<PAGE>

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


                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q


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

               For the quarterly period ended December 31, 1999


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



                        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 February 10, 2000: 14,225,200

                                                                               1
<PAGE>

                            NETSOLVE, INCORPORATED

                                     INDEX



PART I.  FINANCIAL INFORMATION                                            Page
                                                                          ----

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets as of
         March 31, 1999 and December 31, 1999 (unaudited)...............   3

         Condensed Consolidated Statements of Operations for
         the three and nine month periods ended December 31, 1998
         and 1999 (unaudited)...........................................   4

         Condensed Consolidated Statements of Cash Flows for
         the nine month periods ended December 31, 1998 and
         1999 (unaudited)...............................................   5

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

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

PART II. OTHER INFORMATION

Item  2. Changes in Securities and Use of Proceeds

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

Item 6.  Exhibits and Reports on Form 8-K...............................  22

                                                                               2
<PAGE>

PART I.   FINANCIAL INFORMATION
Item 1.   Financial Statements

                            NETSOLVE, INCORPORATED

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)
<TABLE>
<CAPTION>

                                                          March 31,         December 31,
                                                          ---------         ------------
                                                            1999                1999
                                                            ----                ----
<S>                                               <C>                <C>
                                                                            (unaudited)
ASSETS
Current assets:
  Cash and cash equivalents...................            $  2,764             $ 54,447
  Restricted cash.............................                 642                  458
  Certificates of deposit.....................               2,000                  --
  Accounts receivable, net of allowance for
   doubtful accounts of $227 at March 31,
   1999 and $225 at December 31, 1999.........               2,622                5,045
  Inventory...................................                 279                  389
  Prepaid expenses and other assets...........               1,267                2,045
  Deferred tax assets.........................                 --                 2,624
                                                          --------             --------
Total current assets..........................               9,574               65,008

Restricted cash...............................               1,638                  427
Property and equipment:
  Network communications equipment............                  71                   71
  Computer equipment and software.............               2,601                4,864
  Other equipment.............................                 173                  363
  Furniture, fixtures and leasehold
   improvements...............................                 865                1,691
  Equipment held under capital leases.........               3,108                2,032
                                                          --------             --------
                                                             6,818                9,021

  Less accumulated depreciation and
   amortization...............................              (3,571)              (4,769)
                                                          --------             --------
Net property and equipment....................               3,247                4,252
Other Assets..................................                 477                   47
                                                          --------             --------

Total Assets..................................
                                                          $ 14,936             $ 69,734
                                                          ========             ========

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
 STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable............................            $  1,569             $  2,033
  Accrued liabilities.........................               1,914                2,662
  Capital leases obligation...................                 809                  584
                                                          --------             --------
Total current liabilities.....................               4,292                5,279

Capital leases obligation, net of current
 portion......................................               1,027                  482
Redeemable convertible preferred stock,
 $.10 par value; 7,500,000 shares
 authorized;  6,394,727 and 0 issued and
 outstanding at March 31, 1999 and December
 31, 1999, respectively; aggregate
 liquidation preferences of $44,146 at
 March 31, 1999 and $0 at December 31, 1999...              44,146                  --
Stockholders' equity (deficit):
 Common stock, $.01 par value; 25,000,000
  shares authorized; 3,336,444 and
  14,077,598  issued and outstanding at
  March 31, 1999 and December 31, 1999,
  respectively................................                  33                  141
  Additional paid-in capital..................                 --                77,786
  Deferred compensation.......................                 --                  (277)
  Accumulated deficit.........................             (34,562)             (13,677)
                                                          --------             --------
Total stockholders' equity (deficit)..........             (34,529)              63,973
                                                          --------             --------

Total liabilities, redeemable convertible
 preferred stock and stockholders' equity
 (deficit).....................................           $ 14,936             $ 69,734
                                                          ========             ========
</TABLE>
                            See accompanying notes.

