<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, 2001


                        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 9, 2001: 12,119,934.

================================================================================
<PAGE>

                            NETSOLVE, INCORPORATED

                                     INDEX


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

               Condensed Consolidated Balance Sheets as of March 31, 2001 and September 30, 2001 (unaudited)..............   3

               Condensed Consolidated Statements of Operations for the three and six month periods ended September
               30, 2000 and 2001 (unaudited)..............................................................................   4


               Condensed Consolidated Statements of Cash Flows for the six month periods ended September 30, 2000
               and 2001 (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............................................................................................  22

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

                                                             3/31/01               9/30/01
                                                            ---------             ---------
                                                                                 (unaudited)
<S>                                                        <C>                   <C>
                         ASSETS
Current assets:
  Cash and cash equivalents..............................   $ 45,411              $ 46,037
  Restricted cash........................................        306                   439
  Accounts receivable, net of allowance for
   doubtful accounts of $207 at March 31, 2001 and
   $205 at September 30, 2001............................      4,013                 4,776
  Inventory..............................................         52                    80
  Prepaid expenses and other assets......................      1,314                 1,667
  Deferred tax assets....................................      1,647                   676
                                                            --------              --------
Total current assets.....................................     52,743                53,675

Property and equipment:
  Computer equipment and software........................      9,277                 9,703
  Furniture, fixtures and leasehold improvements.........      1,983                 5,138
  Equipment held under capital leases....................      1,343                   283
  Other equipment........................................        393                   388
                                                            --------              --------
                                                              12,996                15,512

  Less accumulated depreciation and amortization.........     (7,163)               (7,283)
                                                            --------              --------
Net property and equipment...............................      5,833                 8,229
Other  assets............................................      1,275                   466
Deferred tax assets, net of current portion..............      2,980                 3,080
                                                            --------              --------

Total assets.............................................   $ 62,831              $ 65,450
                                                            ========              ========

          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.......................................   $    954              $    813
  Accrued liabilities....................................      3,468                 3,981
  Deferred revenue.......................................      1,108                   954
  Capital leases obligation..............................        324                   105
                                                            --------              --------
Total current liabilities................................      5,854                 5,853

Deferred revenue, net of current portion.................         --                 1,202

Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares
  authorized at March 31, 2001 and  September 30,
  2001; 14,866,318 issued and 12,071,002
  outstanding at March 31, 2001 and 15,047,401
  issued and 12,117,085 outstanding at September
  30, 2001...............................................        148                   150
Additional paid-in capital...............................     80,574                80,874
Treasury stock...........................................    (20,179)              (21,059)
Deferred compensation....................................        (69)                  (51)
Accumulated deficit......................................     (3,497)               (1,519)
                                                            --------              --------
Total stockholders' equity...............................     56,977                58,395
                                                            --------              --------

Total liabilities and stockholders' equity...............   $ 62,831              $ 65,450
                                                            ========              ========
</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
                                                                             -------------------   -------------------
                                                                              9/30/00    9/30/01    9/30/00    9/30/01
                                                                             --------   --------   --------   --------
                                                                                  (unaudited)           (unaudited)
<S>                                                                          <C>        <C>        <C>        <C>
Revenues:
 Network management services..............................................   $  8,138   $  9,655   $ 16,496   $ 18,290
 Equipment and other......................................................      3,128      2,630      6,339      5,244
                                                                             --------   --------   --------   --------
  Total revenues..........................................................     11,266     12,285     22,835     23,534
Costs of revenues:
 Cost of network management services......................................      4,620      5,537      8,906     10,770
 Cost of equipment and other..............................................      2,192      1,843      4,528      3,623
                                                                             --------   --------   --------   --------
  Total cost of revenues..................................................      6,812      7,380     13,434     14,393
                                                                             --------   --------   --------   --------
Gross profit..............................................................      4,454      4,905      9,401      9,141
Operating expenses:
 Development..............................................................        759        910      1,555      1,712
 Selling and marketing....................................................      1,408      1,563      2,876      2,962
 General and administrative...............................................        928      1,280      1,900      2,361
 Amortization of deferred compensation....................................         20          9         40         18
                                                                             --------   --------   --------   --------
  Total operating expenses................................................      3,115      3,762      6,371      7,053
                                                                             --------   --------   --------   --------
Operating income..........................................................      1,339      1,143      3,030      2,088
Other income (expense):
 Interest income..........................................................        967        412      1,843        943
 Interest expense.........................................................        (13)        (3)       (29)        (6)
 Other, net...............................................................          1         (2)        --         14
                                                                             --------   --------   --------   --------
                                                                                  955        407      1,814        951
                                                                             --------   --------   --------   --------
Income before income taxes................................................      2,294      1,550      4,844      3,039
Income tax expense........................................................        848        541      1,792      1,061
                                                                             --------   --------   --------   --------
Net income................................................................   $  1,446   $  1,009   $  3,052   $  1,978
                                                                             ========   ========   ========   ========


