<PAGE>

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


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

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000


                         Commission file number 0-24983

                             NetSolve, Incorporated

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

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


                           12331 RIATA TRACE PARKWAY
                             AUSTIN, TEXAS    78727
          (Address of principal executive offices, including zip code)


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


  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X]  No [ ]

  Number of shares outstanding of the issuer's common stock, $.01 par value as
of February 12, 2001: 12,230,705
<PAGE>

                             NETSOLVE, INCORPORATED

                                     INDEX

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

<S>        <C>                                                                                                      <C>
           Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31, 2000 (unaudited)..........         3

           Condensed Consolidated Statements of Operations for the three and nine month periods ended December
           31, 1999 and 2000 (unaudited).........................................................................         4

           Condensed Consolidated Statements of Cash Flows for the nine month periods ended December 31, 1999
           and 2000 (unaudited)..................................................................................         5

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

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

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

PART II.   OTHER INFORMATION

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

Item  2.   Changes in Securities and Use of Proceeds

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

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

PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                             NETSOLVE, INCORPORATED

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


<TABLE>
<CAPTION>

                                                    3/31/00          12/31/00
                                                    -------          --------
                                                                    (UNAUDITED)
<S>                                                <C>               <C>
ASSETS
Current assets:
  Cash and cash equivalents....................    $ 57,185          $  47,384
  Restricted cash..............................         395                395
  Accounts receivable, net of allowance for
   doubtful accounts of $219 at March 31, 2000
   and $210 at December 31, 2000...............       4,913              3,469
  Inventory....................................         252                236
  Prepaid expenses and other assets............       2,139              1,701
  Deferred tax assets..........................       3,682              1,345
                                                   --------          ---------
Total current assets...........................      68,566             54,530

Restricted cash................................         306                 --
Property and equipment:
  Computer equipment and software..............       5,696              8,295
  Furniture, fixtures and leasehold                   1,765              1,954
   improvements................................
  Equipment held under capital leases..........       1,701              1,701
  Other equipment..............................         363                664
                                                   --------          ---------
                                                      9,525             12,614
  Less accumulated depreciation and
   amortization................................      (5,230)            (6,761)
                                                   --------          ---------
Net property and equipment.....................       4,295              5,853

Other  Assets..................................          47                 12
Deferred tax assets, net of current portion....       1,305              1,305
                                                   --------          ---------
Total Assets...................................    $ 74,519          $  61,700
                                                   ========          =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.............................    $  2,174          $   1,252
  Accrued liabilities..........................       2,526              3,923
  Capital leases obligation....................         537                409
                                                   --------          ---------
Total current liabilities......................       5,237              5,584

Capital leases obligation, net of current               324                 72
 portion.......................................
Stockholders' equity:
Common stock, $.01 par value;  25,000,000
 shares authorized at March 31, 2000 and
 December 31, 2000; 14,485,586 issued and
 outstanding at March 31, 2000 and
 14,854,083 issued and 12,384,083
 outstanding at December 31, 2000..............         145                148
Additional paid-in capital.....................      77,578             78,240
Treasury Stock.................................          --            (17,963)
Deferred compensation..........................        (257)               (78)
Accumulated deficit............................      (8,508)            (4,303)
                                                   --------          ---------
Total stockholders' equity.....................      68,958             56,044
                                                   --------          ---------
Total liabilities and stockholders' equity.....    $ 74,519          $  61,700
                                                   ========          =========
</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
                                                                              -----------------------   -----------------------
<S>                                                                           <C>          <C>          <C>          <C>
                                                                               12/31/99     12/31/00     12/31/99     12/31/00
                                                                              ---------    ---------    ---------    ---------
                                                                                   (unaudited)               (unaudited)
Revenues:
 Network management services...............................................   $   6,300    $   8,215    $  16,386    $  24,710
 Equipment and other.......................................................       2,795        3,618       11,077        9,958
                                                                              ---------    ---------    ---------    ---------
  Total revenues...........................................................       9,095       11,833       27,463       34,668
Costs of revenues:
 Cost of network management services.......................................       3,296        5,179        9,101       14,085
 Cost of equipment and other...............................................       2,047        2,576        8,555        7,104
                                                                              ---------    ---------    ---------    ---------
  Total cost of revenues...................................................       5,343        7,755       17,656       21,189
                                                                              ---------    ---------    ---------    ---------
Gross profit...............................................................       3,752        4,078        9,807       13,479
Operating expenses:
 Development...............................................................         611          822        1,781        2,377
 Selling and marketing.....................................................       1,129        1,423        3,097        4,299
 General and administrative................................................         888          820        2,173        2,720
 Amortization of deferred compensation.....................................          20            9           45           49
                                                                              ---------    ---------    ---------    ---------
  Total operating expenses.................................................       2,648        3,074        7,096        9,445
                                                                              ---------    ---------    ---------    ---------
Operating income...........................................................       1,104        1,004        2,711        4,034
Other income (expense):
 Interest income...........................................................         696          830          839        2,672
 Interest expense..........................................................         (25)         (12)         (91)         (42)
 Other, net................................................................          (2)          10           (2)          11
                                                                              ---------    ---------    ---------    ---------
                                                                                    669          828          746        2,641
                                                                              ---------    ---------    ---------    ---------
Income before income taxes.................................................       1,773        1,832        3,457        6,675
Income tax expense (benefit)...............................................        (351)         678       (2,557)       2,470
                                                                              ---------    ---------    ---------    ---------
Net income.................................................................   $   2,124    $   1,154    $   6,014    $   4,205
                                                                              ---------    ---------    ---------    ---------
Dividends on redeemable convertible preferred stock........................   $      --    $      --    $  (1,260)   $      --
                                                                              ---------    ---------    ---------    ---------
Net income applicable to common stock......................................   $   2,124    $   1,154    $   4,754    $   4,205
                                                                              =========    =========    =========    =========
Basic net income per share.................................................       $0.15        $0.09        $0.68        $0.30

