<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 April 30, 2002


                                       OR

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

                  For the transition period from ____ to ____.

                        Commission File Number 001-15715


                         TIPPINGPOINT TECHNOLOGIES, INC.


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

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


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

         The number of shares outstanding of each of the issuer's classes of
common stock as of May 31, 2002.

              Class                                        Number of Shares
              -----                                        ----------------
  Common Stock, $0.01 par value                                 4,056,475

<PAGE>

                         TIPPINGPOINT TECHNOLOGIES, INC.

                                      INDEX

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

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

               Condensed Balance Sheets
                   as of April 30, 2002, January 31, 2002 and December 31, 2001 ...................    1

               Condensed Statements of Operations
                   for the three months ended April 30, 2002 and March 31, 2001 and the
                   one month ended January 31, 2002 ...............................................    2

               Condensed Statements of Cash Flows
                   for the three months ended April 30, 2002 and March 31, 2001 and the
                   one month ended January 31, 2002 ...............................................    3

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

     Item 2.   Management's Discussion and Analysis of Results of Operations and
               Financial Condition ................................................................    8

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

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

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

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

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

<PAGE>

PART I.  FINANCIAL INFORMATION.

ITEM 1.  FINANCIAL STATEMENTS.

                         TIPPINGPOINT TECHNOLOGIES, INC.
                            CONDENSED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                              April 30,        January 31,        December 31,
                            ASSETS                              2002               2002               2001
                                                              ---------        -----------        ------------
<S>                                                         <C>                <C>               <C>
Current assets:
     Cash, cash equivalents and short-term investments ..  $  34,349,401      $  40,512,649      $  42,297,751
     Prepaid expenses and other current assets ..........      2,260,718          1,007,468            899,613
     Inventory ..........................................        415,428             50,615                 --
                                                           -------------      -------------      -------------

         Total current assets ...........................     37,025,547         41,570,732         43,197,364
                                                           -------------      -------------      -------------

Property and equipment, net .............................      5,830,197          5,535,872          5,669,136
Net assets from discontinued operations .................             --                 --            375,000
Other ...................................................      1,785,789          2,071,006          1,841,738
                                                           -------------      -------------      -------------

                                                           $  44,641,533      $  49,177,610      $  51,083,238
                                                           =============      =============      =============

             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Trade accounts payable .............................  $     839,267      $     620,615      $     138,127
     Accrued liabilities ................................      5,526,328          4,894,123          5,478,881
                                                           -------------      -------------      -------------

         Total current liabilities ......................      6,365,595          5,514,738          5,617,008

     Other liabilities ..................................        484,480            522,730            535,480
                                                           -------------      -------------      -------------

         Total liabilities ..............................      6,850,075          6,037,468          6,152,488
                                                           -------------      -------------      -------------

Stockholders' equity:
Common stock ............................................         40,564             40,495             40,460
Additional paid-in capital ..............................    304,825,286        304,796,929        304,779,058
Deferred stock-based compensation .......................     (1,669,488)        (1,925,795)        (2,002,515)
Stockholder notes receivable ............................       (652,800)          (652,800)          (652,800)
Accumulated other comprehensive gain/(loss) .............         (3,366)              (209)             5,329
Accumulated deficit .....................................   (264,748,738)      (259,118,478)      (257,238,782)
                                                           -------------      -------------      -------------

         Total stockholders' equity .....................     37,791,458         43,140,142         44,930,750
                                                           -------------      -------------      -------------

                                                           $  44,641,533      $  49,177,610      $  51,083,238
                                                           =============      =============      =============
</TABLE>

       See accompanying notes to unaudited condensed financial statements.

                                        1

<PAGE>

                         TIPPINGPOINT TECHNOLOGIES, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     Three Months                    One Month
                                                                         Ended                         Ended
                                                            -----------------------------------  ------------------
                                                              April 30, 2002    March 31, 2001    January 31, 2002
                                                            -----------------  ----------------  ------------------
<S>                                                         <C>                <C>               <C>
Operating expenses:
     Research and development ...........................        $ 3,981,943       $ 2,370,455         $ 1,474,247
     Sales and marketing ................................            607,273                 -             112,724
     General and administrative .........................          1,225,079         1,876,462             369,103
                                                            -----------------  ----------------  ------------------

         Total operating expenses .......................          5,814,295         4,246,917           1,956,074
                                                            -----------------  ----------------  ------------------

         Operating loss .................................         (5,814,295)       (4,246,917)         (1,956,074)

Interest income, net ....................................            184,035           963,289              76,378
                                                            -----------------  ----------------  ------------------

     Loss from continuing operations ....................         (5,630,260)       (3,283,628)         (1,879,696)
     Discontinued operations:
     Loss from operations of a discontinued business                       -        (3,697,206)                  -
     Loss on disposal of a discontinued business,
     including provision for operating losses during
     phase-out period ...................................                  -        (2,200,000)                  -
                                                            -----------------  ----------------  ------------------

         Net loss .......................................        $(5,630,260)      $(9,180,834)        $(1,879,696)
                                                            =================  ================  ==================
Per share data:
     Net loss ...........................................        $(5,630,260)      $(9,180,834)        $(1,879,696)
                                                            =================  ================  ==================
     Net basic and diluted loss from continuing
     operations per common share ........................        $     (1.39)      $     (0.81)        $     (0.46)

     Net basic and diluted loss from discontinued
     operations per common share ........................                  -             (1.46)                  -
                                                            =================  ================  ==================

     Net basic and diluted loss per common share ........        $     (1.39)      $     (2.27)        $     (0.46)
                                                            =================  ================  ==================

Weighted average common shares outstanding ..............          4,053,284         4,039,037           4,049,355
                                                            =================  ================  ==================
</TABLE>

       See accompanying notes to unaudited condensed financial statements.

