NETPLIANCE INC, S-1/A, 2000-03-15

NETPLIANCE INC
S-1/A, 2000-03-15
COMPUTER PROCESSING & DATA PREPARATION

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<PAGE>

As filed with the Securities and Exchange Commission on March 15, 2000
Registration No. 333-93545

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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NETPLIANCE, INC.
(Exact name of registrant as specified in its charter)
Delaware 7370 77-0463167
_______________________ ___________________ _______________________
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification
organization) Code Number)
7600A North Capital of Texas Highway
Austin, Texas 78731
(512) 493-8300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
James E. Cahill
Vice President and General Counsel
Netpliance, Inc.
7600A North Capital of Texas Highway
Austin, Texas 78731
(512) 493-8300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Ross Clayton Mulford Paul R. Tobias
J. William Wilson Wilson Sonsini Goodrich &
Hughes & Luce, L.L.P. Rosati
111 Congress Avenue, Suite 900 8911 Capital of Texas Highway
Austin, Texas 78701 Austin, Texas 78759
(512) 482-6800 (512) 338-5400
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 145 under the Securities Act of
1933, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Each Class of Amount to be Offering Price Offering Price Registration
Securities to be Registered Registered (1) Per Share (2) (2) Fee (3)
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par value $8,050,000
(2).......................... shares $15.00 $120,750,000 $31,878
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</TABLE>
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(1) Includes 1,050,000 shares of Common Stock, $0.01 par value issuable upon
exercise of the underwriters' overallotment option.

(2) Estimated solely for purposes of computing the amount of registration fee
in accordance with Rule 457(a) under the Securities Act of 1933, as
amended.

(3) $26,400 of which was previously paid.

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to such Section 8(a), may determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION -- March 15, 2000

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Prospectus
, 2000
[NETPLIANCE LOGO APPEARS HERE]

7,000,000 Shares of Common Stock

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Netpliance, Inc.: The Offering:

. We offer . We are offering
Internet-based 7,000,000 shares of
content, our common stock.
applications and
services through
devices . The underwriters
specifically have an option to
designed for purchase an
Internet access, additional 1,050,000
commonly known as shares from us to
Internet cover over-
appliances. allotments.

. This is our initial
Proposed Symbol & public offering, and
Market: no public market
currently exists for
our shares. We
. We have applied anticipate that the
for listing on initial public
the Nasdaq offering price for
National Market our common stock
under the symbol will be between
NPLI. $13.00 and $15.00
per share.

. Closing: ,
2000

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<TABLE>
<CAPTION>
Per Share Total
-----------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Netpliance:
-----------------------------------------------------------------
</TABLE>

This investment involves risk. See "Risk Factors"
beginning on Page 5.

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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette
Chase H&Q
Robertson Stephens
DLJdirect Inc.
<PAGE>

[ARTWORK]

A diagram illustrates the elements of the i-opener network, starting at the
top with a picture of the i-opener Internet appliance on the left and pictures
of a cellular phone, a screen phone and set-top box with the words "Other
Access Devices" to the right. Two curved lines connect the i-opener appliance
and the access devices to a cloud labeled "Internet" with the words "i-opener
Nationwide Service" above it. Below the cloud is a rectangle with pictures of
four computer servers in it. Arrows point to each of four rectangles depicting
the following pages of the i-opener portal: the guide to the Internet, or Web
Guide, the e-mail "Mailbox" page, the online shopping mall, or Web Mall, and a
box containing the words "update, backup, metrics" to describe the network
functions.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Forward-Looking Statements................................................ 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business................................................................... 23
Management................................................................. 31
Related-Party Transactions................................................. 39
Principal Stockholders..................................................... 41
Description of Capital Stock............................................... 43
Shares Eligible for Future Sale............................................ 46
Underwriting............................................................... 48
Legal Matters.............................................................. 50
Experts.................................................................... 50
Where You Can Find Additional Information.................................. 50
Index to Financial Statements.............................................. F-1
</TABLE>
<PAGE>

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks discussed
under "Risk Factors."

Netpliance, Inc.

Our i-opener service consists of the following three integrated elements:

. i-opener Internet Appliance -- arrives ready to use and personalized to
the new user based on information provided while ordering. Our i-opener
Internet appliance is tailored to provide our i-opener service and comes
with a 10-inch flat-panel color screen, a standard-sized keyboard that
includes a pointer and an optional mouse. A new user is ready to access
our i-opener service and the Internet after plugging the i-opener
Internet appliance into an electric outlet, connecting it to a phone line
and turning it on. Because our i-opener Internet appliance requires no
boot-up, unlike a personal computer, our consumer portal appears
immediately after the i-opener Internet appliance is turned on.

. i-opener Internet Access -- comes prepackaged with our i-opener Internet
appliance and is delivered over a nationwide dial-up network. Our i-
opener Internet appliance can only access the Internet through our
network. Our system software enables us to deliver content over our
network to be stored locally on our i-opener Internet appliance, allowing
the user to access content even when the appliance is not connected to
the Internet. Our i-opener Internet appliance is programmed to
automatically dial into our network remotely several times a day to
retrieve new or updated content, email, system software upgrades and
software applications.

. i-opener Consumer Portal -- provides an entry point to the Internet and
provides links to consumer content and e-commerce sites tailored to the
user's age and geographic location. In the future we intend to further
tailor content to the personal preferences of each user. Our portal
provides access to stored content on our content channels, including
news, weather, sports, entertainment and finance, and e-mail. In
addition, our portal features an online shopping mall and a guide to the
Internet with direct links to pre-selected, consumer-oriented content
sites as well as an Internet browser.

We currently are deriving substantially all of our revenues from monthly
subscriptions from our users. In the future we expect to derive additional
revenue from selling advertisements featured on our portal and from revenue
sharing on e-commerce transactions initiated from our portal. We may also
receive revenue in the future from licensing our technology to manufacturers of
other Internet appliances and from selling additional applications to our users
for additional fees. We charge, and expect to continue to charge, significantly
less than our cost for our Internet appliance in order to acquire users. Our i-
opener Internet appliance is manufactured by a third party and is shipped
directly from the manufacturer to the new user.

Our objective is to establish ourselves as the leader in the new market of
delivering user-friendly Internet access, content and applications through
Internet appliances. We intend to consistently upgrade and customize our portal
and add new features to ensure user satisfaction. Our infrastructure, operating
system and network are designed to provide access to our i-opener service over
broadband digital subscriber lines and cable, and through wireless telephones
and other handheld communication devices. Our ability to remotely upgrade and
deliver software to Internet appliances through our network will allow us to
provide users with new and emerging Internet-based applications and services as
they become available.

1
<PAGE>

We were incorporated in Texas in January 1999, and we began offering our i-
opener service in November 1999. We have virtually no operating history and
have not proven our ability to generate revenues. As of December 31, 1999, we
had an accumulated deficit of $43.5 million and only $25,716 in revenues from
inception through December 31, 1999. We reincorporated in Delaware on March 15,
2000. Our principal executive offices are located at 7600A North Capital of
Texas Highway, Austin, Texas 78731 and our telephone number is (512) 493-8300.
Our Web site address is www.netpliance.com. Information contained on our Web
site should not be considered a part of this prospectus.

Strategic Relationships

In December 1999 we entered into an agreement with GO.com, an affiliate of
The Walt Disney Company, under which GO.com will act as our exclusive provider
of specified content to be locally stored in our children, family, sports, news
and entertainment content channels. Also in December 1999, we entered into a
non-binding letter of intent with U S WEST regarding the joint marketing and
distribution of our i-opener service to U S WEST's subscribers through dial-up
and digital subscriber lines. Affiliates of GO.com and U S WEST invested in our
Series D preferred stock.

Under agreements we entered into in February 2000 with two Canadian cable
companies, Rogers Communications and Shaw Communications, we agreed to
negotiate final agreements relating to the joint marketing and distribution of
our i-opener service in Canada through broadband cable with Rogers and Shaw.
Also in February 2000, we entered into a non-binding letter of intent with
Thomson Multimedia and ATLINKS, an affiliate of Thomson, regarding the
manufacture and sale by ATLINKS of Internet access devices, including screen
phones, enabled with our i-opener service. Rogers and affiliates of Shaw and
Thomson invested in our Series E preferred stock.

2
<PAGE>

The Offering

<TABLE>
<C> <S>
Common stock offered.............................. 7,000,000 shares
Common stock to be outstanding after the offering. 59,435,935 shares
Use of proceeds................................... We plan to use the
proceeds from this
offering for working
capital, general corporate
purposes and other
operating expenses,
including sales and
marketing, subsidies for
the purchase price of our
i-opener Internet
appliance and further
development of our
services. However, we do
not have specific uses
planned for the net
proceeds of this offering.
See "Use of Proceeds."
Nasdaq National Market symbol..................... NPLI
</TABLE>

The number of shares of common stock to be outstanding after the offering is
based on:

.19,036,446 shares of common stock outstanding as of March 14, 2000;

. 32,932,455 shares of common stock issuable upon conversion of our
preferred stock outstanding as of March 14, 2000; and

. 467,034 shares of common stock that we expect to issue upon the
exercise of warrants that will expire upon the closing of this
offering.

The above number excludes:

. 8,812,422 shares of common stock issuable upon exercise of
outstanding options under our stock option plan as of March 14, 2000
at a weighted average exercise price of $4.13 per share;

. 1,687,578 shares reserved for future issuance under our stock option
plan; and

. 600,000 shares of common stock issuable upon the exercise of an
outstanding common stock purchase warrant that does not expire upon
the closing of this offering.

See "Capitalization."

Generally, unless otherwise indicated, all information in this prospectus:

. assumes a three for one stock split;

. gives effect to the conversion of all preferred stock into common
stock and the exercise of warrants to purchase 467,034 shares of
common stock;

. assumes the reservation of a total of 10,500,000 shares of common
stock issuable under our stock option plan upon the closing of this
offering;

. gives effect to our reincorporation in Delaware; and

. assumes no exercise of the underwriters' over-allotment option.

We have applied to register the trademarks Netpliance(TM) and i-opener(TM).
Every other trademark, trade name or service mark appearing in this prospectus
belongs to its owner.

3
<PAGE>

Summary Historical and Pro Forma Financial Information
(In thousands, except per share data)

The following table summarizes our historical financial information. This
table does not present all of our financial information. You should read this
information together with our financial statements and the notes to those
statements beginning on page F-1 of this prospectus, and the information under
"Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
From January 12, 1999
(inception) through
December 31, 1999
<S> <C>
Statement of Operations Data:
Subscription revenue...................................... $ 26
Operating expenses........................................ 27,477
-----------
Loss from operations...................................... (27,451)
Other income, net....................................... 165
-----------
Net loss.................................................. $ (27,286)
===========
Net loss applicable to common stock....................... (43,528)
===========
Weighted average common shares outstanding................ 15,588,420
===========
Loss per common share--basic and diluted.................. $ (2.79)
===========
</TABLE>

<TABLE>
<CAPTION>
As of December 31, 1999
---------------------------
Pro Pro Forma
Actual Forma As Adjusted
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................... $ 9,563 $71,139 $161,279
Working capital..................................... 10,990 72,566 162,706
Total assets........................................ 20,625 82,180 171,858
Non-current portion of capital lease obligations.... 636 636 636
Total stockholders' equity.......................... 12,917 76,493 166,633
</TABLE>

The table above summarizes our balance sheet data:

. on an actual basis as of December 31, 1999;

. on a pro forma basis to reflect the conversion of all shares of
preferred stock outstanding as of December 31, 1999 into common
stock, issuance and conversion into common stock of 1,430,000 shares
of Series D and 1,127,675 shares of Series E preferred stock, the
issuance and exercise of warrants to purchase 467,034 shares of
common stock and the exercise of options to purchase 129,375 shares
of common stock subsequent to December 31, 1999; and

. on a pro forma as adjusted basis to reflect the pro forma
transactions described above and the sale of 7,000,000 shares of
common stock offered by this prospectus at an assumed initial
offering price of $14 per share after deducting estimated
underwriting discounts and commissions and estimated offering
expenses.

4
<PAGE>

RISK FACTORS

An investment in our common stock involves a high degree of risk. You should
consider carefully the following risks and the other information in this
prospectus before investing in our common stock. Each of the following risks
could seriously harm our business and results of operations. The trading price
of our common stock could decline due to any of these risks, and you may lose
all or part of your investment.

Risks Related to Our Business

We cannot predict our future results because we have virtually no operating
history.

We were incorporated in January 1999, and we began offering our i-opener
service in November 1999. Given our limited operating history, it will be
difficult for you to evaluate our performance. You should consider the
uncertainties that we may encounter as an early stage company in a new and
rapidly evolving market. These uncertainties include:

. market acceptance of Internet appliances;

. consumer demand for, and acceptance of, our i-opener service;

. our ability to create user-friendly applications and a portal that
appeals to consumers;

. our ability to contract with content providers who will furnish useful
and entertaining information to our users;

. our ability to support a large number of users;

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

. our unproven and evolving business model; and

. our need to expand significantly our internal resources to support
growth of our product and service offerings.

If we are not able to address successfully some or all of these
uncertainties, we may not be able to expand our business, compete effectively
or achieve profitability.

Our ability to generate revenues is unproven and we may never achieve
profitability.

We expect to generate revenues from user fees for our i-opener service and
from other sources such as application services, e-commerce, sponsorships and
advertising. Many of our potential customers have never purchased Internet
service for personal use, used the Internet and e-mail or engaged in e-commerce
transactions. We must convince these potential users to sign up for our service
and continue to pay a user fee for our i-opener service. Other potential users
already pay a monthly fee for Internet access and/or e-mail service, and we
must convince these consumers to pay our user fee in addition to their existing
fee or to switch from their existing service to our service. In addition,
certain online service providers in the Internet industry offer Internet access
at little or no cost to the user, which may cause us to lose existing and
potential users. Our inability to convince potential users to pay fees for a
significant period of time would prevent us from achieving profitability.

We currently price our i-opener Internet appliance below our cost and expect
to continue to subsidize the purchase price of our appliance for the
foreseeable future. At current pricing levels, a new customer must pay monthly
fees for our service for a significant period of time before we recover the
purchase price subsidy on that customer's appliance. Any reduction in user fee
levels due to competitive or other factors could increase significantly the
period of time necessary to recoup our purchase price subsidy. Due to our
pricing structure and the short period of time we have been offering our i-
opener service, we have experienced significant operating losses to date. If we
are unable to achieve sufficient revenues from user fees and other sources to
cover the subsidies of appliance purchases, we may never become profitable and
our business model could fail.

5
<PAGE>

We are not profitable and expect to incur future losses and negative cash flow
that could cause our stock price to fall.

As of December 31, 1999 we had an accumulated deficit of $43.5 million. We
expect to continue to spend significant and increasing amounts to subsidize the
purchase price of our i-opener Internet appliance. We also expect that sales
and marketing, research and development, and general and administrative
expenses will increase significantly. From inception through December 31, 1999,
we generated only $25,716 in revenues. We will need to generate and sustain
dramatically greater revenues from sales of our services if we are to achieve
profitability. If we are unable to achieve dramatically greater revenues, our
losses will likely continue indefinitely and we may never generate profits. If
this occurs, the market price of our common stock could suffer.

Our market share and revenues will suffer if we are not able to compete
successfully for users.

The markets for Internet appliances, consumer portals and Internet access
service are intensely competitive, evolving and subject to rapid technological
change. These markets are characterized by an increasing number of entrants. We
compete for users, and consequently for potential e-commerce and advertising
revenue, directly or indirectly, with the following categories of companies:

. online service providers, such as AOL, EarthLink and Microsoft;

. software platform providers such as Aether Systems and Liberate
Technologies;

. Internet portals, such as Excite@Home, Lycos and Yahoo!;

. manufacturers of other stand alone Internet appliances, such as InfoGear
and WebTV;

. manufacturers of portable Internet appliances, such as Hewlett Packard
and Palm, and cellular telephone and pager manufacturers; and

. manufacturers of personal computers, such as Apple, Compaq, Dell,
Gateway, Hewlett Packard and IBM.

Virtually all of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a substantially larger
installed base of customers than we do. In addition, many of our competitors
have nationally known brands and have extensive knowledge of our industry.
Moreover, our current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address consumer needs or to combine
hardware product and service offerings. We expect the intensity of competition
in this market to increase in the future. Increased competition is likely to
result in price reductions, reduced or negative margins and difficulty in
gaining market share. Any of these effects could seriously harm our business.

We rely on a single third-party to manufacture our Internet appliance. If the
manufacturer fails to deliver our products in a reliable, timely and cost-
efficient manner, our business will suffer.

We depend on our relationship with Quanta Computer, Incorporated, a
manufacturer based in Taiwan, for the production and delivery of our i-opener
Internet appliance. Since we do not have direct control over Quanta's
workmanship and the quality of its service, we cannot assure you that we will
be able to provide consistently reliable products for our users. If Quanta does
not produce our products on a timely basis or delivers products of unacceptable
quality, that do not meet specifications or are otherwise flawed, we may have
to delay product delivery, recall or replace unacceptable products. As a
result, we could lose existing and potential users.

If Quanta is unable to manufacture our i-opener Internet appliance due to
natural disasters, political turmoil or other reasons, or if Quanta refuses to
provide its manufacturing services on a timely basis and on

6
<PAGE>

commercially acceptable price terms and alternative providers of these services
are not available on acceptable terms, our operating expenses could increase
significantly, reducing the likelihood of our becoming profitable.

If our brand does not achieve the broad recognition necessary to expand and
maintain our user base, our revenues may not grow and our financial performance
may suffer.

We believe that broad recognition and a favorable consumer perception of our
products and services is essential to our future success. Our success in
promoting and maintaining our brand, or any other brand that we may use in the
future, will depend largely on:

. the success of our brand-enhancement strategy, including mass marketing
and multi-media advertising, promotional programs and public relations
activities;

. the quality and ease-of-use of our services and applications; and

. our success in providing high-quality content accessible from our
Internet portal.

If we are unsuccessful in establishing or maintaining a favorable image of
our products and services, we may not be able to expand our user base. In
addition, in order to attract and retain users and to promote and maintain our
brand or future brands, we expect to increase substantially our marketing
expenditures. If we incur expenses in promoting and maintaining our brands
without a corresponding increase in revenue and income, our financial results
could be seriously harmed.

If we are unsuccessful in obtaining compelling content, or in developing or
maintaining relationships with content providers, we may be unable to attract
and retain users.

We rely on third parties to provide our cached content, including news,
weather and relevant local information, on our i-opener portal. In addition,
some content provided via links to third-party sites is provided without the
contractual agreement of the third party. Our inability to establish or
maintain any or all of the relationships with our content providers could put
our delivery of quality services in jeopardy. The inability to obtain any of
this content could result in delays in the development or delivery of our
services and the loss of existing or potential users. Alternatively, contracts
or exclusive arrangements with content providers could result in diminished
demand for our service, if the content is not appealing to users, inferior in
quality or less desirable than content available from other portals or content
providers.

We will not be able to support increased numbers of users if our network
infrastructure is unable to expand to accommodate increased usage.

If our network systems cannot be expanded to manage increased demand, or if
our systems fail to perform, we could experience:

. unanticipated disruptions and reduced quality of service;

. decreased user service and satisfaction; or

. delays in the introduction of new applications and services.

Any of these results could impair our reputation, damage our brand and result
in decreased revenues.

If the number of users of our service increases substantially, we will need
to expand significantly and upgrade our technology, transaction processing
systems and network infrastructure. We do not know whether we will be able to
project accurately the rate or timing of any such increases in usage, or expand
and upgrade our systems and infrastructure to accommodate such increases in a
timely manner. In the event we do not have the required systems and
infrastructure to accommodate increased usage of our services, we will have to
contract for additional capacity. We cannot assure you that we will be able to
contract for additional capacity on terms acceptable to us, if at all.

7
<PAGE>

Our systems may fail and consequently our business may suffer.

Our ability to facilitate transactions successfully and provide high-quality
customer service also depends on the efficient and uninterrupted operation of
our computer and communications hardware systems. Our systems and operations
also are vulnerable to damage or interruption from human error, natural
disasters, power loss, telecommunication failures, break-ins, sabotage,
computer viruses, intentional acts of vandalism and similar events. While we
currently maintain redundant servers to provide limited service during system
disruptions, we do not have fully redundant systems, a formal disaster recovery
plan or alternative providers of hosting services. In addition, we do not carry
any business interruption insurance to compensate us for any losses that may
occur. Any system failure that causes an interruption in service or decreases
the responsiveness of our services could impair our reputation, damage our
brand name and consequently reduce our revenues.

We are dependent upon our telecommunications carrier to provide Internet access
to our users; if they fail to provide quality service, we may be unable to
retain users.

Since we do not have direct control over the reliability of our carrier's
network or the quality of its service, we cannot assure you that we will be
able to provide consistently reliable Internet access for our users. If the
quality of service provided by our telecommunications carrier does not meet our
clients' expectations, we may lose users because of dissatisfaction with our
service.

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

Our future success depends on our continuing ability to attract, hire, train
and retain a substantial number of highly skilled personnel and on the
continued service and performance of our senior management and other key
personnel, especially our Chief Executive Officer and Chairman of the Board.
The loss of the services of our executive officers or other key employees could
adversely affect our business. In addition, we will need to add a significant
number of new technical support and operations personnel to develop and
maintain the operations of our services. 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 in this
area is intense, and we may fail to attract or retain the employees necessary
to execute our business model successfully.

Rapid technological change could render our products and services obsolete.

The Internet and the e-commerce industries are characterized by rapid
technological innovation, sudden changes in user and customer requirements and
preferences, frequent new product and service introductions and the emergence
of new industry standards and practices. Each of these characteristics could
render our services, products, intellectual property and systems obsolete. The
rapid evolution of our market will require that we improve continually the
performance, features and reliability of our products and services,
particularly in response to competitive offerings. Our success also will
depend, in part, on our ability:

. to develop or license new products, services and technology that address
the varied needs of our customers and prospective customers; and

. to respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.

If we are unable, for technical, financial, legal or other reasons, to adapt
in a timely manner to changing market conditions or user preferences, we could
lose users, which would cause a decrease in our revenue.

8
<PAGE>

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

We expect that the net proceeds from this offering and cash on hand will
meet our working capital and capital expenditure needs for at least the next 12
months. After that time, we may need to raise additional funds, and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, if at all. Our future capital requirements will depend upon several
factors, including the rate of market acceptance of our products and services,
our ability to expand our user base, our level of expenditures for sales and
marketing and the cost of product and service upgrades. If our capital
requirements vary materially from those currently planned, we may require
additional financing sooner than anticipated. If we cannot raise funds on
acceptable terms, we may not be able to develop our products and services, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, any of which could have a material adverse effect
on our ability to grow our business. Further, if we issue equity securities,
you will experience dilution of your ownership percentage, and the new equity
securities may have rights, preferences or privileges senior to those of our
common stock.

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

We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to protect our intellectual property. We have applied
to register several trademarks, including Netpliance and i-opener, in the
United States. We have not yet attempted to register other marks that may
become important to us in the future, and none of our marks has been registered
in any other country. We have several United States patent applications
currently pending. If we are not successful in obtaining the patent protection
we seek, our competitors may be able to replicate our technology and compete
more effectively against us. The legal protections described above would afford
only limited protection. Unauthorized parties may attempt to copy aspects of
our products, services, or otherwise attempt to obtain and use our intellectual
property. Enforcement of trademark rights against unauthorized use,
particularly over the Internet and in other countries, may be impractical or
impossible and could generate confusion and diminish the value of those rights.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets and to determine the validity and scope of the
proprietary rights of others. Any litigation could result in substantial costs
and diversion of our resources and could seriously harm our business and
operating results. In addition, our inability to protect our intellectual
property may harm our business and financial prospects. Also, if we cannot
protect our domain names and prevent others from using similar domain names or
trademarks, we may not be able to establish a strong brand and our business and
financial results could suffer.

Our products and services employ technology that may infringe on the
proprietary rights of others, and we may be liable to others for significant
damages.

We believe there is an increasing amount of litigation in the Internet
industry regarding intellectual property rights. It is possible that third
parties may in the future claim that we or our products or services infringe
upon their intellectual property rights. We expect that developers and
providers of Internet appliances and similar devices, and providers of Internet
access and content services, will be subject to an increasing number of
infringement claims as the number of products, services and competitors in our
market grows. Any claim, with or without merit, could consume management time,
result in costly litigation, cause delays in implementation of our products or
services or require us to enter into royalty or licensing agreements. Royalty
or licensing agreements, if required and available, may be on terms
unacceptable to us or detrimental to our business. Moreover, a successful claim
of product infringement against us or our failure or inability to license the
infringed or similar technology on commercially reasonable terms could
seriously harm our business.

We may incur potential product liability for our i-opener Internet appliance
and for products sold over the Internet.