Basic net income per share................................................   $   0.10    $  0.08    $  0.21    $  0.16

Weighted average shares used in basic per share calculation...............     14,390     12,107     14,429     12,073

Diluted net income per share..............................................      $0.09      $0.08      $0.19      $0.15

Weighted average shares used in diluted per share calculation.............     15,507     13,378     15,914     13,171
</TABLE>

                            See accompanying notes.

                                                                               4
<PAGE>

                            NETSOLVE, INCORPORATED

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                                Six Months Ended
                                                                                                  September 30,
                                                                                                ----------------
                                                                                                2000        2001
                                                                                                ----        ----
                                                                                                  (unaudited)
<S>                                                                                           <C>          <C>
Cash flows from operating activities:
 Net income.................................................................................   $ 3,052    $ 1,978
 Adjustments to reconcile net income to net cash provided by
 operating activities:
  Depreciation and amortization.............................................................     1,035      1,554
  Amortization of deferred compensation......,,,,,,.........................................        40         18
  Deferred tax assets.......................................................................     1,695        871
  Loss on disposition of property and equipment.............................................         3          1
  Change in assets and liabilities:
    Accounts receivable, net................................................................     1,870       (763)
    Inventory and prepaid expenses and other assets.........................................       400        428
    Accounts payable........................................................................      (517)      (141)
    Unearned income.........................................................................        74      1,048
    Accrued liabilities.....................................................................       340        513
                                                                                               -------    -------
Net cash provided by operating activities...................................................     7,992      5,507
                                                                                               -------    -------

Cash flows from investing activities:
 Transfer of funds from (to) restricted cash................................................       306       (133)
 Purchases of property and equipment........................................................    (2,458)     (3951)
                                                                                               -------    -------
Net cash used in investing activities.......................................................    (2,152)    (4,084)
                                                                                               -------    -------

Cash flows from financing activities:
 Repurchase of common stock.................................................................   (11,810)      (880)
 Payments under capital lease obligations...................................................      (251)      (219)
 Proceeds from exercise of common stock options and warrants................................       681        302
                                                                                               -------    -------
Net cash used in financing activities.......................................................   (11,380)      (797)
                                                                                               -------    -------

Net increase (decrease) in cash and cash equivalents........................................    (5,540)       626
Cash and cash equivalents, beginning of period..............................................    57,185     45,411
                                                                                               -------    -------
Cash and cash equivalents, end of period....................................................   $51,645    $46,037
                                                                                               =======    =======

Supplemental disclosure of cash flow information:
 Cash paid for interest.....................................................................   $    28    $     6
                                                                                              ========    =======
 Income taxes paid..........................................................................   $   152    $    49
                                                                                              ========    =======
</TABLE>

                            See accompanying notes.

                                                                               5
<PAGE>

                            NETSOLVE, INCORPORATED

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 2001

          Information with respect to the three and six months ended
                   September 30, 2000 and 2001 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, and ongoing network management. 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
selectively outsource, or "out-task" 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, 2001, which can be found in the Company's annual report filed on Form
10-K, as filed on May 30, 2001 (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 $59,000 at March 31, 2001
and September 30, 2001.

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.

