##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




---

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


(MARK ONE)



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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

OR



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

FOR THE TRANSITION PERIOD FROM
            TO

Commission File Number: 000-23699

VISUAL NETWORKS, INC.

(Exact Name of Registrant as Specified in Its
Charter)


|                                                                                |  |                                               
|------------------------------------------------------------------------------- |  | ----------------------------------------------
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Delaware
	(State or Other Jurisdiction of
	Incorporation or Organization)       |  | 52-1837515
	(IRS Employer
	Identification No.)
|                                                                               
|2092 Gaither Road, Rockville, Maryland
	(Address of Principal Executive Office) |  | 20850
	(Zip Code)                             

Registrants telephone number, including
area code:(301) 296-2300

Securities Registered Pursuant to Section 12(b) of the
Act:

|                                         |  |                       
|---------------------------------------- |  | ----------------------
|                                         |  | Name of Each Exchange 
|Title of Each Class:                     |  | on which Registered:  
|                                         |  |                       
|COMMON STOCK, PAR VALUE
	$0.01 PER SHARE |  | NASDAQ NATIONAL MARKET

Securities Registered Pursuant to Section 12(g) of
the Act:

NONE

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 
[   ]

Documents incorporated by reference: Specified portions of the
Definitive Proxy Statement to be filed with the Commission
pursuant to Regulation 14A in connection with the 2000
Annual Meeting are incorporated herein by reference into Part III
 of this Report. Such proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days
after the Registrants fiscal year ended December 31,
1999.

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K [X].

The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of February 29, 2000 was
 approximately $1,513,500,000.

The number of shares outstanding of the Registrants common
stock, as of March 21, 2000, was 25,036,912 shares of
common stock.



---






---



##### Table of Contents



VISUAL NETWORKS, INC. FORM 10-K

TABLE OF CONTENTS

|              |  |                                                                                        |    |      |    | 
|------------- |  | -------------------------------------------------------------------------------------- | -- | ---- | -- | 
|              |  |                                                                                        |    | Page
|              |  |                                                                                        |    |     
|PART I       
|             
|             
|             
|             
|Item  1.      |  | Business                                                                               |    |      | 1  | 
|             
|             
|             
|             
|              |  | Overview                                                                               |    |      | 1  | 
|             
|             
|             
|             
|              |  | Industry Background                                                                    |    |      | 1  | 
|             
|             
|             
|             
|              |  | Problems Managing Networks Based on IP and the Internet                                |    |      | 3  | 
|             
|             
|             
|             
|              |  | The Visual Networks Solution                                                           |    |      | 5  | 
|             
|             
|             
|             
|              |  | Visual Networks Strategy                                                              |    |      | 5  | 
|             
|             
|             
|             
|              |  | Products                                                                               |    |      | 6  | 
|             
|             
|             
|             
|              |  | Visuals Selling Strategy and Visual UpTime System
	Deployment Models                  |    |      | 9  | 
|             
|             
|             
|             
|              |  | Product Development                                                                    |    |      | 9  | 
|             
|             
|             
|             
|              |  | Customers                                                                              |    |      | 9  | 
|             
|             
|             
|             
|              |  | Sales, Marketing and Support                                                           |    |      | 10 | 
|             
|             
|             
|             
|              |  | Competition                                                                            |    |      | 11 | 
|             
|             
|             
|             
|              |  | Manufacturing                                                                          |    |      | 12 | 
|             
|             
|             
|             
|              |  | Patents and Other Intellectual Property Rights                                         |    |      | 12 | 
|             
|             
|             
|             
|              |  | Employees                                                                              |    |      | 13 | 
|             
|             
|             
|             
|Item  2.      |  | Properties                                                                             |    |      | 13 | 
|             
|             
|             
|             
|Item  3.      |  | Legal Proceedings                                                                      |    |      | 13 | 
|             
|             
|             
|             
|Item  4.      |  | Submission of Matters to a Vote of Security Holders                                    |    |      | 13 | 
|PART II      
|             
|             
|             
|             
|Item  5.      |  | Market for our Common Stock and Related Stockholder Matters                            |    |      | 14 | 
|             
|             
|             
|             
|Item  6.      |  | Selected Consolidated Financial Data                                                   |    |      | 17 | 
|             
|             
|             
|             
|Item  7.      |  | Managements Discussion and Analysis of Financial Condition
	and Results of Operations |    |      | 18 | 
|             
|             
|             
|             
|Item  7A.     |  | Quantitative and Qualitative Disclosure about Market Risk                              |    |      | 30 | 
|             
|             
|             
|             
|Item  8.      |  | Financial Statements and Supplementary Data                                            |    |      | 30 | 
|             
|             
|             
|             
|Item  9.      |  | Changes in and Disagreements with Accountants on Accounting and
	Financial Disclosure  |    |      | 30 | 
|PART III     
|             
|             
|             
|             
|Item  10.     |  | Our Directors and Executive Officers                                                   |    |      | 31 | 
|             
|             
|             
|             
|Item  11.     |  | Executive Compensation                                                                 |    |      | 31 | 
|             
|             
|             
|             
|Item  12.     |  | Security Ownership of Certain Beneficial Owners and Management                         |    |      | 31 | 
|             
|             
|             
|             
|Item  13.     |  | Certain Relationships and Related Transactions                                         |    |      | 31 | 
|PART IV      
|             
|             
|             
|             
|Item  14.     |  | Exhibits, Financial Statement Schedules and Reports on Form 
	 8-K                     |    |      | 31 | 
|             
|             
|             
|             
|Signatures    |  |                                                                                        | 34 |     
|             
|             
|             
|             
|Exhibit Index |  |                                                                                        |    |     

i



---



##### Table of Contents



FORWARD-LOOKING STATEMENTS

IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM
 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
THE SECTION ENTITLED MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
READERS SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER
DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES
 AND EXCHANGE COMMISSION, INCLUDING THE QUARTERLY REPORTS ON
FORM 10-Q TO BE FILED BY THE COMPANY IN 2000. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL REPORT
 ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
RELEASE ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.

ii



---

TABLE OF CONTENTS



|              |                                                                                                |          |  |  |  |  |  | 
|------------- | ---------------------------------------------------------------------------------------------- | -------- |  |  |  |  |  | 
|PART I       
|              | Item 1. Business.                                                                             
|              |                                                                                                | Overview
|              | Industry Background                                                                           
|              | Problems Managing Networks Based on IP and the Internet                                       
|              | The Visual Networks Solution                                                                  
|              | Visual Networks Strategy                                                                     
|              | Products                                                                                      
|              | Visuals Selling Strategy and Visual Uptime System Deployment Strategy                        
|              | Product Development                                                                           
|              | Customers                                                                                     
|              | Sales, Marketing and Support                                                                  
|              | Competition                                                                                   
|              | Manufacturing                                                                                 
|              | Patents and Other Intellectual Property Rights                                                
|              | Employees                                                                                     
|              | Item 2. Properties.                                                                           
|              | Item 3. Legal Proceedings.                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|PART II      
|              | Item 5. Market for Our Common Stock and Related Stockholder Matters.                          
|              | Item 6. Selected Consolidated Financial Data.                                                 
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|              | Item 7A. Quantitative and Qualitative Disclosure About Market Risk.                           
|              | Item 8. Financial Statements and Supplementary Data.                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 
|PART III     
|              | Item 10. Our Directors and Executive Officers of the Company.                                 
|              | Item 11. Executive Compensation.                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management.                      
|              | Item 13. Certain Relationships and Related Transactions.                                      
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.                     
|SIGNATURES   
|EXHIBIT INDEX



---






PART I




Item 1.  Business.




Overview

We design, manufacture and sell service management systems for
corporate networks based on the internet protocol
(IP) and the Internet. Our systems combine
purpose-built software agents placed at key demarcation points in
 the network with centralized software applications for
performance monitoring, troubleshooting and network capacity
planning. Visual UpTime, Visual IP Insight and Visual Internet
Benchmark provide instrumentation for network performance
measurement and analysis that allows service providers to achieve
 the service levels required by their customers and to lower
operating costs associated with IP networks and the Internet. The
 availability of performance monitoring and troubleshooting
instrumentation also allows subscribers to verify service levels
being supplied by their service provider and monitor traffic
traversing networks, a requirement for many subscribers wishing
to use public services to carry mission-critical data traffic. We
 believe that our systems are deployed in configurations managing
 up to 4,500 circuits and 1,500,000 desktop computers.

We believe that we are a worldwide leader in providing service
management systems and we have shipped systems for deployment on
an aggregate of over 80,000 circuits and over 20,000,000
desktops. We have developed relationships with major service
providers such as AT&T Corporation, Sprint/ United Management
 Company, MCI Worldcom, Inc., British Telecommunications,
Concentric Network Corporation, Earthlink Network, Inc., Prodigy
Communications Corporation, Ameritech Corporation, Bell Atlantic,
 Inc., BellSouth Communication Systems, Inc., and GTE
Communication Systems Corporation. These service providers either
 resell our systems to their subscribers or integrate our systems
 into their network infrastructure to enable them to offer
enhanced network service levels. Subscribers deploying our
systems in their IP networks include ABN-AMRO Bank, BP Amoco
p.l.c., Cargill, Inc., Cisco Systems, Inc., Citicorp, Delta Air
Lines, Inc., EDS Electronic Commerce Division, Federal Express
Corporation, Household International, Inc., Intuit Inc., Marriott
 International, Inc., Alcoa, Inc., and Waste Management, Inc. For
 the year ended December 31, 1999, we had consolidated
revenue of approximately $91.7 million.

Vertical Systems Group, a leading industry analyst, estimates
that approximately 830,000 Frame Relay circuits and 48,000 ATM
circuits will be installed worldwide from 2000 through 2002.
GartnerGroup, a leading industry analyst, estimates that the
number of remote users  telecommuters and other mobile
 users  will grow from 30 million today to more
than 100 million by the year 2002. To take advantage of this
 projected growth in these markets, we plan to expand our
relationships with our service provider customers which together
account for the majority of IP network and Internet traffic
worldwide. The percentage of revenue attributable to service
providers increased from approximately 67% of consolidated
revenue for the year ended December 31, 1998, to
approximately 72% of consolidated revenue for the year ended
December 31, 1999. Sprint, AT&T and MCI accounted for
27%, 16% and 13%, respectively, of consolidated revenue for the
year ended December 31, 1998. Sprint, AT&T and MCI
accounted for 25%, 25% and 8%, respectively, of consolidated
revenue for the year ended December 31, 1999.

Our company was incorporated in Maryland in August 1993
under the name Avail Networks, Inc. and reincorporated in
Delaware in December 1994 as Visual Networks, Inc. On
May 15, 1998, we acquired Net2Net Corporation
(Net2Net). On September 30, 1999, we acquired
Inverse Network Technology (Inverse). Both
acquisitions have been accounted for as pooling of interests
transactions. References herein to we and
us refer to Visual Networks, Inc. on a consolidated
basis. Our principal executive offices are located at 2092
Gaither Road, Rockville, Maryland 20850, and our telephone number
 is (301) 296-2300.




Industry Background

Wide Area Network Services
Market

The Wide Area Network, or WAN, services market has grown rapidly
with the increase in computing and the associated data traffic
volumes carried over WANs. WAN services are used to interconnect
the

1



---



##### Table of Contents







| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Proliferation of distributed computing applications such as
	electronic mail, electronic transaction processing, enterprise
	resource planning and inter-enterprise information transfer based
	 on Web technologies;
|
| |  | Deregulation of the telecommunications services industry, which
	has intensified competition and resulted in decreasing prices of
	WAN services;  and                                                                
|
| |  | Continued deployment of high capacity fiber-optic networks and
	the emergence of high bandwidth network access technologies that
	increase the ability to transfer large volumes of electronic
	information.         

Vertical Systems estimates that Frame Relay and ATM service
revenue worldwide was $6.2 billion dollars in 1998 and projects
that it will grow to $16.5 billion in 2002.

WAN Network Deployment

A typical WAN deployment to support distributed computing
environments includes various types of customer premise
equipment, or CPE, owned by the subscriber, deployed at the
subscribers sites and interconnected by the WAN service.
The points at which the subscriber CPE connects to the WAN
service are known as service demarcations (demarcs).
The subscribers are responsible for network performance on the
subscriber side of the demarc, while providers are responsible
for network performance on the provider side of the demarc.

The equipment used for Frame Relay, ATM and IP/Internet services
comprises both the access equipment located at the subscriber
premises and the switches located at the providers central
office. Access equipment includes devices such as digital service
 units/channel service units, or DSU/ CSUs, frame relay access
devices, or FRADs, frame relay cards for routers and ATM access
multiplexers. Vertical Systems projects that the markets for this
 equipment will grow from approximately $1.1 billion in 1998
 to approximately $2.0 billion in 2002. Forrester Research,
a leading industry analyst, estimates that the total Internet
access market will grow from $14.3 billion in 1999 to $35.1
billion in 2001.

WAN Network Architectures

WAN services are provided through two network architectures, time
 division multiplexing, or TDM, and statistical multiplexing. TDM
 services, such as leased-line and integrated services digital
network, or ISDN, rely on architectures which provide dedicated
circuits between computing facilities and provide fixed bandwidth
 regardless of traffic flow. Unless information is continuously
transmitted, the dedicated bandwidth is often idle, resulting in
the inefficient use of expensive bandwidth. The use of dedicated
bandwidth does, however, provide guaranteed throughput and fixed
delay, ensuring high quality of service for all network traffic.
Consequently, TDM services are suitable for the large installed
base of mainframe computing environments running
mission-critical, host-centric applications where the variability
 in traffic volume is low and the traffic volume is relatively
predictable. By contrast, statistical multiplexing technologies
and their derivative services, such as Frame Relay, ATM,
IP/Internet, X.25 and Switched Multimegabit Data Services, or
SMDS, are based on the concept of shared bandwidth which is
dynamically allocated in real time according to prevailing
traffic patterns. As a result of this shared bandwidth, WANs
based on these services can be up to 50% less expensive than WANs
 based on leased-line services for distributed computing
applications. Because bandwidth in the WAN is shared among
multiple subscribers, however, these services are generally
characterized by best efforts throughput and variable
 delay, often resulting in lower quality of service more suitable
 for non-mission-critical distributed computing applications
where the traffic is highly variable and unpredictable.

2



---



##### Table of Contents



WAN services are undergoing a significant shift from TDM
architectures to statistically multiplexed architectures.
Vertical Systems estimates that worldwide revenues for Frame
Relay service, the most widely used service, grew at a compound
annual growth rate of 117% between 1995 and 1997 and will grow at
 a compound annual growth rate of over 25% through the
year 2002. The worldwide number of installed Frame Relay
circuits is projected to grow from approximately 580,000 in 1997
to more than 2 million in 2002. ATM services, which are
characterized by higher capacities and higher speeds, are less
widely offered today but also are projected to experience rapid
growth. The worldwide number of installed ATM circuits is
projected by Vertical Systems to grow from approximately 4,000 in
 1997 to more than 60,000 in 2002. Accordingly, the
U.S. market for Frame Relay and ATM services is expected to
shift from 12% of WAN bandwidth in 1996 to nearly 40% in 2000
(with the majority of growth attributed to Frame Relay services)
while the U.S. market for leased-line services is expected
to decrease from approximately 88% of WAN bandwidth to 60% from
1996 to 2000.

The growth of statistically multiplexed services has resulted in
increased focus by subscribers on WAN service levels, defined by
parameters such as service availability, throughput and delay.
Subscribers have historically been able to tolerate the lower
reliability and quality of service of statistically multiplexed
services because most of the distributed computing applications
supported by these services, including e-mail and file transfer,
were not mission-critical. Today, however, the importance of
distributed computing applications is increasing as enterprises
implement newer mission-critical applications for enterprise
resource planning, transaction processing, work group
collaboration, remote telecommuting, sales force automation and
electronic order entry. Subscribers, therefore, are demanding
that their providers offer, achieve and, increasingly, guarantee
higher service levels.

The proliferation of statistically multiplexed services has also
resulted in increased administrative costs for subscribers as
more network managers manage multiple networks consisting of
leased-line services supporting mission-critical legacy
applications and statistically multiplexed services supporting
recently deployed, distributed computing applications. The high
cost of administering multiple networks coupled with the
attractive pricing of statistically multiplexed services is
driving the need for subscribers to consolidate their
applications onto a single statistically multiplexed WAN. The
migration of mainframe computing environments running
mission-critical host-centric applications onto lower cost
statistically multiplexed services has highlighted the need to
provide higher service levels with such services. This migration
and the proliferation of distributed computing applications have
also generated subscriber demand for providers to offer multiple
classes of service levels. Multiple service levels enable
subscribers to deploy statistically multiplexed WANs that have
service characteristics commensurate with the performance
requirements of their differing computing applications, thereby
optimizing price and performance. Subscriber demand for multiple,
 guaranteed and verified WAN service levels presents challenges
to providers, who must be able to offer these service levels
while maintaining profitability.

The WAN services segment of deregulated telecommunications
markets is intensely competitive and price sensitive, and cost
leadership tends to drive competitive strategies. Providers can
only achieve cost leadership if they can realize economies of
scale. They must also avoid a costly dependence on highly skilled
 personnel for service provisioning and maintenance, a dependence
 that has historically existed for statistically multiplexed
services. Therefore, providers face the challenge of increasing
the manageability of statistically multiplexed services while
simultaneously developing service deployment and operational
models that can satisfy rapid growth requirements and achieve
economies of scale.




Problems Managing Networks Based on IP and the Internet

In leased-line environments, the performance, quality and
maintainability of the service are independent of the volume and
type of traffic running over the service. Accordingly, the
diagnostic and measurement capabilities required to sufficiently
maintain these services are fairly simplistic and are focused
largely on physical transmission characteristics such as bit
error rates or line coding violations. These capabilities are
widely available within the providers facilities and work
in conjunction with simple DSU/ CSUs deployed by the subscribers.
 By contrast, the performance, quality and maintainability of
statistically multiplexed services are highly dependent on the
volume and type of traffic running over the service. This
extensive interplay

3



---



##### Table of Contents





Suspect Service Levels Inhibit Subscriber Acceptance of
Service. Subscribers generally view statistically multiplexed
 services as offering deficient service levels and are therefore
reluctant to run mission-critical applications across
statistically multiplexed WANs. As the demand for higher service
levels and multiple service levels has increased, subscribers and
 providers need a mechanism to measure, verify and improve
service levels at the demarc.

Operational Cost Models are Not Scaleable. The inability
to cost-effectively measure performance at the demarc, and
thereby demonstrate to subscribers the WAN service level being
provided, results in providers requiring many highly skilled
personnel to provision and operate statistically multiplexed
services. This cost is exacerbated by the gap between the demand
for and supply of such personnel. The implication of this model
is that operating costs are driven up and providers WAN
service businesses are not scaleable to the levels required to
generate the economies of scale necessary for cost leadership.
The specific areas of concern are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inefficient Service Provisioning. It is difficult for the
	provider to ascertain if the WAN service is properly deployed
	until the subscribers network has been connected to the
	service and the subscribers applications are operational.
	This often results in multiple dispatches of personnel to the
	subscriber site and extensive interaction with the subscriber for
	 its equipment and applications to be configured properly for the
	 WAN service. At the same time, the provider is typically
	restricted from billing the subscriber for the service until the
	subscribers applications are working properly over the WAN
	service.                                                                                                                                                                                                                                       
|
| |  | Extensive Troubleshooting and High Maintenance. When the
	subscriber applications experience degraded performance,
	subscribers generally assume there is a problem with the WAN
	service supplied by the provider. It can often take days, weeks
	or even months to diagnose the causes of degraded performance and
	 require highly skilled personnel with sophisticated
	instrumentation and diagnostic tools. Although these degraded
	performance conditions are frequently caused by faulty or
	misconfigured subscriber equipment or applications, the service
	provider is forced to expend significant time and effort without
	reimbursement to help the subscriber diagnose the problem.                                                                                                                                                                                           
|
| |  | Inaccurate Network Engineering and Planning. The shared
	bandwidth nature of these WAN services coupled with subscriber
	demand for many classes of service levels increases the
	importance of accurate network planning and design to ensure that
	 the network architecture is optimized for performance and cost.
	If the network is engineered with excess capacity, it may improve
	 the performance of subscriber applications, but it will tend to
	negate the inherent bandwidth efficiencies of statistically
	multiplexed technologies. By contrast, if the network is designed
	 with inadequate capacity, performance will suffer. Successful
	network engineering and planning is dependent on accurate
	historical usage information which, because of the inability of
	traditional equipment to measure traffic at the demarc, is
	difficult to ascertain for these services.

We believe that the potential subscriber demand for statistically
 multiplexed services has been constrained by the inability to
manage and verify service levels. Additionally, we believe that
it will be difficult for service providers to meet the increasing
 demand for statistically multiplexed services without systems
for managing service levels because the labor-intensity of
provisioning and maintaining the service inhibits the
providers ability to scale these WAN services profitably.
As the providers focus shifts to profitability, the growth
in Frame Relay, ATM and IP/Internet services will depend, in
part, on the ability of service providers to implement systems
that can manage service levels, lower operational costs and
increase scalability.

4



---



##### Table of Contents






The Visual Networks Solution

We offer a market-leading family of WAN service level management
systems that combine WAN access functionality with planning,
monitoring and troubleshooting capabilities that enable the
implementation of required service levels while simultaneously
decreasing the costs and complexity of achieving such levels. The
 systems deploy instrumentation for measurement and analysis at
the demarc and provide innovative software applications that
address the historical problems of managing service levels. We
believe that our service level management systems offer to
customers the following benefits:

Increased Confidence in Service Levels. By instrumenting
the demarc, our systems enable providers and subscribers to
accurately measure, report on and improve service levels. These
abilities serve to clarify the relationship between subscriber
and provider, resulting in increased subscriber confidence in
running mission-critical computing applications on statistically
multiplexed services.

Increased Scaleability and Lower Costs of Providers
Operational Model. Our systems can reduce the labor-intensive
 nature of deploying statistically multiplexed services, thereby
decreasing providers costs and increasing their ability to
generate revenues, by enabling the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Rapid and Cost-Effective Service Provisioning. Our systems
	 allow the provider to verify that its service is properly
	provisioned without waiting for the subscriber network or
	applications to be connected and configured. This tends to reduce
	 customer support costs during initiation of service.
	Additionally, it positions the provider to begin billing for the
	service earlier than was previously possible.                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Reduced Need for Troubleshooting. Our systems reduce the
	need for providers to perform troubleshooting by continuously
	monitoring the service performance at the demarc and proactively
	alerting the provider and subscriber to anomalous performance
	characteristics. Such early warnings allow the network operator
	to take corrective action before the performance of any computing
	 application on the network is impaired. Furthermore, since many
	of the anomalous characteristics are subscriber-related, the
	subscriber is more likely to take corrective action without
	involving the provider. The net result of this early warning
	system is that fewer maintenance personnel are required to solve
	fewer problems, thereby increasing provider efficiency and
	subscriber satisfaction.
|
| |  | More Rapid but Less Costly Troubleshooting. Because our
	systems provide information which enables isolation of problems
	between provider network and subscriber equipment and
	applications, the provider can more quickly diagnose the cause of
	 faulty or degraded performance. With our systems, many problems
	that would otherwise last for days and require on-site visits of
	highly skilled personnel can be diagnosed remotely within
	minutes. Because our systems are architected to allow both the
	provider and the subscriber to access the same reports and
	analyses simultaneously, more problem conditions can be resolved
	collaboratively.                                                                                                                                              
|
| |  | More Accurate Network Engineering and Planning. Our
	systems continuously provide an accurate and detailed view of
	historical WAN service usage patterns along with automated
	guidance regarding the need to change circuit capacities. This
	allows subscribers and providers to implement a network design
	optimized for cost and performance.                                                                                                                                                                                                                                                                                                                                                                                                                                                            




Visual Networks Strategy

Our overall strategy is to maintain and build upon our market
leadership in the deployment of WAN service level management
systems for networks based on IP and the Internet. Key elements
of our strategy include:

Integration of our Service Level Management Functionality into
 Network Infrastructure. Our systems provide an innovative
integration of service level management functionality at the
point of service demarcation. We believe that this integration
substantially enhances the cost effectiveness of deploying our
systems.

Deployment of our Systems as Part of Provider Networks. We
 believe service providers will become the predominant vehicle
for the deployment of service level management systems such as
Visual UpTime and

5



---



##### Table of Contents





Extension of our Technology Leadership. We believe a
combination of technological competencies have been crucial to
our success. These competencies include network analysis
technology and its application to the effective operation of
WANs, the integration of network analysis with WAN access
technology, and collaborative subscriber/provider system
architectures. Since introducing Visual UpTime in mid-1995, we
have continued to invest in our core competencies by focusing on
feature development, architectural enhancements and cost
reductions. We intend to continue to invest in the development of
 our systems, with particular emphasis on features and
architectural improvements designed to accommodate large scale
deployment by providers. This includes leveraging our current
remote access, Frame Relay, ATM and IP/Internet technologies to
provide customers with a single vender solution for end-to-end
service level management as well as to address emerging
opportunities such as virtual private networks, or VPNs, over the
 Internet.