To date, we have had limited experience in selling our i-opener Internet
appliance. In addition, we have had limited experience in selling products over
the Internet and developing relationships with manufacturers or

9
<PAGE>

suppliers of those products. We plan to enter into relationships with
manufacturers or suppliers to offer their products directly through our
Internet service. Such a strategy involves numerous risks and uncertainties.
Although our agreements with manufacturers and suppliers may sometimes contain
provisions intended to limit our exposure to liability claims, these
limitations may not prevent our exposure to all potential claims. Liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. As a result, any such claims, whether or not
successful, could seriously damage our reputation and our business.

If we expand our business internationally, our business would become
increasingly susceptible to numerous international business risks.

Although we have not had international sales and subscription fee revenue to
date, we intend to initiate international sales efforts. International sales
and subscription fees are subject to inherent risks, including:

. unexpected changes in international regulatory requirements and tariffs;

. difficulties in staffing and managing foreign operations;

. longer payment cycles;

. greater difficulty in accounts receivable collection;

. potentially adverse tax consequences;

. price controls or other restrictions on foreign currency; and

. difficulties in obtaining export and import licenses.

To the extent our dependence on revenues from international sales and
subscription fees increases, a material adverse effect on our international
business could materially and adversely affect our overall business, operating
results and financial condition.

Risks Related to Our Industry

The market for Internet appliances is new and may not develop as we anticipate.

Because the Internet appliance market is new and evolving, the potential
size of this market opportunity and the timing of its development are
uncertain. Broad acceptance of Internet appliances will depend on many factors.
These factors include:

. the willingness of large numbers of consumers to use devices other than
personal computers to access the Internet; and

. the development of content and applications that are accessible from
Internet appliances.

If the market for Internet appliances does not develop or develops more
slowly than we anticipate, our revenues will not grow as quickly as we
anticipate, if at all.

If Internet use does not continue to increase, we may not be able to expand our
business and increase our revenues.

Use of the Internet has grown dramatically, but we cannot assure you that
Internet use will continue to grow at the same rate, or at all. Substantially
all of our revenue is dependent on the continued growth in use of the Internet.
A decrease in the demand for Internet services or a reduction in the
anticipated growth for such services may prevent us from expanding our business
and increasing our revenue.

We could face liability for content retrieved through our Internet portal.

As a distributor of Internet content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based upon the nature and content of the materials that we

10
<PAGE>

distribute. Although we carry general liability insurance, our insurance may
not cover claims of this type or may not be adequate to indemnify us for all
liability that we may suffer. Any of these claims, particularly those resulting
in liability that is not covered by insurance or is in excess of insurance
coverage, could occupy significant amounts of our management's time and
attention, harm our reputation and negatively affect our business.

We could be exposed to liability or increased costs if new case law is decided,
or new government regulation is enacted, regarding the Internet.

The law relating to our business and operations is evolving and no clear
legal precedents have been established. The adoption of any new Internet laws
and regulations or the application of existing laws and regulations to the
Internet and e-commerce may decrease the growth in the use of the Internet. For
example, tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in e-commerce, and new state tax
regulations may subject us to additional state sales or other taxes. These
results could decrease the demand for our products and services or increase the
cost of doing business, either of which would reduce our revenue or
profitability.

In addition, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
If we were alleged to have violated federal, state or foreign civil or criminal
law, even if we could successfully defend such claims, it could occupy
significant amounts of management's time, harm our business reputation and
negatively affect our operating results and financial condition.

Concerns regarding the security of transmission of confidential information
over the Internet may reduce consumer confidence in our product and service
offerings and negatively impact our business.

The secure transmission of confidential information over the Internet is
essential to maintaining user confidence in our Internet service. Substantial
or ongoing security breaches on our system or other Internet-based systems
could significantly damage user confidence and harm our business. A party that
is able to circumvent our security systems could steal proprietary information
or cause interruptions in our operations. Security breaches also could damage
our reputation and expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits, which may not be
adequate to reimburse us for losses caused by security breaches. While we
attempt to protect against and remedy security breaches, we cannot guarantee
that our security measures will prevent security breaches. We also face risks
associated with security breaches affecting third parties conducting business
over the Internet. Any publicized security problems relating to third parties
could heighten concern regarding security and privacy on the Internet, inhibit
the growth of the Internet and, therefore, our Internet service as a means of
conducting commercial transactions.

Risks Related to this Offering

You may not be able to sell your stock for the same price or a price higher
than you paid when you want to sell it if a public market does not exist for
our stock.

An active public market for our common stock may not develop or be sustained
after this offering. The market price for our common stock will vary from the
initial offering price. 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 quarterly operating results;

. changes in estimates of our financial performance by securities
analysts;

. changes in market valuations of comparable Internet-related companies;

11
<PAGE>

. announcements by us or our competitors of new products, services,
significant contracts, acquisitions, strategic relationships, joint
ventures or capital commitments;

. our inability to locate or maintain suppliers of our manufactured
products at prices that will allow us to attain profitability;

. product or design flaws, product recalls or similar occurrences;

. loss of a major content provider;

. network outages;

. loss of our telecommunications provider;

. additions or departures of key personnel;

. sales of common stock in the future; and

. fluctuations in stock market prices and volume, which are particularly
common among highly volatile Internet-related securities.

We will determine the initial public offering price of the shares of our
common stock through negotiations with the underwriters, and this price may not
be indicative of the price that will prevail in the trading market.

Future sales by current stockholders may depress our stock price.

The market price of our common stock could decline as a result of sales of a
large number of shares in the market after this offering or the perception that
such sales could occur. These factors also could make it more difficult for us
to raise funds through future offerings of common stock.

There will be 59,435,935 shares of common stock outstanding immediately
after this offering. The 7,000,000 shares sold in this offering will
immediately be transferable without restriction in the public market, unless
these shares are held by affiliates. 190,254 shares will become eligible for
sale 90 days after the date of this prospectus. The holders of an additional
51,629,178 shares are subject to agreements with the underwriters or us that
restrict their ability to transfer their stock for 180 days after the date of
this prospectus without consent of the underwriters or us. After these
agreements expire, 34,451,757 additional shares will be eligible for immediate
sale in the public market subject to restrictions pursuant to Rule 144. See
"Shares Eligible for Future Sale."

Our stockholders could be adversely affected if our management and larger
stockholders use their influence in a manner adverse to our stockholders'
interests.

On completion of this offering, our executive officers, directors and 5%
stockholders will beneficially own, in the aggregate, approximately 55.6% of
our outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent someone from acquiring or merging
with us. These stockholders may use their influence to approve or take actions
which are adverse to your interests. See "Principal Stockholders."

You will experience immediate and substantial dilution.

The initial public offering price is expected to be substantially higher
than the book value per share of the outstanding common stock immediately after
the offering. Accordingly, if you purchase common stock in the offering, you
will incur immediate dilution in the book value per share of the common stock
from the price you pay for the common stock. This dilution will be
approximately $11.20 per share, at the initial public offering price of $14.00.
In addition, we have issued options to acquire common stock at prices
significantly below the assumed initial public offering price. To the extent
outstanding options are ultimately exercised, there will be further dilution to
investors. For a discussion regarding dilution in this offering, see
"Dilution."

12
<PAGE>

Some shares in this offering may have been offered or sold in violation of the
Securities Act.

Prior to the effectiveness of the registration statement covering the shares
of our common stock being sold in this offering, Donaldson, Lufkin & Jenrette
Securities Corporation, an underwriter of this offering, provided written
materials to approximately 200 individuals that we had designated as potential
purchasers of up to 350,000 shares of common stock in this offering through a
directed share program. These materials may constitute a prospectus that does
not meet the requirements of the Securities Act of 1933. No individual who
received these written materials should rely upon them in any manner in making
a decision whether to purchase shares of common stock in this offering.

If the distribution of these materials by Donaldson, Lufkin & Jenrette
Securities Corporation did constitute a violation of the Securities Act of
1933, the recipients of these materials who purchased common stock in this
offering would have the right, for a period of one year after the date of their
purchase of common stock, to obtain recovery of the purchase price paid for
their common stock, or, if they had already sold the stock, sue us for damages
resulting from their purchase of the common stock. Assuming that these
recipients do not acquire additional shares through the underwriters in the
offering, these damages would total up to approximately $4.9 million plus
interest, based upon the initial public offering price of $14.00 per share, if
these investors seek recovery or damages after an entire loss of their
investment. To the extent that any of the recipients of the materials also
purchase shares through the underwriters in this offering outside the directed
share program, the potential damages would increase by $14.00 per share so
purchased. We have no way of knowing how many, if any, additional shares of
common stock will be purchased by these recipients through the underwriters
outside the directed share program, but we believe that the number will not be
significant. If these recipients seek recovery or damages, our business,
results of operations and financial condition would be harmed.

If our management does not effectively use the proceeds from this offering, we
may not be able to successfully operate and grow our business.

We do not have specific uses planned for the net proceeds of this offering.
The net proceeds of this offering will be available for working capital,
general corporate purposes and other operating expenses. We believe we need to
retain flexibility to respond to factors affecting our business in determining
the amount, if any, of these expenditures among our several priorities.
Accordingly, our management will retain broad discretion as to the allocation
of the proceeds of this offering and may use such proceeds in a manner with
which you may not agree. See "Use of Proceeds."

Provisions in our charter documents and Delaware law may deter takeover efforts
that could be beneficial to stockholder value.

Upon the closing of this offering, certain provisions of our certificate of
incorporation and bylaws, and the anti-takeover statute in Delaware law, may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. See "Description of Capital Stock-- Delaware Anti-Takeover
Statute and Charter and Bylaw Provisions" for a description of these provisions
and their effects.

13
<PAGE>

FORWARD-LOOKING STATEMENTS

Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, without limitation, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipate," "believe," "estimate" and similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, there are important factors that
could cause actual results to differ materially from those expressed or implied
by these forward-looking statements, including our plans, objectives,
expectations and intentions and other factors discussed under "Risk Factors."

14
<PAGE>

USE OF PROCEEDS

We expect to receive net proceeds of approximately $90.1 million from the
sale of 7,000,000 shares of our common stock in this offering, at an assumed
initial public offering price of $14 per share after deducting underwriting
discounts and commissions and estimated expenses payable by us. We will receive
approximately $13.7 million from the sale of an additional 1,050,000 shares if
the underwriters' over-allotment option is exercised in full.

We plan to use the net proceeds of this offering for working capital,
general corporate purposes and other operating expenses including:

. sales and marketing;

. subsidies for the purchase price of our i-opener Internet appliance; and

. further development of our services.

We do not have specific uses planned for the net proceeds of this offering.
We believe that we need to retain flexibility with respect to the use of the
net proceeds of this offering to respond to factors affecting our business. The
amounts and timing of these expenditures will vary depending on a number of
factors, including competitive and technological developments, success of our
marketing efforts and the rate of growth, if any, of our business. Because of
these uncertainties, we cannot tell you with any reasonable certainty how we
plan to allocate the net proceeds.

We will retain broad discretion in the allocation of net proceeds of this
offering.

Pending the uses described above, we will invest the net proceeds in short-
term, interest bearing, investment-grade securities, certificates of deposit or
direct or guaranteed U.S. government obligations, such as Treasury bills.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business and do not anticipate paying any cash dividends in the
foreseeable future.

15
<PAGE>

CAPITALIZATION

The table below sets forth our capitalization:

.on an actual basis as of December 31, 1999;

. on a pro forma basis to reflect the conversion of all shares of preferred
stock outstanding as of December 31, 1999 into common stock, issuance and
conversion into common stock of 1,430,000 shares of Series D preferred
stock on January 5, 2000 and 1,127,675 shares of Series E preferred stock
on February 7, 2000, the issuance and exercise of warrants to purchase
467,034 shares of common stock, the beneficial conversion features
approximating $27,155,700 and $13,532,100 associated with the Series D
and E preferred stock issuances, respectively, approximately $24,300,000
of deferred stock option compensation and $4,320,000 of compensation
expense relating to stock options granted to directors prior to March 14,
2000 and the exercise of options to purchase 129,375 shares of common
stock subsequent to December 31, 1999; and

. on a pro forma as adjusted basis to reflect the pro forma transactions
described above and the sale of 7,000,000 shares of common stock offered
by this prospectus at an assumed initial offering price of $14 per share
after deducting estimated underwriting discounts and commissions and
estimated offering expenses.

The capitalization information is qualified by, and you should read it in
conjunction with, "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the more
detailed financial statements and related notes and the information appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
(In thousands, except share
data)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 9,563 $ 71,139 $161,279
======== ======== ========

Noncurrent portion of capital lease
obligations................................... $ 636 $ 636 $ 636

Stockholders' equity:
Preferred stock, par value $0.01; 5,000,000
shares authorized; 841,981 shares issued and
outstanding actual; no shares issued and
outstanding pro forma; and no shares issued
and outstanding pro forma as adjusted....... 29,492 -- --
Common stock, par value $0.01; 250,000,000
shares authorized, 18,907,071 shares issued
and outstanding actual; 52,435,935 shares
issued and outstanding pro forma; and
59,435,935 shares issued and outstanding pro
forma as adjusted .......................... 189 524 594
Additional paid-in capital................... 41,749 203,773 293,843
Deferred stock option compensation........... (14,164) (38,447) (38,447)
Notes receivable from stockholders........... (821) (821) (821)
Accumulated deficit.......................... (43,528) (88,536) (88,536)
-------- -------- --------
Total stockholders' equity................... 12,917 76,493 166,633
-------- -------- --------
Total capitalization........................... $ 13,553 $ 77,129 $167,269
======== ======== ========
</TABLE>

Outstanding shares in this table excludes:

. 8,812,422 shares of common stock issuable upon the exercise of stock
options outstanding as of March 14, 2000 under our stock option plan at a
weighted average exercise price of $4.13 per share;

. 1,687,578 shares of common stock available for issuance under our stock
option plan; and

. 600,000 shares of common stock issuable upon exercise of an outstanding
common stock purchase warrant that does not expire upon the closing of
this offering.

16
<PAGE>

DILUTION

As of December 31, 1999, our pro forma net tangible book value was $76.1
million or $1.45 per share. Pro forma net tangible book value per share
represents our total tangible assets less total liabilities, divided by the pro
forma number of shares of our common stock outstanding of 52,435,935, after
giving effect to the conversion of Series A, B, C, D and E preferred stock into
common stock upon completion of the offering, the exercise of warrants to
purchase 467,034 shares of common stock, and the issuance of 129,375 shares of
common stock upon the exercise of stock options during the period from January
1, 2000 to March 14, 2000.

Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
our common stock immediately afterwards. Assuming our sale of 7,000,000 shares
of common stock offered by this prospectus at an assumed initial public
offering price of $14 per share, and after deducting estimated underwriting
discounts and commissions and estimated offering expenses, our pro forma net
tangible book value at December 31, 1999 would have been approximately $166.2
million, or approximately $2.80 per share. This represents an immediate
increase in pro forma net tangible book value of $1.35 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$11.20 to the investors purchasing shares of common stock in this offering. The
following table illustrates this dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $14.00
Pro forma net tangible book value per share before the
offering...................................................... $ 1.45
Increase in pro forma net tangible book value per share
attributable to new investors................................. $ 1.35
------
Adjusted pro forma net tangible book value per share after this
offering........................................................ $ 2.80
------
Dilution per share to investors purchasing in this offering...... $11.20
======
</TABLE>

The following table sets forth the differences between existing stockholders
and the new investors with respect to the number of shares of common stock
purchased from us, the total consideration paid and the average price per share
paid. We have assumed an initial public offering price of $14 per share, and we
have not deducted estimated underwriting discounts and commissions and
estimated offering expenses in our calculations.

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 51,968,901 87% $100,072,254 50% $ 1.93
Existing warrant holders. 467,034 1 1,997,268 1 4.28
Purchasers in this
offering................ 7,000,000 12 98,000,000 49 14.00
---------- --- ------------ --- ------
Total.................. 59,435,935 100% $200,069,522 100% $ 3.37
========== === ============ === ======
</TABLE>

The foregoing discussion and tables assume no exercise of any outstanding
stock options except for the exercise of 129,375 options. To the extent that
any shares reserved for issuance under our stock plan are issued, there will be
further dilution to new investors. See "Capitalization" and "Management--1999
Stock Option Plan."

17
<PAGE>

SELECTED FINANCIAL DATA
(In thousands, except share data)

The following selected financial data should be read in conjunction with our
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus. The statement of operations data below for the period from
January 12, 1999 (inception) to December 31, 1999, and the balance sheet data
as of December 31, 1999, are derived from and are qualified by reference to the
audited financial statements included elsewhere in this prospectus. Our
historical results are not necessarily indicative of results to be expected for
future periods.

<TABLE>
<CAPTION>
Period from
January 12, 1999
(Inception) to
December 31, 1999
<S> <C>
Statement of Operations Data:
Subscription revenue....................................... $ 26
-----------
Operating expenses:
Cost of services........................................... 1,254
Loss on subsidized appliance and accessory sales........... 1,679
Research and development................................... 6,457
Sales and marketing........................................ 14,070
General and administrative................................. 4,017
-----------
Total operating expenses.................................. 27,477
-----------
Loss from operations....................................... (27,451)
Interest income............................................ 305
Interest expense........................................... (140)
-----------
Net loss................................................... (27,286)
Effect of beneficial conversion feature of convertible
preferred stock........................................... (16,242)
-----------
Net loss applicable to common stock........................ $ (43,528)
===========
Loss per common share:
Weighted average common shares outstanding(1).............. 15,588,420
Basic and diluted(1)....................................... $ (2.79)
Unaudited pro forma loss per common share:
Weighted average shares outstanding(1)..................... 31,181,298
Basic and diluted(1)....................................... $ (1.40)
<CAPTION>
As of
December 31, 1999
<S> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $ 9,563
Working capital............................................ 10,990
Total assets............................................... 20,625
Non-current portion of capital lease obligations........... 636
Total stockholders' equity................................. 12,917
</TABLE>
- ---------------------
(1) See Note 3 to the Financial Statements for an explanation of the
determination of the weighted average shares used to compute basic and
diluted net loss per share and unaudited pro forma basic and diluted net
loss per share.

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and operations should be
read in conjunction with the consolidated financial statements and the related
notes included elsewhere in this prospectus. This discussion contains forward-
looking statements that involve risks and uncertainties. Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including but not limited to, those described under
"Risk Factors" and elsewhere in this prospectus.

Overview

We offer Internet-based content, applications and services, through devices
specifically designed for Internet access, commonly known as Internet
appliances. In November 1999, we introduced our current i-opener service, which
combines our i-opener Internet appliance, Internet access and our own consumer
portal. Our i-opener service includes all of the elements required for a user
to access the Internet. We believe that our i-opener offering simplifies
Internet access and appeals to both novice and veteran Internet users.

We have a limited operating history and have generated only $25,716 in
revenues from inception through December 31, 1999. We expect to incur
significant operating expenses over the next several years in connection with
the continued development and expansion of our business. In particular, we
expect our sales and marketing expenses to increase as we continue to establish
our brand. In addition, we subsidize the purchase price of our i-opener
Internet appliance. As our user base increases, we anticipate a corresponding
increase in total expenditures for these subsidies. We have experienced
operating losses since inception as a result of efforts to develop and market
our i-opener service. We expect that we will continue to incur net losses as we
continue to expend significant resources on sales and marketing and develop
additional products and service offerings. As of December 31, 1999, we had an
accumulated deficit of $43.5 million.

We currently generate revenues from monthly user fees for our i-opener
service. We charge our users $21.95 per month for our standard service. We also
offer a limited-access service plan for $9.95 per month and a service plan to
access the Internet through a traditional PC combined with our standard service
at $26.95 per month. We expect that most of our fees will come from our
standard service. We offer the i-opener Internet appliance at a price below our
cost, as an incentive for new customers to subscribe to the i-opener service.
The cost of the i-opener Internet appliance and accessories, net of sales
proceeds, is classified in sales and marketing expenses at the time of sale, as
the loss represents customer acquisition costs.

In the future we may generate revenue from sources in addition to user fees,
such as:

. application services;

. e-commerce;

. sponsorships and advertising; and

. licensing arrangements with other appliance manufacturers.

To date, we have funded our activities primarily through private equity
offerings, which have included sales of our common stock and preferred stock.

Results of Operations

Period ended December 31, 1999

Subscription revenues. Subscription revenues consist primarily of monthly
subscription fees paid by businesses and consumers for our i-opener service.
Subscription revenues totaled $25,716 for the period ended December 31, 1999.
This revenue is attributable to customers who used our i-opener service
primarily during the month of December. As of December 31, 1999, we had
approximately 3,700 subscribers.

19
<PAGE>

Cost of services. Cost of services consists primarily of employee salaries
and expenses related to providing the i-opener service to subscribers, content
and telecommunications network charges paid to third parties and depreciation
on equipment used to provide the i-opener service. Cost of services totaled
$1.3 million for the period ended December 31, 1999.

Subsidized appliance and accessory sales. We offer our i-opener Internet
appliance and accessories at a price below our cost, as an incentive for new
customers to subscribe our Internet service. We present the loss generated from
the sale of the units and accessories as an operating expense since sales of
these devices are not our principal business activity and the loss primarily
represents customer acquisition costs. At December 31, 1999, subsidized
appliance and accessory sales resulted in a charge of approximately $1.7
million.

Research and development expenses. Our research and development expenses
consist primarily of employee salaries and related expenses and consulting fees
relating to the design of the i-opener service, as well as the development of
our technology to manage and deliver content and applications to various
Internet appliances. Research and development expenses were approximately $6.5
million for the period ended December 31, 1999.

Sales and marketing expenses. Sales and marketing expenses consist primarily
of employee salaries for marketing and business development sales personnel,
and costs of our marketing efforts to generate demand and consumer awareness of
our i-opener service. These costs include development of media advertising,
public relations events, promotions and trade shows. Also included in sales and
marketing expenses is $4.1 million related to the grant to U S WEST of an
immediately exercisable warrant to purchase 600,000 shares of common stock at
an exercise price of $6.67 per share. The expense represents the estimated fair
value of the warrant on the date of grant.

General and administrative expenses. General and administrative expenses
consist primarily of employee salaries and related expenses for the executive,
administrative, finance and information systems departments, and facility
costs, professional fees and recruiting. General and administrative expenses
were approximately $4.0 million for the period ended December 31, 1999.
Included in general and administrative expenses for the period ended December
31, 1999 is $154,251 of stock compensation expense related to stock options
granted during the period with exercise prices that were less than the
estimated fair value of the underlying shares of common stock on the date of
grant. Additional deferred stock compensation totaled approximately $14.2
million as of December 31, 1999. This amount is amortized over the vesting
periods of the applicable options.

Liquidity and Capital Resources

From inception in January 1999 through December 31, 1999, we financed our
operations and met our capital expenditure requirements primarily from proceeds
of the private sale of equity securities totaling approximately $37.6 million.
At December 31, 1999, we had $9.6 million in cash and cash equivalents. The
expansion of our business will require significant additional capital to fund
operating losses, capital expenditures and working capital needs.

Net cash used by operating activities was approximately $25.0 million for
the period ended December 31, 1999. Cash used in operating activities consisted
primarily of net operating losses due to research and development, sales and
marketing, and general and administrative costs.

Net cash used by investing activities was approximately $1.9 million for the
period ended December 31, 1999. Cash used in investing activities consists of
the purchase of property and equipment.

Net cash provided by financing activities was approximately $36.4 million
for the period ended December 31, 1999, including $37.4 million of proceeds
raised from the private sale of equity securities during the period.

20
<PAGE>

We have commitments under facility and other operating leases of $1.3
million and obligations under capital leases of $1.9 million as of December 31,
1999. The obligations under capital leases relate to equipment leased under
leasing facilities with three different vendors. Each of these expires in the
year 2001. Subsequent to December 31, 1999, we entered into an additional
facility lease agreement expiring in the year 2004. The total commitment under
this lease approximates $6.0 million.

We also have a commitment to the manufacturer of our i-opener Internet
appliance to purchase an agreed number of units. As of March 14, 2000, we have
made deposits to the manufacturer sufficient to satisfy this purchase
commitment.

Our future capital requirements will depend on a variety of factors,
including market acceptance of Internet appliances and our i-opener service,
the resources we devote to develop, market, sell and support our current and
future product offerings, and other factors. We expect to devote substantial
capital resources:

. for our sales and marketing efforts;

. to subsidize the purchase price of our i-opener Internet appliance;

. to hire and expand our engineering, sales and marketing and customer
support organizations;

. to further develop our service offerings; and

. for general corporate purposes.

Although we have no specific plans regarding future expenditures, we believe
that our cash and cash equivalents, the net proceeds received subsequent to
December 31, 1999 related to our issuance of Series D preferred stock and
Series E preferred stock and the net proceeds from this offering will be
sufficient to fund our operations for at least the next 12 months. Despite our
expectations, we may need to raise additional capital before that time. We may
need to raise additional funds in order:

. to fund anticipated growth, including significant increases in personnel,
facilities and computer systems;

. to develop new or enhance existing services and products, including our
network infrastructure;

. to subsidize the purchase price of our i-opener Internet appliance; or

. acquire or invest in complementary businesses, technologies, services or
products.

