<PAGE>

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

                                  UNITED STATES
                       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 June 30, 2002

                         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.)


                            9500 Amberglen Boulevard
                               Austin, Texas 78729
          (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 August 7, 2002:  11,958,187

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

<PAGE>

                             NETSOLVE, INCORPORATED

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

             Condensed Consolidated Balance Sheets as of March 31, 2002 and June 30, 2002 (unaudited).................   3

             Condensed Consolidated  Statements of Operations for the three month periods ended June 30, 2001 and 2002
             (unaudited) .............................................................................................   4

             Condensed Consolidated  Statements of Cash Flows for the three month periods ended June 30, 2001 and 2002
             (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........................................................................................   22

Item  2.     Changes in Securities and Use of Proceeds

             Use of proceeds..........................................................................................   22

Item  4.     Submission of Matters to a Vote of Security Holders......................................................   23
</TABLE>

                                                                               2

<PAGE>

PART I.   FINANCIAL INFORMATION
Item 1.   Financial Statements

                             NETSOLVE, INCORPORATED

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

<TABLE>
<CAPTION>
                                                                                03/31/2002      06/30/2002
                                                                                ----------      ----------
                                                                                                (unaudited)
                                ASSETS
<S>                                                                             <C>             <C>
Current Assets:
        Cash and cash equivalents .........................................     $   47,160      $   49,062
        Restricted cash ...................................................            349             351
        Accounts receivable, net of allowance for doubtful accounts of
                $202 at March 31, 2002 and at June 30, 2002 ...............          6,061           3,976
        Prepaid expenses and other assets .................................          1,786           1,809
        Deferred tax assets ...............................................          2,082           2,082
                                                                                ----------      ----------
Total current assets ......................................................         57,438          57,280

Property and Equipment:
        Computer equipment and software ...................................         10,337          11,337
        Furniture, fixtures and leasehold improvements ....................          5,316           5,354
        Other equipment ...................................................            410             526
                                                                                ----------      ----------
                                                                                    16,063          17,217
        Less accumulated depreciation and amortization ....................         (8,094)         (9,039)
                                                                                ----------      ----------
Net property and equipment ................................................          7,969           8,178

Deferred tax assets, net of current portion ...............................          1,962           1,954
Other assets ..............................................................            492             425
                                                                                ----------      ----------

Total assets ..............................................................     $   67,861      $   67,837
                                                                                ==========      ==========

        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
        Accounts payable ..................................................     $      825      $    1,118
        Accrued liabilities ...............................................          3,975           4,124
        Future rentals for idle facility ..................................          1,602           1,956
        Deferred revenue ..................................................          1,178           1,144
                                                                                ----------      ----------
Total current liabilities .................................................          7,580           8,342

Deferred revenue, net of current portion ..................................            891             711
Future rentals for idle facility, net of current portion ..................          1,048             655

Stockholders' equity:
        Common stock, $0.1 par value; 25,000,000 shares authorized
                at March 31, 2002 and June 30, 2002;
                15,063,591 issued and 12,133,275 outstanding at
                March 31, 2002 and 15,070,203 issued and 11,990,787
                outstanding at June 30, 2002 ..............................            150             150
        Additional paid-in capital ........................................         81,110          81,127
        Treasury stock ....................................................        (21,059)        (22,129)
        Deferred compensation .............................................            (27)            (20)
        Accumulated deficit ...............................................         (1,832)           (999)
                                                                                ----------      ----------
Total stockholders' equity ................................................         58,342          58,129
                                                                                ----------      ----------

Total liabilities and stockholders' equity ................................     $   67,861      $   67,837
                                                                                ==========      ==========
</TABLE>



                            See accompanying notes.