                                        2

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                         Three Months                One Month
                                                                                            Ended                       Ended
                                                                             ----------------------------------- ------------------
                                                                               April 30, 2002    March 31, 2001   January 31, 2002
                                                                             ------------------ ---------------- ------------------
<S>                                                                          <C>                <C>              <C>
Cash flows from continuing operating activities:
     Loss from continuing operations .......................................      $ (5,630,260)    $ (3,283,628)      $ (1,879,696)
     Adjustments to reconcile loss from continuing operations to net cash
     provided by/(used in) continuing operating activities:
         Depreciation and amortization .....................................           638,534          756,986            197,888
         Accretion of investment securities ................................           (57,118)        (711,550)           (24,965)
         Loss on sale of fixed assets ......................................                 -           28,840                  -
         Stock-based compensation expense ..................................           284,181          225,074             76,720
         Changes in operating assets and liabilities:
              Prepaid expenses and other current assets ....................        (1,253,250)         (71,493)          (107,855)
              Inventory ....................................................          (364,813)               -            (50,615)
              Trade accounts payable and accrued liabilities ...............         1,011,501       (9,111,204)            (7,381)
              Other non-current assets .....................................           285,216                -           (229,268)
                                                                             ------------------ ---------------- ------------------
     Net cash used in continuing operating activities ......................        (5,086,009)     (12,166,975)        (2,025,172)
                                                                             ------------------ ---------------- ------------------
Cash flows from investing activities:
     Purchases of property and equipment ...................................          (932,859)        (105,763)           (64,624)
     Purchases of investment securities ....................................        (8,789,504)     (25,496,458)        (7,467,392)
     Investment securities sold ............................................                 -        4,942,639                  -
     Investment securities matured .........................................        12,000,000       13,126,058          4,820,000
                                                                             ------------------ ---------------- ------------------
     Net cash provided by/(used in) investing activities ...................         2,277,637       (7,533,524)        (2,712,016)
                                                                             ------------------ ---------------- ------------------
Cash flows from financing activities:
     Principal payments on capital lease obligations .......................                 -         (261,490)                 -
     Proceeds from issuance of common stock ................................                 -           31,598             17,906
     Proceeds from exercise of stock options and warrants ..................               553            7,197                  -
                                                                             ------------------ ---------------- ------------------
     Net cash provided by/(used in) financing activities ...................               553         (222,695)            17,906
                                                                             ------------------ ---------------- ------------------
Cash provided by/(used in) discontinued operations .........................          (198,894)       2,854,194            267,361
                                                                             ------------------ ---------------- ------------------
Net decrease in cash and cash equivalents ..................................        (3,006,713)     (17,069,000)        (4,451,921)
                                                                             ------------------ ---------------- ------------------
Cash and cash equivalents at beginning of period ...........................        28,543,568       27,352,409         32,995,489
                                                                             ------------------ ---------------- ------------------
Cash and cash equivalents at end of period .................................        25,536,855       10,283,409         28,543,568

Short-term investments at end of period ....................................         8,812,546       49,016,584         11,969,081
                                                                             ------------------ ---------------- ------------------

Cash, cash equivalents and short-term investments at end of period .........      $ 34,349,401     $ 59,299,993       $ 40,512,649
                                                                             ================== ================ ==================
</TABLE>

       See accompanying notes to unaudited condensed financial statements.

                                        3

<PAGE>

                          NOTES TO FINANCIAL STATEMENTS

(1)      Incorporation and Nature of Business

         TippingPoint Technologies, Inc. ("TippingPoint" or the "Company") was
incorporated in the State of Texas in January 1999 as Shbang! Inc. In May 1999,
the Company's name was changed to Netpliance, Inc. On March 15, 2000, the
Company was reincorporated in the State of Delaware, and on August 20, 2001, the
Company's name was changed to TippingPoint Technologies, Inc. The Company, after
exiting the consumer Internet appliance and service business in January 2001,
operates in one business segment.

         Currently, the Company is developing a network security offering that
will include hardware and software designed to enable enterprises, government
entities and service providers to prevent unauthorized intrusion into their
information systems and networks. The development of this offering is being
funded initially by the Company's existing capital. As a result of this shift in
business model, the Company expects to report significant operating losses
through at least the end of its fiscal year ending January 31, 2003. There can
be no assurance that the Company will ever achieve positive cash flow from its
operations and faces numerous risks associated with this business.

         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 that 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 ever be achieved.

         On January 24, 2002, the Board of Directors of the Company adopted a
new fiscal year end. The Company's new fiscal year will end on January 31,
beginning with the fiscal year ending January 31, 2003. The Company has included
the unaudited financial information for the transition period of January 1, 2002
to January 31, 2002 (the "Transition Period") in this quarterly report for the
quarterly period ending April 30, 2002. The separate audited financial
statements required for the Transition Period will be included in the Company's
Annual Report on Form 10-K for the fiscal year ending January 31, 2003.

         The Company has not presented financial statements for the three months
ended April 30, 2001, but has instead presented financial statements for the
three months ended March 31, 2001, in compliance with Rule 13a-10 of the
Securities Exchange Act of 1934. Because the adoption of a new fiscal year
resulted in only a one month change in annual and quarterly financial reporting
periods, and considering that there would be little change due to the early
stage of its continuing business, the Company believes that the financial
information for its current fiscal year is sufficiently comparable to the
corresponding financial information for its last fiscal year, as originally
reported, in terms of seasonal and other factors. Accordingly, the Company did
not deem it practical nor could it justify the additional cost to prepare and
present financial statements for the three months ended April 30, 2001.

         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, 2001, has been derived from the
audited financial statements at that date. While the Company believes that the
disclosures are adequate to

                                        4

<PAGE>

make the information not misleading, it suggests that these financial statements
be read in conjunction with the audited financial statements and accompanying
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. Interim results are not necessarily indicative of results
expected in future periods.

(2)      Discontinued Operations

         The Company has experienced operating losses since inception primarily
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; expanding its subscriber base and ultimately winding this business
down.

         In November 2000, the Company began shifting its business model to
focus on providing an offering for information systems and away from its
consumer Internet offering. In connection with this shift in focus, the Company
restructured its operations. In February 2001, the Company entered into an
agreement with EarthLink, Inc. for the transfer of its service obligations
relating to most of its existing customers and approximately 50,000 of the
Company's customers were transferred to EarthLink's service on March 12, 2001.
The Company ceased providing any Internet access service to its remaining
customers in June 2001. In December 2001, any obligation of the Company to
continue providing support services for other Internet service providers
expired. Effective January 1, 2002, EarthLink began operating the Internet
portal for their customers who had been using the Company's portal. In general,
the Company has exited its consumer-focused business entirely, but continues to
have certain obligations, contingencies and potential liabilities relating to
this business.

         The Company recognized a net loss of approximately $8.8 million in 2001
upon the disposition of the Internet appliance and service business. As of April
30, 2002 and January 31, 2002, the Company had accrued approximately $3.5
million and $3.7 million, respectively, for costs estimated to be incurred in
future periods, consisting primarily of approximately $2.5 million and $2.7
million, respectively, relating to facility lease costs, and approximately $1
million for each date relating to estimated legal fees and other expenses. The
accrued costs have been recorded within the Company's continuing operations
accrued liabilities as they will be paid out of the assets of the Company. Any
differences between these estimates and the actual amounts incurred in future
periods will change the estimated net loss from discontinued operations
accordingly.

         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. As a result, the
Company recorded restructuring charges of approximately $1.1 million and $3.4
million in 2000 and 2001, respectively, primarily consisting of costs associated
with closing facilities, employee severance and benefits and a facility lease
that the Company is not utilizing. As of April 30, 2002 and January 31, 2002,
the Company had accrued restructuring charges of approximately $2.5 million and
$2.7 million, respectively. In January 2001, the Company's Board of Directors
adopted a new business strategy for the Company, which resulted in additional
reductions in the Company's workforce. As a result, the Company incurred
approximately $933,000 of severance costs. The following table provides a
summary of restructuring charges, by category, and changes in the restructuring
accrual for the three months ended April 30, 2002 and the one month ended
January 31, 2002:

<TABLE>
<CAPTION>
                                            Cash payments in                        Cash payments in
                              Accrual at    the three months       Accrual at        the one month            Accrual at
                              April 30,      ended April 30,       January 31,      ended January 31,         December 31,
                                 2002             2002                2002               2002                     2001
                              ----------    ----------------      ------------     ------------------         ------------
<S>                           <C>           <C>                   <C>              <C>                 <C>
Facility lease costs ....     $2,501,087    $        153,187      $  2,654,274     $           80,333         $  2,734,607
                              ----------    ----------------      ------------     ------------------         ------------
Total ...................     $2,501,087    $        153,187      $  2,654,274     $           80,333         $  2,734,607
                              ==========    ================      ============     ==================         ============
</TABLE>

                                        5

<PAGE>

(3)      Inventories

         Inventories are stated at the lower of actual cost (first-in, first-out
method) or market value (estimated net realizable value). The valuation of
inventories at the lower of actual cost or market value requires the use of
estimates regarding the amount of current inventory that will be sold and the
prices at which it will be sold. These estimates are dependant on the Company's
assessment of expected orders from its customers. As of April 30, 2002 and
January 31, 2002, the Company's inventories consisted of component parts of
approximately $415,000 and $51,000, respectively. The increase in inventories
was due to the Company's need for components for expected general availability
of its products.