                                                                               3
<PAGE>

                             NETSOLVE, INCORPORATED

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

<TABLE>
<CAPTION>
                                                                                                                       Nine Months
                                                                                       Three Months Ended                 Ended
                                                                                          December 31,                 December 31,
                                                                                          ------------                 ------------
                                                                                   1998      1999      1998               1999
                                                                                   ----      ----      ----               ----
                                                                                           (unaudited)                 (unaudited)
<S>                                                                               <C>       <C>       <C>            <C>
Revenues:
 Network management services.......................................               $ 3,335   $ 6,300    $ 8,976           $16,386
 Equipment and other...............................................                 3,557     2,795      9,901            11,077
                                                                                  -------   -------    -------           -------
  Total revenues...................................................                 6,892     9,095     18,877            27,463
Costs of revenues:
 Cost of network management services...............................                 2,098     3,296      5,880             9,101
 Cost of equipment and other.......................................                 2,663     2,047      7,613             8,555
                                                                                  -------   -------    -------           -------
  Total cost of revenues...........................................                 4,761     5,343     13,493            17,656
                                                                                  -------   -------    -------           -------
Gross profit.......................................................                 2,131     3,752      5,384             9,807
Operating expenses:
 Development.......................................................                   364       611      1,269             1,781
 Selling and marketing.............................................                   791     1,129      2,253             3,097
 General and administrative........................................                   511       888      1,564             2,173
 Amortization of deferred compensation.............................                    --        20         --                45
                                                                                  -------   -------    -------           -------
  Total operating expenses.........................................                 1,666     2,648      5,086             7,096
                                                                                  -------   -------    -------           -------
Operating income...................................................                   465     1,104        298             2,711
Other income (expense):
 Interest income...................................................                    71       696        253               839
 Interest expense..................................................                   (71)      (25)      (204)              (91)
 Other, net........................................................                     3        (2)        25                (2)
                                                                                  -------   -------    -------           -------
                                                                                        3       669         74               746
                                                                                  -------   -------    -------           -------
Income from continuing operations before income taxes..............                   468     1,773        372             3,457
Income tax expense (benefit).......................................                     6      (351)         6            (2,557)
                                                                                  -------   -------    -------           -------
Net income from continuing operations..............................                   462     2,124        366             6,014
Discontinued operations:
 Gain on sale of discontinued operations, net of applicable
  income taxes.....................................................                   98        --         98                --
                                                                                  -------   -------    -------           -------
Net income.........................................................               $   560   $ 2,124    $   464           $ 6,014
                                                                                  =======   =======    =======           =======
Dividends on redeemable convertible preferred stock................               $  (630)  $    --    $(1,890)          $(1,260)
                                                                                  -------   -------    -------           -------
Net income (loss) applicable to common stock.......................               $   (70)  $ 2,124    $(1,426)          $ 4,754
                                                                                  =======   =======    =======           =======
Basic net income (loss) per share from:
 Continuing operations.............................................               $ (0.05)  $  0.15    $ (0.46)          $  0.68
 Discontinued operations...........................................                  0.03        --       0.03                --
                                                                                  -------   -------    -------           -------
 Net income (loss).................................................               $ (0.02)  $  0.15    $ (0.43)          $  0.68

Weighted average shares used in basic per share calculation........                 3,298    13,873      3,288             6,995

Diluted net income (loss) per share from:
 Continuing operations.............................................               $ (0.05)  $  0.13    $ (0.46)          $  0.36
 Discontinued operations...........................................                  0.03        --       0.03                --
                                                                                  -------   -------    -------           -------
 Net income (loss).................................................               $ (0.02)  $  0.13    $ (0.43)          $  0.36

Weighted average shares used in diluted per share calculation......                 3,298    16,104      3,288            13,148

Pro forma basic net income per share from:
 Continuing operations.............................................               $  0.05   $  0.15    $  0.04           $  0.54
 Discontinued operations...........................................                  0.01        --       0.01                --
                                                                                  -------   -------    -------           -------
    Net income.....................................................               $  0.06   $  0.15    $  0.05           $  0.54

Pro forma weighted average shares used in basic per share
 calculation.......................................................                 9,692    13,873      9,683            11,204

Pro forma diluted net income per share from:

 Continuing operations.............................................               $  0.04   $  0.13    $  0.03           $  0.46
 Discontinued operations...........................................                  0.01        --       0.01                --
                                                                                  -------   -------    -------           -------
 Net income........................................................               $  0.05   $  0.13    $  0.04           $  0.46

Pro forma weighted average shares used in diluted per share
 calculation.......................................................                11,522    16,104     11,281            13,148
</TABLE>
                            See accompanying notes.