Weighted average shares used in basic per share calculation................      13,873       12,877        6,995       13,910

Diluted net income per share...............................................       $0.13        $0.09        $0.36        $0.28

Weighted average shares used in diluted per share calculation..............      16,104       12,910       13,148       15,153

Pro forma basic net income per share.......................................       $0.08        $0.09        $0.19        $0.30

Pro forma weighted average shares used in basic per share calculation......      13,873       12,877       11,204       13,910

Pro forma diluted net income per share.....................................       $0.07        $0.09        $0.17        $0.28

Pro forma weighted average shares used in diluted per share calculation....      16,104       12,910       13,148       15,153
</TABLE>

                            See accompanying notes.

                                                                               4
<PAGE>

                             NETSOLVE, INCORPORATED

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                              NINE MONTHS ENDED
                                                                                 DECEMBER 31,
                                                                          --------------------------
<S>                                                                       <C>               <C>
                                                                            1999               2000
                                                                          -------           --------
                                                                                 (unaudited)
Cash flows from operating activities:
 Net income   .....................................................       $ 6,014           $  4,205
 Adjustments to reconcile net income to net cash provided by
 operating activities:
  Depreciation and amortization  ..................................         1,242              1,665
  Amortization of deferred compensation............................            45                 49
  Deferred tax assets  ............................................        (2,624)             2,337
  Loss on disposition of property and equipment  ..................             1                  4
  Change in assets and liabilities:
   Accounts receivable, net  ......................................        (2,423)             1,444
   Inventory and prepaid expenses and other assets  ...............          (458)               489
   Accounts payable  ..............................................           464               (922)
   Accrued liabilities  ...........................................           748             1, 397
                                                                          -------           --------
Net cash provided by operating activities  ........................         3,009             10,668
                                                                          -------           --------
Cash flows from investing activities:
 Proceeds from sale of certificates of deposit  ...................         2,000                 --
 Transfer of funds from restricted cash  ..........................         1,395                306
 Purchases of property and equipment  .............................        (2,248)            (3,227)
                                                                          -------           --------
Net cash provided by (used in) investing activities  ..............         1,147             (2,921)
                                                                          -------           --------
Cash flows from financing activities:
 Proceeds from sale of stock  .....................................        48,083                 --
 Repurchase of common stock  ......................................            --            (17,963)
 Payments under capital lease obligations  ........................          (770)              (380)
 Proceeds from exercise of common stock options and warrants  .....           214                795
                                                                          -------           --------
Net cash provided by (used in) financing activities  ..............        47,527            (17,548)
                                                                          -------           --------
Net increase (decrease) in cash and cash equivalents  .............        51,683             (9,801)
Cash and cash equivalents, beginning of period  ...................         2,764             57,185
                                                                          -------           --------
Cash and cash equivalents, end of period  .........................       $54,447           $ 47,384
                                                                          =======           ========
Supplemental disclosure of cash flow information:
 Cash paid for interest  ..........................................       $    91           $     42
                                                                          =======           ========
 Income taxes paid  ...............................................       $    33           $    278
                                                                          =======           ========
</TABLE>

                            See accompanying notes.

