##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-K/A

AMENDMENT NO. 1



---



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, 2004



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                                                       |  | 52-1837515                       
|(State or Other Jurisdiction of Incorporation or Organization) |  | (IRS Employer Identification No.)



|                                        |  |           
|--------------------------------------- |  | ----------
|2092 Gaither Road, Rockville, Maryland  |  | 20850     
|(Address of Principal Executive Office) |  | (Zip Code)



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



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

NONE



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

Common Stock, par value $0.01 per share



---



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 ̈



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



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No ̈



The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2004 was
approximately $96,644,000. The number of outstanding shares of the Registrants common stock as of March 14, 2005 was 34,440,796 shares.



Documents Incorporated by Reference



Part III of the Form 10-K incorporates by reference certain portions of the Registrants proxy statement for its 2005 annual meeting of stockholders
to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.



---



---

##### Table of Contents

VISUAL NETWORKS, INC. FORM 10-K



TABLE OF CONTENTS



|         |  |                                                         |  |     
|-------- |  | ------------------------------------------------------- |  | ----
|         |  |                                                         |  | Page
|         |  |                                                        
|         |  | PART II                                                 |  |     
|         |  |                                                        
|Item 9A. |  | Controls and Procedures                                 |  | 1   
|         |  |                                                        
|         |  | PART IV                                                 |  |     
|         |  |                                                        
|Item 15. |  | Exhibits and Consolidated Financial Statement Schedules |  | 4   
|         |  | Signatures                                              |  | 8   





































|
|
|
|
|
|
|



EXPLANATORY NOTE



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|This Amendment No. 1 on Form 10-K/A (the Amendment) is being filed to amend Part II,
Item 9a and Part IV, Item 15 of the Companys Annual Report on Form 10-K for the year ended December 31, 2004, filed on March 16, 2005 (the Original 10-K). Part II, Item 9a is being amended to correct certain disclosures omitted from the Original 10-K and to add certain new information. Part IV, Item 15 is being amended to correct and re-file the following exhibits updated auditors consents and Rule 13a-14(a)/15d-14(a) certifications (to correct certain omissions).



---

##### Table of Contents

PART II



Item 9A. Controls and Procedures.



Disclosure Controls and Procedures



As of the
end of the period covered by this Annual Report on Form-10K, we, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-14 and 15d-14. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information relating to us which is required to be included in our periodic SEC filings and in ensuring that information required to be disclosed in our reports that we file or submit
under the Exchange Act is accumulated and communicated and our management, including our Chief Financial Officer, to allow timely decisions regarding required disclosure.



Internal Control over Financial Reporting



(a) Managements annual report on internal control over financial reporting



Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rule 13a-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and that the information required to be disclosed by us in all of the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the Commissions rules and forms. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.



Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2004.
To make this assessment, management used the criteria for effective internal control over financial reporting as described in Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission
or more commonly referred to as the COSO framework. Based on that assessment, our management concluded that, as of December 31, 2004, our internal control over financial reporting was effective based on those criteria.



Managements assessment of the effectiveness of its internal control
over financial reporting as of December 31, 2004, has been audited by Grant Thornton LLP, an independent registered public accounting firm and auditors of our consolidated financial statements, as stated in their attestation report which is
included herein.



February 25, 2005

/s/ Lawrence S.
Barker

Lawrence S. Barker

President and Chief Executive Officer





1



---

##### Table of Contents

(b) Attestation report of the registered public accounting firm



Report of Independent Registered Public Accounting Firm



We have audited managements assessment, included in the accompanying
managements annual report on internal control over financial reporting, that Visual Networks, Inc. (the Company) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets
that could have a material effect on the financial statements.



2



---

##### Table of Contents

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.



In our opinion, managements assessment that
the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by COSO.Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by COSO.



We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated balance sheet and the related consolidated statements of operations, cash flows and changes in stockholders equity as of and for the year ended December 31, 2004
of Visual Networks, Inc. and our report dated February 28, 2005 expressed an unqualified opinion.



/s/ Grant Thornton LLP

Vienna, VA



February 28, 2005



(c) Changes in internal control over
financial reporting



There have been no changes in our
internal control over financial reporting identified in connection with the evaluation required by Exchange Acts Rules 13a-15(d) and 15d-15 during the last quarter of fiscal year 2004 that has materially affected, or is reasonably likely to affect,
our internal control over financial reporting.





3



---

##### Table of Contents

PART IV



Item 15. Exhibits and Consolidated Financial Statement Schedules.

|                                           |  |                                                                                                                 |  |            
|------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------- |  | -----------
|                                           |  |                                                                                                                 |  | Page Number
|(a) Documents filed as part of the report: |  |                                                                                                                
|(1)                                        |  | Reports of Independent Registered Public Accounting Firms                                                       |  | F-2        
|                                           |  | Consolidated Balance Sheets as of December 31, 2003 and 2004                                                    |  | F-4        
|                                           |  | Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004                      |  | F-5        
|                                           |  | Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2002, 2003 and 2004 |  | F-6        
|                                           |  | Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004                      |  | F-7        
|                                           |  | Notes to Consolidated Financial Statements                                                                      |  | F-8        
|(2)                                        |  | Consolidated Financial Statement Schedules                                                                      |  | F-22       
|                                           |  | Reports of Independent Registered Public Accounting Firms on Financial Statement Schedules                      |  | F-23       
|(3)                                        |  | Exhibits                                                                                                        |  | 41         