(4)      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, 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 common stock equivalents are anti-dilutive.
The Company's common stock equivalents consist of common shares issuable upon
the exercise of stock options and warrants, and the lapsing of restrictions on
shares of restricted common stock.

(5)      Capital Stock

Common Stock

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

         On August 9, 2001, the Board of Directors authorized an increase in the
number of shares of common stock reserved for issuance under the Company's stock
incentive plan to 1,033,333. The increase was approved by the Company's
stockholders on October 24, 2001.

         All common stock information has been adjusted to reflect the reverse
stock split.

Restricted Stock

         The Company has reserved 36,655 shares of restricted common stock
("Restricted Stock") for issuance under the Company's stock incentive plan,
which shares were granted in 2001 in exchange for outstanding stock options. The
shares of Restricted Stock will vest over various increments depending on the
vesting schedule of the stock options exchanged, with unvested shares being
subject to forfeiture under certain circumstances. Upon certain change of
control events, to the extent certain shares of Restricted Stock are not fully
vested, one-third of such shares will immediately vest.

(6)      Stock Options

Stock Incentive Plan

         In January 2002, the Company granted to its non-employee directors
options to purchase an aggregate of 40,002 shares of common stock at an exercise
price of $7.41 per share, which were immediately vested and exercisable. In
March 2002, the Company granted to a newly-elected non-employee director an
option to purchase 6,667 shares of common stock at an exercise price of $8.30
per

                                        6

<PAGE>

share, which was immediately vested and exercisable. Between December 31, 2001
and April 30, 2002, the Company granted to employees options to purchase an
aggregate of 61,300 shares of common stock at exercise prices ranging from $6.75
to $11.50 per share, which will vest over a period of four years. Also, in April
2002, the Company granted to members of its technical advisory group options to
purchase an aggregate of 12,000 shares of common stock at an exercise price of
$11.50 per share, which were immediately vested and exercisable. As of April 30,
2002, there are outstanding options with the right to purchase 627,995 shares of
common stock. In addition, there are 36,655 shares of Restricted Stock reserved
for issuance, which are subject to forfeiture under certain circumstances.

         The Company has recorded approximately $284,000 and $77,000 of
compensation expense for the three months ended April 30, 2002 and the one month
ended January 31, 2002, 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, as a result of granting shares of Restricted
Stock during 2001 and also as a result of granting vested options to members of
its technical advisory group during 2002. Remaining deferred compensation of
approximately $1.7 million will be amortized over the applicable vesting period
of outstanding options and Restricted Stock.

(7)      Commitments and Contingencies

         The Company leases its office space and certain equipment under
non-cancelable operating leases expiring in various years through 2005. Terms of
the Company's facility leases call for letters of credit totaling approximately
$1.7 million. The Company has pledged certificates of deposit (included in other
noncurrent assets) as collateral. As of April 30, 2002, the Company had a
reserve of approximately $2.5 million for future commitments under these
facility leases.

         On July 11, 2001, a purported class action lawsuit was filed against
the Company in Texas state court in Travis County, Texas on behalf of all
persons who purchased an Internet appliance from the Company and subscribed to
the related 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 it has meritorious defenses
available. The Company intends to defend this action vigorously.

         On December 5, 2001, the Company and two of its current and former
officers and directors, as well as the managing underwriters in the Company's
initial public offering were named as defendants in a purported class action
lawsuit filed in the United States District Court for the Southern District of
New York. The lawsuit, which is part of a consolidated action that includes over
200 similar actions, is captioned In re Initial Public Offering Securities
Litigation, Brian Levey vs. TippingPoint Technologies, Inc., et al., No. 01 CV
10976. The lawsuit alleges that the defendants participated in a scheme to
manipulate the initial public offering and subsequent market price of the
Company's stock, by the underwriters requiring certain of their customers to
purchase stock in the Company's initial public offering as a condition to being
allocated shares in the initial public offerings of other companies. The
purported plaintiff class for the lawsuit is comprised of all persons who
purchased the Company's stock from March 17, 2000 through December 6, 2000. The
suit seeks rescission of the purchase prices paid by purchasers of shares of the
Company's common stock. The Company believes the lawsuit is without merit and
intends to defend it vigorously. To the extent the plaintiffs are successful in
this action, the Company intends to seek indemnification and/or contribution
from the underwriters pursuant to the Company's underwriting agreement with
them. However, there can be no assurance that such rights will be available to
the Company or enforceable against the underwriters.

         At this time, the Company is not involved in any other legal
proceedings that its management currently believes would be material to its
business, financial condition or results of operations. The Company could be
forced to incur material expenses with respect to these legal proceedings, and
in the

                                        7

<PAGE>

event there is an outcome in any that is adverse to the Company, its financial
position and prospects could be harmed.

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 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.

         On January 24, 2002, our Board of Directors adopted a new fiscal year
end. Our new fiscal year will end on January 31, beginning with the fiscal year
ending January 31, 2003. Information covering the transition period from January
1, 2002 to January 31, 2002 is included in this quarterly report, the first
quarterly report of our newly adopted fiscal year. The separate audited
financial statements required for the transition period will be included in our
annual report on Form 10-K for the fiscal year ending January 31, 2003.

Critical Accounting Policies and Estimates

         Management's discussion and analysis of financial condition and results
of operations is based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to our
discontinued operations, deferred taxes, impairment of long-lived assets,
litigation and inventory. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.

         Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, proposes a new requirement that all public
companies include a discussion of critical accounting policies or methods used
in the preparation of financial statements.

                                        8

<PAGE>

         The following are among the most critical of our accounting policies:

         Discontinued Operations. We recognized a net loss of approximately $8.8
million in 2001 upon the disposition of our discontinued operations. As of April
30, 2002 and January 31, 2002, we had accrued approximately $3.5 million and
$3.7 million, respectively, for costs estimated to be incurred in future
periods, consisting primarily of approximately $2.5 million and $2.7 million,
respectively, relating to facility lease costs, and approximately $1 million for
each date relating to estimated legal fees and other expenses. Any differences
between these estimates and the actual amounts incurred in future periods will
change the estimated net loss from discontinued operations accordingly.

         Deferred Taxes. As part of the process of preparing our financial
statements we are required to estimate our income taxes. This process involves
us estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our balance sheet. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
our statement of operations.

