<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 December 31, 2001

                         Commission File number: 0-24983

                             NetSolve, Incorporated

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

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

                            12331 Riata Trace Parkway

                               Austin, Texas 78727

          (Address of principal executive offices, including zip code)

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

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

      Number of shares outstanding of the issuer's common stock, $.01 par value,
as of February 11, 2002: 12,132,479
================================================================================



<PAGE>



                             NETSOLVE, INCORPORATED

                                      INDEX

PART I.  FINANCIAL INFORMATION                                             Page
                                                                           ----

Item  1. Financial Statements

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

         Condensed Consolidated Statements of Operations for the three
         and nine month periods ended December 31, 2000 and 2001
         (unaudited)......................................................    4

         Condensed Consolidated Statements of Cash Flows for the nine
         month periods ended December 31, 2000 and 2001 (unaudited).......    5

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

Item  2. Management's Discussion and Analysis of Financial Condition and
         Results of Operations............................................   10

Item  3. Quantitative and Qualitative Disclosures About Market Risk.......   22

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings................................................   22

Item  2. Changes in Securities and Use of Proceeds

         Use of proceeds..................................................   23

Item  6. Exhibits and Reports on Form 8-K.................................   23


                                                                               2

<PAGE>


PART I.   FINANCIAL INFORMATION
Item 1.   Financial Statements

                             NETSOLVE, INCORPORATED

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                        (in thousands, except share data)

<TABLE>
<CAPTION>

                                                             3/31/01     12/31/01
                                                             -------     --------
                                                                        (unaudited)
<S>                                                          <C>         <C>
                        ASSETS

Current assets:
    Cash and cash equivalents ............................   $ 45,411    $ 47,054
    Restricted cash ......................................        306         439
    Accounts receivable, net of allowance for doubtful
     accounts of $207 at March 31, 2001 and $205
     at December 31, 2001 ................................      4,013       4,597
    Inventory ............................................         52         123
    Prepaid expenses and other assets ....................      1,314       1,861
    Deferred tax assets ..................................      1,647         343
                                                             --------    --------
Total current assets .....................................     52,743      54,417
Property and equipment:
    Computer equipment and software ......................      9,277      10,145
    Furniture, fixtures and leasehold improvements .......      1,983       5,020
    Equipment held under capital leases ..................      1,343         283
    Other equipment ......................................        393         387
                                                             --------    --------
                                                               12,996      15,835
    Less accumulated depreciation and amortization .......     (7,163)     (7,621)
                                                             --------    --------
Net property and equipment ...............................      5,833       8,214

Other assets .............................................      1,275         399
Deferred tax assets, net of current portion ..............      2,980       3,080
                                                             --------    --------
Total Assets .............................................   $ 62,831    $ 66,110
                                                             ========    ========

         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable .....................................   $    954    $  1,094
    Accrued liabilities ..................................      3,468       3,712
    Deferred revenue .....................................      1,108         837
    Capital lease  obligation ............................        324          72
                                                             --------    --------
Total current liabilities ................................      5,854       5,715

Deferred revenue, net of current portion .................         --       1,074

Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized at March 31, 2001 and
    December 31, 2001; 14,866,318 issued and 12,071,002 outstanding at March 31,
    2001 and 15,062,405 issued and 12,132,089

    outstanding at December 31, 2001 .....................        148         150
Additional paid-in capital ...............................     80,574      81,018
Treasury  stock ..........................................    (20,179)    (21,059)
Deferred compensation ....................................        (69)        (42)
Accumulated deficit ......................................     (3,497)       (746)
                                                             --------    --------
Total stockholders' equity ...............................     56,977      59,321
                                                             --------    --------
Total liabilities and stockholders' equity ...............   $ 62,831    $ 66,110
                                                             ========    ========
</TABLE>

                             See accompanying notes.