Expansion of Sales and Support Functions Globally.
Although over 70% of the worldwide dedicated access circuits for
IP networks are deployed in the U.S., many of our largest
provider and subscriber customers are multinational corporations.
 We intend to develop a presence outside of the U.S. with
particular focus on the providers which have the largest share of
 the worldwide markets for remote access, Frame Relay, ATM and
IP/Internet services.




Products

Visual UpTime System

Visual UpTime is a service level management system consisting of
analysis service elements, or ASEs, performance archive managers,
 or PAMs, and platform applicable clients, or PACs, that perform
data collection, data interpretation and presentation,
respectively. By intelligently monitoring network-wide
performance, Visual UpTime enables users to track and solve
service level problems either on the subscriber or provider side
of the demarc.

ASE. The ASE is a combination of embedded proprietary
software and hardware that performs detailed analysis of network
performance at the demarc. Most versions of the ASE provide the
functionality of WAN access equipment, such as a DSU/ CSU. Visual
 UpTime ASEs use sophisticated proprietary software in
conjunction with networking-specific microprocessors and
integrated circuits to perform detailed analysis of every bit,
frame and packet traversing the demarc. The ASEs generally store
the analysis results locally in memory and wait for the PAM to
request the results. When the ASE detects an anomalous condition,
 it sends an unsolicited alert to the PAM so that network
operators can take prompt action. The analysis results are
organized in accordance with the structure of industry-standard
management information bases, or MIBs. Additionally, the ASEs
include proprietary MIB extensions that provide added value for
WAN service level management. Depending on customer requirements,
 our core ASE technology can be deployed in a number of
configurations based on physical circuit speed, number of virtual
 circuits supported, type of access functionality and subscriber
local area network environment.

PAM. The PAM is the system database and request broker
between the PACs and either the database or ASEs. The PAM runs
our proprietary software on either Microsofts WindowsNT
Server or SQL Server database. The PAM communicates with the PACs
 using a proprietary application programming interface, or API.
The PAM communicates with the ASEs using either simple network
management or trivial file transfer protocols. Unlike traditional
 data transfer management architectures which depend on
continuous polling between the manager (PAM) and agents
(ASEs), a bandwidth consuming process, Visual UpTime distributes
most of the processing burden to the ASE, allowing the PAM-ASE
data sharing to take place less

6



---



##### Table of Contents





PAC. The PAC is Visual UpTimes client software for
packaging and presenting information stored in the PAM and ASE.
Multiple PACs may access a single PAM or ASE. Current versions of
 the PAC run on Windows95, WindowsNT and major versions of UNIX.

The PAC includes three integrated toolsets:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Performance Monitoring. This toolset is an early warning
	system, alerting operators to impending service degradation, that
	 allows corrective action to be taken before the
	subscribers application performance degrades. This toolset
	displays network performance related events and alarms. The
	performance monitoring toolset is tightly linked to the
	troubleshooting toolset, allowing an operator to evaluate quickly
	 and precisely the conditions which caused the event or alarm.
|
| | Troubleshooting. This toolset enables an operator to
	rapidly perform detailed diagnostics to identify the cause of
	service level problems. This toolset displays real-time and
	historical network performance statistics. The troubleshooting
	toolset includes a protocol capture and analysis capability used
	by network operators to isolate problems arising from the
	interplay between a subscribers CPE or applications and the
	 WAN service.                                         
|
| | Planning and Reporting. This toolset is a report
	generation tool that creates a wide variety of reports from the
	network performance data stored in the PAM. This toolset is used
	primarily for capacity planning and network engineering,
	management of service level agreements between provider and
	subscriber and executive reporting from the network operations
	staff to senior management personnel. The planning and reporting
	toolset is accessible through a PAC or a Web-browser.

The Visual UpTime components are sold as a complete system which
requires at least one PAC/ PAM per deployment along with one ASE
deployed at the demarc of each circuit on which service level
management is required. We believe the system is currently
deployed in configurations managing more than 4,500 circuits.
System pricing varies by size of deployment and relative mix
between circuit speeds. We expect the average selling price to
decrease as sales to providers increase.

Visual IP Insight

Visual IP Insight is a WAN service management system for remote
access network technologies utilizing IP and the Internet. It
helps both service providers and enterprises to provide the
highest quality IP services to their customers. Visual IP Insight
 helps operations managers, network managers, and customer care
(help desk) personnel to proactively manage the complete service
experience  whether it is for a service subscriber or
an internal enterprise user. Visual IP Insight has also become a
cornerstone for credible service-level agreement, or SLA,
offerings with Internet Service Providers, or ISPs. The product
is comprised of three software applications:



| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | IP Insight Service Operations. This function provides
	information regarding problems in real-time and monitors
	performance of IP applications, such as e-mail and Domain Name
	System, or DNS, using metrics such as availability, throughput,
	latency and packet loss.
|
| |  | IP Insight Customer Care. This feature allows our Customer
	 Care personnel to call up a customers history of network
	connections and PC configurations.                                                                                                                
|
| |  | IP Insight Service Level Manager. This function makes it
	easy to define, monitor and administer SLAs. Its unique tools
	also map users to their specific services, service providers, and
	 SLAs.                                                                        

System components with Visual IP Insight include PC client
agents, stand-alone test points, data collectors, and a data
repository. These components communicate with each other over an
IP network providing a steady stream of real-time information.
Visual IP Insights architecture is distributed, fault
tolerant and scales to carrier class networks.

7



---



##### Table of Contents



The systems client agent is the origin of
quality-of-service and test data. The client agent can passively
monitor user activity on the network or perform active tests when
 requested by the network manager. The client agent can be
deployed in any remote access environment  dial modem,
 Digital Subscriber Line, or DSL, ISDN or cable modem.

The systems client agent runs transparently until end-user
help is required. Context-sensitive online help suggests
solutions to more than 150 dial-access problems and keeps a
descriptive error log that customer care personnel can use to
solve problems that end users cannot resolve on their own.

In addition to desktop clients, Visual IP Insight also offers
service agents. Service agents are deployed at test points within
 the network (such as the network edge) and perform active tests
as directed by the network manager.

Visual IP Insight Collectors collect data from client agents and
service agents and send it to the back-end database. A collector
can be deployed either behind a firewall or in key points in the
public IP network, and a single collector can handle hundreds of
thousands of active clients.

Visual IP Insight Aggregators are servers positioned at key
locations in the network or data center. Collectors pass the
client agent and service agent data they have collected to one or
 more aggregators for data validation and loading into various
data repositories. All of the performance data gathered is stored
 in a high performance relational database. Data is presented
using a secure web interface, allowing detailed information on
the performance of the network and applications to be quickly
distributed throughout an organization or between customers and
partners.

Visual Internet Benchmark

Visual Internet Benchmark provides an industry benchmark for the
quality of service provided by ISPs. The service provides
standardized, comparative reports of Internet access and
performance statistics for more than 50 service providers. Visual
 Internet Benchmark reports are available for the U.S., U.K., and
 Canada. Enterprises use this data when selecting providers.
Service providers use this data and the expertise behind it to
improve their networks, as well as for marketing purposes.

Visual Internet Benchmark collects comprehensive statistics on
such key metrics as call failure rates, dial-up connection
speeds, log-in elapsed time, Web access failures, DNS lookup
times, Web server access times, and Web server transfer rates.
Our Visual Internet Benchmark operations center makes more than
300,000 test calls per month.

In the U.S., virtually all of the top ISPs subscribe to the
Visual Internet Benchmark service. Our U.S. ISP customers control
 approximately 85% of the dial-up Internet market.

Analyzer

Our network analyzer product, or the Analyzer, is a combination
of embedded proprietary software and hardware and Microsoft
Windows presentation software that performs detailed analysis of
network performance on ATM circuits. The Windows software,
running on a Pentium-based computer, connects either locally or
remotely to the hardware to perform detailed analysis of every
bit, cell and packet traversing the ATM circuit. The Analyzer is
designed to meet both the network monitoring and troubleshooting
needs of field support personnel and the centralized operational
needs for supporting remote ATM circuits. Depending on customer
requirements, the Analyzer can be utilized in a number of
configurations based on physical circuit speed, access line type
and monitoring applications. We distribute the Analyzer
substantially through original equipment manufacturers and expect
 future sales of this product to be made utilizing these
arrangements.




Visuals Selling Strategy and Visual Uptime System
Deployment Strategy

We have deployed a long-term, multi-stage selling strategy.
Initially, we sold our products to subscribers, with the
objectives of creating demand among subscribers for IP-based WAN
services and stimulating demand among providers for the
infrastructure necessary to provide and maintain such service
levels. In 1995

8



---



##### Table of Contents





Substantially all Visual UpTime systems sold to date have been
deployed by subscribers and are configured so that only the
subscriber has access to the WAN service performance data
collected and presented by the system. Now we focus our sales
efforts on demonstrating to providers the incremental value of
provisioning and the operating cost savings arising from wide
scale deployment by the provider. Our selling strategy
contemplates an evolution of the deployment model so that sales
of the Visual UpTime and Visual IP Insight systems will be made
directly to providers and the providers will deploy the systems
as a part of their network infrastructures. In December 1997, we
executed a procurement agreement with AT&T that is based on
this strategy.

The portion of our revenue derived from service provider
relationships, including those with Sprint, MCI and AT&T, has
 grown from approximately 42% to 67% to 72% for 1997, 1998 and
1999, respectively.




Product Development

We have developed core competencies in network analysis
technology and its application to the effective operation of
WANs, the integration of network analysis with WAN access
technology and collaborative subscriber/provider system
architectures.

We have made significant investments in system architecture and
feature development. Through the acquisitions of Net2Net and
Inverse, we accelerated the pace of product development in order
to provide customers with a single-vendor solution for end-to-end
 service level management, encompassing Frame Relay, ATM and IP/
Internet. We will continue to expand the functionality of Visual
UpTime to address emerging opportunities such as VPNs over the
Internet. We are focused on the further enhancement and
refinement of our systems, including the development of the
architectural scalability that will be required for wide-scale
implementation through the provider deployment model.
Additionally, we expect to invest in system refinements which
increase the economic benefit of deployments outside North
America. Our success will depend to a substantial degree on our
ability to bring to market in a timely fashion new products and
enhancements to Visual UpTime and Visual IP Insight that meet
changing market requirements. We expect to employ a combined
strategy of developing products internally and acquiring products
 and technology to meet evolving market requirements.

As of December 31, 1999, there were 116 persons working in
our research and development area. Our research and development
expenditures were $9.1 million, $13.8 million and
$16.7 million for 1997, 1998 and 1999, respectively.




Customers

Since mid-1996, we have developed business relationships with a
number of providers, including AT&T, MCI, Sprint, Ameritech,
Bell Atlantic, BellSouth and GTE. These providers supply
approximately 50% of worldwide Frame Relay and ATM services.
While these relationships are at different levels of business
maturity, the portion of our revenue derived from these
relationships has grown from approximately 67% in 1998, to
approximately 72% in 1999. We expect to expend substantial
additional effort to evolve these business partners to the
provider deployment model.

Sprint, AT&T and MCI accounted for 27%, 16% and 13%,
respectively, of consolidated revenue for 1998. Sales of products
 or services to Sprint, AT&T and MCI accounted for 25%, 25%
and 8%, respectively, of consolidated revenue for 1999.

AT&T Relationship. In December 1997, we entered
into a non-exclusive procurement agreement with AT&T. The
agreement has an initial term of three years and automatically
renews until terminated by either party upon 30 days
notice. Prices and discounts for all equipment purchased by
AT&T are fixed for the term, except in certain limited
circumstances. The equipment carries a five-year warranty. If we
offer more favorable

9



---



##### Table of Contents





MCI Relationship. In August 1997, we entered into a
non-exclusive three-year reseller agreement with MCI, which
automatically renews for successive one-year terms unless
terminated by either party at least 60 days prior to
expiration. Prices and discounts for all equipment purchased by
MCI are fixed for the term. The equipment carries a five-year
warranty. If we offer more favorable prices to any other customer
 for the same quantity of products purchased over a similar
period of time, the prices charged to MCI will be adjusted to the
 more favorable price. The reseller agreement does not obligate
MCI to make any minimum purchases from us. We also provide
certain support services to MCI.

Sprint Relationship. In August 1996, we entered into
a non-exclusive three-year reseller agreement with Sprint. Prices
 for all equipment purchased by Sprint are fixed for the term,
unless Sprint does not purchase a certain minimum amount of
equipment and services, in which event prices for equipment and
services are subject to increase. The equipment carries a
five-year warranty. If we offer more favorable prices and terms
to any other customer during the term of the agreement, such
terms and prices will be applicable to Sprints orders. The
reseller agreement does not obligate Sprint to make any minimum
purchases from us. We also provide certain support services to
Sprint. The agreement was amended to extend the term through
May 23, 2000.




Sales, Marketing and Support

Our sales, marketing and support activities vary depending on the
 type of deployment being targeted.

We have targeted subscriber deployment opportunities through a
combination of direct sales, sales through value-added resellers
and integrators and sales through service providers acting in the
 capacity of resellers. We provide pre-sale technical support to
each of our channels. The time required in order to develop a
relationship with a channel partner can take from 2 to 12 months
for value-added resellers and integrators and from 12 to
24 months for service providers. The sales cycle for
subscriber deployment when handled directly or through resellers
is typically 4 to 6 months long, and, for this reason, a
large majority of sales to date have been subscriber deployments.

We target provider deployment opportunities on an account by
account basis. According to Vertical Systems, AT&T, Sprint
and MCI together control more than 67% of the U.S. market
and 48% of the worldwide market for Frame Relay and ATM services.
 Because of current levels of competition for WAN services, we
believe that the most significant opportunities for Visual
products are with U.S.-based long distance providers. We believe
that our relationships with AT&T, Sprint and MCI influence
other providers to adopt Visual products.

The provider deployment strategy involves a complex sale with
very large companies. The sales cycle begins with the
presentation of Visuals value proposition to multiple
departments within a provider organization followed by a lengthy
evaluation process. We then work with the provider to develop a
service definition and business plan for the integration of
Visual products into the providers existing services.

We have sales and technical support teams assigned to each
account. In addition, our senior management team devotes
significant time furthering the business relationships with these
 providers and we invest significant marketing resources to
stimulate sales to these providers. We expect to increase sales,
marketing and support efforts addressed to these providers and to
 extend these efforts to international and IP/Internet providers.

As of December 31, 1999, we employed 85 persons in sales and
 marketing. Our expenditures for sales and marketing activities
were approximately $14.6 million, $19.8 million and
$24.4 million for 1997, 1998 and 1999, respectively.

10



---



##### Table of Contents






Competition

The markets for telecommunications equipment and software are
intensely competitive. Visuals products integrate key
functionality traditionally found in four distinct market
segments: the WAN access equipment market; the network test and
analysis market; the market for operational support systems, or
OSSs; and the market for client-based network management and
Internet infrastructure testbeds. We believe that Visuals
products are the only systems that integrate functional
attributes from all four market segments to cost-effectively
provide WAN service level management. Because of the size and
growth opportunity associated with the WAN service level
management market, we expect to encounter increased competition
from current and potential participants in each of these
segments. Increased competition may result in price reductions,
reduced profitability and loss of market share, any of which
would have a material adverse effect on our business, financial
condition and results of operations. See Risk
Factors  We Face Growing Competition That Could Make
It Difficult for Us to Acquire and Retain Customers.

WAN Access Equipment. The WAN access equipment market is
highly fragmented. The products in this market include DSU/ CSUs,
 low to mid-range time division multiplexers, Frame Relay access
devices and ATM access products. Leading vendors in this segment
include ADC Telecommunications, Inc., Paradyne Corporation,
Adtran, Inc., Sync Research, Inc. and Digital Link Corp. We
expect that, in some cases, these companies may partner with
companies offering network test and analysis products in order to
 compete in the WAN service level management market. We are aware
 of such arrangements between Digital Link and NetScout Systems,
Inc., and NetScout and Paradyne. Furthermore, internetworking
providers, such as Cisco Systems, Inc., may integrate WAN access
functionality with routers, which may adversely affect Visual
UpTimes cost justification.

Network Test and Analysis. An essential element of a WAN
service level management system is technology and expertise
associated with network test and analysis. Products in this
market include portable and distributed protocol analyzers and
transmission test instruments. The major suppliers in this market
 segment are Network Associates, Inc., Agilent Technologies,
Inc., Telecommunications Techniques Corporation and NetScout.

Telecommunications Operational Support Systems. OSSs
encompass all of the systems related to service deployment
including provisioning systems, billing systems,
trouble-ticketing systems, and fault and performance management
systems. Historically, OSSs have been developed by the
in-house staffs of the service providers and have sometimes been
a source of competitive advantage to providers. Visual UpTime
provides a significant portion of the functionality that might
otherwise be found in a fault and performance management system
for statistically multiplexed WAN services. Therefore, in some
cases, a provider may consider in-house development as an
alternative to deployment of Visual UpTime.

Client-Based Network Management and Internet Infrastructure
Testbeds. An emerging trend in network management is
increased emphasis on visibility of actual user experience.
Installing clients on end user desktops is a particularly
effective way to gather this type of data. This technology can be
 deployed either as a service offering using simulated desktops
or sold as standalone software. Major suppliers of standalone
software include Lucent Technologies, Inc., Ganymede Software,
Inc., First Sense Software, Inc., Jyra Research, Inc. and
NextPoint Networks, Inc. Major suppliers of service based
solutions include Keynote Software, Inc., Freshwater Software,
Inc., Exodus Communications, Inc. and MDIS Group plc.

We intend to compete by offering superior features, performance,
reliability and flexibility at competitive prices. We also intend
 to compete on the strength of its relationships with providers.
As competition in the WAN service level management market
increases, we believe that the industry may be characterized by
intense price competition similar to that present in the broader
networking market. In response to competitive trends, we expect
to continue to reduce the cost of our systems to seek ways to
improve upon Visual UpTimes price-to-performance ratio.

11



---



##### Table of Contents






Manufacturing

We have moved to a predominately outsourced manufacturing model
in order to achieve significant scalability. In connection with
our outsourcing strategy and increased volumes, we are seeking to
 secure additional sources of supply, including additional
contract manufacturers. We are ISO 9001 certified and have not
experienced any significant delays or material unanticipated
costs resulting from the use of subcontractors; however, such a
strategy involves certain risks, including the potential absence
of adequate capacity and reduced control over delivery schedules,
 manufacturing yields, quality and costs. Although we attempt to
maintain appropriate back-up suppliers, in the event that any
significant subcontractor was to become unable or unwilling to
continue to manufacture and/or test our products in required
volumes, we would have to identify and qualify acceptable
replacements. This qualification process could be lengthy and no
assurance could be given that any additional sources would become
 available to us on a timely basis. A delay or reduction in
component shipments, or a delay or increase in costs in the
assembly and testing of products by third party subcontractors,
could materially and adversely affect our business, financial
condition and results of operations.

Although we generally use standard parts and components for our
products, several key components are currently purchased only
from sole, single or limited sources. Any interruption in the
supply of these components or our inability or our subcontractors
 to procure these components from alternate sources at acceptable
 prices and within a reasonable time could have a material
adverse effect upon our business, financial condition and results
 of operations.




Patents and Other Intellectual Property Rights

We presently have one issued patent on the Method and
Apparatus for Non-Intrusive Measurement of Round Trip Delay in
Communications Networks, which expires in April 2015,
another issued on the Method and Apparatus for Measurement
of Peak Throughput in Packetized Data Networks, which
expires in 2016 and another about to be issued on the
Method and Apparatus for Performing Service Level Analysis
of Communications Network Performance Metrics. No assurance
 can be given that competitors will not successfully challenge
the validity or scope of our patents or that such patents will
provide a competitive advantage to us. As part of our
confidentiality procedures, we generally enter into
non-disclosure agreements with our employees, business partners
and customers with respect to our software, documentation and
other proprietary information. Despite these precautions, it may
be possible for a third party to copy or otherwise obtain and use
 our products or technology without authorization, or to develop
similar technology independently. Policing unauthorized use of
our products is difficult. Effective protection of intellectual
property rights is unavailable or limited in certain foreign
countries. There can be no assurance that our protection of our
proprietary rights will be adequate or that our competitors will
not independently develop similar technology, duplicate our
products or design around any of our patents issued to us or our
other intellectual rights.

We expect that software and communications product developers
will increasingly be subject to claims of infringement of patents
 as the number of products and competitors in our industry
segment grows and the functionality of products in the industry
segment overlaps. We are not aware that any of our products
infringe the property rights of third parties. There can be no
assurance, however, that third parties will not claim such
infringement by us with respect to current or future products.
Any such claims, with or without merit, could result in costly
litigation that could absorb significant management time, which
could have a material adverse effect on our business, financial
condition and results of operations. Such claims might require us
 to enter into license or royalty agreements. Such license or
royalty agreements, if required, may not be available on terms
acceptable to us or at all, which could have a material adverse
effect on our business, financial condition and results of
operations.




Employees

As of December 31, 1999, we had 281 full-time employees,
including 116 in product development, 70 in sales, 15 in
marketing, 14 in manufacturing, 21 in customer service and 45 in
finance, centralized services and administration.

12



---



##### Table of Contents



Our future success will depend in significant part on the
continued service of our key technical, sales and senior
management personnel. Competition for such personnel is intense
and there can be no assurance that we can retain our key
managerial, sales and technical employees, or that we can
attract, assimilate or retain other highly qualified technical,
sales and managerial personnel in the future. None of our
employees are represented by a labor union. We have not
experienced any work stoppages and consider our relations with
our employees to be good.




Item 2.  Properties.

Our principal administrative, sales and marketing, research and
development and customer support facility is located in
approximately 53,945 square feet of office space in Rockville,
Maryland that we occupy under a lease that expires in
December 2006. We also occupy approximately 32,256 square
feet of space in Sunnyvale, California, under a sublease that
expires in July 2003. While we believe that our facilities
in Rockville are adequate for our immediate needs, we may need
additional space by late 2000. We intend to obtain additional
office space in the Rockville area.




Item 3.  Legal Proceedings.

We are involved in legal proceedings from time to time in the
ordinary course of our business. Management believes that none of
 these current legal proceedings will have a materially adverse
effect on our business, financial condition or results of
operations.




Item 4.  Submission of Matters to a Vote of
Security Holders.

None.

13



---



##### Table of Contents






PART II






|        |                                                              
|------- | -------------------------------------------------------------
|Item 5. | Market for Our Common Stock and Related Stockholder
	Matters.

Our common stock is traded on the Nasdaq National Market under
the symbol VNWK. Prior to February 6, 1998,
there was no established public trading market for any of our
securities.

The following table sets forth, for the periods indicated, the
range of high and low closing per share sales prices for the
common stock as reported on the Nasdaq National Market.

|                                         |  |      |       |     |  |   |       | 
|---------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal 1999                              |  | High |       | Low
|                                         |  |      |       |    
|First Quarter (ended March 31, 1999)     |  | $    | 43.50 |     |  | $ | 31.50 | 
|                                        
|                                        
|                                        
|                                        
|Second Quarter (ended June 30, 1999)     |  |      | 39.50 |     |  |   | 26.25 | 
|                                        
|                                        
|                                        
|                                        
|Third Quarter (ended September 30, 1999) |  |      | 44.50 |     |  |   | 31.00 | 
|                                        
|                                        
|                                        
|                                        
|Fourth Quarter (ended December 31, 1999) |  |      | 80.00 |     |  |   | 32.25 | 

|                                                        |  |  |       |  |  |  |       | 
|------------------------------------------------------- |  |  | ----- |  |  |  | ----- | 
|Fiscal 2000                                             |  |  |       | 
|                                                        |  |  |       | 
|First Quarter (from January 1, 2000 to
	March 17, 2000) |  |  | 83.50 |  |  |  | 50.31 | 

On March 21, 2000, the last reported sale price of our
common stock was $67.25 per share. As of March 21,
2000, we had approximately 354 stockholders.

We have never paid or declared any cash dividends on our common
stock. It is our present policy to retain earnings to finance the
 growth and development of the business and, therefore, we do not
 anticipate declaring or paying cash dividends on our common
stock in the foreseeable future. In addition, our credit facility
 with Silicon Valley Bank prohibits us from paying cash dividends
 without the Banks consent. See Note 2 of Notes to
Consolidated Financial Statements.