         Significant judgment is required in determining our deferred tax assets
and liabilities and any valuation allowance recorded against our net deferred
tax assets. In assessing the potential realization of deferred tax assets, we
consider whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon us attaining future taxable income during the period in
which our deferred tax assets are recoverable. Due to the uncertainty
surrounding our ability to generate taxable income in the near future, we have
determined that it is more likely than not that we will not be able to utilize
any of the benefits of our deferred tax assets, including net operating loss
carry forwards, before they expire. Therefore, we have provided a 100% valuation
allowance on our deferred tax assets in each year of our existence, and our net
deferred tax assets as of January 31, 2002 and April 30, 2002 is zero.

         Impairment of Long-Lived Assets. We evaluate the recoverability of our
long-lived assets and review these assets for recoverability when events or
circumstances indicate a potential impairment. Factors we consider important
that could trigger an impairment review include the following:

         .  significant underperformance relative to historical or projected
            operating results;

         .  significant changes in the manner or use of the assets or the
            strategy for our overall business; and

         .  significant negative industry or economic trends.

         When we determine that the carrying value of these assets may not be
recoverable based on the existence of one or more of the above indicators of
impairment, we measure any impairment by estimating the undiscounted cash flows
to be generated from the use and ultimate disposition of these assets. We record
assets to be disposed of at the lower of the carrying amount or fair market
value less anticipated costs of sales.

         Litigation. We evaluate contingent liabilities, including threatened or
pending litigation in accordance with SFAS No. 5, "Accounting for Contingencies"
and record accruals when the outcome of these matters is deemed probable and the
liability is reasonably estimable. We make these assessments based upon the
facts and circumstances, and in some instances based in part on the advice of
outside legal counsel. We include in these accruals an estimate to cover legal
fees and expenses to defend ourselves. Because of the uncertainties related to
both the amount and range of loss on certain pending litigation and claims, we
are not able to make a reasonable estimate of the liability that could result
from an unfavorable outcome. As additional information becomes available, we
will assess the potential liability related to our pending litigation and revise
our estimates. Such revisions in our estimates of the potential liability could

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materially impact our results of operations and financial position. At April 30,
2002 and January 31, 2002, we had approximately $1 million for each date accrued
for legal fees and other expenses, which is included in the estimated loss for
discontinued operations.

         Inventory. We adjust our inventory values so that the carrying value
does not exceed net realizable value. We estimate net realizable value based
upon forecasted demand. However, forecasted demand is subject to revisions and
actual demand may differ from forecasted demand. This difference may have a
material effect on our financial position and results of operations.

Overview

         Since the beginning of 2001, our strategic focus has been on the
development of hardware and software offerings that would enhance and manage
various applications for high-speed information systems. In February 2002, we
announced our entry into the network security industry with our UnityOne(TM)
line of products, a natural extension of the development effort we undertook in
2001. This product line is designed to deliver a high-speed network defense
solution to enterprises, including governmental agencies, who operate their own
information systems. Going forward, we anticipate that we will primarily focus
our efforts on developing and marketing products and services in the network
security industry, including an extension of the UnityOne line with a product
for telecommunication service providers. Prior to 2001, we primarily offered
consumers Internet access through devices commonly known as Internet appliances,
which we also marketed and sold to our customers. We discontinued this business
in conjunction with the initiation of our current strategic focus. The financial
statements included elsewhere in this report have been restated to present this
business as a discontinued operation for all historical periods presented.

         Our UnityOne line of network security systems includes hardware and
software designed to enable enterprises to protect their information systems
from hostile or malicious attacks, including, among others, attacks commonly
referred to as viruses, worms, cyber-terrorists, trojans and denial-of-service
attacks by detecting and blocking such attacks without compromising network
performance. Our network-defense systems deliver highly reliable threat
assessment, detection and prevention functions in a single appliance at very
high, or gigabit, speeds. Our systems, which are based upon new high-speed
security processors, analyzes network traffic and, when a threat is detected,
blocks the malicious traffic before damage occurs. Unlike software based
intrusion detection systems, our systems are part of the network infrastructure
and continuously monitor, detect and block hostile network traffic.

Results of Continuing Operations

Revenues

         We are still in the early stages of our business plan. We have
announced and are marketing our network defense systems. We have no sales
contracts with prospective customers for our suite of products to date. We had
no revenue from continuing operations for either the three months ended April
30, 2002, for the one month ended January 31, 2002 or for the three months ended
March 31, 2001. We do not anticipate any revenue from continuing operations
until the anticipated general availability of our products in the third quarter
of our current fiscal year.

Expenses

         Research and development expenses. For the three months ended April 30,
2002 and March 31, 2001, research and development expenses of continuing
operations totaled approximately $4.0 million and $2.4 million, respectively,
including stock-based compensation totaling approximately $223,000 and $175,000,
respectively. The increase in research and development expenses in the first
quarter of our current fiscal year is primarily due to an increase in employment
costs and expenses incurred in the development of product prototypes. For the
one month ended January 31, 2002, research and

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development expenses of continuing operations totaled approximately $1.5
million, including stock-based compensation totaling approximately $55,000.

         Sales and marketing expenses. Sales and marketing expenses of
continuing operations totaled approximately $607,000 for the three months ended
April 30, 2002. These expenses compare with no expenses incurred during the
three months ended March 31, 2001. The increase in sales and marketing expenses
in the first quarter of our current fiscal year is the result of the initiation
of marketing efforts of our network security systems. For the one month ended
January 31, 2002, sales and marketing expenses of continuing operations totaled
approximately $113,000.

         General and administrative expenses. For the three months ended April
30, 2002 and March 31, 2001, general and administrative expenses of continuing
operations were approximately $1.2 million and $1.9 million, respectively,
including stock-based compensation totaling approximately $55,000 and $50,000,
respectively. The decrease in general and administrative expenses in the first
quarter of our current fiscal year was primarily the result of a decrease in
employment and corporate facility costs. General and administrative expenses of
continuing operations was approximately $370,000 for the one month ended January
31, 2002, including stock-based compensation totaling approximately $19,000.

         Interest income. For the three months ended April 30, 2002 and March
31, 2001, interest income, net of interest expense, totaled approximately
$184,000 and $963,000, respectively. The decrease in interest income in the
first quarter of our current fiscal year was due to a general decrease in the
average cash balances in interest-bearing accounts we held at banking and
financial institutions during that period, as well as a general reduction in the
average yield earned on invested funds. For the one month ended January 31,
2002, interest income totaled approximately $76,000.

Discontinued Operations

         From our inception through 2001, we experienced operating losses as a
result of selling Internet appliances at a significant loss, trying to build and
support an Internet service offering for our customers, trying to expand our
customer base and ultimately winding this business down. In November 2000, we
began shifting our business model to focus on providing an offering for
information systems and away from our consumer Internet offering. In connection
with this shift in focus, we restructured our operations. In January 2001, we
announced our decision to discontinue the Internet appliance and service
business. At that time, we terminated all marketing and sales efforts related to
our consumer Internet appliance and service business. We had completely exited
this business in December 2001.