                                                                               5
<PAGE>

                             NETSOLVE, INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 2000

          INFORMATION WITH RESPECT TO THE THREE AND NINE MONTHS ENDED
                   DECEMBER 31, 1999 AND 2000 IS UNAUDITED.

1.   ORGANIZATION AND DESCRIPTION OF THE COMPANY

  NetSolve, Incorporated, a Delaware corporation, (the "Company") engages in the
business of providing enterprise data networking management services within the
U.S. These services include network design, installation and implementation
coordination and ongoing network and security 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
outsource some or all network specific tasks in order to migrate to new
technology, increase network reliability and reduce overall network costs.

2.   BASIS OF PRESENTATION

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

3.   INVENTORY

  Inventory consists of purchased finished goods held for sale to customers.
Inventory is stated at the lower of cost or market with cost determined on a
specific identification basis. Inventory reserves were $98,000 at March 31, 2000
and $86,000 at December 31, 2000.

4.  EARNINGS PER SHARE

   The Company's earnings per share data are presented in accordance with SFAS
128, Earnings Per Share. Basic income per share is computed using the weighted
average number of common shares outstanding. Diluted income per share is
computed using the weighted average number of common shares outstanding adjusted
for the incremental shares attributed to outstanding securities with the ability
to purchase or convert into common stock. The treasury stock method, using the
average price of the Company's common stock for the period, is applied to
determine dilution from options and warrants. The if-converted method is used
for convertible securities. The prior year pro forma amounts have been presented
as if all preferred stock were converted to common shares at the time of the
issuance and all earnings were taxed at the same rate as the nine month period
ended December 31, 2000.

                                                                               6
<PAGE>

                             NETSOLVE, INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               DECEMBER 31, 2000

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

<TABLE>
<CAPTION>
                                                                                      PRO FORMA            PRO FORMA
                                                                                  ------------------   -----------------
                                        THREE MONTHS ENDED   NINE MONTHS ENDED    THREE MONTHS ENDED   NINE MONTHS ENDED
                                           DECEMBER 31,         DECEMBER 31,         DECEMBER 31,        DECEMBER 31,
                                        ------------------   ------------------   ------------------   -----------------
                                            1999      2000      1999       2000       1999      2000      1999      2000
                                         -------   -------   -------    -------    -------   -------   -------   -------
<S>                                     <C>        <C>       <C>        <C>       <C>        <C>       <C>       <C>
Numerator:
    Net income.........................  $ 2,124   $ 1,154   $ 6,014    $ 4,205    $ 1,117   $ 1,154   $ 2,178   $ 4,205
   Dividends on redeemable
      Convertible preferred stock......       --        --    (1,260)        --         --        --        --        --
                                         -------   -------   -------    -------    -------   -------   -------   -------
     Numerator for basic and diluted
      net income per share.............  $ 2,124   $ 1,154   $ 4,754    $ 4,205    $ 1,117   $ 1,154   $ 2,178   $ 4,205
                                         =======   =======   =======    =======    =======   =======   =======   =======
Denominator:
     Denominator for basic net
      income per share--
      weighted average common
      stock outstanding................   13,873    12,877     6,995     13,910     13,873    12,877    11,204    13,910
   Dilutive common stock equivalents--
    common stock options, warrants and
       redeemable convertible
       preferred stock.................    2,231        33     6,153      1,243      2,231        33     1,944     1,243
                                         -------   -------   -------    -------    -------   -------   -------   -------
      Denominator for diluted net
       income per share--weighted
       average common stock
       outstanding and dilutive
       common stock equivalents........   16,104    12,910    13,148     15,153     16,104    12,910    13,148    15,153
                                         =======   =======   =======    =======    =======   =======   =======   =======
</TABLE>

                                                                               7
<PAGE>

                             NETSOLVE, INCORPORATED

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 2000

5.  INCOME TAXES

  During the three and nine month periods ended December 31, 1999, income tax
benefits of $351,000 and $2.6 million, respectively, were recorded.  The benefit
is attributable to a reduction in the deferred tax asset valuation allowance.
Since the valuation allowance against deferred tax assets was completely
eliminated as of March 31, 2000 (resulting in the recording of income tax
benefits), income tax provisions for periods subsequent to March 31, 2000 will
not be offset by similar benefits.  During the three and nine month periods
ended December 31, 2000, income tax provisions of $678,000 and $2.5 million,
respectively, were recorded.