                                                                               4
<PAGE>

                             NETSOLVE, INCORPORATED

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                   Nine Months Ended
                                                                                                      December 31,
                                                                                                      ------------
                                                                                                 1998              1999
                                                                                                 ----              ----
<S>                                                                                    <C>               <C>
                                                                                                  (unaudited)
Cash flows from operating activities:
 Net income..................................................................                  $   464           $ 6,014
 Adjustments to reconcile net income to net cash provided by (used
  in) operating activities:
  Depreciation and amortization..............................................                    1,025             1,242
       Amortization of deferred compensation.................................                       --                45
  Deferred tax assets........................................................                       --            (2,624)
  (Gain) loss on disposition of property and equipment.......................                       (4)                1
  Gain on sale of discontinued operations....................................                      (98)               --
  Change in assets and liabilities:
  Accounts receivable, net...................................................                   (1,164)           (2,423)
  Inventory and prepaid expenses and other assets............................                     (802)             (458)
  Accounts payable...........................................................                      213               464
  Accrued liabilities........................................................                       81               748
                                                                                               -------           -------

Net cash provided by (used in) operating activities..........................                     (285)            3,009
                                                                                               -------           -------

Cash flows from investing activities:
 Proceeds from sale of certificates of deposit...............................                    1,532             2,000
 Transfer of funds from (to) restricted cash.................................                     (634)            1,395
 Purchases of property and equipment.........................................                   (1,448)           (2,248)
 Proceeds from sale of property and equipment................................                        4                --
    Proceeds from sale of discontinued operations............................                       98                --
                                                                                               -------           -------

Net cash provided by (used in) investing activities..........................                     (448)            1,147
                                                                                               -------           -------

Cash flows from financing activities:
    Proceeds from sale of stock...............................................                      --            48,083
 Proceeds from capital lease financing........................................                     846                --
 Payments under capital lease obligations.....................................                    (527)             (770)
 Proceeds from exercise of common stock options and warrants..................                      66               214
                                                                                               -------           -------

Net cash provided by financing activities.....................................                     385            47,527
                                                                                               -------           -------

Net increase (decrease) in cash and cash equivalents...........................                   (348)           51,683
Cash and cash equivalents, beginning of period.................................                  1,333             2,764
                                                                                               -------           -------
Cash and cash equivalents, end of period.......................................                $   985           $54,447
                                                                                               =======           =======

Supplemental disclosure of cash flow information:
 Cash paid for interest........................................................                $   204           $    91
                                                                                               =======           =======
 Income taxes paid.............................................................                $    18           $    33
                                                                                               =======           =======
</TABLE>

                            See accompanying notes.

                                                                               5
<PAGE>

                            NETSOLVE, INCORPORATED

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

 Information with respect to the three and nine months ended December 31, 1998
 and 1999 is unaudited.


1.   Organization and Description of the Company

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

  On September 29, 1999, the Company's common stock began publicly trading in
connection with an initial public offering.  The Company offered 3,530,000
shares of its common stock for net proceeds to the Company of $41.4 million.  At
the commencement of trading on September 29, 1999, each outstanding share of the
Company's redeemable convertible preferred stock was automatically converted
into one share of common stock of the Company, resulting in the issuance of
6,394,727 shares of common stock.  Additionally, on October 28, 1999 the Company
sold an additional 555,000 shares of common stock for net proceeds to the
Company of $6.7 million, pursuant to the exercise of the underwriters'
overallotment option.


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, 1999, which can be found in the Company's registration statement filed
on Form S-1, as amended and declared effective on September 28, 1999 (File No.
333-65691).  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 $85,000 at March 31, 1999
and $98,000 at December 31, 1999.


4.  Earnings Per Share

   The Company's earnings per share data are presented in accordance with SFAS
128, Earnings Per Share. Basic income (loss) per share is computed using the
weighted average number of common shares outstanding. Diluted income (loss) per
share is computed using the weighted average number of common shares outstanding
adjusted for the incremental shares attributed to outstanding securities with
the ability to purchase or convert into common stock. The treasury stock method,
using the average price of the Company's common stock for the period, is applied
to determine dilution from options and warrants. The if-converted method is used
for convertible securities. On a historical basis, potentially dilutive common
stock options and warrants that were excluded from the calculation for the
diluted income (loss) per share because their effect is antidilutive totaled
1,830,000 and 1,598,000 for the three and nine month periods ended December 31,
1998. Historically, for the three and nine month periods ended

                                                                               6
<PAGE>

                            NETSOLVE, INCORPORATED

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1999


December 31, 1998, 6,394,727 shares of convertible preferred stock were excluded
from the calculation of diluted income (loss) per share as their effect is also
antidilutive.