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.                                                                                                     
|            | 
|3.1.1@      |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation.                                                                                        
|            | 
|3.2*        |  | Restated By-Laws of the Company.                                                                                                                                      
|            | 
|4.1@@       |  | Registration Rights Agreement, dated as of March 25, 2002, between Visual Networks Inc. and the Purchasers named therein (filed as Exhibit 99.3 to the Form 8-K).     
|            | 
|4.2@@       |  | Form of 5% Senior Secured Convertible Debenture of Visual Networks, Inc. due March 25, 2006 (filed as Exhibit 99.2 to the Form 8-K).                                  
|            | 
|4.3@@       |  | Form of Warrant of Visual Networks, Inc., dated March 25, 2002 (filed as Exhibit 99.4 to the Form 8-K).                                                               
|            | 
|10.1*       |  | 1994 Stock Option Plan.                                                                                                                                               
|            | 
|10.2*       |  | 1997 Omnibus Stock Plan, as amended.                                                                                                                                  
|            | 
|10.2.1**    |  | Amendment No. 2 to the 1997 Omnibus Stock Plan (related to Exhibit 10.2).                                                                                             
|            | 
|10.3*       |  | Amended and Restated 1997 Directors Stock Option Plan.                                                                                                               
|            | 
|10.3.1**    |  | Amendment No. 2 to the 1997 Directors Stock Option Plan (related to Exhibit 10.3).                                                                                   
|            | 
|10.4!!      |  | 2000 Stock Incentive Plan, as amended.                                                                                                                                
|            | 
|10.4.1**    |  | Amendment No. 1 to the 2000 Stock Incentive Plan (related to Exhibit 10.4).                                                                                           
|            | 
|10.4.2!!!!! |  | Amendment No. 2 to the 2000 Stock Incentive Plan (related to Exhibit 10.4).                                                                                           
|            | 
|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).
|            | 
|10.5.2&&    |  | Agreement, dated July 25, 2002, by and between the Company and MCI WorldCom Network Services, Inc.                                                                    
|            | 
|10.5.3!     |  | Amendment to the Agreement by and between the Company and MCI WorldCom Network Services, Inc. (related to Exhibit 10.5.2).                                            
|            | 
|10.6****++  |  | Master Purchase of Equipment and Services Agreement, dated as of May 22, 2000, between Sprint/United Management Company and the Company.                              
|            | 
|10.6.1&&&&& |  | Amendment No. Two to Master Purchase Agreement, dated as of May 23, 2003, between Sprint/United Management Company and the Company (related to Exhibit 10.6).         
|            | 
|10.6.2++    |  | Amendment No. Three to Master Purchase Agreement, dated as of March 8, 2004, between Sprint/United Management Company and the Company (related to Exhibit 10.6).      



4



---

##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                     
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7*+         |  | General Agreement for the Procurement of Equipment, Services and Supplies, dated November 26, 1997, between the Company and AT&T Corp.                                                                                                                              
|               | 
|10.7.1!!!!!    |  | Amendment No. 6 to General Agreement, dated October 27, 2004, 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 (related to Exhibit 10.8).                                                                                                       
|               | 
|10.8.2$$$      |  | Second Lease Amendment, dated February 8, 1999, by and between the Company and TA/Western, LLC, successor to The Equitable Life Assurance Society of the United States (relating to Exhibit
10.8).                                                                  
|               | 
|10.8.3***      |  | Third Lease Amendment, dated January 10, 2000, by and between the Company and TA/ Western, LLC (relating to Exhibit 10.8).                                                                                                                                          
|               | 
|10.8.4!!       |  | Fourth Lease Amendment, dated May 17, 2000, by and between the Company and TA/ Western, LLC (relating to Exhibit 10.8).                                                                                                                                             
|               | 
|10.8.5$$$$     |  | Fifth Lease Amendment, dated December 29, 2003, by and between the Company and TA/ Western, LLC (relating to Exhibit 10.8 and filed herewith).                                                                                                                      
|               | 
|10.9&&&        |  | 2003 Stock Incentive Plan.                                                                                                                                                                                                                                          
|               | 
|10.9.1&&&&&&   |  | Amendment No. 1 to 2003 Stock Incentive Plan (related to Exhibit 10.9).                                                                                                                                                                                             
|               | 
|10.11!!        |  | Lease Agreement, dated April 7, 2000, by and between Visual Networks, Inc. and TA/ Western, LLC.                                                                                                                                                                    
|               | 
|10.11.1$$$$    |  | Lease Termination Agreement, dated December 29, 2003, by and between the Company and TA/Western, LLC (relating to Exhibit 10.11 and filed herewith).                                                                                                                
|               | 
|10.20$$        |  | 1999 Employee Stock Purchase Plan, as amended April 11, 2001 and January 9, 2002.                                                                                                                                                                                   
|               | 
|10.28&&&&&&    |  | Employment Agreement, dated April 28, 2004, by and between the Company and Lawrence S. Barker.                                                                                                                                                                      
|               | 
|10.29@@@       |  | Nonstatutory Stock Option Grant Agreement, dated April 28, 2003, by and between the Company and Lawrence S. Barker.                                                                                                                                                 
|               | 
|10.29.1&&&&&&  |  | Nonstatutory Stock Option Grant Agreement, dated April 14, 2004, by and between the Company and Lawrence S. Barker.                                                                                                                                                 
|               | 
|10.29.2&&&&&&  |  | Nonstatutory Stock Option Grant Agreement, dated April 14, 2004, by and between the Company and Lawrence S. Barker.                                                                                                                                                 
|               | 
|10.33@@        |  | Securities Purchase Agreement, dated as of March 25, 2002, between Visual Networks, Inc. and the Purchasers named therein (filed as Exhibit 99.1 to the Form 8-K).                                                                                                  
|               | 
|10.36++&       |  | Agreement for Electronic Manufacturing Services, dated March 1, 2000, by and between Visual Networks Operations, Inc. and Celestica Corporation.                                                                                                                    
|               | 
|10.40&&&&&&&   |  | Employment Agreement, dated June 4, 2004, by and between the Company and Donald E. Clarke.                                                                                                                                                                          
|               | 
|10.40.1&&&&&&& |  | Nonstatutory Stock Option Grant Agreement, dated July 12, 2004, by and between the Company and Donald E. Clarke.                                                                                                                                                    
|               | 
|10.41*****     |  | Employment Agreement, dated February 15, 2005, by and between the Company and Mark B. Skurla.                                                                                                                                                                       
|               | 
|10.50&&&&&&&   |  | Loan and Security Agreement, dated July 12, 2004, by and among Visual Networks, Inc. and its subsidiaries and Silicon Valley Bank.                                                                                                                                  
|               | 
|16.1@@@@       |  | Letter from PricewaterhouseCoopers LLP dated August 20, 2004 regarding its concurrence with the statements made by the Company in the Form 8-K filed August 23, 2004 concerning the resignation
of PricewaterhouseCoopers LLP as the Companys principal accountant.
|               | 
|21.1*****      |  | List of subsidiaries of the Company.                                                                                                                                                                                                                                
|               | 
|23.1           |  | Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                       
|               | 
|23.2           |  | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                               