                                                                               3

<PAGE>

                             NETSOLVE, INCORPORATED

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

<TABLE>
<CAPTION>

                                                                  Three Months Ended      Nine Months Ended
                                                                 --------------------    --------------------
                                                                 12/31/00    12/31/01    12/31/00    12/31/01
                                                                 --------    --------    --------    --------
                                                                     (unaudited)              (unaudited)
<S>                                                              <C>         <C>         <C>         <C>
Revenues:
  Network management services ................................   $  8,215    $  9,931    $ 24,710    $ 28,222
  Equipment and other ........................................      3,618       2,437       9,958       7,680
                                                                 --------    --------    --------    --------
    Total revenues ...........................................     11,833      12,368      34,668      35,902
Costs of revenues:
  Cost of network management services ........................      5,179       5,800      14,085      16,570
  Cost of equipment and other ................................      2,576       1,607       7,104       5,230
                                                                 --------    --------    --------    --------
    Total cost of revenues ...................................      7,755       7,407      21,189      21,800
                                                                 --------    --------    --------    --------
Gross profit .................................................      4,078       4,961      13,479      14,102
Operating expenses:
  Development ................................................        822       1,007       2,377       2,720
  Selling and marketing ......................................      1,423       1,688       4,299       4,650
  General and administrative .................................        820       1,297       2,720       3,658
  Amortization of deferred compensation ......................          9           9          49          27
                                                                 --------    --------    --------    --------
    Total operating expenses .................................      3,074       4,001       9,445      11,055
                                                                 --------    --------    --------    --------
Operating income .............................................      1,004         960       4,034       3,047
Other income (expense):
  Interest income ............................................        830         268       2,672       1,211
  Interest expense ...........................................        (12)         (2)        (42)         (8)
  Other net ..................................................         10           1          11          16
                                                                 --------    --------    --------    --------
                                                                      828         267       2,641       1,219
                                                                 --------    --------    --------    --------
Income before income taxes ...................................      1,832       1,227       6,675       4,266
Income tax expense ...........................................        678         454       2,470       1,515
                                                                 --------    --------    --------    --------
Net income ...................................................   $  1,154    $    773    $  4,205    $  2,751
                                                                 ========    ========    ========    ========

Basic net income per share ...................................   $   0.09    $   0.06    $   0.30    $   0.23
Weighted average shares used in basic per share calculation ..     12,877      12,125      13,910      12,090

Diluted net income per share .................................   $   0.09    $   0.06    $   0.28    $   0.21

Weighted average shares used in diluted per share calculation      12,910      13,274      15,153      13,206
</TABLE>

                             See accompanying notes.


                                                                               4

<PAGE>


                             NETSOLVE, INCORPORATED

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                              Nine Months Ended
                                                                                 December 31,
                                                                             --------------------
                                                                               2000         2001
                                                                             --------    --------
                                                                                  (unaudited)
<S>                                                                          <C>         <C>
Cash flows from operating activities:
  Net income .............................................................   $  4,205    $  2,751
  Adjustments to reconcile net income to net cash provided by
   operating activities:
    Depreciation and amortization ........................................      1,665       2,424
    Amortization of deferred compensation ................................         49          27
    Deferred tax assets ..................................................      2,337       1,281
    Loss on disposition of property and equipment ........................          4           1
    Change in assets and liabilities:
     Accounts receivable, net ............................................      1,444        (584)
     Inventory and prepaid expenses and other assets .....................        489         258
     Accounts payable ....................................................       (922)        140
     Unearned Income .....................................................        (12)        803
     Accrued liabilities .................................................      1,409         252
                                                                             --------    --------
Net cash provided by operating activities ................................     10,668       7,353
                                                                             --------    --------
Cash flows from investing activities:

  Transfer of funds from (to) restricted cash ............................        306        (133)
  Purchases of property and equipment ....................................     (3,227)     (4,806)
                                                                             --------    --------
Net cash used in investing activities ....................................     (2,921)     (4,939)
                                                                             --------    --------
Cash flows from financing activities:

  Repurchase of common stock..............................................    (17,963)       (880)
  Payments under capital lease obligations ...............................       (380)       (252)
  Proceeds from exercise of common stock options and warrants ............        795         361
                                                                             --------    --------
Net cash used in financing activities ....................................    (17,548)       (771)
                                                                             --------    --------

Net (decrease) increase in cash and cash equivalents .....................     (9,801)      1,643
Cash and cash equivalents, beginning of period ...........................     57,185      45,411
                                                                             --------    --------
Cash and cash equivalents, end of period .................................   $ 47,384    $ 47,054
                                                                             ========    ========
Supplemental disclosure of cash flow information:

  Cash paid for interest .................................................   $     42    $      8
                                                                             ========    ========
  Income taxes paid ......................................................   $    278    $     52
                                                                             ========    ========
</TABLE>

                             See accompanying notes.


                                                                               5

<PAGE>


                             NETSOLVE, INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2001

           Information with respect to the three and nine months ended December
                    31, 2000 and 2001 is unaudited.