  A reconciliation of the numerators and denominators used in computing per
share net income from continuing operations is as follows:

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

                                      Three months ended    Nine months ended   Three months ended  Nine months ended
                                         December 31,         December 31,         December 31,       December 31,
                                      -------------------  -------------------  ------------------  -----------------
                                        1998       1999      1998       1999      1998      1999     1998      1999
                                      ---------  --------  ---------  --------  --------  --------  -------  --------
<S>                                   <C>        <C>       <C>        <C>       <C>       <C>       <C>      <C>
Numerator:
 Net income from
  continuing operations..........       $  462    $ 2,124   $   366   $ 6,014    $   462   $ 2,124  $   366   $ 6,014
 Dividends on redeemable
  convertible preferred stock....         (630)        --    (1,890)   (1,260)         --        --      --        --
                                        ------    -------   -------   --------    -------   ------- --------  -------

  Numerator for basic and
    diluted net income (loss)
    per share from continuing
    operations..................        $ (168)   $ 2,124   $(1,524)  $ 4,754    $   462   $ 2,124  $   366   $ 6,014
                                        ======    =======   =======   =======    =======   =======  =======   =======
Denominator:
 Denominator for basic net
  income (loss) per share from
  continuing operations--
  weighted average common
  stock outstanding.............         3,298     13,873     3,288     6,995      9,692    13,873    9,683    11,204
 Dilutive common stock
  equivalents--common stock
  options, warrants and
  redeemable convertible
  preferred stock...............            --      2,231        --     6,153      1,830     2,231    1,598     1,944
                                        ------    -------   -------   -------    -------   -------  -------   -------
  Denominator for diluted net
    income (loss) per share
    from continuing
    operations--weighted
    average common stock
    outstanding and dilutive
    common stock
    equivalents..................        3,298     16,104     3,288    13,148     11,522    16,104   11,281    13,148
                                        ======    =======   =======   =======    =======   =======  =======   =======

</TABLE>


                                                                               7
<PAGE>

                            NETSOLVE, INCORPORATED

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1999

5.  Income Taxes

    During the three and nine month periods ended December 31, 1999 management
determined that it was more likely than not that a portion of the previously
reserved deferred tax asset would be realized. Accordingly, the valuation
allowance was reduced by $386,000 and $2.6 million and an income tax benefit was
realized of $386,000  and $2.6 million for the three and nine month periods
ended December 31, 1999, respectively. Additionally, the valuation allowance was
reduced during the three and nine month periods ended December 31, 1999 by
$646,000 and $1,286,000, respectively, due to the utilization of operating
losses which were not previously benefited.

                                                                               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.  Such statements involve known and unknown risks,
uncertainties and other factors that could cause our actual results to differ
materially from the results expressed or implied by such statements, including
general economic and business conditions, conditions affecting the industries
served by us, conditions affecting our customers and suppliers, competition, the
overall market acceptance of the Company's services, and other factors disclosed
in our final prospectus dated September 29, 1999 and this report.  Accordingly,
although we believe that the expectations reflected in such forward-looking
statements are reasonable, there can be no assurance that such expectations will
prove to be correct.

  Any forward-looking statement speaks only as of the date on which such
statement was made, and we do not undertake any obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement was made or to reflect the occurrence of unanticipated
events.  New factors emerge from time to time and it is not possible for us to
predict all of such factors, nor can it 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.


 Revenues

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

  .  Revenues from recurring services represent monthly fees charged to
     resellers or end users for our network management services. Recurring
     network management services revenues are typically based on the number of
     devices under management and are recognized in the period in which the
     services are rendered. In the nine months ended December 31, 1999,
     approximately 59% 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. Non-recurring
     network management services revenues are generally recognized upon
     completion of the assignment or service. For example, we charge fees for
     project implementation services on a per-location basis and we recognize
     revenues associated with these services upon completion of the network
     implementation for a location.

                                                                               9
<PAGE>

  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. Typical contracts
for our services include an initial implementation fee plus a fixed monthly fee
per managed device. Our contracts with end users are generally for terms of 24
to 36 months, although customers may cancel services prior to the end of the
service terms. Cancellations due to reasons other than closings of managed
locations, which to date have not been material, are generally subject to
cancellation fees ranging from 20% to 80% of the recurring charges payable for
the remainder of the service term. Cancellation fees as a percentage of network
management services revenues were less than 1% in each of fiscal years 1997,
1998 and 1999 and the three and nine month periods ended December 31, 1999. We
recognize revenues from cancellation fees on a cash basis unless collection is
assured. Our contracts with resellers typically extend from 12 to 36 months and,
in some cases, require that we continue providing services throughout the term
of the reseller's contract with the end user. In these cases, we continue to
recognize revenues upon performance of the services, even if performance occurs
after the term of the contract with the reseller.