In addition, in order to meet long term liquidity needs, we may need to
raise additional funds, establish a credit facility or seek other financing
arrangements. Additional funding may not be available on favorable terms, or at
all.

Finally, shares of common stock being sold in this offering through our
directed share program may have been offered or sold in violation of the
federal securities laws. If these offers or sales were in violation of those
laws, the purchasers could, for a period of one year after the date of their
purchase of common stock, recover the purchase price paid for their common
stock, or, if they sell the stock, sue us for damages resulting from their
purchase of the common stock. If any of these investors successfully seek
recovery or damages, we may need to use a portion of the net proceeds of this
offering, or we may need to raise additional funds, in order to pay any
recovery or damages awarded to these investors.

Year 2000

We have designed our network and our service for use in the year 2000 and
beyond and believe our network and service are year 2000 ready.

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<PAGE>

To date, we have not experienced any material year 2000 problem relating to
any of our internal systems or services. Our internal operations and business
are also dependent upon the computer-controlled systems of third parties such
as our suppliers, customers and other service providers. We believe that,
absent a systemic failure outside our control, such as a prolonged loss of
electrical or telecommunications service, year 2000 problems at third parties
will not have a material impact on our operations. The failure of our internal
systems or the systems of third parties to be year 2000 ready could temporarily
prevent us from providing service to our customers, issuing invoices and
developing products and services and could require us to devote significant
resources to correct such problems. The costs associated with remediating any
year 2000 problems have not been material to date. Although we do not
anticipate that these costs will be material in the future, we cannot assure
you that these costs will not be material.

Disclosure About Market Risk

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

Recent Accounting Pronouncement

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. We will adopt SFAS No. 133 as required
by SFAS No. 137, "Deferral of the Effective Date of the FASB Statement No.
133," in fiscal year 2001. We do not expect the adoption of SFAS No. 133 to
have an impact on our financial condition or results of operations.

22
<PAGE>

BUSINESS

Overview

We offer Internet-based content, applications and services through devices
specifically designed for Internet access, commonly known as Internet
appliances. In November 1999 we introduced our current i-opener service, which
combines our i-opener Internet appliance, Internet access and our own consumer
portal. Our i-opener service includes all of the elements required for a user
to access the Internet. We believe that our offering avoids many of the
technological complexities associated with using personal computers, or PCs.
For example, because our i-opener Internet appliance requires no boot-up, our
consumer portal appears immediately after the i-opener Internet appliance is
turned on. For this reason, we believe that our i-opener offering simplifies
Internet access and appeals to both novice and veteran Internet users.

Our objective is to establish ourselves as the leader in the new market of
delivering user-friendly Internet access, content and applications through
Internet appliances. We intend to consistently upgrade and customize our portal
and add new features to ensure user satisfaction. Our infrastructure, operating
system and network are designed to provide access to our i-opener service over
broadband digital subscriber lines and cable, and through wireless telephones
and other handheld communication devices. Our ability to remotely upgrade and
deliver software to Internet appliances through our network, will allow us to
provide users with new and emerging Internet-based applications and services as
they become available.

Industry Overview

Growth of the Internet

The Internet is an increasingly significant global mass medium for
conducting business, collecting and exchanging information, facilitating
communication and providing entertainment. International Data Corporation, or
IDC, estimates that the number of Internet users worldwide will grow from
approximately 142 million at the end of 1998 to approximately 502 million by
the end of 2003, representing a compound annual growth rate of 29%. We expect
growth in Internet usage to translate into growth in demand for devices to
access the Internet and growth in revenues for online service providers.

The rapid acceptance of the Internet has created an opportunity for e-
commerce. A growing number of Internet users are conducting e-commerce
transactions such as trading securities, buying goods, purchasing airline
tickets and paying bills. According to IDC, the percentage of Internet users
buying goods and services on the Internet will increase from approximately 22%
in 1998 to approximately 36% in 2003, and the total value of goods and services
purchased directly on the Internet will increase from approximately $27.0
billion in 1998 to approximately $842.7 billion in 2003.

Advertisers and direct marketers are increasingly using the Internet to
locate customers, advertise and facilitate transactions. The Internet allows
marketers to interact more effectively with customers and to more easily obtain
relevant data about buying patterns, preferences and demands. The value of
Internet advertising is enhanced by the ability of advertisers to obtain
specific user information and target promotions and advertisements effectively.
According to Forrester Research, the total worldwide dollar value of Internet
advertising will increase from $3.3 billion in 1999 to $24.1 billion in 2003.

Need for Simplified Internet Accessibility

Today, the Internet is primarily accessed through PCs, which we believe many
consumers find relatively complex and expensive. PC-based devices present many
challenges for consumers such as costly hardware, large components, limited
mobility, complex system configuration and time consuming boot-up and Internet
dial-up sequences. While the PC remains an important access device, we believe
users are increasingly looking to access the Internet with less complicated
devices. Information appliances such as stand alone Internet devices, TV set-
top boxes, Web-enabled telephones, Web-enabled personal digital assistants and
Web-enabled

23
<PAGE>

video game consoles are being introduced to the market to address the
disadvantages of PCs. IDC estimates that the worldwide market for information
appliances will grow from approximately $2.4 billion in 1999 to approximately
$17.8 billion in 2004.

Internet content and the number of Web pages available to consumers are
increasing dramatically. According to IDC, the number of Web pages will
increase from approximately 925 million at the end of 1998 to over 13 billion
by the end of 2003, representing a compound annual growth rate of 70%. We
believe the proliferation of content is making it increasingly difficult and
time-consuming for users to navigate the Internet and to locate useful and
relevant information.

Market Opportunity for a Simplified Internet Solution

With the growth of the Internet and the proliferation of Web sites and
content, we believe that many consumers will seek a simple way to get on-line
and access relevant content. We believe that a comprehensive yet easy-to-use
method for Internet access will be appealing to consumers. Ultimately, we
believe that there is a significant market opportunity to develop a platform
to manage the delivery of Internet content and services to users employing all
types of other Internet appliances, including cellular telephones, TV set-top
boxes and Web-enabled personal digital assistants. In addition, we believe
that aggregating information on a large number of consumers through one
platform will provide an opportunity to effectively target advertisements and
market products and services over the Internet.

The Netpliance Solution

Our i-opener service includes all of the elements required for a user to
access the Internet and delivers Internet access, content and applications to
the user's i-opener Internet appliance or other access device illustrated
below.

[CHART]

A diagram illustrates the elements of the i-opener network, starting at the
top with a picture of the i-opener Internet appliance on the left and pictures
of a cellular phone, a screen phone and set-topbox with the words "Other
Access Devices" to the right. Two curved lines connect the i-opener appliance
and the access devices to a cloud labeled "Internet" with the words "i-opener
Nationwide Service" above it. Below the cloud is a rectangle with pictures of
four computer servers in it. Arrows point to each of four rectangles depicting
the following pages of the i-opener portal: the guide to the Internet, or
WebGuide, the e-mail "Mailbox" page, the online shopping mall or Web Mall and
a box containing the words "update, backup, metrics" to describe the network
functions.

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<PAGE>

Key benefits of our i-opener service for our users include the following:

Simple Set-Up. Our i-opener service offers users a new level of simplicity.
A new user simply plugs the i-opener Internet appliance into an electric
outlet, connects a phone line and is ready to enjoy the Internet. Software and
configurations are stored on our network so complications related to set-up are
eliminated.

Ease-of-Use. Our i-opener service hides the complexities of system
configurations, software maintenance and the dial-up process to access the
Internet and e-mail. We periodically update software remotely and manage the
user interface over our network. In addition, our portal has a user-friendly
graphical interface with intuitive features and instructions, allowing even
novice users to navigate the Internet effectively.

Relevant Content. Our consumer portal organizes Internet content so that
users have immediate access to relevant information. Our portal provides an
entrance point to the Internet for our users that links them directly to
content and e-commerce sites tailored to their likely interests and needs based
on age and geographic location. Additionally, we are able to filter undesirable
content such as pornograhic and hate sites. Users are able to enjoy our portal
and cached content without the clutter of banner and other advertisements.

Cached Content. Our i-opener portal content is automatically updated and
stored in the memory of our i-opener Internet appliance. This content can be
immediately accessed in an offline mode, avoiding the need for a constant
connection to the network. The i-opener automatically establishes an Internet
connection on a scheduled basis when the phone line is not in use and downloads
or caches the content relevant to users, such as e-mail, local weather, top
news stories, sports scores and stock market news.

e-Mail Notification. The i-opener Internet appliance is equipped with an e-
mail waiting light that informs a user when there is an e-mail message without
requiring the user to go online to check an e-mail account. The user can access
e-mail messages without connecting to the Internet.

Appealing Design. The sleek profile and attractive design of our i-opener
Internet appliance makes it suitable to be placed in high traffic areas of the
home such as the kitchen, the living room, or any convenient location for
accessing information and e-mail. Because of the increased contact with our i-
opener Internet appliance, we believe our i-opener service will become a
prominent source of communication, news and relevant information for our users.

Key benefits of our i-opener service for businesses include the following:

Co-Branding Relationships. We believe our service will provide an attractive
platform for businesses to develop Internet-based services for either their
customers or employees. For example, an on-line brokerage could subsidize the
cost of the i-opener Internet appliance and co-brand a service to a prospective
or existing customer in order to encourage on-line trading through a dedicated
channel, better control the quality of the customer's on-line experience and to
increase customer retention and loyalty. An on-line grocer may develop a co-
branded service with us that has Internet-based grocery lists that can be sent
to the grocer at the touch of a button. A direct marketing company might
provide a customized i-opener service to its employees to assist in order
processing, inventory control, product promotion and employee communication.

Sponsorship and Advertising Platform. The i-opener service will enable
sponsorship opportunities whereby content providers may pay to provide content
on our channels in order to drive users to their Web sites and to enhance their
brand awareness. In addition, we believe our platform will enable marketers to
deliver targeted promotions and advertisements to our user base.

e-Commerce Opportunities. Through strategic placement within our portal we
believe we can provide e-commerce marketers with the ability to reach potential
customers in a simplified and targeted manner. We

25
<PAGE>

intend to showcase a limited number of high quality merchants on our Web Mall,
which is an easy-to-use, intuitive interface for buying and selling a wide
variety of goods and services. In addition, merchants will be able to sponsor a
transaction key on our keyboard that will directly connect users to their
service.

Software and Service Platform. We have designed our software and service
infrastructure to enable us to license our platform to other information
appliance manufacturers. We expect that our infrastructure will provide the
user interface and manage the delivery of content and services for a large
number of users employing many different devices and will enable manufacturers
to focus on their competencies.

Our Strategy

Our objective is to establish our i-opener service as the leader in the new
market of delivering user-friendly Internet access, content and applications
through Internet appliances. Establishing and maintaining a market leadership
position should enable us to develop new sources of revenue and grow our
business. To achieve this objective, we intend to:

Build a Premier Brand. We are aggressively marketing i-opener as a consumer
service. We believe that establishing brand awareness is critical to attracting
and retaining users, content providers, e-commerce companies and advertisers,
and to developing co-branding relationships. Our strategy is to promote our i-
opener service as a simple way to access the Internet, targeted content and
applications through an Internet appliance. We plan to dedicate substantial
resources to promote our brand through a variety of marketing vehicles,
including advertising, retail points of presence, promotional events,
conferences and sponsorship relationships with leading on-line and offline
consumer brands.

Enhance Distribution and Develop Co-Branding Relationships. We plan to
increase our user base and market share by supplementing our direct-to-consumer
distribution method by establishing distribution relationships with consumer
on-line and traditional retailers. We also plan to offer a platform for
businesses to develop Internet-based services for their customers or employees.

Enhance Our Consumer Portal. We will continue to develop our relationships
with content providers to aggregate more high-quality and relevant content for
our users. We currently plan to offer a significant number of additional
applications during 2000, such as enhanced e-mail, instant messaging, calendar,
portfolio, chat, music, audio and video streaming. We intend to consistently
upgrade and customize our portal to ensure that our users can continue to
access content in a simple manner.

Develop Multiple Revenue Sources. We believe that there will be significant
opportunities to develop multiple sources of revenue. We believe that an
established user base will enable us to develop sponsorship relationships with
content providers who will pay to distribute content through our channels or
offer links through our i-opener portal. We also plan to generate e-commerce
revenues through relationships with established on-line retailers in our i-
opener Web Mall.

Develop Application Hosting Services. We believe our installed base of
devices and ability to simultaneously upgrade and deliver software to our
entire user base remotely through our network will allow us to host new and
emerging Web-based applications and services. For example, in the future a user
may be able to rent the use of tax preparation software on a per user basis
instead of purchasing and installing the software. In addition, users may be
able to rent secure personal space on our network for personal files and data.

Extend Our Platform to New Technologies. Our infrastructure, operating
system and network are also able to support additional devices such as cellular
and wireless telephones and other handheld communications devices. In the
future, we plan to make our platform compatible with emerging access
technologies such as broadband, wireless and home radio frequency to continue
to provide an enhanced user experience and make the Internet more accessible
and conducive to consumers.

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<PAGE>

Strategic Relationships

GO.com. In December 1999 we entered into an agreement with GO.com, an
affiliate of The Walt Disney Company. GO.com has agreed to serve as our content
provider for our children, family, sports, news and entertainment related
categories for the cached instant channels on our i-opener portal. The
agreement also provides certain co-branding and revenue sharing arrangements.
In January 2000, an affiliate of The Walt Disney Company purchased shares of
our Series D preferred stock.

U S WEST. In December 1999 we entered into a non-binding letter of intent
with U S WEST regarding joint sales, marketing and distribution of our i-opener
service to its customers and the use of U S WEST's dial-up and DSL network. We
currently anticipate entering into a definitive and binding agreement with
respect to these matters with U S WEST in the first quarter of 2000. An
affiliate of U S WEST purchased shares of our Series D preferred stock and a
warrant to purchase common stock.

Rogers Communications and Shaw Communications. In February 2000 we entered
into agreements with Rogers Communications Inc. and Shaw Communications Inc. We
agreed to execute a final agreement under which Rogers and Shaw would jointly
market and distribute our i-opener service in Canada through a broadband cable
service. Rogers and an affiliate of Shaw invested in our Series E preferred
stock.

ATLINKS. In February 2000 we entered into a non-binding letter of intent
with Thomson Multimedia and ATLINKS, an affiliate of Thomson, regarding the
manufacture and sale by ATLINKS of Internet appliances enabled with our i-
opener service. An affiliate of Thomson also invested in our Series E preferred
stock.

Technology, Products and Services

We deliver a simplified Internet access experience to our users through
technology we have developed or licensed, which allows us to conceal the
traditional complexities of system configuration, software maintenance,
connection interactions and intricacies of e-mail and Internet
information/content access. This technology includes:

Customized Downstream Caching. We have developed a set of processes and
technology that continuously filters and prioritizes data feeds from third
parties such that we can send this data and cache it locally in our i-opener
Internet appliances.

System Maintenance and Upgrades. Our architecture is server-based, and
maintenance and system configuration is handled by the server with our updating
technology, which can detect the software configuration on a given appliance
and automatically deliver new software upgrades and perform maintenance.

Scalability and Adaptability. Our architecture allows us to support and
enable a large number of appliances on our network, including those designed by
third parties. The architecture's flexibility makes it easily adaptable to new
appliances such as Web-enabled phones, set-top boxes and personal digital
assistants.

Building from our technology, we developed our i-opener service, which
includes our Internet appliance portal and our service offerings.

Our i-opener Internet appliance is tailored to provide our i-opener service
and comes with a 10-inch flat-panel color screen, a standard-sized keyboard
that includes a pointer and an optional mouse. Our i-opener Internet appliance
comes in two colors, turns on instantly and has helpful features like an e-mail
waiting light and on-line indicator. Additionally, our keyboard has "hot keys"
to provide quick access to certain content.

27
<PAGE>

The following table provides a description of the features and benefits of
our current service offering:

<TABLE>
<CAPTION>
Service Features Benefits
<S> <C> <C>
Automatically Linked . Requires no initial dial- . No need to install or
Internet Access up and set-up configure Internet access
configuration software
. Shares the phone line . No second phone line
needed
. Hides dial-up process at . No noise and delay of
each access traditional dial-up
Internet access process

. Unlimited access to the . No need for purchaser to
i-opener service and the subscribe for third party
Internet Internet access service

- -------------------------------------------------------------------------------

e-Mail Service . Downloads e-mail messages . Allows reading and
at regular intervals and drafting of e-mail
when the user connects to without tying up the
the Internet phone line
. e-Mail notification light . Alerts users to new e-
on the i-opener Internet mail
appliance

- -------------------------------------------------------------------------------

Content Customization and . Types users by geographic . Delivers updated
Filtering location for purposes of information to users such
content delivery as local telephone
directory and local
weather and events
. Configures to filter . Protects i-opener users
undesirable content from specific sites such
as pornographic and hate
sites

- -------------------------------------------------------------------------------

Instant Channels and Web . Web Guide.Entertainment . Web Guide links consumers
Guide to destinations on the
Internet
. Web Mall.Sports . Our Web Mall provides an
intuitive user interface
for on-line shoppers
. Weather.News . The most popular
information is filtered
and organized for instant
and access
. Finance
- -------------------------------------------------------------------------------

Cached Information . Internet content such as . Users can quickly access
e-mail, i-opener instant cached content without
news, sports, weather, tying up their phone line
finance and entertainment
channels is
delivered periodically . Users have easy access to
from the Internet and fresh information without
stored locally having to search the
Internet
- -------------------------------------------------------------------------------

Software and Application . Software and system . Frees consumers from
Updates maintenance updates are complex system and
handled remotely without software configurations
user intervention
. Protects consumers
against software
obsolesence
</TABLE>
- -------------------------------------------------------------------------------

We continually seek new ways to enhance our i-opener service, and are
currently designing new products and services, many of which we anticipate
introducing in 2000. We believe these new products and services will enrich
the i-opener experience for our users and help attract new users and
merchants.

Sales and Marketing

We are building a team of sales and marketing professionals whose efforts
are focused on establishing the i-opener brand, educating consumers about the
features and benefits of our i-opener service and promoting the benefits of
our Internet service platform to businesses. We plan to pursue an aggressive
advertising and promotional campaign designed to raise awareness of our i-
opener brand among both first-time and experienced Internet users. We believe
that we will be most effective by using traditional media, such as television,
national newspapers and magazines, and radio. Additionally, we plan to promote
our brand through retail points of presence, promotional events and
conferences.

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<PAGE>

Consumers can purchase our i-opener service through our Web site,
www.netpliance.com, over the telephone at 1-888-iopener and through selected
consumer electronics retailers, including Circuit City starting in February
2000. Our Web site is user-friendly and simplifies the purchase of our i-opener
service by explaining our services and providing color pictures. In addition,
we provide on-line customer service that we believe reduces phone calls for
customer service and technical support.

We believe that businesses will be attracted to our i-opener service by the
opportunity to develop co-branded Internet-based services for their customers
or employees. Through a co-branded service, businesses will be able to provide
their customers with direct and simplified access to their products and
services. Our marketing targets include businesses that want to expand or
initiate their use of the Internet to attract new customers or solidify
existing relationships, and businesses seeking to enhance communications with
employees. Currently, our specific targets include financial services providers
and on-line retailers focused on consumer goods that require frequent purchases
such as groceries, pharmaceuticals and pet supplies.

Network

We provide Internet access to our users over a redundant network throughout
the United States that includes local dial-up access and toll-free inbound
access as a default when users are unable to dial-up locally. The network is
monitored and maintained twenty-four hours a day, seven days a week by our
personnel in a Network Operations Control Center (NOCC) located at our
facilities. We interconnect the national network and our NOCC, through a local
area network, with our production and back-office systems that provide the
intelligence for our portal. Our production facilities manage the content feeds
and applications for our portal and perform the update, back-up and logging of
our users' relevant data. Production systems are co-located at a third-party
telecommunications facility, where we lease both rack space and managed
bandwidth. Our back-office systems employ Portal Software for billing and to
manage the internal information on our users.

The costs associated with our network infrastructure are a major component
of our cost of service. Our strategy of purchasing telecommunications capacity
from third-party wholesale providers will allow us to expand the geographic
scope of our service, and accommodate user growth without building our own
network. Additionally, we believe that our strategy of using wholesale
providers will enable us to change providers or technologies as cost or
performance improvements become available. As a result, we believe we can be
flexible in responding to user demand for higher-speed access and other types
of improved service such as DSL, cable modems, high-speed wireless access and
other broadband technologies.

Direct Fulfillment Model

We outsource the production of our i-opener Internet appliances to Quanta, a
leading manufacturer of portable computers that is located in Taiwan. Quanta
has strategic alliances with key component providers and utilizes state-of-the-
art information tools and strong inventory management practices to achieve
rapid inventory turnover and maintain reduced inventory levels. Quanta's
manufacturing methods provide rapid pass-through of material cost decreases in
its products.

We utilize an integrated distribution and delivery system that allows us to
minimize inventory and shipping costs as well as delivery time. Upon sale of an
i-opener Internet appliance, a customer's order is recorded in our automated
system and routed to Quanta for processing, assembly and delivery. Quanta then
coordinates drop-shipment through Federal Express. We believe the average time
from placing of an order to delivery is approximately three to five days.

Competition

We compete for users, and consequently for potential e-commerce and
advertising revenue, directly or indirectly, with the following categories of
companies:

. online service providers, such as AOL, EarthLink and Microsoft;

. software platform providers such as Aether Systems and Liberate
Technologies.

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<PAGE>

. Internet portals, such as Excite@Home, Lycos and Yahoo!; and

. manufacturers of other stand alone Internet appliances, such as InfoGear
and WebTV;

. manufacturers of portable Internet appliances, such as Hewlett Packard
and Palm, and cellular telephone and pager manufacturers;

. manufacturers of personal computers, such as Apple, Compaq, Dell,
Gateway, Hewlett Packard and IBM;

However, we believe our i-opener service offers advantages over our
competition. Unlike companies that are Internet service providers only, we are
not limited to the PC-user market. We believe our i-opener service is more
convenient and practical than the TV-related Internet boxes. Most of the
companies that are producing Internet appliances, screenphones, and inexpensive
or free PCs do not offer Internet access, tailored content portals or
applications. By providing only the equipment, these companies cannot capture
the wealth of user data and ensure user loyalty. Our model is based on creating
long-term loyalty of our users.

Patent Applications and Intellectual Property

We have filed patent applications for several inventions that are key
enablers to our service offerings. We believe these inventions will
differentiate us in the marketplace. Our pending patent applications include:

. a method for immediate personalization of devices, allowing us to
customize devices before they reach the customer. A variation of the
method allows us to perform the personalization remotely and
transparently during the installation of the device.

. a method for updating user and device profile information remotely and
transparently from the server to the device. This method allows for
transparent and reliable connect and reconfiguration of the device.

. a method for downloading cached content based on incremental changes to
the content and individual preferences. Content is predicted based on
user preferences and updated adaptively based on user behavior.

. a simplified address book scheme that allows specific users to edit a
user's address book remotely and to pre-configure an address book for
immediate use.

If we are not successful in obtaining the patent protection we seek, our
competitors may be able to replicate our technology and more effectively
compete with us.

Employees

As of March 14, 2000, we had a total of 166 full-time employees 65 in
research and development, 62 in sales and marketing, 14 in network operations
and 25 in general administration, and 18 part-time employees. Our future
success depends in part, on our continuing ability to attract, train and retain
highly qualified technical, sales, marketing and managerial personnel. We have
not experienced any work stoppages, and we believe that our relations with our
employees are good.

Facilities

Our headquarters are located in a leased facility in Austin, Texas,
consisting of approximately 30,000 square feet under a two-year lease which
expires in May 2001. This facility houses all functions of the organization and
includes our network operations control center. We have also entered into a new
five-year office lease agreement to lease an additional 43,713 square feet near
our current location in Austin, Texas beginning in May 2000.

Legal Proceedings

We are not currently involved in any material litigation matters.