6.  CONTINGENCIES

  A consolidated action, In re NetSolve Incorporated Securities Litigation, is
currently pending against the Company and certain of its officers.  Early
versions of complaints filed in this action alleged that the Company and certain
of its officers violated certain provisions of the federal securities laws,
including Rule 10b-5 under the Securities Exchange Act of 1934, by making false
statements, failing to disclose material information and taking other actions
intending to artificially inflate and maintain the market price of the Company's
common stock during the Class Period of April 18, 2000 to August 18, 2000.  An
Amended and Consolidated complaint, which may make these and other allegations,
is due to be filed by February 19, 2001.  Though this case is at an early stage,
the Company believes this action is without merit and intends to defend itself
vigorously.  However, it is not feasible to predict or determine the final
outcome in this proceeding, and if the outcome were to be unfavorable, the
Company's business, financial condition, cash flows and results of operations
could be materially adversely affected.

7.  RECENT ACCOUNTING PRONOUNCEMENTS

  In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
No. 101), as amended, which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements.  The Company's current
revenue recognition policies and practices are materially consistent with this
statement.  The standard is required to be implemented no later than the fourth
fiscal quarter of fiscal 2001.

  In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended.  This statement requires
companies to record derivatives on the balance sheet as assets or liabilities
measured at fair value.  Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting.  SFAS No. 133  will be effective
for the Company's financial statements for the year ending March 31, 2002.
Management believes that this statement will not have a material impact on the
Company's financial position or results of operation.

                                                                               8
<PAGE>

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

FORWARD-LOOKING STATEMENTS

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

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

OVERVIEW

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

 Revenues

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

  .  Revenues from recurring services represent monthly fees charged to
     resellers or end users for our network management services. Recurring
     network management services revenues are typically based on the number of
     devices under management and are recognized in the period in which the
     services are rendered. In the nine months ended December 31, 2000,
     approximately 68% of network management services revenues were from
     recurring services.

                                                                               9
<PAGE>

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

  Our network management services revenues are derived from contracts with
telecommunications carriers, value-added resellers of networking equipment and
services, and enterprises sold to by our direct sales force. Our services
include both initial implementation and project management services for a one-
time fee per location as well as ongoing management services for a fixed monthly
fee per managed device. Our contracts with end users are generally for terms of
24 to 36 months, although customers may cancel services prior to the end of the
service terms. Cancellations due to reasons other than closings of managed
locations, which to date have not been material, are generally subject to
cancellation fees ranging from 20% to 80% of the recurring charges payable for
the remainder of the service term. Cancellation fees as a percentage of network
management services revenues were less than 1% in each of fiscal years 1999 and
2000 and the three and nine month periods ended December 31, 2000. We recognize
revenues from cancellation fees on a cash basis unless collection is assured.
Our contracts with resellers typically extend from 12 to 36 months and, in some
cases, require that we continue providing services throughout the term of the
reseller's contract with the end user. In these cases, we recognize revenue over
the period we perform services to the end user which is sometimes longer than
the contracted terms we have with the reseller.

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

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

  We currently have a network management services contract with two business
units within AT&T: AT&T Solutions and AT&T Data and Internet Services. AT&T
accounted for 59% of our total revenues in fiscal year 1999, 71% of our total
revenues in fiscal year 2000, and 70% of our total revenues for the nine month
period ended December 31, 2000. We anticipate that sales to AT&T will continue
to comprise a substantial percentage of our revenues at least through calendar
year 2001 and it is possible that this percentage could increase. No other
customer accounted for more than 10% of our revenues in fiscal year 1999 or 2000
or in the three and nine month periods ended December 31, 2000.

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

                                                                              10
<PAGE>

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2000

 Revenues

  Total revenues.   Total revenues increased 30%, from $9.1 million in the three
months ended December 31, 1999 to $11.8 million in the three months ended
December 31, 2000.

  Network management services.   Revenues from network management services
increased 30%, from $6.3 million in the three months ended December 31, 1999 to
$8.2 million in the three months ended December 31, 2000, representing 69% of
total revenues in the three months ended December 31, 1999 and 2000. The dollar
increase was due to increased recurring revenues resulting from a growth in the
number of managed devices under contract.  This increase in recurring revenues
was partially offset by a decrease in implementation revenues resulting from
fewer devices installed during the three months ended December 31, 2000 as
compared to the same period in the prior year.