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

  We derive equipment and other revenues from the resale of customer premise
equipment, or CPE, and from the sale of CPE maintenance contracts to our network
management services customers. CPE is networking equipment which usually resides
at the customer's location and includes routers, customer service units or CSUs,
and LAN switches. We utilize CPE produced by Cisco and, to a lesser extent, by
3Com, Bay/Nortel, Paradyne and others. We recognize revenues from the sale of
CPE upon shipment to the end user. However, if the transaction is financed
through our lease financing subsidiary, we recognize the revenues upon sale of
the underlying lease contract on a non-recourse basis. We recognize revenues
from CPE maintenance contracts on a monthly basis as the services are provided.
We only resell CPE to our network management services customers. We expect to
limit discounts on CPE and encourage end users to purchase equipment from other
sources. Further, as an alternative to selling CPE to our resellers, we have
recently amended some of our reseller agreements such that we receive management
fees for ordering CPE and managing CPE inventories for these resellers. Although
we believe some of our customers will continue to purchase CPE from us, our
strategy is to focus on our network management services which generate higher
margins. We therefore anticipate that revenues from CPE sales will decline as we
seek to manage our mix of revenues.

  We currently have a network management services contract with two business
units within AT&T: AT&T Solutions and AT&T Business Network Services. AT&T
accounted for 30% of our total revenues in fiscal year 1997, 52% of our total
revenues in fiscal year 1998, 59% of our total revenues in fiscal year 1999 and
71% of our total revenues for the nine month period ended December 31, 1999. We
anticipate that sales to AT&T will continue to comprise a substantial percentage
of our revenues at least through fiscal year 2000 and it is possible that this
percentage could increase. No other customer accounted for more than 10% of our
revenues in fiscal year 1997, 1998 or 1999 or in the three and nine month
periods ended December 31, 1999.

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

                                                                              10
<PAGE>

Results of Operations

Three months ended December 31, 1998 compared to three months ended December 31,
1999

 Revenues

  Total revenues.   Total revenues increased 32%, from $6.9 million in the three
months ended December 31, 1998 to $9.1 million in the three months ended
December 31, 1999.

  Network management services.   Revenues from network management services
increased 89%, from $3.3 million in the three months ended December 31, 1998 to
$6.3 million in the three months ended December 31, 1999, representing 48% of
total revenues in the three months ended December 31, 1998 and 69% of total
revenues in the three months ended December 31, 1999. Approximately one-half of
the dollar increase was due to increased implementation revenues resulting from
higher volumes of newly installed sites and increased management fees for
ordering and managing CPE for selected resellers.  The remainder of the increase
was due to increased recurring revenues resulting from a growth in the number of
managed devices under contract and increased equipment installation revenue.

  Equipment and other.   Revenues from equipment and other decreased 21%, from
$3.6 million in the three months ended December 31, 1998 to $2.8 million in the
three months ended December 31, 1999.  Revenues from equipment sales decreased
as a result of amendments we have made to some of our reseller agreements
whereby we receive management fees for ordering CPE and managing CPE inventories
for these resellers.  In addition, we expect to limit discounts on CPE and
encourage end users to purchase equipment from other sources.  The decrease in
equipment sales was partially offset by an increase in CPE maintenance revenue
which occurred as a result of an increase in the number of maintenance contracts
in place.


 Costs of revenues

  Cost of network management services.   Cost of network management services
includes salary and other costs of personnel, depreciation of equipment utilized
to manage customer networks, the network management infrastructure utilized to
provide remote network management services, and the costs of third-party
providers of CPE installation services. Cost of network management services is
expensed as incurred. Cost of network management services increased 57%, from
$2.1 million in the three months ended December 31, 1998 to $3.3 million in the
three months ended December 31, 1999, representing 63% of network management
services revenues in the three months ended December 31, 1998 and 52% of such
revenues in the three months ended December 31, 1999. The dollar increase was
due primarily to the addition of personnel to accommodate growth, upgrades to
the network management infrastructure and, to a lesser extent, increased
subcontractor costs related to installation of CPE. 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.