30
<PAGE>

MANAGEMENT

The following table sets forth, as of February 24, 2000, the name, age and
position of each of our directors, executive officers and certain other key
employees:

<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
John F. McHale *(1).......... 43 Chairman of the Board and Co-founder
Kent A. Savage *(1).......... 38 President, CEO, Director and Co-founder
Ann M. Bacon................. 42 Vice President of Corporate Communications and
Retail Sales
James E. Cahill.............. 33 Vice President and General Counsel
Craig Cantrell............... 40 Vice President of Client Development
William C. Cobb.............. 43 Vice President and General Manager of Consumer
Sales
Greg A. Cummings............. 39 Vice President of Product Management and User
Experience
Thomas E. Gaunt.............. 41 Vice President of Business Sales
M. David Hampton............. 32 Treasurer and Controller
Barbara A. Kaczynski......... 41 Chief Financial Officer
Kenneth A. Kalinoski......... 38 Vice President of Development and Co-founder
Marc Willebeek-LeMair........ 38 Chief Technology Officer and Chief Architect
Camillo Martino.............. 37 Vice President and General Manager of
International Operations
Michael R. Corboy (2)........ 69 Director
Kevin Denuccio............... 40 Director
Grant A. Dove................ 71 Director
David S. Lundeen (3)......... 38 Director
James M. Mansour (3)......... 40 Director
Steven G. Papermaster........ 41 Director
Joseph R. Zell............... 40 Director
Paul S. Zito (2)(3).......... 44 Director and Secretary
</TABLE>
- ---------------------
* Denotes executive officer
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee

John F. McHale was a Co-founder of Netpliance and has served as our Chairman
of the Board since our inception in January 1999. From January 1996 to April
1998, Mr. McHale served as President, Chief Executive Officer and Chairman of
NetSpeed, Inc. From January 1985 to November 1995, Mr. McHale was President,
Chief Executive Officer and Chairman of NetWorth, Inc. Mr. McHale also serves
as the Chairman of Panja Corporation.

Kent A. Savage was a Co-founder of Netpliance and has served as our
President, Chief Executive Officer and Director since our inception in January
1999. From April 1998 to December 1998, Mr. Savage served as Director and
General Manager of Broadband Operations for Cisco Systems, Inc. From April 1996
to April 1998, Mr. Savage served as Vice President of Sales and Marketing for
NetSpeed, Inc. From November 1993 to April 1996, Mr. Savage served as Vice
President of Sales and Marketing for Connectware, Inc.

Ann M. Bacon has served as our Vice President of Corporate Communications
and Retail Sales since June 1999. From April 1994 to May 1999, Ms. Bacon served
as Manager, Director and General Manager for the Handheld Division of Compaq
Computer Corporation.

James E. Cahill has served as our Vice President and General Counsel since
November 1999. From September 1993 to October 1999, Mr. Cahill served as an
attorney with Hughes & Luce, L.L.P.

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<PAGE>

Craig Cantrell has served as our Vice President of Client Development since
June 1999. From April 1998 to May 1999, Mr. Cantrell served as Senior Manager
for the broadband customer premise equipment organization of Cisco Systems,
Inc. From June 1996 to April 1998, Mr. Cantrell served as a Director of
Engineering for NetSpeed, Inc. From September 1989 to June 1996, Mr. Cantrell
served as Engineering Manager for Interphase Corporation.

William C. Cobb has served as our Vice President and General Manager of
Consumer Sales starting February 2000. From July 1997 to February 2000, Mr.
Cobb served as Senior Vice President and Chief Marketing Officer for the Tricon
Restaurants International division of Tricon Global Restaurants, Inc. From
August 1995 to July 1997, Mr. Cobb served as Senior Vice President and Chief
Marketing Officer for the Pizza Hut division of PepsiCo, Inc. From September
1990 to September 1995, Mr. Cobb served as Vice President of Marketing for the
Pepsi-Cola division of PepsiCo, Inc.

Greg A. Cummings has served as our Vice President of Product Management and
User Experience since April 1999. From March 1998 to March 1999, Mr. Cummings
served as Research and Development Manager for Hewlett-Packard. From April 1996
to March 1998, Mr. Cummings served as Senior Products Manager and Director of
Product and Program Management for Hitachi Ltd. From June 1992 to April 1996,
Mr. Cummings served as Program Manager of personal computer development for
Dell Computer Corporation.

Thomas E. Gaunt has served as our Vice President of Business Sales since
July 1999. From June 1996 to June 1999, Mr. Gaunt served as a Director at
Inprise Corporation. From June 1994 to April 1996, Mr. Gaunt served as
President of Double Impact Multimedia, which filed for Chapter 11 bankruptcy in
1996.

M. David Hampton has served as our Treasurer since December 1999 and
Controller since February 1999. From February 1994 to January 1999, Mr. Hampton
served as a Financial Analyst in the Consumer Desktop Division of Dell Computer
Corporation.

Barbara A. Kaczynski has served as our Chief Financial Officer since
February 2000. From April 1999 to November 1999, Ms. Kaczynski served as Chief
Operating Officer and Chief Financial Officer for Adsmart Corporation. From
January 1997 to March 1999 Ms. Kaczynski pursued personal interests. From June
1987 to December 1996 Ms. Kaczynski served in various capacities for Time,
Inc., most recently as Vice President of Finance and Controller from September
1993 to December 1996.

Kenneth A. Kalinoski was a Co-founder of Netpliance and has served as our
Vice President of Development since January 1999. From February 1998 to January
1999, Mr. Kalinoski served as Program Director for IBM PC Company Systems
Solutions and Product Licensing. From March 1995 to January 1998, Mr. Kalinoski
served as Program Director of the IBM Multimedia Server Development Group. From
February 1993 to February 1995 he served as the Program Director of IBM UNIX
AIX Worldwide Development and Support.

Marc Willebeek-LeMair has served as our Chief Technology Officer and Chief
Architect since March 1999. From December 1998 to February 1999, Mr. Willebeek-
LeMair served as Senior Manager at the T.J. Watson Research Center of IBM. From
January 1998 to November 1998, Mr. Willebeek-LeMair served as Technical Staff
to the Vice President of Strategy of IBM. From May 1993 to December 1997, Mr.
Willebeek-LeMair served as Manager of Multimedia Networking for IBM.

Camillo Martino has served as our Vice President and General Manager of
International Operations since February 2000. From October 1998 to February
2000, Mr. Martino served as the Worldwide Director of the WebPAD Internet
Appliance Business Unit at National Semiconductor Corporation. From January
1997 to September 1998, Mr. Martino served as a Strategic Marketing Director in
the Personal Systems & Computing Division of National Semiconductor
Corporation. From May 1991 to December 1996, Mr. Martino served as Marketing
and Business Unit Director for National Semiconductor Corporation-Japan.

Michael R. Corboy has served as our Director since February 1999. Since
January 1992, Mr. Corboy has served as President of Corboy Investment Company.

32
<PAGE>

Kevin Denuccio has served as our Director since April 1999. From August
1995 to April 1999, Mr. Denuccio has served as Vice President of Sales of
Cisco Systems, Inc. From July 1993 to July 1995, Mr. Denuccio served as
President and Chief Executive Officer of Bell Atlantic Network Integration.

Grant A. Dove has served as our Director since February 2000. Since January
1993, Mr. Dove has been Managing Partner of Technology Strategies & Alliances.
He also serves as a director of MediaOne Group, Inc., Inet Technologies, Inc.,
Cooper Cameron Corporation and InterVoice Brite, Inc.

David S. Lundeen has served as our Director since October 1999. Since
February 1999, Mr. Lundeen has been Managing General Partner of Watershed
Capital. From June 1995 to August 1998, Mr. Lundeen served as Executive Vice
President and Chief Financial Officer of BSG Corporation. From February 1990
to April 1995, Mr. Lundeen served as director of the Merger and Acquisition
Group and President of the Technology Division of Blockbuster Entertainment
Corporation. He also serves as a director of How2.com, Inc and Perficient,
Inc.

James M. Mansour has served as our Director since February 1999. Since May
1998, Mr. Mansour has served as President of Telephone Management, Inc. From
March 1991 to April 1998, he served as President of NationalTel, Inc. He
currently serves as a director of GT Group Telecom, Inc.

Steven G. Papermaster has served as our Director since February 1999. Since
May 1996, Mr. Papermaster has served as the Chairman of Powershift Group.
Since January 1999, he has also served as CEO of Agillion, Inc. From 1987 to
1997, he was CEO of BSG Corporation. Mr. Papermaster also serves as a director
of Perficient, Inc. and Vignette Corporation.

Joseph R. Zell has served as our Director since January 2000. Since March
1997, Mr. Zell has served as President of the !nterprise Networking Services
Division of U S WEST Communications, Inc. From April 1996 to April 1997, he
served as President of the Carrier Division of U S WEST. From April 1995 to
April 1996 he served as Vice President of Market and Innovation for U S WEST
Communications, Inc. From April 1994 to March 1995, he served as Executive
Director of Applications and Services Development for the !nterprise
Networking Services Division of U S WEST. Mr. Zell also serves as a director
of USinternetworking, Inc.

Paul S. Zito has served as our Director since January 1999 and Secretary
since February 1999. From April 1996 until April 1998 Mr. Zito served as Chief
Operating Officer, Secretary, and Treasurer of NetSpeed, Inc. From 1993 to
March 1996 Mr. Zito served as Chief Financial Officer and Director of
NetWorth, Inc.

Board Representation

Our Board of Directors currently consists of ten members, two of whom are
our founders and eight of whom are outside directors. David S. Lundeen was
nominated to our Board of Directors by Watershed Capital I, L.P., which, as
holder of Series B and Series C preferred stock, has the right to nominate one
director. Watershed Capital's director nomination rights will terminate at the
closing of this Offering. See "Description of Securities."

Joseph R. Zell was nominated to our Board of Directors by U S WEST which,
as holder of Series D preferred stock, has the right to nominate one director.
Also in connection with U S WEST's purchase of Series D preferred stock, John
F. McHale, our Chairman of the Board, and Kent A. Savage, our President and
CEO, signed a voting agreement in which they agreed to vote their shares in
favor of the nominee of U S WEST. See "Description of Securities."

There are no family relationships among any of the directors, officers or
key employees of Netpliance.

Board Composition

Our Board of Directors consists of ten members. Each director is elected
for a period of one year at our annual meeting of stockholders and serves
until the next annual meeting of stockholders or until a successor is duly
elected and qualified.

33
<PAGE>

Directors Compensation

Our directors may receive such compensation for their services as may be
approved by the Board of Directors from time to time, including a fixed sum and
expenses for attendance at each meeting of the Board of Directors or a
committee of the Board of Directors. To date, no cash compensation has been
paid to any member of the Board of Directors for his service. We have granted
options to purchase 90,000 shares of common stock to each of our non-employee
directors other than Joseph R. Zell, who is restricted from accepting such
options by his employer, U S WEST. Prior to February 2000, we extended the
opportunity to each of our directors to purchase 90,000 shares of our common
stock at the time they joined our Board of Directors. Each of our directors,
except for Joseph R. Zell and Grant A. Dove, purchased those shares. David S.
Lundeen subsequently transferred his shares to Watershed Capital I, L.P.

Board Committees

Effective upon the closing of this offering, the following committees of the
Board of Directors shall be established:

Executive Committee. The executive committee has broad discretionary
authority to take most actions that may be taken by the Board of Directors,
including acting upon recommendations of other committees of the Board of
Directors, declaring a dividend and authorizing the issuance of stock. Actions
the executive committee is not authorized to take include amending our
certificate of incorporation or bylaws, adopting an agreement of merger or
consolidation or appointing members to committees of our Board of Directors.
The executive committee typically meets once per month and reports to the Board
of Directors on a quarterly basis. The executive committee consists of Messrs.
McHale and Savage.

Audit Committee. The audit committee is responsible for, among other things,
making recommendations to the Board of Directors regarding the engagement of
our independent public accountants, reviewing with the independent public
accountants the plans and results of the audit engagement, approving
professional services provided by the independent public accountants, and
reviewing the adequacy of our internal accounting controls. The audit committee
consists of Messrs. Lundeen, Mansour and Zito.

Compensation Committee. The compensation committee is responsible for
determining salaries and incentives compensation for our directors, officers,
employees and consultants and administering our stock option plan. The
compensation committee consists of Messrs. Corboy and Zito. The compensation
committee establishes the salary of the Chief Executive Officer by considering
the salaries of executive officers in similar positions with comparably sized
companies in our industry and in related industries, the experience and
contribution of the individual and our financial performance. Mr. Savage's
employment agreement requires that his salary not be less than $195,000 per
year.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves on the board of directors or
compensation committee of any entity that has one or more executive officers
who is a member of our Board of Directors or Compensation Committee.

The members of our compensation committee are Messrs. Corboy and Zito.
Except for Mr. Zito's service as our secretary, none of the members of our
compensation committee is currently or has been an officer or employee. Prior
to the formation of the compensation committee, all decisions regarding
compensation for directors, officers, employees and consultants, or concerning
administration of stock and incentive plans, were made by the Board of
Directors.

Executive Compensation

The following table sets forth information concerning compensation awarded
to, earned by or paid to our Chief Executive Officer during the year ended
December 31, 1999. No other executive officer has earned in excess of $100,000
since inception. This executive is referred to as the Named Executive Officer
elsewhere in this prospectus.

34
<PAGE>

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Long Term All Other
Compensation Compensation Awards Compensation
Name and Principal ---------------- ------------------------- ------------
Position Salary Bonus Shares Underlying Options
<S> <C> <C> <C> <C>
Kent Savage, President
and Chief Executive
Officer............... $176,154 $21,095 -- --
</TABLE>

Option Grants in Last Fiscal Year

There were no options or stock appreciation rights granted to the Named
Executive Officer from inception through December 31, 1999.

1999 Stock Option Plan

The following is a summary description of the Netpliance, Inc. Amended and
Restated 1999 Stock Option and Restricted Stock Plan. You may refer to the
exhibits that are part of the registration statement for a copy of the stock
option plan.

Types of Awards. The stock option plan provides for grants of incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, non-qualified stock options and restricted stock.

Share Reserve. We have reserved 10,500,000 shares for issuance under the
stock option plan. If stock awards granted under the stock option plan expire
or otherwise terminate before the recipients of the awards purchase the shares
subject to the options, the shares not acquired again become available for
issuance under the stock option plan. The number of shares reserved for
issuance under the stock option plan automatically increases at the end of each
year such that shares representing at least 15% of our issued and outstanding
common stock are reserved for issuance under the plan, or a lesser amount as
determined by the Board.

Administration. Our compensation committee administers the stock option
plan. The compensation committee has the authority to construe, interpret and
amend the stock option plan as well as to determine:

. the grant recipients;

. the grant dates;

. the number of shares subject to the award;

. the exercisability of the award;

. the exercise price, subject to the limits regarding incentive stock
options described below;

. the type of consideration; and

. the other terms of the award.

Eligibility. The compensation committee may grant incentive stock options to
our employees or employees of any parent or subsidiary of ours that are
intended to qualify under Section 422 of the Internal Revenue Code. The
compensation committee may grant nonstatutory stock options, stock bonuses and
restricted stock purchase awards to our employees, directors, and consultants
or affiliates.

. A stock option is a contractual right to purchase a specified number of
our shares at a specified price, or exercise price, for a specified
period of time.

. An incentive stock option is a stock option that has met the
requirements of Section 422 of the Internal Revenue Code. No taxable
income is recognized by an optionee upon the grant or exercise of an
incentive stock option. If no disposition of the shares is made by the
optionee within two years after the date of grant or within one year
after the issuance of the shares to the optionee, then upon the
optionee's resale of the shares, any amount realized in excess of the
option exercise price will be

35
<PAGE>

treated as long-term capital gain and any loss sustained will be long-
term capital loss. If the shares are disposed of before either of the
holding periods described above, there has been a disqualifying
disposition, and the difference between the exercise price and the fair
market value of the shares on the exercise date will be taxed at
ordinary income rates. The difference between the fair market value on
date of exercise and the exercise price is an item of adjustment for
purposes of the alternative minimum tax unless there is a disqualifying
disposition in the year of exercise.

. A nonstatutory stock option is a stock option not intended to qualify as
an incentive stock option. No income is recognized by an optionee on the
date of grant. An optionee generally will recognize ordinary income on
the date of exercise equal to the difference between exercise price and
the fair market value of the shares on the date of exercise. If the
optionee is also an employee at the time of grant, any income recognized
upon exercise of a nonstatutory stock option will constitute wages for
which withholding will be required.

. A restricted stock purchase award is an offer to purchase shares at a
price either at or near the fair market value of the shares. A stock
bonus is a grant of shares at no cost to the recipient. However, we may
reacquire the shares under either type of award at the original purchase
price, if any, if the recipient's service to us and our affiliates is
terminated before the shares vest. At the time either award vests, the
recipient will generally recognize income equal to the difference
between the fair market value of the restricted stock at the time of
vesting and the amount paid for the restricted stock, if any.

The compensation committee may not grant an incentive stock option to any
person who, at the time of the grant, owns, or is deemed to own, stock
possessing more than 10% of the total combined voting power of Netpliance or
any affiliate of Netpliance, unless the exercise price is at least 110% of the
fair market value of the stock on the grant date and the option term is five
years or less. In addition, the board may not grant an employee an incentive
stock option under the stock option plan that exceeds the $100,000 per year
limitation set forth in Section 422(d) of the Internal Revenue Code. To
calculate the $100,000 per year limitation, we determine the aggregate number
of shares under all incentive stock options granted to the employee that will
become exercisable for the first time during a calendar year. For this purpose,
we include incentive stock options granted under the stock option plan as well
as under any other stock plans that our affiliates or we maintain. We then
determine the aggregate fair market value of such stock as of the grant date of
the option. Taking the options into account in the order in which they were
granted, we treat only the options covering the first $100,000 worth of stock
as incentive stock options. We treat any options covering stock in excess of
$100,000 as nonstatutory stock options.

Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations for compensation paid to the chief
executive officer or the four highest compensated officers in a taxable year to
the extent that the compensation exceeds $1,000,000. Unless our stock option
plan is modified, Section 162(m) will not apply to any compensation paid
pursuant to the plan until the first stockholder meeting that occurs during the
fourth calendar year after this offering.

Option Terms. The compensation committee determines the exercise price for
any options, provided that incentive stock options are required to have an
exercise price of 100% or more of the fair market value of a share of our
common stock on the grant date. The maximum option term is 10 years. The board
may provide for exercise periods of any length in individual option grants.
However, generally an option terminates three months after the optionholder's
service to Netpliance and its affiliates terminates. If such termination is due
to the optionholder's death or disability, the exercise period generally is
extended to 12 months.

No option granted under the plan is transferable or assignable by an
optionee, voluntarily or by operation of law, other than by will or the laws of
descent and distribution. Each option is exercisable during the optionee's
lifetime, only by him or her.

Terms of Other Stock Awards. The compensation committee determines the
purchase price of other stock awards but it may not be less than the fair
market value of our common stock on the grant date. The compensation committee
may award stock bonuses in consideration of past services without a purchase

36
<PAGE>

payment. Shares sold or awarded under the stock option plan may, but need not
be, restricted and subject to a repurchase option in favor of Netpliance in
accordance with a vesting schedule that the Board of Directors determines. The
board, however, may accelerate the vesting of such restricted stock.

Other Provisions. Transactions not involving receipt of consideration by
Netpliance, such as a merger, consolidation, reorganization, stock dividend, or
stock split, may change the class and number of shares subject to the stock
option plan and to outstanding awards. In that event, the compensation
committee will appropriately adjust the stock option plan as to the class and
the maximum number of shares subject to the stock option plan. It also will
adjust outstanding awards as to the class, number of shares and price per share
subject to such awards.

Upon a change in control of Netpliance, the surviving entity may either
assume or replace outstanding awards under the stock option plan unless
specifically provided for in a particular option grant.

Awards Granted. As of March 14, 2000, we had issued options to purchase
8,812,422 shares at a weighted average exercise price of $4.13, and 1,687,578
shares remained available for future grant. As of March 14, 2000, the board had
granted no shares as restricted stock awards under the stock option plan.

2000 Employee Stock Purchase Plan

Our 2000 Employee Stock Purchase Plan was adopted by the Board of Directors
in February 2000 and we expect that the purchase plan will be approved by the
stockholders in February 2000, and will become effective on the date of this
offering. A total of 600,000 shares of common stock has been reserved for
issuance under the purchase plan. The amount reserved under the purchase plan
will automatically increase at the end of each fiscal year by the lesser of
900,000 shares or 1% of the issued and outstanding shares on such date or a
lesser amount as determined by the Board.

The purchase plan, which is intended to qualify under Section 423 of the
Code, contains successive six-month offering periods. The offering periods
generally start on the first trading day on or after January 1 and July 1 of
each year.

Employees are eligible to participate in the purchase plan if they are
employed by us for at least 20 hours per week and more than five months in any
calendar year, although any employee who would own stock constituting 5% or
more of the total combined voting power or value of all classes of our stock
may not participate in the purchase plan. The purchase plan permits
participants to purchase common stock through payroll deductions of up to 15%
of the participant's base compensation, up to a maximum aggregate deduction of
$25,000 for all offering periods ending within any calendar year.

Amounts deducted and accumulated under the purchase plan are used to
purchase shares of common stock at the end of each offering period. The price
of stock purchased under the purchase plan is 85% of the lower of the fair
market value of the common stock at the beginning of the offering period or end
of the offering period. Participants may end their participation at any time
during an offering period and will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with
Netpliance.

Rights granted under the purchase plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the purchase plan. The purchase plan provides that, in the event
of a corporate transaction as described in Section 424(a) of the Code, our
Board of Directors may approve assumption of the purchase plan by a successor
corporation that becomes the employer of a significant number of participating
employees. The Board of Directors has the authority to amend or terminate the
purchase plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the purchase plan.

37
<PAGE>

401(k) Plan

We maintain the Netpliance, Inc. 401(k) Retirement Plan for eligible
employees. In order to be a participant in the 401(k) plan, an employee must
have attained age 21. A participant may contribute up to 20% of his or her
total annual compensation to the 401(k) plan, or up to a statutorily prescribed
annual limit, if less. The annual limit for 1999 is $10,000. Each participant
is fully vested in his or her deferred salary contributions. Participant
contributions are held and invested by the 401(k) plan's trustee. We may make
discretionary contributions as a percentage of participant contributions,
subject to established limits. To date, we have not made any contributions to
the 401(k) plan on behalf of the participants. The 401(k) plan is intended to
qualify under Section 401 of the Internal Revenue Code, so that contributions
by us or our employees to the 401(k) plan, and income earned on the 401(k) plan
contributions, are not taxable to employees until withdrawn from the 401(k)
plan, and so that our contributions, if any, will be deductible by us when
made.

Employment Agreements

Agreement with Kent A. Savage. Under a two-year employment agreement dated
February 1, 1999, Kent A. Savage became Chief Executive Officer and President
of Netpliance at a base salary of $195,000. Mr. Savage is eligible for an
annual discretionary bonus of up to $40,000. Mr. Savage may terminate the
employment agreement for any reason upon 30 days notice to us. If Mr. Savage's
employment is terminated during the first year of his employment for any reason
other than failure to perform his duties or misconduct, then we are obligated
to continue paying Mr. Savage's salary and benefits for six months. In
addition, Mr. Savage also agreed not to compete with Netpliance and not to
solicit our customers or employees for 18 months following the termination of
his employment, with limited exceptions.

Agreement with Kenneth A. Kalinoski. Under a two-year employment agreement
dated February 1, 1999, Ken Kalinoski became our Vice President of Development
at a base salary of $150,000. Mr. Kalinoski is eligible for an annual
discretionary bonus of up to $22,500. In addition, Mr. Kalinoski's employment
agreement provided for the transfer of his intellectual property rights to an
internet device and application to Netpliance. Mr. Kalinoski may terminate his
employment agreement for any reason upon 30 days notice to us. If Mr.
Kalinoski's employment is terminated during the first year of his employment
for any reason other than failure to perform his duties or misconduct, then we
are obligated to continue paying Mr. Kalinoski's salary and benefits for six
months. Under his employment agreement, Mr. Kalinoski agreed not to compete
with Netpliance and not to solicit our customers or employees for 18 months
after the termination of his employment, with limited exceptions.

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<PAGE>

RELATED PARTY TRANSACTIONS

Private Placement Financings

The following sets forth certain transactions between Netpliance and our
directors, executive officers and 5% stockholders and their affiliates. We
believe that each of the transactions described below was on terms no less
favorable to Netpliance than could have been obtained from unaffiliated third
parties. Shares held by all affiliated persons and entities have been
aggregated. All share numbers reflect the number of shares purchased by the
respective party on an as-converted basis and as adjusted for a three-for-one
stock split. See "Principal Stockholders" for more detail on shares held by
these purchasers. The following table summarizes the shares of common stock and
preferred stock purchased by our directors, executive officers, and 5%
stockholders.

<TABLE>
<CAPTION>
Common equivalent shares of preferred stock
------------------------------------------------
Directors, Executive Shares of
Officers and 5% common Series
Stockholders: stock Series A Series B Series C Series D E
<S> <C> <C> <C> <C> <C> <C>
John F. McHale.......... 1,108,641 16,071,420 -- 1,000,020 -- --
Kent A. Savage.......... 5,963,199 -- -- -- -- --
Paul S. Zito............ 221,565 100,020 -- -- -- --
James M. Mansour........ 920,193 125,010 -- -- -- --
Steven G. Papermaster... 1,052,784 -- -- -- -- --
Michael R. Corboy....... 218,301 -- -- -- -- --
Kevin Denuccio.......... 180,000 -- -- -- -- --
Kenneth A. Kalinoski.... 4,601,868 -- -- -- -- --
David S. Lundeen........ 90,000 -- -- -- -- --
Watershed Capital I,
L.P. .................. -- -- 3,499,980 1,000,020 -- 283,023
U S WEST Internet
Ventures, Inc. ........ 600,000(1) -- -- -- 2,100,000 --
</TABLE>
- ---------------------
(1) Includes a warrant to purchase 600,000 shares of common stock for $6.67 per
share purchased by U S WEST Internet Ventures, Inc. for $5,000 in December
1999.