5



---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                           
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1  |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                                                                                       
|      | 
|31.2  |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                                                                                       
|      | 
|32.1  |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         
|      | 
|32.2  |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         
|      | 
|*     |  | Incorporated herein by reference to the Companys Registration Statement on Form S-1, No. 333-41517.                                                                                                                                                                                      
|      | 
|**    |  | Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2002.                                                                                                                                                                        
|      | 
|***   |  | Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 1999.                                                                                                                                                                        
|      | 
|****  |  | Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2000.                                                                                                                                                                        
|      | 
|***** |  | Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.                                                                                                                                                                        
|      | 
|@     |  | Incorporated herein by reference to the Companys Registration Statement on Form S-4, No. 333-33946.                                                                                                                                                                                      
|      | 
|@@    |  | Incorporated herein by reference to the Companys Current Report on Form 8-K filed March 27, 2002.                                                                                                                                                                                        
|      | 
|@@@   |  | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the three months ended March 31, 2003.                                                                                                                                                                
|      | 
|@@@@  |  | Incorporated herein by reference to the Companys Current Report on Form 8-K filed August 23, 2004                                                                                                                                                                                        
|      | 
|$     |  | 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.                                                                                                                                                  
|      | 
|$$    |  | Incorporated herein by reference to the Companys Definitive Proxy Statement on Schedule 14A filed April 24, 2002.                                                                                                                                                                        
|      | 
|$$$   |  | Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 1998.                                                                                                                                                                        
|      | 
|$$$$  |  | Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2003.                                                                                                                                                                        
|      | 
|+     |  | Portions of this Exhibit were omitted and have been filed separately with the Secretary of the Commission pursuant to the Companys Application Requesting Confidential Treatment under
Rule 406 of the Securities 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 Commission pursuant to the Companys Application Requesting Confidential Treatment under
Rule 24b-2 of the Securities Exchange Act.                                                        
|      | 
|!     |  | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the three months ended September 30, 2002.                                                                                                                                                            
|      | 
|!!    |  | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the three months ended June 30, 2000.                                                                                                                                                                 
|      | 
|!!!   |  | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the three months ended June 30, 2001.                                                                                                                                                                 
|      | 
|!!!!  |  | Incorporated herein by reference to the Companys Annual Report on Form 10-K/A for the year ended December 31, 2001.                                                                                                                                                                      
|      | 
|!!!!! |  | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the three months ended September 30, 2004.                                                                                                                                                            
|      | 
|&     |  | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the three months ended March 31, 2002.                                                                                                                                                                
|      | 
|&&    |  | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the three months ended June 30, 2002.                                                                                                                                                                 



6



---

##### Table of Contents

|        |  |                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------
|&&&     |  | Incorporated herein by reference to the Companys Definitive Proxy Statement on Schedule 14A filed April 29, 2003.            
|        | 
|&&&&    |  | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the three months ended June 30, 2003.     
|        | 
|&&&&&   |  | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the three months ended September 30, 2003.
|        | 
|&&&&&&  |  | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the three months ended March 31, 2004.    
|        | 
|&&&&&&& |  | Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the three months ended June 30, 2004.     



(b) Exhibits



The exhibits required by this Item are listed under Item 15(a)(3).



(c) Consolidated Financial Statement Schedules



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



7



---

##### 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 October, 2005.



VISUAL NETWORKS, INC.By:

/s/ Lawrence S. BarkerLawrence S. Barker President and Chief Executive Officer




8



---

##### Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                |  | Page
|Reports of Independent Registered Public Accounting Firms                                                       |  | F-2 
|Consolidated Balance Sheets as of December 31, 2003 and 2004                                                    |  | F-4 
|Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004                      |  | F-5 
|Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2002, 2003 and 2004 |  | F-6 
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004                      |  | F-7 
|Notes to Consolidated Financial Statements                                                                      |  | F-8 
|Consolidated Financial Statement Schedules                                                                      |  | F-22
|Reports of Independent Registered Public Accounting Firms on Consolidated Financial Statement Schedules         |  | F-23



F-1



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders

Visual Networks, Inc.



We have audited the accompanying consolidated balance sheet of Visual Networks, Inc., (the Company) as of December 31, 2004, and the related
consolidated statements of operations, stockholders equity, and cash flows for the year then ended. 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 audit.



We conducted our
audit in accordance with the standards of the Public Company Accounting Oversight Board (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 audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Visual
Networks, Inc., as of December 31, 2004, and the results of operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.



/s/ Grant Thornton LLP



Vienna, Virginia

February 28, 2005



F-2



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To Board of Directors and

Stockholders of Visual Networks, Inc.:



In our opinion, the consolidated balance sheet and the related consolidated statements of operations, of cash flows and of changes in stockholders equity present fairly, in all material respects, the financial position of Visual
Networks, Inc. and its subsidiaries at December 31, 2003, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the
United States of America. 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 of these statements
in accordance with the standards of the Public Accounting Oversight Board (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, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



As discussed in Note 2, the consolidated balance sheet for 2003 and the consolidated statements of changes in stockholders equity for 2002 and 2003
have been restated.



/s/ PricewaterhouseCoopers LLP



McLean, Virginia

March 30, 2004, except for Note 2, as to which the date is March 15, 2005.



F-3



---

##### Table of Contents

VISUAL NETWORKS, INC.



CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                   |  |              |          |   |      |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                   |  | December 31, |         
|                                                                                                                                   |  | 2003         |          |   | 2004 |  
|                                                                                                                                   |  | (Restated)   |          |   |      |  
|Assets                                                                                                                             |  |              |          |  
|Current assets:                                                                                                                    |  |              |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                          |  | $            | 15,671   |   |      | $ | 11,317   |  
|Restricted short-term investments                                                                                                  |  |              | 1,530    |   |      |   |         |  
|Accounts receivable, net of allowance of $377 and $399, respectively                                                               |  |              | 2,326    |   |      |   | 9,335    |  
|Inventory, net                                                                                                                     |  |              | 3,346    |   |      |   | 3,822    |  
|Other current assets                                                                                                               |  |              | 788      |   |      |   | 940      |  
|                                                                                                                                   |  |              |          |   |      |   |          |  
|Total current assets                                                                                                               |  |              | 23,661   |   |      |   | 25,414   |  
|Property and equipment, net                                                                                                        |  |              | 2,378    |   |      |   | 2,001    |  
|                                                                                                                                   |  |              |          |   |      |   |          |  
|Total assets                                                                                                                       |  | $            | 26,039   |   |      | $ | 27,415   |  
|                                                                                                                                   |  |              |          |   |      |   |          |  
|Liabilities and Stockholders Equity                                                                                               |  |              |          |   |      |   |          |  
|Current liabilities:                                                                                                               |  |              |          |   |      |   |          |  
|Accounts payable and accrued expenses                                                                                              |  | $            | 8,115    |   |      | $ | 9,341    |  
|Deferred revenue                                                                                                                   |  |              | 4,662    |   |      |   | 3,388    |  
|Convertible debentures, net of unamortized debt discount of $1,756 and $837, respectively                                          |  |              | 8,744    |   |      |   | 8,163    |  
|                                                                                                                                   |  |              |          |   |      |   |          |  
|Total current liabilities                                                                                                          |  |              | 21,521   |   |      |   | 20,892   |  
|                                                                                                                                   |  |              |          |   |      |   |          |  
|Commitments and contingencies (Note 9)                                                                                             |  |              |          |   |      |   |          |  
|Stockholders equity:                                                                                                              |  |              |          |   |      |   |          |  
|Common stock, $.01 par value; 200,000,000 shares authorized, 32,866,010 and 33,981,840 shares issued and outstanding,
respectively |  |              | 328      |   |      |   | 340      |  
|Additional paid-in capital                                                                                                         |  |              | 475,222  |   |      |   | 477,343  |  
|Warrants                                                                                                                           |  |              | 2,087    |   |      |   | 2,087    |  
|Deferred compensation                                                                                                              |  |              |         |   |      |   | (143     | )
|Accumulated deficit                                                                                                                |  |              | (473,119 | ) |      |   | (473,104 | )
|                                                                                                                                   |  |              |          |   |      |   |          |  
|Total stockholders equity                                                                                                         |  |              | 4,518    |   |      |   | 6,523    |  
|                                                                                                                                   |  |              |          |   |      |   |          |  
|Total liabilities and stockholders equity                                                                                         |  | $            | 26,039   |   |      | $ | 27,415   |  
|                                                                                                                                   |  |              |          |   |      |   |          |  



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



F-4



---

##### Table of Contents

VISUAL NETWORKS, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                            |  | Years Ended December 31, |       
|                                            |  | 2002                     |        |   | 2003 |   |        | 2004 | 
|Revenue:                                    |  |                          |        |   |      |   |        |      |  |   |        |  
|Hardware                                    |  | $                        | 42,062 |   |      | $ | 24,701 |      |  | $ | 33,495 |  
|Software                                    |  |                          | 6,857  |   |      |   | 5,143  |      |  |   | 10,308 |  
|Support and services                        |  |                          | 12,542 |   |      |   | 9,335  |      |  |   | 8,839  |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Total revenue                               |  |                          | 61,461 |   |      |   | 39,179 |      |  |   | 52,642 |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Cost of revenue:                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Product                                     |  |                          | 15,129 |   |      |   | 9,339  |      |  |   | 14,782 |  
|Support and services                        |  |                          | 2,076  |   |      |   | 1,008  |      |  |   | 1,098  |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Total cost of revenue                       |  |                          | 17,205 |   |      |   | 10,347 |      |  |   | 15,880 |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Gross profit                                |  |                          | 44,256 |   |      |   | 28,832 |      |  |   | 36,762 |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Operating expenses:                         |  |                          |        |   |      |   |        |      |  |   |        |  
|Research and development                    |  |                          | 12,301 |   |      |   | 10,473 |      |  |   | 10,145 |  
|Sales and marketing                         |  |                          | 20,541 |   |      |   | 15,428 |      |  |   | 15,778 |  
|General and administrative                  |  |                          | 6,821  |   |      |   | 6,214  |      |  |   | 9,288  |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Total operating expenses                    |  |                          | 39,663 |   |      |   | 32,115 |      |  |   | 35,211 |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Income (loss) from operations               |  |                          | 4,593  |   |      |   | (3,283 | )    |  |   | 1,551  |  
|Other income (expense)                      |  |                          |       |   |      |   | 452    |      |  |   | (262   | )
|Interest income                             |  |                          | 132    |   |      |   | 104    |      |  |   | 146    |  
|Interest expense                            |  |                          | (1,319 | ) |      |   | (1,562 | )    |  |   | (1,420 | )
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Income (loss) before income taxes           |  |                          | 3,406  |   |      |   | (4,289 | )    |  |   | 15     |  
|Provision for income taxes                  |  |                          |       |   |      |   |       |      |  |   |       |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income (loss)                           |  | $                        | 3,406  |   |      | $ | (4,289 | )    |  | $ | 15     |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Basic income (loss) per share               |  | $                        | 0.11   |   |      | $ | (0.13  | )    |  | $ | 0.00   |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Diluted income (loss) per share             |  | $                        | 0.11   |   |      | $ | (0.13  | )    |  | $ | 0.00   |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Basic weighted-average shares outstanding   |  |                          | 32,139 |   |      |   | 32,610 |      |  |   | 33,257 |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Diluted weighted-average shares outstanding |  |                          | 32,434 |   |      |   | 32,610 |      |  |   | 35,755 |  
|                                            |  |                          |        |   |      |   |        |      |  |   |        |  



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



(in thousands, except share data)