On September 30, 1999, Visual Acquisitions Two, Inc., our
wholly owned subsidiary, merged into Inverse under the terms of
an Agreement and Plan of Merger dated September 15, 1999. In
 connection with the merger, the shares of capital stock of
Inverse owned by the Inverse stockholders and certain obligations
 of Inverse were converted, on a pro rata basis, into shares of
our common stock, and Inverse became our wholly owned subsidiary.
 The stockholders and certain creditors of Inverse received, in
the aggregate, 4,107,666 shares of our common stock in
connection with the merger. All such shares were issued by the
Company in reliance upon the exemption contained in
Section 506 of Regulation D.

The following table lists the persons to whom we sold shares of
our common stock which were not registered under the Securities
Act of 1933, as amended, as a result of our merger with Inverse.

|                                                          |  |                  |         | 
|--------------------------------------------------------- |  | ---------------- | ------- | 
|Name                                                      |  | Number of Shares
|                                                          |  |                 
|Dale M. Anderson                                          |  |                  | 4,591   | 
|                                                         
|                                                         
|                                                         
|                                                         
|Dale M. Anderson and Lleanna R. Anderson Revocable
	Trust |  |                  | 2,265   | 
|                                                         
|                                                         
|                                                         
|                                                         
|Associated Venture Investors III L.P.                     |  |                  | 76,449  | 
|                                                         
|                                                         
|                                                         
|                                                         
|AVI Capital L.P.                                          |  |                  | 523,696 | 
|                                                         
|                                                         
|                                                         
|                                                         
|AVI Partners Growth Fund II L.P.                          |  |                  | 14,889  | 

14



---



##### Table of Contents



|                                                                  |  |                  |         | 
|----------------------------------------------------------------- |  | ---------------- | ------- | 
|Name                                                              |  | Number of Shares
|                                                                  |  |                 
|AVI Silicon Valley Partners L.P.                                  |  |                  | 5,458   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Robert E. Berry, Jr.                                              |  |                  | 58,772  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Jennifer Bestor                                                   |  |                  | 22,116  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Shekhar Bhide                                                     |  |                  | 4,744   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Linda Bower                                                       |  |                  | 397     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Matt J. Burdick                                                   |  |                  | 22,304  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Corinne Cheung                                                    |  |                  | 734     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Gigi Chu                                                          |  |                  | 15,424  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Rachel Cox                                                        |  |                  | 714     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Andrew Davis                                                      |  |                  | 105,101 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Dominion Ventures                                                 |  |                  | 3,594   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|David J. Ehrlich                                                  |  |                  | 47,752  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Raphael Frommer                                                   |  |                  | 2,601   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Jon Furukawa                                                      |  |                  | 734     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Kimberly A. Gazlay                                                |  |                  | 2,851   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Joan and Frank Gennaro                                            |  |                  | 1,224   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Michael Gennaro                                                   |  |                  | 46,528  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Fred Gibbons (Trust)                                              |  |                  | 31,222  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Fred Gibbons, Trustee of the Fred Gibbons Separate Property Trust |  |                  | 26,432  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Michael Gilbert                                                   |  |                  | 48,201  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Susan E. Gilbert and Michael M. Gilbert                           |  |                  | 4,897   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Anne M. Gilbert and Michael M. Gilbert                            |  |                  | 4,897   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Jasinder Gill                                                     |  |                  | 2,601   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Greylock IX Limited Partnership                                   |  |                  | 934,925 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|John Hancock                                                      |  |                  | 47,752  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Steve J. Hand                                                     |  |                  | 3,183   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Claudis and Helen Hicks                                           |  |                  | 1,224   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|HSBC Trustee (Jersey) Limited                                     |  |                  | 369,974 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|William Whit Jelks                                                |  |                  | 1,224   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Marnie L. Lambert                                                 |  |                  | 153     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|John Leong                                                        |  |                  | 120,116 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Jamshid Mahdavi                                                   |  |                  | 397     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Belle Marino                                                      |  |                  | 994     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Matt Mathis                                                       |  |                  | 397     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Roberta Murphy                                                    |  |                  | 96,576  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Prem Nambiar                                                      |  |                  | 1,224   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Erikas Napjus                                                     |  |                  | 3,918   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|John J. Pacholski                                                 |  |                  | 13,963  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Thomas Panicker                                                   |  |                  | 1,101   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Kathleen Parks                                                    |  |                  | 1,224   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Ann Peckenpaugh                                                   |  |                  | 2,485   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Drew Perkins                                                      |  |                  | 40,405  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Karen Perry                                                       |  |                  | 3,061   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Jenny K. Redo                                                     |  |                  | 3,443   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Veronica Richardson                                               |  |                  | 1,224   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Lee Schweichler                                                   |  |                  | 3,037   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Ashok Sethi                                                       |  |                  | 2,066   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Amanda G. Seward-Chavis                                           |  |                  | 91      | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Thomas A. Skornia                                                 |  |                  | 7,346   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Richard Sneiderman                                                |  |                  | 2,754   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Priyadarshini Tamhankar                                           |  |                  | 1,148   | 

15



---



##### Table of Contents



|                               |       |                  |         |           | 
|------------------------------ | ----- | ---------------- | ------- | --------- | 
|Name                           |       | Number of Shares
|                               |       |                 
|Thompson Clive Investments plc |       |                  | 201,003 |          
|                              
|                              
|                              
|                              
|Silicon Valley Bank            |       |                  | 2,363   |          
|                              
|                              
|                              
|                              
|Skilun Tong                    |       |                  | 1,836   |          
|                              
|                              
|                              
|                              
|Venture Lending and Leasing    |       |                  | 5,280   |          
|                              
|                              
|                              
|                              
|Sudhanshu Verma                |       |                  | 180,174 |          
|                              
|                              
|                              
|                              
|David L. Walters               |       |                  | 2,321   |          
|                              
|                              
|                              
|                              
|Michael G. Watters             |       |                  | 965,169 |          
|                              
|                              
|                              
|                              
|Raymond Andrew Wimset          |       |                  | 1,734   |          
|                              
|                              
|                              
|                              
|Robert Zeljko                  |       |                  | 1,193   |          
|                               |       |                  |         |          
|                               | Total |                  |         | 4,107,666 | 
|                               |       |                  |         |          

16



---



##### Table of Contents






Item 6.  Selected Consolidated Financial Data.

The selected consolidated financial data below should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
consolidated financial statements, notes thereto and other
financial information included elsewhere in this Form 10-K.
The selected consolidated financial data as of and for the years
ended December 31, 1997, 1998 and 1999, are derived from our
 consolidated financial statements which have been audited by
Arthur Andersen LLP, independent public accountants. The selected
 consolidated financial data for the years ended
December 31, 1995 and 1996, are derived from audited
consolidated financial statements not included in this
Form 10-K.

|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |        |        | 
|------------------------------------------------------ | -------------------------- | ------------------------------------- | ------ | ----- | ----- | ---- | ------- | ----- | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                       |                            |                                      
|                                                       |                            | Year Ended December 31,              
|                                                       |                            |                                      
|                                                       |                            | 1995                                  |        | 1996  |       | 1997 |         | 1998  |        | 1999
|                                                       |                            |                                       |        |       |       |      |         |       |        |     
|                                                       |                            |                                      
|                                                       |                            | (in thousands, except per share data)
|                                                      
|                                                      
|                                                      
|                                                      
|Consolidated Statement of Operations Data:             |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|                                                      
|                                                      
|                                                      
|                                                      
|Revenue                                                |                            | $                                     | 567    |       |       | $    | 8,762   |       |        | $    | 29,300  |        |        | $ | 56,088 |        |        | $ | 91,719 |       
|                                                      
|                                                      
|                                                      
|                                                      
|Cost of revenue                                        |                            |                                       | 242    |       |       |      | 3,715   |       |        |      | 11,179  |        |        |   | 20,829 |        |        |   | 30,888 |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|                                                       | Gross profit               |                                       |        | 325   |       |      |         | 5,047 |        |      |         | 18,121 |        |   |        | 35,259 |        |   |        | 60,831 |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Operating expenses:                                    |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Research and development   |                                       |        | 2,038 |       |      |         | 5,880 |        |      |         | 9,148  |        |   |        | 13,771 |        |   |        | 16,677 |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Sales and marketing        |                                       |        | 1,187 |       |      |         | 9,605 |        |      |         | 14,555 |        |   |        | 19,759 |        |   |        | 24,447 |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | General and administrative |                                       |        | 566   |       |      |         | 2,281 |        |      |         | 3,798  |        |   |        | 5,528  |        |   |        | 7,928  |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Merger-related costs(1)    |                                       |        |      |       |      |         |      |        |      |         |       |        |   |        | 5,069  |        |   |        | 6,776  |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|                                                       |                            | Total operating expenses              |        |       | 3,791 |      |         |       | 17,766 |      |         |        | 27,501 |   |        |        | 44,127 |   |        |        | 55,828 | 
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Income (loss) from operations                          |                            |                                       | (3,466 | )     |       |      | (12,719 | )     |        |      | (9,380  | )      |        |   | (8,868 | )      |        |   | 5,003  |       
|                                                      
|                                                      
|                                                      
|                                                      
|Interest income, net                                   |                            |                                       | 63     |       |       |      | 217     |       |        |      | 165     |        |        |   | 2,413  |        |        |   | 2,270  |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Income (loss) before income taxes                      |                            |                                       | (3,403 | )     |       |      | (12,502 | )     |        |      | (9,215  | )      |        |   | (6,455 | )      |        |   | 7,273  |       
|                                                      
|                                                      
|                                                      
|                                                      
|Provision for income taxes                             |                            |                                       |       |       |       |      |        |       |        |      |        |        |        |   |       |        |        |   | (3,722 | )     
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Net income (loss)                                      |                            |                                       | (3,403 | )     |       |      | (12,502 | )     |        |      | (9,215  | )      |        |   | (6,455 | )      |        |   | 3,551  |       
|                                                      
|                                                      
|                                                      
|                                                      
|Dividends and accretion on preferred stock             |                            |                                       | (250   | )     |       |      | (1,012  | )     |        |      | (1,457  | )      |        |   | (171   | )      |        |   |       |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Net income (loss) attributable to common stockholders  |                            | $                                     | (3,653 | )     |       | $    | (13,514 | )     |        | $    | (10,672 | )      |        | $ | (6,626 | )      |        | $ | 3,551  |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Basic income (loss) per share                          |                            | $                                     | (1.04  | )     |       | $    | (2.36   | )     |        | $    | (1.44   | )      |        | $ | (0.30  | )      |        | $ | 0.14   |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Diluted income (loss) per share                        |                            | $                                     | (1.04  | )     |       | $    | (2.36   | )     |        | $    | (1.44   | )      |        | $ | (0.30  | )      |        | $ | 0.13   |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Basic weighted-average shares(2)                       |                            |                                       | 3,525  |       |       |      | 5,715   |       |        |      | 7,431   |        |        |   | 21,946 |        |        |   | 24,583 |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Diluted weighted-average shares(2)                     |                            |                                       | 3,525  |       |       |      | 5,715   |       |        |      | 7,431   |        |        |   | 21,946 |        |        |   | 26,547 |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Pro forma basic and diluted loss per share             |                            |                                       |        |       |       |      |         |       |        | $    | (0.51   | )      |        | $ | (0.28  | )      |        |   |        |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Pro forma basic and diluted weighted-average shares(2) |                            |                                       |        |       |       |      |         |       |        |      | 18,037  |        |        |   | 23,166 |        |        |   |        |       
|                                                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|Consolidated Balance Sheet Data:                       |                            |                                       |        |       |       |      |         |       |        |      |         |        |        |   |        |        |        |   |        |       
|                                                      
|                                                      
|                                                      
|                                                      
|Cash and cash equivalents                              |                            | $                                     | 3,548  |       |       | $    | 7,551   |       |        | $    | 9,601   |        |        | $ | 51,655 |        |        | $ | 54,629 |       
|                                                      
|                                                      
|                                                      
|                                                      
|Working capital                                        |                            |                                       | 3,632  |       |       |      | 3,458   |       |        |      | (782    | )      |        |   | 43,146 |        |        |   | 50,353 |       
|                                                      
|                                                      
|                                                      
|                                                      
|Total assets                                           |                            |                                       | 5,091  |       |       |      | 13,253  |       |        |      | 21,036  |        |        |   | 71,780 |        |        |   | 83,154 |       
|                                                      
|                                                      
|                                                      
|                                                      
|Long-term debt, net of current portion                 |                            |                                       | 86     |       |       |      | 286     |       |        |      | 138     |        |        |   | 1,011  |        |        |   | 782    |       
|                                                      
|                                                      
|                                                      
|                                                      
|Redeemable convertible preferred stock                 |                            |                                       | 3,385  |       |       |      | 13,398  |       |        |      | 14,855  |        |        |   |       |        |        |   |       |       
|                                                      
|                                                      
|                                                      
|                                                      
|Stockholders equity (deficit)                         |                            |                                       | 678    |       |       |      | (8,563  | )     |        |      | (13,251 | )      |        |   | 48,322 |        |        |   | 58,252 |       




|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During 1998, we incurred certain merger-related costs in
	connection with our acquisition of Net2Net. During 1999, we
	incurred certain merger-related costs in connection with our
	acquisition of Inverse. See Notes 1 and 6 of Notes to
	Consolidated Financial Statements.
|   
|(2) | For an explanation of the determination of the weighted-average
	number of shares used in computing income (loss) per share
	amounts, see Note 1 of Notes to Consolidated Financial
	Statements.                                                                              

17



---



##### Table of Contents






Item 7.  Managements Discussion and
Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results
of operations should be read in conjunction with our consolidated
 financial statements, the related notes thereto, and other
financial information included elsewhere in this Form 10-K.

Overview

We were incorporated in Maryland in August 1993 as Avail
Networks, Inc. and reincorporated in Delaware in
December 1994 as Visual Networks, Inc. From incorporation
through December 1996, our principal objective was to secure
 sufficient equity financing to enable us to accelerate product
development efforts of Visual UpTime for Frame Relay deployment
and to develop sales and marketing functions and general and
administrative infrastructure. Visual UpTime was first shipped in
 mid-1995. We began generating significant revenue from sales of
Visual UpTime during 1996, primarily to subscribers.

In August 1996, we entered into a master reseller agreement
with Sprint, resulting in our products shipping through Sprint to
 subscribers. In October 1997, we entered into a similar
master reseller agreement with MCI, which also resulted in
shipments of our products through MCI to subscribers. During 1997
 and 1998, we focused on selling Visual UpTime directly to
providers as part of their network infrastructure and Visual IP
Insight and Visual Internet Benchmark to Internet service
providers. In December 1997, we entered into an agreement
with AT&T, which provides for the sale of our products to
AT&T for deployment as part of AT&Ts
infrastructure. During 1999, we continued to focus on selling
Visual UpTime, Visual IP Insight and Visual Internet Benchmark.

We realize revenue from sales of hardware, from the licensing of
related software and from maintenance contracts. We generally
recognize revenue upon shipment or delivery of the product and
passage of title to the customer. Where the agreements provide
for evaluation or customer acceptance, we recognize revenue upon
the completion of the evaluation process and acceptance of the
product by the customer. Maintenance contracts call for us to
provide technical support and software updates to customers. We
recognize maintenance revenue, including maintenance revenue that
 is bundled with product sales, ratably over the contract period,
 which currently ranges from one to three years.

We currently contract with third party subcontract manufacturers
for most of the assembly, testing and shipping of our products.
We anticipate maintaining a portion of our internal manufacturing
 function for the foreseeable future at our Rockville, Maryland
facility.

On May 15, 1998, we acquired Net2Net in a merger accounted
for as a pooling of interests. On September 30, 1999, we
acquired Inverse in a merger accounted for as a pooling of
interests. The combinations with Net2Net and Inverse will affect
the future results of the operations reported by us. See
Note 1 of Notes to Consolidated Financial Statements. On
February 7, 2000, we entered into an agreement and plan of
merger with Avesta Technologies, Inc. to acquire all of their
outstanding preferred and common stock. The acquisition will be
accounted for as a purchase business combination. See
Note 10 of Notes to Consolidated Financial Statements.

18



---



##### Table of Contents



Results of Operations

The following table presents for the periods indicated certain
consolidated statement of operations data as a percentage of our
revenue:

|                                      |                            |                          |         |      |      |      |         |      |      |  |       |      |      | 
|------------------------------------- | -------------------------- | ------------------------ | ------- | ---- | ---- | ---- | ------- | ---- | ---- |  | ----- | ---- | ---- | 
|                                      |                            |                         
|                                      |                            | Year Ended December 31, 
|                                      |                            |                         
|                                      |                            | 1997                     |         | 1998 |      | 1999
|                                      |                            |                          |         |      |      |     
|Revenue                               |                            |                          | 100.0 % |      |      |      | 100.0 % |      |      |  | 100.0 | %   
|                                     
|                                     
|                                     
|                                     
|Cost of revenue                       |                            |                          | 38.2    |      |      |      | 37.1    |      |      |  | 33.7  |     
|                                      |                            |                          |         |      |      |      |         |      |      |  |       |     
|                                      | Gross profit               |                          |         | 61.8 |      |      |         | 62.9 |      |  |       | 66.3 |     
|                                      |                            |                          |         |      |      |      |         |      |      |  |       |     
|Operating expenses:                   |                            |                          |         |      |      |      |         |      |      |  |       |     
|                                     
|                                     
|                                     
|                                     
|                                      | Research and development   |                          |         | 31.2 |      |      |         | 24.6 |      |  |       | 18.2 |     
|                                     
|                                     
|                                     
|                                     
|                                      | Sales and marketing        |                          |         | 49.7 |      |      |         | 35.2 |      |  |       | 26.7 |     
|                                     
|                                     
|                                     
|                                     
|                                      | General and administrative |                          |         | 12.9 |      |      |         | 9.9  |      |  |       | 8.6  |     
|                                     
|                                     
|                                     
|                                     
|                                      | Merger-related costs       |                          |         |     |      |      |         | 9.0  |      |  |       | 7.3  |     
|                                      |                            |                          |         |      |      |      |         |      |      |  |       |     
|                                      |                            | Total operating expenses |         |      | 93.8 |      |         |      | 78.7 |  |       |      | 60.8 | 
|                                      |                            |                          |         |      |      |      |         |      |      |  |       |     
|Income (loss) from operations         |                            |                          | (32.0   | )    |      |      | (15.8   | )    |      |  | 5.5   |     
|                                     
|                                     
|                                     
|                                     
|Interest income, net                  |                            |                          | 0.5     |      |      |      | 4.3     |      |      |  | 2.4   |     
|                                      |                            |                          |         |      |      |      |         |      |      |  |       |     
|Net income (loss) before income taxes |                            |                          | (31.5   | )    |      |      | (11.5   | )    |      |  | 7.9   |     
|                                     
|                                     
|                                     
|                                     
|Provision for income taxes            |                            |                          |        |      |      |      |        |      |      |  | 4.0   |     
|                                      |                            |                          |         |      |      |      |         |      |      |  |       |     
|Net income (loss)                     |                            |                          | (31.5   | )%   |      |      | (11.5   | )%   |      |  | 3.9   | %   
|                                      |                            |                          |         |      |      |      |         |      |      |  |       |     

1999 Compared with 1998

Revenue. We recognized $91.7 million in revenue for
1999, a 63.5% increase over revenue of $56.1 million for
1998. The increase was due primarily to the continued acceptance
of Visual UpTime, Visual IP Insight, and Visual Internet
Benchmark products with an increase in sales to service
providers, particularly AT&T and Sprint. Sales to service
providers accounted for approximately 72% of revenue for 1999 as
compared to approximately 67% for 1998.

Gross Profit. Cost of revenue consists of subcontracting
costs, component parts, direct compensation costs, communication
costs, warranty and other contractual obligations, royalties,
license fees and other overhead expenses related to manufacturing
 operations and to support our software products and benchmark
services. Gross profit was $60.8 million for 1999, as
compared to $35.3 million for 1998, an increase of
$25.5 million. Gross margin was 66.3% of revenue for 1999,
as compared to 62.9% of revenue for 1998. The increase in gross
margin percentage was due primarily to product cost reductions
and to product sales mix. Our future gross margins may be
affected by a number of factors, including product mix, the
proportion of sales to providers, competitive pricing,
manufacturing volumes and an increase in the cost of component
parts.

Research and Development Expense. Research and development
 expense consists of compensation for research and development
staff, depreciation of test and development equipment, certain
software development costs and costs of prototype materials.
Research and development expense was $16.7 million for 1999
as compared to $13.8 million for 1998, an increase of
$2.9 million. The increase in research and development
expense was due primarily to increased staffing levels and
related support costs, and purchases of materials and services
used in the development of new or enhanced products. Research and
 development expense was 18.2% and 24.6% of revenue for 1999 and
1998, respectively. We expect that research and development
expenditures will increase in absolute dollars, and may continue
to decrease as a percentage of revenue, during 2000 and
thereafter. The increase in absolute dollars will support
continued development of new enhanced products and the
exploration of new or complementary technologies.

Sales and Marketing Expense. Sales and marketing expense
consists of compensation for the sales and marketing staff,
commissions, pre-sales support, travel and entertainment expense,
 trade shows and other marketing programs. Sales and marketing
expense was $24.4 million for 1999, as compared to
$19.8 million

19



---



##### Table of Contents





General and Administrative Expense. General and
administrative expense consists of the costs of finance,
administration, and general management activities. General and
administrative expense was $7.9 million for 1999 as compared
 to $5.5 million for 1998, an increase of $2.4 million.
 The increase in general and administrative expense was due
primarily to increased staffing levels, professional services and
 continued growth in corporate facilities and network
infrastructure. General and administrative expense was 8.6% and
9.9% of revenue for 1999 and 1998, respectively. We expect that
general and administrative expenditures will increase in absolute
 dollars, and may continue to decrease as a percentage of
revenue, during 2000 and thereafter. The increase in absolute
dollars is expected to be required for the expansion of our
administrative staff and internal systems to support expanding
operations.

Merger-Related Costs. In connection with the Inverse
acquisition, we recorded merger-related costs of approximately
$6.8 million. Transaction costs totaled approximately
$6.4 million and consisted primarily of fees for investment
bankers, attorneys, accountants and other direct transaction
costs. The remaining $0.4 million in non-recurring costs
consisted primarily of the write-off of certain assets as a
result of the merger and the accrual of certain employee benefits
 to conform the policies of Inverse with our policies.

In connection with the acquisition of Net2Net, we recorded
merger-related costs of approximately $5.1 million.
Transaction costs totaled approximately $4.1 million and
consisted primarily of fees for investment bankers, attorneys,
accountants and other direct transaction costs. Integration
expenses totaled approximately $0.2 million and consisted of
 incremental and non-recurring costs necessary to integrate
Visual and Net2Net. The remaining $0.8 million was a
restructuring charge that consisted primarily of the
consolidation of Visual and Net2Nets manufacturing, sales,
marketing and administration functions as well as the
discontinuance of certain Net2Net product development efforts.

Interest Income, Net. Interest income, net, for 1999 was
approximately $2.3 million as compared to $2.4 million
for 1998. The decrease of $0.1 million was primarily due to
the increase in interest expense related to capital leases and
other borrowings.

Income Taxes. Income taxes for 1999 were
$3.7 million, reflecting an effective tax rate of 51%. The
effective tax rate differed from statutory rates due to the
effect of certain non-deductible merger-related costs and the
effect of our net operating loss carryforwards.

Net Income (Loss). Net income for 1999 was
$3.6 million as compared to a net loss of $6.5 million
for 1998, an increase of $10.1 million. The increase was due
 primarily to increases in revenue and gross profit, which offset
 the increased operating and merger-related expenses described
above.

1998 Compared with 1997

Revenue. We recognized $56.1 million in revenue for
1998 as compared to $29.3 million for 1997, an increase of
$26.8 million. The increase was primarily due to the
continued acceptance of Visual UpTime, Visual IP Insight and
Visual Internet Benchmark products with an increase in sales to
service providers. Sales to service providers accounted for
approximately 67% of revenue for 1998 compared to 42% for 1997.

Gross Profit. Gross profit was $35.3 million for
1998, as compared to $18.1 million for 1997, an increase of
$17.2 million. Gross profit was 62.9% for 1998, as compared
to 61.8% for 1997. The increase in gross margin percentage was
due primarily to product cost reductions and to the mix of
product sales.

Research and Development Expense. Research and development
 expense was $13.8 million for 1998, as compared to
$9.1 million for 1997, an increase of $4.7 million. The
 increase in research and development

20



---



##### Table of Contents





Sales and Marketing Expense. Sales and marketing expense
was $19.8 million for 1998, as compared to
$14.6 million for 1997, an increase of $5.2 million.
The increase in sales and marketing expense was due primarily to
increased staffing levels and related commissions. As a
percentage of revenue, sales and marketing expense was 35.2% and
49.7% for 1998 and 1997, respectively.