         We recognized a net loss of approximately $8.8 million in 2001 upon the
disposition of the discontinued operations. Net loss from our discontinued
operations totaled approximately $3.7 million for the three months ended March
31, 2001, compared to no net loss for the three months ended April 30, 2002 and
for the one month ended January 31, 2002. The net loss from discontinued
operations in the first quarter of our last fiscal year also includes a reserve
of approximately $2.2 million established for estimated future net losses to be
incurred relating to this discontinued business. As of April 30, 2002 and
January 31, 2002, we had accrued approximately $3.5 million and $3.7 million,
respectively, for costs estimated to be incurred in future periods related to
this discontinued business, consisting primarily of approximately $2.5 million
and 2.7 million, respectively, relating to facility lease costs and
approximately $1 million for each such date relating to estimated legal fees and
other expenses.

         We have continuing material commitments under certain contracts related
to this discontinued business, including approximately $3.3 million under a
facility lease expiring in 2005.

Liquidity and Capital Resources

         From inception in January 1999 through April 30, 2002, we financed our
operations and met our capital expenditure requirements primarily from the net
proceeds of the private and public sale of equity

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securities totaling approximately $230 million. As of April 30, 2002 and January
31, 2002, we had approximately $34.3 million and $40.5 million in cash, cash
equivalents and short-term investments, respectively, compared to approximately
$42.3 million at December 31, 2001. Although we have taken steps to decrease our
operating expenses, our business plan will require significant capital to fund
operating losses, including research and development expenses and sales and
marketing 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 business model.

         For the three months ended April 30, 2002, working capital decreased by
approximately $5.4 million, to $30.7 million as of April 30, 2002 from $36.1
million as of January 31, 2002. For the one month ended January 31, 2002,
working capital decreased by approximately $1.5 million, to $36.1 million as of
January 31, 2002 from $37.6 million as of December 31, 2001. The decrease in
working capital during the three months ended April 30, 2002 and the one month
ended January 31, 2002 was primarily the result of losses incurred in our
continuing operations during those periods.

         Net cash used in continuing operating activities was approximately $5.1
million for the three months ended April 30, 2002, compared to net cash used in
continuing operating activities of approximately $12.2 million for the three
months ended March 31, 2001. The decrease in cash used in continuing operating
activities in the first quarter of our current fiscal year is primarily the
result of an increase in accounts payable and accrued liabilities during that
period, as compared with a decrease in accounts payable and accrued liabilities
during 2001. Net cash used in continuing operating activities for the one month
ended January 31, 2002 was approximately $2 million.

         Net cash provided by investing activities was approximately $2.3
million for the three months ended April 30, 2002, compared to net cash used in
investing activities of approximately $7.5 million for the three months ended
March 31, 2001. Cash provided by investing activities consists of the net result
of the sale and purchase of property and equipment and the maturity and purchase
of certain investment securities. For the one month ended January 31, 2002, our
investing activities used net cash of approximately $2.7 million.

         Net cash provided by financing activities was approximately $1,000 for
the three months ended April 30, 2002, compared to net cash used in financing
activities of approximately $223,000 for the three months ended March 31, 2001.
This increase in net cash from financing activities was primarily the result of
approximately $261,000 of principal payments on capital leases we made during
the three months ended March 31, 2001. For the one month ended January 31, 2002,
our financing activities provided net cash of approximately $18,000.

         Net cash used in discontinued operations was approximately $199,000 for
the three months ended April 30, 2002, as compared to net cash provided by
discontinued operations of approximately $2.9 million for the three months ended
March 31, 2001. The decrease in cash provided by discontinued operations in the
first quarter of our current fiscal year, as compared to the first quarter of
our last fiscal year, was primarily the result of the receipt of approximately
$4.7 million during the three months ended March 31, 2001 from EarthLink in
payments under the agreement for the transfer of certain service obligations,
and the discontinuance of this business and peripheral sales in January 2001.
Net cash provided by discontinued operations was approximately $267,000 for the
one month ended January 31, 2002, which principally resulted from the receipt of
additional amounts from EarthLink.

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Recently Issued Accounting Standards

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

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

         In April 2002, the FASB issued SFAS No. 145, Recession of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145). SFAS 145 updates, clarifies and simplifies existing
accounting pronouncements. We do not expect that the adoption of SFAS 145 to
have a significant impact on our financial condition or results of operation.

Factors Affecting Operating Results

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

         We cannot predict our future results because we have a limited
         operating history and have recently introduced our line of products
         within the network security industry.

         We have a limited operating history and little history operating our
network security solutions business. We only recently introduced our new line of
products, and have not yet generated any revenues from that line of products.
Therefore, we have little meaningful historical financial data upon which to
base projections of operating expenses or revenues accurately. Specifically, we
were incorporated in January 1999 and we began offering an Internet appliance
and service in November 1999. We began exploring a telecommunications
infrastructure initiative in November 2000 and began to focus on our network
security offering in the later half of 2001. Our network security offering is
still in the early stage,

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and we have yet to receive any revenues from this offering. There are
significant risks and costs inherent in our efforts to undertake this business
model. These include the risk that we may not be able to achieve market
acceptance for our network security line of products or earn revenues from the
sale of such products, that our business model may not be profitable and other
significant risks related to the 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 rapidly evolving industries, such as network security.
It is possible that we will exhaust all available funds before we reach the
positive cash flow phase of our business model.

         We expect to incur operating losses throughout at least the remainder
         of our current fiscal year, 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 our new products and any additional products
               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 product
               offerings;

         .     uncertainties concerning our strategic direction and financial
               condition;

         .     our need for large enterprises to launch and maintain information
               systems that create a need for our new products;

         .     our need to introduce additional reliable products that meet the
               demanding needs of large enterprises; and

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

         In addition, although we believe that the actions that we are taking
under our business plan will help us become profitable, we cannot assure you
that such actions will succeed in the long or short term.

         Internal and external changes resulting from our reorganization may
concern our prospective customers, strategic relationships, resellers and
employees, and produce a prolonged period of uncertainty, which could have a
material adverse affect on our business. Our strategy requires substantial
changes, including pursuing new strategic relationships, increasing our research
and development expenditures, adding employees who possess the skills we believe
we will need going forward, investing in new technologies, establishing
leadership positions in new high-growth markets, establishing distribution
channels for our new products 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,
sustain the productivity of our workforce, introduce innovative

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new products in a timely manner, manage operating expenses and quickly respond
to, and recover from, unforeseen events associated with our transition and
realignment.

         Competition in the network security market may reduce the demand for,
         or price of, our products.

         The market for network security products is highly competitive, and we
expect competition to intensify in the future. Our competitors may introduce new
competitive products for the same markets targeted by our products. These
products may have better performance, lower prices and broader acceptance than
our products. Competition may reduce the overall market for our products.