                                                                               6
<PAGE>

                            NETSOLVE, INCORPORATED

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                              September 30, 2001

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

<TABLE>
<CAPTION>
                                                   Three months ended       Six months ended
                                                     September 30,           September 30,
                                                 ----------------------  --------------------
<S>                                              <C>         <C>         <C>        <C>
                                                   2000        2001        2000        2001
                                                   ----        ----        ----        ----
Numerator:
     Net Income...............................   $ 1,446     $ 1,009     $ 3,052     $ 1,978
                                                 =======     =======     =======     =======
Denominator:
    Denominator for basic net
      income per share--
      weighted average common
      stock outstanding.......................    14,390      12,107      14,429      12,073
    Dilutive common stock
      equivalents--common stock
      options  and warrants...................     1,117       1,271       1,485       1,098

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

    Denominator for diluted net
      income per share--weighted
      average common stock
      outstanding and dilutive
      common stock equivalents................    15,507      13,378      15,914      13,171
                                                 =======     =======     =======     =======
</TABLE>


                                                                               7
<PAGE>

                            NETSOLVE, INCORPORATED

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                              September 30, 2001


5.   Contingencies


     A consolidated putative class action complaint was filed on February 21,
2001 and is currently pending against the Company and certain of its officers in
the United States District Court for the Western District of Texas, Austin
Division. In re NetSolve Incorporated Securities Litigation, Civil Action No.
A00-CA-591 SS. Plaintiffs seek to represent a class comprised of purchasers of
the Company's common stock between April 18, 2000 and August 18, 2000 ("Class
Period"). They 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 moved to dismiss the complaint on March 8, 2001 for failing to
state a claim under which relief could be granted and for failing to comply with
the pleading requirements of the Private Securities Litigation Reform Act of
1995, 15 U.S.C. (S) 78u-4 et seq. On August 15, 2001, the District Court granted
this motion in part and denied it in part. The District Court dismissed claims
against one officer of the Company and dismissed certain of the theories under
which plaintiffs alleged liability against the Company. However, the District
Court let stand certain of the stated claims against the Company and certain of
its officers.

     The Company and each remaining individual defendant believe that this
lawsuit is meritless and the Company and its officers intend to vigorously
defend themselves in this action. However, it is not feasible to predict or
determine the final outcome in this proceeding, 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.


6.   Recent Accounting Pronouncements

     During June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, Business Combinations, and Statement
No. 142, Goodwill and Other Intangible Assets, which prescribe a non-
amortization, impairment only approach for purchased goodwill. These statements
will be effective for the Company on April 1, 2002. Management expects the
adoption of these statements will not have a material impact on the results of
operations or the financial position of the Company.

                                                                               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.  They include, among others, statements relating to
trends in revenue, company growth, sales, margin and expenses, and the drivers
behind those trends; our ability to obtain any needed additional working
capital, the amount we use our facilities for anticipated growth in network
management service revenues, trends in sales of network management services,
sales of customer premise equipment, sales deriving from our work related to
Cisco System, Inc.'s AVVID systems, the level of any stock repurchase we may
undertake, payments requested by customers regarding our WAN guarantee, the
amount of any added costs from anticipated new sales, marketing and development
resources we gain, and sales to AT&T.

     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. On June 21, 2001, we announced that IBM Global
Services will offer NetSolve's ProWatch suite of managed network services
worldwide. The acceptance of our first software licensing agreement occurred in
the quarter ending September 30, 2001. This agreement allows another
organization to utilize our technology to provide remote network management
services to its customers. Additionally, on October 1, 2001, we announced that
we will offer remote network management for Cisco Systems, Inc. Architecture for
Voice, Video and Integrated Data (AVVID) Internet Protocol (IP) telephony
systems.

                                                                               9
<PAGE>

  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, software
        licensing fees, software usage royalties and software maintenance fees.
        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, 2001, approximately 80% of network management services revenues were
        from recurring services.

     .  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 and software professional fees. Non-recurring network
        management services primarily relate to services performed to assist
        customers in implementing new networks. Non-recurring network management
        revenues are also earned when implementing network management services
        for existing networks; however, the level of work and related fees are
        both lower. 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 or per-device basis and we recognize revenues associated with
        these services upon completion of the network implementation for the
        location or device.