General and Administrative Expense. General and
administrative expense was $5.5 million for 1998, as
compared to $3.8 million for 1997, an increase of
$1.7 million. The increase in general and administrative
expense was due primarily to increased staffing levels. As a
percentage of revenue, general and administrative expense was
9.9% and 12.9% for 1998 and 1997, respectively.

Merger-Related Costs. In connection with the Net2Net
acquisition, we recorded merger-related charges for transaction
costs, integration expenses and restructuring charges of
approximately $5.1 million. Transaction costs totaled
approximately $4.2 million and consisted primarily of fees
for investment bankers, attorneys, accountants, and other direct
transaction costs. Integration expenses totaled approximately
$0.2 million and consisted of incremental and non-recurring
costs necessary to integrate Visual and Net2Net. These costs were
 expensed as incurred. In May 1998, we recorded a
restructuring charge of approximately $2.7 million primarily
 in connection with the consolidation of Visual and
Net2Nets manufacturing, sales, marketing and administrative
 functions as well as the discontinuance of certain Net2Net
product development efforts. The consolidation included a
reduction in employees that resulted in severance and other
termination benefits including out-placement assistance. The
remaining restructuring costs related primarily to the
termination of contractual obligations, including leases and OEM
distribution agreements, with no future benefit. During 1998,
approximately $0.7 million was charged against the
restructuring reserve. This amount included approximately
$0.5 million related to employee termination costs and
approximately $0.2 million related to contractual
obligations. In December 1998, we reversed the remaining
$2.0 million of the restructuring accrual. The lower than
estimated cost resulted from fewer than planned terminations and
higher than planned attrition, along with lower than estimated
costs associated with exiting certain contractual obligations. As
 of December 31, 1998, all amounts due under contractual
obligations were paid and all of the employee terminations were
completed and the related benefits were paid.

Net Loss. Our net loss was $6.5 million for 1998, as
compared to the net loss of $9.2 million for 1997, a
decrease of $2.7 million. This decrease was due primarily to
 the revenue and gross profit increases described above offset by
 increased operating and merger-related costs described above.

Liquidity and Capital Resources

At December 31, 1999, our combined balance of cash, cash
equivalents and short-term investments was $54.6 million as
compared to $52.7 million as of December 31, 1998. Cash
 provided by operating activities was approximately
$6.4 million for 1999. Capital expenditures were
approximately $5.8 million for 1999.

We require substantial working capital to fund our core business,
 particularly to finance inventories, accounts receivable,
research and development activities and capital expenditures.
Additionally, we require substantial working capital to support
our acquisition strategy. We currently anticipate that capital
expenditures for 2000 are not expected to exceed
$10 million. Our future capital requirements will depend on
many factors, including the rate of revenue growth, if any, the
timing and extent of spending to support product development
efforts and expansion of sales and marketing, the timing of
introductions of new products and enhancements to existing
products and market acceptance of our products. There can be no
assurance that additional equity or debt financing, if required,
will be available on acceptable terms, if at all.

In addition to our cash and cash equivalents, our other principal
 source of liquidity is our bank credit facility. The credit
facility includes a revolving line of credit providing for
borrowings up to the lesser of $7.0 million or 85% of
eligible accounts receivable (as defined in the credit facility)
as well as a $1.0 million capital equipment line. The
agreement entitles Silicon Valley Bank to a negative pledge of
our inventory and

21



---



##### Table of Contents





Substantially all of our product sales to date have been made to
customers in the U.S. We intend to increase its sales efforts in
foreign markets. We plan to sell our products to foreign
customers at prices denominated in U.S. dollars. However, if
 the Company commences selling material volumes of product to
such customers at prices not denominated in U.S. dollars, we
 intend to adopt a strategy to hedge against fluctuations in
foreign currency.

We believe that existing sources of liquidity will be sufficient
to fund our capital expenditures and working capital needs for
the next 18 to 24 months. We may consider from time to time
various financing alternatives and may seek to raise additional
capital through equity or debt financing or to enter into
strategic arrangements. There can be no assurance, however, that
any such financing alternatives will be available on terms
acceptable to us, if at all.

Risk Factors

Our success depends on service provider companies
incorporating our product into their infrastructure.

Network service companies have not typically offered products and
 services that enable their customers to measure and test the
level of service they receive on their communications networks,
and if these companies do not want to offer this type of service,
 our future revenues could be significantly lower than
anticipated. Our leading sales and marketing strategy, which we
refer to as the provider deployment model, depends on
 sales of Visual UpTime and Visual IP Insight to service provider
 companies for them to deploy as part of their network
infrastructure. For 1999, sales to service providers represented
approximately 72% of total revenue. Although we expect that for
2000 a significant portion of our revenue will be attributable to
 sales of our products under the provider deployment model, we
cannot be sure that we will be successful in persuading service
provider companies to continue to adopt this model for Visual
UpTime and Visual IP Insight.

We believe that the success of the provider deployment model
depends on a number of factors over which we may have little or
no control, including:



| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | acceptance of and satisfaction with our systems by service
	provider companies and their customers;                                                                                                 
|
| |  | the realization of operating cost efficiencies when Visual Uptime
	 and/or Visual IP Insight is deployed;                                                                                           
|
| |  | our ability to demonstrate the operational benefits of Visual
	UpTime and Visual IP Insight;                                                                                                        
|
| |  | the generation of demand for these systems from customers and
	support for the systems by the service provider companies
	sales forces;                                                            
|
| |  | the competitive dynamics between service provider companies that
	provide communication networks for wide area use and the
	development of service for IP networks overall;                         
|
| |  | our successful development of systems and products that address
	the requirements for systems deployed as part of a service
	provider companys infrastructure;                                     
|
| |  | the timing and successful completion of integration development
	work by service provider companies to incorporate our service
	management functionality into their operational
	infrastructure; and
|
| |  | the absence of new technologies that make our products and
	systems obsolete before they become standardized in network
	systems.                                                                   

The failure of our products to become an accepted part of the
service provider companies service offerings or a slower
than expected increase in the volume of sales by us to these
companies would have a material adverse effect on our business,
financial condition and results of operations.

22



---



##### Table of Contents



Our long sales cycle requires us to expend significant
resources on potential sales opportunities that may never be
consummated.

If we do not eventually generate additional revenue from our
sales and marketing efforts, the expended resources and lack of
increased revenues could have a material adverse affect on our
business, financial condition and results of operations. Our
future business prospects depend on growing the sales of our
products and services. The provider deployment model under which
we are emphasizing future sales is characterized by a long sales
cycle to turn opportunities into sales.

The risks inherent in the long sales cycle for Visual UpTime and
Visual IP Insight, many of which we have little or no control
over, include:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | service provider companies internal acceptance reviews;                                                                                    
|
| |  | service provider companies budgetary constraints and
	technology assessment;                                                               
|
| |  | service provider companies lengthy decision-making
	processes;                                                                             
|
| |  | the attendant delays frequently associated with service provider
	companies internal procedures to approve large capital
	expenditures; and
|
| |  | the substantial commitment of capital from service provider
	companies.                                                                     

Sales of Visual UpTime and Visual IP Insight generally involve
significant testing by and education of both service provider
companies and their customers as well as a substantial commitment
 of our sales and marketing resources. As a result, we may expend
 significant resources pursuing potential sales opportunities
that will not be consummated. Even if the provider deployment
model is implemented, curtailment or termination of service
provider company marketing programs, decreases in service
provider company capital budgets or reduction in the purchasing
priority assigned to products such as Visual UpTime and Visual IP
 Insight, particularly if significant and unanticipated by us,
could have a material adverse effect on our business, financial
condition and results of operations.

The loss of Sprint, AT&T or MCI as a customer could harm
our business.

Our provider deployment model depends predominantly on sales to
service provider companies. The loss of either Sprint, AT&T
or MCI, which have historically provided a majority of our
revenue, would result in a substantial loss of revenue that could
 have a material adverse effect on our business, financial
condition and results of operations. During 1998, Sprint,
AT&T and MCI accounted for 27%, 16% and 13%, respectively, of
 our consolidated revenue. During 1999, Sprint, AT&T and MCI
accounted for 25%, 25% and 8%, respectively, of our consolidated
revenue. As our provider deployment model develops, this
concentration should continue as our customer base will consist
predominantly of service provider companies. The concentration
will be further increased upon the consummation of the pending
merger between Sprint and MCI.

Existing service provider company customers are not easily
replaced because of the relatively few participants in that
market. High barriers to entry due to extraordinary capital
requirements and the likelihood that mergers of existing
providers may further reduce their number mean that replacing a
significant network provider company customer will be even more
difficult in the future.

Furthermore, the small number of customers means that the
reduction, delay or cancellation of orders or a delay in shipment
 of our products to any one service provider company customer
could have a material adverse effect on our business, financial
condition and results of operations.

Our anticipated dependence on sizable orders from a limited
number of service provider companies will make the relationship
between us and each service provider company critically important
 to our business. As our relationships with these service
provider companies evolve over time, we will make adjustments to
product specifications, forecasts and delivery timetables in
response to service provider company demands and expectations.
Further, because none of our agreements contain minimum purchase
requirements, there can be no assurance that the issuance of a
purchase order will result in significant repeat business. Any
inability to

23



---



##### Table of Contents





Our industry is characterized by rapid technological change
and we must adapt quickly to these changes to compete
effectively.

The market for Frame Relay, ATM and IP/ Internet network services
 is characterized by rapid changes, including continuing advances
 in technology, frequent new product introductions, changes in
customer requirements and preferences and changes in industry
standards. If we are unable to develop and introduce new products
 and product enhancements in a timely fashion that accommodate
these changes, we will likely lose customers and business which
could have a material adverse effect on our business, financial
condition and results of operations. The introduction of new
technologies or advances in techniques for network services or
the integration of service level management functionality into
other network hardware components could render our products
obsolete or unmarketable. There can be no assurance that
(i) Visual UpTime and/or Visual IP Insight will continue to
compete successfully; (ii) our future product offerings will
 keep pace with the technological changes implemented by our
competitors; (iii) our products will satisfy evolving
industry standards or preferences of existing or prospective
customers; or (iv) we will be successful in developing and
marketing products for any future technology. Failure to achieve
any one of these objectives could have a material adverse effect
on our business, financial condition and results of operations.

Our future success depends on continued market acceptance of
the IP technology and our ability to adapt to new network
technologies that may develop.

Because Visual UpTime is deployed predominantly on IP networks,
our near-term success will depend on the continued market
acceptance of IP technology as a preferred networking solution.
If services for IP networking do not maintain widespread market
acceptance, the market for our products will be substantially
reduced which could have a material adverse effect on our
business, financial condition and results of operations. Although
 we are currently devoting significant resources to the
development of additional products, there can be no assurance
that we will complete the development of these or any future
products in a timely fashion, that we will successfully manage
the transition from existing products, that our future products
will achieve market acceptance, or if market acceptance is
achieved, that we will be able to maintain such acceptance for a
significant period of time. If we are unable to develop products
on a timely basis that address changing customer needs and
technologies, we may lose market share to competitors or be
required to substantially increase development expenditures. Such
 an increase in research and development expenditures may have a
material adverse effect on our business, financial condition and
results of operations. There also can be no assurance that
products or technologies developed by others will not adversely
affect our competitive position or render our products or
technologies noncompetitive or obsolete.

The success of our business depends on the widespread adoption
 of the Internet by business and consumers for e-commerce and
communications.

Because our Internet service management products and services are
 based on providing performance measurement and diagnostics for
the Internet and corporate IP networks, the Internet must be
widely adopted, in a timely manner, as a means of electronic
commerce, or e-commerce, and communications. If this adoption
should not occur, our business, financial condition and results
of operations could be adversely affected. Because e-commerce and
 communications over the Internet are new and evolving, it is
difficult to predict the size of this market and its sustainable
growth rate. In addition, we believe that the use of the Internet
 for conducting business transactions could be hindered for a
number of reasons, including, but not limited to:



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | security concerns including the potential for fraud or theft of
	stored data and information communicated over the Internet;
|
| |  | inconsistent quality of service, including well-publicized
	outages of popular web sites;                                   
|
| |  | lack of availability of cost-effective, high-speed service;                                                                 

24



---



##### Table of Contents





| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | limited numbers of local access points for corporate users;                     
|
| |  | delay in the development of enabling technologies or adoption of
	new standards;
|
| |  | inability to integrate business applications with the Internet;                 
|
| |  | the need to operate with multiple and frequently incompatible
	products; and    
|
| |  | a lack of tools to simplify access to and use of the Internet.                  

Improvements to the infrastructure of the Internet could
reduce or eliminate demand for our Internet performance
measurement products and services.

The demand for our Internet service management products and
services could be reduced or eliminated if future improvements to
 the infrastructure of the Internet lead companies to conclude
that measuring and evaluating the performance of their networks
is no longer important to their business. The Internet is a
complex, heterogeneous network of communications networks with
multiple operators and vendors supplying and managing the
underlying infrastructure as well as connections to this
infrastructure. Because the inherent complexity of the Internet
currently causes significant e-commerce quality-of-service
problems for companies, the vendors and operators that supply and
 manage the underlying infrastructure are continuously seeking to
 improve the speed, availability, reliability and consistency of
the Internet. If these vendors and operators succeed in
significantly improving the performance of the Internet, which
would result in corresponding improvements in the performance of
companies networks, demand for our products and services
would likely decline which could have a material adverse effect
on our business, financial condition and results of operations.

Errors in our products or services could discourage customers
and damage our reputation.

If our existing or future products or services contain errors
that are not detected before shipment, we could experience a loss
 of or delay in market acceptance of our products, diversion of
development resources, damage to our reputation or increases in
service or warranty costs, any of which could have a material
adverse effect upon our business, financial condition and results
 of operations. Products and services as complex as those we
offer may contain undetected errors or failures when first
introduced or as new versions are released. There can be no
assurance that, despite testing by us and by current and
potential customers, errors will not be found in new products and
 services until commercial shipments have commenced.

We face growing competition that could make it difficult for
us to acquire and retain customers.

The market for service management systems for corporate IP
networks and the Internet is new and rapidly evolving. We expect
competition in this market to intensify in the future. Our
competitors vary in size and in the scope and breadth of the
products and services that they offer. Many of these competitors
have greater financial, technical, marketing and other resources
than us, and some have well established relationships with our
current and potential customers. As a result, these competitors
may be able to respond to new or emerging technologies and
changes in customer requirements more effectively than us, or
devote greater resources than us to the development, promotion
and sale of products. Increased competition may result in price
reductions, reduced profitability and loss of market share, any
of which could have a material adverse effect on our business,
financial condition and results of operations.

Companies directly competing with Visual UpTime include:



| |   |                                                 
| | - | ------------------------------------------------
| |  | ADC Telecommunications, Inc.  Kentrox Division;
|
| |  | Adtran, Inc.;                                   
|
| |  | Digital Link Corp.;                             
|
| |  | Agilent Technologies, Inc.;                     
|
| |  | NetScout Systems, Inc.;                         

25



---



##### Table of Contents





| |   |                                          
| | - | -----------------------------------------
| |  | Network Associates, Inc.;                
|
| |  | Paradyne Corporation;                    
|
| |  | Sync Research, Inc.; and                 
|
| |  | Telecommunications Techniques Corporation

Companies directly competing with Visual IP Insight include:



| |   |                                                  
| | - | -------------------------------------------------
| |  | Concord Communications, Inc.;                    
|
| |  | First Sense Software, Inc.;                      
|
| |  | Ganymede Software, Inc.;                         
|
| |  | Agilent Technologies, Inc.;                      
|
| |  | Lucent Technologies, Inc.  INS/ InSoft Division;
|
| |  | Micromuse, Inc.;                                 
|
| |  | MDIS Group plc                                   
|
| |  | Jyra Research, Inc.                              
|
| |  | NextPoint Networks, Inc.; and                    
|
| |  | Response Networks, Inc.                          

Companies directly competing with Visual Internet Benchmark
include:



| |   |                                                       
| | - | ------------------------------------------------------
| |  | Freshwater Software, Inc.;                            
|
| |  | Internet Resources Group;                             
|
| |  | Keynote Software, Inc.; and                           
|
| |  | Exodus Communications, Inc.  Service Metrics Division

We expect that we may experience competition from less expensive
products and services that provide only a portion of the
functionality provided by our products and services. In
particular, as prices for network equipment components such as
DSU/CSUs decrease, customers may decide to purchase these less
expensive products even though they lack certain features offered
 by our products. For example, we expect that participants with
strong capabilities in these various segments could partner with
each other to offer products that supply functionality
approaching that provided by Visual UpTime. We are aware of such
arrangements between Digital Link and NetScout, and NetScout and
Paradyne. The success of such products could have a material
adverse effect on our business, financial condition and results
of operations.

If we expand the scope of our products and services, we may
encounter many additional, market-specific competitors. These
potential competitors include companies that sell network
management software such as Lucent Technologies, Inc. 
 OneVision Division and Telecordia Technologies, Inc., each of
which has announced products that could potentially compete with
us in the future. The success of such products could have a
material adverse effect on our business, financial condition and
results of operations.

We have a history of losses and an accumulated deficit and we
may not be profitable in the future.

Our limited history, operating losses and accumulated deficit
make predicting our future operating results difficult. We were
organized in 1993 and introduced Visual UpTime in mid-1995.
Accordingly, we have only a limited operating history upon which
an evaluation of our product and prospects can be based. As of
December 31, 1999, we had an accumulated deficit of
approximately $31.5 million. Although we reported net income
 of $3.6 million for 1999, we incurred consolidated net
losses in 1997 and 1998 of approximately $9.2 million and
$6.5 million, respectively. The loss in 1997 related
primarily to our expenditures associated with the development and
 marketing of the Visual UpTime product, the products of Net2Net
and the

26



---



##### Table of Contents





Our revenue may not continue to grow or be sustained in the
future. Although we have recently experienced an increase in
revenue from service provider companies, such growth should not
be considered indicative of future revenue growth, if any, or of
future operating results. Our revenue in any period depends
primarily on the volume and timing of orders received during the
period, which are difficult to predict. Our expense levels are
based, in part, on the expectation of future revenue. If revenue
levels are below expectations due to delays associated with
customers decision-making processes or for any other
reason, operating results are likely to be materially and
adversely affected. Results of operations may be affected
disproportionately by a reduction in revenue because a large
portion of our expenses are fixed and cannot be easily reduced
without adversely affecting our business. In addition, we
currently intend to increase funding of research and product
development efforts and sales, marketing and customer support
operations and to expand distribution channels. To the extent
such expenses precede or are not promptly followed by increased
revenue, our business, financial condition and results of
operations could be adversely affected.

Our dependence on sole and limited source suppliers makes the
price we pay for important components in our products more
volatile.

We purchase many key components used in the manufacture of our
products only from sole or limited sources. If a sole or limited
source supplier raises their prices, delays shipments or becomes
unable or unwilling to supply a key component, we may be forced
to obtain these components from alternative sources if they are
available which could impair our ability to deliver our products
to our customers in a timely and cost-effective manner, or could
force us to increase our prices or reduce our gross profit
margins. Any of these events could have a material adverse effect
 on our business, financial condition and results of operations
and could jeopardize our relationships with those customers.

The risks associated with being dependant on sole or limited
source suppliers of key components include the following:



| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we have not identified alternative suppliers for all of our key
	components and we may not be able to find alternative suppliers,
	if necessary, or find alternative components of comparable
	quality;                                                                                                        
|
| |  | we will have to qualify alternative suppliers before we purchase
	components from them which will, even if successful, necessarily
	delay the process of procuring the replacement components;                                                                                                                 
|
| |  | most of our suppliers do not have long-term agreements with us,
	so these suppliers could suddenly increase component prices;                                                                                                                                                                                  
|
| |  | even minor delays in shipments of key components from
	suppliers  which we have experienced in the
	past  could delay the shipment of our products;                                                                                                                                                          
|
| |  | although all of our sole or limited source suppliers are based in
	 the United States, some of them may manufacture or acquire
	components from outside of the United States and thus they may be
	 unable to deliver their components if their own supplies are
	interrupted by events in other countries; and
|
| |  | some of the components, including dynamic random access memories
	and embedded communications processors, are subject to
	significant price fluctuations.                                                                                                                                                      

Sole-source components presently include framers, certain
semiconductors, embedded communications processors, communication
 controllers and line interface components.

27



---



##### Table of Contents



We may face difficulties assimilating and may incur costs
associated with any future acquisitions.

As part of our business strategy, we may seek to acquire or
invest in businesses, products or technologies that we feel could
 complement or expand our business, augment our market coverage,
enhance our technical capabilities or that may otherwise offer
growth opportunities. Acquisitions could create risks for us,
including:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | difficulties in assimilation of acquired personnel, operations
	and technologies;                                            
|
| |  | unanticipated costs associated with the acquisition;                                                                         
|
| |  | diversion of managements attention from our core business;                                                                  
|
| |  | adverse effects on existing business relationships with channel
	partners of our products and services and our customers; and
|
| |  | use of substantial portions of our available cash to consummate
	the acquisition.                                            

Our failure to successfully assimilate companies acquired by us
in the future and the occurrence of unanticipated costs that may
arise in connection with such acquisitions, could have a material
 adverse effect on our business, financial condition and results
of operations.

If we expand our international activities, our business will
be susceptible to additional risks associated with international
operations.

We believe we must expand the sales and marketing activities for
our products and services outside the United States and hire
additional international personnel. Therefore, we expect to
commit significant resources to expand our international sales
and marketing activities, which were less than 10% of our
consolidated revenue for 1999 and prior periods. With respect to
the Visual Internet Benchmark product, we intend to deploy
additional measurement computers worldwide, which would require
us to maintain and service computers over longer distances.

Conducting international operations would subject us to risks we
do not face in the United States. These include, but are not
limited to:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | currency exchange rate fluctuations;                                                          
|
| |  | seasonal fluctuations in purchasing patterns;                                                 
|
| |  | unexpected changes in regulatory requirements;                                                
|
| |  | maintaining and servicing computer hardware in distant locations;                             
|
| |  | longer accounts receivable payment cycles and difficulties in
	collecting accounts receivable;
|
| |  | difficulties in managing and staffing international operations;                               
|
| |  | potentially adverse tax consequences, including restrictions on
	the repatriation of earnings;
|
| |  | the burdens complying with a wide variety of foreign
	laws; and                               
|
| |  | reduced protection for intellectual property rights in some
	countries.                       

The Internet and other IP services, such as Frame Relay and ATM,
may not be used as widely in other countries and the adoption of
public data service for transporting mission-critical
applications may evolve slowly or may not evolve at all. As a
result, we may not be successful in selling our products and
services to customers in markets outside the United States.
Failure to expand our international activities successfully could
 have a material adverse effect on our business, financial
condition and results of operations.

The loss of key people could jeopardize our growth prospects.

The loss of the services of our President and Chief Executive
Officer or any other key employee could adversely affect our
ability to execute our business plan and could have a material
adverse effect on our business, financial conditions and results
of operations. Our success depends to a significant degree upon
the

28



---



##### Table of Contents





Our inability to hire and retain employees may hurt our growth
 prospects.

If we fail to hire and retain personnel, it could damage our
ability to grow and expand our business. Our future success
depends on our ability to attract and retain highly skilled
managerial, sales, marketing, customer support and product
development personnel. Intense competition for technically
trained sales and product development personnel makes recruiting
qualified personnel difficult. There can be no assurance that we
will be successful in retaining our key employees or that we can
attract or retain additional skilled personnel as required.
Failure to attract and retain key personnel could have a material
 adverse effect on our business, financial condition and results
of operations.

Others may claim that we infringe their intellectual property
rights.

If others claim that our products infringe on their intellectual
property rights, whether the claims are valid or not, we may be
forced to spend significant sums in litigation, pay damages,
delay product shipments, reengineer our products or acquire
licenses to the claimants intellectual property. We expect
that these claims may become more common as the number of
products in the network management industry increases and the
functionality of these products further overlaps. If a claimant
is successful in a lawsuit arising from such a claim, it could
have a material adverse effect on our business, financial
condition and results of operations.

We must protect our intellectual property rights.

Our success is dependent on our proprietary technology and
intellectual property rights. We hold three patents and also rely
 on copyright and trade secret laws, trademarks, confidentiality
procedures and contractual provisions to protect our proprietary
software, documentation and other proprietary information. These
protection methods may not be adequate to prevent competitors
from developing similar technology. Moreover, in the absence of
patent protection, our business may be adversely affected by
competitors that develop functionally equivalent technology.
Litigation to enforce our intellectual property rights,
regardless of its success or failure, could be burdensome and
expensive and could involve a high degree of uncertainty. In
addition, legal proceedings may divert managements
attention from growing our business.