  Cost of equipment and other.   Cost of equipment and other includes the
purchase of CPE from manufacturers and distributors, maintenance contracts
purchased for resale to end users, and capital equipment maintained by us for
replacement of failed units. These costs are expensed in the period the related
revenues are recognized, other than costs associated with capital equipment
maintained by us for the replacement of failed units. The cost of replacement
units is amortized generally over three years, with the unamortized balance
expensed when the replacement unit is used. Cost of equipment and other
decreased 23%, from $2.7 million in the three months ended December 31, 1998 to
$2.0 million in the three months ended December 31, 1999, representing 75% of
equipment and other revenues in the three months ended December 31, 1998 and 73%
of such revenues in the three months ended December 31, 1999. The decrease in
dollars was due to reduced costs of resold equipment resulting from the decrease
in equipment resales.  The percentage decrease was due to increased CPE
maintenance revenue which generally has higher gross margins than equipment
sales.

                                                                              11
<PAGE>

 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 68%, from $364,000 in the three months ended December 31,
1998 to $611,000 in the three months ended December 31, 1999, representing 5% of
total revenues in the three months ended December 31, 1998 and 7% of total
revenues in the three months ended December 31, 1999. The increase in dollars
and as a percentage of total revenues was due to an increase in the number of
software and service development personnel 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 43%, from $791,000 in the
three months ended December 31, 1998 to $1.1 million in the three months ended
December 31, 1999, representing 11% of total revenues in the three months ended
December 31, 1998 and 12% of total revenues in the three months ended December
31, 1999. The increase in dollars and as a percentage of total revenues  was due
to  increased spending for advertising and other promotional activities as well
as costs related to the addition of sales and marketing personnel.

  General and administrative.   General and administrative expenses consist
primarily of expenses related to our human resources, finance and executive
departments. Included in human resources spending is all employee training
sponsored by us, as well as most costs of recruiting and relocating new
employees. General and administrative expenses increased 74%, from $511,000 in
the three months ended December 31, 1998 to $888,000 in the three months ended
December 31, 1999, representing 7% of total revenues in the three months ended
December 31, 1998 and 10% of total revenues in the three months ended December
31, 1999. The dollar and percentage increase was due primarily to additional
spending related to recruiting of new employees and to being a public company.

 Other income, net

  Other income, net consists primarily of interest income earned on our cash
balances, offset by expense from our leases for capital equipment. Other income,
net increased from $3,000 in the three months ended December 31, 1998 to
$669,000 in the three months ended December 31, 1999, representing less than 1%
of total revenues in the three months ended December 31, 1998 and 7% in the
three months ended December 31, 1999.   The increase was primarily due to
interest income earned on the net proceeds received from the Company's initial
public offering.

 Income tax expense (benefit)

  The income tax provision recorded for the three months ended December 31, 1998
was $6,000, compared to a benefit of $351,000 for the three months ended
December 31, 1999. The benefit in the three months ended December 31, 1999 is
attributable to a reduction in the deferred tax asset valuation allowance. In
August, 1999, we determined that a portion of the deferred tax asset, which had
been fully reserved at March 31, 1999, would more likely than not be utilized.
Accordingly, the valuation allowance was reduced.  The valuation allowance was
also reduced during the quarter ended December 31, 1999 due to our determination
that additional previously unbenefited deferred tax assets would more likely
than not be realized.

                                                                              12
<PAGE>

Nine months ended December 31, 1998 compared to nine months ended December 31,
1999

 Revenues

  Total revenues.   Total revenues increased 45%, from $18.9 million in the nine
months ended December 31, 1998 to $27.5 million in the nine months ended
December 31, 1999.

  Network management services.   Revenues from network management services
increased 83%, from $9.0 million in the nine months ended December 31, 1998 to
$16.4 million in the nine months ended December 31, 1999, representing 48% of
total revenues in the nine months ended December 31, 1998 and 60% of total
revenues in the nine months ended December 31, 1999. Approximately one-half of
the dollar increase was due to increased recurring revenues resulting from a
growth in the number of managed devices under contract. The remainder of the
increase was due to increased implementation and installation revenues resulting
from higher volumes of newly installed sites and increased management fees for
ordering and managing  CPE for selected resellers.

  Equipment and other.   Revenues from equipment and other increased 12%, from
$9.9 million in the nine months ended December 31, 1998 to $11.1 million in the
nine months ended December 31, 1999, primarily as a result of an increase in the
number of equipment maintenance contracts in place offset by a slight decrease
in CPE sales.  Revenues from CPE sales decreased slightly as a result of
amendments we have made to some of our reseller agreements whereby we receive
management fees for ordering CPE and managing CPE inventories for these
resellers.  In addition, we expect to limit discounts on CPE and encourage end
users to purchase equipment from other sources.