  Equipment and other.   Revenues from equipment and other increased 29%, from
$2.8 million in the three months ended December 31, 1999 to $3.6 million in the
three months ended December 31, 2000. Revenues from equipment and other sales
increased due to 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
$3.3 million in the three months ended December 31, 1999 to $5.2 million in the
three months ended December 31, 2000, representing 52% of network management
services revenues in the three months ended December 31, 1999 and 63% in the
three months ended December 31, 2000. The dollar and percentage increase was due
primarily to the addition of personnel and network management infrastructure
enhancements that should allow us to scale efficiently going forward in
anticipation of continued growth.

  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 increased 26%, from
$2.0 million in the three months ended December 31, 1999 to $2.6 million in the
three months ended December 31, 2000, representing 73% of equipment and other
revenues in the three months ended December 31, 1999 and 71% of such revenues in
the three months ended December 31, 2000. The increase in dollars was due to
increased CPE maintenance revenues. The percentage decrease was due to increased
CPE maintenance revenues which generally have 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

                                                                              11
<PAGE>

increased 35%, from $611,000 in the three months ended December 31, 1999 to
$822,000 in the three months ended December 31, 2000, representing 7% of total
revenues in the three months ended December 31, 1999 and 2000. The increase in
dollars was due to an increase in the number of software and service development
personnel and outside contractors devoted to the development and enhancement of
network management tools and our network management services.

  Selling and marketing.   Sales and marketing expenses consist primarily of
salaries, commissions, travel and costs associated with creating awareness of
our services. Sales and marketing expenses increased 26%, from $1.1 million in
the three months ended December 31, 1999 to $1.4 million in the three months
ended December 31, 2000, representing 12% of total revenues in the three months
ended December 31, 1999 and 2000. The increase in dollars was due to increased
spending for advertising and other promotional activities as well as cost
related to the addition of sales and marketing personnel.

  General and administrative. General and administrative expenses consist
primarily of expenses related to our human resources, finance and executive
departments. Included in human resources spending is a majority of costs of
recruiting and relocating new employees. General and administrative expenses
decreased 8%, from $888,000 in the three months ended December 31, 1999 to
$820,000 in the three months ended December 31, 2000, representing 10% of total
revenues in the three months ended December 31, 1999 and 7% of total revenues in
the three months ended December 31, 2000. The dollar and percentage decrease was
due primarily to a decrease in spending related to relocating new employees and
our continued focus on managing corporate expenses.

 Other income, net

  Other income, net consists primarily of interest income earned on our cash
balances, offset by interest expense from our leases for capital equipment.
Other income, net increased from $669,000 in the three months ended December 31,
1999 to $828,000 in the three months ended December 31, 2000, representing 7% of
total revenues in the three months ended December 31, 1999 and 2000. The
increase was due to additional cash being invested in securities earning
interest and higher average interest  rates for the three months ended December
31, 2000 compared to the same period in the prior year.

 Income tax expense (benefit)

  The income tax benefit recorded for the three months ended December 31, 1999
was $351,000, compared to a provision of $678,000 for the three months ended
December 31, 2000. The benefit in the three months ended December 31, 1999 is
attributable to a reduction in the deferred tax asset valuation allowance. Since
the valuation allowance against deferred tax assets was completely eliminated as
of March 31, 2000 (resulting in the recording of income tax benefits), income
tax provisions for periods subsequent to March 31, 2000 are no longer offset by
similar benefits.

                                                                              12
<PAGE>

NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
2000

 Revenues

  Total revenues.   Total revenues increased 26%, from $27.5 million in the nine
months ended December 31, 1999 to $34.7 million in the nine months ended
December 31, 2000.

  Network management services.   Revenues from network management services
increased 51%, from $16.4 million in the nine months ended December 31, 1999 to
$24.7 million in the nine months ended December 31, 2000, representing 60% of
total revenues in the nine months ended December 31, 1999 and 71% of total
revenues in the nine months ended December 31, 2000. The majority of the dollar
increase was due to increased recurring revenues resulting from a growth in the
number of managed devices under contract.  The remainder of the increase was due
to increased implementation revenues resulting from higher volumes of newly
installed sites and increased management fees for ordering and managing CPE for
selected resellers.

