<PAGE>

================================================================================



                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                                   FORM 10-Q


               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended September 30, 2000


                        Commission file number 0-24983

                            NetSolve, Incorporated

          (Exact name of the registrant as specified in its charter)

                 Delaware                                75-2094811-2
      (State or Other Jurisdiction of                   (IRS Employer
       Incorporation or Organization)                Identification No.)



                           12331 Riata Trace Parkway
                             Austin, Texas  78727
         (Address of principal executive offices, including zip code)


                                (512) 340-3000
             (Registrant's telephone number, including area code)


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


  Number of shares outstanding of the issuer's common stock, $.01 par value as
of  November  10, 2000 : 12,887,319



================================================================================

                                                                               1
<PAGE>

                            NETSOLVE, INCORPORATED

                                     INDEX

<TABLE>
<CAPTION>
PART I.     FINANCIAL INFORMATION                                                                                      Page
                                                                                                                       ----
<S>         <C>                                                                                                        <C>
Item  1.    Financial Statements

            Condensed Consolidated Balance Sheets as of March 31, 2000 and September 30, 2000 (unaudited).........        3

            Condensed Consolidated Statements of Operations for the three and six month periods ended September
            30, 1999 and 2000 (unaudited).........................................................................        4


            Condensed Consolidated Statements of Cash Flows for the six month periods ended September 30, 1999
            and 2000 (unaudited)..................................................................................        5


            Notes to Condensed Consolidated Financial Statements..................................................        6

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

Item  3.    Quantitative and Qualitative Disclosures About Market Risk............................................       21

PART II.    OTHER INFORMATION

Item 1.     Legal Proceedings.....................................................................................       21

Item  2.    Changes in Securities and Use of Proceeds

            Use of proceeds.......................................................................................       21

Item  6.    Exhibits and Reports on Form 8........................................................................       22
</TABLE>

                                                                               2
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements

                             NETSOLVE, INCORPORATED

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                                 3/31/00           9/30/00
                                                                                --------          --------
                                                                                                 (unaudited)
<S>                                                                            <C>               <C>
                                  ASSETS
Current assets:
    Cash and cash equivalents.............................................   $    57,185       $    51,645
    Restricted cash.......................................................           395               395
    Accounts receivable, net of allowance for doubtful accounts of
     $219 at March 31, 2000 and $214 at September 30, 2000................         4,913             3,043
    Inventory.............................................................           252               241
    Prepaid expenses and other assets.....................................         2,139             1,785
    Deferred tax assets...................................................         3,682             1,987
                                                                             -----------       -----------
Total current assets......................................................        68,566            59,096

Restricted cash...........................................................           306                --
Property and equipment:
    Computer equipment and software.......................................         5,696             7,939
    Furniture, fixtures and leasehold improvements........................         1,765             1,876
    Equipment held under capital leases...................................         1,701             1,701
    Other equipment.......................................................           363               358
                                                                             -----------       -----------
                                                                                   9,525            11,874
    Less accumulated depreciation and amortization........................        (5,230)           (6,158)
                                                                             -----------       -----------
Net property and equipment................................................         4,295             5,716
Other assets..............................................................            47                12
Deferred tax assets, net of current portion...............................         1,305             1,305
                                                                             -----------       -----------

Total assets..............................................................   $    74,519       $    66,129
                                                                             ===========       ===========

                  LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable......................................................   $     2,174       $     1,657
    Accrued liabilities...................................................         2,526             2,940
    Capital leases obligation.............................................           537               505
                                                                             -----------       -----------
Total current liabilities.................................................         5,237             5,102

Capital leases obligation, net of current portion.........................           324               105
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized
       at March 31, 2000 and September 30, 2000; 14,485,586
       issued and outstanding at March 31, 2000 and
       14,631,703 issued and 13,047,703 outstanding
       at September 30, 2000..............................................           145               146
Additional paid-in capital................................................        77,578            78,258
Treasury Stock............................................................            --           (11,810)
Deferred compensation.....................................................          (257)             (216)
Accumulated deficit.......................................................        (8,508)           (5,456)
                                                                             -----------       -----------
Total stockholders' equity................................................        68,958            60,922
                                                                             -----------       -----------

Total liabilities and stockholders' equity................................   $    74,519       $    66,129
                                                                             ===========       ===========
</TABLE>

                            See accompanying notes.

                                                                               3
<PAGE>

                            NETSOLVE, INCORPORATED

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                               Three Months Ended           Six Months Ended
                                                                                  September 30,               September 30,
                                                                                  -------------               ------------
                                                                               1999           2000         1999           2000
                                                                             --------       --------     --------       --------
                                                                                   (unaudited)                  (uaudited)
<S>                                                                          <C>            <C>          <C>            <C>
Revenues:
  Network management services............................................    $  5,502       $  8,138     $ 10,086       $ 16,496
  Equipment and other....................................................       3,790          3,128        8,282          6,339
                                                                             --------       --------     --------       --------
    Total revenues.......................................................       9,292         11,266       18,368         22,835
Costs of revenues:
  Cost of network management services....................................       3,132          4,620        5,804          8,906
  Cost of equipment and other............................................       2,973          2,192        6,509          4,528
                                                                             --------       --------     --------       --------
    Total cost of revenues...............................................       6,105          6,812       12,313         13,434
                                                                             --------       --------     --------       --------
Gross profit.............................................................       3,187          4,454        6,055          9,401
Operating expenses:
  Development............................................................         591            759        1,170          1,555
  Selling and marketing..................................................       1,025          1,408        1,968          2,876
  General and administrative.............................................         663            928        1,285          1,900
  Amortization of deferred compensation..................................          20             20           25             40
                                                                             --------       --------     --------       --------
    Total operating expenses.............................................       2,299          3,115        4,448          6,371
                                                                             --------       --------     --------       --------
Operating income.........................................................         888          1,339        1,607          3,030
Other income (expense):
  Interest income........................................................          60            967          143          1,843
  Interest expense.......................................................         (29)           (13)         (66)           (29)
  Other, net.............................................................          --              1           --             --
                                                                             --------       --------     --------       --------
                                                                                   31            955           77          1,814
                                                                             --------       --------     --------       --------
Income before income taxes...............................................         919          2,294        1,684          4,844
Income tax expense (benefit).............................................      (1,070)           848       (2,206)         1,792
                                                                             --------       --------     --------       --------
Net income...............................................................    $  1,989       $  1,446     $  3,890       $  3,052
                                                                             ========       ========     ========       ========