                                                                               3

<PAGE>

                             NETSOLVE, INCORPORATED

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

<TABLE>
<CAPTION>
                                                                            Three Months Ended
                                                                        --------------------------
                                                                        06/30/2001      06/30/2002
                                                                        ----------      ----------
                                                                                (unaudited)
<S>                                                                     <C>             <C>
Revenues:
        Network management services ...............................     $    8,636      $   10,291
        Equipment and other .......................................          2,614           2,295
                                                                        ----------      ----------
                Total revenues ....................................         11,250          12,586
                                                                        ----------      ----------

Costs of revenues:
        Network management services ...............................          5,233           5,966
        Equipment and other .......................................          1,780           1,520
                                                                        ----------      ----------
                Total costs of revenues ...........................          7,013           7,486
                                                                        ----------      ----------

Gross profit ......................................................          4,237           5,100

Operating expenses:
        Development ...............................................            803             893
        Selling and marketing .....................................          1,399           1,830
        General and administrative ................................          1,081           1,284
        Amortization of deferred compensation .....................              9               7
                                                                        ----------      ----------
                Total operating expenses ..........................          3,292           4,014
                                                                        ----------      ----------

Operating income ..................................................            945           1,086

Other Income (expense):
        Interest income ...........................................            530             201
        Interest expense ..........................................             (3)              -
        Other, net ................................................             17              15
                                                                        ----------      ----------
                Total other income (expense) ......................            544             216
                                                                        ----------      ----------

Income before income taxes ........................................          1,489           1,302
Income tax expense ................................................            520             469
                                                                        ----------      ----------

Net income ........................................................     $      969      $      833
                                                                        ==========      ==========

Basic net income per share ........................................     $     0.08      $     0.07
Weighted average shares used in basic per share calculation .......         12,039          12,053

Diluted net income per share ......................................     $     0.08      $     0.07
Weighted average shares used in diluted per share calculation .....         12,065          12,801
</TABLE>

                             See accompanying notes.

                                                                               4

<PAGE>

                             NETSOLVE, INCORPORATED

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                   Three Months Ended
                                                                                --------------------------
                                                                                06/30/2001      06/30/2002
                                                                                ----------      ----------
                                                                                        (unaudited)

                                                                             <C>             <C>
Cash flows from operating activities
        Net income .........................................................    $       969     $       833

        Adjustments to reconcile net income to net cash provided by
                operating activities:
                Depreciation and amortization ..............................            754             945
                Amortization of deferred compensation ......................              9               7
                Reduction in future rentals for idle facility ..............              -             (39)
                Change in assets and liabilities
                 Accounts receivable, net ..................................            768           2,085
                 Prepaid expenses and other assets .........................            677              44
                 Deferred tax assets .......................................            475               8
                 Accounts payable ..........................................            605             293
                 Accrued liabilities........................................            326             149
                 Unearned income ...........................................            214            (214)
                                                                                -----------     -----------

Net cash provided by operating activities ..................................          4,797           4,111
                                                                                -----------     -----------

Cash flows from investing activities........................................
        Transfer of funds from restricted cash .............................            141               -
        Purchases of property and equipment ................................         (3,356)         (1,156)
                                                                                -----------     -----------

Net cash (used in) investing activities ....................................         (3,215)         (1,156)
                                                                                -----------     -----------


Cash flows from financing activities
        Repurchase of common stock .........................................           (880)         (1,070)
        Payments under capital lease obligations ...........................           (143)              -
        Proceeds from exercise of common stock options and warrants ........            277              17
                                                                                -----------     -----------
Net cash (used in) financing activities ....................................           (746)         (1,053)
                                                                                -----------     -----------


Net increase in cash and cash equivalents ..................................            836           1,902
Cash and cash equivalents, beginning of period .............................         45,411          47,160
                                                                                -----------     -----------
Cash and cash equivalents, end of period ...................................    $    46,247          49,062
                                                                                ===========     ===========

Supplemental disclosure of cash flow information:
        Cash paid for interest .............................................    $         6               -
                                                                                ===========     ===========
        Income taxes paid ..................................................    $         -               3
                                                                                ===========     ===========
</TABLE>

                             See accompanying notes.