1.    Organization and Description of the Company

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

2.    Basis of Presentation

      The quarterly financial information presented herein should be read in
conjunction with the Company's annual financial statements for the year ended
March 31, 2001, which can be found in the Company's annual report filed on Form
10-K, as filed on May 30, 2001 (File No. 000-24983). The accompanying unaudited
interim financial statements reflect all adjustments (which include only normal,
recurring adjustments) that are, in the opinion of management, necessary to
state fairly the results for the periods presented. The results for such periods
are not necessarily indicative of the results to be expected for the full fiscal
year.

3.    Inventory

      Inventory consists of purchased finished goods held for sale to customers.
Inventory is stated at the lower of cost or market with cost determined on a
specific identification basis. Inventory reserves were $59,000 at March 31, 2001
and December 31, 2001.

4.    Earnings Per Share

      The Company's earnings per share data are presented in accordance with
SFAS 128, Earnings Per Share. Basic income per share is computed using the
weighted average number of common shares outstanding. Diluted income per share
is computed using the weighted average number of common shares outstanding
adjusted for the incremental shares attributed to outstanding securities with
the ability to purchase or convert into common stock. The treasury stock method,
using the average price of the Company's common stock for the period, is applied
to determine dilution from options and warrants.


                                                                               6

<PAGE>


                             NETSOLVE, INCORPORATED

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

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

                                   Three months ended   Nine months ended
                                      December 31,        December 31,
                                   ------------------  ------------------
                                     2000      2001      2000      2001
                                   -------   -------   -------   -------

Numerator:

    Net income .................   $ 1,154   $   773   $ 4,205   $ 2,751
                                   =======   =======   =======   =======

Denominator:

    Denominator for basic net
      income per share--
      weighted average common
      stock outstanding ........    12,877    12,125    13,910    12,090
    Dilutive common stock
      equivalents--common stock
      options and warrants .....        33     1,149     1,243     1,116
                                   -------   -------   -------   -------

    Denominator for diluted net
      income per share--weighted
      average common stock
      outstanding and dilutive
      common stock equivalents .    12,910    13,274    15,153    13,206
                                   =======   =======   =======   =======



                                                                               7

<PAGE>


                             NETSOLVE, INCORPORATED

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                December 31, 2001

5.    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. 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. This settlement is subject to approval by the United States
District Court. A hearing on the settlement has not yet been scheduled. Should
this settlement not be approved by the Court, it would 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 ("Class Period").
Plaintiff alleges that the defendants failed to properly disclose certain
commissions, discounts and purported tie-in arrangements related to the
Company's initial public offering. Plaintiff alleges claims under Sections 11
and 15 of the Securities Act against the Company, and plaintiff alleges 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
pre-trial 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, finances, condition, cash flow and results of operations
could be materially adversely affected.

6.    Recent Accounting Pronouncements

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


                                                                               8

<PAGE>

      In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, Business Combinations ("Statement 141"). Statement 141 requires that
all business combinations be accounted for under the purchase method of
accounting. Additionally, certain intangible assets acquired as part of a
business combination must be recognized as separate assets, apart from goodwill.
Statement 141 is effective for all business combinations initiated subsequent to
June 30, 2001. The Company does not expect the adoption of Statement 141 will
have a significant impact on its financial statements.

      Also in July 2001, the Financial Accounting Standards Board issued
Statement No. 142, Goodwill and Other Intangible Assets ("Statement 142").
Statement 142 requires that ratable amortization of goodwill be replaced with
periodic review and analysis of goodwill for possible impairment. Intangible
assets other than goodwill must be amortized over their estimated useful lives.
The provisions of Statement 142 will be effective for fiscal years beginning
after December 15, 2001. Beginning fiscal year 2003, the Company will adopt
Statement 142 and will review its intangible assets and goodwill for impairment
pursuant to this Statement. The Company does not expect the adoption of
Statement 142 will have a significant impact on its financial statements.


                                                                               9

<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, projections, company growth, sales, margin and expenses, and
the drivers behind those trends; our ability to obtain any needed additional
working capital, the amount we use our facilities for anticipated growth in
network management service revenues, trends in sales of network management
services, sales of customer premise equipment, sales deriving from our work
related to Cisco System, Inc.'s AVVID systems, the level of any stock repurchase
we may undertake, payments requested by customers regarding our WAN guarantee,
the amount of any added costs from anticipated new sales, marketing and
development resources we gain, our reliance on resellers, the continued
development of competition, the outcome of pending litigation and revenues
derived from AT&T and other customers.