         Current and potential competitors in our target market include the
following, all of which sell worldwide or have a presence in most of the major
geographical markets for their products:

         .     intrusion detection system vendors such as Internet Security
               Systems, Inc., Cisco Systems, Inc. and Intrusion Inc.;

         .     firewall and virtual private network software vendors such as
               Check Point Software Technologies Ltd, Symantec Corporation and
               Crossbeam Systems, Inc.;

         .     network equipment manufacturers such as Cisco Systems, Inc.,
               Lucent Technologies, Inc., Nokia Corporation and Nortel Networks
               Corporation;

         .     security appliance suppliers such as NetScreen Technologies,
               Inc., SonicWALL, Inc. and WatchGuard Technologies, Inc.;

         .     computer and network component manufacturers; and

         .     low cost Internet hardware suppliers with products that include
               network security functionality.

         Many of these current and potential competitors have longer operating
histories, greater name recognition, larger customer bases and significantly
greater financial, technical, sales, marketing and other resources than we do.
Many of these competitors may also have existing relationships with the
resellers who we will use to sell our products. In addition, some of our
competitors currently combine their products with other companies' networking
and security products to compete with our products. These competitors also often
combine their sales and marketing efforts to compete with our products. This
competition may result in reduced prices and longer sales cycles for our
products. If any of our larger competitors were to commit greater technical,
sales, marketing and other resources to our markets, our ability to compete
would be adversely affected.

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

         Some key processors and other components of our line of products 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 supplying certain of our competitors. We cannot be certain that we will be
able to meet our demand for components in a timely and cost-effective manner. We
expect to carry very little inventory of some of our products and product
components, and we will rely on our suppliers to deliver necessary components to
our contract manufacturers in a timely manner based on forecasts we provide.
Some of the semiconductors and processors we will require are very complex, and
we may not be able to develop an alternate source in a timely manner, which
could hurt our ability to deliver our products to our customers. If we are
unable to buy these components on a timely and a cost-

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<PAGE>

efficient basis, we will not be able to deliver products to our customers, which
would negatively impact future revenues and, in turn, seriously harm our
business.

         At various times, some of the key components for our products have been
in short supply. Delays in receiving components would harm our ability to
deliver our products on a timely basis. In addition, because we expect to rely
on purchase orders rather than long-term contracts with our suppliers, we cannot
predict with certainty our ability to procure components in the longer term. If
we receive a smaller allocation of components than is necessary to manufacture
products in quantities sufficient to meet customer demand, customers could
choose to purchase competing products.

         Our reliance on third parties to manufacture and assemble our products
         could cause a delay in our ability to fill orders, which might cause us
         to lose sales.

         We currently do not have a long-term supply contract with any third
parties to manufacture and assemble our UnityOne line of products. We are
currently purchasing our products on a purchase order basis, and expect to
continue this method of procurement indefinitely. If we cannot continue an
arrangement with at least one contract manufacturer who will agree to
manufacture our products on terms acceptable to us, we will not be able to
produce and ship our products, and our business will suffer. If we should fail
to manage our relationships with our contract manufacturers effectively, or if
they experience delays, disruptions or quality control problems in their
manufacturing operations, our ability to ship products to our customers could be
delayed.

         The absence of dedicated capacity with our contract manufacturers means
that, with little or no notice, they could refuse to continue manufacturing some
or all of our products. Qualifying a new contract manufacturer and commencing
volume production is expensive and time-consuming. If we are required or choose
to change contract manufacturers, we could lose revenues and damage our customer
relationships.

         Our reliance on third-party manufacturers also exposes us to the
following risks outside our control:

         .     unexpected increases in manufacturing and repair costs;

         .     interruptions in shipments if one of our manufacturers is unable
               to complete production;

         .     inability to control delivery schedules;

         .     unpredictability of manufacturing yields; and

         .     financial strength to meet procurement and manufacturing needs.

         If we fail to develop or maintain relationships with significant
         resellers, or if these resellers are not successful in their sales
         efforts, sales of our products and our operating results would suffer.

         We expect to derive the bulk of our total revenues, if any, from
resellers. Sometimes purchasers of network security solutions choose their
products based on which network security solution is carried by the reseller
from which they buy other products rather than solely on performance
characteristics. We do not expect to have any long-term contracts or minimum
purchase commitments with any of our resellers. In addition, our resellers may
sell products that are competitive with ours, may devote more resources to those
competitive products and may cease selling our products altogether. If we fail
to develop and maintain relationships with significant resellers, or if these
resellers are not successful in their sales efforts, sales of our products may
not materialize and our operating results will suffer.

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         Marketing to most of our target customers involves long sales and
         implementation cycles, which may cause revenues and operating results
         to vary significantly.

         We will market our line of products primarily to large enterprises and
the federal government through resellers. A prospective customer's decision to
purchase our products will often involve a significant commitment of its
resources and a lengthy evaluation and product qualification process. Throughout
the sales cycle, we anticipate often spending considerable time educating and
providing information to prospective customers regarding the use and benefits of
our products. Budget constraints and the need for multiple approvals within
these organizations may also delay the purchase decision. Failure to obtain the
timely required approval for a particular project or purchase decision may delay
the purchase of our products. As a result, we expect that the sales cycle for
our network security solutions typically will be 60 to 180 days. These long
cycles may cause delays in any potential sale, and we may spend a large amount
of time and resources on prospective customers who decide not to purchase our
line of products and services, which could materially and adversely affect our
business.

         Even after making the decision to purchase our products, our customers
may not deploy our products broadly within their networks. We expect the timing
of implementation to vary widely, depending on the complexity of the customer's
network environment, the size of the network deployment, the skill set of the
customer and the degree of hardware and software configuration necessary to
deploy our products. Customers with large networks usually expand their networks
in large increments on a periodic basis. Large deployments and purchases of our
network security products also require a significant outlay of capital from
customers. As a result, there may be a further delay before we can begin to
realize revenues from our current business.

         Additionally, our network security systems are designed for the network
infrastructure market, which requires us to maintain a sophisticated sales
force, engage in extensive negotiations and provide high level engineering
support to complete sales. We have limited experience selling into this market
and do not expect to begin delivering our network security solutions until at
least the third quarter of our current fiscal year. If we do not successfully
market our network security systems to these targeted customers, our operating
results will be below our expectations and the expectations of investors and
market analysts, which would likely cause the price of our common stock to
decline.

         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 an Internet appliance and related services, was unsuccessful.
Therefore, it may be more difficult for us to make an effective transition into
our network security business, especially in the areas of raising capital,
attracting and retaining talented employees, attracting research analyst
coverage of our common stock and gaining the confidence of possible strategic
relationships, substantial investors and new customers for our current business.

         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. Our facilities are located in Austin, Texas, which has a high demand
for technical and other personnel and a relatively low unemployment rate.
Competition for qualified personnel possessing the skills necessary for success
in the competitive market of the network security industry is intense, and we
may fail to attract or retain the employees necessary to execute our business
model successfully. Because of our unsuccessful first attempt at achieving
profitability, we may have a more difficult time in attracting and retaining the
employees we need.

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         We will also offer support and other services through maintenance and
other agreements, along with updating and other services through our threat
management center. Although we plan to provide support services sufficient to
meet our expected business level, our growth will be limited in the event we are
unable to hire or retain support services personnel or subcontract these
services to qualified third parties.

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

         Some members of our management team have joined us only recently. Our
success depends to a significant degree upon the continued contributions of our
key management, engineering, research and development, business development and
marketing and other personnel, many of whom would be difficult to replace. In
particular, we believe that our future success is highly dependent on John F.
McHale, our chairman and chief executive officer, with whom we do not have an
employment agreement.