Dividends on redeemable convertible preferred stock......................    $   (630)      $     --     $ (1,260)      $     --
                                                                             --------       --------     --------       --------
Net income applicable to common stock....................................    $  1,359       $  1,446     $  2,630       $  3,052
                                                                             ========       ========     ========       ========



Basic net income per share...............................................    $   0.37       $   0.10     $   0.74       $   0.21

Weighted average shares used in basic per share calculation..............       3,713         14,390        3,538       $ 14,429

Diluted net income per share.............................................    $   0.11       $   0.09     $   0.22       $   0.19

Weighted average shares used in diluted per share calculation............      11,877         15,507       11,699         15,914

Pro forma basic net income per share.....................................    $   0.06       $   0.10     $   0.11       $   0.21

Pro forma weighted average shares used in basic per share calculation....       9,969         14,390        9,863         14,429

Pro forma diluted net income per share...................................    $   0.05       $   0.09     $   0.09       $   0.19

Pro forma weighted average shares used in diluted per share calculation..      11,877         15,507      11, 699         15,914
</TABLE>

                            See accompanying notes.

                                                                               4
<PAGE>

                            NETSOLVE, INCORPORATED

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                                  Six Months Ended
                                                                                                    September 30,
                                                                                                    -------------
                                                                                                 1999            2000
                                                                                                 ----            ----
                                                                                                      (unaudited)
<S>                                                                                           <C>            <C>
Cash flows from operating activities:
  Net income...............................................................................   $ 3,890        $  3,052
  Adjustments to reconcile net income to net cash provided by
  operating activities:
    Depreciation and amortization..........................................................       826           1,035
    Amortization of deferred compensation..................................................        25              40
    Deferred tax assets....................................................................    (2,238)          1,695
    Loss on disposition of property and equipment..........................................         1               3
    Change in assets and liabilities:
    Accounts receivable, net...............................................................    (1,588)          1,870
    Inventory and prepaid expenses and other assets........................................      (940)            400
    Accounts payable.......................................................................       897            (517)
    Accrued liabilities....................................................................       270             414
                                                                                              -------        --------
Net cash provided by operating activities..................................................     1,143           7,992
                                                                                              -------        --------

Cash flows from investing activities:
  Proceeds from sale of certificates of deposit............................................     2,000              --
  Transfer of funds from restricted cash...................................................     1,325             306
  Purchases of property and equipment......................................................    (1,250)         (2,458)
                                                                                              -------        --------
Net cash provided by (used in) investing activities........................................     2,075          (2,152)
                                                                                              -------        --------

Cash flows from financing activities:
  Repurchase of common stock...............................................................        --         (11,810)
  Payments under capital lease obligations.................................................      (457)           (251)
  Proceeds from exercise of common stock options and warrants..............................       130             681
                                                                                              -------        --------
Net cash used in financing activities......................................................      (327)        (11,380)
                                                                                              -------        --------

Net increase (decrease) in cash and cash equivalents.......................................     2,891          (5,540)
Cash and cash equivalents, beginning of period.............................................     2,764          57,185
                                                                                              -------        --------
Cash and cash equivalents, end of period...................................................   $ 5,655        $ 51,645
                                                                                              =======        ========

Supplemental disclosure of cash flow information:
  Cash paid for interest...................................................................   $    66        $     28
                                                                                              =======        ========
  Income taxes paid........................................................................   $    28        $    152
                                                                                              =======        ========
</TABLE>

                            See accompanying notes.

                                                                               5
<PAGE>

                            NETSOLVE, INCORPORATED

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 2000

 Information with respect to the three and six months ended September 30, 1999
                            and 2000 is unaudited.


1. Organization and Description of the Company

     NetSolve, Incorporated, a Delaware corporation, (the "Company") engages in
the business of providing enterprise data networking management services within
the U.S. These services include network design, installation and implementation
coordination, ongoing network management and security. The Company also resells
data networking equipment manufactured by selected leading suppliers of these
products. The Company's services are designed to allow its clients to outsource
some or all network specific tasks in order to migrate to new technology,
increase network reliability and reduce overall network costs.


2. Basis of Presentation

     The quarterly financial information presented herein should be read in
conjunction with the Company's annual financial statements for the year ended
March 31, 2000, which can be found in the Company's annual report filed on Form
10-K, as filed on May 23, 2000 (File No. 000-24983).  The accompanying unaudited
interim financial statements reflect all adjustments (which include only normal,
recurring adjustments) that are, in the opinion of management, necessary to
state fairly the results for the periods presented.  The results for such
periods are not necessarily indicative of the results to be expected for the
full fiscal year.


3. Inventory

Inventory consists of purchased finished goods held for sale to customers.
Inventory is stated at the lower of cost or market with cost determined on a
specific identification basis. Inventory reserves were $98,000 at March 31, 2000
and September 30, 2000.

4. Earnings Per Share

     The Company's earnings per share data are presented in accordance with SFAS
128, Earnings Per Share. Basic income per share is computed using the weighted
average number of common shares outstanding. Diluted income per share is
computed using the weighted average number of common shares outstanding adjusted
for the incremental shares attributed to outstanding securities with the ability
to purchase or convert into common stock. The treasury stock method, using the
average price of the Company's common stock for the period, is applied to
determine dilution from options and warrants. The if-converted method is used
for convertible securities. The prior year pro forma amounts have been presented
as if all preferred stock were converted to common shares at the time of the
issuance and all earnings were taxed at the same rate as the six month period
ended September 30, 2000.

                                                                               6
<PAGE>

                            NETSOLVE, INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                              September 30, 2000

   A reconciliation of the numerators and denominators used in computing per
share net income is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                            Pro forma              Pro forma
                                                                                       -------------------     -------------------

                                      Three months ended        Six months ended        Three months ended      Six months ended
                                         September 30,            September 30,           September 30,           September 30,
                                         -------------            -------------           -------------           -------------
                                         1999     2000            1999     2000           1999     2000           1999     2000
                                         ----     ----            ----     ----           ----     ----           ----     ----
<S>                                  <C>          <C>         <C>        <C>           <C>         <C>         <C>         <C>
Numerator:

    Net income.....................  $ 1,989      $ 1,446     $ 3,890      $ 3,052     $   579     $ 1,446     $ 1,061     $ 3,052
    Dividends on redeemable
      Convertible stock.........        (630)          --      (1,260)          --          --          --          --          --
                                     -------      -------     -------      -------     -------     -------     -------     -------