On January 19, 1999 we sold 14,400,000 shares of common stock to our
founders for an aggregate purchase price of $240,000. 3,981,060 of these shares
were subsequently repurchased and reissued to other investors. From February
1999 through March 14, 2000 we issued an aggregate of 8,617,506 shares of
common stock to employees and other investors for an aggregate purchase price
of $7,292,745.

Prior to February 2000, we extended the opportunity to each of our non-
employee directors to purchase 90,000 shares of our common stock at the time
they joined our Board of Directors. Each of our non-employee directors, except
for Joseph R. Zell and Grant A. Dove, purchased these shares. David S. Lundeen
subsequently transferred his shares to Watershed Capital I, L.P.

In January 1999, one of our founders entered into an agreement with us under
which he purchased 350,000 shares of Series A preferred stock for an aggregate
purchase price of $2,000,000 and received rights to purchase additional shares
of Series A preferred stock. These rights were exercised in May and July 1999
for the purchase of an aggregate of 185,714 shares of Series A preferred stock
for an aggregate purchase price of $7,800,000.

Between September 1999 and February 2000 we sold shares of preferred stock
in the following rounds of financings:

. in September 1999, we sold an aggregate of 122,933 shares of Series A
preferred stock for an aggregate purchase price of $7,375,980.

. on October 1, 1999, we sold 116,666 shares of Series B preferred stock
for an aggregate purchase price of $7,000,000 and entered into an
agreement giving us the right to sell, at any time prior to December 31,
1999, an additional 66,668 shares of Series C preferred stock to the
purchaser of the

39
<PAGE>

Series B preferred stock and to one of the holders of Series A preferred
stock. We exercised this right and issued the Series C preferred stock on
December 3, 1999 for an aggregate purchase price of $6,000,000.

. In December 1999, several investors entered into irrevocable commitments
to purchase an aggregate of 1,430,000 shares of Series D preferred stock
for an aggregate purchase price of $28.6 million. The Series D preferred
stock financing closed on January 5, 2000. In December 1999, we also
granted to U S WEST Internet Ventures, Inc. a warrant to purchase 600,000
shares of our common stock at a price of $6.67 per share.

. In February 2000, we sold an aggregate of 1,127,675 shares of Series E
preferred stock to four investors for an aggregate purchase price of
$33,830,250.

Shares of Series A, Series B and Series C preferred stock are convertible
to common stock on a thirty-for-one basis, and shares of Series D and Series E
preferred stock are convertible to common stock on a three-for-one basis. All
outstanding shares of our preferred stock will automatically convert upon the
closing of the offering.

Executive Officer and Stockholder Loans

We loaned $97,298 to Kent Savage, our President, Chief Executive Officer
and a member of our Board of Directors, which he repaid in February 2000. The
loan had an interest rate of seven percent per annum, was due and payable on
January 18, 2004 and was secured by a pledge of 5,837,880 shares of our common
stock owned by Mr. Savage.

We loaned $71,351 to Ken Kalinoski, our Vice President of Development,
which he repaid in February 2000. The loan had an interest rate of seven
percent per annum, was due and payable on January 18, 2004 and was secured by
a pledge of 4,281,060 shares of our common stock owned by Mr. Kalinoski.

Sublease Agreement with Powershift Ventures, LLC

In June 1999 we entered into a sublease agreement with Powershift Ventures,
LLC, which is owned by Steven G. Papermaster, a member of our Board of
Directors. This sublease is for 30,000 square feet of office space in the
office building known as Building A of Lakewood on the Park in Austin, Texas
on substantially the same terms as between Powershift Ventures and Motorola,
Inc., the landlord. The sublease will terminate in February 28, 2001, and the
base rent is $44,625 per month.

Stock Options Granted to Executive Officers and Directors

For information regarding the grant of stock options to executive officers
and directors, see "Management--Director Compensation" and "--Executive
Compensation."

40
<PAGE>

PRINCIPAL STOCKHOLDERS

The following sets forth certain information concerning the beneficial
ownership of our outstanding common stock and preferred stock as of March 14,
2000, after giving pro forma effect to the preferred stock conversion and
assuming the exercise of warrants to purchase common stock which expire upon
the closing of this offering, and as adjusted to reflect the sale of the common
stock offered by us in this offering, for:

. each person known by us to beneficially own at least 5% of the common
stock;

. each of our directors;

. each executive officer as designated in the "Management" section; and

. all directors and executive officers named in the "Management" section as
a group.

Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to the
securities.

Unless otherwise indicated below, the address for each listed director and
executive officer is Netpliance, Inc., 7600A North Capital of Texas Highway,
Austin, Texas 78731. Except as indicated by footnote, the persons named in the
table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them. The number of shares of
common stock outstanding used in calculating the percentage for each listed
person includes the shares of common stock underlying options held by that
person that are exercisable within 60 days of March 14, 2000 but excludes
shares of common stock underlying options held by any other person. Percentage
of beneficial ownership is based on 53,035,935 shares of common stock
outstanding as of March 14, 2000, assuming the conversion of the preferred
stock and the exercise of warrants to purchase common stock outstanding as of
March 14, 2000, a three-for-one stock split and 60,035,935 shares of common
stock outstanding after completion of this offering.

<TABLE>
<CAPTION>
Percentage of Shares
Number of Beneficially Owned
Shares -----------------------
Beneficially Before After
Owned(1) Offering(1) Offering(1)
<S> <C> <C> <C>
Named Executive Officers and Directors:
John F. McHale (2)....................... 15,508,095 29.2% 25.8%
Kent A. Savage (3)....................... 5,963,199 11.2 9.9
Paul S. Zito (4)......................... 1,446,585 2.7 2.4
James M. Mansour (5)..................... 1,135,203 2.1 1.9
Steven G. Papermaster ................... 997,284 1.9 1.7
Michael R. Corboy (6).................... 308,301 * *
Grant A. Dove (7)........................ 90,000 * *
Kevin Denuccio (8)....................... 270,000 * *
David S. Lundeen (9)..................... 4,963,023 9.4 8.3
Joseph R. Zell (10)...................... 2,700,000 5.1 4.5
5% Stockholders:
Kenneth A. Kalinoski (11)................ 4,540,368 8.6 7.6
Watershed Capital I, L.P. (12)........... 4,873,023 9.2 8.1
U S WEST Internet Ventures, Inc. (13).... 2,700,000 5.1 4.5
All executive officers and directors as a
group
(10 persons)............................. 33,381,690 63.0 55.6
</TABLE>
- ---------------------
* Less than 1%.
(1) Does not include shares issuable upon exercise of outstanding options
granted to employees under our 1999 Stock Option and Restricted Stock Plan.
We have reserved 10,500,000 shares of our common stock

41
<PAGE>

for issuance to directors, executive officers, and employees under the
plan, of which we have issued options to purchase 8,812,422 shares of
common stock at a weighted average exercise price of $4.13 per share to
date.
(2) Includes 105,240 shares held by each of the Caitlin McHale Trust, Casey
McHale Trust and Ryan McHale Trust for the benefit of family members of Mr.
McHale.
(3) Includes 30,000 shares held by each of the ACS Trust 2000, CKS Trust 2000
and MAS Trust 2000, for the benefit of family members of Mr. Savage.
(4) These shares are held for the benefit of Mr. Zito by Z Start I, L.P.
Includes option to purchase 90,000 shares of common stock which are
immediately exercisable.
(5) These shares are held for the benefit of Mr. Mansour by JMM PHLP, Ltd.
Includes option to purchase 90,000 shares of common stock which are
immediately exercisable.

(6) Includes options to purchase 90,000 shares of common stock which are
immediately exercisable.

(7) Includes options to purchase 90,000 shares of common stock which are
immediately exercisable.

(8) Includes options to purchase 90,000 shares of common stock which are
immediately exercisable.

(9) David S. Lundeen was appointed to our Board of Directors by Watershed
Capital I, L.P. and is managing general partner of Watershed. Includes
4,873,023 shares held by Watershed. Mr. Lundeen disclaims beneficial
ownership of the shares held by Watershed. Also includes options to
purchase 90,000 shares of common stock which are immediately exercisable.
Mr. Lundeen's address is 650 Castro Street, Suite 2000, Mountain View,
California 94041.

(10) Joseph R. Zell was appointed to our Board of Directors by U S WEST
Internet Ventures, Inc. and is President--!nterprise Networking Services
of U S WEST. Includes 2,100,000 shares held by U S WEST and a warrant to
purchase 600,000 shares of common stock held by U S WEST that is currently
exercisable. Mr. Zell disclaims beneficial ownership of these securities
held by U S WEST. Mr. Zell's address is 1999 Broadway, Denver, Colorado
80202.

(11) 4,300,368 of these shares are held by Kalinoski, LTD for the benefit of
Mr. Kalinoski and family members. 120,000 of these shares are held by
Nicholas Kalinoski and 120,000 of these shares are held by Jaclyn
Kalinoski. Kalinoski, LTD's and Nicholas and Jaclyn Kalinoski's address is
4687 Rockcliff Road, Austin, Texas 78746.

(12) Watershed's address is 650 Castro Street, Suite 2000, Mountain View,
California 94041.

(13) Includes shares issuable upon exercise of a warrant to purchase 600,000
shares of common stock held by U S WEST that is currently exercisable. U S
WEST's address is 1999 Broadway, Denver, Colorado 80202.

42
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Our certificate of incorporation authorizes the issuance of up to
250,000,000 shares of common stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.01 per share, the rights and
preferences of which may be established from time to time by our board of
directors.

The following summary of provisions of the common stock and preferred stock
does not purport to be complete and is subject to and qualified in its entirety
by, the provisions of our certificate of incorporation and bylaws, which are
included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.

Common Stock

Upon the closing of this offering, all shares of Series A, Series B and
Series C preferred stock will automatically convert on a thirty-for-one basis,
and all shares of Series D and Series E preferred stock will automatically
convert on a three-to-one basis, into common stock. Each holder of common stock
is entitled to one vote for each share on all matters to be voted upon by the
stockholders and there are no cumulative voting rights. Subject to preferences
that may be applicable to any preferred stock outstanding at the time, holders
of common stock are entitled to receive ratable dividends, if any, as may be
declared from time to time by the board of directors out of funds legally
available for that purpose. In the event of a liquidation, dissolution or
winding up of Netpliance, holders of common stock would be entitled to share in
our assets remaining after the payment of liabilities and liquidation
preferences on any outstanding preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and shares of common stock offered by
us in this offering, when issued and paid for, will be, validly issued, fully
paid and nonassessable.

Upon the closing of this offering, there will be outstanding a warrant to
purchase 600,000 shares of our common stock at $6.67 per share, which is
immediately exercisable and expires December 31, 2003.

Preferred Stock

Upon the closing of this offering, all outstanding shares of preferred stock
will convert into shares of common stock. Upon the closing of this offering,
the board of directors will be authorized, subject to Delaware law, without
stockholder approval, from time to time to issue up to an aggregate of
5,000,000 shares of preferred stock in one or more series. The board of
directors can fix the rights, preferences and privileges of the shares of each
series and any qualifications, limitations or restrictions. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of our outstanding voting
stock. We have no present plans to issue any shares of preferred stock.

Rights Agreements

On October 1, 1999, we and the purchasers of our Series B preferred stock
entered into an investors rights agreement. On December 3, 1999, the investors
rights agreement was amended and restated to provide for our issuance of the
Series C preferred stock. Under the terms of the amended and restated investors
rights agreement, holders of 5,500,020 shares (on an as-converted basis) of our
Series B preferred stock and Series C preferred stock were granted registration
rights with respect to the registration under the Securities Act of the shares
of common stock issuable upon conversion of their respective shares of our
preferred stock. These rights include rights to require us to include their
common stock in future registration statements we file with the SEC and, in
some cases, demand registration rights. Some holders may also require us to
register their common

43
<PAGE>

stock once we are eligible to use a short-form registration statement. However,
holders of these shares have agreed not to exercise their registration rights
until 180 days after the effective date of this prospectus. Registration of
shares of common stock upon the exercise of demand registration rights would
result in the covered shares becoming freely tradable without restriction under
the Securities Act immediately upon the effectiveness of the registration under
which these shares were registered.

On January 5, 2000, we and the purchasers of our Series D preferred stock
entered into an investors rights agreement. On February 7, 2000, the investor
rights agreement was amended and restated to provide for our issuance of the
Series E preferred stock. Under the terms of the amended and restated investors
rights agreement, holders of 7,673,025 shares (on an as-converted basis) of our
Series D preferred stock and Series E preferred stock were granted registration
rights with respect to the registration under the Securities Act of the shares
of common stock issuable upon conversion of their respective shares of our
preferred stock. These rights include rights to require us to include their
common stock in future registration statements we file with the SEC and, in
some cases, demand registration rights. Some holders may also require us to
register their common stock once we are eligible to use a short-form
registration statement. However, holders of these shares have agreed not to
exercise their registration rights until 180 days after the effective date of
this prospectus. Registration of shares of common stock upon the exercise of
demand registration rights would result in the covered shares becoming freely
tradable without restriction under the Securities Act immediately upon the
effectiveness of the registration under which these shares were registered.

Delaware Anti-Takeover Statute and Charter and Bylaw Provisions

Under Delaware law, we may not engage in a "business combination," which
includes a merger or sale of more than 10% of our assets, with any "interested
stockholder," namely a stockholder who owns 15% or more of our outstanding
voting stock, as well as affiliates and associates of the stockholder, for
three years following the time that stockholder became an interested
stockholder unless:

. the transaction in which the stockholder became an interested stockholder
is approved by our board of directors prior to the time the interested
stockholder attained that status;

. upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of Netpliance outstanding at the time the
transaction commenced, excluding those shares owned by persons who are
directors and also officers; or

. at or after the time the stockholder became an interested stockholder the
business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote
of at least two-thirds of the outstanding voting stock which is not owned
by the interested stockholder.

Upon the closing of this offering, certain provisions of our certificate of
incorporation and bylaws may also discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable.

Such provisions could include:

. authorizing the issuance of "blank check" preferred stock;

. prohibiting cumulative voting in the election of directors;

. limiting the persons who may call special meetings of stockholders;

. prohibiting stockholder action by written consent; and

. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.

44
<PAGE>

The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
Netpliance. These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in our control or our management.

Limitation of Liability and Indemnification Matters

We have adopted provisions in our certificate of incorporation that
eliminate the personal liability of our directors for monetary damages arising
from a breach of their fiduciary duties in certain circumstances to the fullest
extent permitted by law. Such limitation of liability does not affect the
availability of equitable remedies, such as injunctive relief or rescission. We
are aware that, in the opinion of the Securities and Exchange Commission,
indemnification against liabilities arising out of breaches of the federal
securities laws is against
public policy and, therefore, is unenforceable. Accordingly, if a claim for
such indemnification is submitted to Netpliance, we reserve the right to submit
the issue of enforceability of any provision for indemnification, which is or
may be by its terms applicable in the circumstances, to a court of competent
jurisdiction and, if it does so, will be governed by the final adjudication of
such issue.

Our certificate of incorporation also provides that we may indemnify our
directors, and have the power to indemnify our officers, employees and agents,
to the fullest extent permitted under the Delaware law.

We also intend to enter into Indemnity Agreements with our officers and
directors.

Transfer Agent and Registrar

ChaseMellon Shareholder Services, L.L.C. has been appointed as the transfer
agent and registrar for our common stock.

Listing

We have applied for listing of our common stock on the Nasdaq National
Market under the trading symbol NPLI.

45
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common
stock, and we cannot provide any assurances that a significant public market
for our common stock will develop or be sustained after this offering. Future
sales of substantial amounts of common stock, including shares issued upon
exercise of outstanding options and warrants, in the public market, or the
possibility of such sales occurring, could adversely affect prevailing market
prices for our common stock and impair our future ability to raise capital
through an offering of equity securities.

After this offering, we will have outstanding 59,435,935 shares of common
stock, assuming no exercise of outstanding options and exercise of all
outstanding warrants to purchase common stock. Of these shares, the 7,000,000
shares to be sold in this offering, or 8,050,000 shares if the underwriters'
over-allotment option is exercised in full, will be freely tradable in the
public market without restriction under the Securities Act, unless such shares
are held by our "affiliates," as that term is defined in Rule 144 under the
Securities Act.

The remaining 52,435,935 shares outstanding upon completion of this offering
will be "restricted securities" as that term is defined under Rule 144. We
issued and sold the restricted shares in private transactions in reliance on
exemptions from registration under the Securities Act. Restricted shares may be
sold in the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities
Act, as summarized below.

All of the shares outstanding prior to the offering will become available
for sale in the public market, subject to public availability of information
regarding us and volume and manner restrictions on those sales, after those
shares have been outstanding for one year. These shares will be available for
sale in the public market as follows:

<TABLE>
<CAPTION>
Number
of Shares Date Available for Sale in the Public Market
<C> <S>
190,254 90 days after the date of this offering, subject to restrictions
under Rule 144.
34,451,757 Additional shares, 180 days after the date of this prospectus, upon
the expiration of lock-up agreements between the stockholders and
the underwriters or us, provided that Donaldson, Lufkin & Jenrette
can waive the restriction at any time. All of these shares will
also be subject to sales volume restrictions under Rule 144 under
the Securities Act.
17,793,924 Additional shares, upon expiration of applicable one-year holding
periods under Rule 144, which will expire between 180 days after
the date of this offering and March 14, 2001, subject to
restrictions under Rule 144.
</TABLE>

Pursuant to the "lock-up" agreements of our directors, executive officers,
employees, stockholders and optionees with the underwriters, the holders of
51,629,178 shares have agreed not to offer, sell, pledge or otherwise dispose
of, directly or indirectly, or announce their intention to do the same, any of
our common stock or any security convertible into, or exchangeable or
exercisable for our common stock for a period of 180 days from the date of this
offering. However, the restrictions described in this paragraph do not apply
to:

. transfers as a bona fide gift or gifts;

. transfers by an individual, either during his or her lifetime or on death
by will or intestacy, to his or her immediate family or to a trust the
beneficiaries of which are exclusively the holder of the securities
and/or a member of his or her immediate family;

. distributions to limited partners or stockholders;

. transfers of our common stock purchased on the open market after this
offering; and

. with respect to some stockholders, transfers to affiliates.

46
<PAGE>

The underwriters may choose to release some or all of these shares from the
restrictions prior to the expiration of the 180-day lock-up period, although we
believe they have no current intention of doing so.

We also have entered into an agreement with the underwriters that we will
not offer, sell or otherwise dispose of common stock for a period of 180 days
from the date of this offering. On the date of the expiration of the lock-up
agreements, all of the restricted shares will be eligible for immediate sale,
of which shares will be subject to the volume, manner of sale and other
limitations under Rule 144.

Following the expiration of the lock-up periods, some shares issued upon
exercise of options that we granted prior to the date of this offering will
also be available for sale in the public market pursuant to Rule 701 under the
Securities Act. Rule 701 permits resales of such shares in reliance upon Rule
144 under the Securities Act but without compliance with the restrictions,
including the holding-period requirement, imposed under Rule 144. In general,
under Rule 144 as in effect at the closing of this offering, beginning 90 days
after the date of this prospectus, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including the holding period of any prior owner who is not an affiliate, would
be entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of:

. 1% of the then-outstanding shares of common stock; or

. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.

Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner who is not an affiliate, is entitled to sell these shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

We intend to file, within 90 days after the effective date of this offering,
registration statements on Form S-8 to register up to 10,500,000 million shares
of common stock reserved for issuance under our stock option plan and up to
600,000 shares of common stock reserved for issuance under our employee stock
purchase plan. The registration statement will become effective automatically
upon filing. Shares issued under our stock option plan after the filing of a
registration statement on Form S-8 may be sold in the public market, subject to
the Rule 144 limitations applicable to affiliates, the above-referenced lock-up
agreements and vesting restrictions imposed by us. Accordingly, subject to the
exercise of such options, shares registered under such registration statement
will be available for sale in the public market immediately after the 180-day
lock-up period expires.

In addition, following this offering, the holders of 13,173,045 shares of
common stock will, under some circumstances, have rights to require us to
register their shares for future sale.

47
<PAGE>

UNDERWRITING

Subject to the terms and conditions contained in an underwriting agreement
dated , 2000, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC,
FleetBoston Robertson Stephens Inc. and DLJdirect Inc., have severally agreed
to purchase from Netpliance the respective number of shares of common stock set
forth opposite their names below:

<TABLE>
<CAPTION>
Number
Underwriters of Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
Chase Securities Inc. ................................................
FleetBoston Robertson Stephens Inc. ..................................
DLJdirect Inc.........................................................
---------
Total................................................................. 7,000,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of legal matters
concerning the offering and to conditions precedent that must be satisfied by
us including the effectiveness of the registration statement, the continuing
correctness of our representations, the receipt of a "comfort letter" from our
accountants, the listing of the common stock for quotation on the Nasdaq
National Market and no occurrence of an event that would have a material
adverse effect on us. The underwriters are obligated to purchase and accept
delivery of all of the shares of common stock offered hereby, other than those
shares covered by the over-allotment option described below, if any are
purchased.

The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to dealers, including the
underwriters, at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow, to other dealers a
concession not in excess of $ per share. After the initial offering of the
common stock, the public offering price and other selling terms may be changed
by the representatives at any time without notice. The underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.

An electronic prospectus will be available on the Web site maintained by
DLJdirect Inc., one of the underwriters and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation. Other than the prospectus in electronic
format, the information on this Web site relating to the offering is not part
of this prospectus and has not been approved or endorsed by Netpliance or the
underwriters, and should not be relied on by prospective investors.

Netpliance has granted to the underwriters an option, exercisable for 30
days after the date of this prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 1,050,000 additional shares of common
stock at the initial public offering price less underwriting discounts and
commission. The underwriters may exercise the option solely to cover over-
allotments, if any, made in connection with the offering. To the extent that
the underwriters exercise the option, each underwriter will become obligated,
subject to conditions contained in the underwriting agreement, to purchase its
pro rata portion of such additional shares based on the underwriters'
percentage underwriting commitment as indicated in the above table.

Netpliance has agreed to indemnify the underwriters against liabilities
which may arise in connection with the offering, including liabilities under
the Securities Act of 1933, or to contribute to payments that the underwriters
may be required to make.

Each of Netpliance's executive officers, directors, and certain of its
stockholders and option holders has agreed not to:

. offer, pledge, sell, contract to sell, grant, purchase any option or
contract to sell, grant any option, right or warrant to purchase, lend,
or otherwise transfer or dispose of directly or indirectly any shares of
common stock or any securities convertible into or exercisable or
exchangeable for common stock, or

48
<PAGE>

. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, whether any such transaction described above is to be
settled by delivery of common stock or other securities, in cash or
otherwise

for a period of 180 days after the date of this prospectus. Donaldson, Lufkin &
Jenrette Securities Corporation may choose to release some or all of these
shares from such restrictions prior to the expiration of the 180-day lock-up
period, although it has no current intention of doing so.

In addition, during such 180-day period, Netpliance has also agreed not to
file any registration statement with respect to, and each of its executive
officers, directors and stockholders of Netpliance have agreed not to make any
demand for, or exercise any right with respect to, the registration of any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation.

At our request, the underwriters have reserved up to five percent of the
shares offered by this prospectus for sale at the initial public offering price
to individuals associated with us and members of their families. The number of
shares of common stock available for sale to the general public will be reduced
to the extent these individuals purchase these reserved shares. Any reserved
shares not purchased or confirmed for purchase will be offered by the
underwriters to the general public on the same basis as the other shares
offered by this prospectus.

We have applied to list our common stock for quotation in the Nasdaq
National Market under the symbol "NPLI".

Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price of the shares of common stock
offered will be determined by negotiation among Netpliance and the
underwriters. The factors considered in determining the initial public offering
price included:

. the history of and the prospects for the industry in which Netpliance
competes;

. the past and present operations of Netpliance;

. the historical results of operations of Netpliance;

. the prospects for future earnings of Netpliance;

. the recent market prices of securities of generally comparable companies;
and

. the general condition of the securities markets at the time of the
offering.

Other than in the United States, no action has been taken by Netpliance or
the underwriters that would permit a public offering of the shares of common
stock offered in any jurisdiction where action for the purpose is required. The
shares of common stock offered may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and observe any restrictions
relating to the offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any shares of common stock offered in any jurisdiction in which such an
offer or a solicitation is unlawful.