 Costs of revenues

  Cost of network management services.  Cost of network management services
increased 55%, from $5.9 million in the nine months ended December 31, 1998 to
$9.1 million in the nine months ended December 31, 1999, representing 66% of
network management services revenues in the nine months ended December 31, 1998
and 56% of such revenues in the nine months ended December 31, 1999.  The dollar
increase was due primarily to the addition of personnel to accommodate growth,
upgrades to the network management infrastructure and, to a lesser extent,
increased subcontractor costs related to installation of CPE. 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.

  Cost of equipment and other.   Cost of equipment and other increased 12%, from
$7.6 million in the nine months ended December 31, 1998 to $8.6 million in the
nine months ended December 31, 1999, representing 77% of equipment and other
revenues in both the nine months ended December 31, 1998 and 1999.  The increase
in dollars was primarily due to a higher number of equipment maintenance
contracts in place in the nine months ended December 31, 1999.


 Operating expenses

  Development.   Development expenses increased 40%, from $1.3 million in the
nine months ended December 31, 1998 to $1.8 million in the nine months ended
December 31, 1999, representing 7% of total revenues in the nine months ended
December 31, 1998 and 6% of total revenues in the nine months ended December 31,
1999. 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. The decrease as a
percentage of total revenues was affected by our decision to manage development
spending to a lower level as a percentage of total revenues in the early half of
the current fiscal year.

  Selling and marketing.   Sales and marketing expenses increased 37%, from $2.3
million in the nine months ended December 31, 1998 to $3.1 million in the nine
months ended December 31, 1999, representing 12% of total

                                                                              13
<PAGE>

revenues in the nine months ended December 31, 1998 and 11% of total revenues in
the nine months ended December 31, 1999. The increase in dollars was due to
increased spending for advertising and other promotional activities, including a
planned customer summit. The increase was also caused by the addition of sales
and marketing personnel.

  General and administrative.   General and administrative expenses increased
39%, from $1.6 million in the nine months ended December 31, 1998 to $2.2
million in the nine months ended December 31, 1999, representing 8% of total
revenues in both the nine months ended December 31, 1998 and 1999.  The dollar
increase was due primarily to additional spending related to recruiting of new
employees and to being a public company.


 Other income, net

  Other income, net increased from $74,000 in the nine months ended December 31,
1998 to $746,000 in the nine months ended December 31, 1999, representing less
than 1% of total revenues in the months ended December 31, 1998 and 3% of total
revenues in the nine months ended December 31, 1999.   The increase was
primarily due to interest income earned on the net proceeds received from the
Company's initial public offering.


 Income tax expense (benefit)

  The income tax provision recorded for the nine months ended December 31, 1998
was $6,000, compared to a benefit of $2.6 million for the nine months ended
December 31, 1999. The benefit in the nine months ended December 31, 1999 is
attributable to a reduction in the deferred tax asset valuation allowance. In
August, 1999, we determined that a portion of the deferred tax asset, which had
been fully reserved at March 31, 1999, would more likely than not be utilized.
Accordingly, the valuation allowance was reduced.  The valuation allowance was
also reduced during the quarter ended December 31, 1999 due to our determination
that additional previously unbenefited deferred tax assets would more likely
than not be realized.


Quarterly results of operations

  Although our total revenues have increased in each of the last eleven
quarters, 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 used in operating activities for the nine months ended December 31,
1998 was $285,000. Net cash provided by operating activities for the nine months
ended December 31, 1999 was $3.0 million.

  We used $1.4 million and $2.2 million in the nine month periods ended December
31, 1998 and December 31, 1999 to purchase capital assets primarily used in the
delivery of our network management services. We currently have no material
commitments for capital expenditures. Proceeds from leases of capital equipment
totaled $846,000 for the nine month period ended December 31, 1998 and $0 for
the nine month period ended December 31, 1999.  We paid $527,000 for the nine
month period ended December 31, 1998 and $770,000 for the nine month period

                                                                              14
<PAGE>

ended December 31, 1999, toward our lease obligations for capital equipment. We
intend to continue to add sales, marketing and development resources over the
next 12 months; however, we anticipate that costs associated with sales,
marketing and development initiatives will not materially increase as a
percentage of revenues and will not result in significant uses of working
capital.