     Numerator for basic and
       diluted net income
       per share...................  $ 1,359      $ 1,446     $ 2,630      $ 3,052     $   579     $ 1,446     $ 1,061     $ 3,052
                                     =======      =======     =======      =======     =======     =======     =======     =======
Denominator:
     Denominator for basic net
      income per share--
      weighted average common
      stock outstanding............    3,713       14,390       3,538       14,429       9,969      14,390       9,863      14,429

     Dilutive common stock
      Equivalents--common stock
      options, warrants and
      redeemable convertible
       preferred stock.............    8,164        1,117       8,161        1,485       1,908       1,117       1,836       1,485
                                     -------      -------     -------      -------     -------     -------     -------     -------

      Denominator for diluted net
       income per share--weighted
       average common stock
       outstanding and dilutive
       common stock
       equivalents.................   11,877       15,507      11,699       15,914      11,877      15,507      11,699      15,914
                                      ======      =======     =======      =======     =======     =======     =======     =======
</TABLE>

                                                                               7
<PAGE>

                            NETSOLVE, INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                              September 30, 2000

5. Income Taxes

     During the three and six month periods ended September 30, 1999, income tax
benefits of $1.1 and $2.2 million, respectively, were recorded.  The benefit is
attributable to a reduction in the deferred tax asset valuation allowance.
Since the valuation allowance against deferred tax assets was completely
eliminated as of March 31, 2000 (resulting in the recording of income tax
benefits), income tax provisions for periods subsequent to March 31, 2000 will
not be offset by similar benefits.  During the three and six month periods ended
September 30, 2000, income tax provisions of $848,000 and $1.8 million,
respectively, were recorded.


6. Contingencies

     Class action complaints were filed on September 11, September 26,
October 2 and October 3, 2000 in the U.S. District Court for the Western
District of Texas against the Company and certain of its officers.  The
complaints allege that the Company and certain of its officers violated certain
provisions of the federal securities laws, including Rule 10b-5 under the
Securities Exchange Act of 1934, by making false statements, failing to disclose
material information and taking other actions intending to artificially inflate
and maintain the market price of the Company's common stock during the Class
Period of April 18, 2000 and August 18, 2000.  While the proceedings are at a
very early stage, the Company believes the suits are without merit and intends
to defend itself vigorously.  However, it is not feasible to predict or
determine the final outcome of these proceedings, and if the outcome were to be
unfavorable, the Company's business, financial condition, cash flows and results
of operations could be materially adversely affected.


7. Recent Accounting Pronouncements

     The FASB recently issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation."  The Interpretation provides
guidance related to the implementation of APB Opinion No. 25, "Accounting for
Stock Issued to Employees."  The Interpretation is to be applied prospectively
to all new awards, modifications to outstanding awards, and changes in employee
status on or after July 1, 2000.  For changes made after December 15, 1998 to
awards that affect exercise prices of the awards, the Company must prospectively
account for the impact of those changes.  The Company does not believe the full
adoption of the Interpretation will have a material impact on the Company's
financial condition or results of operations.

                                                                               8
<PAGE>

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

Forward-looking Statements

     This report and other presentations made by us contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. We sometimes identify forward-looking statements with such
words as "expects", "anticipates", "intends", "believes" or similar words
concerning future events. You should not rely on these forward-looking
statements. Such statements involve known and unknown risks, uncertainties and
other factors that could cause our actual results to differ materially from the
results expressed or implied by such statements, including general economic and
business conditions, conditions affecting the industries served by us,
conditions affecting our customers and suppliers, competition, the overall
market acceptance of the Company's services, and other factors disclosed in our
fiscal year 2000 annual report as filed on Form 10-K on May 23, 2000 and in Item
3 "Quantitative and Qualitative Disclosures About Market Risk" and other
sections of Report on Form 10-Q. You should also consult the risk factors listed
from time to time in the Company's Reports on Form 8-K. Accordingly, although we
believe that the expectations reflected in such forward-looking statements are
reasonable, there can be no assurance that such expectations will prove to be
correct.

     Any forward-looking statement speaks only as of the date on which such
statement was made, and we do not undertake any obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement was made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for us to
predict all of such factors, nor can we assess the impact of each such factor or
the extent to which any factor, or combination of factors, may cause results to
differ materially from those contained in any forward-looking statement.

Overview

     We provide network management services that allow enterprises and carriers
to outsource some or all network-specific activities in order to increase
network reliability and up-time, reduce overall network costs, and simplify
timely migration to new technologies. We were incorporated in September 1985 in
the State of Delaware and began operating in the second half of 1987. Until
December 1996, substantially all of our services revenues were derived from the
sale of data transport services. To provide these transport services, we leased
network transmission facilities from major carriers, and we also resold AT&T's
transport services. We began developing our first remote network management
service offering for WANs in early 1993 and began offering that service,
together with AT&T's transport services, in the quarter ended March 31, 1994. We
began selling network management services separately from our data transport
services in the quarter ended March 31, 1995. We introduced our first security
service in the quarter ended September 30, 1996. We discontinued our data
transport business in the quarter ended December 31, 1996. We began offering
network management services for LANs in the quarter ended June 30, 1997. We
began offering virtual private network (VPN) management services during the
quarter ended September 30, 2000.

   Revenues

     Our revenues consist of network management services revenues as well as
equipment resales and other revenues. Our network management services include
both recurring and nonrecurring revenues:

     .    Revenues from recurring services represent monthly fees charged to
          resellers or end users for our network management services. Recurring
          network management services revenues are typically based on the number
          of devices under management and are recognized in the period in which
          the services are rendered. In the six months ended September 30, 2000,
          approximately 66% of network management services revenues were from
          recurring services.

                                                                               9
<PAGE>

     .    Non-recurring network management services consist of data network
          design, project implementation services and equipment installation
          services, as well as one-time project and development assignments that
          assist resellers in defining and creating new network management
          services. Non-recurring network management services revenues are
          generally recognized upon completion of the assignment or service. For
          example, we charge fees for project implementation services on a per-
          location basis and we recognize revenues associated with these
          services upon completion of the network implementation for a location.

     Our network management services revenues are derived from contracts with
telecommunications carriers, value-added resellers of networking equipment and
services, and enterprises sold to by our direct sales force. Our services
include both initial implementation and project management services for a one-
time fee per location as well as ongoing management services for a fixed monthly
fee per managed device. Our contracts with end users are generally for terms of
24 to 36 months, although customers may cancel services prior to the end of the
service terms. Cancellations due to reasons other than closings of managed
locations, which to date have not been material, are generally subject to
cancellation fees ranging from 20% to 80% of the recurring charges payable for
the remainder of the service term. Cancellation fees as a percentage of network
management services revenues were less than 1% in each of fiscal years 1999 and
2000 and the three and six month periods ended September 30, 2000. We recognize
revenues from cancellation fees on a cash basis unless collection is assured.
Our contracts with resellers typically extend from 12 to 36 months and, in some
cases, require that we continue providing services throughout the term of the
reseller's contract with the end user. In these cases, we continue to recognize
revenues upon performance of the services, even if performance occurs after the
term of the contract with the reseller.