We may be subject to additional risk as we enter into
transactions in countries where intellectual property laws are
not well developed or enforced effectively. Legal protection of
our rights may be ineffective in such countries, and technology
developed or used in such countries may not be protectable in
jurisdictions where protection is ordinarily available. Failure
to adequately protect our intellectual property rights could have
 a material adverse effect on our business, financial condition
and results of operations.

We have antitakeover protections that may delay or prevent a
change in control that could benefit our stockholders.

Terms of our certificate of incorporation and bylaws make it more
 difficult for another individual or company to acquire control
of our company, even if a change of control would benefit our
stockholders. These terms include:



| |   |                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our board of directors, without stockholder approval, may issue
	up to 5,000,000  shares of preferred stock on terms that
	they determine. This preferred stock could be issued quickly with
	 terms that delay or prevent the change in control of our
	company, make removal of management more difficult or depress the
	 price of our stock;
|
| |  | certain provisions of our Certificate of Incorporation and Bylaws
	 and of Delaware law could delay or make more difficult a merger,
	 tender offer or proxy contest;                                                                                                                                                                           
|
| |  | we are subject to the anti-takeover provisions of
	Section 203 of the Delaware General Corporation Law which
	prohibits a publicly held Delaware corporation from engaging in a
	 business combination with an interested
	stockholder for a period of three years after the date of
	the transaction in which the                          

29



---



##### Table of Contents



| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | person became an interested stockholder, unless the business
	combination is approved in a prescribed manner;                                                     
|
| |  | our board of directors is staggered so that only a
	portion of its members are elected each year;                                                               
|
| |  | only our board of directors, our chairman of the board, our
	president or stockholders holding a majority of our stock can
	call special stockholder meetings; and
|
| |  | special procedures must be followed in order for stockholders to
	present proposals at stockholder meetings.                                                      

In addition, our credit facility with Silicon Valley Bank
prohibits us from engaging in a merger with or being acquired by
another entity without their consent, unless we are the surviving
 entity.




Item 7A.  Quantitative and Qualitative Disclosure
 About Market Risk.

See Item 7 for discussion.




Item 8.  Financial Statements and Supplementary
Data.

The information required by Item 8 of Part II is
incorporated herein by reference to the Consolidated Financial
Statements and financial statement schedules filed with this
report; see Item 14 of Part IV.




Item 9.  Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.

None.

30



---



##### Table of Contents






PART III




Item 10.  Our Directors and Executive Officers of
 the Company.

The information required by Item 10 is hereby incorporated
by reference from the Proxy Statement for our 2000 Annual Meeting
 of Stockholders.




Item 11.  Executive Compensation.

The information required by Item 11 is hereby incorporated
by reference from the Proxy Statement for our 2000 Annual Meeting
 of Stockholders.




Item 12.  Security Ownership of Certain
Beneficial Owners and Management.

The information required by Item 12 is hereby incorporated
by reference from the Proxy Statement for our 2000 Annual Meeting
 of Stockholders.




Item 13.  Certain Relationships and Related
Transactions.

The information required by Item 13 is hereby incorporated
by reference from the Proxy Statement for our 2000 Annual Meeting
 of Stockholders.




PART IV




Item 14.  Exhibits, Financial Statement Schedules
 and Reports on Form 8-K.

|                                           |                                              |                                                                                                                  |  |     |     | 
|------------------------------------------ | -------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- |  | --- | --- | 
|                                           |                                              | Page                                                                                                            
|                                           |                                              | Number                                                                                                          
|                                           |                                              |                                                                                                                 
|(a) Documents filed as part of the report: |                                              |                                                                                                                  |  |    
|                                          
|                                          
|                                          
|                                          
|                                           | (1) Report of Independent Public Accountants |                                                                                                                  |  | F-2 |    
|                                          
|                                          
|                                          
|                                          
|                                           |                                              | Consolidated Balance Sheets as of December 31, 1998
	and 1999                                                    |  |     | F-3 | 
|                                          
|                                          
|                                          
|                                          
|                                           |                                              | Consolidated Statements of Operations for the years ended
	December 31, 1997, 1998 and 1999                      |  |     | F-4 | 
|                                          
|                                          
|                                          
|                                          
|                                           |                                              | Consolidated Statements of Changes in Stockholders
	Equity for the years ended December 31, 1997, 1998 and 1999 |  |     | F-5 | 
|                                          
|                                          
|                                          
|                                          
|                                           |                                              | Consolidated Statements of Cash Flows for the years ended
	December 31, 1997, 1998 and 1999                      |  |     | F-7 | 
|                                          
|                                          
|                                          
|                                          
|                                           |                                              | Notes to Consolidated Financial Statements                                                                       |  |     | F-8 | 
|                                          
|                                          
|                                          
|                                          
|                                           | (2) Financial Statement Schedule             |                                                                                                                  |  | S-1 |    
|                                          
|                                          
|                                          
|                                          
|                                           | (3) Exhibits                                 |                                                                                                                  |  |     |    

The following exhibits are filed or incorporated by reference, as
 stated below:

|        |             |             |  |                                                                                                                                                                          
|------- | ----------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |             |            
|Number  |             | Description
|        |             |            
|        | 3.1$        |             |  | Amended and Restated Certificate of Incorporation of the Company.                                                                                                        
|        | 3.2*        |             |  | Restated By-Laws of the Company.                                                                                                                                         
|        | 10.1*       |             |  | 1994 Stock Option Plan.                                                                                                                                                  
|        | 10.2*       |             |  | 1997 Omnibus Stock Plan, as amended.                                                                                                                                     
|        | 10.3*       |             |  | Amended and Restated 1997 Directors Stock Option Plan.                                                                                                                  
|        | 10.5*      |             |  | Reseller/ Integration Agreement, dated August 29, 1997, by
	and between the Company and MCI Telecommunications Corporation.                                              
|        | 10.5.1$$$ |             |  | Second Amendment, dated November 4, 1998, to the Reseller/
	Integration Agreement between the Company and MCI
	Telecommunications Corporation (relating to Exhibit 10.5).

31



---



##### Table of Contents



|        |           |             |  |                                                                                                                                                                                                       
|------- | --------- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 10.6*    |             |  | Master Reseller Agreement, dated as of August 23, 1996,
	between Sprint/ United Management Company and the Company.                                                                                   
|        | 10.6.1    |             |  | Amendment No. 7 to Agreement between the Company and Sprint/
	 United Management Company dated as of March 23, 2000
	(relating to Exhibit 10.6).                                                      
|        | 10.7*    |             |  | General Agreement for the Procurement of Equipment, Services and
	Supplies between the Company and AT&T Corp.                                                                                         
|        | 10.8*     |             |  | Lease Agreement, dated December 12, 1996, by and between the
	 Company and The Equitable Life Assurance Society of The United
	States.                                                                
|        | 10.8.1*   |             |  | Lease Amendment, dated September 2, 1997, by and between the
	 Company and The Equitable Life Assurance Society of The United
	States (relating to Exhibit 10.8).                                     
|        | 10.8.2$$$ |             |  | Second Lease Amendment, dated February 8, 1999, by and
	between the Company and TA/ Western, LLC, successor to The
	Equitable Life Assurance Society of The United States (relating
	to Exhibit 10.8).
|        | 10.8.3    |             |  | Third Lease Amendment, dated January 10, 2000, by and
	between the Company and TA/Western, LLC (relating to
	Exhibit 10.8).                                                                           
|        | 10.9      |             |  | Sublease, dated October 1, 1999, between the Company and
	Micron Technology, Inc.                                                                                                                     
|        | 10.10*    |             |  | Employment Agreement, dated December 15, 1994, by and
	between the Company and Scott E. Stouffer, as amended.                                                                                         
|        | 10.12*    |             |  | Terms of Employment, dated June 11, 1997, by and between the
	 Company and Peter J. Minihane, as amended.                                                                                             
|        | 10.13     |             |  | Employment Agreement, dated September 15, 1999, by and
	between Inverse Network Technology and Michael Watters.                                                                                       
|        | 10.15%    |             |  | Loan and Security Agreement, dated April 5, 1999, by and
	between Silicon Valley Bank and the Company.                                                                                                
|        | 10.15.1%  |             |  | Revolving Promissory Note issued by the Company on April 5,
	1999, to Silicon Valley Bank (relating to Exhibit 10.15).                                                                                
|        | 10.15.2%  |             |  | Equipment Term Note No. 1 of 2 issued by the Company on
	April 5, 1999 (relating to Exhibit 10.15).                                                                                                   
|        | 10.15.3%  |             |  | Equipment Term Note No. 2 of 2 issued by the Company on
	April 5, 1999 (relating to Exhibit 10.15).                                                                                                   
|        | 10.17**   |             |  | Net2Net 1994 Stock Option Plan.                                                                                                                                                                       
|        | 10.20$$   |             |  | 1999 Employee Stock Purchase Plan.                                                                                                                                                                    
|        | 10.21%%   |             |  | Agreement and Plan of Merger, dated April 15, 1998, by and
	among the Company, Visual Acquisitions Two, Inc. and Inverse
	Network Technology.                                                         
|        | 10.22%%%  |             |  | Inverse Network Technology 1996 Stock Option Plan.                                                                                                                                                    
|        | 16.1*     |             |  | Letter regarding change in certified accountants.                                                                                                                                                     
|        | 21.1      |             |  | List of subsidiaries of the Company.                                                                                                                                                                  
|        | 23.1      |             |  | Consent of Arthur Andersen LLP.                                                                                                                                                                       
|        | 24.1      |             |  | Powers of Attorney (included in signature pages).                                                                                                                                                     
|        | 27.1      |             |  | Financial Data Schedule.                                                                                                                                                                              




|   |                                                                                                                       
|-- | ----------------------------------------------------------------------------------------------------------------------
|*  | Incorporated herein by reference to the Companys
	Registration Statement on Form S-1, No. 333-41517.                 
|  
|** | Incorporated herein by reference to Exhibit 10.1 to the
	Companys Registration Statement on Form S-8,
	No. 333-53153.
|  
|%  | Incorporated herein by reference to the Companys
	Registration Statement on Form S-3, No. 333-90105.                 
|  
|%% | Incorporated herein by reference to Exhibit 2.1 to the
	Companys Current Report on Form 8-K dated
	October 8, 1999.  

32



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|%%% | Incorporated herein by reference to Exhibit 10.1 to the
	Companys Registration Statement on Form S-8,
	No. 333-88719.                                                                                                                                                           
|   
|$   | Incorporated herein by reference to Exhibit 3.1 to the
	Companys Quarterly Report on Form 10-Q for the three
	months ended June 30, 1999.                                                                                                                                       
|   
|$$  | Incorporated herein by reference to the Companys Definitive
	 Proxy Statement on Schedule 14A filed April 30, 1999.                                                                                                                                                             
|   
|$$$ | Incorporated herein by reference to the Companys Annual
	Report on Form 10-K for the year ended December 31,
	1998.                                                                                                                                                             
|   
|   | Portions of these Exhibits were omitted and have been filed
	separately with the Secretary of the SEC pursuant to the
	Companys Applications Requesting Confidential Treatment
	under Rule 406 of the Act, filed on December  22, 1997,
	 January 28, 1998 and February 4, 1998.
|   
|  | Portions of this Exhibit were omitted and have been filed
	separately with the Secretary of the SEC pursuant to the
	Companys Application Requesting Confidential Treatment
	under Rule 24b-2 of the Exchange Act of 1934.                                                      

(b) Reports on Form 8-K

We filed a Current Report on Form 8-K on October 8,
1999, reporting as an Item 2 event the closing of the merger
 with Inverse Network Technology.

We filed a Current Report on Form 8-K on November 12,
1999, reporting as an Item 5 event our post-merger financial
 results on a consolidated basis, reflecting our combined
operations including Inverse Network Technology.

(c) Exhibits

The exhibits required by this Item are listed under
Item 14(a)(3).

(d) Financial Statement Schedules

The consolidated financial statement schedules required by this
Item are listed under Item 14(a)(2).

33



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Company has duly
 caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rockville,
 Maryland, on the 24th day of March, 2000.



| |                      
| | ---------------------
| | VISUAL NETWORKS, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ SCOTT E. STOUFFER

| |                                      
| | -------------------------------------
| | Scott E. Stouffer                    
| | President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Report has been signed below by the
following persons in the capacities and on the date indicated.

Each person whose signature appears below in so signing also
makes, constitutes and appoints Scott E. Stouffer,
Peter J. Minihane and Nancy A. Spangler, and each of
them acting alone, his true and lawful attorney-in-fact, with
full power of substitution, for him in any and all capacities, to
 execute and cause to be filed with the Securities and Exchange
Commission any and all amendments to this Report, with exhibits
thereto and other documents in connection therewith, and hereby
ratifies and confirms all that said attorney-in-fact or his
substitute or substitutes may do or cause to be done by virtue
hereof.

|                                         |  |                                                                                                                          |  |        
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | -------
|Signature                                |  | Title                                                                                                                    |  | Date   
|                                         |  |                                                                                                                          |  |        
|                                        
|/s/ SCOTT E. STOUFFERScott E. Stouffer   |  | President, Chief Executive Officer and Director
	(Principal Executive Officer)                                           |  | 3/24/00
|                                        
|/s/ PETER J. MINIHANEPeter J. Minihane   |  | Executive Vice President, Chief Financial Officer,
	Treasurer and Director
	(Principal Financial and Accounting Officer) |  | 3/24/00
|                                        
|/s/ GRANT G. BEHRMANGrant G. Behrman     |  | Director                                                                                                                 |  | 3/24/00
|                                        
|/s/ MARC F. BENSONMarc F. Benson         |  | Director                                                                                                                 |  | 3/24/00
|                                        
|/s/ THEODORE R. JOSEPHTheodore R. Joseph |  | Director                                                                                                                 |  | 3/24/00
|                                        
|/s/ TED H. MCCOURTNEYTed H. McCourtney   |  | Director                                                                                                                 |  | 3/24/00
|                                        
|/s/ THOMAS A. SMITHThomas A. Smith       |  | Director                                                                                                                 |  | 3/24/00
|                                        
|/s/ WILLIAM J. SMITHWilliam J. Smith     |  | Director                                                                                                                 |  | 3/24/00

34



---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                  |  |      |     | 
|----------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                  |  | Page
|                                                                                                                  |  |     
|Report of Independent Public Accountants                                                                          |  |      | F-2 | 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|Consolidated Balance Sheets as of December 31, 1998 and
	1999.                                                    |  |      | F-3 | 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|Consolidated Statements of Operations for the years ended
	December 31, 1997, 1998 and 1999                       |  |      | F-4 | 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|Consolidated Statements of Changes in Stockholders Equity
	for the years ended December 31, 1997, 1998 and 1999. |  |      | F-5 | 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|Consolidated Statements of Cash Flows for the years ended
	December 31, 1997, 1998 and 1999                       |  |      | F-7 | 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|Notes to Consolidated Financial Statements                                                                        |  |      | F-8 | 

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of



We have audited the accompanying consolidated balance sheets of
Visual Networks, Inc. (a Delaware corporation) and subsidiaries
as of December 31, 1998 and 1999, and the related
consolidated statements of operations, changes in
stockholders equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial
 statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
 about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Visual Networks, Inc. and subsidiaries as of December 31,
 1998 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles
generally accepted in the United States.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Vienna, Virginia



F-2



---



##### Table of Contents



VISUAL NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)


|                                       |                                                                                                                                                                      |                                            |       |         |        |  |       |         |        | 
|-------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------- | ------ |  | ----- | ------- | ------ | 
|                                       |                                                                                                                                                                      |                                           
|                                       |                                                                                                                                                                      | December 31,                              
|                                       |                                                                                                                                                                      |                                           
|                                       |                                                                                                                                                                      | 1998                                       |       | 1999   
|                                       |                                                                                                                                                                      |                                            |       |        
|                                      
|                                      
|                                      
|                                      
|Assets                                
|                                      
|                                      
|                                      
|                                      
|Current assets:                        |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|                                      
|                                      
|                                      
|                                      
|                                       | Cash and cash equivalents                                                                                                                                            |                                            | $     | 51,655  |        |  | $     | 54,629  |       
|                                      
|                                      
|                                      
|                                      
|                                       | Short-term investments                                                                                                                                               |                                            |       | 1,002   |        |  |       |        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts receivable, net of allowance of $493 and $754,
	respectively                                                                                                |                                            |       | 5,948   |        |  |       | 9,374   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Inventory                                                                                                                                                            |                                            |       | 5,086   |        |  |       | 7,998   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Other current assets                                                                                                                                                 |                                            |       | 1,902   |        |  |       | 2,472   |       
|                                       |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|                                       |                                                                                                                                                                      | Total current assets                       |       |         | 65,593 |  |       |         | 74,473 | 
|                                      
|                                      
|                                      
|                                      
|Property and equipment, net            |                                                                                                                                                                      |                                            | 5,814 |         |        |  | 8,566 |        
|                                      
|                                      
|                                      
|                                      
|Other assets                           |                                                                                                                                                                      |                                            | 373   |         |        |  | 115   |        
|                                       |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|                                       |                                                                                                                                                                      | Total assets                               |       | $       | 71,780 |  |       | $       | 83,154 | 
|                                       |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|                                      
|                                      
|                                      
|                                      
|Liabilities and Stockholders Equity  
|                                      
|                                      
|                                      
|                                      
|Current liabilities:                   |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts payable and accrued expenses                                                                                                                                |                                            | $     | 6,388   |        |  | $     | 8,114   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Accrued compensation                                                                                                                                                 |                                            |       | 2,853   |        |  |       | 3,640   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Customer deposits                                                                                                                                                    |                                            |       | 4,613   |        |  |       |        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred revenue                                                                                                                                                     |                                            |       | 7,957   |        |  |       | 11,798  |       
|                                      
|                                      
|                                      
|                                      
|                                       | Current portion of long-term debt                                                                                                                                    |                                            |       | 636     |        |  |       | 568     |       
|                                       |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|                                       |                                                                                                                                                                      | Total current liabilities                  |       |         | 22,447 |  |       |         | 24,120 | 
|                                      
|                                      
|                                      
|                                      
|Long-term debt, net of current portion |                                                                                                                                                                      |                                            | 1,011 |         |        |  | 782   |        
|                                       |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|                                       |                                                                                                                                                                      | Total liabilities                          |       |         | 23,458 |  |       |         | 24,902 | 
|                                       |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|Commitments and contingencies (Note 9) |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|                                      
|                                      
|                                      
|                                      
|                                      
|Stockholders equity:                  |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|                                      
|                                      
|                                      
|                                      
|                                       | Common stock, $.01 par value; 50,000,000 shares
	authorized, 24,190,219 and 24,833,609 shares issued and
	outstanding as of December 31, 1998 and 1999, respectively |                                            |       | 242     |        |  |       | 248     |       
|                                      
|                                      
|                                      
|                                      
|                                       | Additional paid-in capital                                                                                                                                           |                                            |       | 83,977  |        |  |       | 90,169  |       
|                                      
|                                      
|                                      
|                                      
|                                       | Notes receivable from stockholders                                                                                                                                   |                                            |       | (147    | )      |  |       |        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred compensation                                                                                                                                                |                                            |       | (739    | )      |  |       | (705    | )     
|                                      
|                                      
|                                      
|                                      
|                                       | Accumulated deficit                                                                                                                                                  |                                            |       | (35,011 | )      |  |       | (31,460 | )     
|                                       |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|                                       |                                                                                                                                                                      | Total stockholders equity                 |       |         | 48,322 |  |       |         | 58,252 | 
|                                       |                                                                                                                                                                      |                                            |       |         |        |  |       |        
|                                       |                                                                                                                                                                      | Total liabilities and stockholders equity |       | $       | 71,780 |  |       | $       | 83,154 | 
|                                       |                                                                                                                                                                      |                                            |       |         |        |  |       |        

The accompanying notes are an integral part of these consolidated
 financial statements.

F-3



---



##### Table of Contents



VISUAL NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |        |        | 
|--------------------------------------------------------------- | -------------------------- | ------------------------ | ------- | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                |                            |                         
|                                                                |                            | Year Ended December 31, 
|                                                                |                            |                         
|                                                                |                            | 1997                     |         | 1998   |        | 1999
|                                                                |                            |                          |         |        |        |     
|Revenue                                                         |                            | $                        | 29,300  |        |        | $    | 56,088 |        |        | $ | 91,719 |       
|                                                               
|                                                               
|                                                               
|                                                               
|Cost of revenue                                                 |                            |                          | 11,179  |        |        |      | 20,829 |        |        |   | 30,888 |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|                                                                | Gross profit               |                          |         | 18,121 |        |      |        | 35,259 |        |   |        | 60,831 |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|Operating expenses:                                             |                            |                          |         |        |        |      |        |        |        |   |        |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Research and development   |                          |         | 9,148  |        |      |        | 13,771 |        |   |        | 16,677 |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Sales and marketing        |                          |         | 14,555 |        |      |        | 19,759 |        |   |        | 24,447 |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | General and administrative |                          |         | 3,798  |        |      |        | 5,528  |        |   |        | 7,928  |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Merger-related costs       |                          |         |       |        |      |        | 5,069  |        |   |        | 6,776  |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|                                                                |                            | Total operating expenses |         |        | 27,501 |      |        |        | 44,127 |   |        |        | 55,828 | 
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|Income (loss) from operations                                   |                            |                          | (9,380  | )      |        |      | (8,868 | )      |        |   | 5,003  |       
|                                                               
|                                                               
|                                                               
|                                                               
|Interest income, net                                            |                            |                          | 165     |        |        |      | 2,413  |        |        |   | 2,270  |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|Income (loss) before income taxes                               |                            |                          | (9,215  | )      |        |      | (6,455 | )      |        |   | 7,273  |       
|                                                               
|                                                               
|                                                               
|                                                               
|Provision for income taxes                                      |                            |                          |        |        |        |      |       |        |        |   | (3,722 | )     
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|Net income (loss)                                               |                            |                          | (9,215  | )      |        |      | (6,455 | )      |        |   | 3,551  |       
|                                                               
|                                                               
|                                                               
|                                                               
|Dividends and accretion on preferred stock                      |                            |                          | (1,457  | )      |        |      | (171   | )      |        |   |       |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|Net income (loss) attributable to common stockholders           |                            | $                        | (10,672 | )      |        | $    | (6,626 | )      |        | $ | 3,551  |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|Basic income (loss) per share                                   |                            | $                        | (1.44   | )      |        | $    | (0.30  | )      |        | $ | 0.14   |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|Diluted income (loss) per share                                 |                            | $                        | (1.44   | )      |        | $    | (0.30  | )      |        | $ | 0.13   |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|Basic weighted-average shares outstanding                       |                            |                          | 7,431   |        |        |      | 21,946 |        |        |   | 24,583 |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|Diluted weighted-average shares outstanding                     |                            |                          | 7,431   |        |        |      | 21,946 |        |        |   | 26,547 |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|Pro forma basic and diluted loss per share                      |                            | $                        | (0.51   | )      |        | $    | (0.28  | )      |        |   |        |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       
|Pro forma basic and diluted weighted-average shares outstanding |                            |                          | 18,037  |        |        |      | 23,166 |        |        |   |        |       
|                                                                |                            |                          |         |        |        |      |        |        |        |   |        |       

The accompanying notes are an integral part of these consolidated
 financial statements.