                                                                               5

<PAGE>

                             NETSOLVE, INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2002

              Information with respect to the three months ended June 30, 2001
and 2002 is unaudited.

1.   Organization and Description of the Company

     NetSolve, Incorporated, a Delaware corporation, (the "Company") engages in
the business of providing remote network management services. These services
include network configuration and design, installation and implementation
coordination, fault diagnosis and resolution, and ongoing network management.
The Company also resells data network equipment manufactured by selected leading
suppliers of these products. The Company also licenses its software overseas.
The Company's services are designed to allow its customers 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, 2002, which can be found in the Company's annual report on Form 10-K,
as filed on June 10, 2002 (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.   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)
                                  June 30, 2002

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

                                       Three months ended
                                            June 30,

                                    2001            2002
                                    ----            ----
Numerator:
     Net income..................   $    969        $    833
                                    ========        ========
Denominator:
  Denominator for basic net
    income per share--
    weighted average common
    stock outstanding............     12,039          12,053
  Dilutive common stock
    equivalents--common stock
    options and warrants.........         26             748
                                    --------        --------

  Denominator for diluted net
    income per share--weighted
    average common stock
    outstanding and dilutive
    common stock
    equivalents..................     12,065          12,801
                                    ========        ========

                                                                               7






<PAGE>

                             NETSOLVE, INCORPORATED

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  June 30, 2002

4.  Contingencies

     A consolidated putative class action complaint was filed on February 21,
2001 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.

     On December 17, 2001, the Company and individual defendants reached a
settlement of this action. The plaintiff class will receive $2,750,000 in
connection with the settlement, all of which will be funded by the Company's
insurance carrier. On May 28, 2002, the District Court preliminary certified the
class and approved the settlement. A Settlement Fairness Hearing has been set
for September 13, 2002 before the Honorable Sam Sparks. If this settlement is
not approved by the District Court, it will not then be 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.

     On December 6, 2001, a second putative securities class action complaint
was filed against the Company, certain of its officers and the Company's
underwriters of its initial public offering in the United States District Court
for the Southern District of New York. Woodward v. NetSolve, Inc., 01 CV 11239.
Plaintiff seeks to represent a class comprised of purchasers of the Company's
common stock between September 29, 1999 and December 6, 2000. The plaintiffs
allege that the defendants failed to properly disclose certain commissions,
discounts and purported tie-in arrangements related to the Company's initial
public offering. The plaintiffs allege claims under Sections 11 and 15 of the
Securities Act against the Company, and the plaintiffs allege claims under
Section 11 and 12 of Securities Act, and Section 10 (b) of the Exchange Act,
against the Company's underwriters. This case has been coordinated for pretrial
purposes with over 300 other cases alleging similar claims against other
underwriters and companies. In re Initial Public Offering Securities Litigation,
21 MC 92 (SAS). It is not feasible to predict or determine the final outcome of
this proceeding, and if the outcome were to be unfavorable, the Company's
business, financial condition, cash flow and results of operations could be
materially adversely affected.

                                                                               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, and sales which may be derived from our
work related to Cisco Systems, 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, our reliance on resellers, and the continued
development of competition; the outcome of pending litigation; revenues derived
from AT&T and other customers; our ability to attract and retain a qualified
workforce; our ability to protect our intellectual property rights; and the
impact of changes in accounting rules.

     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 uptime, 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 during 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 selected ProWatch managed network services. The acceptance
of our first software licensing agreement occurred in the quarter ended
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 (IPT).

   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.

                                                                               9

<PAGE>

        Recurring network management services revenues are typically based on a
        fixed monthly fee per customer site or device and are recognized in the
        period in which the services are rendered. For the three months ended
        June 30, 2002, approximately 83% of network management services revenues
        were from recurring services.