     Our network management services for WANs typically include a guarantee
providing end-to-end network availability for at least 99.5% of the time in any
given month. In the event the guaranteed availability is not achieved, we
generally are obligated to refund our WAN management fees for that month. This
guarantee covers some components of the end user's WAN, such as the transport
services provided by the end user's carrier, that are not directly under our
control. As a result, we may, in some instances, refund amounts to customers for
circumstances beyond our control. We establish a reserve against guarantees we
offer. Historically, guarantee payments have not been material in relation to
network management services.  However, in the future, refunds made under our
guarantees or otherwise could have a material adverse impact on the results of
our operations.

     We derive equipment and other revenues from the resale of customer premise
equipment, or CPE, and from the sale of CPE maintenance contracts to our network
management services customers. CPE is networking equipment which usually resides
at the customer's location and includes routers, customer service units or CSUs,
and LAN switches. We utilize CPE produced by Cisco and, to a lesser extent, by
Bay/Nortel, Paradyne and others. We recognize revenues from the sale of CPE upon
shipment to the end user. However, if the transaction is financed through our
lease financing subsidiary, we recognize the revenues upon sale of the
underlying lease contract on a non-recourse basis. We recognize revenues from
CPE maintenance contracts on a monthly basis as the services are provided. We
only resell CPE to our network management services customers. We expect to limit
discounts on CPE and encourage end users to purchase equipment from other
sources. Further, as an alternative to selling CPE to our resellers, we have
amended some of our reseller agreements such that we receive management fees for
ordering CPE and managing CPE inventories for these resellers. Although we
believe some of our customers will continue to purchase CPE from us, our
strategy is to focus on our network management services which generate higher
margins. We therefore anticipate that revenues from CPE sales will decline as we
seek to manage our mix of revenues.

     We currently have a network management services contract with two business
units within AT&T: AT&T Solutions and AT&T Data and Internet Services. AT&T
accounted for 59% of our total revenues in fiscal year 1999, 71% of our total
revenues in fiscal year 2000, and 70% of our total revenues for the six month
period ended September 30, 2000. We anticipate that sales to AT&T will continue
to comprise a substantial percentage of our revenues at least through fiscal
year 2001 and it is possible that this percentage could increase. No other
customer accounted for more than 10% of our revenues in fiscal year 1999 or 2000
or in the three and six month periods ended September 30, 2000.

     Historically, we have generated substantially all of our revenues from
sales to customers in the United States, although we manage devices in several
locations around the world for these U.S.-based customers.

                                                                              10
<PAGE>

Results of Operations

Three months ended September 30, 1999 compared to three months ended September
30, 2000

 Revenues

     Total revenues. Total revenues increased 21%, from $9.3 million in the
three months ended September 30, 1999 to $11.3 million in the three months ended
September 30, 2000.

     Network management services. Revenues from network management services
increased 48%, from $5.5 million in the three months ended September 30, 1999 to
$8.1 million in the three months ended September 30, 2000, representing 59% of
total revenues in the three months ended September 30, 1999 and 72% of total
revenues in the three months ended September 30, 2000. Virtually all of the
dollar increase was due to increased recurring revenues resulting from a growth
in the number of managed devices under contract. The remainder of the increase
was due to increased implementation revenues resulting from higher volumes of
newly installed sites and increased management fees for ordering and managing
CPE for selected resellers.

     Equipment and other. Revenues from equipment and other decreased 17%, from
$3.8 million in the three months ended September 30, 1999 to $3.1 million in the
three months ended September 30, 2000. Revenues from equipment and other sales
decreased primarily as a result of amendments we have made to some of our
reseller agreements whereby we receive management fees for ordering CPE and
managing CPE inventories for these resellers. The decrease in equipment sales
was partially offset by an increase in CPE maintenance revenue which occurred as
a result of an increase in the number of maintenance contracts in place.

   Costs of revenues

     Cost of network management services. Cost of network management services
includes salary and other costs of personnel, depreciation of equipment utilized
to manage customer networks, the network management infrastructure utilized to
provide remote network management services, and the costs of third-party
providers of CPE installation services. Cost of network management services is
expensed as incurred. Cost of network management services increased 48%, from
$3.1 million in the three months ended September 30, 1999 to $4.6 million in the
three months ended September 30, 2000, representing 57% of network management
services revenues in the three months ended September 30, 1999 and September 30,
2000, respectively. The dollar increase was due primarily to the addition of
personnel to accommodate growth and upgrades to the network management
infrastructure.

     Cost of equipment and other. Cost of equipment and other includes the
purchase of CPE from manufacturers and distributors and maintenance contracts
purchased for resale to end users. These costs are expensed in the period the
related revenues are recognized. Cost of equipment and other decreased 26%, from
$3.0 million in the three months ended September 30, 1999 to $2.2 million in the
three months ended September 30, 2000, representing 78% of equipment and other
revenues in the three months ended September 30, 1999 and 70% of such revenues
in the three months ended September 30, 2000. The decrease in dollars was due to
reduced costs of resold equipment resulting from the decrease in equipment
resales. The percentage decrease was due to increased CPE maintenance revenues
which generally has higher gross margins than equipment sales.

   Operating expenses

     Development.   Development expenses consist primarily of salaries and
related costs of development personnel, including contract programming services.
Development employees are responsible for developing internal software

                                                                              11
<PAGE>

systems, selecting and integrating purchased software applications, developing
software tools for our network management services, developing our web-enabled
software applications that give customers access to network management
information, and defining and developing operating processes for new services.
Development expenses increased 28%, from $591,000 in the three months ended
September 30, 1999 to $759,000 in the three months ended September 30, 2000,
representing 6% of total revenues in the three months ended September 30, 1999
and 7% of total revenues in the three months ended September 30, 2000. The
increase in dollars and as a percentage of total revenues was due to an increase
in the number of software and service development personnel and outside
contractors devoted to the development and enhancement of network management
tools and our network management services.