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

Overview

      We provide network management services that allow enterprises and carriers
to outsource some or all network-specific activities in order to increase
network reliability and up-time, reduce overall network costs, and simplify
timely migration to new technologies. We were incorporated in September 1985 in
the State of Delaware and began operating 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 NetSolve's ProWatch suite of managed network services
worldwide. 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 systems.

      In January 2002, we entered into a new amendment to our agreement with
AT&T relating to the Managed Router Services which accounted for 33% of our
total revenues, 25% of our total network management services revenues and 26% of
our recurring network management services revenues in the quarter ended December
31, 2001. The pricing terms of the new amendment include discounts on our
services for each quarter which we anticipate having an adverse affect on our
revenues. Based on our current financial projections for the 2002 calendar
year, we anticipate that our revenues will decrease as a result of these
discounts by approximately $160,000 for the quarter ended March 31, 2002,
$230,000 for the quarter ended June 30, 2002, $580,000 for the quarter ended
September 30, 2002, and $475,000 for the quarter ending December 31, 2002.

<PAGE>

      We are currently renegotiating the terms of the amendment to our agreement
with AT&T Frame Relay Plus Services. In January 2002, we entered into a letter
agreement with AT&T whereby we effectively extended the term of the original
amendment relating to Frame Relay Plus Services and agreed to continue to
perform these services on the same terms as set forth in such amendment. In
February 2002, we entered into a second letter agreement with AT&T in which we
agreed to continue to provide network management services for new customers and
locations under the existing Frame Relay Plus Services amendment with different
pricing terms until February 22, 2002. As of February 13, 2002, we are
continuing to actively renegotiate the terms of this amendment. We anticipate
that this amendment will be renewed on terms, including pricing terms,
substantially similar to those in the existing amendment. Our Frame Relay
Services accounted for 21% of our total revenues, 27% of our total network
management services revenues, and 20% of our recurring network management
services revenues for the quarter ended December 31, 2001.

   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:

      o     Revenues from recurring services represent monthly fees charged to
            resellers or end users for our network management services, software
            licensing fees, software usage royalties and software maintenance
            fees. Recurring network management services revenues are typically
            based on the number of devices under management and are recognized
            in the period in which the services are rendered. In the nine months
            ended December 31, 2001, approximately 81% of network management
            services revenues were from recurring services.

      o     Non-recurring network management services consist of data network
            design, 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. Non-recurring network management
            services primarily relate to services performed to assist customers
            in implementing new networks. Non-recurring network management
            revenues are also earned when implementing network management
            services for existing networks; however, the level of work and
            related fees are both lower. Non-recurring network management
            services revenues are generally recognized upon completion of the
            assignment or service. For example, we charge fees for project
            implementation services on a per-location or per-device basis and we
            recognize revenues associated with these services upon completion of
            the network implementation for the location or device.

      Our network management services revenues are derived from contracts with
telecommunications carriers, value-added resellers of networking equipment and
services, and enterprises sold to by our direct sales force. Our services
include both initial implementation and project management services for a
one-time fee per location as well as ongoing management services for a fixed
monthly fee per managed device. Network management services revenues also
include software licensing, usage royalties, maintenance fees and professional
fees. Our contracts with end users are generally for terms of 24 to 36 months,
although customers may cancel services prior to the end of the service terms.
Cancellations due to reasons other than closings of managed locations, which to
date have not been material, are generally subject to cancellation fees ranging
from 20% to 80% of the recurring charges payable for the remainder of the
service term. Cancellation fees as a percentage of network management services
revenues were less than 1% in each of fiscal years 2000 and 2001 and in the
three and the nine month periods ended December 31, 2001. We recognize revenues
from cancellation fees on a cash basis unless collection is assured. Our
contracts with resellers typically extend from 12 to 36 months and, in most
cases, require that we continue providing services throughout the term of the
reseller's contract with the end user. In these cases, we continue to recognize
revenues upon performance of the services, even if performance occurs after the
term of the contract with the reseller.

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


                                                                              11

<PAGE>


refunds made under our guarantees or otherwise could have a material adverse
impact on the results of our operations.