|                                                            |  |              |  |                           |     |          |   |                       |  |   |                                        |  |   |                     |   |  |       |     |   |  |   |          |   |  |   |        |  
|----------------------------------------------------------- |  | ------------ |  | ------------------------- | --- | -------- | - | --------------------- |  | - | -------------------------------------- |  | - | ------------------- | - |  | ----- | --- | - |  | - | -------- | - |  | - | ------ | -
|                                                            |  | Common Stock |  | Additional Paid-inCapital |     | Warrants |   | Deferred Compensation |  |   | Accumulated Other Comprehensive Income |  |   | Accumulated Deficit |   |  | Total |    
|                                                            |  | Shares       |  | Amount                    |     |          |   |                       |  |  
|Balance, December 31, 2001                                  |  | 31,915,752   |  | $                         | 319 |          | $ | 473,132               |  | $ |                                       |  | $ | (80                 | ) |  | $     | 21  |   |  | $ | (473,907 | ) |  | $ | (515   | )
|Adjustment (see Note 2)                                     |  |             |  |                           |    |          |   |                      |  |   |                                       |  |   |                    |   |  |       |    |   |  |   | 1,671    |   |  |   | 1,671  |  
|                                                            |  |              |  |                           |     |          |   |                       |  |   |                                        |  |   |                     |   |  |       |     |   |  |   |          |   |  |   |        |  
|Adjusted Balance, December 31, 2001                         |  | 31,915,752   |  |                           | 319 |          |   | 473,132               |  |   |                                       |  |   | (80                 | ) |  |       | 21  |   |  |   | (472,236 | ) |  |   | 1,156  |  
|Exercise of stock options and warrants                      |  | 76,531       |  |                           | 1   |          |   | 122                   |  |   |                                       |  |   |                    |   |  |       |    |   |  |   |         |   |  |   | 123    |  
|Issuance of common stock under employee stock purchase plan |  | 406,573      |  |                           | 4   |          |   | 382                   |  |   |                                       |  |   |                    |   |  |       |    |   |  |   |         |   |  |   | 386    |  
|Issuance of warrants with convertible debentures            |  |             |  |                           |    |          |   |                      |  |   | 2,087                                  |  |   |                    |   |  |       |    |   |  |   |         |   |  |   | 2,087  |  
|Beneficial conversion (see Note 4)                          |  |             |  |                           |    |          |   | 1,035                 |  |   |                                       |  |   |                    |   |  |       |    |   |  |   |         |   |  |   | 1,035  |  
|Deferred compensation adjustments                           |  |             |  |                           |    |          |   | 48                    |  |   |                                       |  |   | (48                 | ) |  |       |    |   |  |   |         |   |  |   |       |  
|Amortization of deferred compensation                       |  |             |  |                           |    |          |   |                      |  |   |                                       |  |   | 126                 |   |  |       |    |   |  |   |         |   |  |   | 126    |  
|Foreign currency translation adjustment                     |  |             |  |                           |    |          |   |                      |  |   |                                       |  |   |                    |   |  |       | (21 | ) |  |   |         |   |  |   | (21    | )
|Net income                                                  |  |             |  |                           |    |          |   |                      |  |   |                                       |  |   |                    |   |  |       |    |   |  |   | 3,406    |   |  |   | 3,406  |  
|                                                            |  |              |  |                           |     |          |   |                       |  |   |                                        |  |   |                     |   |  |       |     |   |  |   |          |   |  |   |        |  
|Balance, December 31, 2002                                  |  | 32,398,856   |  |                           | 324 |          |   | 474,719               |  |   | 2,087                                  |  |   | (2                  | ) |  |       |    |   |  |   | (468,830 | ) |  |   | 8,298  |  
|Exercise of stock options and warrants                      |  | 163,077      |  |                           | 1   |          |   | 238                   |  |   |                                       |  |   |                    |   |  |       |    |   |  |   |         |   |  |   | 239    |  
|Issuance of common stock under employee stock purchase plan |  | 304,077      |  |                           | 3   |          |   | 265                   |  |   |                                       |  |   |                    |   |  |       |    |   |  |   |         |   |  |   | 268    |  
|Amortization of deferred compensation                       |  |             |  |                           |    |          |   |                      |  |   |                                       |  |   | 2                   |   |  |       |    |   |  |   |         |   |  |   | 2      |  
|Net loss                                                    |  |             |  |                           |    |          |   |                      |  |   |                                       |  |   |                    |   |  |       |    |   |  |   | (4,289   | ) |  |   | (4,289 | )
|                                                            |  |              |  |                           |     |          |   |                       |  |   |                                        |  |   |                     |   |  |       |     |   |  |   |          |   |  |   |        |  
|Balance, December 31, 2003                                  |  | 32,866,010   |  |                           | 328 |          |   | 475,222               |  |   | 2,087                                  |  |   |                    |   |  |       |    |   |  |   | (473,119 | ) |  |   | 4,518  |  
|Exercise of stock options and warrants                      |  | 959,891      |  |                           | 10  |          |   | 1,487                 |  |   |                                       |  |   |                    |   |  |       |    |   |  |   |         |   |  |   | 1,497  |  
|Issuance of common stock under employee stock purchase plan |  | 155,939      |  |                           | 2   |          |   | 304                   |  |   |                                       |  |   |                    |   |  |       |    |   |  |   |         |   |  |   | 306    |  
|Deferred compensation adjustments                           |  |             |  |                           |    |          |   | 330                   |  |   |                                       |  |   | (330                | ) |  |       |    |   |  |   |         |   |  |   |       |  
|Amortization of deferred compensation                       |  |             |  |                           |    |          |   |                      |  |   |                                       |  |   | 187                 |   |  |       |    |   |  |   |         |   |  |   | 187    |  
|Net income                                                  |  |             |  |                           |    |          |   |                      |  |   |                                       |  |   |                    |   |  |       |    |   |  |   | 15       |   |  |   | 15     |  
|                                                            |  |              |  |                           |     |          |   |                       |  |   |                                        |  |   |                     |   |  |       |     |   |  |   |          |   |  |   |        |  
|Balance, December 31, 2004                                  |  | 33,981,840   |  | $                         | 340 |          | $ | 477,343               |  | $ | 2,087                                  |  | $ | (143                | ) |  | $     |    |   |  | $ | (473,104 | ) |  | $ | 6,523  |  
|                                                            |  |              |  |                           |     |          |   |                       |  |   |                                        |  |   |                     |   |  |       |     |   |  |   |          |   |  |   |        |  



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)