     .  Nonrecurring network management services consist primarily of project
        implementation services, equipment installation services, one-time
        project and development assignments that assist resellers in defining
        and creating new network management services and software professional
        fees. Nonrecurring network management services primarily relate to
        services performed to assist customers in implementing new networks.
        Nonrecurring 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. Nonrecurring 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 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 2001 and 2002 and in the
three months ended June 30, 2002. 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 resellers or 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, Visual Networks and others. We
recognize equipment revenues in the period the CPE is shipped to the customer.
However, if the transaction is financed through our lease financing subsidiary,
we recognize the revenues upon sale of the underlying lease contract on a
nonrecourse basis. We recognize revenues from CPE maintenance contracts on a
monthly basis as the services are provided. We generally 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.

                                                                              10

<PAGE>

     We currently have two primary reseller agreements with AT&T, one for
Managed Router Service and one for Managed DSU Service. AT&T accounted for 69%
of our total revenues in fiscal year 2001, 61% of our total revenues in fiscal
year 2002, and 57% of our total revenues in the three months ended June 30,
2002. We anticipate that sales to AT&T will continue to comprise a substantial
percentage of our revenues in fiscal 2003, but believe the percentage will
continue to decline. No other customer accounted for more than 10% of our
revenues in fiscal years 2001, 2002 or the three months ended June 30, 2002.

     In January 2002, we entered into a new amendment to our agreement with AT&T
relating to the Managed Router Services. The services provided under this
amendment in the quarter ended June 30, 2002 accounted for 27% of our total
revenues, 19% of our total network management services revenues and 20% of our
recurring network management services revenues. The pricing terms of the new
amendment include discounts on our services that we estimate will reduce
recurring management revenues by approximately $365,000 for the quarter ending
September 30, 2002 with prices increasing slightly thereafter.

     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 June 30, 2001 compared to three months ended June 30, 2002

   Revenues

     Total revenues. Total revenues increased 12%, from $11.3 million in the
three months ended June 30, 2001 to $12.6 million in the three months ended June
30, 2002.

     Network management services. Revenues from network management services
increased 19%, from $8.6 million in the three months ended June 30, 2001 to
$10.3 million in the three months ended June 30, 2002, representing 77% of total
revenues in the three months ended June 30, 2001 and 82% in the three months
ended June 30, 2002. The dollar and percentage increase was due primarily to
increased recurring revenues resulting from a growth in the number of managed
devices under contract and to a lesser extent increased revenue from software
licensing fees.

     Equipment and other. Revenues from equipment and other decreased 12%, from
$2.6 million in the three months ended June 30, 2001 to $2.3 million in the
three months ended June 30, 2002. This decrease was primarily as a result of a
decrease in CPE maintenance revenue due to fewer equipment 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 14%, from
$5.2 million in the three months ended June 30, 2001 to $6.0 million in the
three months ended June 30, 2002, representing 61% of network management
services revenues in the three months ended June 30, 2001 and 58% in the three
months ended June 30, 2002. The dollar increase was due primarily to the
addition of personnel and network management infrastructure enhancements that
should allow us to scale efficiently in anticipation of continued growth. The
percentage decrease was due primarily to improvements in processes and tools
which have resulted in a higher number of managed devices per operations
employee and to increased software licensing revenues as a percentage of overall
network management services revenues which generally have higher margins than
revenues derived from managing our customers' networks.

                                                                              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 15%, from
$1.8 million in the three months ended June 30, 2001 to $1.5 million in the
three months ended June 30, 2002, representing 68% of equipment and other
revenues in the three months ended June 30, 2001 and 66% of such revenues in the
three months ended June 30, 2002. The decrease in dollars was due to reduced
costs of equipment maintenance which occurred as a result of a decrease in the
number of maintenance contracts in place.

   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 11% from $803,000 in the three months ended June 30, 2001 to
$893,000 in the three months ended June 30, 2002, representing 7% of total
revenues in the three months ended June 30, 2001 and 2002. The increase in
dollars was due to an increase in the number of software and service development
personnel devoted to the development and enhancement of network management tools
and our network management services and increased use of software development
consulting 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 31%, from $1.4 million in
the three months ended June 30, 2001 to $1.8 million in the three months ended
June 30, 2002, representing 12% of total revenues in the three months ended June
30, 2001 and 15% in the three months ended June 30, 2002. The increase in
dollars and as a percentage of revenue was due primarily to increased costs
related to the addition of sales and marketing personnel and additional spending
related to identifying software licensing opportunities overseas.