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

      We currently have a network management services contract with separate
amendments that cover two primary services with two business units within AT&T:
AT&T Solutions (Managed Router Services) and AT&T Data and Internet Services
(Frame Relay Plus Services). Revenues relating to these services currently
account for 54% of our total recurring network management services revenues with
AT&T. As described in the "Overview" section above, we entered into a new
amendment relating to the Managed Router Services in January 2002. We also
entered into two letter agreements with AT&T which extended the term of the
amendment relating to the Frame Relay Plus Services until February 22, 2002,
while we continue to actively negotiate a new amendment with respect to such
services. AT&T accounted for 71% of our total revenues in fiscal year 2000, 69%
of our total revenues in fiscal year 2001, and 63% of our total revenues for the
nine months ended December 31, 2001. We anticipate that sales to AT&T will
continue to comprise a substantial percentage of our revenues in calendar year
2002, but we believe the percentage will continue to decline. No other customer
accounted for more than 10% of our revenues in fiscal years 2000, 2001 or the
nine months ended December 31, 2001.

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

Results of Operations

Three months ended December 31, 2000 compared to three months ended December 31,
2001

   Revenues

      Total revenues. Total revenues increased 5%, from $11.8 million in the
three months ended December 31, 2000 to $12.4 million in the three months ended
December 31, 2001.

      Network management services. Revenues from network management services
increased 21%, from $8.2 million in the three months ended December 31, 2000 to
$9.9 million in the three months ended December 31, 2001, representing 69% of
total revenues in the three months ended December 31, 2000 and 80% of total
revenues in the three months ended December 31, 2001. The dollar and percentage
increase was primarily due to increased recurring revenues resulting from a
growth in the number of managed devices under contract and to a lesser extent
revenues derived from software licensing fees. This increase was offset slightly
by a decrease in implementation revenues resulting from fewer newly installed
sites and decreased management fees for ordering and managing CPE for selected
resellers.

      Equipment and other. Revenues from equipment and other decreased 33%, from
$3.6 million in the three months ended December 31, 2000 to $2.4 million in the
three months ended December 31, 2001. Revenues from


                                                                              12

<PAGE>


equipment and other sales decreased primarily as a result of lower equipment
sales due to lower demand caused by a general slowdown of corporate spending on
network infrastructures.

   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 12%, from
$5.2 million in the three months ended December 31, 2000 to $5.8 million in the
three months ended December 31, 2001, representing 63% of network management
services revenues in the three months ended December 31, 2000 and 58% in the
three months ended December 31, 2001. The dollar increase was due primarily to
the addition of personnel to accommodate growth and upgrades to the network
management infrastructure. 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 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 38%, from
$2.6 million in the three months ended December 31, 2000 to $1.6 million in the
three months ended December 31, 2001, representing 71% of equipment and other
revenues in the three months ended December 31, 2000 and 66% of such revenues in
the three months ended December 31, 2001. The decrease in dollars was primarily
due to the decrease in equipment sales. The decrease in percentage was due to an
increase in CPE maintenance revenue as a percentage of equipment and other
revenue which generally has higher gross margins than equipment sales.

   Operating expenses

      Development. Development expenses consist primarily of salaries and
related costs of development personnel, including contract programming services.
Development employees are responsible for developing internal software 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 23%, from $822,000 in the three months ended December 31,
2000 to $1.0 million in the three months ended December 31, 2001, representing
7% of total revenues in the three months ended December 31, 2000 and 8% of total
revenues in the three months ended 2001. The increase in dollars and as a
percentage in revenue 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 19%, from $1.4 million in
the three months ended December 31, 2000 to $1.7 million in the three months
ended December 31, 2001, representing 12% of total revenues in the three months
ended December 31, 2000 and 14% of total revenues in the three months ended
December 31, 2001. The increase in dollars and as a percentage of revenue was
due to increased costs related to the addition of sales and marketing personnel.
This increase was partially offset by decreased spending for advertising during
the three months ended December 31, 2001 as compared to the three months ended
December 31, 2000.

      General and administrative. General and administrative expenses consist
primarily of expenses related to our human resources, finance and executive
departments. Included in human resources spending is a majority of costs of
recruiting and relocating new employees. General and administrative expenses
increased 58%, from $820,000 in the three months ended December 31, 2000 to $1.3
million in the three months ended December 31, 2001, representing 7% of total
revenues in the


                                                                              13

<PAGE>


three months ended December 31, 2000 and 10% of total revenues in the three
months ended December 31, 2001. The increase was due primarily to approximately
$438,000 of additional spending related to rent and operating costs of a
facility that we have leased which will be utilized for anticipated growth in
network management services revenues.