|                                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                   |  | Years Ended December 31, |       
|                                                                                                   |  | 2002                     |        |   | 2003 |   |        | 2004 | 
|Cash Flows from Operating Activities:                                                              |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income (loss)                                                                                  |  | $                        | 3,406  |   |      | $ | (4,289 | )    |  | $ | 15     |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                          |        |   |      |   |        |      |  |   |        |  
|Depreciation                                                                                       |  |                          | 3,530  |   |      |   | 2,091  |      |  |   | 1,384  |  
|Non-cash compensation expense                                                                      |  |                          | 126    |   |      |   | 2      |      |  |   | 187    |  
|Non-cash interest expense                                                                          |  |                          | 761    |   |      |   | 1,015  |      |  |   | 936    |  
|Loss on early extinguishment of debt                                                               |  |                          |       |   |      |   |       |      |  |   | 262    |  
|Bad debt expense                                                                                   |  |                          | 500    |   |      |   | 69     |      |  |   | 136    |  
|Provision for excess and obsolete inventory                                                        |  |                          | 1,023  |   |      |   | 209    |      |  |   | 492    |  
|Translation gain from foreign subsidiary                                                           |  |                          | (21    | ) |      |   |       |      |  |   |       |  
|Changes in assets and liabilities                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Accounts receivable                                                                                |  |                          | (659   | ) |      |   | 5,252  |      |  |   | (7,145 | )
|Inventory                                                                                          |  |                          | 1,352  |   |      |   | (162   | )    |  |   | (968   | )
|Other assets                                                                                       |  |                          | 904    |   |      |   | 3      |      |  |   | (430   | )
|Accounts payable and accrued expenses                                                              |  |                          | (1,990 | ) |      |   | (1,618 | )    |  |   | 1,225  |  
|Deferred revenue                                                                                   |  |                          | (8,934 | ) |      |   | (103   | )    |  |   | (1,274 | )
|                                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash (used in) provided by operating activities                                                |  |                          | (2     | ) |      |   | 2,469  |      |  |   | (5,180 | )
|                                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash Flows from Investing Activities:                                                              |  |                          |        |   |      |   |        |      |  |   |        |  
|Net proceeds from sales of short-term investments                                                  |  |                          |       |   |      |   | 973    |      |  |   | 1,530  |  
|Expenditures for property and equipment                                                            |  |                          | (951   | ) |      |   | (986   | )    |  |   | (1,007 | )
|                                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash (used in) provided by investing activities                                                |  |                          | (951   | ) |      |   | (13    | )    |  |   | 523    |  
|                                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash Flows from Financing Activities:                                                              |  |                          |        |   |      |   |        |      |  |   |        |  
|Exercise of stock options and warrants, and shares purchased under employee stock purchase plan    |  |                          | 509    |   |      |   | 507    |      |  |   | 1,803  |  
|Net repayments under credit agreements                                                             |  |                          | (2,039 | ) |      |   |       |      |  |   |       |  
|Principal payments on capital lease obligations                                                    |  |                          | (285   | ) |      |   |       |      |  |   |       |  
|Proceeds from issuance of convertible debentures and warrants, net of issuance costs               |  |                          | 9,555  |   |      |   |       |      |  |   |       |  
|Repayment of convertible debentures                                                                |  |                          |       |   |      |   |       |      |  |   | (1,500 | )
|                                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash provided by financing activities                                                          |  |                          | 7,740  |   |      |   | 507    |      |  |   | 303    |  
|                                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Net increase (decrease) in cash and cash equivalents                                               |  |                          | 6,787  |   |      |   | 2,963  |      |  |   | (4,354 | )
|Cash and cash equivalents, beginning of year                                                       |  |                          | 5,921  |   |      |   | 12,708 |      |  |   | 15,671 |  
|                                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents, end of year                                                             |  | $                        | 12,708 |   |      | $ | 15,671 |      |  | $ | 11,317 |  
|                                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Supplemental Cash Flow Information:                                                                |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash paid for interest                                                                             |  | $                        | 480    |   |      | $ | 545    |      |  | $ | 484    |  
|                                                                                                   |  |                          |        |   |      |   |        |      |  |   |        |  



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. VISUAL NETWORKS, INC. AND SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES



Description of Business



Visual Networks, Inc. (the Company) is a leading provider of
network and application performance management solutions. The Companys technologies enable businesses and organizations to reliably and securely manage the delivery of mission-critical applications across their infrastructures. The
Companys products increase application and network availability, optimize the use of bandwidth, and reduce operating costs across traditional and IP-based infrastructures.



The Companys principal executive offices are located at 2092 Gaither Road, Rockville, Maryland 20850.



Principles of Consolidation



The consolidated financial statements include the accounts of Visual
Networks, Inc. and its wholly owned subsidiaries. All intercompany account balances and transactions have been eliminated in consolidation.



Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires the Company
to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expense, together with amounts disclosed in the related notes to the financial statements. Actual results could differ from the
recorded estimates.



Cash and Cash Equivalents



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.



Investments



The Company had an investment in
an entity over which the Company exercised no control or significant influence that was accounted for under the cost method. Prior to 2002, the Company wrote-off the entire balance of the investment in the amount of $3.7 million. During 2003, the
Company reached an agreement with another shareholder of this entity for that shareholder to buy the Companys investment for $452,000 in cash. The amount was recorded as other income in the statement of operations for the year ended December
31, 2003.



The Company held two certificates of deposit
(CD) of $1.5 million and $30,000 as of December 31, 2003, which are included as restricted short-term investments in the accompanying consolidated balance sheet at December 31, 2003. The $1.5 million CD collateralized a $1.5 million
letter of credit issued in favor of one of the Companys contract manufacturers that was cancelled on August 20, 2004. The $30,000 CD collateralized a letter of credit issued in favor of a customer that expired on July 30, 2004. Upon
liquidation, the two CDs were transferred to cash during 2004.



Inventory



Inventory is stated at the lower of standard cost or
market, with cost determined on the first-in, first-out basis. Inventory consists of the following (in thousands):



|                                          |  |              |        |   |      |   |        |  
|----------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                          |  | December 31, |       
|                                          |  | 2003         |        |   | 2004 |  
|Raw materials                             |  | $            | 2,114  |   |      | $ | 1,138  |  
|Work-in-progress                          |  |              | 74     |   |      |   |       |  
|Finished goods                            |  |              | 4,796  |   |      |   | 4,902  |  
|                                          |  |              |        |   |      |   |        |  
|Gross inventory                           |  |              | 6,984  |   |      |   | 6,040  |  
|Reserve for excess and obsolete inventory |  |              | (3,638 | ) |      |   | (2,218 | )
|                                          |  |              |        |   |      |   |        |  
|Total                                     |  | $            | 3,346  |   |      | $ | 3,822  |  
|                                          |  |              |        |   |      |   |        |  



F-8



---

##### Table of Contents

The Company writes down its inventory to the lower of cost or market value based on assumptions about
future demand and market conditions. The following table summarizes the activity in the Companys reserve for excess and obsolete inventory during 2002, 2003 and 2004 (in thousands):



|                                            |  |   |        |  
|------------------------------------------- |  | - | ------ | -
|Balance as of December 31, 2001             |  | $ | 5,311  |  
|Provision for excess and obsolete inventory |  |   | 1,023  |  
|Inventory scrapped                          |  |   | (1,404 | )
|                                            |  |   |        |  
|Balance as of December 31, 2002             |  |   | 4,930  |  
|Provision for excess and obsolete inventory |  |   | 209    |  
|Inventory scrapped                          |  |   | (1,501 | )
|                                            |  |   |        |  
|Balance as of December 31, 2003             |  |   | 3,638  |  
|Provision for excess and obsolete inventory |  |   | 492    |  
|Inventory scrapped                          |  |   | (1,912 | )
|                                            |  |   |        |  
|Balance as of December 31, 2004             |  | $ | 2,218  |  
|                                            |  |   |        |  