     Selling and marketing. Sales and marketing expenses consist primarily of
salaries, commissions, travel and costs associated with creating awareness of
our services. Sales and marketing expenses increased 37%, from $1.0 million in
the three months ended September 30, 1999 to $1.4 million in the three months
ended September 30, 2000, representing 11% of total revenues in the three months
ended September 30, 1999 and 12% in the three months ended September 30, 2000.
The increase in dollars and as a percentage of total revenues was due to
increased spending for advertising and other promotional activities as well as
costs related to the addition of sales and marketing personnel.

     General and administrative. General and administrative expenses consist
primarily of expenses related to our human resources, finance and executive
departments. Included in human resources spending is a majority of costs of
recruiting and relocating new employees. General and administrative expenses
increased 40%, from $663,000 in the three months ended September 30, 1999 to
$928,000 in the three months ended September 30, 2000, representing 7% of total
revenues in the three months ended September 30, 1999 and 8% of total revenues
in the three months ended September 30, 2000. The dollar and percentage increase
was due primarily to an accrual of $200,000 for legal fees related to the
pending class action securities lawsuits, additional spending related to
recruiting new employees, increased personnel and to being a public company.

   Other income, net

     Other income, net consists primarily of interest income earned on our cash
balances, offset by interest expense from our leases for capital equipment.
Other income, net increased from $31,000 in the three months ended September 30,
1999 to $955,000 in the three months ended September 30, 2000, representing less
than 1% of total revenues in the three months ended September 30, 1999 and 8% in
the three months ended September 30, 2000. The increase was primarily due to
interest income earned on the net proceeds received from the Company's initial
public offering.

   Income tax expense (benefit)

     The income tax benefit recorded for the three months ended September 30,
1999 was $1.1 million, compared to a provision of $848,000 for the three months
ended September 30, 2000. The benefit in the three months ended September 30,
1999 is attributable to a reduction in the deferred tax asset valuation
allowance. Since the valuation allowance against deferred tax assets was
completely eliminated as of March 31, 2000 (resulting in the recording of income
tax benefits), income tax provisions for periods subsequent to March 31, 2000
are no longer offset by similar benefits.

                                                                              12
<PAGE>

Six months ended September 30, 1999 compared to six months ended September 30,
2000

   Revenues

     Total revenues. Total revenues increased 24%, from $18.4 million in the six
months ended September 30, 1999 to $22.8 million in the six months ended
September 30, 2000.

     Network management services. Revenues from network management services
increased 64%, from $10.1 million in the six months ended September 30, 1999 to
$16.5 million in the six months ended September 30, 2000, representing 55% of
total revenues in the six months ended September 30, 1999 and 72% of total
revenues in the six months ended September 30, 2000. The majority of the dollar
increase was due to increased recurring revenues resulting from a growth in the
number of managed devices under contract. The remainder of the increase was due
to increased implementation revenues resulting from higher volumes of newly
installed sites and increased management fees for ordering and managing CPE for
selected resellers.

     Equipment and other. Revenues from equipment and other decreased 23%, from
$8.3 million in the six months ended September 30, 1999 to $6.3 million in the
six months ended September 30, 2000. Revenues from equipment and other sales
decreased as a result of amendments we have made to some of our reseller
agreements whereby we receive management fees for ordering CPE and managing CPE
inventories for these resellers. The decrease in equipment sales was partially
offset by an increase in CPE maintenance revenue which occurred as a result of
an increase in the number of maintenance contracts in place.

   Costs of revenues

     Cost of network management services. Cost of network management services
increased 53%, from $5.8 million in the six months ended September 30, 1999 to
$8.9 million in the six months ended September 30, 2000, representing 58% of
network management services revenues in the six months ended September 30, 1999
and 54% of such revenues in the six months ended September 30, 2000. The dollar
increase was due primarily to the addition of personnel to accommodate growth
and upgrades to the network management infrastructure.

     Cost of equipment and other. Cost of equipment and other decreased 30%,
from $6.5 million in the six months ended September 30, 1999 to $4.5 million in
the six months ended September 30, 2000, representing 79% of equipment and other
revenues in the six months ended September 30, 1999 and 71% of such revenues in
the six months ended September 30, 2000. The decrease in dollars was due to
reduced costs of resold equipment resulting from the decrease in equipment
resales. The percentage decrease was due to increased CPE maintenance revenue
which generally has higher gross margins than equipment sales.

   Operating expenses

     Development.   Development expenses increased 33%, from $1.2 million in the
six months ended September 30, 1999 to $1.6 million in the six months ended
September 30, 2000, representing 6% of total revenues in the six months ended
September 30, 1999 and 7% of total revenues in the six months ended September
30, 2000. The increase in dollars and as a percentage of total revenues was due
to an increase in the number of software and service development personnel and
outside contractors devoted to the development and enhancement of network
management tools and our network management services.

     Selling and marketing. Sales and marketing expenses increased 46%, from
$2.0 million in the six months ended September 30, 1999 to $2.9 million in the
six months ended September 30, 2000, representing 11% of total revenues in the
six months ended September 30, 1999 and 13% of total revenues in the six months
ended September 30, 2000. The increase in dollars and as a percentage of total
revenues was due to increased spending for advertising and other promotional
activities as well as costs related to the addition of sales and marketing
personnel.

                                                                              13
<PAGE>

     General and administrative.   General and administrative expenses increased
48%, from $1.3 million in the six months ended September 30, 1999 to $1.9 in the
six months ended September 30, 2000, representing 7% of total revenues in the
six months ended September 30, 1999 and 8% of total revenues in the six months
ended September 30, 2000. The dollar and percentage increase was due primarily
to an accrual of $200,000 for legal fees related to the pending class action
securities lawsuits, additional spending related to recruiting new employees,
increased personnel and to being a public company.

   Other income, net

     Other income, net increased from $77,000 in the six months ended September
30, 1999 to $1.8 million in the six months ended September 30, 2000,
representing less than 1% of total revenues in the six months ended September
30, 1999 and 8% in the six months ended September 30, 2000. The increase was
primarily due to interest income earned on the net proceeds received from the
Company's initial public offering.

   Income tax expense (benefit)

     The income tax benefit recorded for the six months ended September 30, 1999
was $2.2 million, compared to a provision of $1.8 million for the six months
ended September 30, 2000. The benefit in the six months ended September 30, 1999
is attributable to a reduction in the deferred tax asset valuation allowance.
Since the valuation allowance against deferred tax assets was completely
eliminated as of March 31, 2000 (resulting in the recording of income tax
benefits), income tax provisions for periods subsequent to March 31, 2000 are no
longer offset by similar benefits.