   Other income, net

      Other income, net consists primarily of interest income earned on our cash
balances, offset by interest expense from our leases for capital equipment.
Other income, net decreased from $828,000 in the three months ended December 31,
2000 to $267,000 in the three months ended December 31, 2001, representing 7% of
total revenues in the three months ended December 31, 2000 and 2% in the three
months ended December 31, 2001. The decrease was primarily due to lower average
interest rates for the three months ended December 31, 2001 compared to the same
period in the prior year.

Nine months ended December 31, 2000 compared to nine months ended December 31,
2001

   Revenues

      Total revenues. Total revenues increased 4%, from $34.7 million in the
nine months ended December 31, 2000 to $35.9 million in the nine months ended
December 31, 2001.

      Network management services. Revenues from network management services
increased 14%, from $24.7 million in the nine months ended December 31, 2000 to
$28.2 million in the nine months ended December 31, 2001, representing 71% of
total revenues in the nine months ended December 31, 2000 and 79% of total
revenues in the nine months ended December 31, 2001. The dollar increase was
primarily due to increased recurring revenues resulting from a growth in the
number of managed devices under contract and to a lesser extent revenues derived
from software licensing fees. The increase in recurring revenues was partially
offset by a decrease in implementation revenues. Implementation revenues
decreased in the current year period versus the prior year because a higher
percentage of new devices placed under management in the current year were in
existing networks which are charged at a lower rate per device. A significant
portion of the existing networks implemented in the current year period was
related to the acquisition of the Comdisco customer base which had no
implementation revenues.

      Equipment and other. Revenues from equipment and other decreased 23%, from
$10.0 million in the nine months ended December 31, 2000 to $7.7 million in the
nine months ended December 31, 2001. Revenues from equipment and other sales
decreased primarily as a result of lower equipment sales due to lower demand
caused by a general slowdown of corporate spending on network infrastructures.

   Costs of revenues

      Cost of network management services. Cost of network management services
increased 18%, from $14.1 million in the nine months ended December 31, 2000 to
$16.6 million in the nine months ended December 31, 2001, representing 57% of
network management services revenues in the nine months ended December 31, 2000
and 59% of such revenues in the nine months ended December 31, 2001. The dollar
and percentage increase was due primarily to the addition of personnel to
accommodate growth and upgrades to the network management infrastructure.

      Cost of equipment and other. Cost of equipment and other decreased 26%,
from $7.1 million in the nine months ended December 31, 2000 to $5.2 million in
the nine months ended December 31, 2001, representing 71% of equipment and other
revenues in the nine months ended December 31, 2000 and 68% of such revenues in
the nine months ended December 31, 2001. The decrease in dollars was due to
reduced costs of equipment sales


                                                                              14

<PAGE>


resulting from the decrease in equipment sales. The percentage decrease was due
to increased CPE maintenance revenue which generally has higher gross margins
than equipment sales.

   Operating expenses

      Development. Development expenses increased 14%, from $2.4 million in the
nine months ended December 31, 2000 to $2.7 million in the nine months ended
December 31, 2001, representing 7% of total revenues in the nine months ended
December 31, 2000 and 8% of total revenues in the nine months ended December 31,
2001. The increase in dollars and as a percentage of total revenues was due to
an increase in the number of software and service development personnel and
outside contractors devoted to the development and enhancement of network
management tools and our network management services.

      Selling and marketing. Sales and marketing expenses increased 8%, from
$4.3 million in the nine months ended December 31, 2000 to $4.7 million in the
nine months ended December 31, 2001, representing 12% of total revenues in the
nine months ended December 31, 2000 and 13% of total revenues in the nine months
ended December 31, 2001. The increase in dollars and as a percentage of revenue
was due to increased costs related to the addition of sales and marketing
personnel. This increase was partially offset by decreased spending for
advertising during the nine months ended December 31, 2001 as compared to the
nine months ended December 31, 2000.

      General and administrative. General and administrative expenses increased
35%, from $2.7 million in the nine months ended December 31, 2000 to $3.7 in the
nine months ended December 31, 2001, representing 8% of total revenues in the
nine months ended December 31, 2000 and 10% of revenue in the nine months ended
December 31, 2001. The increase was due primarily to approximately $1.0 million
of additional spending related to rent and operating costs of a facility that we
have leased which will be utilized for anticipated growth in network management
services revenues.