     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 19%, from $1.1 million in the three months ended June 30, 2001 to $1.3
million in the three months ended June 30, 2002, representing 10% of total
revenues in the three months ended June 30, 2001 and 2002. The dollar increase
was due primarily to approximately $180,000 of additional spending related to
rent and operating costs of our new facility and the addition of general and
administrative personnel. We moved into the new facility at the end of June 2002
in order to consolidate substantially all of our operations into one facility.
As a result, we anticipate that our quarterly costs for facilities which are
included in general and administrative costs will decline by approximately
$450,000 per quarter beginning with the quarter ending September 2002.

   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 decreased from $544,000 in the three months ended June 30,
2001 to $216,000 in the three months ended June 30, 2002, representing 5% of
total revenues in the three months ended June 30, 2001 and 2% in the three
months ended June 30, 2002. The decrease was due to lower average interest rates
for the three months ended June 30, 2002 compared to the same period in the
prior year.

                                                                              12

<PAGE>

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 continue to 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 three month periods
ended June 30, 2001 and June 30, 2002 was $4.8 million and $4.1 million,
respectively.

     We used $3.4 million during the three months ended June 30, 2001 and $1.2
million in the three months ended June 30, 2002 to purchase capital assets which
includes leasehold improvements related to the addition of our new facility and
to purchase capital assets used in the delivery of our network management
services. We currently have no material commitments for capital expenditures. We
paid $143,000 during the three months ended June 30, 2001 toward our lease
obligations for capital equipment. The capital leases matured in the prior
fiscal year and therefore we made no capital lease payments in the three months
ended June 30, 2002. We have no future commitments for capital leases.

     We used $1.1 million during the three months ended June 30, 2002 to
repurchase 149,100 shares of our common stock. We have approval from our Board
of Directors to purchase up to an aggregate of four million shares, including
those previously repurchased. Since the inception of the stock repurchase
program, the Company has repurchased 3.1 million shares of its common stock at
an aggregate price of approximately $22.0 million. The extent and timing of any
additional 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 June 30, 2002, we had $49.1 million in cash and cash equivalents,
$4.0 million in net accounts receivable and $48.9 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/or private equity offerings and debt financings, sales of
nonstrategic assets and other financing arrangements.

     As of June 30, 2002, we had net operating loss carryforwards of
approximately $3.0 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 $245,000 which do not expire. We also have foreign tax credits
of $200,000 that expire beginning in 2006 if not utilized. 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.

                                                                              13

<PAGE>

     As of June 30, 2002, we have no debt or off-balance sheet debt. As of June
30, 2002, we have noncancelable operating lease obligations of approximately
$7.5 million. At June 30, 2002, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, we are not exposed
to any financing, liquidity, market or credit risk that could arise if we were
engaged in such relationships.

Related Party Transactions

     The consolidated balance sheets as of June 30, 2001 and 2002 include in
accounts receivable a $100,000 loan to an officer of the Company. The loan is
represented by a full recourse note, is payable upon default, bears interest at
4.65% per annum and is secured by a security interest in all stock options
granted to the officer by the Company at any time prior to the satisfaction of
the loan and all shares of the Company's common stock issued upon the exercise
of any such options.

Critical Accounting Policies

General

     The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Estimates and assumptions are reviewed periodically. Actual results may differ
from these estimates under different assumptions or conditions.