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

         Our business model involves competing in an established market.
Therefore, our financial performance and any future growth will depend upon our
ability to obtain market share for the network security products we are
marketing from existing competitors. We intend to invest a significant
proportion of our resources in the network security market, which we anticipate
will grow at a significantly higher rate than the networking and infrastructure
industry on average. At the present time, the markets for network security
solutions are highly competitive, and we are not certain that our target
customers will widely adopt and deploy our technology. Even if our solutions are
effective, our target customers may not choose to use them for technical, cost,
support or other reasons. The market for telecommunications solutions is
characterized by the need to support industry standards as different standards
emerge, evolve and achieve acceptance. To be competitive, we will need to
develop and introduce new products and product enhancements that meet these
standards. We may have to redesign existing products or 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.

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

         The market for network security products is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Therefore, our success will depend
upon our ability to identify product opportunities, to develop and introduce
products in a timely manner and to gain market acceptance of any products
developed. In developing our products, we have made, and will continue to make,
assumptions with respect to which features, security standards and performance
criteria will be required by our customers. If we implement features, security
standards and performance criteria that are different from those required by our
customers, market acceptance of our products may be significantly reduced or
delayed and our business would be seriously harmed.

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         Our failure to develop or introduce new products or product
         enhancements might cause our business to suffer.

         We expect to introduce new products and enhancements to address current
and evolving customer requirements. We also expect to develop products with
strategic partners and incorporate advanced third-party security capabilities
into our products. We may not be able to develop new products or product
enhancements in a timely manner, or at all. If we fail to develop or introduce
these new products and product enhancements, such failure might cause our
products to be less competitive and our ability to generate revenues to decline.
In addition, our assumptions about customer requirements may be wrong. Even if
we are able to develop and introduce new products and enhancements, these
products or enhancements may not achieve widespread market acceptance. Any
failure of our future products or product enhancements to achieve market
acceptance could cause our business to suffer.

         If we are unable to integrate our products with our customers'
         networks, our business will suffer.

         The network security solutions that we are marketing must interface
with our customers' existing networks, each of which will likely have different
specifications and utilize multiple protocol standards. Many of our prospective
customers' networks contain multiple generations of products that have been
added over time as these networks have grown and evolved. In order to meet our
customers' requirements, our products must interoperate with all of the products
within these networks, as well as with products that might be added to these
networks in the future. If we find errors in the existing software used in our
customers' networks, we may have to modify our software to fix or overcome these
errors so that our products will interoperate and scale with the existing
software and hardware. If our products do not interoperate with those within our
customers' networks, installations could be delayed or orders for our products
could be cancelled, which could significantly impact our revenues, and our
business would suffer materially.

         Our business will suffer if our target customers do not accept our
         network security solutions.

         Our future revenues and profits, if any, will depend upon the
widespread acceptance and use of network security technology by our target
market. Substantially all of our anticipated revenues, if any, may come from
sales of one or two product lines, making us dependent on widespread market
acceptance of these products. We may be more dependent on the market acceptance
of individual product lines than our competitors with broader offerings. Factors
that may affect the market acceptance of our anticipated line of products
include:

         .  adoption of advanced network security products and technologies;

         .  adoption of an integrated, unified, solution to network security,
            similar to our product line;

         .  the need, or perceived need, to maintain or increase network
            connection speed when adding network security devices;

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

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

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

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<PAGE>

         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 patent applications and applied to register
trademarks relating to our business in the United States. We anticipate filing
additional patent and trademark applications relating to our business. If we are
not successful in obtaining the patent protection we need, our competitors may
be able to replicate our technology and compete more effectively against us. We
also enter, and plan to continue to enter into confidentiality or license
agreements with our employees, consultants and other parties with whom we
contract, and control access to and distribution of our software, documentation
and other proprietary information. The legal protections described above would
afford only limited protection. Unauthorized parties may attempt to copy aspects
of our products, or otherwise attempt to obtain and use our intellectual
property. Monitoring unauthorized use of our products will be difficult, and the
steps we have taken may not prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States.

         Downturns in the telecommunications infrastructure, network security
         and related markets may cause our revenues and operating results to
         suffer.

         The market for our products depends on economic conditions affecting
the broader telecommunications infrastructure, network security and related
markets. Downturns in these markets may cause large enterprises to delay or
cancel security projects, reduce their overall or security-specific information
technology budgets or reduce or cancel orders for our products. In this
environment, customers may experience financial difficulty, cease operations or
not budget for the purchase of our products. This, in turn, may lead to longer
sales cycles, price pressures, delays in payment and collection, causing us to
realize lower revenues and margins. In particular, capital spending in the
information technology sector generally has decreased in the past 12 months, and
many of our customers and potential customers have experienced declines in their
revenues and operations. In addition, the terrorist acts of September 11, 2001
have created an uncertain economic environment, and we cannot predict the impact
of these events, any future terrorist acts or any related military action, on
our customers or our business. We believe that, in light of these events, some
businesses may curtail or eliminate capital spending on information technology.
If capital spending in our markets declines, it may be necessary for us to gain
significant market share from our competitors in order to meet our financial
goals and achieve profitability.

         Undetected product errors or defects could result in loss of revenues,
         delayed market acceptance and claims against us.

         We will offer a warranty on all of our products, allowing the customer
to have any defective unit repaired or to receive a replacement product. Our
products may contain undetected errors or defects. If one of our products fails,
we may have to replace all affected products without being able to book any
revenue for the replacement units, or we may have to refund the purchase price
for the defective units. Some errors are discoverable only after a product has
been installed and used by customers. Any errors discovered after commercial
availability of our products could result in loss of revenues and claims against
us.

         If we are unable to fix errors or other problems that later are
identified after installation, in addition to the consequence described above,
we could experience:

         .  failure to achieve market acceptance;

         .  loss of customers;

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<PAGE>

         .  loss of or delay in revenues and loss of market share;

         .  diversion of development resources;

         .  increased service and warranty costs;

         .  legal actions by our customers; and

         .  increased insurance costs.

         If we fail to predict our manufacturing requirements accurately, we
         could incur additional costs or experience manufacturing delays, which
         could reduce our gross margins or cause us to lose sales.

         Because we do not expect to have long-term supply contracts with our
contract manufacturers, they will not be obligated to supply products to us for
any specific period, in any specific quantity or at any specific price, except
as may be provided in a particular purchase order. We will provide forecasts of
our demand to our contract manufacturers prior to the scheduled delivery of
products to our customers. If we overestimate our requirements, our contract
manufacturers may have excess component inventory, which would increase our
costs. If we underestimate our requirements, our contract manufacturers may have
an inadequate component inventory, which could interrupt the manufacturing of
our products and result in delays in shipments and revenues. In addition, lead
times for materials and components that we order vary significantly and depend
on factors such as the specific supplier, contract terms and demand for each
component at a given time. We may also experience shortages of components from
time to time, which also could delay the manufacturing of our products.

         A breach of network security could harm public perception of our
         products, which could harm our business.