     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. Network management services revenues also include
software licensing, usage royalties, maintenance fees and professional fees.
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 2000 and 2001 and in the
three and six months ended September 30, 2001.  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 most 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 all or a portion of 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 revenues.  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 certain of
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

                                                                              10
<PAGE>

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. 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 continue to
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 71% of our total revenues in fiscal year 2000, 69% of our total
revenues in fiscal year 2001, and 64% of our total revenues for the six months
ended September 30, 2001. We anticipate that sales to AT&T will continue to
comprise a substantial percentage of our revenues in fiscal 2002, but we believe
the percentage will continue to decline.  No other customer accounted for more
than 10% of our revenues in fiscal years 2000, 2001 or the six  months ended
September 30, 2001.

     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.

Results of Operations

Three months ended September 30, 2000 compared to three months ended September
30, 2001

  Revenues

     Total revenues. Total revenues increased 9%, from $11.3 million in the
three months ended September 30, 2000 to $12.3 million in the three months ended
September 30, 2001.

     Network management services. Revenues from network management services
increased 19%, from $8.1 million in the three months ended September 30, 2000 to
$9.7 million in the three months ended September 30, 2001, representing 72% of
total revenues in the three months ended September 30, 2000 and 79% of total
revenues in the three months ended September 30, 2001. The dollar and percentage
increase was due to increased recurring revenues resulting from a growth in the
number of managed devices under contract. This increase was offset slightly by a
decrease in implementation revenues resulting from fewer newly installed sites
and decreased management fees for ordering and managing CPE for selected
resellers.

     Equipment and other. Revenues from equipment and other decreased 16%, from
$3.1 million in the three months ended September 30, 2000 to $2.6 million in the
three months ended September 30, 2001. Revenues from equipment and other sales
decreased primarily as a result of lower equipment sales due to lower demand
caused by a general slowdown of corporate spending on network infrastructures.
The decrease in equipment sales was partially offset by an increase in CPE
maintenance revenue which occurred as a result of higher levels of one-time non-
recurring maintenance charges for cancellations of maintenance contracts.

  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 20%, from
$4.6 million in the three months ended September 30, 2000 to $5.5 million in the
three months ended September 30, 2001, representing 57% of network management
services revenues in the three months ended September 30, 2000 and September 30,
2001. The dollar increase was due primarily to the addition of personnel to
accommodate growth and upgrades to the network management infrastructure.

                                                                              11
<PAGE>

     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 16%, from
$2.2 million in the three months ended September 30, 2000 to $1.8 million in the
three months ended September 30, 2001, representing 70% of equipment and other
revenues in the three months ended September 30, 2000 and September 30, 2001.
The decrease in dollars was due to the decrease in 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 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 20%, from $759,000 in the three months ended September 30,
2000 to $910,000 in the three months ended September 30, 2001, representing 7%
of total revenues in the three months ended September 30, 2000 and September 30,
2001. The increase in dollars 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 11%, from $1.4 million in
the three months ended September 30, 2000 to $1.6 million in the three months
ended September 30, 2001, representing 12% of total revenues in the three months
ended September 30, 2000 and 13% in the three months ended September 30, 2001.
The increase in dollars and as a percentage of total revenues was due to
increased spending related to the addition of sales and marketing personnel.
This increase was partially offset by decreased spending for advertising during
the three months ended September 30, 2001 as compared to the three months ended
September 30, 2000.

     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 38%, from $928,000 in the three months ended September 30, 2000 to
$1.3 million in the three months ended September 30, 2001, representing 8% of
total revenues in the three months ended September 30, 2000 and 10% of total
revenues in the three months ended September 30, 2001. The increase was due
primarily to approximately $371,000 of additional spending related to rent and
operating costs of a facility that we have leased which will be utilized for
anticipated growth in network management services revenues.

  Other income, net

     Other income, net consists primarily of interest income earned on our cash
balances, offset slightly by interest expense from our leases for capital
equipment. Other income, net decreased from $955,000 in the three months ended
September 30, 2000 to $407,000 in the three months ended September 30, 2001,
representing 8% of total revenues in the three months ended September 30, 2000
and 3% of total revenues in the three months ended September 30, 2001. The
decrease was due to lower average interest rates and a lower average cash
balance for the three months ended September 30, 2001 compared to the same
period in the prior year.