  Equipment and other.  Revenues from equipment and other decreased 10%, from
$11.1 million in the nine months ended December 31, 1999 to $10.0 million in the
nine months ended December 31, 2000.  Revenues from equipment and other sales
decreased as a result of amendments we have made to some of our reseller
agreements whereby we receive management fees for ordering CPE and managing CPE
inventories for these resellers. The decrease in equipment sales was partially
offset by an increase in CPE maintenance revenue which occurred as a result of
an increase in the number of maintenance contracts in place.

 Costs of revenues

  Cost of network management services.  Cost of network management services
increased 55%, from $9.1 million in the nine months ended December 31, 1999 to
$14.1 million in the nine months ended December 31, 2000, representing 56% of
network management services revenues in the nine  months ended December 31, 1999
and 57% of such revenues in the nine months ended December 31, 2000. The dollar
and percentage increase was due primarily to the addition of personnel and
network management infrastructure enhancements that should allow us to scale
efficiently going forward in anticipation of continued growth.

  Cost of equipment and other. Cost of equipment and other decreased 17%, from
$8.6 million in the nine months ended December 31, 1999 to $7.1 million in the
nine months ended December 31, 2000, representing 77% of equipment and other
revenues in the nine months ended December 31, 1999 and 71% of such revenues in
the nine months ended December 31, 2000. The decrease in dollars was due to
reduced costs of resold equipment resulting from the decrease in equipment
resales.  The decrease in costs of resold equipment was partially offset by an
increase in maintenance costs which occurred as a result of an increase in the
number of maintenance contracts in place.  The percentage decrease was due to
increased CPE maintenance revenue which generally has higher gross margins than
equipment sales.

 Operating expenses

  Development.   Development expenses increased 33%, from $1.8 million in the
nine months ended December 31, 1999 to $2.4 million in the nine months ended
December 31, 2000, representing 6% of total revenues in the nine months ended
December 31, 1999 and 7% of total revenues in the nine months ended December 31,
2000. The increase in dollars and as a percentage of total revenues was due to
an increase in the number of software and service development personnel and
outside contractors devoted to the development and enhancement of network
management tools and our network management services.

  Selling and marketing.   Sales and marketing expenses increased 39%, from $3.1
million in the nine months ended December 31, 1999 to $4.3 million in the nine
months ended December 31, 2000, representing 11% of total

                                                                              13
<PAGE>

revenues in the nine months ended December 31, 1999 and 12% of total revenues in
the nine months ended December 31, 2000. The increase in dollars and as a
percentage of total revenues was due to increased spending for advertising and
other promotional activities as well as costs related to the addition of sales
and marketing personnel.

  General and administrative.   General and administrative expenses increased
25%, from $2.2 million in the nine months ended December 31, 1999 to $2.7 in the
nine months ended December 31, 2000, representing 8% of total revenues in the
nine months ended December 31, 1999 and 2000. The dollar increase was due
primarily to an accrual of $200,000 for legal fees related to the pending class
action securities lawsuits, additional spending related to recruiting and
relocating new employees and to being a public company.

 Other income, net

  Other income, net increased from $746,000 in the nine months ended December
31, 1999 to $2.6 million in the nine months ended December 31, 2000,
representing 3% of total revenues in the nine months ended December 31, 1999 and
8% in the nine months ended December 31, 2000. The increase was primarily due to
interest income earned on the net proceeds received from the Company's initial
public offering.

 Income tax expense (benefit)

  The income tax benefit recorded for the nine months ended December 31, 1999
was $2.6 million, compared to a provision of $2.5 million for the nine months
ended December 31, 2000. The benefit in the nine months ended December 31, 1999
is attributable to a reduction in the deferred tax asset valuation allowance.
Since the valuation allowance against deferred tax assets was completely
eliminated as of March 31, 2000 (resulting in the recording of income tax
benefits), income tax provisions for periods subsequent to March 31, 2000 are no
longer offset by similar benefits.

QUARTERLY RESULTS OF OPERATIONS

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

LIQUIDITY AND CAPITAL RESOURCES

    Net cash provided by operating activities for the nine months ended December
31, 1999 was $3.0 million and $10.7 million for the nine months ended December
31, 2000.

  We used $2.2 million and $3.2 million in the nine month periods ended December
31, 1999 and December 31, 2000 to purchase capital assets primarily used in the
delivery of our network management services. We currently have no material
commitments for capital expenditures. We paid $770,000 for the nine month period
ended December 31, 1999 and $380,000 for the nine month period ended December
31, 2000, toward our lease obligations for capital equipment. We intend to
continue to add sales, marketing and development resources over the next 12

                                                                              14
<PAGE>

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.