F-4



---



##### Table of Contents



VISUAL NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY

(in thousands, except share data)


|                            |                                                             |                 |           |                      |   |              |        |         |   |        |         |          |   |   |   |     |   |  |            |            |   |   |     |     |  
|--------------------------- | ----------------------------------------------------------- | --------------- | --------- | -------------------- | - | ------------ | ------ | ------- | - | ------ | ------- | -------- | - | - | - | --- | - |  | ---------- | ---------- | - | - | --- | --- | -
|                            |                                                             |                 |           |                      |   |              |        |         |   |       
|                            |                                                             | Redeemable      |           |                      |   |              |        |        
|                            |                                                             | Convertible     |           | Series A Convertible |   |             
|                            |                                                             | Preferred Stock |           | Preferred Stock      |   | Common Stock
|                            |                                                             |                 |           |                      |   |             
|                            |                                                             | Shares          |           | Amount               |   | Shares       |        | Amount  |   | Shares |         | Amount  
|                            |                                                             |                 |           |                      |   |              |        |         |   |        |         |         
|Balance, December 31, 1996  |                                                             |                 | 7,228,473 |                      |   | $            | 13,398 |         |   |        | 347,070 |          |   | $ | 3 |     |   |  | 7,337,314  |            |   | $ | 73  |    
|                           
|                           
|                           
|                           
|                            | Accretion on preferred stock                                |                 |           |                     |   |              |        | 235     |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Accrued dividends on preferred stock                        |                 |           |                     |   |              |        | 1,222   |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Issuance of common stock                                    |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            | 35,504     |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Exercise of stock options                                   |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            | 152,452    |   |   |     | 2   |  
|                           
|                           
|                           
|                           
|                            | Deferred compensation                                       |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Amortization of deferred compensation                       |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Net loss                                                    |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                            |                                                             |                 |           |                      |   |              |        |         |   |        |         |          |   |   |   |     |   |  |            |            |   |   |     |    
|Balance, December 31, 1997  |                                                             |                 | 7,228,473 |                      |   |              | 14,855 |         |   |        | 347,070 |          |   |   | 3 |     |   |  | 7,525,270  |            |   |   | 75  |    
|                           
|                           
|                           
|                           
|                            | Accretion on preferred stock                                |                 |           |                     |   |              |        | 16      |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Accrued dividends on preferred stock                        |                 |           |                     |   |              |        | 125     |   |        |         |         |   |   |   | 30  |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Conversion of preferred stock and payment of dividend       |                 |           | (7,228,473           | ) |              |        | (14,996 | ) |        |         | (347,070 | ) |   |   | (33 | ) |  |            | 10,605,735 |   |   |     | 106 |  
|                           
|                           
|                           
|                           
|                            | Issuance of common stock                                    |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            | 5,325,849  |   |   |     | 53  |  
|                           
|                           
|                           
|                           
|                            | Repurchase of common stock                                  |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            | (75,073    | ) |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Exercise of stock options and warrants                      |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            | 785,274    |   |   |     | 8   |  
|                           
|                           
|                           
|                           
|                            | Issuance of common stock for services                       |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            | 6,316      |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Settlement of note for common stock                         |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            | 16,848     |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Deferred compensation                                       |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Amortization of deferred compensation                       |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Net loss                                                    |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                            |                                                             |                 |           |                      |   |              |        |         |   |        |         |          |   |   |   |     |   |  |            |            |   |   |     |    
|Balance, December 31, 1998. |                                                             |                 |          |                      |   |              |       |         |   |        |        |          |   |   |  |     |   |  | 24,190,219 |            |   |   | 242 |    
|                           
|                           
|                           
|                           
|                            | Exercise of stock options and warrants                      |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            | 699,266    |   |   |     | 7   |  
|                           
|                           
|                           
|                           
|                            | Income tax benefit from exercise of stock options           |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Issuance of common stock under employee stock purchase plan |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            | 4,182      |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Repurchase of common stock                                  |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            | (60,058    | ) |   |     | (1  | )
|                           
|                           
|                           
|                           
|                            | Repayment of shareholder notes                              |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Deferred compensation                                       |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Amortization of deferred compensation                       |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                           
|                           
|                           
|                           
|                            | Net income                                                  |                 |           |                     |   |              |        |        |   |        |         |         |   |   |   |    |   |  |            |           |   |   |     |    |  
|                            |                                                             |                 |           |                      |   |              |        |         |   |        |         |          |   |   |   |     |   |  |            |            |   |   |     |    
|Balance, December 31, 1999. |                                                             |                 |          |                      |   | $            |       |         |   |        |        |          |   | $ |  |     |   |  | 24,833,609 |            |   | $ | 248 |    
|                            |                                                             |                 |           |                      |   |              |        |         |   |        |         |          |   |   |   |     |   |  |            |            |   |   |     |    

The accompanying notes are an integral part of these consolidated
 financial statements.

F-5



---



##### Table of Contents



VISUAL NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY  (Continued)

(in thousands, except share data)


|                            |                                                             |            |        |              |   |              |      |             |   |       |      |      |   |   |         |        |   |   |         |        |  
|--------------------------- | ----------------------------------------------------------- | ---------- | ------ | ------------ | - | ------------ | ---- | ----------- | - | ----- | ---- | ---- | - | - | ------- | ------ | - | - | ------- | ------ | -
|                            |                                                             |            |        | Notes        |   |              |      |             |   |      
|                            |                                                             | Additional |        | Receivable   |   |              |      |             |   |      
|                            |                                                             | Paid-In    |        | From         |   | Deferred     |      | Accumulated |   |      
|                            |                                                             | Capital    |        | Stockholders |   | Compensation |      | Deficit     |   | Total
|                            |                                                             |            |        |              |   |              |      |             |   |      
|Balance, December 31, 1996. |                                                             | $          | 14,891 |              |   | $            |     |             |   | $     |     |      |   | $ | (17,713 | )      |   | $ | (2,746  | )     
|                           
|                           
|                           
|                           
|                            | Accretion on preferred stock                                |            |        |             |   |              |      |            |   |       |      |     |   |   |         | (235   | ) |   |         | (235   | )
|                           
|                           
|                           
|                           
|                            | Accrued dividends on preferred stock                        |            |        |             |   |              |      |            |   |       |      |     |   |   |         | (1,222 | ) |   |         | (1,222 | )
|                           
|                           
|                           
|                           
|                            | Issuance of common stock                                    |            |        | 94           |   |              |      |            |   |       |      |     |   |   |         |       |   |   |         | 94     |  
|                           
|                           
|                           
|                           
|                            | Exercise of stock options                                   |            |        | 26           |   |              |      |            |   |       |      |     |   |   |         |       |   |   |         | 28     |  
|                           
|                           
|                           
|                           
|                            | Deferred compensation                                       |            |        | 292          |   |              |      |            |   |       |      | (292 | ) |   |         |       |   |   |         |       |  
|                           
|                           
|                           
|                           
|                            | Amortization of deferred compensation                       |            |        |             |   |              |      |            |   |       |      | 45   |   |   |         |       |   |   |         | 45     |  
|                           
|                           
|                           
|                           
|                            | Net loss                                                    |            |        |             |   |              |      |            |   |       |      |     |   |   |         | (9,215 | ) |   |         | (9,215 | )
|                            |                                                             |            |        |              |   |              |      |             |   |       |      |      |   |   |         |        |   |   |         |       
|Balance, December 31, 1997. |                                                             |            | 15,303 |              |   |              |     |             |   |       | (247 | )    |   |   | (28,385 | )      |   |   | (13,251 | )     
|                           
|                           
|                           
|                           
|                            | Accretion on preferred stock                                |            |        |             |   |              |      |            |   |       |      |     |   |   |         | (16    | ) |   |         | (16    | )
|                           
|                           
|                           
|                           
|                            | Accrued dividends on preferred stock                        |            |        |             |   |              |      |            |   |       |      |     |   |   |         | (155   | ) |   |         | (125   | )
|                           
|                           
|                           
|                           
|                            | Conversion of preferred stock and payment of dividend       |            |        | 14,923       |   |              |      |            |   |       |      |     |   |   |         |       |   |   |         | 14,996 |  
|                           
|                           
|                           
|                           
|                            | Issuance of common stock                                    |            |        | 51,800       |   |              |      |            |   |       |      |     |   |   |         |       |   |   |         | 51,853 |  
|                           
|                           
|                           
|                           
|                            | Repurchase of common stock                                  |            |        | (1           | ) |              |      |            |   |       |      |     |   |   |         |       |   |   |         | (1     | )
|                           
|                           
|                           
|                           
|                            | Exercise of stock options and warrants                      |            |        | 804          |   |              |      | (147        | ) |       |      |     |   |   |         |       |   |   |         | 665    |  
|                           
|                           
|                           
|                           
|                            | Issuance of common stock for services                       |            |        |             |   |              |      |            |   |       |      |     |   |   |         |       |   |   |         |       |  
|                           
|                           
|                           
|                           
|                            | Settlement of note for common stock                         |            |        | 542          |   |              |      |            |   |       |      |     |   |   |         |       |   |   |         | 542    |  
|                           
|                           
|                           
|                           
|                            | Deferred compensation                                       |            |        | 606          |   |              |      |            |   |       |      | (606 | ) |   |         |       |   |   |         |       |  
|                           
|                           
|                           
|                           
|                            | Amortization of deferred compensation                       |            |        |             |   |              |      |            |   |       |      | 114  |   |   |         |       |   |   |         | 114    |  
|                           
|                           
|                           
|                           
|                            | Net loss                                                    |            |        |             |   |              |      |            |   |       |      |     |   |   |         | (6,455 | ) |   |         | (6,455 | )
|                            |                                                             |            |        |              |   |              |      |             |   |       |      |      |   |   |         |        |   |   |         |       
|Balance, December 31, 1998. |                                                             |            | 83,977 |              |   |              | (147 | )           |   |       | (739 | )    |   |   | (35,011 | )      |   |   | 48,322  |       
|                           
|                           
|                           
|                           
|                            | Exercise of stock options and warrants                      |            |        | 2,047        |   |              |      |            |   |       |      |     |   |   |         |       |   |   |         | 2,054  |  
|                           
|                           
|                           
|                           
|                            | Income tax benefit from exercise of stock options           |            |        | 3,722        |   |              |      |            |   |       |      |     |   |   |         |       |   |   |         | 3,722  |  
|                           
|                           
|                           
|                           
|                            | Issuance of common stock under employee stock purchase plan |            |        | 132          |   |              |      |            |   |       |      |     |   |   |         |       |   |   |         | 132    |  
|                           
|                           
|                           
|                           
|                            | Repurchase of common stock                                  |            |        |             |   |              |      |            |   |       |      |     |   |   |         |       |   |   |         | (1     | )
|                           
|                           
|                           
|                           
|                            | Repayment of shareholder notes                              |            |        |             |   |              |      | 147         |   |       |      |     |   |   |         |       |   |   |         | 147    |  
|                           
|                           
|                           
|                           
|                            | Deferred compensation                                       |            |        | 291          |   |              |      |            |   |       |      | (291 | ) |   |         |       |   |   |         |       |  
|                           
|                           
|                           
|                           
|                            | Amortization of deferred compensation                       |            |        |             |   |              |      |            |   |       |      | 325  |   |   |         |       |   |   |         | 325    |  
|                           
|                           
|                           
|                           
|                            | Net income                                                  |            |        |             |   |              |      |            |   |       |      |     |   |   |         | 3,551  |   |   |         | 3,551  |  
|                            |                                                             |            |        |              |   |              |      |             |   |       |      |      |   |   |         |        |   |   |         |       
|Balance, December 31, 1999. |                                                             | $          | 90,169 |              |   | $            |     |             |   | $     | (705 | )    |   | $ | (31,460 | )      |   | $ | 58,252  |       
|                            |                                                             |            |        |              |   |              |      |             |   |       |      |      |   |   |         |        |   |   |         |       

The accompanying notes are an integral part of these consolidated
 financial statements.

F-6



---



##### Table of Contents



VISUAL NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


|                                                                                                     |                  |                                                               |                                       |      |        |        |        |        |        |        |        |       |        |        |  
|---------------------------------------------------------------------------------------------------- | ---------------- | ------------------------------------------------------------- | ------------------------------------- | ---- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ----- | ------ | ------ | -
|                                                                                                     |                  |                                                              
|                                                                                                     |                  | Year Ended December 31,                                      
|                                                                                                     |                  |                                                              
|                                                                                                     |                  | 1997                                                          |                                       | 1998 |        | 1999  
|                                                                                                     |                  |                                                               |                                       |      |        |       
|Cash Flows From Operating Activities:                                                                |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Net income (loss)                                                                                    |                  | $                                                             | (9,215                                | )    |        | $      | (6,455 | )      |        | $      | 3,551  |      
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Adjustments to reconcile net income (loss) to net cash
	provided by
	(used in) operating activities: |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Depreciation and amortization                                 |                                       |      | 1,103  |        |        |        | 1,912  |        |        |       | 4,033  |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Loss on disposal of property and equipment                    |                                       |      | 408    |        |        |        |       |        |        |       |       |       
|                                                                                                     |                  | Changes in assets and liabilities                            |                                       |      |        |        |        |        |        |        |        |       |        |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  |                                                               | Accounts receivable                   |      |        | (1,824 | )      |        |        | (1,422 | )      |       |        | (3,426 | )
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  |                                                               | Inventory                             |      |        | (2,326 | )      |        |        | (1,362 | )      |       |        | (2,912 | )
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  |                                                               | Other assets                          |      |        | (513   | )      |        |        | (1,384 | )      |       |        | (312   | )
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  |                                                               | Accounts payable and accrued expenses |      |        | 4,283  |        |        |        | 290    |        |       |        | 5,448  |  
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  |                                                               | Accrued compensation                  |      |        | 819    |        |        |        | 1,075  |        |       |        | 787    |  
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  |                                                               | Customer deposits                     |      |        | 3,068  |        |        |        | 1,545  |        |       |        | (4,613 | )
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  |                                                               | Deferred revenue                      |      |        | 5,486  |        |        |        | 1,222  |        |       |        | 3,841  |  
|                                                                                                     |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|                                                                                                     |                  | Net cash provided by (used in) operating activities           |                                       |      | 1,289  |        |        |        | (4,579 | )      |        |       | 6,397  |       
|                                                                                                     |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|Cash Flows From Investing Activities:                                                                |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Net (purchases) sales/maturities of short-term investments    |                                       |      |       |        |        |        | (1,002 | )      |        |       | 1,002  |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Proceeds from sale leaseback transactions                     |                                       |      | 544    |        |        |        |       |        |        |       | 750    |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Expenditures for property and equipment                       |                                       |      | (1,898 | )      |        |        | (5,234 | )      |        |       | (5,828 | )     
|                                                                                                     |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|                                                                                                     |                  | Net cash used in investing activities                         |                                       |      | (1,354 | )      |        |        | (6,236 | )      |        |       | (4,076 | )     
|                                                                                                     |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|Cash Flows From Financing Activities:                                                                |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Series A Convertible Preferred Stock dividend                 |                                       |      |       |        |        |        | (30    | )      |        |       |       |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Proceeds from issuance of common stock, net of issuance costs |                                       |      | 94     |        |        |        | 51,853 |        |        |       |       |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Exercise of stock options and warrants                        |                                       |      | 28     |        |        |        | 652    |        |        |       | 2,054  |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Proceeds from employee stock purchase plan                    |                                       |      |       |        |        |        |       |        |        |       | 132    |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Proceeds/repayments from note payable to/from stockholders    |                                       |      | 500    |        |        |        |       |        |        |       | 147    |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Repurchase of common stock                                    |                                       |      |       |        |        |        |       |        |        |       | (1     | )     
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Net borrowings (repayments) under credit agreements           |                                       |      | (348   | )      |        |        | 764    |        |        |       | (1,079 | )     
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Principal payments on capital lease obligations               |                                       |      | (290   | )      |        |        | (370   | )      |        |       | (600   | )     
|                                                                                                     |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|                                                                                                     |                  | Net cash provided by (used in) financing activities           |                                       |      | (16    | )      |        |        | 52,869 |        |        |       | 653    |       
|                                                                                                     |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|Net Increase (Decrease) in Cash and                                                                  |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Cash Equivalents |                                                               |                                       | (81  | )      |        |        | 42,054 |        |        |        | 2,974 |       
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Cash and Cash Equivalents, Beginning of Year                                                         |                  |                                                               | 9,682                                 |      |        |        | 9,601  |        |        |        | 51,655 |      
|                                                                                                     |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|Cash and Cash Equivalents, End of Year                                                               |                  | $                                                             | 9,601                                 |      |        | $      | 51,655 |        |        | $      | 54,629 |      
|                                                                                                     |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|Supplemental Cash Flow Information:                                                                  |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                  | Cash paid for interest                                        |                                       | $    | 143    |        |        | $      | 241    |        |        | $     | 232    |       
|                                                                                                     |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      
|                                                                                                     |                  | Cash paid for income taxes                                    |                                       | $    |       |        |        | $      | 513    |        |        | $     |       |       
|                                                                                                     |                  |                                                               |                                       |      |        |        |        |        |        |        |        |      

The accompanying notes are an integral part of these consolidated
 financial statements.

F-7



---



##### Table of Contents



VISUAL NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Nature of Operations and Summary of Significant
Accounting Policies:

Visual Networks, Inc. (Visual or the
Company) designs, manufactures and sells service
management systems for corporate networks based on the internet
protocol (IP) and the Internet. Visuals
operations are subject to certain risks and uncertainties,
including among others, successful implementation of the Visual
sales and distribution model, long sales cycles, dependence on
significant customers, rapidly changing technology, current and
potential competitors with greater financial, technological,
production, and marketing resources, dependence on sole and
limited source suppliers, dependence on key management personnel,
 limited protection of intellectual property and proprietary
rights, integration of its acquisitions, uncertainty of future
profitability and possible fluctuations in financial results.

Business Combinations and Basis of Presentation

On May 15, 1998, Visual acquired Net2Net Corporation
(Net2Net) in a merger transaction accounted for as a
pooling of interests. Net2Net was engaged in developing,
manufacturing and marketing Asynchronous Transfer Mode
(ATM) wide-area-network management and analysis
systems. Visual issued 2,056,204 shares of its common stock
in exchange for all of the outstanding preferred and common stock
 of Net2Net. In addition, outstanding Net2Net stock options were
converted into options to purchase 189,733 shares of Visual
common stock, a note payable by Net2Net was settled with 16,848
shares of the Companys common stock, and the exercise of a
warrant resulted in the issuance of 2,225 shares of the
Companys common stock.

In connection with the Net2Net acquisition, the Company recorded
merger-related costs of approximately $5,069,000. Transaction
costs totaled approximately $4,111,000 and consisted primarily of
 fees for investment bankers, attorneys, accountants and other
direct transaction costs. Integration costs totaled approximately
 $207,000 and consisted of incremental and non-recurring costs
necessary to integrate Visual and Net2Net. These costs were
expensed as incurred. Restructuring costs totaled approximately
$751,000 (Note 6).

On September 30, 1999, Visual acquired Inverse Network
Technology (Inverse) in a merger transaction
accounted for as a pooling of interests. Inverse is a provider of
 service level management software solutions and internet
measurement services. Visual issued 4,096,429 shares of its
common stock in exchange for all of the outstanding preferred and
 common stock of Inverse. In addition, outstanding Inverse stock
options and warrants were converted into options and warrants to
purchase 425,088 shares of Visual common stock.

In connection with the Inverse acquisition, the Company recorded
merger-related costs of approximately $6,776,000. Transaction
costs totaled approximately $6,400,000 and consisted primarily of
 fees for investment bankers, attorneys, accountants and other
direct transaction costs. The remaining $376,000 in non-recurring
 costs consisted primarily of the write-off of certain assets as
a result of the merger and the accrual of certain employee
benefits to conform the policies of Inverse with those of the
Company.

The accompanying consolidated financial statements have been
retroactively restated to reflect the combined financial position
 and combined results of operations and cash flows for all
periods presented, giving effect to the acquisitions of Net2Net
and Inverse as if they had occurred at the beginning of the
earliest period presented for Net2Net and as of April 1996,
the date of inception, for Inverse (hereafter, Net2Net and
Inverse will be collectively referred to as the Pooled
Entities and Visual, Net2Net and Inverse are

F-8



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

collectively referred to as the Company). Results of
operations for the separate and combined companies prior to the
poolings are as follows (in thousands):

|                   |                 |              |        |        |   |   |        |        |  
|------------------ | --------------- | ------------ | ------ | ------ | - | - | ------ | ------ | -
|                   |                 |             
|                   |                 | Year Ended  
|                   |                 | December 31,
|                   |                 |             
|                   |                 | 1997         |        | 1998  
|                   |                 |              |        |       
|Revenue:           |                 |              |        |        |   |   |        |       
|                  
|                  
|                  
|                  
|                   | Visual          |              | $      | 23,651 |   |   | $      | 49,699 |  
|                  
|                  
|                  
|                  
|                   | Pooled Entities |              |        | 5,649  |   |   |        | 6,389  |  
|                   |                 |              |        |        |   |   |        |       
|                   |                 | $            | 29,300 |        |   | $ | 56,088 |       
|                   |                 |              |        |        |   |   |        |       
|Net Income (Loss): |                 |              |        |        |   |   |        |       
|                  
|                  
|                  
|                  
|                   | Visual          |              | $      | (152   | ) |   | $      | 3,145  |  
|                  
|                  
|                  
|                  
|                   | Pooled Entities |              |        | (9,063 | ) |   |        | (9,600 | )
|                   |                 |              |        |        |   |   |        |       
|                   |                 | $            | (9,215 | )      |   | $ | (6,455 | )     
|                   |                 |              |        |        |   |   |        |       

Use of Estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid instruments with an
original maturity of three months or less at the time of purchase
 to be cash equivalents. The Company maintains its cash and cash
equivalents with high credit quality financial institutions. The
Companys cash equivalents consist primarily of investments
in money market funds that invest in U.S. Treasury
obligations, repurchase agreements collateralized by
U.S. Treasury securities, and high quality corporate
obligations. The Company had approximately $41,919,000 and
$52,638,000, respectively, invested in money market funds as of
December 31, 1998 and 1999 and approximately $1,991,000
invested in a bond fund as of December 31, 1999. The Company
 had short-term investments that consisted of U.S. corporate
 bonds with maturities in excess of three months of approximately
 $1,002,000 as of December 31, 1998. These investments were
classified as available-for-sale securities and were reported at
fair value. As of December 31, 1998, the difference between
the fair value and the amortized cost of available-for-sale
securities was not significant.

Fair Value of Financial Instruments

Statement of Financial Accounting Standards (SFAS)
No. 107, Disclosures about Fair Value of Financial
Instruments, requires disclosures of fair value information
 about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available,
fair values are based on estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. The
carrying values of current assets and current liabilities
approximate fair value because of the relatively short maturities
 of these instruments. The fair value of the Companys
long-term debt is estimated using a discounted cash flow analysis
 based on the Companys borrowing cost for similar credit
facilities. The Company estimates that as of December 31,
1999, the fair value of its long-term debt does not differ
materially from its carrying value.

F-9



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Revenue Recognition

The Companys service management products and services
include hardware, software, benchmark services and technical
support. The Company generally recognizes revenue from the sale
or license of its products upon delivery and passage of title to
the customer. Where agreements provide for evaluation or customer
 acceptance, the Company recognizes revenue upon the completion
of the evaluation process and acceptance of the product by the
customer. Maintenance contracts call for the Company to provide
technical support and software updates to customers. The Company
recognizes product support and maintenance revenue, including
maintenance revenue that is bundled with product sales, ratably
over the term of the contract period, which generally ranges from
 one to three years. Revenues from services are recognized when
the services are performed. Subscription fees for the
Companys benchmark reports are deferred and recognized upon
 delivery of the reports.

The Company adopted the American Institute of Certified Public
Accountants (the AICPA) Statement of Position
(SOP) 97-2, Software Revenue Recognition
in 1998 and recognizes software revenue in accordance with SOP
97-2. Effective December 15, 1998, the AICPA issued SOP 98-9
 Modification of SOP 97-2, Software Revenue Recognition,
with Respect to Certain Transactions. This SOP amends SOP
98-4, Deferral of Effective Date of a Provision of SOP
97-2 to extend the deferral of the application of passages
of SOP 97-2 provided by SOP 98-4 through fiscal years beginning
before March 15, 1999 and provides additional guidance
regarding the accounting for multiple element software sales. The
 adoption of SOP 98-9 did not have a material effect on the
Companys operating results or financial position.

The Company has agreements with certain resellers that provide
price protection in the event that more favorable prices and
terms are granted to any other customer. Reserves for estimated
price protection credits are established by the Company
concurrently with the recognition of revenue. The Company
monitors the factors that influence the pricing of its products
and reseller inventory levels and makes adjustments to these
reserves when management believes that actual price protection
credits may differ from established estimates.

Credit Risk

Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash, cash equivalents, short-term investments, and accounts
receivable. The Company sells its products to large
telecommunications and internet service providers and subscribers
 primarily in the United States. The Company grants
uncollateralized credit terms to its customers and has not
experienced any significant credit related losses. Accounts
receivable include allowances to record receivables at their
estimated net realizable value. For the year ended
December 31, 1997, one customer individually represented 26%
 of revenue. For the year ended December 31, 1998, three
customers individually represented 27%, 16% and 13% of revenue,
respectively. For the year ended December 31, 1999, two
customers each represented 25% of revenue.

Warranty

The Company warrants its hardware products for periods of up to
five years. Estimated warranty costs are charged to cost of
revenue in the period in which revenue from the related product
sale is recognized.

F-10



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Inventory

Inventory is stated at the lower of average cost or market.
Inventory consists of the following (in thousands):

|                 |  |              |       |      |  |   |       | 
|---------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                 |  |             
|                 |  | December 31,
|                 |  |             
|                 |  | 1998         |       | 1999
|                 |  |              |       |     
|Raw materials    |  | $            | 821   |      |  | $ | 764   | 
|                
|                
|                
|                
|Work-in-progress |  |              | 1,228 |      |  |   | 2,230 | 
|                
|                
|                
|                
|Finished goods   |  |              | 3,037 |      |  |   | 5,004 | 
|                 |  |              |       |      |  |   |       | 
|                 |  | $            | 5,086 |      |  | $ | 7,998 | 
|                 |  |              |       |      |  |   |       | 

Property and Equipment

Property and equipment is carried at cost and depreciated over
its estimated useful life, ranging from three to five years,
using the straight-line method. Equipment held under capital
leases is recorded at the present value of the future minimum
lease payments and is amortized on a straight-line basis over the
 shorter of the assets useful lives or the relevant lease
term, ranging from three to seven years.