                                                                              12
<PAGE>

Six months ended September 30, 2000 compared to six months ended September 30,
2001

  Revenues

     Total revenues. Total revenues increased 3%, from $22.8 million in the six
months ended September 30, 2000 to $23.5 million in the six months ended
September 30, 2001.

     Network management services. Revenues from network management services
increased 11%, from $16.5 million in the six months ended September 30, 2000 to
$18.3 million in the six months ended September 30, 2001, representing 72% of
total revenues in the six months ended September 30, 2000 and 78% of total
revenues in the six months ended September 30, 2001. The dollar increase was due
to increased recurring revenues resulting from a growth in the number of managed
devices under contract. The increase in recurring revenues was partially offset
by a decrease in implementation revenues. Implementation revenues decreased in
the current year period versus the prior year because a higher percentage of new
devices placed under management in the current year were in existing networks
which are charged at a lower rate per device. A significant portion of the
existing networks implemented in the current year period was related to the
acquisition of the Comdisco customer base which had no implementation revenues.

     Equipment and other. Revenues from equipment and other decreased 17%, from
$6.3 million in the six months ended September 30, 2000 to $5.2 million in the
six months ended September 30, 2001. Revenues from equipment and other sales
decreased primarily as a result of lower equipment sales due to lower demand
caused by a general slowdown of corporate spending on network infrastructures.
The decrease in equipment sales was partially offset by an increase in CPE
maintenance revenue which occurred as a result of higher levels of one-time non-
recurring maintenance charges for cancellations of maintenance contracts.

  Costs of revenues

     Cost of network management services. Cost of network management services
increased 21%, from $8.9 million in the six months ended September 30, 2000 to
$10.8 million in the six months ended September 30, 2001, representing 54% of
network management services revenues in the six months ended September 30, 2000
and 59% of such revenues in the six months ended September 30, 2001. The dollar
and percentage 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 20%,
from $4.5 million in the six months ended September 30, 2000 to $3.6 million in
the six months ended September 30, 2001, representing 71% of equipment and other
revenues in the six months ended September 30, 2000 and 69% of such revenues in
the six months ended September 30, 2001. The decrease in dollars was due to
reduced costs of equipment sales resulting from the decrease in equipment sales.
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 10%, from $1.6 million in the
six months ended September 30, 2000 to $1.7 million in the six months ended
September 30, 2001, representing 7% of total revenues in the six months ended
September 30, 2000 and September 30, 2001. The increase in dollars 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. During the current year period,
approximately $489,000 of development costs was capitalized to match against
software license fees under a three year agreement.

                                                                              13
<PAGE>

     Selling and marketing. Sales and marketing expenses increased 3%, from $2.9
million in the six months ended September 30, 2000 to $3.0 million in the six
months ended September 30, 2001, representing 13% of total revenues in the six
months ended September 30, 2000 and September 30, 2001. The increase in dollars
was due to increased costs related to the addition of sales and marketing
personnel. This increase was partially offset by decreased spending for
advertising during the six months ended September 30, 2001 as compared to the
six months ended September 30, 2000.

     General and administrative. General and administrative expenses increased
24%, from $1.9 million in the six months ended September 30, 2000 to $2.4 in the
six months ended September 30, 2001, representing 8% of total revenues in the
six months ended September 30, 2000 and 10% of total revenues in the six months
ended September 30, 2001. The increase was due primarily to approximately
$609,000 of additional spending related to rent and operating costs of a
facility that we have leased which will be utilized for anticipated growth in
network management services revenues.

  Other income, net

     Other income, net decreased from $1.8 million in the six months ended
September 30, 2000 to $951,000 in the six months ended September 30, 2001,
representing 8% of total revenues in the six months ended September 30, 2000 and
4% in the six months ended September 30, 2001. The decrease was due to lower
average interest rates and a lower average cash balance for the six months ended
September 30, 2001 compared to the same period in the prior year.

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 during the six month periods
ended September 30, 2000 and September 30, 2001 was $8.0 million and $5.5
million, respectively.