   Other income, net

      Other income, net decreased from $2.6 million in the nine months ended
December 31, 2000 to $1.2 million in the nine months ended December 31, 2001,
representing 8% of total revenues in the nine months ended December 31, 2000 and
3% in the nine months ended December 31, 2001. The decrease was primarily due to
lower average interest rates for the nine months ended December 31, 2001
compared to the same period in the prior year.

Quarterly results of operations

      Results of operations have varied from quarter to quarter. Accordingly, we
believe that period-to-period comparisons of results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Our operating results may fluctuate as a result of many factors,
including our ability to renew or retain existing end-user and reseller
relationships (including our ability to renew our agreement with AT&T related to
Frame Relay Plus services, which, unless renewed, will expire on February 22,
2002), the cost of introducing new service offerings and the profitability of
such offerings, and the level and nature of competition. Further, we may be
unable to adjust spending rapidly enough to compensate for any significant
fluctuations in the number of new managed devices implemented in a given period.
Any significant shortfall in the number of new managed devices could therefore
seriously damage our business. Finally, there can be no assurance that we will
be profitable in the future or, if we are profitable, that our levels of
profitability will not vary significantly between quarters.

Liquidity and capital resources

      Net cash provided by operating activities for the nine months ended
December 31, 2000 was $10.7 million and $7.4 million for the nine months ended
December 31, 2001.

      We used $3.2 million in the nine month period ended December 31, 2000 to
purchase capital assets primarily used in the delivery of our network management
services and $4.8 million in the nine month period ended


                                                                              15

<PAGE>


December 31, 2001 to purchase capital assets, including 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 $380,000 for the nine
month period ended December 31, 2000 and $252,000 for the nine month period
ended December 31, 2001, toward our lease obligations for capital equipment.

      We used $880,000 during the nine months ended December 31, 2001 to
repurchase 135,000 shares of our common stock. We have approval from our Board
of Directors to purchase up to four million shares, including those previously
repurchased. Since the inception of the stock repurchase program, the Company
has repurchased 2.9 million shares of its common stock at an aggregate cost of
approximately $21.1 million. The extent and timing of any repurchases will
depend on market conditions and other business considerations. Repurchased
shares may be held in treasury for general corporate purposes, including for use
in connection with the Company's stock option plans, or may be retired.

      As of December 31, 2001, we had $47.1 million in cash and cash
equivalents, $4.6 million in net accounts receivable and $48.7 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, stock buy back program and any potential
future acquisitions for at least 12 months. Our current cash balances are kept
in short-term, investment-grade, interest-bearing securities pending their use.
In the event our plans or assumptions change or prove to be inaccurate, or if we
consummate any unplanned acquisitions of businesses or assets, we may be
required to seek additional sources of capital. Sources of additional capital
may include public and private equity and debt financings, sales of nonstrategic
assets and other financing arrangements.

      As of December 31, 2001, we had net operating loss carryforwards of
approximately $5.8 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 had alternative minimum tax credit
carryforwards of $350,000 which do not expire. We had foreign tax credit
carryforwards of $100,000 which 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.

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:

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

      o     renew the Frame Relay Plus Services contract amendment with AT&T,
            which, unless renewed, will expire on February 22, 2002;

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

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

      o     develop and sell other network management services; and



                                                                              16

<PAGE>


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

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

      Sales to AT&T, which resells our services to its customers, accounted for
69% of our total revenues in the fiscal year ended March 31, 2001 and 63% of our
total revenues for the nine months ended December 31, 2001. We anticipate that
sales to AT&T will continue to comprise a substantial percentage of our revenues
in calendar year 2002, 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 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.

      The term of our contract amendment with AT&T relating to Frame Relay Plus
services has been extended by the terms of a letter agreement until February 22,
2002, and we are currently renegotiating the terms of this amendment. Failure to
renew this amendment at all or failure to renew the amendment on favorable terms
would seriously damage our business. We cannot assure you that this amendment
will be renewed or, that if renewed, that such agreement will contain favorable
terms. The discounted pricing terms included in the renewed amendment with AT&T
relating to our Managed Router Services will have an adverse affect on our
revenues.

      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
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 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:

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

      o     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;

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

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

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

      o     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


                                                                              17

<PAGE>


      o     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, resulting in a decrease in our stock price. You should not
rely on our quarterly results of operations to predict our future performance.