  We used $6.2 million during the three months ended December 31, 2000 to
repurchase 886,000 million 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 nearly 2.5 million shares of its common stock at an
aggregate price of approximately $18 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, 2000, we had $47.4 million in cash and cash equivalents,
$3.5 million in net accounts receivable and $48.9 million in working capital. We
believe that our current cash balances, together with cash generated from
operations, will be sufficient to fund our anticipated working capital needs,
capital expenditures, stock buy back program and any potential future
acquisitions for at least 12 months.  Our current cash balances are kept in
short-term, investment-grade, interest-bearing securities pending their use.  In
the event our plans or assumptions change or prove to be inaccurate, or if we
consummate any unplanned acquisitions of businesses or assets, we may be
required to seek additional sources of capital. Sources of additional capital
may include public and private equity and debt financings, sales of nonstrategic
assets and other financing arrangements.

    As of December 31, 2000, we had net operating loss carryforwards of
approximately $8.2 million available to offset future net income for U.S.
federal income tax purposes. These net operating loss carryforwards will expire
beginning in 2007 if not utilized. We have alternative minimum tax credit
carryforwards of $325,000 which do not expire. Our utilization of these net
operating loss and tax credit carryforwards may be subject to a substantial
annual limitation due to the ''change in ownership'' provisions of the Internal
Revenue Code. The annual limitation may result in the expiration of the net
operating losses before utilization.

RISK FACTORS

WE MAY BE UNABLE TO OPERATE PROFITABLY IN THE FUTURE.

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

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

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

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

  .  develop and sell other network management services; and

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

                                                                              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 71%
of our total revenues in the fiscal year ended March 31, 2000 and 69% and 70% of
our total revenues for the three and nine months ended December 31, 2000,
respectively.  We expect sales to AT&T to continue to comprise a substantial
percentage of our revenues at least through calendar year 2001 and it is
possible this percentage could increase. To the extent we continue to depend on
AT&T for a large portion of our sales, our total revenues will decline
materially if AT&T discontinues selling our services or significantly reduces
its sales of our services. We cannot be sure that we will be successful in
reducing our dependence on AT&T in the future.

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

OUR QUARTERLY RESULTS MAY FLUCTUATE AND CAUSE THE PRICE OF OUR COMMON STOCK TO
FALL.

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

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

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

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

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

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

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

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

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

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

                                                                              16
<PAGE>

OUR FUTURE OPERATING RESULTS MAY VARY BY SEASON, WHICH WILL MAKE IT DIFFICULT TO
PREDICT OUR FUTURE PERFORMANCE.

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

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

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

THE MARKET FOR OUR SERVICES IS NEW AND EVOLVING RAPIDLY, AND OUR BUSINESS WILL
BE SERIOUSLY DAMAGED IF THE MARKET DOES NOT DEVELOP AS WE EXPECT.

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

WE MUST ESTABLISH RELATIONSHIPS WITH ADDITIONAL RESELLERS IN ORDER TO INCREASE
OUR REVENUES AND BECOME CONSISTENTLY PROFITABLE.

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

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

                                                                              17
<PAGE>

RESELLER RELATIONSHIPS MAY ADVERSELY AFFECT OUR BUSINESS BY WEAKENING OUR
RELATIONSHIPS WITH END USERS, DECREASING THE STRENGTH OF OUR BRAND NAME AND
LIMITING OUR ABILITY TO SELL SERVICES DIRECTLY TO RESELLERS' CUSTOMERS.

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

ANY MATERIAL DECREASE IN SALES OF OUR WAN MANAGEMENT SERVICES WILL SIGNIFICANTLY
REDUCE OUR TOTAL REVENUES AND ADVERSELY AFFECT OUR BUSINESS.

  Competitive pressures or other factors that adversely affect sales of our wide
area network, or WAN, management services or that cause significant decreases in
the prices of our WAN management services could significantly limit or reduce
our revenues. Sales of our ProWatch for WANs and similar WAN management services
accounted for 95% of our recurring network management services revenues in the
three month period ending December 31, 2000 and 96% in the nine month period
ended December 31, 2000. Likewise, a substantial portion of our nonrecurring
network management services and equipment resale revenues depend on the
successful sale of these WAN management services. We expect that these WAN
management services will continue to generate substantially all of our revenues
for the foreseeable future. Our financial performance therefore depends directly
on continued market acceptance of our WAN management services, as well as our
ability to introduce enhanced versions of these services that make these
services more efficient and economical.