     We used $2.5 million in the six month period ended September 30, 2000 to
purchase capital assets primarily used in the delivery of our network management
services and $4.0 million in the six month period ended September 30, 2001 for
leasehold improvements and to purchase capital assets, including leasehold
improvements, primarily related to the addition of our new facility. We
currently have no material commitments for capital expenditures. We paid
$251,000 during the six month period ended September 30, 2000 and $219,000
during the six month period ended September 30, 2001, toward our lease
obligations for capital equipment. We currently intend to add sales, marketing
and development resources over the remainder of the current fiscal year;
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.

     We used $880,000 during the six months ended September 30, 2001 to
repurchase 135,000 shares of our common stock. We have approval from our Board
of Directors to purchase up to four million shares, including

                                                                              14
<PAGE>

those previously repurchased. Since the inception of the stock repurchase
program, the Company has repurchased 2.9 million shares of its common stock at
an aggregate cost of approximately $21.1 million. 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, 2001, we had $46.0 million in cash and cash
equivalents, $4.8 million in net accounts receivable and $47.8 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, 2001, we had net operating loss carryforwards of
approximately $5.6 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 $361,000 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
69% of our total revenues in the fiscal year ended March 31, 2001 and 64% of our
total revenues for the six months ended September 30, 2001. We anticipate that
sales to AT&T will continue to comprise a substantial percentage of our revenues
in fiscal 2002, but

                                                                              15
<PAGE>

we believe the percentage will continue to decline. 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 in December 2001. We are currently
in negotiations with AT&T to renew these agreements. We cannot assure that we
will reach an agreement on a renewal of these contracts, or that, if we do, the
terms of the renewals will be favorable to us. A substantial adverse deviation
from our current arrangement with AT&T could result in a significant decrease in
revenues generated from our relationship with AT&T which would reduce our total
revenues and profitability and adversely affect our business. In addition, a
number of the orders for services that we provide to AT&T's customers under one
of our curent agreements can be cancelled at anytime upon ninety days notice and
all new orders placed after June 30, 1999 under that agreement can be cancelled
upon twelve months notice. 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 and equipment
        maintenance services from other sources, and we therefore anticipate
        that our revenues from equipment hardware and maintenance 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 often 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. 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.

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.

                                                                              17
<PAGE>

     Our strategy of selling our services primarily through resellers may result
in us having 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, general declines in the levels of new wide area
network, or WAN, installations or other factors that adversely affect sales of
our 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
95% of our recurring network management services revenues in the six months
ended September 30, 2001. 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.

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

                                                                              18
<PAGE>

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
could seriously damage our business.

In order to support our business, we must hire additional information technology
professionals, who are in 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, a major source of
competition is the internal network administration organizations of our end
users and resellers. 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 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;

                                                                              19
<PAGE>

     .  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, tornadoes 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 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.

                                                                              20
<PAGE>

     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

     A consolidated putative class action complaint was filed on February 21,
2001 and is currently pending against the Company and certain of its officers in
the United States District Court for the Western District of Texas, Austin
Division. In re NetSolve Incorporated Securities Litigation, Civil Action No.
A00-CA-591 SS. Plaintiffs seek to represent a class comprised of purchasers of
the Company's common stock between April 18, 2000 and August 18, 2000 ("Class
Period"). They 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 moved to dismiss the complaint on March 8, 2001 for failing to
state a claim under which relief could be granted and for failing to comply with
the pleading requirements of the Private Securities Litigation Reform Act of
1995, 15 U.S.C. (S) 78u-4 et seq.  On August 15, 2001, the District Court
granted this motion in part and denied it in part.  The District Court dismissed
claims against one officer of the Company and dismissed certain of the theories
under which plaintiffs alleged liability against the Company.  However, the
District Court let stand certain of the stated claims against the Company and
certain of its officers.

     The Company and each remaining individual defendant believe that this
lawsuit is meritless and the Company and its officers intend to vigorously
defend themselves in this action.

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. Net proceeds from the
offering in the amount of $21,059,000 have been used to repurchase 2,930,316
shares of the Company's common stock under its stock repurchase program. The
remainder of the proceeds of this offering are

                                                                              21
<PAGE>

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

          10.1  Management Services Purchase and Resale Agreement between
                NetSolve and International Business Machines Corporation,
                effective March 9, 2001+

     (b)  Reports on Form 8-K

          No reports were filed on Form 8-K during the quarter ended September
          30, 2001.

+Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.

                                                                              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 14, 2001                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