Quarterly results of operations

     Results of operations have varied from quarter to quarter. Accordingly, we
believe that period-to-period comparisons of results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Our operating results may fluctuate as a result of many factors,
including our ability to renew or retain existing end-user and reseller
relationships, the cost of introducing new service offerings and the
profitability of such offerings, and the level and nature of competition.
Further, we may be unable to adjust spending rapidly enough to compensate for
any significant fluctuations in the number of new managed devices implemented in
a given period. Any significant shortfall in the number of new managed devices
could therefore seriously damage our business. Finally, there can be no
assurance that we will be profitable in the future or, if we are profitable,
that our levels of profitability will not vary significantly between quarters.

Liquidity and capital resources

     Net cash provided by operating activities for the six months ended
September 30, 1999 was $1.1 million. Net cash provided by operating activities
for the six months ended September 30, 2000 was $8.0 million.

     We used $1.3 million and $2.5 million in the six month periods ended
September 30, 1999 and September 30, 2000 to purchase capital assets primarily
used in the delivery of our network management services. We currently have no
material commitments for capital expenditures. We paid $457,000 for the six
month period ended September 30, 1999 and $251,000 for the six month period
ended September 30, 2000, toward our lease obligations for capital equipment. We
intend to continue to add sales, marketing and development resources over the
next 12 months; however, we anticipate that costs associated with sales,
marketing and development initiatives will not materially increase as a
percentage of revenues and will not result in significant uses of working
capital.

                                                                              14
<PAGE>

     We used $11.8 million during the three months ended September 30, 2000 to
repurchase 1.6 million shares of our common stock. We have approval from our
Board of Directors to purchase up to 4 million shares, including those
previously repurchased. The extent and timing of any repurchases will depend on
market conditions and other business considerations. Repurchased shares may be
held in treasury for general corporate purposes, including for use in connection
with the company's stock option plans, or may be retired.

     As of September 30, 2000, we had $51.6 million in cash and cash
equivalents, $3.0 million in net accounts receivable and $54.0 million in
working capital. We believe that our current cash balances together with cash
generated from operations, will be sufficient to fund our anticipated working
capital needs, capital expenditures, stock buy back program and any potential
future acquisitions for at least 12 months. Our current cash balances are kept
in short-term, investment-grade, interest-bearing securities pending their use.
In the event our plans or assumptions change or prove to be inaccurate, or if we
consummate any unplanned acquisitions of businesses or assets, we may be
required to seek additional sources of capital. Sources of additional capital
may include public and private equity and debt financings, sales of nonstrategic
assets and other financing arrangements.

     As of September 30, 2000, we had net operating loss carryforwards of
approximately $9.2 million available to offset future net income for U.S.
federal income tax purposes. These net operating loss carryforwards will expire
beginning in 2007 if not utilized. We have alternative minimum tax credit
carryforwards of $380,000 which do not expire. Our utilization of these net
operating loss and tax credit carryforwards may be subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code. The annual limitation may result in the expiration of the net
operating losses before utilization.


Risk Factors

We may be unable to operate profitably in the future.

     We may not operate profitably. Although we began operating in 1987, we did
not introduce our first network management service until the quarter ended March
31, 1994. Our track record of operating profitably in the network management
services business is short, and it is difficult to predict our future revenues
and operating results. We have previously incurred substantial net losses. Our
ability to operate profitably in the future depends on increasing sales of our
services while maintaining sufficient gross profit margins. We must, among other
things:

     .  maintain satisfactory relationships with resellers such as AT&T, our
          largest customer, and network equipment manufacturers such as Cisco;

     .  establish relationships with additional marketing partners for the
          resale of our services;

     .  develop software to make our principal existing service, ProWatch for
          WANs, more efficient and economical;

     .  develop and sell other network management services; and

     .  maintain reliable, uninterrupted service from our network management
          center 24 hours per day, seven days per week.


Our revenues will decline significantly and our business will be adversely
affected if AT&T discontinues, or materially reduces, sales of our services.

  Sales to AT&T, which resells our services to its customers, accounted for 71%
of our total revenues in the fiscal year ended March 31, 2000 and 69% and 70% of
our total revenues for the three and six months ended September 30, 2000,
respectively.  We expect sales to AT&T to continue to comprise a substantial
percentage of our

                                                                              15
<PAGE>

revenues at least through fiscal year 2001 and it is possible this percentage
could increase. To the extent we continue to depend on AT&T for a large portion
of our sales, our total revenues will decline materially if AT&T discontinues
selling our services or significantly reduces its sales of our services. We
cannot be sure that we will be successful in reducing our dependence on AT&T in
the future.

     Our existing agreements with AT&T expire at various dates beginning in
December 2000. In addition, a number of the orders for services that we provide
to AT&T's customers under an agreement expiring in December 2001 can be
cancelled at anytime upon ninety days notice and all new orders placed after
June 30, 1999 can be cancelled beginning July 2001. Our agreements with AT&T are
not exclusive arrangements. We will need to maintain a good working relationship
with different business units of AT&T in order to maintain the business we
currently provide to AT&T's customers and to encourage AT&T to sell our services
to additional customers. Problems in our relationship with AT&T would seriously
damage our business. We cannot assure you that AT&T will continue to sell our
services to existing or additional AT&T customers. A substantial reduction in
our AT&T business would result in diminished revenues for an extended period of
time as we attempted to replace that business.


Our quarterly results may fluctuate and cause the price of our common stock to
fall.

     Our revenues and results of operations are difficult to predict and may
fluctuate significantly from quarter to quarter. If either our revenues or
results of operations fall below the expectations of investors or public market
analysts, the price of our common stock could fall dramatically.

     Our revenues are difficult to forecast and may fluctuate for a number of
reasons:

     .    the market for network management services is relatively new, and we
          have no reliable means to assess overall customer demand;

     .    we derive a majority of our revenues from AT&T and other resellers,
          and our revenues therefore depend significantly on the willingness and
          ability of AT&T and those other resellers to sell our services to
          their customers;

     .    we may not be able to attract additional resellers to market our
          services as expected;

     .    we expect to encourage end users to purchase equipment from other
          sources, and we therefore anticipate that our revenues from equipment
          resales will continue to decline as we seek to manage our mix of
          revenues;

     .    we may not add new end users as rapidly as we expect;

     .    we may lose existing end users as the result of competition, problems
          with our services or, in the case of end users who are customers of
          our resellers, problems with the reseller's services; and

     .    we may not be able to develop new or improved services as rapidly as
          they are needed.

     Most of our expenses, particularly employee compensation and rent, are
relatively fixed. As a result, variations in the timing of revenues could
significantly affect our results of operations from quarter to quarter and could
result in quarterly losses.