DLJ Capital Corporation, DLJ Fund Investment Partners II, L.P., DLJ Private
Equity Employees Fund, L.P. and DLJ Private Equity Partners Fund, L.P., each of
which are affiliates of Donaldson, Lufkin & Jenrette Securities Corporation,
are stockholders of Netpliance. Donaldson, Lufkin & Jenrette Securities
Corporation and its affiliates and employees own an aggregate of less than one
percent of the issued and outstanding shares of our common stock.

49
<PAGE>

In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot the offering, creating a
syndicate short position. The underwriters may bid for and stabilize the price
of the common stock. In addition, the underwriting syndicate may reclaim
selling concessions from syndicate members and selected dealers if they
repurchase previously distributed common stock in syndicate covering
transactions, in stabilizing covering transactions or otherwise. These
activities may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Hughes & Luce, L.L.P., Austin, Texas. As of the date of this prospectus, a
partner of Hughes & Luce, L.L.P. beneficially owns an aggregate of 143,037
shares of our common stock. Certain legal matters will be passed upon for the
underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Austin, Texas.

EXPERTS

The financial statements of Netpliance, Inc. as of December 31, 1999 and for
the period from January 12, 1999 (inception) to December 31, 1999 have been
included herein and in the registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

A registration statement on Form S-1, including amendments thereto, relating
to the common stock offered by this prospectus has been filed by us with the
SEC. This prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the registration statement
and the exhibits and schedules thereto. For further information with respect to
us and the common stock offered by this prospectus, reference is made to the
registration statement, exhibits and schedules. A copy of the registration
statement may be inspected by anyone without charge at the public reference
facilities maintained by the SEC at 450 Fifth Street, NW, Judiciary Plaza,
Washington, D.C. 20549, and copies of all or any part thereof maybe obtained
from the SEC upon payment of the fees prescribed by the SEC. The SEC maintains
a Web site that contains reports, proxy and information statements and other
information filed electronically with the SEC. The address of the site is
http://www.sec.gov.

Upon completion of this offering, Netpliance will become subject to the
information and periodic reporting requirements of the Securities and Exchange
Act and, accordingly, will file periodic reports, proxy statements and other
information with the SEC. Such periodic reports, proxy statements and other
information will be available for inspection at the SEC's public reference
room, and their Web site referred to above.

50
<PAGE>

NETPLIANCE, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report............................................... F-2
Balance Sheet.............................................................. F-3
Statement of Operations.................................................... F-4
Statement of Stockholders' Equity.......................................... F-5
Statement of Cash Flows.................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Netpliance, Inc.:

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

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

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

/s/ KPMG LLP

Austin, Texas

March 15, 2000

F-2
<PAGE>

NETPLIANCE, INC.
BALANCE SHEET

<TABLE>
<CAPTION>
December 31, 1999
--------------------------
Pro forma
(Unaudited)
Assets Actual (note 2(m))
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 9,563,362 $ 9,563,362
Prepaid expenses.................................. 5,984,595 5,984,595
Other current assets.............................. 514,036 514,036
------------ ------------
Total current assets............................. 16,061,993 16,061,993
------------ ------------
Property and equipment, net........................ 3,102,629 3,102,629
Deferred offering costs............................ 482,513 482,513
Other noncurrent assets............................ 978,048 978,048
------------ ------------
$ 20,625,183 $ 20,625,183
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable............................ $ 1,909,487 $ 1,909,487
Accrued liabilities............................... 2,208,087 2,208,087
Current portion of capital lease obligations...... 954,221 954,221
------------ ------------
Total current liabilities........................ 5,071,795 5,071,795
Non-current portion of capital lease obligations... 636,302 636,302
------------ ------------
Total liabilities................................ 5,708,097 5,708,097
------------ ------------
Deposit received on Series D preferred stock ...... 2,000,000 2,000,000
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.01 par value;
5,000,000 shares authorized:
Series A convertible preferred stock, 658,647
shares issued and outstanding as of December 31,
1999, liquidation preference of $3,760,874, no
shares issued or outstanding pro forma ......... 16,925,598 --
Series B convertible preferred stock, 116,666
shares issued and outstanding as of December 31,
1999, liquidation preference of $6,999,960, no
shares issued or outstanding pro forma ......... 6,767,900 --
Series C convertible preferred stock, 66,668
shares issued and outstanding as of December 31,
1999, liquidation preference of $6,000,120, no
shares issued or outstanding pro forma ......... 5,799,387 --
Common stock, $0.01 par value; 250,000,000 shares
authorized; 18,907,071 shares (44,166,501 shares
pro forma) issued and outstanding................ 189,071 441,665
Additional paid-in capital........................ 41,749,006 70,989,297
Deferred stock option compensation................ (14,164,611) (14,164,611)
Stockholder notes receivable...................... (821,449) (821,449)
Accumulated deficit............................... (43,527,816) (43,527,816)
------------ ------------
Total stockholders' equity....................... 12,917,086 12,917,086
------------ ------------
$ 20,625,183 $ 20,625,183
============ ============
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>

NETPLIANCE, INC.
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
Period from
January 12,
1999
(Inception)
through
December 31,
1999
-------------
<S> <C>
Subscription revenue............................................ $ 25,716
Operating expenses:
Cost of services............................................... 1,253,799
Loss on subsidized appliance and accessory sales............... 1,678,814
Research and development....................................... 6,457,133
Sales and marketing............................................ 14,069,426
General and administrative..................................... 4,017,082
-------------
Loss from operations........................................... (27,450,538)
Interest income................................................. 304,761
Interest expense................................................ (139,918)
-------------
Net loss....................................................... (27,285,695)
Effect of beneficial conversion feature of convertible
preferred stock............................................... (16,242,121)
-------------
Net loss applicable to common stock............................ $ (43,527,816)
=============
Weighted average common shares outstanding...................... 15,588,420
=============
Loss per common share--basic and diluted........................ $ (2.79)
=============
Weighted average shares outstanding--pro forma.................. 31,181,298
=============
Pro forma loss per common share--basic and diluted (unaudited).. $ (1.40)
=============
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>

NETPLIANCE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM JANUARY 12, 1999 (INCEPTION)
THROUGH DECEMBER 31, 1999

<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Preferred Preferred Common Deferred
Stock Stock Stock Stock Additional stock
------------------- ------------------ ----------------- ----------------------- paid-in option
Shares Amount Shares Amount Shares Amount Shares Amount capital compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
inception...... -- $ -- -- $ -- -- $ -- -- $ -- $ -- $ --
Issuance of
common stock... -- -- -- -- -- -- 22,870,131 228,701 6,986,004 --
Repurchase of
common stock... -- -- -- -- -- -- (3,981,060) (39,810) (26,541) --
Exercise of
common stock
options........ -- -- -- -- -- -- 18,000 180 3,240 --
Issuance of
Series A
preferred
stock, net of
issuance costs. 658,647 16,925,598 -- -- -- -- -- -- -- --
Issuance of
Series B
preferred
stock, net of
issuance costs. -- -- 116,666 6,767,900 -- -- -- -- -- --
Issuance of
Series C
preferred
stock, net of
issuance costs. -- -- -- -- 66,668 5,799,387 -- -- -- --
Beneficial
conversion
feature on
convertible
preferred stock
............... -- -- -- -- -- -- -- -- 16,242,121 --
Deferred stock
option
compensation... -- -- -- -- -- -- -- -- 14,318,861 (14,318,861)
Amortization of
deferred
stock option
compensation... -- -- -- -- -- -- -- -- -- 154,250
Issuance of
warrants to
purchase shares
of common
stock.......... -- -- -- -- -- -- -- -- 4,225,321 --
Net loss........ -- -- -- -- -- -- -- -- -- --
------- ----------- ------- ---------- ------ ---------- ------------- -------- ----------- ------------
Balances at
December 31,
1999........... 658,647 $16,925,598 116,666 $6,767,900 66,668 $5,799,387 $ 18,907,071 $189,071 $41,749,006 $(14,164,611)
======= =========== ======= ========== ====== ========== ============= ======== =========== ============
<CAPTION>
Total
Stockholder Accum- stock-
notes ulated holders'
receivable deficit equity
<S> <C> <C> <C>
Balances at
inception...... $ -- $ -- $ --
Issuance of
common stock... (892,800) -- 6,321,905
Repurchase of
common stock... 71,351 -- 5,000
Exercise of
common stock
options........ -- -- 3,420
Issuance of
Series A
preferred
stock, net of
issuance costs. -- -- 16,925,598
Issuance of
Series B
preferred
stock, net of
issuance costs. -- -- 6,767,900
Issuance of
Series C
preferred
stock, net of
issuance costs. -- -- 5,799,387
Beneficial
conversion
feature on
convertible
preferred stock
............... -- (16,242,121) --
Deferred stock
option
compensation... -- -- --
Amortization of
deferred
stock option
compensation... -- -- 154,250
Issuance of
warrants to
purchase shares
of common
stock.......... -- -- 4,225,321
Net loss........ -- (27,285,695) (27,285,695)
----------- ------------- -------------
Balances at
December 31,
1999........... $(821,449) $(43,527,816) $ 12,917,086
=========== ============= =============
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>

NETPLIANCE, INC.
STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
Period from
January 12,
1999
(Inception)
through
December 31,
1999
------------
<S> <C>
Cash flows from operating activities:
Net loss........................................................ $(27,285,695)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 752,315
Noncash compensation expense................................... 4,891,338
Changes in operating assets and liabilities:
Prepaid expenses ............................................. (6,040,865)
Other current assets.......................................... (514,036)
Other assets.................................................. (434,038)
Accounts payable and accrued liabilities...................... 3,671,961
------------
Net cash used in operating activities........................... (24,959,020)
------------
Cash flows used in investing activities:
Purchases of property and equipment............................. (1,859,487)
------------
Cash flows from financing activities:
Increase in restricted cash related to capital leases........... (445,231)
Principal payments on capital lease obligations................. (348,664)
Principal payments on note payable.............................. (220,546)
Proceeds from issuance of common stock.......................... 5,936,905
Proceeds from exercise of stock options......................... 3,420
Proceeds from issuance of preferred stock, net.................. 29,492,885
Deposit received on Series D preferred stock.................... 2,000,000
Payment of deferred offering costs.............................. (36,900)
------------
Net cash provided by financing activities........................ 36,381,869
------------
Increase in cash and cash equivalents since inception............ $ 9,563,362
============
Supplemental disclosure:
Interest paid during period..................................... $ 139,918
Supplemental disclosure of noncash investing and financing
activities:
Acquisition of computer equipment through capital leases........ $ 1,939,187
Issuance of common stock for notes receivable................... $ 821,449
Accrual of deferred offering costs.............................. $ 445,613
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

(1) Incorporation and Nature of Business

Netpliance, Inc. ("Netpliance" or the "Company") was incorporated in the
State of Texas in January 1999 as Shbang! Inc. In May 1999, the Company's name
was changed to Netpliance, Inc.

The Company has experienced operating losses since inception as a result of
efforts to build its network infrastructure to support the Internet service
offering for customers. The Company expects that it will continue to incur net
losses as it continues to expend significant resources on sales and marketing.
There can be no assurance that the Company will achieve or sustain
profitability or positive cash flow from its 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. The Company expects to seek additional funding through private or public
equity offerings until such time as it achieves positive cash flow from
operations; however, there can be no assurance that such financing will be
available or that positive operating cash flows will be achieved.

(2) Summary of Significant Accounting Policies

(a) Cash Equivalents

For purposes of the statement of cash flows, the Company considers all short
term, highly liquid investments with an original maturity of three months or
less at the date of acquisition to be cash equivalents. At December 31, 1999,
the Company's cash equivalents principally consisted of repurchase agreements
and money market funds.

(b) Property and Equipment

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

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

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

(d) Impairment of Long-Lived Assets

Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the

F-7
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair market
value less costs to sell.

(e) Revenue Recognition

Subscription revenues represent amounts earned from customer subscriptions
for Internet service and are recognized ratably over the applicable period.
Subscriptions to the Internet service are available on a monthly and annual
basis and are generally charged to customers' credit cards in advance on a
monthly basis.

(f) Advertising Costs

Advertising costs are included in sales and marketing. Production costs are
expensed as incurred and communication costs are expensed the first time the ad
is run. Advertising costs approximated $5.7 million from January 12, 1999
(inception) through December 31, 1999. At December 31, 1999, the Company had
prepaid $3.15 million of advertising costs for television commercials that have
not yet run. This amount is included in prepaid expenses and will be expensed
the first time the commercial is run.

(g) Subsidized Appliance and Accessory Sales

The Company subcontracts the manufacturing and assembly of its i-opener
Internet appliance, which is shipped directly to the customer. The Company
offers its i-opener Internet appliance and accessories at a price below cost,
as an incentive for new customers to subscribe to its Internet service. The
Company presents the loss generated from the sale of the units and accessories
as an operating expense since sales of these devices are not the Company's
principal business activity and the loss primarily represents customer
acquisition costs. The Company records a provision for estimated warranty costs
and sales returns at the time of sale. To date, the Company's warranty costs
have not been significant. The sales return allowance was $110,000 at December
31, 1999. The loss on the sale of i-opener Internet appliances and related
accessories for the period ended December 31, 1999 is as follows:

<TABLE>
<S> <C>
Appliance and accessory sales, net of return provision.............. $1,193,780
Cost of appliance and accessory sales............................... 2,872,594
----------
$1,678,814
==========
</TABLE>

(h) Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

(i) Use of Estimates

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

F-8
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

(j) Stock-Based Compensation

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

(k) Comprehensive Income

The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in the financial
statements. Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to owners. To
date, no elements of comprehensive income exist other than net loss.

(l) Segments

The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company has determined that it did not have any separately reportable
business segments for the period ended December 31, 1999.

(m) Unaudited Pro Forma Balance Sheet

The Board of Directors authorized the Company to file a Registration
Statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering ("IPO"). The
Registration Statement was filed on December 23, 1999. If the IPO is
consummated as presently anticipated, all shares of Series A, Series B, and
Series C preferred stock will automatically convert into shares of common stock
at a thirty-for-one conversion ratio. The unaudited pro forma balance sheet
reflects the conversion of the preferred stock as though it occurred as of
December 31, 1999.

(3) Net Loss Per Share

Historical

Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, "Earnings Per Share." In accordance with SFAS No. 128 and SEC Staff
Accounting Bulletin No. 98, basic loss per share is computed using the weighted
average number of common shares outstanding during the period. Diluted loss per
share is equivalent to basic loss per share because outstanding stock options,
warrants and convertible preferred stock are anti-dilutive. Potentially
dilutive securities that were excluded from the calculation of loss per share
because their effect was antidilutive were options to purchase 3,717,750 shares
of common stock, warrants to purchase 845,634 shares of common stock and shares
of preferred stock convertible into 25,259,430 shares of common stock.

Pro Forma Net Loss Per Share (Unaudited)

The following table sets forth the computation of the unaudited pro forma
basic and diluted loss per share for the period, assuming the conversion of the
Series A, B and C preferred stock into shares of the Company's

F-9
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

common stock effective upon the closing of the Company's initial public
offering as if such conversion occurred at the date of issuance:

<TABLE>
<S> <C>
Numerator:
Net loss.................................................... $ (27,285,695)
Effect of beneficial conversion feature of convertible
preferred stock............................................ (16,242,121)
-------------
Net loss applicable to common stock......................... $ (43,527,816)
=============
Denominator:
Weighted average common shares outstanding.................. 15,588,420
Conversion of Series A preferred stock...................... 14,531,973
Conversion of Series B preferred stock...................... 902,262
Conversion of Series C preferred stock...................... 158,643
-------------
Shares used in pro forma calculation........................ 31,181,298
-------------
Pro forma basic and diluted loss per share.................. $ (1.40)
=============
</TABLE>

(4) Property and Equipment

Property and equipment at December 31, 1999 consists of:

<TABLE>
<S> <C>
Computer equipment.............................................. $2,482,568
Furniture and fixtures.......................................... 221,822
Leasehold improvements.......................................... 74,897
Office and other equipment...................................... 159,805
Software........................................................ 859,582
----------
3,798,674
Less accumulated depreciation and amortization.................. (696,045)
----------
Net property and equipment...................................... $3,102,629
==========
</TABLE>

The Company's depreciation expense for the period from January 12, 1999
(inception) through December 31, 1999 totaled $696,045. Included in property
and equipment and accumulated depreciation at December 31, 1999 are $1,939,187
and $473,240, respectively, related to equipment on capital lease. Amortization
of assets leased under capital lease arrangements is included in depreciation
expense.

Terms of one of the Company's equipment leases calls for a letter of credit
in an amount equal to 25% of the value of the equipment. The Company has
pledged a certificate of deposit (included in other noncurrent assets at
December 31, 1999) in the amount of $445,231 as collateral for the letter of
credit issued by a financial institution.

(5) Accrued Liabilities

Accrued liabilities at December 31, 1999 consists of the following:

<TABLE>
<S> <C>
Payroll and employee benefits................................... $ 460,376
Professional services........................................... 725,000
Marketing and promotions........................................ 242,752
Other........................................................... 779,959
----------
$2,208,087
==========
</TABLE>

F-10
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

(6) Notes Receivable

From January 12, 1999 (inception) through December 31, 1999, the Company
issued shares of its common stock in exchange for promissory notes to five
employees of the Company. The aggregate amount of the notes totaled $892,800.
In conjunction with the resignation of one of the Company's founders, one of
the notes was forgiven as part of the consideration for the repurchase of the
founder's shares. At December 31, 1999, the remaining four notes receivable
from employees were outstanding and aggregated $821,449. The notes are secured
by the common stock, bear interest at 7% and mature from January 18, 2004
through November 8, 2004. The notes have been reflected as a reduction of
stockholders' equity on the accompanying balance sheet. The Company issued
300,000 shares of common stock to an employee at a price below the estimated
fair value on the date of issuance and recognized $390,000 of expense which is
included in general and administrative expenses for the period ended December
31, 1999.

(7) Capital Stock

Common Stock

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

Convertible Preferred Stock

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

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

Series B and Series C may be converted at the option of the holder into
shares of common stock at a rate equal to the product of the number of shares
of preferred stock and the initial purchase price for such shares, divided by
the Conversion Price, as defined. The Conversion Price per share is $2 and $3
for Series B and Series C, respectively. Additionally, each share of Series B
and Series C automatically converts at the Conversion Price into shares of
common stock upon the Company's consummation of an initial firm underwritten
public offering of its common stock raising gross proceeds to the Company of
$15 million or more at an offering price per share greater than or equal to
150% of the initial Conversion Price, upon a consolidation or merger of the
Company with or into any other corporation or the sale or other transfer of all
or substantially all of the assets of the Company.

In the event of any liquidation or dissolution or winding up of the Company,
voluntary or involuntary, the holders of each series of preferred stock shall
be entitled to receive, subject to rights of any other class of stock

F-11
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

which ranks senior to the applicable series of preferred stock but before any
distribution is made on any class of stock ranking junior to the applicable
series of preferred stock, a liquidation preference plus any declared and
unpaid dividends. At December 31, 1999, the Series A, B and C carried a
liquidation preference equal to $5.71, $60 and $90 per share, respectively.

During the time the preferred stock is outstanding, the Company may not
declare or pay any dividends on any share of common stock unless a dividend
(including previously accrued, but unpaid dividends) is paid with respect to
all outstanding shares of the preferred stock. The holders of the preferred
stock will be entitled to receive dividends on each share of common stock into
which the preferred stock is then convertible. Any accrued dividends on the
preferred stock are payable upon the conversion of the preferred stock or
liquidation of the Company. No dividends had been declared or paid as of
December 31, 1999.

On December 22, 1999, the Company entered into an irrevocable agreement to
sell 1,430,000 shares of Series D Convertible Preferred Stock ("Series D") for
$20 per share in a private placement. On January 5, 2000, the Company
consummated the Series D offering and issued the Series D. Net proceeds to the
Company approximated $27.1 million. The holders of Series D are entitled to the
same voting and dividend rights as Series B and Series C and have a liquidation
preference equal to the original purchase price of $20 per share and in
preference to the Series A, Series B and Series C. The Series D may be
converted at the option of the holder into shares of common stock at a
conversion ratio of three-for-one. In December 1999, a purchaser of Series D
paid $2 million for its shares in advance of the Company issuing the shares.

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

The Company has entered into a shareholder agreement with three of its
founders (the "Agreement"). Among other provisions, the Agreement provides the
Company the right of first refusal to repurchase the founders' shares of common
and preferred stock upon their voluntary or involuntary transfer of the shares.
This Agreement will terminate upon the closing of this offering.

(8) Stock Options and Warrants

Stock Option Plan

In January 1999, the Company established the Shbang! Inc. Stock Option and
Restricted Stock Plan (the "Plan"). The Plan provides for the grant to
employees of the Company of incentive stock options to purchase shares of the
Company's common stock. The Plan also provides for the grant to certain
employees, officers, directors and consultants of the Company of non-qualified
options to purchase shares of the Company's common stock. The total number of
shares authorized to be issued pursuant to options granted under the Plan is
4,500,000. The Plan is administered by a committee appointed by the Board of
Directors which determines the terms of the options granted, including the
exercise price, the number of shares subject to option, and the option vesting
period. Options generally have a maximum term of ten years and vest in equal
annual increments over a four year period beginning one year from the date of
grant. As of December 31, 1999, there were 782,250 shares available for future
option grants under the Plan.

F-12
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

Pro forma information assuming the Company had accounted for its employee
stock options granted under the fair value method prescribed by SFAS 123 is
presented below. The per share weighted-average fair value of stock options
granted through December 31, 1999 was $2.85 on the date of grant using a
minimum value option pricing model (0% volatility). The fair value of options
was estimated using a risk-free interest rate of 6.2%, a dividend yield of 0%
and a weighted average expected life of 4 years.

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

<TABLE>
<S> <C>
Net loss (in thousands):
As reported..................................................... $(27,286)
Pro forma....................................................... (42,423)
Basic and diluted net loss per share:
As reported..................................................... $ (2.79)
Pro forma....................................................... (3.75)
</TABLE>

A summary of changes in common stock options is as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise price
Shares per share
<S> <C> <C>
Options granted....................................... 5,315,382 $1.22
Options exercised..................................... (18,000) 0.19
Options forfeited..................................... (610,500) 0.34
--------- -----
Options outstanding at December 31, 1999.............. 4,686,882 $1.34
========= =====
</TABLE>

Thirty thousand options with an exercise price of $2.55 were exercisable as
of December 31, 1999.

At December 31, 1999, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $0.19 to $2.55 and 9.6
years, respectively. A summary of outstanding stock options as of December 31,
1999 follows:

<TABLE>
<CAPTION>
Number Contractual Exercise
of options life price
<S> <C> <C>
1,279,500 9.3 $0.19
1,114,500 9.6 1.19
580,500 9.7 1.40
527,250 9.9 1.70
1,185,132 10.0 2.55
--------- -----
4,686,882 $1.34
========= =====
</TABLE>

The Company had $3,515,293 of deferred stock option compensation related to
employee stock options as of December 31, 1999 and recognized stock-based
compensation expense of $80,807 during the period ended December 31, 1999 as a
result of granting stock options with exercise prices below the estimated fair
value of the Company's common stock at the date of grant. Deferred stock option
compensation has been presented as a component of stockholders' equity and is
being amortized as a charge to general and administrative expense over the
vesting period of the applicable options.

F-13
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

On December 21, 1999, the Company granted an option to purchase 969,132
shares of common stock at $2.55 per share to a consultant who is expected to
become an officer of the Company. At the time of the grant, the Company
recorded $10,722,761 of deferred stock compensation of which $73,444 was
recognized as compensation expense for the period ended December 31, 1999. The
fair value of the option was computed using the Black-Scholes model using an
assumed volatility of 50%, a risk-free interest rate of 6.2%, a weighted-
average expected life of four years, and a dividend rate of 0%. On February 14,
2000, the consultant became an employee and the compensation related to the
options was remeasured on that date.

Warrants

On October 1, 1999 and December 3, 1999, the Company issued warrants to
purchase 215,634 and 30,000 shares of common stock warrants, respectively, to a
third party in connection with the private placement of the Company's preferred
stock. The warrants enable the holder to purchase shares of the Company's
common stock at $2 and $3 per share, respectively. The warrants' fair value on
the date of grant was estimated to be $275,320. Additionally, subsequent to
December 31, 1999, in connection with the Series D offering, the Company issued
warrants to purchase 221,400 shares of the Company's common stock at $6.67 per
share.

On December 22, 1999 the Company entered into a nonbinding Memorandum of
Understanding ("MOU") with U S WEST !nterprise Networking Services ("U S WEST")
to form a strategic alliance for the distribution of the i-opener Internet
appliance. As consideration for signing the MOU, the Company granted to US West
for $5,000 an immediately exercisable warrant to purchase 600,000 shares of the
Company's common stock at $6.67 per share. The exercise price of the warrant is
subject to adjustment under certain conditions, and expires on December 31,
2003. The fair value of the warrant on the measurement date was $4,126,544,
which has been recognized as sales and marketing expense as there were no
remaining performance obligations on behalf of the warrant holder. The fair
value of the warrant was estimated using the Black-Scholes model using an
assumed volatility of 50%, a risk-free interest rate of 6%, a weighted-average
expected life of one year, and a dividend rate of 0%.