Revenue Recognition

     Network management services revenues are recognized in the period services
are provided by NetSolve, whether sold directly or through resellers, based upon
rates established by contract. These amounts are adjusted to the extent of any
reserves affecting the realization of these revenues as described below. The
typical contract terms are from 24 to 36 months and provide for one-time
services, consisting primarily of project implementation services at a fixed fee
per customer site or device, as well as recurring services which are provided at
a fixed monthly fee per customer site or device over the life of the contract.
Revenues for project implementation services are recognized upon completion of
the assignment or service, and recurring revenues are recognized on a monthly
basis as the services are performed. Revenue from software licensing
arrangements is deferred and amortized on a straight-line basis over the
licensing agreement's term. Revenue from software royalty fees are based on a
flat fee per device and are recognized monthly. Equipment revenues are
recognized in the period the equipment is shipped to the customer. Equipment
revenues from assets leased by the Company's lease financing subsidiary are
recognized upon the sale of the equipment and the related lease to a third-party
lessor on a nonrecourse basis following installation of the equipment. Other
revenues, which consist primarily of equipment maintenance services, are
recognized in the period services are provided.

Receivables

     We continuously monitor collections and payments from our customers and
maintain allowances for doubtful accounts based upon our historical experience
and any specific customer collection issues that we have identified. While
losses due to bad debt have historically been within our expectations, there can
be no assurance that we will continue to experience the same level of bad debt
losses that we have in the past. In addition, a significant amount

                                                                              14

<PAGE>

of our revenues and accounts receivable are concentrated in AT&T. A significant
change in the liquidity or financial position of AT&T could have a material
adverse impact on the collectability of our accounts receivable and our future
operating results, including a reduction in future revenues and additional
allowances for doubtful accounts.

Availability Reserve

     The Company's remote 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, the Company generally is obligated to refund its WAN management fees
for that month. The Company provides a reserve based on the estimated costs of
these refunds. Historically, guarantee payments have not been significant.

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 history 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;

     .    renew the Frame Relay Plus agreement with AT&T beyond the ordering
            period that currently expires in June 2003;

     .    continue to provide services under the Managed Router Service
            agreement with AT&T after June 2003;

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

     .    develop software to make our principal existing service, ProWatch for
            WANs, as well as other services as they achieve larger volumes, 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
61% of our total revenues in fiscal year 2002 and 57% of our total revenues in
the three months ended June 30, 2002. We anticipate that sales to AT&T will
continue to comprise a substantial percentage of our revenues in fiscal year
2003, but 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, significantly
reduces its sales of our services, fails to renew our two primary agreements
that have ordering periods expiring in June 2003, or cancels orders for services
provided to existing AT&T customers. We cannot be sure that we will be
successful in reducing our dependence on AT&T in the future, or that AT&T will
continue to renew its agreements with us.

                                                                              15

<PAGE>

     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. We cannot assure
that AT&T will continue to sell our services to existing or additional AT&T
customers or continue to utilize our services following the expiration of the
service terms set forth in our agreements with AT&T. A substantial reduction in
our AT&T business from any cause, including those described above, 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 continue encouraging end users to purchase equipment and
            equipment maintenance services from other sources; therefore, we
            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 or an
            unwillingness by our resellers to renew their agreements with us;
            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.

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, and may result in a decrease in our stock price. Quarterly
results of operations should not be relied upon 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.

                                                                              16

<PAGE>

     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 relatively 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 continue to rely on resellers such as data networking
value-added resellers and integrators and, to a lesser extent,
telecommunications carriers to market our services. We must establish and
develop these alternative sales channels in order to increase our revenues and
become consistently profitable. We have a limited history developing these sales
channels, and we have established productive relationships with only a few
resellers. While we have gained additional experience in managing sales through
resellers, we have not yet achieved consistent results from such sales. 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.

     Our strategy of selling our services primarily through resellers may result
in our 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.

                                                                              17

<PAGE>

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
85% of our recurring network management services revenues in the three months
ended June 30, 2002. 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 a significant portion of our revenues for the
foreseeable future. Our financial performance therefore depends directly on
continued market acceptance of our WAN management services and 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, network security services and IP
Telephony, 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. We
cannot assure 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 any member of our
management team without appropriate succession and transition arrangements.