                                                                              16
<PAGE>

Our future operating results may vary by season, which will make it difficult to
predict our future performance.

     As a result of seasonal factors, we believe that quarter-to-quarter
comparisons of our results of operations are not necessarily meaningful. These
factors may adversely affect our operating results or cause our operating
results to fluctuate, resulting in a decrease in our stock price. You should not
rely on our quarterly results of operations to predict our future performance.

     Our bookings may be slower during the months of July and August due to the
vacation schedules of our resellers' sales and marketing employees. This
situation may lead to lower levels of revenues earned during the following
fiscal quarter, which ends December 31.

     Our revenues during our third and fourth fiscal quarters may be more
volatile and difficult to predict due to the budgeting and purchasing cycles of
our end users. End users typically purchase our services at the same time they
purchase new network equipment such as routers. As a result, the timing of their
large capital expenditures could affect the timing of their purchases of our
services. Some end users may not be able to purchase network equipment and our
services near the end of a calendar year due to depleted budgets. Other end
users may accelerate purchases in order to use an unspent portion of their
budget.

     The market for our services is new and evolving rapidly, and our business
will be seriously damaged if the market does not develop as we expect.

     Our long-term viability depends significantly upon the acceptance and use
of remote network management services by mid-sized companies. The market for
remote network management services is new and rapidly evolving. This market
environment makes it more difficult to determine the size and growth of the
market and to predict how this market will develop. Changes in technology, the
availability of qualified information technology professionals and other factors
that make internal network management more cost effective than remote network
management would adversely affect the market for our services. Our business may
be seriously damaged if this market fails to grow, grows more slowly than we
expect or develops in some way that is different from our expectations.

We must establish relationships with additional resellers in order to increase
our revenues and become consistently profitable.

     We expect to rely increasingly on resellers such as telecommunications
carriers, Internet service providers and data networking value-added resellers
to market our services. We must establish these alternative sales channels in
order to increase our revenues and become consistently profitable. We have
limited experience in managing sales through resellers. We have only recently
begun to develop these sales channels, and we have established relationships
with only a few resellers. Except for AT&T, these resellers have not generated
significant sales of our services to date and may not succeed in marketing our
services in the future.

     Our agreements with resellers, including AT&T, generally do not require
that the resellers sell any minimum level of our services and generally do not
restrict the resellers' development or sale of competitive services. We cannot
be sure that these resellers will dedicate resources or give priority to selling
our services. In addition, resellers may seek to make us reduce the prices for
our services in order to lower the total price of their equipment, software or
service offerings.

                                                                              17
<PAGE>

Reseller relationships may adversely affect our business by weakening our
relationships with end users, decreasing the strength of our brand name and
limiting our ability to sell services directly to resellers' customers.

     If we succeed in increasing our sales through resellers, we may have weaker
relationships with the end users of our services. This may inhibit our ability
to gather customer feedback that helps us improve our services, develop new
services and monitor customer satisfaction. We may also lose brand
identification and brand loyalty, since our services may be identified by
private label names or may be marketed differently by our resellers. A failure
by any of our resellers to provide their customers with satisfactory products,
services or customer support could injure our reputation and seriously damage
our business. Our agreements with these resellers may limit our ability to sell
our services directly to the resellers' customers in the future.

Any material decrease in sales of our WAN management services will significantly
reduce our total revenues and adversely affect our business.

     Competitive pressures or other factors that adversely affect sales of our
wide area network, or WAN, management services or that cause significant
decreases in the prices of our WAN management services could significantly limit
or reduce our revenues. Sales of our ProWatch for WANs and similar WAN
management services accounted for 97% of our recurring network management
services revenues in the three and six month periods ended September 30, 2000.
Likewise, a substantial portion of our nonrecurring network management services
and equipment resale revenues depend on the successful sale of these WAN
management services. We expect that these WAN management services will continue
to generate substantially all of our revenues for the foreseeable future. Our
financial performance therefore depends directly on continued market acceptance
of our WAN management services, as well as our ability to introduce enhanced
versions of these services that make these services more efficient and
economical.

Our failure to develop and sell additional services could impair our financial
results and adversely affect our business.

     Our future financial performance will depend in part on our ability to
develop, introduce and sell new and enhanced network management services other
than WAN management services, including services that:

     .    address the increasingly sophisticated needs of current and
          prospective end users; and

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

     Although we have developed new services, such as network management
services for local area networks, or LANs, and network security services, we
have not derived significant revenues from these services to date. We cannot be
sure that we will be successful selling these services or developing additional
services on time or on budget. The development of new services is a complex and
uncertain process. The newness of the market for remote network management
services makes it difficult to determine whether a market will develop for any
particular network management service. If we succeed in increasing the
percentage of our revenues that is derived from resellers, we may have weaker
relationships with the end users of our services, making it even more difficult
for us to identify services acceptable to our target market of mid-sized
companies. We cannot assure you that future technological or industry
developments will be compatible with our business strategy or that we will be
successful in responding to these changes in a timely or cost-effective manner.
Our failure to develop and sell services other than WAN management services
could seriously damage our business.

                                                                              18
<PAGE>

Our business may be harmed if we lose the services of our chief executive
officer.

     Our ability to build our business and compete effectively depends to a
significant degree on the skills, experience and efforts of our executive
officers, particularly Craig S. Tysdal, our president and chief executive
officer. Mr. Tysdal has led us during our transition from our data transport
business to the network management services field. He is our key representative
in our relationship with AT&T. We do not have employment contracts requiring Mr.
Tysdal or any of our other personnel to continue their employment for any period
of time, and we do not maintain key man life insurance on Mr. Tysdal or any of
our other personnel. The loss of the services of Mr. Tysdal would seriously
damage our business.

In order to support our business, we must hire additional information technology
professionals, who are in extremely short supply.

     We derive all of our revenues from network management services and related
resales of equipment. These services can be extremely complex, and in general
only highly qualified, highly trained information technology, or IT,
professionals have the skills necessary to develop and provide these services.
In order to continue to support our current and future business, we need to
attract, motivate and retain a significant number of qualified IT professionals.
Qualified IT professionals are in short supply, and we face significant
competition for these professionals, from not only our competitors but also our
end users, marketing partners and other companies throughout the network
services industry. Other employers may offer IT professionals significantly
greater compensation and benefits or more attractive career paths or geographic
locations than we are able to offer. Any failure on our part to hire, train and
retain a sufficient number of qualified IT professionals would seriously damage
our business.

We could incur significant costs if we are unable to retain our information
technology professionals.