Under the terms of the MOU it is anticipated that the Company will issue to
U S WEST incentive warrants to purchase up to 1,500,000 shares of the Company's
common stock at $6.67 per share if a binding agreement is consummated. It is
anticipated that the number of shares to be issued under the incentive warrants
will be subject to adjustment based on the number of users of the i-opener
activated by U S WEST. When and if it becomes probable that the performance
criteria will be achieved, the Company will record the then fair value of the
earned warrants as a charge to operating expenses.

(9) Income Taxes

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

<TABLE>
<S> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards.......................... $ 6,090,000
Start-up costs capitalized for tax purposes............... 3,655,000
Tax credits (research).................................... 229,000
Property and equipment, principally due to differences in
depreciation............................................. 187,000
Stock option compensation expense......................... 1,795,000
Other..................................................... 128,000
------------
Total deferred tax assets................................... 12,084,000
Less: valuation allowance................................... (12,084,000)
------------
Net deferred tax assets..................................... $ --
============
</TABLE>

F-14
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

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

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

(10) Commitments and Contingencies

Leases

The Company leases its office space and certain equipment under non-
cancelable operating leases expiring in various years through 2002. The Company
also leases equipment, primarily computer equipment, under capital leases.
Total rent expense for all operating leases from January 12, 1999 (inception)
through December 31, 1999 was $720,756. Minimum lease commitments under non-
cancelable leases at December 31, 1999 are as follows:

<TABLE>
<CAPTION>
Operating Capital
<S> <C> <C>
Years ended December 31:
2000...................................................... $ 921,672 $1,151,928
2001...................................................... 340,361 763,603
2002...................................................... 1,645 --
---------- ----------
Total lease payments...................................... $1,263,678 1,915,531
==========
Interest at rates ranging from 9% to 18%.................. 325,008
----------
Obligations under capital leases at December 31, 1999..... $1,590,523
==========
</TABLE>

The Company's lease for its office space is with a related party. The lease
calls for base payments of $44,625 plus common area costs and terminates in
2001. Total rent expense on this lease for the period ended December 31, 1999
approximated $479,000.

The Company is involved in certain legal proceedings as a part of its normal
course of business. Management does not believe that the ultimate resolution of
these matters will have a material impact on the Company's results of
operations or financial position.

Prior to the effectiveness of the registration statement covering the sale
of Netpliance common stock being sold in the initial public offering,
Donaldson, Lufkin & Jenrette Securities Corporation, an underwriter of the
offering, provided written materials to approximately 200 individuals that
Netpliance had designated as potential purchasers of up to 350,000 shares of
common stock in the offering through a directed share program. These materials
may constitute a prospectus that does not meet the requirements of the
Securities Act of 1933. If the distribution of these materials by Donaldson,
Lufkin & Jenrette Securities Corporation did constitute a violation of the
Securities Act of 1933, the recipients of the materials who purchased common
stock in the offering would have the right, for a period of one year from the
date of their purchase of common stock, to recover from the Company the
consideration paid in connection with their purchase of common stock or, if

F-15
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

they have already sold the stock, to sue Netpliance for damages resulting from
their purchase of common stock. These damages could total up to approximately
$4.9 million plus interest, based on the assumed initial public offering price
of $14.00 per share, if these investors seek recovery or damages after an
entire loss of their investment. To the extent that any of the recipients of
the materials also purchase shares in this offering outside the program from
the underwriters, the potential damages would increase by the purchase price of
those shares. The Company has no way of knowing if any additional shares will
be purchased by these recipients outside the directed share program from the
underwriters. The Company does not believe that the distribution in question is
a violation of the Securities Act and therefore, believes that it would prevail
in any litigation if any such claims are made. While the ultimate outcome of
these matters cannot be determined, Netpliance does not expect that they will
have a material adverse effect on its financial position, results of operations
or cash flows.

Significant Contracts

In May 1999, the Company entered into an agreement with QNX Software Systems
Ltd. to purchase licenses for copies of the operating system software utilized
in the i-opener Internet appliance. The agreement called for a prepayment of
$500,000 and a subsequent payment of $247,000 on May 1, 2000 for the initial
copies of the software. The unamortized portion of the initial prepayment has
been included in prepaid expenses at December 31, 1999. Amounts are expensed as
the units are shipped.

In June 1999, the Company signed an agreement with GTE for GTE to provide
the nationwide telecommunications network that will enable the Company to
provide its customers with Internet access. The term of the agreement is 36
months and calls for monthly payments based on actual usage billings during the
first six months. The contract includes minimum monthly payments of $82,500 for
months seven to nine, $165,500 for months 10 to 12 and $250,000 for months 13
to 36. Amounts are expensed as incurred based on the greater of the actual
billings or the minimum monthly payment as cost of services.

In June 1999, the Company signed an agreement under which GTE Communications
Corporation agreed to provide help-desk services for Internet service
customers. The term of the agreement is 24 months and calls for a per minute
charge to the Company for service. The agreement also obligates the Company to
pay for a minimum of 250,000 and 500,000 minutes per month for the first and
second years, respectively. Amounts are expensed as incurred based on the
greater of the actual billings or the minimum monthly payment as cost of
services.

In September 1999, the Company entered into an agreement with Quanta
Computer for Quanta to manufacture the i-opener Internet appliance. The initial
term of the agreement is for three years expiring on August 15, 2002, and is
renewable at the Company's option for one year periods. As part of the
agreement, Quanta has granted to Netpliance six months exclusivity on products
covered under the agreement. In December 1999, the Company prepaid Quanta $2.3
million as a deposit for production of an agreed number of units. This amount
has been included in prepaid expenses at December 31, 1999. The Company is
committed to purchase from Quanta a specified number of units by the end of
February 2000. The Company's remaining commitment approximated $5.7 million at
December 31, 1999.

(11) Employee Benefit Plan

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

(12) Subsequent Events

On February 4, 2000, the Company entered into an irrevocable agreement to
sell 1,127,675 shares of Series E Convertible Preferred Stock ("Series E") for
$30 per share in a private placement. The closing for the

F-16
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
sale of these shares was on February 7, 2000. The holders of Series E are
entitled to the same voting and dividend rights as Series B, C and D and Series
E has a liquidation preference equal to the original purchase price of $30 per
share. The Series E may be converted at the option of the holder into shares of
common stock at an initial conversion ratio of three-to-one, and automatically
converts upon the consummation of the Company's initial public offering.

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

On February 4, 2000, the Company agreed to grant to two preferred
stockholders, at such time as final agreements are entered into with these
parties, warrants to purchase 3,000,000 shares (1,500,000 shares each) of
common stock at $10 per share. An aggregate of 1,500,000 shares (750,000 each)
will vest immediately upon execution of certain "Commercial Agreements," as
defined. The Commercial Agreements will grant the
preferred stockholders jointly an exclusive right and license to distribute,
market and promote the i-opener in Canada for broadband cable distribution for
an initial period of three years. These preferred stockholders will also
provide network and subscriber management, billing, distribution and
provisioning services and systems with respect to i-opener subscribers in their
licensed territories. The Company will record as operating expenses the fair
value of the 750,000 warrants on the date of the signing of each of the
Commercial Agreements. If and when the performance criteria of the remaining
1,500,000 warrants are met, the Company will record the then fair value of the
earned warrants as a charge to operating expenses.

Subsequent to December 31, 1999, the Company granted, to employees and
officers, options to purchase approximately 3,627,915 shares of common stock at
exercise prices ranging from $1.70 to $14.00 per share that will vest over four
years and options to directors to purchase 630,000 shares of common stock at
exercise prices ranging from $6.67 to $10.00 per share that vest immediately.
The Company will record approximately $6,190,000 of compensation expense in the
first quarter of 2000 as a result of granting stock options with exercise
prices below the estimated fair value at the date of grant. Remaining deferred
compensation of $36,580,000 will be amortized over the remaining four-year
vesting period.

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

On February 11, 2000, the Company entered into a non-binding letter of
intent with ATLINKS and THOMSON MultiMedia (collectively referred to as the
"Entity") wherein Netpliance and the Entity intend to form a strategic
relationship whereby the Entity will manufacture and distribute certain
consumer Internet appliances and Netpliance will provide the i-opener Internet
service to consumers. Upon execution of a definitive agreement, the Company
will grant the Entity a warrant to purchase one share of the Company's common
stock at a purchase price of $10 per share for the net number of subscribers of
that are actually activated prior to January 1, 2002, up to a maximum of
250,000. The warrants will vest December 31, 2000, December 31, 2001 and
December 31, 2002, as to that net number of subscribers that are activated
during each

F-17
<PAGE>

NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
calendar year. If and when the performance criteria of the warrants are met,
the Company will record the then fair value of the earned warrants as a charge
to operating expenses. An affiliate of THOMSON also owns a portion of the
Company's Series E preferred stock.

On February 16, 2000, the Company signed an agreement to lease additional
office space for a period of 60 months at a monthly base rate of $101,414.

The Board approved adoption of the 2000 Employee Stock Purchase Plan (the
"Plan") effective the later of (a) March 1, 2000, (b) the date stockholders'
approval is obtained or (c) the date on which a Registration Statement under
the Securities Act of 1933, as amended, covering the shares to be issued under
the Plan becomes effective. The Company initially reserved for issuance to and
purchase by qualified employees under the Plan an aggregate of 600,000 shares
of common stock. The annual increase in the number of shares reserved for
issuance pursuant to the Plan shall be the least of the following: (1) 1% of
issued and outstanding shares as of the last day of the prior fiscal year; (2)
900,000 shares; or (3) a smaller number as determined by the Board of
Directors. Such annual increase shall occur automatically on the first trading
day in January of each year. The purchase price for each share of common stock
shall be 85% of the lesser of (i) the fair market value of such share on the
last business day in June and December during the life of the Plan or (ii) the
fair market value of such share on the first day of the Purchase Period. The
Purchase Period is defined as each six month period beginning on January 1 or
July 1.

F-18
<PAGE>

Inside of Back Cover:

[ARTWORK]

Illustration of the i-opener portal homepage with circles representing
buttons that link to "Mail," "Shopping," "Weather," "Finance," "Entertainment,"
"Sports," "News" and "Webguide."
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000

[NETPLIANCE LOGO APPEARS HERE]

7,000,000 Shares of Common Stock

------------------

PROSPECTUS

------------------

Donaldson, Lufkin & Jenrette
Chase H&Q
Robertson Stephens
DLJdirect Inc.

- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Netpliance
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 2000, (25 days after the date of this prospectus), all dealers
that effect transactions in these shares of common stock may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.

- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the expenses to be incurred by the Registrant
in connection with the issuance and distribution of the securities being
registered.

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $ 31,878
National Association of Securities Dealers, Inc. Filing Fee.... 12,575
Printing and Mailing Expenses.................................. 240,000
Accounting Fees and Expenses................................... 225,000
Legal Fees and Expenses........................................ 450,000
Blue Sky Fees and Expenses..................................... 5,000
Registrar and Transfer Agent Fees.............................. 10,000
Miscellaneous Expenses......................................... 25,547
----------
Total.......................................................... $1,000,000
==========
</TABLE>

All of the above fees and expenses, except the Securities and Exchange
Commission registration fee and the National Association of Securities Dealers,
Inc. filing fee, represent estimates only.

Item 14. Indemnification of Directors and Officers

Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person, including any
officer or director, who is, or is threatened to be made, party to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of such corporation), by reason of the fact that such person was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation. The indemnity may include expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such officer, director, employee or agent acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests and, for criminal proceedings, had no reasonable cause to believe
that his conduct was unlawful. A Delaware corporation may indemnify officers
and directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director actually and
reasonably incurred.

The Certificate of Incorporation of the Registrant provides that no director
of the Registrant will be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption from liability or limitation thereof is not permitted
under the DGCL as currently in effect or as the same may hereafter be amended.
Pursuant to Section 102(b)(7) of the DGCL the Certificate of Incorporation of
the Registrant eliminates such liability, except for liabilities related to
breach of duty of loyalty, actions not in good faith and certain other
liabilities.

The Registrant has a directors' and officers' liability insurance policy.
The Bylaws of the Registrant provide for indemnification of the officers and
directors of the Company to the fullest extent permitted by the applicable law.
In addition, the Company will enter into an indemnification agreement with each
of its

II-1
<PAGE>

directors, pursuant to which they will be entitled to advances for the costs of
defending actions against them in addition to that provided by the
indemnification provisions in the Certificate of Incorporation or the Company's
officers' and directors' insurance policy.

The form of Underwriting Agreement attached hereto as Exhibit 1.1, which
provides for, among other things, the Registrant's sale to the Underwriters of
the securities being registered herein, will obligate the Underwriters to
indemnify the Registrant and Registrant's officers and directors against
certain liabilities under the Securities Act of 1933.

Item 15. Recent Sales of Unregistered Securities

Since our formation, we have issued and sold the following securities (as
adjusted for a three-for-one stock split effective immediately prior to the
effectiveness of this Registration Statement).

(a) In January 1999, we issued 3,000 shares of common stock at $0.17 per
share in order to initially capitalize the Registrant as required by state law.

(b) Also in January 1999, we issued 14,400,000 shares of common stock at
$0.02 per share, for an aggregate purchase price of $240,000, to our founders.
3,981,060 of these shares were subsequently redeemed and reissued to investors
in April 1999 as described in (d) below.

(c) Also in January 1999, we issued an aggregate of 350,000 shares of Series
A preferred stock at $5.71 per share for an aggregate purchase price of
$2,000,000 to one of our founders.

(d) From February 1999 through April 1999, we issued an aggregate of
4,431,066 shares of Common Stock at $0.19 per share for an aggregate purchase
price of $841,902 to 21 investors.

(e) In May and July 1999, we issued an aggregate of 185,714 shares of Series
A preferred stock at $42.00 per share for an aggregate purchase price of
$7,800,000 to one of our founders.

(f) In July 1999, we issued 120,000 shares of common stock at $1.19 per
share for an aggregate purchase price of $142,800 to one investor in connection
with his employment with us.

(g) In July and August 1999, we issued an aggregate of 3,526,065 shares of
common stock at $1.40 per share for an aggregate purchase price of $4,936,491
to 24 investors.

(h) In September 1999, we issued 122,933 shares of Series A preferred stock
at $60.00 per share for an aggregate purchase price of $7,375,980 to 30
investors.

(i) In October 1999, we issued 116,666 shares of Series B preferred stock at
$60.00 per share for an aggregate purchase price of $7,000,000 to one investor
and entered into an agreement to put, prior to December 31, 1999, 66,668 shares
of Series C preferred stock at $90.00 per share to that investor and one of our
founders. We also issued 90,000 shares of common stock to the director
nominated by the Series B preferred stock purchaser at a purchase price of
$1.70 per share in October 1999.

(j) In November 1999, we issued 300,000 shares of common stock at $1.70 for
an aggregate purchase price of $510,000 to one investor in connection with his
employment with us.

(k) In December 1999, we issued an aggregate of 66,668 shares of Series C
preferred stock to the investor in Series B preferred stock and one of our
founders pursuant to the October agreement, at $90.00 per share, for an
aggregate purchase price of $6,000,000.

(l) On December 22, 1999, we entered into irrevocable commitments to sell an
aggregate of 1,430,000 shares of Series D preferred stock for an aggregate
purchase price of $28,600,000 to eight investors and granted a warrant to
purchase 600,000 shares of our common stock to one of those investors. In
January 2000, we issued the 1,430,000 shares of Series D preferred stock.

(m) On February 7, 2000, we issued 1,127,675 shares of our Series E
preferred stock for an aggregate purchase price of $33,830,250 to four
investors. The issuance of 933,334 shares of Series E preferred stock was
exempt from the registration requirements of the Securities Act by virtue of
Regulation S promulgated thereunder.

II-2
<PAGE>

From our inception to March 14, 2000, we granted options to purchase an
aggregate of 8,959,797 shares of common stock to our directors, executive
officers, employees and consultants pursuant to our stock option plan. To date
we have issued 147,375 shares of our common stock upon exercise of outstanding
options.

In connection with the private placements of our Series B, Series C and
Series D preferred stock, we issued warrants to purchase an aggregate of
467,034 shares of common stock to private placement agents. These warrants will
be exercised and shares of common stock issued immediately prior to the
consummation of this offering.

None of the foregoing transactions involved any public offering, and we
believe that each transaction was exempt from the registration requirements of
the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients in
each such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about
Netpliance, Inc.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

<TABLE>
<C> <C> <S>
1.1 Form of Underwriting Agreement among Netpliance and the
Underwriters.

3.1 ** Certificate of Incorporation of Netpliance.

3.2 ** Bylaws of Netpliance.

4.1 ** Specimen Certificate for Common Stock.

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

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

5 Opinion of Hughes & Luce, L.L.P. as to the validity of the shares
of Common Stock of Netpliance being registered.

10.1 +** Internetworking Agreement by and between GTE Internetworking
Incorporated and Netpliance dated as of May 30, 1999, as amended.

10.2 +** OEM Purchase Agreement by and between Netpliance and Quanta
Computer dated as of August 15, 1999.

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

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

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

10.6 ** Netpliance's Employee Stock Purchase Plan.

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

10.8 ** Employment Agreement by and between Netpliance and Kenneth A.
Kalinoski dated February 1, 1999.

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

</TABLE>

II-3
<PAGE>

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

21 There are no principal subsidiaries of Netpliance, Inc.

23.1 Consent of KPMG LLP.

23.2 Consent of Hughes & Luce, L.L.P.
23.3 ** Consent of International Data Corporation.
24.1 ** Power of Attorney (included in this Registration Statement).

24.2 ** Power of Attorney of Joseph R. Zell.

27.1 Financial Data Schedule.
</TABLE>
- ---------------------

** Previously filed

+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted information has been filed separately
with the Securities and Exchange Commission.
(b) Financial Statements filed as part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.

Item 17. Undertakings

(a) The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under Item 14 or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

(1) for the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.

(2) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Austin, State of Texas,
on March 14, 2000.

NETPLIANCE, INC.

/s/ Kent A. Savage
By: _________________________________
Kent A. Savage
President and Chief Executive
Officer

/s/ Barbara A. Kaczynski
By: _________________________________
Barbara A. Kaczynski
Chief Financial Officer

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
* Chairman of the Board March 14, 2000
____________________________________
John F. McHale

/s/ Kent A. Savage President and Chief March 14, 2000
____________________________________ Executive Officer and
Kent A. Savage Director (Principal
Executive Officer)

/s/ Barbara A. Kaczynski Chief Financial Officer March 14, 2000
____________________________________ (Principal Financial
Barbara A. Kaczynski Officer)

/s/ M. David Hampton Treasurer and Controller March 14, 2000
____________________________________ (Principal Accounting
M. David Hampton Officer)

* Director and Secretary March 14, 2000
____________________________________
Paul S. Zito

* Director March 14, 2000
____________________________________
Michael R. Corboy
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
* Director March 14, 2000
____________________________________
David S. Lundeen

* Director March 14, 2000
____________________________________
James M. Mansour

* Director March 14, 2000
____________________________________
Steven G. Papermaster

* Director March 14, 2000
____________________________________
Kevin Denuccio

* Director March 14, 2000
____________________________________
Joseph R. Zell

* Director March 14, 2000
____________________________________
Grant A. Dove
</TABLE>

/s/ Kent A. Savage
* By __________________________
Kent A. Savage
Attorney-in-Fact
Pursuant to Power of Attorney

II-6
<PAGE>

Exhibit Index

<TABLE>
<CAPTION>
Exhibit
Number
<C> <S>
1.1 Form of Underwriting Agreement among Netpliance and the Underwriters.

3.1 ** Certificate of Incorporation of the Company.

3.2 ** Bylaws of the Company.

4.1 ** Specimen Certificate for Common Stock.

4.2 ** Amended and Restated Rights Agreement among Netpliance and Watershed
Capital L.L.P. and John F. McHale dated as of December 3, 1999.
(Previously filed as exhibit 10.6)

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

5 Opinion of Hughes & Luce, L.L.P. as to the validity of the shares of
Common Stock of the Company being registered.

10.1 +** Internetworking Agreement by and between GTE Internetworking
Incorporated and Netpliance dated as of May 30, 1999.

10.2 +** OEM Purchase Agreement by and between Netpliance and Quanta Computer
dated as of August 15, 1999.

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

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

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

10.6 ** Netpliance's Employee Stock Purchase Plan.

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

10.8 ** Employment Agreement by and between Netpliance and Kenneth A.
Kalinoski dated February 1, 1999.

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

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

21 There are no principal subsidiaries of Netpliance, Inc.

23.1 Consent of KPMG LLP.

23.2 Consent of Hughes & Luce, L.L.P. (included in the opinion filed
herewith as Exhibit 5).
23.3 ** Consent of International Data Corporation.

24.1 ** Power of Attorney (included in this Registration Statement).

24.2 ** Power of Attorney of Joseph R. Zell.

27.1 Financial Data Schedule.
</TABLE>
- ---------------------

** Previously filed.

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

<PAGE>

EXHIBIT 1.1

Shares
----------

NETPLIANCE, INC.

Common Stock

UNDERWRITING AGREEMENT
----------------------

__________, 2000

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CHASE H&Q
ROBERTSON STEPHENS INC.
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172

Dear Sirs:

Netpliance, Inc., a Delaware corporation (the "Company"), proposes to issue
and sell _____________ shares of its Common Stock, $0.01 par value per share
(the "Firm Shares") to the several underwriters named in Schedule I hereto (the
"Underwriters"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional ____________ shares of its Common
Stock, $0.01 par value per share (the "Additional Shares") if requested by the
Underwriters as provided in Section 2 hereof. The Firm Shares and the
Additional Shares are hereinafter referred to collectively as the "Shares". The
shares of common stock of the Company to
<PAGE>

be outstanding after giving effect to the sales contemplated hereby are
hereinafter referred to as the "Common Stock".

SECTION 1. Registration Statement and Prospectus. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1, including a prospectus, relating
to the Shares. The registration statement, as amended at the time it became
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Act, is hereinafter referred to as the "Registration Statement"; and the
prospectus in the form first used to confirm sales of Shares is hereinafter
referred to as the "Prospectus". If the Company has filed or is required
pursuant to the terms hereof to file a registration statement pursuant to Rule
462(b) under the Act registering additional shares of Common Stock (a "Rule
462(b) Registration Statement"), then, unless otherwise specified, any reference
herein to the term "Registration Statement" shall be deemed to include such Rule
462(b) Registration Statement.

SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the
basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "Purchase Price") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.

On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to _____________ Additional Shares from
the Company at the Purchase Price. Additional Shares may be purchased solely
for the purpose of covering over-allotments made in connection with the offering
of the Firm Shares. The Underwriters may exercise their right to purchase
Additional Shares in whole or in part from time to time by giving written notice
thereof to the Company within thirty (30) days after the date of this Agreement.
You shall give any such notice on behalf of the Underwriters, and such notice
shall specify the aggregate number of Additional Shares to be purchased pursuant
to such exercise and the date for payment and delivery thereof, which date shall
be a business day (i) no earlier than two business days after such notice has
been given (and, in any event, no earlier than the Closing Date (as hereinafter
defined)) and (ii) no later than ten business days after such notice has been
given. If any Additional Shares are to be purchased, each Underwriter,
severally and not jointly, agrees to purchase from the Company the number of
Additional Shares (subject to such adjustments to eliminate fractional shares as
you may determine) which bears the same proportion to the total number of
Additional Shares to be purchased from the Company as the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I bears to the total
number of Firm Shares.

-2-
<PAGE>

The Company hereby agrees not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, (ii)
accelerate the vesting of stock options granted pursuant to the Company's
existing stock option plan, or (iii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i), (ii) or (iii) is to be settled by the delivery of
Common Stock, or such other securities, in cash or otherwise), except to the
Underwriters pursuant to this Agreement, for a period of 180 days after the date
of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. Notwithstanding the foregoing, during such
period (i) the Company may grant stock options pursuant to the Company's
existing stock option plan and (ii) the Company may issue shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof. The Company also agrees not to file any
registration statement with respect to any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock for
a period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, the Company may during such period file a registration statement
on Form S-8 relating to its employee benefit plans; provided, however, that in
no event shall such registration statement on Form S-8 be used for resale of
shares issued upon exercise of stock options or stock purchase rights during
such 180 day period and, provided further that the Company shall not, during
such 180 day period, waive any provision of any stock option or stock purchase
agreement that obligates the optionee or purchaser, as the case may be, to enter
into a 180 day lockup agreement following the offering of Company's Common Stock
contemplated hereby without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. The Company shall, prior to or concurrently
with the execution of this Agreement, deliver an agreement executed by (i) each
of the directors and officers of the Company, (ii) each stockholder, other than
as listed on Schedule II hereto, and (iii) each holder of options to purchase
equity securities of the Company, other than those listed on Schedule III
hereto, to the effect that such person will not, during the period commencing on
the date such person signs such agreement and ending 180 days after the date of
the Prospectus, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, (A) engage in any of the transactions described
in the first sentence of this paragraph or (B) make any demand for, or exercise
any right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock.