  As of December 31, 1999, we had $54.4 million in cash and cash equivalents,
$5.0 million in net accounts receivable and $59.7 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 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 March 31, 1999, we had net operating loss carryforwards of approximately
$17.2 million available to offset future net income for U.S. federal income tax
purposes. These net operating loss carryforwards will expire beginning in 2004
if not utilized. We have alternative minimum tax credit carryforwards of
$231,000 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. We provided a full valuation allowance on the deferred tax
asset at March 31, 1999 because of uncertainty regarding its realization. As of
December 31, 1999, we have reduced the valuation allowance by $3.3 million.  In
determining the appropriate amount of valuation allowance required, we
considered factors such as the history of operating losses, the recent
consecutive quarters of income, future profitability expectations, and the
nature of the deferred tax assets.



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.

                                                                              15
<PAGE>

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 59%
of our total revenues in the fiscal year ended March 31, 1999 and 71% of our
total revenues for the three and nine months ended December 31, 1999.  We expect
sales to AT&T to continue to comprise a substantial percentage of our revenues
at least through fiscal year 2000 and it is possible this percentage could
increase. To the extent we continue to depend on AT&T for a large portion of our
sales, our total revenues will decline materially if AT&T discontinues selling
our services or significantly reduces its sales of our services. We cannot be
sure that we will be successful in reducing our dependence on AT&T in the
future.

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


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

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

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

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

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

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

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

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

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

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

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

                                                                              16
<PAGE>

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

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

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

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


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

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


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

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

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


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>

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


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

  Competitive pressures or other factors that adversely affect sales of our wide
area network, or WAN, management services or that cause significant decreases in
the prices of our WAN management services could significantly limit or reduce
our revenues. Sales of our ProWatch for WANs and similar WAN management services
accounted for 98% of our recurring network management services revenues in the
fiscal year ended March 31, 1999. 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

                                                                              18
<PAGE>

services field. He is our key representative in our relationship with AT&T. We
do not have employment contracts requiring Mr. Tysdal or any of our other
personnel to continue their employment for any period of time, and we do not
maintain key man life insurance on Mr. Tysdal or any of our other personnel. The
loss of the services of Mr. Tysdal would seriously damage our business.


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

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


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

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


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

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

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

  If the market for out-sourced network management services grows as we expect,
we believe this market will become highly competitive. Competition is likely to
increase significantly as new network management services 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, tornados and other natural disasters at our network
     management center;

  .  telecommunications failures;

  .  equipment failures or ''crashes;''

  .  security breaches; and

  .  other potential interruptions.

  Any interruptions could:

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

  .  cause end users to seek damages for losses incurred;

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

  .  damage our reputation for reliable service;

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

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


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

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

                                                                              20
<PAGE>

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

  Our business and financial performance depends to a significant degree upon
our software and other proprietary technology. The software industry has
experienced widespread unauthorized reproduction of software products. We have
no patents. 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.



PART II.   OTHER INFORMATION

Item  2.   Changes in Securities and Use of Proceeds

Use of Proceeds

  The Company's registration statement on Form S-1 (File No. 333-65691) was
declared effective on September 28, 1999.  An offering of the Company's common
stock was commenced on September 29, 1999.  The offering, for which BancBoston
Robertson Stephens Inc. and Thomas Weisel Partners LLC served as managing
underwriters, terminated following the sale of all of the shares offered.  Gross
proceeds of the offering were received by the Company on October 4, 1999 and
October 28, 1999 totaling $53.1 million.  The following offering costs have been
paid through December 31, 1999, none of which were paid to affiliates of the
Company:

     IPO Offering Costs:

         Securities and Exchange Commission filing fee               $   15,267
         Nasdaq National Market listing fee                              86,000
         Printing and engraving expenses                                275,450
         Legal fees and expenses                                        351,118
         Accounting fees and expenses                                   232,568
         Transfer agent and registrar fees                                9,242
         Miscellaneous                                                  335,107
                                                                     ----------
         Total                                                       $1,304,752
                                                                     ==========

     Underwriter discounts, commissions and expenses:                $3,717,350
                                                                     ==========

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

                                                                              21
<PAGE>

Item  6.   EXHIBITS AND REPORTS ON FORM 8-K

      (a)  EXHIBITS

--------------------------------------------------------------------------------
| 27.1 |  Financial Data Schedule.                                             |
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      (b)  Reports on Form 8-K

No reports were filed on Form 8-K during the quarter ended December 31, 1999.

                                                                              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:    February 14, 2000        NETSOLVE, INCORPORATED


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



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

                                                                              23