     Our ability to continue to build our business and meet our goals going
forward depends to a significant degree on the skills, experience and efforts of
each member of our management team, including Craig S. Tysdal, our president and
chief executive officer. We do not have employment contracts requiring any of
our personnel, including the members of our management team, to continue their
employment for any period of time, and we do not maintain key man life insurance
on any of our personnel, including our executive officers. The loss of the
expertise of any member of our management team without appropriate succession
and transition arrangements could seriously damage our business.

                                                                              18

<PAGE>

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 outsourced 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;

     . greater name recognition; and

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

                                                                              19


<PAGE>

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

     We must be able to operate our network management infrastructure 24 hours a
day, 365 days a year 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 currently have redundant systems at a separate
geographic location. However, in order to operate without undue risk of
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; and

     . 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 enforcing our intellectual property against infringers or
defending 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 two patents. The steps we have taken may not be adequate to deter
competitors from

                                                                              20

<PAGE>

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.

                                                                              21

<PAGE>

PART II.   OTHER INFORMATION

Item 1.   LEGAL PROCEEDINGS

     A consolidated putative class action complaint was filed on February 21,
2001 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. ss. 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.

     On December 17, 2001, the Company and individual defendants reached a
settlement of this action. The plaintiff class will receive $2,750,000 in
connection with the settlement, all of which will be funded by the Company's
insurance carrier. On May 28, 2002, the District Court preliminary certified the
class and approved the settlement. A Settlement Fairness Hearing has been set
for September 13, 2002 before the Honorable Sam Sparks. If this settlement is
not approved by the District Court, it will not then be 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.

     On December 6, 2001, a second putative securities class action complaint
was filed against the Company, certain of its officers and the Company's
underwriters of its initial public offering in the United States District Court
for the Southern District of New York. Woodward v. NetSolve, Inc., 01 CV 11239.
Plaintiff seeks to represent a class comprised of purchasers of the Company's
common stock between September 29, 1999 and December 6, 2000. The plaintiffs
allege that the defendants failed to properly disclose certain commissions,
discounts and purported tie-in arrangements related to the Company's initial
public offering. The plaintiffs allege claims under Sections 11 and 15 of the
Securities Act against the Company, and the plaintiffs allege claims under
Sections 11 and 12 of the Securities Act, and Section 10 (b) of the Exchange
Act, against the Company's underwriters. This case has been coordinated for
pretrial purposes with over 300 other cases alleging similar claims against
other underwriters and companies. In re Initial Public Offering Securities
Litigation, 21 MC 92 (SAS). It is not feasible to predict or determine the final
outcome of this proceeding, and if the outcome were to be unfavorable, the
Company's business, financial condition, cash flow and results of operations
could be materially adversely affected.

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 $22,129,000 have been used to repurchase 3,079,416
shares of the Company's common stock under its stock repurchase program. The
remainder of the proceeds of this offering is temporarily invested in
short-term, investment-grade, interest bearing securities pending their use for
other purposes.

                                                                              22

<PAGE>

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  NetSolve held its Annual Meeting of Stockholders on July 17, 2002. The
following items were presented to the stockholders with the following results:

               1.  The following directors were elected to serve until the next
annual meeting:

<TABLE>
<CAPTION>
                                                                  Votes Withheld
                          Directors               Votes For         or Against           Abstentions
                                                  ---------         ----------           -----------

                                              <c>              <c>                    <c>
               J. Michael Gullard                11,194,614             52,915              None
               G. Joseph Lueckenhoff              8,921,543          2,325,986              None
               John S. McCarthy                  11,194,614             52,915              None
               Suzanne C. Narducci               10,361,383            886,146              None
               Craig S. Tysdal                    9,861,938          1,385,591              None
               Howard D. Wolfe, Jr.              11,194,614             52,915              None
</TABLE>

                                                                              23


<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:   August 14, 2002              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

                                          By:
                                               /s/ H. Perry Barth
                                               --------------------
                                               H. Perry Barth
                                               Controller and Chief Accounting
                                               Officer

                                                                              24