The Company hereby confirms its engagement of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") as, and DLJ hereby confirms its agreement with
the Company to render services as, a "qualified independent underwriter", within
the meaning of Section (b)(15) of Rule 2720 of the National Association of
Securities Dealers, Inc. with respect to the offering and sale of the Shares.
DLJ, solely in its capacity as the qualified independent underwriter and not
otherwise, is referred to herein as the "QIU". As compensation for the services
of the QIU hereunder, the Company agrees to pay the QIU $5,000 on the Closing
Date. The price at which the Shares will be sold to the public shall not be
higher than the maximum price recommended by the QIU.

-3-
<PAGE>

SECTION 3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the execution and delivery of this Agreement as in
your judgment is advisable and (ii) initially to offer the Shares upon the terms
set forth in the Prospectus.

SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Company shall deliver the Shares, with any transfer taxes thereon duly paid by
the respective Sellers, to Donaldson, Lufkin & Jenrette Securities Corporation
through the facilities of The Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment to the Company
of the Purchase Price therefore by wire transfer of Federal or other funds
immediately available in New York City. The certificates representing the Shares
shall be made available for inspection not later than 9:30 A.M., New York City
time, on the business day prior to the Closing Date or the applicable Option
Closing Date, as the case may be, at the office of DTC or its designated
custodian (the "Designated Office"). The time and date of delivery and payment
for the Firm Shares shall be 9:00 A.M., New York City time, on ________, 2000 or
such other time on the same or such other date as Donaldson, Lufkin & Jenrette
Securities Corporation and the Company shall agree in writing. The time and date
of delivery for the Firm Shares are hereinafter referred to as the "Closing
Date". The time and date of delivery and payment for any Additional Shares to be
purchased by the Underwriters shall be 9:00 A.M., New York City time, on the
date specified in the applicable exercise notice given by you pursuant to
Section 2 or such other time on the same or such other date as Donaldson, Lufkin
& Jenrette Securities Corporation and the Company shall agree in writing. The
time and date of delivery for any Additional Shares are hereinafter referred to
as an "Option Closing Date".

The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 9 of this Agreement
shall be delivered at the offices of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, and the Shares shall be delivered at the Designated
Office, all on the Closing Date or such Option Closing Date, as the case may be.

SECTION 5. Agreements of the Company. The Company agrees with you:

(a) To advise you promptly and, if requested by you, to confirm such advice
in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which

-4-
<PAGE>

makes any statement of a material fact made in the Registration Statement or the
Prospectus untrue or which requires any additions to or changes in the
Registration Statement or the Prospectus in order to make the statements therein
not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.

(b) To furnish to you three signed copies of the Registration Statement as
first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.

(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.

(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.

(e) If during the period specified in Section 5(d), any event shall occur
or condition shall exist as a result of which, in the opinion of counsel for the
Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of
counsel for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.

(f) Prior to any public offering of the Shares, to cooperate with you and
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as

-5-
<PAGE>

required for distribution of the Shares and to file such consents to service of
process or other documents as may be necessary in order to effect such
registration or qualification; provided, however, that the Company shall not be
required in connection therewith to qualify as a foreign corporation in any
jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.

(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period ending March
31, 2001 that shall satisfy the provisions of Section 11(a) of the Act, and to
advise you in writing when such statement has been so made available.

(h) During the period of three years after the date of this Agreement, to
furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.

(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel and
the Company's accountants in connection with the registration and delivery of
the Shares under the Act and all other fees and expenses in connection with the
preparation, printing, filing and distribution of the Registration Statement
(including financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing, including
the mailing and delivering of copies thereof to the Underwriters and dealers in
the quantities specified herein, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) all costs of printing or producing this
Agreement and any other agreements or documents in connection with the offering,
purchase, sale or delivery of the Shares, (iv) all expenses in connection with
the registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in connection
therewith (including the filing fees and fees and disbursements of counsel for
the Underwriters in connection with such registration or qualification and
memoranda relating thereto), (v) the filing fees and disbursements of counsel
for the Underwriters in connection with the review and clearance of the offering
of the Shares by the National Association of Securities Dealers, Inc., (vi) all
fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all costs
and expenses incident to the listing of the Shares on the Nasdaq National
Market, (vii) the cost of printing certificates representing the Shares, (viii)
the costs and charges of any transfer agent, registrar and/or depositary, (ix)
the fees and expenses of the QIU (including the fees and disbursements of
counsel to the QIU), and (x) all other

-6-
<PAGE>

costs and expenses incident to the performance of the obligations of the Company
hereunder for which provision is not otherwise made in this Section.

(j) To use its best efforts to list for quotation the Shares on the Nasdaq
National Market and to maintain the listing of the Shares on the Nasdaq National
Market for a period of three years after the date of this Agreement.

(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.

(l) If the Registration Statement at the time of the effectiveness of this
Agreement does not cover all of the Shares, to file a Rule 462(b) Registration
Statement with the Commission registering the Shares not so covered in
compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.

SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:

(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.

(b) (i) The Registration Statement (other than any Rule 462(b) Registration
Statement to be filed by the Company after the effectiveness of this Agreement),
when it became effective, did not contain and, as amended, if applicable, will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement) and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Act, (iii) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, such Rule 462(b) Registration Statement and any
amendments thereto, when they become effective (A) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(B) will comply in all material respects with the Act and (iv) the Prospectus
does not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in the Registration

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<PAGE>

Statement or the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.

(c) Each preliminary prospectus filed as part of the registration statement
as originally filed or as part of any amendment thereto, or filed pursuant to
Rule 424 under the Act, complied when so filed in all material respects with the
Act, and did not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in any preliminary
prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.

(d) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of incorporation
and has the corporate power and authority to carry on its business as described
in the Prospectus and to own, lease and operate its properties, free and clear
of all encumbrances, liens and defects except as described in the Prospectus or
as do not materially affect the value of and use of such property by the
Company, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole
("Material Adverse Effect").

(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.

(f) All the outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid, non-assessable and not
subject to any preemptive or similar rights; and the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.

(g) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.

(h) The Company is not in violation of its respective charter or by-laws
or, except as would not cause a Material Adverse Effect, in default in the
performance of any obligation, agreement, covenant or condition contained in any
indenture, loan agreement, mortgage, lease or other agreement or instrument to
which the Company is a party or by which the Company or its property is bound.

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<PAGE>

(i) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.

(j) There are no legal or governmental proceedings pending or threatened
to which the Company or any of its subsidiaries is or could be a party or to
which any of their respective property is or could be subject that are required
to be described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required.

(k) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act, or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operation of the Company and its subsidiaries, taken as
a whole.

(l) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in full
force and effect and each of the Company and its subsidiaries is in compliance
with all the terms and conditions thereof and with the rules and regulations of
the authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of any
notice from any authority or

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<PAGE>

governing body) which allows or, after notice or lapse of time or both, would
allow, revocation, suspension or termination of any such Authorization or
results or, after notice or lapse of time or both, would result in any other
impairment of the rights of the holder of any such Authorization; and such
Authorizations contain no restrictions that are burdensome to the Company or any
of its subsidiaries; except where such failure to be valid and in full force and
effect or to be in compliance, the occurrence of any such event or the presence
of any such restriction would not, singly or in the aggregate, have a material
adverse effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.

(m) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.

(n) This Agreement has been duly authorized, executed and delivered by the
Company.

(o) KPMG LLP are independent public accountants with respect to the
Company and its subsidiaries as required by the Act.

(p) The financial statements included in the Registration Statement and
the Prospectus (and any amendment or supplement thereto), together with related
schedules and notes, present fairly, in all material respects, the financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly, in all material respects, in accordance
with generally accepted accounting principles the information required to be
stated therein; and the other financial and statistical information and data set
forth in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are, in all material respects, accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company.

(q) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.

(r) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company, except as described in the Registration Statement or except to the
extent such right has been irrevocably waived by the person holding such

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<PAGE>

right, or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.

(s) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.

(t) Each certificate signed by any officer of the Company and delivered to
the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.

(u) The Company owns or possesses, or can acquire on reasonable terms, all
patents, patent rights, licenses, inventions, copyrights, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names ("intellectual property") currently employed by it in connection
with the business now operated by it except where the failure to own or possess
or otherwise be able to acquire such intellectual property would not, singly or
in the aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operation of the Company; and the Company has
not received any notice of infringement of or conflict with asserted rights of
others with respect to any of such intellectual property which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the business, prospects, financial condition
or results of operations of the Company.

(v) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which they are engaged; and the Company (i)
has not received notice from any insurer or agent of such insurer that
substantial capital improvements or other material expenditures will have to be
made in order to continue such insurance or (ii) has no reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers at a cost
that would not have a material adverse effect on the business, prospects,
financial conditions or results of operations of the Company.

(w) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or

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<PAGE>

specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.

SECTION 7. Indemnification.

(a) The Company agrees to indemnify and hold harmless each Underwriter,
its directors, its officers and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")(13), from and
against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter who failed to deliver a Prospectus, as then
amended or supplemented, (so long as the Prospectus and any amendments or
supplements thereto was provided by the Company to that Underwriter in the
requisite quantity and on a timely basis to permit proper delivery on or prior
to the Closing Date) to the person asserting any losses, claims, damages,
liabilities or judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in such preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person.

(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent
as the foregoing indemnity from the Company to such Underwriter but only with
reference to information relating to such Underwriter furnished in writing to
the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.

(c) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the

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<PAGE>

"indemnifying party") in writing and the indemnifying party shall assume the
defense of such action, including the employment of counsel reasonably
satisfactory to the indemnified party and the payment of all fees and expenses
of such counsel, as incurred (except that in the case of any action in respect
of which indemnity may be sought pursuant to both Sections 7(a) and 7(b), the
Underwriter shall not be required to assume the defense of such action pursuant
to this Section 7(c), but may employ separate counsel and participate in the
defense thereof, but the fees and expenses of such counsel, except as provided
below, shall be at the expense of such Underwriter). Any indemnified party shall
have the right to employ separate counsel in any such action and participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of the indemnified party unless (i) the employment of such counsel shall
have been specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party shall have failed to assume the defense of such action or
employ counsel reasonably satisfactory to the indemnified party or (iii) the
named parties to any such action (including any impleaded parties) include both
the indemnified party and the indemnifying party, and the indemnified party
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the indemnifying party (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of the
indemnified party). In any such case, the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all indemnified parties
and all such fees and expenses shall e reimbursed as they are incurred. Such
firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation, in the case of parties indemnified pursuant to Section 7(a), and by
the Company, in the case of parties indemnified pursuant to Section 7(b). The
indemnifying party shall indemnify and hold harmless the indemnified party from
and against any and all losses, claims, damages, liabilities and judgments by
reason of any settlement of any action (i) effected with its written consent or
(ii) effected without its written consent if the settlement is entered into more
than twenty business days after the indemnifying party shall have received a
request from the indemnified party for reimbursement for the fees and expenses
of counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.

(d) To the extent the indemnification provided for in this Section 7 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party,

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<PAGE>

shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Company, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.

The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.

(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.

SECTION 8. Indemnification of QIU.

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<PAGE>

(a) The Company agrees to indemnify and hold harmless the QIU, its
directors, its officers and each person, if any, who controls the QIU within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) related to, based upon or arising out of (i) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), the Prospectus (or any amendment or
supplement thereto) or any preliminary prospectus, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) the QIU's
activities as QIU under its engagement pursuant to Section 2 hereof, except in
the case of this clause (ii) insofar as any such losses, claims, damages,
liabilities or judgments are found in a final judgment by a court of competent
jurisdiction, not subject to further appeal, to have resulted solely from the
willful misconduct or gross negligence of the QIU.

(b) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 8(a) (the "QIU Indemnified
Party"), the QIU Indemnified Party shall promptly notify the Company in writing
and the Company shall assume the defense of such action, including the
employment of counsel reasonably satisfactory to the QIU Indemnified Party and
the payment of all fees and expenses of such counsel, as incurred. Any QIU
Indemnified Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the QIU Indemnified Party unless (i) the
employment of such counsel shall have been specifically authorized in writing by
the Company, (ii) the Company shall have failed to assume the defense of such
action or employ counsel reasonably satisfactory to the QIU Indemnified Party or
(iii) the named parties to any such action (including any impleaded parties)
include both the QIU Indemnified Party and the Company, and the QIU Indemnified
Party shall have been advised by such counsel that there may be one or more
legal defenses available to it which are different from or additional to those
available to the Company (in which case the Company shall not have the right to
assume the defense of such action on behalf of the QIU Indemnified Party). In
any such case, the Company shall not, in connection with any one action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for all QIU Indemnified Parties, which firm shall be
designated by the QIU, and all such fees and expenses shall be reimbursed as
they are incurred. The Company shall indemnify and hold harmless the QIU
Indemnified Party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if the
settlement is entered into more than twenty business days after the Company
shall have received a request from the QIU Indemnified Party for reimbursement
for the fees and expenses of counsel (in any case where such fees and expenses
are at the expense of the Company) and, prior to the date of such settlement,
the Company shall have failed to comply with such reimbursement request. The
Company shall not, without the prior written consent of the QIU Indemnified
Party, effect any settlement or compromise of, or consent to the entry of
judgment with

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<PAGE>

respect to, any pending or threatened action in respect of which the QIU
Indemnified Party is or could have been a party and indemnity or contribution
may be or could have been sought hereunder by the QIU Indemnified Party, unless
such settlement, compromise or judgment (i) includes an unconditional release of
the QIU Indemnified Party from all liability on claims that are or could have
been the subject matter of such action and (ii) does not include a statement as
to or an admission of fault, culpability or a failure to act, by or on behalf of
the QIU Indemnified Party.

(c) To the extent the indemnification provided for in this Section 8 is
unavailable to a QIU Indemnified Party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then the Company,
in lieu of indemnifying such QIU Indemnified Party, shall contribute to the
amount paid or payable by such QIU Indemnified Party as a result of such losses,
claims, damages, liabilities and judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the QIU on the other hand from the offering of the Shares or (ii) if
the allocation provided by clause 8(c)(i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause 8(c)(i) above but also the relative fault of the
Company on the one hand and the QIU on the other hand in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the QIU on the other hand shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company as set forth in the table on the cover page of the Prospectus, and
the fee received by the QIU pursuant to Section 2 hereof, bear to the sum of
such total net proceeds and such fee. The relative fault of the Company on the
one hand and the QIU on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the QIU and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission and whether the QIU's activities as QIU under its
engagement pursuant to Section 2 hereof involved any willful misconduct or gross
negligence on the part of the QIU.

The Company and the QIU agree that it would not be just and equitable if
contribution pursuant to this Section 8(c) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by a QIU Indemnified Party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such QIU Indemnified Party
in connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.

-16-
<PAGE>

(d) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
QIU Indemnified Party at law or in equity.

SECTION 9. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters to purchase the Firm Shares under this Agreement are subject
to the satisfaction of each of the following conditions:

(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.

(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.

(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Kent Savage and Barbara Kaczynski, in their capacities
as the Chief Executive Officer and Chief Financial Officer of the Company,
confirming the matters set forth in Sections 6(t), 9(a) and 9(b) and that the
Company has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by the
Company on or prior to the Closing Date.

(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.

(e) You shall have received on the Closing Date an opinion (reasonably
satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Hughes & Luce, L.L.P., counsel for the Company, to the effect that:

(i) the Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate

-17-
<PAGE>

power and authority to carry on its business as described in the Prospectus
and to own, lease and operate its properties;

(ii) the Company is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in which
the nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would not
have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole;

(iii) all the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable
and not subject to any preemptive or similar rights;

(iv) the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar
rights;

(v) this Agreement has been duly authorized, executed and delivered
by the Company;

(vi) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;

(vii) the Registration Statement has become effective under the Act,
no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's knowledge
after due inquiry, pending before or contemplated by the Commission;

(viii) the statements under the caption "Description of Capital Stock"
in the Prospectus and Items 14 and 15 of Part II of the Registration
Statement, insofar as such statements constitute a summary of the legal
matters, documents or proceedings referred to therein, fairly present, in
all material respects, the information called for with respect to such
legal matters, documents and proceedings;

(ix) to the best of such counsel's knowledge, the Company is not in
violation of its respective charter or by-laws and, to the best of such
counsel's knowledge after due inquiry, the Company is not in default in the
performance of any obligation, agreement, covenant or condition contained
in any indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company, to which the Company is a party
or by which the Company or its property is bound;

(x) the execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions hereof
and the consummation of the

-18-
<PAGE>

transactions contemplated hereby will not (A) require any consent,
approval, authorization or other order of, or qualification with, any court
or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (B) conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, the charter or by-laws of the Company or any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is
material to the Company, to which the Company is a party or by which the
Company or its property is bound, (C) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over the
Company or its property or (D) result in the suspension, termination or
revocation of any Authorization of the Company or any other impairment of
the rights of the holder of any such Authorization;

(xi) after due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company is or
might reasonably likely be a party or to which any of its property is or
might reasonably likely be subject that are required to be described in the
Registration Statement or the Prospectus and are not so described, or of
any statutes, regulations, contracts or other documents that are required
to be described in the Registration Statement or the Prospectus or to be
filed as exhibits to the Registration Statement that are not so described
or filed as required;

(xii) to the best of such counsel's knowledge, the Company has such
Authorizations of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations
and all courts and other tribunals, including, without limitation, under
any applicable Environmental Laws, as are necessary to own, lease, license
and operate its respective properties and to conduct its business, except
where the failure to have any such Authorization or to make any such filing
or notice would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company; each such Authorization is valid and in full
force and effect and, to the best of such counsel's knowledge, the Company
is in compliance with all the terms and conditions thereof and with the
rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and, to the best of such counsel's
knowledge, no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows
or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after
notice or lapse of time or both, would result in any other impairment of
the rights of the holder of any such Authorization; and such Authorizations
contain no restrictions that are burdensome to the Company; except where
such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company;

(xiii) the Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be,

-19-
<PAGE>

an "investment company" as such term is defined in the Investment Company
Act of 1940, as amended;

(xiv) to the best of such counsel's knowledge after due inquiry,
except as disclosed in the Registration Statement, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or,
except to the extent any such right has been irrevocably waived by the
person holding such right, to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement; and

(xv) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and
other financial data included therein as to which no opinion need be
expressed) comply as to form with the Act, (B) such counsel has no reason
to believe that at the time the Registration Statement became effective or
on the date of this Agreement, the Registration Statement and the
prospectus included therein (except for the financial statements and other
financial data as to which such counsel need not express any belief)
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and (C) such counsel has no reason to
believe that the Prospectus, as amended or supplemented, if applicable
(except for the financial statements and other financial data, as
aforesaid) contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.

The opinion of Hughes & Luce, L.L.P. described in Section 9(e) above shall
be rendered to you at the request of the Company and shall so state therein.

(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters, as to the matters referred to in Sections
9(e)(iv), 9(e)(vi), 9(e)(ix) (but only with respect to the statements under the
caption "Description of Capital Stock" and "Underwriting") and 9(e)(xvii).

In giving such opinions with respect to the matters covered by Section
9(e)(xvii) Hughes & Luce, L.L.P. and Wilson Sonsini Goodrich & Rosati,
Professional Corporation, may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and discussion
of the contents thereof, but are without independent check or verification
except as specified.

(g) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from KPMG Peat Marwick, L.L.P.,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with

-20-
<PAGE>

respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.

(h) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.

(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.

(j) The Company shall not have failed on or prior to the Closing Date to
perform or comply with any of the agreements herein contained and required to be
performed or complied with by the Company on or prior to the Closing Date.

The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.

SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.

This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.

If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter

-21-
<PAGE>

or Underwriters agreed but failed or refused to purchase is not more than one-
tenth of the total number of Firm Shares or Additional Shares, as the case may
be, to be purchased on such date by all Underwriters, each non-defaulting
Underwriter shall be obligated severally, in the proportion which the number of
Firm Shares set forth opposite its name in Schedule I bears to the total number
of Firm Shares which all the non-defaulting Underwriters have agreed to
purchase, or in such other proportion as you may specify, to purchase the Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you
and the Company for purchase of such Firm Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. If, on an Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Additional Shares to be purchased on such date,
the non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase such Additional Shares or (ii) purchase not
less than the number of Additional Shares that such non-defaulting Underwriters
would have been obligated to purchase on such date in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of any such Underwriter
under this Agreement.

SECTION 11. Miscellaneous. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (i) if to the Company, to Netpliance,
Inc., 7600 N. Capital of Texas Hwy., Austin, Texas 78731, Attention: General
Counsel, and (ii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin
& Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172,
Attention: Syndicate Department, or in any case to such other address as the
person to be notified may have requested in writing.

The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the QIU Indemnified Party,
the Company, the officers or directors of

-22-
<PAGE>

the Company or any person controlling the Company, (ii) acceptance of the Shares
and payment for them hereunder and (iii) termination of this Agreement.

If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses which it has agreed
to pay pursuant to Section 5(i) hereof. The Company also agrees to reimburse
the several Underwriters, their directors and officers, any persons controlling
any of the Underwriters and the QIU Indemnified Party for any and all fees and
expenses (including, without limitation, the fees disbursements of counsel)
incurred by them in connection with enforcing their rights hereunder (including,
without limitation, pursuant to Section 7 hereof).

Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Underwriters, the
Underwriters' directors and officers, any controlling persons referred to
herein, the QIU Indemnified Party, the Company's directors and the Company's
officers who sign the Registration Statement and their respective successors and
assigns, all as and to the extent provided in this Agreement, and no other
person shall acquire or have any right under or by virtue of this Agreement.
The term "successors and assigns" shall not include a purchaser of any of the
Shares from any of the several Underwriters merely because of such purchase.

This Agreement shall be governed and construed in accordance with the laws
of the State of New York.

This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.

-23-
<PAGE>

Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.

Very truly yours,

NETPLIANCE, INC.

By:
-------------------------------------
Title:

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CHASE H&Q
ROBERTSON STEPHENS, INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto

By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

By
-----------------------------

-24-
<PAGE>

SCHEDULE I
----------

Underwriters Number of Firm Shares to
be Purchased
Donaldson, Lufkin & Jenrette
Securities Corporation

Total
<PAGE>

Annex I

<PAGE>

EXHIBIT 5

[HUGHES & LUCE, L.L.P. LETTERHEAD]

March 15, 2000

Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549

Ladies and Gentlemen:

We have acted as counsel to Netpliance, Inc., a Delaware corporation (the
"Company"), in connection with the registration under the Securities Act of
1933, as amended, of 7,000,000 shares of the Company's common stock, par value
$0.01 per share (the "Common Stock"), and up to an additional 1,050,000 shares
of Common Stock subject to an over-allotment option as described in the
Registration Statement of the Company on Form S-1 (Registration No. 333-93545),
as amended (the "Registration Statement"), filed with the Securities and
Exchange Commission. Upon effectiveness, the Company proposes to sell such
shares to the Underwriters (the "Underwriters") listed in the final Prospectus
(the "Prospectus") that forms a part of the Registration Statement.

In rendering this opinion, we have examined and relied upon executed
originals, counterparts or copies of such documents, records and certificates
(including certificates of public officials and officers of the Company) as we
considered necessary or appropriate for enabling us to express the opinions set
forth herein. In all such examinations, we have assumed the authenticity and
completeness of all documents submitted to us as originals and the conformity to
originals and completeness of all documents submitted to us as photostatic,
conformed, notarized or certified copies.

Based on the foregoing, we are of the opinion that the Common Stock, when
issued and sold to the Underwriters as described in the Registration Statement,
will be validly issued, fully paid and nonassessable.

This opinion may be filed as an exhibit to the Registration Statement.
We also consent to the reference to this firm as having passed on the validity
of the Common Stock under the caption "Legal Matters" in the Prospectus. In
giving this consent, we do not admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.

Very truly yours,

/s/ HUGHES & LUCE, L.L.P.

<PAGE>

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Netpliance, Inc.:

We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.

/s/ KPMG LLP

Austin, Texas

March 15, 2000

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NETPLIANCE
INC.'S AUDITED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED DECEMBER 31,
1999 AND ITS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-12-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,563
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,062
<PP&E> 3,799
<DEPRECIATION> (696)
<TOTAL-ASSETS> 20,625
<CURRENT-LIABILITIES> 5,072
<BONDS> 0
0
29,493
<COMMON> 189
<OTHER-SE> (16,765)
<TOTAL-LIABILITY-AND-EQUITY> 20,625
<SALES> 26
<TOTAL-REVENUES> 26
<CGS> 1,254
<TOTAL-COSTS> 27,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (140)
<INCOME-PRETAX> (27,286)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,286)
<EPS-BASIC> (2.79)
<EPS-DILUTED> (2.79)

</TABLE>