Property and Equipment



Property and equipment is carried at cost and depreciated
over its estimated useful life, ranging from three to seven years, using the straight-line method. Property and equipment consists of the following (in thousands):



|                                  |  |              |         |   |      |   |         |  
|--------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                  |  | December 31, |        
|                                  |  | 2003         |         |   | 2004 |  
|Equipment and software            |  | $            | 12,937  |   |      | $ | 14,442  |  
|Furniture and fixtures            |  |              | 2,512   |   |      |   | 2,012   |  
|Leasehold improvements            |  |              | 2,231   |   |      |   | 2,233   |  
|                                  |  |              |         |   |      |   |         |  
|Total property and equipment      |  |              | 17,680  |   |      |   | 18,687  |  
|Less-accumulated depreciation     |  |              | (15,302 | ) |      |   | (16,686 | )
|                                  |  |              |         |   |      |   |         |  
|Total property and equipment, net |  | $            | 2,378   |   |      | $ | 2,001   |  
|                                  |  |              |         |   |      |   |         |  



The Company disposed
of $6.9 million in retired assets during 2002. The loss on disposal of these assets was insignificant. No disposals were recorded during 2003 or 2004.



Depreciation expense was $3.5 million, $2.1 million and $1.4 million for 2002, 2003 and 2004, respectively.



Long-Lived Assets



In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company
reviews its long-lived assets, including property and equipment and identifiable intangibles, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of
its long-lived assets, the Company evaluates the probability that future estimated undiscounted net cash flows will be less than the carrying amount of the assets. If future estimated undiscounted net cash flows are more likely than not to be less
than the carrying amount of the long-lived assets, then the carrying amount of such assets are written down to their fair value. There were no assets written down during 2002, 2003 and 2004.



Accounts Payable and Accrued Expenses



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



|                       |  |              |       |      |   |      
|---------------------- |  | ------------ | ----- | ---- | - | -----
|                       |  | December 31,
|                       |  | 2003         |       | 2004
|Accounts payable       |  | $            | 2,452 |      | $ | 1,940
|Accrued compensation   |  |              | 1,387 |      |   | 2,108
|Accrued warranty       |  |              | 425   |      |   | 384  
|Deferred rent          |  |              | 426   |      |   | 434  
|Other accrued expenses |  |              | 3,425 |      |   | 4,475
|                       |  |              |       |      |   |      
|Total                  |  | $            | 8,115 |      | $ | 9,341
|                       |  |              |       |      |   |      



F-9



---

##### Table of Contents

Revenue Recognition



The Companys products and services include hardware, software, professional services and technical support. The Company sells its products directly
to service providers, through resellers (indirect channels) and, occasionally, to end-user customers. Professional services and technical support revenues are included in support and services revenue in the accompanying consolidated statements of
operations. The Company recognizes revenue from software licensing in accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) No. 97-2, Software Revenue Recognition. The Company
recognizes revenue from the sale of hardware in accordance with SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which summarizes existing accounting literature and requires that four criteria be met prior to
the recognition of revenue. The Companys accounting policies regarding revenue recognition comply with the following criteria: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and
4) collectibility is probable.



To determine if a fee is fixed
or determinable, the Company evaluates rights of return, customer acceptance rights (if applicable), extended payment terms (if any), and multiple-element arrangements of products and services to determine the impact on revenue recognition.



Certain reseller agreements do include stock rotation rights.
If an agreement provides for a right of return, the Company recognizes revenue when the right has expired or a specific end-user customer has been identified by the reseller as evidenced with a letter of acceptance or documentation provided by the
reseller. If the Company has sufficient historical information to allow it to make an estimate of returns in accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS)
No. 48, Revenue Recognition When Right of Return Exists, the Company defers revenue based on an estimate for such returns. If an agreement calls for a right of return and sufficient historical return information does not exist, the
Company defers revenue for the entire agreement until the right of return expires.



If an agreement provides for evaluation or customer acceptance, the Company recognizes revenue upon the completion of the evaluation process, acceptance of the product by the customer and completion of all other
criteria.



The Companys normal payment terms are between
30 and 45 days. Any payment terms beyond those normal terms are considered to be extended payment terms. The Company examines the specific facts and circumstances of all sales arrangements with extended payment terms to make a determination of
whether the sales price is fixed or determinable and whether collectibility is probable. Payment terms are not tied to milestone deliverables or customer acceptance. The evaluation of the impact on revenue recognition, if any, includes the
Companys history with the particular customer and the specific facts of each arrangement. The Company has not provided any concessions or written off any accounts receivable related to extended payment term arrangements.



Many of the Companys sales are multiple element arrangements and
include hardware, software, and technical support. The Companys software sales may include professional services for installation but these services are not a significant source of revenue. The Company does not perform professional services to
customize the product. Training is also offered but is not a significant source of revenue. Revenue from multiple element arrangements is recognized using the residual method, as prescribed in SOP No. 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions, whereby the fair value of any undelivered elements, such as customer support and services, is deferred and any residual value is allocated to the software and recognized as revenue
upon delivery. The fair value of any undelivered elements, typically professional services, technical support and training, have been determined based on the Companys specific objective evidence of fair value, which is based on the price that
the Company charges customers when the element is sold separately. Should the Company introduce new multiple element arrangements into its sales channels, a determination of the objective evidence of the fair value of the undelivered elements will
be necessary and an inability to provide objective evidence could impact the Companys ability to recognize revenue.



The Company recognizes revenue from services, such as installation and training, when the services are performed. The Companys technical support
contracts require it to provide technical support and unspecified software updates to customers on a when and if available basis. The Company recognizes customer support revenue, including support revenue that is bundled with product sales, ratably
over the term of the contract period, which typically ranges from one to three years.



The Company has agreements with certain service providers that provide price protection in the event that more favorable prices and terms are granted to any other similarly situated customer. When required, 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 service provider inventory levels and makes
adjustments to these reserves when management believes that actual price protection credits may differ from established estimates.