     Because of the limited availability of IT professionals, we seek to hire
persons who have obtained college bachelor's degrees and then train those
persons to provide our services. As a result, we invest a significant amount of
time and money in training these new employees before they begin to support our
business. We do not enter into employment agreements requiring these employees
to continue in our employment for any period of time. Departures of trained
employees could limit our ability to generate revenues and would require us to
incur additional costs in training new employees.

We currently compete most directly with our customers' internal solutions, and
we expect increasing competition from other network services companies.

     To compete successfully, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors'
innovations by continuing to enhance our services, as well as our sales programs
and channels. Any pricing pressures, reduced margins or loss of market share
resulting from increased competition, or our failure to compete effectively,
could seriously damage our business.

     We face competition from different sources. Currently, we compete
principally with potential end users' and resellers' internal network
administration organizations. These organizations may have developed tools and
methodologies to manage their network processes and may be reluctant to adopt
applications offered by third parties like us.

     If the market for out-sourced network management services grows as we
expect, we believe this market will become highly competitive. Competition is
likely to increase significantly as new network management services

                                                                              19
<PAGE>

companies enter the market and current competitors expand their service and
product lines. Many of these potential competitors are likely to enjoy
substantial competitive advantages, including:

     .    larger technical staffs;

     .    more established sales channels;

     .    more software development experience;

     .    greater name recognition; and

     .    substantially greater financial, marketing, technical and other
          resources.

If our operations are interrupted, we may lose customers and revenues.

     We must be able to operate our network management infrastructure 24 hours
per day, seven days per week without interruption. If our operations are
interrupted, we may lose customers and revenues. All of our network management
services are provided remotely from our network management center, which is
located at a single site in Austin, Texas. We do not have any redundant systems
or facilities at a separate geographic location. In order to operate without
interruption, we must guard against:

     .    power outages, fires, tornados and other natural disasters at our
          network management center;

     .    telecommunications failures;

     .    equipment failures or "crashes;"

     .    security breaches; and

     .    other potential interruptions.

     Any interruptions could:

     .    require us to make payments on the contractual performance guarantees
          we offer our customers;

     .    cause end users to seek damages for losses incurred;

     .    require us to spend more money replacing existing equipment or adding
          redundant facilities;

     .    damage our reputation for reliable service;

     .    cause existing end users and resellers to cancel our contracts; or

     .    make it more difficult for us to attract new end users and resellers.


Our revenues would decline and our business would be adversely affected if the
networking equipment and carrier services we support become obsolete or are
otherwise not used by a large part of our target market.

     As part of our strategy, we have elected to support only selected providers
of networking equipment and carrier services. For example, we support routers
manufactured by 3Com, Bay/Nortel and Cisco, but not by other equipment
providers. Our services cannot be used by companies with networking equipment
and carrier services that we do not support. Our business would be seriously
damaged if, in the future, the networking equipment

                                                                              20
<PAGE>

manufacturers and carrier services that we support were not the predominant
providers to our target market or if their equipment or services became
unavailable or significantly more expensive. Technological advances that make
obsolete any of the networking equipment and carrier services that we support,
or that offer significant economic or functional advantages over the equipment
and services, also could limit or reduce our revenues or could force us to incur
significant costs attempting to support other networking equipment and carrier
services.

We may be unable to protect our intellectual property, and we could incur
substantial costs defending our intellectual property from infringement or
claims of infringement made by others.

     Our business and financial performance depends to a significant degree upon
our software and other proprietary technology. The software industry has
experienced widespread unauthorized reproduction of software products. We have
only one patent. The steps we have taken may not be adequate to deter
competitors from misappropriating our proprietary information, and we may not be
able to detect unauthorized use and take appropriate steps to enforce our
intellectual property rights.

     We could be the subject of claims alleging infringement of third-party
intellectual property rights. In addition, we may be required to indemnify our
distribution partners and end users for similar claims made against them. Any
infringement claim could require us to spend significant time and money in
litigation, pay damages, develop non-infringing intellectual property or acquire
licenses to intellectual property that is the subject of the infringement
claims. As a result, any infringement claim could seriously damage our business.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company invests its cash in money market funds or instruments which
meet high credit quality standards specified by the Company's investment policy.
The Company does not use financial instruments for trading or other speculative
purposes.

PART II.   OTHER INFORMATION

Item 1.   LEGAL PROCEEDINGS

     Four complaints have been filed in the United States District Court for the
Western District of Texas, Austin Division against the Company, Craig S. Tysdal,
Harry S. Budow, and Kenneth C. Kieley.  Wilson v. NetSolve, et al., Case No. A
00CA 591SS; Stassi v. NetSolve, et al., Case No. A 00CA 618JN; Palen v.
NetSolve, Case No. A 00CA 633SS; and Aberger v. NetSolve, et al., Case No. A
00CA 636SS.  These complaints were filed on September 11, September 26, October
2 and October 3, 2000, respectively.  Plaintiffs in each of these cases seek to
represent a class comprised of purchasers of the Company's common stock between
April 18, 2000 and August 18, 2000 ("Class Period").  These complaints allege
that the defendants engaged in a fraudulent scheme by issuing false and
materially misleading statements regarding the Company's business during the
Class Period.  The Company and each individual defendants believe that these
lawsuits are meritless and the Company and its officers intend to vigorously
defend themselves in these actions.

Item 2.  USE OF PROCEEDS

     The Company's registration statement on Form S-1 (File No. 333-65691) was
declared effective on September 28, 1999.  Gross proceeds from the offering were
used to pay offering costs through December 31, 1999.  There have been no other
expenses or costs paid through September 30, 2000.  The remainder of the
proceeds of this

                                                                              21
<PAGE>

offering, $48.1 million, are temporarily invested in short-term, investment-
grade, interest bearing securities pending their use for other purposes.

Item 6.   EXHIBITS AND REPORTS ON FORM 8-K

     (a)  EXHIBITS

________________________________________________________________________________
   27.1   Financial Data Schedule.
________________________________________________________________________________


     (b)  Reports on Form 8-K

          Date of Report                Item Reported
          --------------                -------------
          September 11, 2000            Item 5. Other Events

                                                                              22
<PAGE>

SIGNATURES


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


Date:    November 13, 2000           NETSOLVE, INCORPORATED


                                     By: /s/  Craig S. Tysdal
                                         --------------------
                                         Craig S. Tysdal
                                         President and Chief Executive Officer



                                     By: /s/  Kenneth C. Kieley
                                         ----------------------
                                         Kenneth C. Kieley
                                         Vice President-Finance, Chief Financial
                                         Officer and Secretary

                                                                              23