Property and equipment consists of the following (in thousands):

|                              |  |              |        |      |  |   |        |  
|----------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                              |  |             
|                              |  | December 31,
|                              |  |             
|                              |  | 1998         |        | 1999
|                              |  |              |        |     
|Equipment and software        |  | $            | 6,991  |      |  | $ | 10,170 |  
|                             
|                             
|                             
|                             
|Furniture and fixtures        |  |              | 1,644  |      |  |   | 3,043  |  
|                             
|                             
|                             
|                             
|Leasehold improvements        |  |              | 59     |      |  |   | 1,684  |  
|                              |  |              |        |      |  |   |        |  
|                              |  |              | 8,694  |      |  |   | 14,897 |  
|                             
|                             
|                             
|                             
|Less-Accumulated depreciation |  |              | (2,880 | )    |  |   | (6,331 | )
|                              |  |              |        |      |  |   |        |  
|                              |  | $            | 5,814  |      |  | $ | 8,566  |  
|                              |  |              |        |      |  |   |        |  

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following
(in thousands):

|                 |  |              |       |      |  |   |       | 
|---------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                 |  |             
|                 |  | December 31,
|                 |  |             
|                 |  | 1998         |       | 1999
|                 |  |              |       |     
|Accounts payable |  | $            | 2,055 |      |  | $ | 2,908 | 
|                
|                
|                
|                
|Accrued expenses |  |              | 4,333 |      |  |   | 5,206 | 
|                 |  |              |       |      |  |   |       | 
|                 |  | $            | 6,388 |      |  | $ | 8,114 | 
|                 |  |              |       |      |  |   |       | 

Research and Development

Research and development costs are expensed as incurred.

The Company accounts for software development costs in accordance
 with SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise
Marketed. Costs incurred prior to establishment of
technological feasibility are expensed as incurred and reflected
as research and development costs in the accompanying
consolidated statements of operations. For the years ended
December 31, 1997, 1998, and 1999, the Company did not
capitalize any costs related to software development. During
these periods, the time between the establishment of
technological feasibility and general release of products was

F-11



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

very short. Consequently, costs otherwise capitalizable after
technological feasibility were expensed as they were immaterial.

In March 1998, the AICPA issued SOP 98-1 Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 requires the Company to capitalize
internal computer software costs once the capitalization criteria
 are met. SOP 98-1 was effective January 1, 1999, and has
been applied to all projects in progress upon initial
application. The Company adopted SOP 98-1 on January 1, 1999
 and its adoption had no material impact on the Companys
operating results or financial position.

Income Taxes

The Company accounts for income taxes in accordance with SFAS
No. 109 Accounting for Income Taxes. Under SFAS
No. 109, deferred tax assets and liabilities are computed
based on the difference between the financial statement and
income tax bases of assets and liabilities using the enacted
marginal tax rate. SFAS No. 109 requires that the net
deferred tax asset be reduced by a valuation allowance if, based
on the weight of available evidence, it is more likely than not
that some portion or all of the net deferred tax asset will not
be realized.

Basic and Diluted Earnings (Loss) per Share

In March 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 128, Earnings Per
Share. SFAS No. 128 requires dual presentation of
basic and diluted earnings per share. Basic earnings
(loss) per share includes no dilution and is computed by
dividing net income (loss) available to common stockholders
by the weighted-average number of common shares outstanding for
the period.

Diluted earnings (loss) per share includes the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
 Options to purchase 2,470,395 and 2,600,019 shares of
common stock, respectively, that were outstanding at
December 31, 1997 and 1998, were not included in the
computation of diluted loss per share as their effect would be
anti-dilutive. The treasury stock effect of options to purchase
3,953,444 shares of common stock that were outstanding as of
 December 31, 1999 was included in the computation of
diluted earnings per share for the year ended December 31,
1999. The effect of preferred stock convertible into
10,605,735 shares of common stock as of December 31,
1997 has not been included in the computation of diluted loss per
 share as such effect would have been anti-dilutive. Similarly,
the effect of preferred stock convertible into
10,605,735 shares of common stock outstanding from
January 1, 1998 to February 11, 1998, has also not been
 included in the computation of diluted loss per share. The
effect of the conversion of the preferred stock is included in
the computation of both basic and diluted loss per share from the
 date of conversion on February 11, 1998. Pro forma basic
and diluted weighted-average common shares outstanding assumes
the conversion of all of the Companys outstanding
convertible preferred stock for each period presented.

F-12



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The following details the computation of the earnings
(loss) per share (in thousands, except per share data):

|                                                                 |                                                       |                         |        |         |   |      |        |        |   |   |        |        | 
|---------------------------------------------------------------- | ----------------------------------------------------- | ----------------------- | ------ | ------- | - | ---- | ------ | ------ | - | - | ------ | ------ | 
|                                                                 |                                                       |                        
|                                                                 |                                                       | Year Ended December 31,
|                                                                 |                                                       |                        
|                                                                 |                                                       | 1997                    |        | 1998    |   | 1999
|                                                                 |                                                       |                         |        |         |   |     
|Adjustments to net income (loss):                                |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|                                                                
|                                                                
|                                                                
|                                                                
|Net income (loss)                                                |                                                       | $                       | (9,215 | )       |   | $    | (6,455 | )      |   | $ | 3,551  |       
|                                                                
|                                                                
|                                                                
|                                                                
|Dividends and accretion on preferred stock                       |                                                       |                         | (1,457 | )       |   |      | (171   | )      |   |   |       |       
|                                                                 |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|                                                                 | Net income (loss) attributable to common stockholders |                         | $      | (10,672 | ) |      | $      | (6,626 | ) |   | $      | 3,551  | 
|                                                                 |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|Weighted-average share calculation:                              |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|                                                                
|                                                                
|                                                                
|                                                                
|Basic weighted-average shares outstanding:                       |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Average number of shares of common stock outstanding  |                         |        | 7,431   |   |      |        | 21,946 |   |   |        | 24,583 | 
|                                                                
|                                                                
|                                                                
|                                                                
|Diluted weighted-average shares outstanding:                     |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Treasury stock effect of options and warrants         |                         |        |        |   |      |        |       |   |   |        | 1,964  | 
|                                                                 |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|Diluted weighted-average shares outstanding                      |                                                       |                         | 7,431  |         |   |      | 21,946 |        |   |   | 26,547 |       
|                                                                 |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|Pro forma basic and diluted weighted-average shares outstanding: |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Conversion of preferred stock                         |                         |        | 10,606  |   |      |        | 1,220  |   |   |        |        | 
|                                                                 |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|Pro forma basic and diluted weighted-average shares outstanding  |                                                       |                         | 18,037 |         |   |      | 23,166 |        |   |   |        |       
|                                                                 |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|Income (loss) per common share:                                  |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Basic income (loss) per share                         |                         | $      | (1.44   | ) |      | $      | (0.30  | ) |   | $      | 0.14   | 
|                                                                 |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|                                                                 | Diluted income (loss) per share                       |                         | $      | (1.44   | ) |      | $      | (0.30  | ) |   | $      | 0.13   | 
|                                                                 |                                                       |                         |        |         |   |      |        |        |   |   |        |       
|                                                                 | Pro forma basic and diluted loss per share            |                         | $      | (0.51   | ) |      | $      | (0.28  | ) |   |        |        | 
|                                                                 |                                                       |                         |        |         |   |      |        |        |   |   |        |       

New Accounting Pronouncements

The Company has adopted SFAS No. 130, Reporting
Comprehensive Income. Under SFAS No. 130, the Company
is required to display comprehensive income (loss) and its
components as part of the financial statements. Comprehensive
income (loss) includes certain changes in equity that are
excluded from net income (loss). Specifically, SFAS No. 130
requires unrealized holding gains and losses on
available-for-sale securities, to be included in accumulated and
other comprehensive income (loss). The Company has no material
components of other comprehensive income (loss) and,
accordingly, the comprehensive income (loss) is the same as
net income (loss) for all periods presented.

The Company has adopted SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information.
The adoption of SFAS No. 131 did not have a significant
effect on the disclosure of segment information as management
concluded that operations occur primarily in one segment only.

2.  Credit Agreements and Long-Term Debt:

The Companys line of credit agreement (the Loan
Agreement), as amended on April 5, 1999, provides for
a revolving credit line with borrowings up to the lesser of
$7,000,000 or 85% of eligible accounts receivable as well as a
$1,000,000 capital equipment line. The revolving line matures in
July 2000 and borrowings under the revolving line bear
interest at the prime rate. Borrowings under the capital
equipment line will be payable over a three-year period. The Loan
 Agreement also contains restrictive covenants, including, but
not limited to, restrictions related to liquidity, profitability
and net worth, as well as restrictions related to acquisitions,
disposition of assets, distributions and investments. As of
December 31, 1998 and 1999, the Company had no borrowings
outstanding under the Loan Agreement.

F-13



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

In June 1999, Inverse entered into an accounts receivable
purchase agreement (Accounts Receivable Agreement)
with a bank. The Accounts Receivable Agreement, as amended,
allows for the sale of Inverse accounts receivable of up to
$2,500,000 to the bank, subject to certain limitations. The
Accounts Receivable Agreement matures on June 25, 2000, and
outstanding balances bear interest at the banks prime rate
plus 4%. The Accounts Receivable Agreement also provides for
certain other administrative and facility fees. There were no
borrowings against the Accounts Receivable Agreement as of
December 31, 1999. In connection with the Accounts
Receivable Agreement, the Company issued the bank a warrant to
purchase 4,452 shares of common stock at a price of
$22.46 per share. The fair value of this warrant was
immaterial. In November 1999, the bank, in lieu of
exercising the warrant, elected to convert the warrant into
2,363 shares of common stock in accordance with the terms of
 the warrant.

In January 1997, Inverse entered into an equipment financing
 agreement for up to $350,000 with a leasing company. As of
December 31, 1998, Inverse had financed approximately
$350,000 in equipment purchases structured as loans under this
agreement. The equipment loans are repaid over 42 months
with interest at a rate of approximately 16% and are secured by
the related equipment. In connection with the equipment financing
 agreement, the Company issued a warrant to purchase
5,799 shares of common stock at a price of $3.62 per
share. The fair value of this warrant was immaterial. In
October 1999, the leasing company, in lieu of exercising the
 warrant, elected to convert the warrant into 5,280 shares
of common stock in accordance with the terms of the warrant.

In June 1998, Inverse entered into an equipment financing
agreement for up to $1,000,000 with a bank. As of
December 31, 1998, Inverse had financed $1,000,000 in
equipment purchases under this agreement structured as loans. The
 equipment loans are repaid over 48 months at a rate of the
institutions prime lending rate plus 0.5% and are secured
by certain assets of Inverse.

During 1999, the Inverse made additional principal payments on
the equipment financing agreements of approximately $1,079,000.
Following is a schedule of future principal payments under the
equipment financing agreements as of December 31, 1999 (in
thousands):

|                        |      |      |    
|----------------------- | ---- | ---- | ---
|Year ended December 31, |      |     
|                       
|                       
|                       
|                       
|                        | 2000 |      | $93
|                       
|                       
|                       
|                       
|                        | 2001 |      | 92 
|                        |      |     
|                        |      | $185
|                        |      |     

3.  Preferred Stock:

The Company had a total of 12,576,508 shares of authorized
preferred stock, 7,576,508 shares of which were designated
as Series A, B, C, D and E convertible preferred stock and
5,000,000 of which has not been designated. All of the then
outstanding shares of Series A, B, C, D and E convertible
preferred stock were converted to common stock in connection with
 the Companys initial public offering (IPO) in
February 1998. In connection with the conversion of the
Series A preferred stock into common stock upon completion
of the IPO, the Company declared and paid cash dividends of
approximately $30,000 to holders of the Series A. The series
 B, C, D and E Preferred Stock had certain liquidation, dividend
and redemption rights. The Company accrued the cumulative
dividends and recorded periodic accretion under the interest
method for the excess of the redemption value of each series over
 the stated value.

4.  Stockholders Equity:

Initial Public Offering

In February 1998, the Company completed an IPO of
4,025,000 shares of the Companys common stock
resulting in net proceeds of approximately $45,353,000.
Concurrent with the offering, the Series A convertible

F-14



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

preferred stock and the Series B, C, D, and E redeemable
convertible preferred stock were converted into 485,890 and
10,119,845 shares of common stock, respectively.

1999 Employee Stock Purchase Plan

In May 1999, the Company adopted the 1999 Employee Stock
Purchase Plan (the 1999 Purchase Plan) which provides
 for the issuance of a maximum of 400,000 shares of common
stock pursuant to options granted to participating employees. All
 employees of the Company, except employees who own 5% or more of
 the Companys common stock, whose customary employment is
more than 20 hours per week and more than five months in any
 calendar year are eligible to participate in the 1999 Purchase
Plan. To participate, an employee must authorize the Company to
deduct an amount, subject to certain limitations, from his or her
 pay during defined six-month periods (Option
Periods). An initial Option Period was established upon
adoption of the 1999 Purchase Plan for a stub period from
August 1, 1999 through October 31, 1999. Subsequent to
October 31, 1999, Option Periods will begin on November 1
and May 1 of each year. In no case will an employee be entitled
to purchase more than the number of whole shares determined by
dividing $12,500 by the fair market value of the common stock on
the first day of the Option Period. The purchase price for each
share of common stock purchased pursuant to an option is 85% of
the closing price of the common stock on either the first or last
 trading day of the applicable Option Period, whichever price is
lower. In November 1999, the Company issued
4,182 shares of common stock pursuant to the provisions of
the 1999 Purchase Plan.

5. Stock Options:

1994 Stock Option Plan

The Companys 1994 Stock Option Plan (the Option
Plan) authorizes the issuance of an aggregate of
1,975,000 shares of common stock pursuant to the exercise of
 stock options. The Option Plan provides for grants of options to
 employees, consultants, and directors of the Company. The Option
 Plan provides for the granting of both incentive stock options
and non-statutory options. The Option Plan is administered by the
 Compensation Committee of the Board of Directors, which has sole
 discretion and authority, consistent with the provisions of the
Option Plan, to determine which eligible participants will
receive options, the time when options will be granted, the terms
 of options granted, and the number of shares that will be
subject to options granted under the Option Plan.

For any option intended to qualify as an incentive stock option,
the exercise price must not be less than 100% of the fair market
value of the common stock on the date the option is granted (110%
 of the fair market value of such common stock with respect to
any optionee who immediately before any option is granted,
directly or indirectly, possesses more than 10% of the total
combined voting power of all classes of stock of the Company
(10% Owners)). In the case of non-statutory options,
the exercise price shall not be less than 20% of the fair value
of the common stock at the time of the grant. The Compensation
Committee has the authority to determine the time or times at
which options granted under the Option Plan become exercisable
(typically up to five years); provided that, for any option
intended to qualify as an incentive stock option, such option
must expire no later than ten years from the date of grant (five
years with respect to 10% Owners). Unless terminated sooner by
the Board, the Option Plan terminates in December 2004 or
the date on which all shares available for issuance shall have
been issued pursuant to the exercise or cancellation of options
granted under the Option Plan.

Net2Net 1994 Stock Plan

The Net2Net 1994 Stock Plan (the Net2Net Plan)
authorizes the issuance of shares of common stock with respect to
 certain Stock Rights granted under the Net2Net Plan.
 In connection with the Net2Net merger, the Company assumed the
obligations of Net2Net under the Net2Net Plan. Subsequent to the

F-15



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

merger, Visuals Board of Directors adopted a resolution not
 to make any future option grants under the Net2Net Plan. Stock
Rights under the Net2Net Plan took the form of grants of
incentive and non-statutory stock options. The Net2Net Plan
provided for grants of options to employees, officers, directors
and consultants of Net2Net or any affiliate of Net2Net.

Inverse 1996 Stock Option Plan

Under the 1996 Stock Option Plan (the Inverse Plan),
both incentive and nonqualified stock options were granted to
eligible employees. In connection with the Inverse merger, the
Company assumed the obligations of Inverse under the Inverse
Plan. Options granted under the Inverse Plan, generally vest over
 four years. Subsequent to the merger, Visuals Board of
Directors adopted a resolution not to make any future option
grants under the Inverse Plan.

1997 Omnibus Stock Plan

The Companys 1997 Omnibus Stock Plan (the Omnibus
Plan) authorizes the issuance of an aggregate of up to
3,000,000 shares of common stock with respect to certain
Awards made under the Omnibus Plan. The Omnibus Plan
provides for grants of options to employees, officers, directors,
 and consultants of the Company or any affiliate of the Company;
provided, however, that no individual may receive an award of
more than 250,000 shares in any year. Awards under the
Omnibus Plan may take the form of grants of stock options, stock
appreciation rights, restricted or unrestricted stock, phantom
stock, performance awards, or any combination thereof. The
Omnibus Plan is administered by the Board of Directors, or by
such committee or committees as may be appointed by the Board of
Directors from time to time (the Administrator). The
Administrator has sole power and authority, consistent with the
provisions of the Omnibus Plan, to determine which eligible
participants will receive Awards, the form of the Awards and the
number of shares of common stock covered by each Award, to impose
 terms, limits, restrictions, and conditions upon Awards, to
modify, amend, extend, or renew Awards (with the consent of the
awardee), to accelerate or change the exercise timing of Awards
or to waive any restrictions or conditions to an Award and to
establish objectives and conditions for earning Awards. Unless
terminated sooner by the Board, the Omnibus Plan will terminate
in October 2007 or the date on which all shares available
for issuance shall have been issued pursuant to the exercise or
cancellation of Awards under the Omnibus Plan.

1997 Directors Stock Option Plan

The 1997 Directors Stock Option Plan (the Director
Plan) was adopted in October 1997. Under the terms of
the Director Plan, directors of the Company who are not employees
 of the Company (the Eligible Directors) are eligible
 to receive non-statutory options to purchase shares of common
stock. A total of 300,000 shares of common stock may be
issued upon exercise of options granted under the Director Plan.
Unless terminated sooner by the Board of Directors, the Director
Plan will terminate in October 2007, or the date on which
all shares available for issuance under the Director Plan shall
have been issued pursuant to the exercise of options granted
under the Director Plan.

Upon a members initial election or appointment to the Board
 of Directors, such member will be granted options to purchase
24,000 shares of common stock, vesting over four years, with
 options to purchase 6,000 shares vesting at the first
anniversary of the grant and options to purchase the remaining
18,000 shares vesting thereafter, in 36 equal monthly
installments. Annual options to purchase 6,000 shares of
common stock (the Annual Options) will be granted to
each Eligible Director on the date of each annual meeting of
stockholders. Annual Options will vest at the rate of one-twelfth
 of the total grant per month, and will vest in full at the
earlier of (i) the first anniversary of the date of the
grant or (ii) the date of the next annual meeting of
stockholders. The exercise price of options granted under the
Director Plan will equal the fair market value per share of the
common stock on the date of grant.

F-16



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

A summary of the Companys stock option activity is
presented below:

|                                         |           |           |           |              |      |                |   |        |       |   |       |       | 
|---------------------------------------- | --------- | --------- | --------- | ------------ | ---- | -------------- | - | ------ | ----- | - | ----- | ----- | 
|                                         |           |           |           |              |      | Weighted-     
|                                         |           |           |           | Option Price |      | Average       
|                                         |           | Options   |           | Per Share    |      | Exercise Price
|                                         |           |           |           |              |      |               
|Options outstanding at December 31, 1996 |           | 1,404,900 |           | $0.02        |      |               |   | $4.73  |       | $ | 0.59  |      
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |           | 1,355,117 |              | 0.17 |                |  |        | 7.00  |   |       | 2.63  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |           | (163,420) |              | 0.07 |                |  |        | 7.00  |   |       | 1.56  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |           | (126,202) |              | 0.02 |                |  |        | 7.00  |   |       | 0.17  | 
|                                         |           |           |           |              |      |                |   |       
|Options outstanding at December 31, 1997 |           | 2,470,395 |           | 0.03         |      |               |   | 7.00   |       |   | 1.67  |      
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |           | 1,148,862 |              | 0.41 |                |  |        | 34.50 |   |       | 14.33 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |           | (236,292) |              | 0.17 |                |  |        | 29.00 |   |       | 12.23 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |           | (782,946) |              | 0.07 |                |  |        | 17.50 |   |       | 1.03  | 
|                                         |           |           |           |              |      |                |   |       
|Options outstanding at December 31, 1998 |           | 2,600,019 |           | 0.03         |      |               |   | 34.50  |       |   | 6.50  |      
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |           | 2,394,873 |              | 0.06 |                |  |        | 59.00 |   |       | 31.48 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |           | (345,836) |              | 0.17 |                |  |        | 34.50 |   |       | 14.91 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |           | (695,612) |              | 0.03 |                |  |        | 32.25 |   |       | 3.27  | 
|                                         |           |           |           |              |      |                |   |       
|Options outstanding at December 31, 1999 |           | 3,953,444 |           | $0.03        |      |               |   | $59.00 |       | $ | 21.41 |      
|                                         |           |           |           |              |      |                |   |       

As of December 31, 1999, options to purchase
706,186 shares of common stock were exercisable with a
weighted-average exercise price of $11.71. The weighted-average
remaining contractual life of options outstanding at
December 31, 1999 was 8.6 years.

In October 1995, the FASB issued SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS
No. 123 defines a fair value based method of
accounting for stock-based compensation. Under the fair value
based method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the
service period. Prior to the issuance of SFAS No. 123,
stock-based compensation was accounted for under the
intrinsic value method as defined by Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Under the
intrinsic value method, compensation is the excess, if any, of
the market price of the stock at grant date or other measurement
date over the amount an employee must pay to acquire the stock.

SFAS No. 123 allows an entity to continue to use the
intrinsic value method. However, entities electing the accounting
 in APB Opinion No. 25 must make pro forma disclosures as if
 the fair value based method of accounting had been applied. The
Company applies APB Opinion No. 25 and the related
interpretations in accounting for its stock-based compensation.
Under APB Opinion No. 25, the Company has recorded deferred
compensation of approximately $292,000, $606,000 and $291,000
related to stock option grants in 1997, 1998 and 1999,
respectively, of which approximately $45,000, $114,000, and
$325,000 has been amortized in the years ended December 31,
1997, 1998 and 1999, respectively.

F-17



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Had compensation expense been determined based on the fair value
of the options at the grant dates consistent with the method of
accounting under SFAS No. 123, the Companys net income
 or (loss) and income or (loss) per share would have
decreased or increased to the pro forma amounts indicated below
(in thousands, except per share amounts):

|                                                       |             |                         |   |         |   |      |   |        |   |  |   |        |  
|------------------------------------------------------ | ----------- | ----------------------- | - | ------- | - | ---- | - | ------ | - |  | - | ------ | -
|                                                       |             |                        
|                                                       |             | Year Ended December 31,
|                                                       |             |                        
|                                                       |             | 1997                    |   | 1998    |   | 1999
|                                                       |             |                         |   |         |   |     
|Net income (loss) attributable to common stockholders: |             |                         |   |         |   |      |   |        |   |  |   |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | As reported |                         | $ | (10,672 | ) |      | $ | (6,626 | ) |  | $ | 3,551  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Pro forma   |                         | $ | (10,814 | ) |      | $ | (8,658 | ) |  | $ | (4,620 | )
|                                                      
|                                                      
|                                                      
|                                                      
|Diluted earnings (loss) per share:                     |             |                         |   |         |   |      |   |        |   |  |   |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | As reported |                         | $ | (1.44   | ) |      | $ | (0.30  | ) |  | $ | 0.13   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Pro forma   |                         | $ | (1.46   | ) |      | $ | (0.39  | ) |  | $ | (0.19  | )

The fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for grants during the years ended
December 31, 1997, 1998 and 1999: no dividend yield,
expected volatility from zero to 81%, risk-free interest rates
from 4.0% to 6.9% and an expected term ranging from 5 to
10 years.