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

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

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

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

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

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

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


                                                                              18

<PAGE>


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

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

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

      Competitive pressures, general declines in the levels of new wide area
network, or WAN, installations or other factors that adversely affect sales of
our WAN management services or that cause significant decreases in the prices of
our WAN management services could significantly limit or reduce our revenues.
Sales of our ProWatch for WANs and similar WAN management services accounted for
94% of our recurring network management services revenues in the nine months
ended December 31, 2001. Likewise, a substantial portion of our nonrecurring
network management services and equipment resale revenues depend on the
successful sale of these WAN management services. We expect that these WAN
management services will continue to generate substantially all of our revenues
for the foreseeable future. Our financial performance therefore depends directly
on continued market acceptance of our WAN management services, as well as our
ability to introduce enhanced versions of these services that make these
services more efficient and economical.

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

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

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

      o     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
Internet Protocol telephony systems, 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.


                                                                              19

<PAGE>


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

      Our ability to build our business and compete effectively depends to a
significant degree on the skills, experience and efforts of our executive
officers, including Craig S. Tysdal, our president and chief executive officer.
Mr. Tysdal has led us during our transition from our data transport business to
the network management services field. He is a 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 could seriously damage
our business.

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

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

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

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

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

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

      We face competition from different sources. Currently, a major source of
competition is the internal network administration organizations of our end
users and resellers. These organizations may have developed tools and
methodologies to manage their network processes and may be reluctant to adopt
applications offered by third parties like us.

      If the market for out-sourced network management services grows as we
expect, we believe this market will become highly competitive. Competition is
likely to increase significantly as new network management services companies
enter the market and current competitors expand their service and product lines.
Many of these potential competitors are likely to enjoy substantial competitive
advantages, including:


                                                                              20

<PAGE>


    o   larger technical staffs;

    o   more established sales channels;

    o   more software development experience;

    o   greater name recognition; and

    o   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
at a separate geographic location. In order to operate without interruption, we
must guard against:

      o     power outages, fires, tornadoes and other natural disasters at our
            network management center;

      o     telecommunications failures;

      o     equipment failures or "crashes;"

      o     security breaches; and

      o     other potential interruptions.

      Any interruptions could:

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

      o     cause end users to seek damages for losses incurred;

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

      o     damage our reputation for reliable service;

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

      o     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


                                                                              21

<PAGE>


functional advantages over the equipment and services, also could limit or
reduce our revenues or could force us to incur significant costs attempting to
support other networking equipment and carrier services.

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

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

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

Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

PART II.  OTHER INFORMATION

Item 1.   LEGAL PROCEEDINGS

      A consolidated putative class action complaint was filed on February 21,
2001 and is currently pending against the Company and certain of its officers in
the United States District Court for the Western District of Texas, Austin
Division. In re NetSolve Incorporated Securities Litigation, Civil Action No.
A00-CA-591 SS. Plaintiffs seek to represent a class comprised of purchasers of
the Company's common stock between April 18, 2000 and August 18, 2000 ("Class
Period"). They allege that the defendants engaged in a fraudulent scheme by
issuing false and materially misleading statements regarding the Company's
business during the Class Period.

      The Company moved to dismiss the complaint on March 8, 2001 for failing to
state a claim under which relief could be granted and for failing to comply with
the pleading requirements of the Private Securities Litigation Reform Act of
1995, 15 U.S.C. 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 reached a settlement of this action,
which settlement is subject to final approval by the United States District
Court. A hearing on the settlement has not yet been scheduled.

      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


                                                                              22

<PAGE>


comprised of purchasers of the Company's common stock between September 29, 1999
and December 6, 2000 ("Class Period"). Plaintiff alleges that the defendants
failed to properly disclose certain commissions, discounts and purported tie-in
arrangements related to the Company's initial public offering. Plaintiff alleges
claims under Sections 11 and 15 of the Securities Act against the Company, and
plaintiff alleges claims under Sections 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 pre-trial 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).

Item 2.   USE OF PROCEEDS

      The Company's registration statement on Form S-1 (File No. 333-65691) was
declared effective on September 28, 1999. Gross proceeds from the offering were
used to pay offering costs through December 31, 1999. Net proceeds from the
offering in the amount of $21,059,000 have been used to repurchase 2,930,316
shares of the Company's common stock under its stock repurchase program. The
remainder of the proceeds of this offering is temporarily invested in
short-term, investment-grade, interest bearing securities pending their use for
other purposes.

Item  6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a)   EXHIBITS

            None

      (b)   Reports on Form 8-K

            No reports were filed on Form 8-K during the quarter ended December
31, 2001.


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<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, 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



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