OUR FAILURE TO DEVELOP AND SELL ADDITIONAL SERVICES COULD IMPAIR OUR FINANCIAL
RESULTS AND ADVERSELY AFFECT OUR BUSINESS.

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

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

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

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

                                                                              18
<PAGE>

OUR BUSINESS MAY BE HARMED IF WE LOSE THE SERVICES OF OUR CHIEF EXECUTIVE
OFFICER.

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

IN ORDER TO SUPPORT OUR BUSINESS, WE MUST HIRE ADDITIONAL INFORMATION TECHNOLOGY
PROFESSIONALS, WHO ARE IN EXTREMELY SHORT SUPPLY.

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

WE COULD INCUR SIGNIFICANT COSTS IF WE ARE UNABLE TO RETAIN OUR INFORMATION
TECHNOLOGY PROFESSIONALS.

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

WE CURRENTLY COMPETE MOST DIRECTLY WITH OUR CUSTOMERS' INTERNAL SOLUTIONS, AND
WE EXPECT INCREASING COMPETITION FROM OTHER NETWORK SERVICES COMPANIES.

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

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

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

                                                                              19
<PAGE>

  .  larger technical staffs;

  .  more established sales channels;

  .  more software development experience;

  .  greater name recognition; and

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

IF OUR OPERATIONS ARE INTERRUPTED, WE MAY LOSE CUSTOMERS AND REVENUES.

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

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

  .  telecommunications failures;

  .  equipment failures or "crashes;"

  .  security breaches; and

  .  other potential interruptions.

  Any interruptions could:

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

  .  cause end users to seek damages for losses incurred;

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

  .  damage our reputation for reliable service;

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

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

OUR REVENUES WOULD DECLINE AND OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF THE
NETWORKING EQUIPMENT AND CARRIER SERVICES WE SUPPORT BECOME OBSOLETE OR ARE
OTHERWISE NOT USED BY A LARGE PART OF OUR TARGET MARKET.

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

                                                                              20
<PAGE>

obsolete any of the networking equipment and carrier services that we support,
or that offer significant economic or functional advantages over the equipment
and services, also could limit or reduce our revenues or could force us to incur
significant costs attempting to support other networking equipment and carrier
services.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, AND WE COULD INCUR
SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM INFRINGEMENT OR
CLAIMS OF INFRINGEMENT MADE BY OTHERS.

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

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

PART II.   OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

  A series of complaints were filed in the United States District Court for the
Western District of Texas, Austin Division against the Company and certain of
its officers in September and October 2000. Plaintiffs in each of these cases
sought to represent a class comprised of purchasers of the Company's common
stock between April 18, 2000 and August 18, 2000 ("Class Period").  Those
complaints alleged that the defendants engaged in a fraudulent scheme by issuing
false and materially misleading statements regarding the Company's business
during the Class Period.  Those cases were consolidated into one action, In re
NetSolve Incorporated Securities Litigation, Civil Action No. A00-CA-591 SS. An
Amended and Consolidated Complaint is due to be filed in this case by February
19, 2001.  The Company and each individual defendant believe that this lawsuit
is meritless and the Company and its officers intend to vigorously defend
themselves in this action.

ITEM 2.  USE OF PROCEEDS

  The Company's registration statement on Form S-1 (File No. 333-65691) was
declared effective on September 28, 1999. Gross proceeds from the offering were
used to pay offering costs through December 31, 1999. Net proceeds from the
offering in the amount of $17,963,000 have been used to repurchase 2,470,000
shares of the Company's common stock under its stock repurchase program,
including (a) payment to Craig S. Tysdal, the Company's president and chief
executive officer, in the amount of $1,089,000 for the repurchase of 160,000
shares and (b) payment to two entities in which J. Michael Gullard, chairman of
the Board of Directors, has an indirect beneficial interest, in the aggregate
amount of $1,425,000 for the repurchase of an aggregate 200,000 shares. The
remainder of the proceeds of this offering are temporarily invested in
short-term, investment-grade, interest bearing securities pending their use for
other purposes.

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<PAGE>

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, 2000.

                                                                              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 13, 2001              NETSOLVE, INCORPORATED


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



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

                                                                              23