6.  Restructuring:

In the second quarter of 1998, the Company recorded a
restructuring charge of approximately $2,749,000 primarily in
connection with the consolidation of Visual and Net2Nets
manufacturing, sales, marketing and administrative functions as
well as the discontinuance of certain Net2Net product development
 efforts. The consolidation included a reduction in employees
that resulted in severance and other termination benefits
including out-placement assistance. The remaining restructuring
costs related primarily to the termination of contractual
obligations, including leases and OEM distribution agreements,
with no future benefit. During 1998, approximately $751,000 was
charged against the restructuring reserve. This amount included
approximately $546,000 related to termination costs for
approximately 15 employees including severance and other
benefits. The remaining charge to the reserve of approximately
$205,000 related primarily to amounts paid under contractual
obligations. In the fourth quarter of 1998, the Company reversed
approximately $1,998,000 of the restructuring charge previously
recorded. The lower than estimated cost resulted from fewer than
planned terminations and higher than planned attrition, along
with lower than estimated costs associated with exiting certain
contractual obligations. As of December 31, 1998, all
amounts due under the contractual obligations have been paid and
all of the employee terminations have been completed and the
related benefits have been paid.

7.  Employee Benefit Plans:

Effective January 1, 1996, the Company adopted a defined
contribution plan (the Visual 401(k) Plan), available
 to all eligible full-time employees upon employment. The Visual
401(k) Plan qualifies for preferential tax treatment under the
Internal Revenue Code. Employee contributions are voluntary and
are determined on an individual basis with a maximum annual
amount equal to 15% of compensation paid during the plan year,
not to exceed the annual Internal Revenue Service contribution
limitations. All participants are fully vested in their
contributions. There have been no employer contributions under
the Visual 401(k) Plan.

During 1996, Net2Net adopted a qualified 401(k) retirement plan
(the Net2Net 401(k) Plan). The Net2Net 401(k) Plan
covered substantially all employees who satisfied a three-month
service requirement and attained the age of 21. The Net2Net
401(k) Plan provided for an optional Net2Net contribution for any
 plan year at Net2Nets discretion. There were no Net2Net
contributions to the plan for the years ended December 31,
1997 and 1998.

F-18



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

During 1997, Inverse adopted a defined contribution retirement
plan under Internal Revenue Service Code Section 401(k) (the
 Inverse 401(k) Plan). All Inverse employees are
eligible, following three months of employment, to contribute a
specified percentage of their salary, not to exceed the statutory
 limit, to the Inverse 401(k) Plan. Inverses contributions
were not material during the year ended December 31, 1998
and no contributions were made during the year ended
December 31, 1999.

8.  Income Taxes:

No provision for income taxes has been recorded as a result of
the operating losses incurred by the Company for the years ended
December 31, 1997 and 1998. For the years ended
December 31, 1997 and 1998, the tax provision was comprised
primarily of a deferred tax benefit, which was offset by a
valuation allowance of the same amount. The components of the
provision for income taxes consist of the following for the year
ended December 31, 1999 (in thousands):

|                      |          |                 |   |        |       | 
|--------------------- | -------- | --------------- | - | ------ | ----- | 
|                     
|                     
|                     
|                     
|Income tax provision: |          |                 |   |       
|                     
|                     
|                     
|                     
|                      | Current  |                 | $ | 5,902  |      
|                     
|                     
|                     
|                     
|                      | Deferred |                 |   | (2,180 | )    
|                      |          |                 |   |       
|                      |          | Total provision |   | $      | 3,722 | 
|                      |          |                 |   |       

The tax provisions for 1997 and 1998 differ from the expected tax
 benefits, computed by applying the U.S. Federal statutory
rate, principally due to the effect of increases in the valuation
 allowance. The provision for income taxes results in an
effective rate which differs from the Federal statutory rate as
follows for the year ended December 31, 1999:

|                                           |                      |  |     |    |  
|------------------------------------------ | -------------------- |  | --- | -- | -
|                                          
|                                          
|                                          
|                                          
|Statutory federal income tax rate          |                      |  | 35  | % 
|                                          
|                                          
|                                          
|                                          
|State income taxes, net of federal benefit |                      |  | 4   |   
|                                          
|                                          
|                                          
|                                          
|Net operating loss carryforward            |                      |  | (28 | ) 
|                                          
|                                          
|                                          
|                                          
|Non-deductible expenses                    |                      |  | 40  |   
|                                           |                      |  |     |   
|                                           | Total effective rate |  |     | 51 | %
|                                           |                      |  |     |   

The components of the Companys net deferred tax asset
(liability) are as follows (in thousands):

|                    |                                  |                              |   |         |   |  |   |         |   | 
|------------------- | -------------------------------- | ---------------------------- | - | ------- | - |  | - | ------- | - | 
|                    |                                  |                             
|                    |                                  | December 31,                
|                    |                                  |                             
|                    |                                  | 1998                         |   | 1999   
|                    |                                  |                              |   |        
|Deferred tax asset: |                                  |                              |   |         |   |  |   |        
|                   
|                   
|                   
|                   
|                    | Net operating loss carryforwards |                              | $ | 8,007   |   |  | $ | 9,692   |  
|                   
|                   
|                   
|                   
|                    | Depreciation                     |                              |   | 351     |   |  |   | 498     |  
|                   
|                   
|                   
|                   
|                    | Allowance for doubtful accounts  |                              |   | 181     |   |  |   | 276     |  
|                   
|                   
|                   
|                   
|                    | Inventory valuation              |                              |   | 680     |   |  |   | 396     |  
|                   
|                   
|                   
|                   
|                    | Accrued liabilities              |                              |   | 1,248   |   |  |   | 1,208   |  
|                   
|                   
|                   
|                   
|                    | Deferred revenue                 |                              |   | 1,169   |   |  |   | 1,248   |  
|                   
|                   
|                   
|                   
|                    | Tax credit carryforwards         |                              |   | 1,481   |   |  |   | 1,481   |  
|                   
|                   
|                   
|                   
|                    | Valuation allowance              |                              |   | (13,117 | ) |  |   | (14,799 | )
|                    |                                  |                              |   |         |   |  |   |        
|                    |                                  | Total net deferred tax asset |   | $       |  |  |   | $       |  | 
|                    |                                  |                              |   |         |   |  |   |        

The Company had net operating loss carryforwards to offset future
 taxable income of approximately $26,400,000 as of
December 31, 1999. These net operating loss carryforwards
expire through 2019. Only a portion of the net operating loss
carryforwards are attributable to operating activities. The
remainder of the net

F-19



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

operating loss carryforwards are attributable to tax deductions
related to the exercise of stock options. In computing its income
 tax expense, the Company recognizes the tax benefits of current
and prior years stock option deductions after the
utilization of net operating losses from operations (operating
losses determined without deductions for exercised stock options)
 to reduce income tax expense. Net operating loss carryforwards,
when realized related to stock option deductions, are credited to
 stockholders equity.

Under the provisions of the Tax Reform Act of 1986, when there
has been a change in an entitys ownership, utilization of
net operating loss carryforwards may be limited. Because of the
changes in the ownership of Net2Net and Inverse, the use of the
Net2Net and Inverse net operating losses will be limited to
approximately $3,500,000 and $8,600,000 per year,
respectively, and may not be available to offset future taxable
income.

9. Commitments and Contingencies:

Leases

The Company leases office space and office equipment under
noncancelable operating leases expiring through
December 2006. The Company recorded rent expense of
approximately $854,000, $1,242,000 and $1,671,000 during 1997,
1998 and 1999, respectively.

During 1997, Visual and Net2Net entered into separate
sale-leaseback transactions in which equipment was sold and
leased back under noncancelable capital leases. Such equipment
was sold at its net book value resulting in no gain or loss on
the transactions.

In May 1999, Inverse entered into a master lease agreement,
as amended, with a leasing company to provide up to $1,750,000 in
 financing to purchase furniture and equipment through
April 2000. During 1999, Inverse purchased approximately
$1,376,000 of furniture and equipment under the master lease
agreement. Inverse also entered into a sale-leaseback transaction
 with the leasing company in which equipment was sold at its net
book value and leased back under noncancelable capital leases. No
 gain or loss was recognized on the transaction. In connection
with the master lease and sale-leaseback transaction, the Company
 issued the leasing company a warrant to purchase
4,217 shares of common stock at a price of $9.19 per
share. The fair value of this warrant was not material. In
November 1999, the leasing company, in lieu of exercising
the warrant, elected to convert the warrant into
3,594 shares of common stock in accordance with the terms of
 the warrant.

F-20



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Future minimum lease payments as of December 31, 1999 under
noncancelable operating and capital leases are as follows (in
thousands):

|                                               |                              |         |       |           |  |   |       |        | 
|---------------------------------------------- | ---------------------------- | ------- | ----- | --------- |  | - | ----- | ------ | 
|                                               |                              | Capital |       | Operating
|                                               |                              | Leases  |       | Leases   
|                                               |                              |         |       |          
|2000                                           |                              | $       | 554   |           |  | $ | 2,333 |       
|                                              
|                                              
|                                              
|                                              
|2001                                           |                              |         | 521   |           |  |   | 2,349 |       
|                                              
|                                              
|                                              
|                                              
|2002                                           |                              |         | 212   |           |  |   | 1,739 |       
|                                              
|                                              
|                                              
|                                              
|2003                                           |                              |         |      |           |  |   | 966   |       
|                                              
|                                              
|                                              
|                                              
|2004                                           |                              |         |      |           |  |   | 995   |       
|                                              
|                                              
|                                              
|                                              
|Thereafter                                     |                              |         |      |           |  |   | 2,078 |       
|                                               |                              |         |       |           |  |   |       |       
|                                               | Total minimum lease payments |         |       | 1,287     |  |   | $     | 10,460 | 
|                                               |                              |         |       |           |  |   |       |       
|Interest element of lease payment              |                              |         | (122  | )         |  |   |       |       
|                                               |                              |         |       |           |  |   |       |       
|Present value of future minimum lease payments |                              |         | 1,165 |           |  |   |       |       
|                                              
|                                              
|                                              
|                                              
|Current portion                                |                              |         | (475  | )         |  |   |       |       
|                                               |                              |         |       |           |  |   |       |       
|Long-term portion                              |                              | $       | 690   |           |  |   |       |       
|                                               |                              |         |       |           |  |   |       |       

Litigation

The Company is periodically a party to disputes arising from
normal business activities. In the opinion of management,
resolution of these matters will not have a material adverse
effect upon the financial position or future operating results of
 the Company, and adequate provision for any potential losses has
 been made in the accompanying financial statements.

10. Events Subsequent to Date of Auditors Report
(Unaudited):

On February 7, 2000, the Company entered into an agreement
and plan of merger (the Merger) with Avesta
Technologies, Inc. (Avesta), a provider of fault
management and application performance monitoring software
systems to e-business customers. Upon closing of the Merger, all
of the outstanding preferred and common stock of Avesta will be
exchanged for 5,261,328 shares of Visual common stock, and the
outstanding stock options and warrants of Avesta will be
converted into stock options and warrants to purchase 1,271,226
shares of Visual common stock. Also, the equity holders of Avesta
 will be entitled to receive up to an aggregate of 2,000,000
additional shares of Visual common stock if certain sales goals
of Avesta are achieved in 2000. The acquisition will be accounted
 for as a purchase business combination. The Boards of Directors
of Visual and Avesta have approved the Merger. The Merger will
become effective subject to approval by Visual stockholders and
regulatory approval.

F-21



---



##### Table of Contents



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

11. Interim Financial Data  Unaudited:

The following table of quarterly financial data has been prepared
 from the financial records of the Company, without audit, and
reflects all adjustments that are, in the opinion of management,
necessary for a fair presentation of the results of operations
for the interim periods presented:

|                                                      |  |                                          |        |          |  |               |        |              |  |      |        |      |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |  |  |   |        | 
|----------------------------------------------------- |  | ---------------------------------------- | ------ | -------- |  | ------------- | ------ | ------------ |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | - |  | - | ------ |  |  | - | ------ | 
|                                                      |  |                                          |        |          |  |               |        |             
|                                                      |  | March 31,                                |        | June 30, |  | September 30, |        | December 31,
|                                                      |  |                                          |        |          |  |               |        |             
|                                                      |  | 1998                                     |        | 1999     |  | 1998          |        | 1999         |  | 1998 |        | 1999 |  | 1998 |        | 1999
|                                                      |  |                                          |        |          |  |               |        |              |  |      |        |      |  |      |        |     
|                                                      |  |                                         
|                                                      |  | (in thousands, except per share amounts)
|                                                     
|                                                     
|                                                     
|                                                     
|Revenue                                               |  | $                                        | 11,348 |          |  | $             | 18,588 |              |  | $    | 13,075 |      |  | $    | 21,210 |      |  | $ | 14,889 |   |  | $ | 24,522 |   |  | $ | 16,776 |  |  | $ | 27,399 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Gross profit                                          |  |                                          | 6,570  |          |  |               | 12,111 |              |  |      | 8,369  |      |  |      | 13,709 |      |  |   | 9,546  |   |  |   | 16,296 |   |  |   | 10,774 |  |  |   | 18,715 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Income (loss) from operations                         |  |                                          | (2,750 | )        |  |               | 1,019  |              |  |      | (8,709 | )    |  |      | 1,912  |      |  |   | (351   | ) |  |   | (3,222 | ) |  |   | 2,942  |  |  |   | 5,294  | 
|                                                     
|                                                     
|                                                     
|                                                     
|Net income (loss)                                     |  |                                          | (2,843 | )        |  |               | 1,075  |              |  |      | (7,484 | )    |  |      | 1,652  |      |  |   | 304    |   |  |   | (3,973 | ) |  |   | 3,568  |  |  |   | 4,797  | 
|                                                     
|                                                     
|                                                     
|                                                     
|Net income (loss) attributable to common stockholders |  |                                          | (3,014 | )        |  |               | 1,075  |              |  |      | (7,484 | )    |  |      | 1,652  |      |  |   | 304    |   |  |   | (3,973 | ) |  |   | 3,568  |  |  |   | 4,797  | 
|                                                     
|                                                     
|                                                     
|                                                     
|Basic income (loss) per share                         |  |                                          | (0.19  | )        |  |               | 0.04   |              |  |      | (0.32  | )    |  |      | 0.07   |      |  |   | 0.01   |   |  |   | (0.16  | ) |  |   | 0.15   |  |  |   | 0.19   | 
|                                                     
|                                                     
|                                                     
|                                                     
|Diluted income (loss) per share                       |  |                                          | (0.19  | )        |  |               | 0.04   |              |  |      | (0.32  | )    |  |      | 0.06   |      |  |   | 0.01   |   |  |   | (0.16  | ) |  |   | 0.13   |  |  |   | 0.18   | 
|                                                     
|                                                     
|                                                     
|                                                     
|Pro forma basic and diluted income (loss)  per share  |  |                                          | (0.14  | )        |  |               | 0.04   |              |  |      | (0.32  | )    |  |      | 0.06   |      |  |   | 0.01   |   |  |   | (0.16  | ) |  |   | 0.13   |  |  |   | 0.18   | 

The sum of the per share amounts may not equal the annual amounts
 because of the changes in the weighted-average number of shares
outstanding during the year. The net loss for the three months
ended June 30, 1998, includes merger-related costs of
approximately $7,347,000 related to the Net2Net merger. Net
income for the three months ended December 31, 1998,
includes the reversal of approximately $2,278,000 of the
aforementioned merger-related costs (see Notes 1 and 6). The
 reversal resulted from the payment of lower than estimated costs
 in connection with the Net2Net transaction and subsequent
restructuring and included approximately $280,000 in transaction
costs and approximately $1,998,000 in restructuring costs.

F-22



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of



We have audited, in accordance with auditing standards generally
accepted in the United States, the consolidated financial
statements of Visual Networks, Inc. (a Delaware corporation) and
subsidiaries and have issued our report thereon dated
January 14, 2000. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a
whole. The schedule listed in item 16(b) is the responsibility of
 the Companys management and is presented for purposes of
complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in
 the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial
data required to be set forth therein in relation to the basic
financial statements taken as a whole.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Vienna, Virginia



S-1



---



##### Table of Contents



SCHEDULE II

VISUAL NETWORKS, INC.

VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)

|                                      |                                |                                   |  |                      |     |            |  |                |       |  |  |   |       |     |  |   |     | 
|------------------------------------- | ------------------------------ | --------------------------------- |  | -------------------- | --- | ---------- |  | -------------- | ----- |  |  | - | ----- | --- |  | - | --- | 
|                                      |                                | Balance at Beginning              |  | Additions Charged to |     |            |  | Balance at End
|Description                           |                                | of Period                         |  | Costs and Expenses   |     | Deductions |  | of Period     
|                                      |                                |                                   |  |                      |     |            |  |               
|For the year ended December 31, 1997, |                                |                                   |  |                      |     |            |  |                |       |  |  |   |       |     |  |  
|                                     
|                                     
|                                     
|                                     
|                                      | Deducted from assets accounts: |                                   |  |                      |     |            |  |                |       |  |  |   |       |     |  |   |    
|                                     
|                                     
|                                     
|                                     
|                                      |                                | Allowance for doubtful accounts   |  | $                    | 260 |            |  | $              | 152   |  |  | $ |      |     |  | $ | 412 | 
|For the year ended December 31, 1998, |                                |                                   |  |                      |     |            |  |                |       |  |  |   |       |     |  |  
|                                     
|                                     
|                                     
|                                     
|                                      | Deducted from assets accounts: |                                   |  |                      |     |            |  |                |       |  |  |   |       |     |  |   |    
|                                     
|                                     
|                                     
|                                     
|                                      |                                | Allowance for doubtful accounts   |  |                      | 412 |            |  |                | 106   |  |  |   | 25    |     |  |   | 493 | 
|                                     
|                                     
|                                     
|                                     
|                                      |                                | Reserves related to restructuring |  |                      |    |            |  |                | 2,749 |  |  |   | 2,749 | (a) |  |   |    | 
|For the year ended December 31, 1999, |                                |                                   |  |                      |     |            |  |                |       |  |  |   |       |     |  |  
|                                     
|                                     
|                                     
|                                     
|                                      | Deducted from assets accounts: |                                   |  |                      |     |            |  |                |       |  |  |   |       |     |  |   |    
|                                     
|                                     
|                                     
|                                     
|                                      |                                | Allowance for doubtful accounts   |  |                      | 493 |            |  |                | 301   |  |  |   | 40    |     |  |   | 754 | 




|    |                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Included in these deductions were costs of $751,000 charged
	against the reserve and the reversal of $1,998,000 of the
	restructuring charges for the year ended December 31, 1998.
	See Note 6 of the Notes to Consolidated Financial
	Statements.

S-2



---



##### Table of Contents






EXHIBIT INDEX

|        |             |             |  |                                                                                                                                                                                                       
|------- | ----------- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |             |            
|Number  |             | Description
|        |             |            
|        | 3.1$        |             |  | Amended and Restated Certificate of Incorporation of the Company.                                                                                                                                     
|        | 3.2*        |             |  | Restated By-Laws of the Company.                                                                                                                                                                      
|        | 10.1*       |             |  | 1994 Stock Option Plan.                                                                                                                                                                               
|        | 10.2*       |             |  | 1997 Omnibus Stock Plan, as amended.                                                                                                                                                                  
|        | 10.3*       |             |  | Amended and Restated 1997 Directors Stock Option Plan.                                                                                                                                               
|        | 10.5*      |             |  | Reseller/ Integration Agreement, dated August 29, 1997, by
	and between the Company and MCI Telecommunications Corporation.                                                                           
|        | 10.5.1$$$ |             |  | Second Amendment, dated November 4, 1998, to the Reseller/
	Integration Agreement between the Company and MCI
	Telecommunications Corporation (relating to Exhibit 10.5).                             
|        | 10.6*      |             |  | Master Reseller Agreement, dated as of August 23, 1996,
	between Sprint/ United Management Company and the Company.                                                                                   
|        | 10.6.1      |             |  | Amendment No. 7 to Agreement between the Company and Sprint/
	 United Management Company dated as of March 23, 2000
	(relating to Exhibit 10.6).                                                      
|        | 10.7*      |             |  | General Agreement for the Procurement of Equipment, Services and
	Supplies between the Company and AT&T Corp.                                                                                         
|        | 10.8*       |             |  | Lease Agreement, dated December 12, 1996, by and between the
	 Company and The Equitable Life Assurance Society of The United
	States.                                                                
|        | 10.8.1*     |             |  | Lease Amendment, dated September 2, 1997, by and between the
	 Company and The Equitable Life Assurance Society of The United
	States (relating to Exhibit 10.8).                                     
|        | 10.8.2$$$   |             |  | Second Lease Amendment, dated February 8, 1999, by and
	between the Company and TA/ Western, LLC, successor to The
	Equitable Life Assurance Society of The United States (relating
	to Exhibit 10.8).
|        | 10.8.3      |             |  | Third Lease Amendment, dated January 10, 2000, by and
	between the Company and TA/Western, LLC (relating to
	Exhibit 10.8).                                                                           
|        | 10.9        |             |  | Sublease, dated October 1, 1999, between the Company and
	Micron Technology, Inc.                                                                                                                     
|        | 10.10*      |             |  | Employment Agreement, dated December 15, 1994, by and
	between the Company and Scott E. Stouffer, as amended.                                                                                         
|        | 10.12*      |             |  | Terms of Employment, dated June 11, 1997, by and between the
	 Company and Peter J. Minihane, as amended.                                                                                             
|        | 10.13       |             |  | Employment Agreement, dated September 15, 1999, by and
	between Inverse Network Technology and Michael Watters.                                                                                       
|        | 10.15%      |             |  | Loan and Security Agreement, dated April 5, 1999, by and
	between Silicon Valley Bank and the Company.                                                                                                
|        | 10.15.1%    |             |  | Revolving Promissory Note issued by the Company on April 5,
	1999, to Silicon Valley Bank (relating to Exhibit 10.15).                                                                                
|        | 10.15.2%    |             |  | Equipment Term Note No. 1 of 2 issued by the Company on
	April 5, 1999 (relating to Exhibit 10.15).                                                                                                   
|        | 10.15.3%    |             |  | Equipment Term Note No. 2 of 2 issued by the Company on
	April 5, 1999 (relating to Exhibit 10.15).                                                                                                   
|        | 10.17***    |             |  | Net2Net 1994 Stock Option Plan.                                                                                                                                                                       
|        | 10.20$$     |             |  | 1999 Employee Stock Purchase Plan.                                                                                                                                                                    
|        | 10.21%%     |             |  | Agreement and Plan of Merger, dated April 15, 1998, by and
	among the Company, Visual Acquisitions Two, Inc. and Inverse
	Network Technology.                                                         
|        | 10.22%%%    |             |  | Inverse Network Technology 1996 Stock Option Plan.                                                                                                                                                    



---



##### Table of Contents



|        |       |             |  |                                                  
|------- | ----- | ----------- |  | -------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 16.1* |             |  | Letter regarding change in certified accountants.
|        | 21.1  |             |  | List of subsidiaries of the Company.             
|        | 23.1  |             |  | Consent of Arthur Andersen LLP.                  
|        | 24.1  |             |  | Powers of Attorney (included in signature pages).
|        | 27.1  |             |  | Financial Data Schedule.                         




|    |                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Incorporated herein by reference to the Companys
	Registration Statement on Form S-1, No. 333-41517.                                                                                                                                                                            
|   
|**  | Incorporated herein by reference to Exhibit 2.1 to the
	Companys Current Report on Form 8-K dated May 19,
	 1998.                                                                                                                                                               
|   
|*** | Incorporated herein by reference to Exhibit 10.1 to the
	Companys Registration Statement on Form S-8,
	No. 333-53153.                                                                                                                                                           
|   
|%   | Incorporated herein by reference to the Companys
	Registration Statement on Form S-3, No. 333-90105.                                                                                                                                                                            
|   
|%%  | Incorporated herein by reference to Exhibit 2.1 to the
	Companys Current Report on Form 8-K dated
	October 8, 1999.                                                                                                                                                             
|   
|%%% | Incorporated herein by reference to Exhibit 10.1 to the
	Companys Registration Statement on Form S-8,
	No. 333-88719.                                                                                                                                                           
|   
|$   | Incorporated herein by reference to Exhibit 3.1 to the
	Companys Quarterly Report on Form 10-Q for the three
	months ended June 30, 1999.                                                                                                                                       
|   
|$$  | Incorporated herein by reference to the Companys Definitive
	 Proxy Statement on Schedule 14A filed April 30, 1999.                                                                                                                                                             
|   
|$$$ | Incorporated herein by reference to the Companys Annual
	Report on Form 10-K for the year ended December 31,
	1998.                                                                                                                                                             
|   
|   | Portions of these Exhibits were omitted and have been filed
	separately with the Secretary of the SEC pursuant to the
	Companys Applications Requesting Confidential Treatment
	under Rule 406 of the Act, filed on December  22, 1997,
	 January 28, 1998 and February 4, 1998.
|   
|  | Portions of this Exhibit were omitted and have been filed
	separately with the Secretary of the SEC pursuant to the
	Companys Application Requesting Confidential Treatment
	under Rule 24b-2 of the Exchange Act of 1934.