         If an actual or perceived breach of network security occurs in one of
our customer's security systems, regardless of whether the breach is
attributable to our products, the market perception of the effectiveness of our
products could be harmed. This could cause us to lose existing and potential
customers or cause us to lose existing and potential resellers. Because the
techniques used by computer hackers to access or sabotage networks change
frequently and generally are not recognized until launched against a target, we
may be unable to anticipate these techniques.

         Because we are in the business of providing network security, our own
networks may be more likely to become a target of hacker attacks. If attacks on
our internal networks are successful, public perception of our products would be
harmed.

         We might have to defend lawsuits or pay damages in connection with any
         alleged or actual failure of our products.

         Because our products will provide and monitor network security and may
protect valuable information, we could face claims for product liability, tort
or breach of warranty. Anyone who circumvents our network security measures
could misappropriate the confidential information or other property of customers
using our products, or interrupt their operations. If that happens, affected
customers or others may sue us. In addition, we may face liability for breaches
caused by faulty installation of our products by our service and support
organizations. Defending a lawsuit, regardless of its merit, could be costly and
divert management attention. Our business liability insurance coverage may be
inadequate or future coverage may be unavailable on acceptable terms or at all.
Our business liability insurance has no specific provisions for product
liability for network security breaches.

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<PAGE>

         We could become subject to litigation regarding intellectual property
         rights that could be costly and result in the loss of significant
         rights.

         In recent years, there has been a significant increase in litigation in
the United States involving patents and other intellectual property rights. In
the future, we may become a party to litigation to protect our intellectual
property or as a result of an alleged infringement by us of another party's
intellectual property. Claims for alleged infringement and any resulting
lawsuit, if successful, could subject us to significant liability for damages
and invalidation of our intellectual property rights. These lawsuits, regardless
of their success, would likely be time-consuming and expensive to resolve and
would divert management time and attention. Any potential intellectual property
litigation could also force us to do one or more of the following:

         .  stop or delay selling, integrating or using products that use the
            challenged intellectual property;

         .  obtain from the owner of the infringed intellectual property right a
            license to sell or use the relevant technology, which license might
            not be available on reasonable terms, or at all; or

         .  redesign the products that use that technology.

         If we are forced to take any of these actions, our business might be
seriously harmed. Our business insurance may not cover potential claims of this
type or may not be adequate to indemnify us for all liability that could be
imposed.

         The inability to obtain any third-party license required to develop new
         products and product enhancements could seriously harm our business,
         financial condition and results of operations.

         From time to time, we may be required to license technology from third
parties to develop new products or product enhancements. Third-party licenses
may not be available to us on commercially reasonable terms, or at all. Our
inability to obtain any third-party license required to develop new products or
product enhancements could require us to obtain substitute technology of lower
quality or performance standards, or at greater cost, which could seriously harm
our business, financial condition and results of operations.

         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 55% of our outstanding stock as of April 30,
2002. These stockholders, if acting together, would be able to determine all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions.

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

         The market price of our common stock could 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 may
be more significant because of the relatively low volume of our common stock
that is traded on any given day. All of our outstanding common stock that was
issued in past private placements may currently be resold in reliance on Rule
144 of the Securities Act of 1933.

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<PAGE>

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

         As of April 30, 2002, we had approximately $34.3 million in cash, cash
equivalents and short-term investments on hand, which we expect will meet our
working capital and capital expenditure needs for the next 12 months. We may
need to raise additional funds at any time and, given our history, we cannot be
certain that we will be able to obtain additional financing on favorable terms,
if at all. Due to the recent volatility of the U.S. equity markets, particularly
for smaller technology companies, we may not have access to new capital
investment when we need to raise additional funds.

         Our future capital requirements will depend upon several factors,
including whether we are successful in developing our products, and our level of
operating expenditures. Our expenditures are likely to rise as we continue our
technology and business development efforts. If our capital requirements vary
materially from those we currently plan, 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 percentages, 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 all future earnings, if any, to finance the
development of our 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 network security
            industry;

         .  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 components of our
            line of network security 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;

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<PAGE>

     .    stock liquidity or cash flow constraints; and

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

     We have exited our old line of business, and have attempted to minimize our
     obligations related to that business, but if we are unsuccessful in
     minimizing those obligations, our business will suffer.

     We have exited our consumer-focused business, but continue to have certain
obligations, contingencies and potential liabilities relating to this business.

     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 discontinued operations. The complaint seeks an unspecified amount of
damages. This action, regardless of its success, is likely be time-consuming and
expensive to resolve and may divert management time and attention. If this
action is successful, we could be subject to significant liability for damages.

     We are also attempting to sub-lease our facility that we utilized with our
old business, but which is currently vacant. If we are not successful in
sub-leasing this facility, we will have to continue paying the entire rent for a
facility that we are not using, which would adversely affect our financial
results. In any event, given current commercial real estate market conditions in
Austin, Texas, where the facility is located, we believe that we will not be
able to completely eliminate our entire liability under this lease, if at all,
within the next 12 months.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

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

PART II. OTHER INFORMATION.

ITEM 1.  LEGAL PROCEEDINGS.

     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 discontinued operations. The complaint seeks an unspecified amount of
damages. We believe that the action has no merit, that the action is not proper
for class action treatment and that we have meritorious defenses available. We
intend to defend this action vigorously.

     On December 5, 2001, we and two of our current and former officers and
directors, as well as the managing underwriters in our initial public offering
were named as defendants in a purported class action lawsuit filed in the United
States District Court for the Southern District of New York. The lawsuit,

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which is part of a consolidated action that includes over 200 similar actions,
is captioned In re Initial Public Offering Securities Litigation, Brian Levey
vs. TippingPoint Technologies, Inc., et al., No. 01 CV 10976. The lawsuit
alleges that the defendants participated in a scheme to manipulate the initial
public offering and subsequent market price of our stock, by the underwriters
requiring certain of their customers to purchase stock in our initial public
offering as a condition to being allocated shares in the initial public
offerings of other companies. The purported plaintiff class for the lawsuit is
comprised of all persons who purchased our stock from March 17, 2000 through
December 6, 2000. The suit seeks rescission of the purchase prices paid by
purchasers of shares of our common stock. We believe the lawsuit is without
merit and intend to defend it vigorously. To the extent the plaintiffs are
successful in this action, we intend to seek indemnification and/or contribution
from the underwriters in our initial public offering pursuant to our
underwriting agreement with them. However, there can be no assurance that such
rights will be available to us or enforceable against the underwriters.

     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 6.  EXHIBITS AND REPORTS ON FORM 8-K.

     (a) None.

     (b) Reports on Form 8-K

         On January 30, 2002, the Company filed a current report on Form 8-K
     adopting a new fiscal year end. The Company's new fiscal year end will be
     on January 31, beginning with the fiscal year ending January 31, 2003.

         No other reports on Form 8-K were filed during the transition period or
     quarter period for which this report is filed.

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                                   SIGNATURES

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

                                  TIPPINGPOINT TECHNOLOGIES, INC.


Date: June 12, 2002               /s/ JAMES E. CAHILL
                                  --------------------------------------------
                                  James E. Cahill
                                  Vice President, Chief Financial Officer
                                  and General Counsel

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