F-10



---

##### Table of Contents

Credit Risk



Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The
Company sells its products to large telecommunications and Internet service provider companies primarily in the United States of America. The Company grants credit terms without collateral to its customers and, prior to the 2002 bankruptcy of one of
the Companys significant customers as described below, has not experienced any significant credit-related losses. Accounts receivable reflect allowances to record receivables at their estimated net realizable value. At December 31, 2003, two
customers individually represented 33% and 13% of accounts receivable. At December 31, 2004, four customers individually represented 33%, 21%, 12% and 11% of accounts receivable.



During 2002, the Company wrote-off $0.7 million of accounts receivable due from a significant customer, MCI WorldCom Network
Services, Inc. (MCI), formerly known as MCI Telecommunications Corporation, against the allowance for bad debts. MCI filed for bankruptcy on July 21, 2002. During 2003, the Company sold those previously written off receivables to an
unrelated third party for $0.3 million in cash. The amount of the proceeds was recorded as a reduction to bad debt expense included in general and administrative expense in the accompanying consolidated statement of operations for that period.



Subsequent to its bankruptcy filing, MCI has complied with all
payment terms required by the Company. MCI emerged from bankruptcy in April 2004 and continues to be a significant customer. Sales to MCI were $6.3 million, $3.2 million and $9.1 million in 2002, 2003 and 2004, respectively.



Warranty and Indemnifications



The Company warrants Visual UpTime hardware for a period of up to five
years. The Company warrants Visual UpTime Select hardware for one year. The Company estimates its warranty obligation at the end of each period and records changes in the liability to cost of revenue in the respective period. Such estimates
are based on actual warranty cost experience.



The following is
a summary of the change in the Companys accrued warranty balance during 2002, 2003 and 2004 (in thousands):



|                             |  |   |      |  
|---------------------------- |  | - | ---- | -
|Balance at December 31, 2001 |  | $ | 441  |  
|Provision for warranty       |  |   | 153  |  
|Settlements made             |  |   | (192 | )
|                             |  |   |      |  
|Balance at December 31, 2002 |  |   | 402  |  
|Provision for warranty       |  |   | 87   |  
|Settlements made             |  |   | (64  | )
|                             |  |   |      |  
|Balance at December 31, 2003 |  |   | 425  |  
|Provision for warranty       |  |   | 28   |  
|Settlements made             |  |   | (69  | )
|                             |  |   |      |  
|Balance at December 31, 2004 |  | $ | 384  |  
|                             |  |   |      |  



In November 2002, the
FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires the accounting for and
disclosure of guarantees and clarifies the requirements of FASB No. 5, Accounting for Contingencies.



Pursuant to FIN 45 and subsequent FASB staff positions, intellectual property infringement indemnifications are subject to the disclosure requirements of
FIN 45, but are exempt from its initial recognition and measurement provisions. The Company typically includes standard intellectual property indemnification clauses in software license agreements. Pursuant to these clauses, the Company agrees to
pay any final judgments against the customer in connection with certain intellectual property infringement claims by third parties relating to the Companys products. The indemnification clauses apply at any time after the execution of the
software license agreement. In addition, the Company warrants that software products will perform in accordance with material specifications in effect at the time of delivery of the licensed products to the customer for 90 days following delivery.
The Company has not experienced any material intellectual property indemnification claims and have no amounts accrued as of December 31, 2004 relating to such obligations.



Research and Development



Research and development expense consists primarily of research and development staff compensation, outsourced development costs and testing and prototype
materials.



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



F-11



---

##### Table of Contents

expensed as incurred and reflected as research and development costs in the accompanying consolidated statements of
operations. For 2002, 2003 and 2004, 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 very short.
Consequently, costs which could have been capitalized after technological feasibility were expensed due to immateriality.



Income Taxes



The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, whereby deferred tax assets and
liabilities are computed based on the differences 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.



Fair Value of Financial Instruments



SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires the disclosure of fair value information about financial
instruments, whether or not recognized in the consolidated 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, cannot be realized in immediate settlement of the instrument. The Company estimates that at December 31, 2003 and 2004, the
fair value of the convertible debentures issued in March 2002 (see Note 4) did not differ materially from their carrying value. The carrying values of the Companys current assets and other current liabilities approximate fair value because of
the relatively short maturities of these instruments.



Comprehensive Income



The Company reports comprehensive income in accordance
with SFAS No. 130, Reporting Comprehensive Income, which establishes rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires foreign currency translation adjustments and the unrealized gains
and losses on marketable securities to be included in other comprehensive income. Because the Company has not had any significant components of other comprehensive income, the reported net income (loss) does not differ materially from comprehensive
income (loss) for 2002, 2003 and 2004.



Segment Reporting and Significant
Customers



SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information, establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that these enterprises report selected
information about operating segments in interim financial reports. Management has concluded that the Companys operations occur in one segment only based upon the information used by management in evaluating the performance of the business.
SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The revenue and assets of the Companys foreign subsidiaries were less than 10% of consolidated revenue and
assets. Regarding significant customers, four customers individually represented 34%, 11%, 10% and 10% of revenue in 2002. Four customers individually represented 27%, 18%, 17% and 11% of revenue in 2003. Four customers individually represented 23%,
23%, 17% and 12% of revenue in 2004. The Companys major service provider customers include, among others: AT&T, BellSouth, Earthlink, Equant, MCI, SBC, Sprint and Verizon. The revenue generated from sales to service providers was 82%, 83%
and 86% of the Companys consolidated revenue in 2002, 2003 and 2004, respectively. The agreements with the Companys significant customers do not obligate these customers to make any minimum purchases from the Company.



Accounting for Stock Options



Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees provides for the accounting of stock-based compensation under the intrinsic value method. Under the intrinsic value method, compensation expense is recorded for the excess, if any, of
the market price of the stock at grant date or other measurement date over the amount that an employee must pay to acquire the stock.



In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, that 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. SFAS No. 123 allows an entity to continue to
use the intrinsic value method. However, entities electing the accounting method described in APB Opinion No. 25 must make pro forma disclosures as if the fair value based method of accounting had been applied.



F-12



---

##### Table of Contents

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure (SFAS No. 148). SFAS No. 148 amends SFAS No. 123 by providing alternative methods of transition from the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148
was effective for financial statements for fiscal years ending after December 15, 2002. Accordingly, the Company adopted the disclosure requirements of SFAS No. 148 in the first quarter of 2003.



The Company has elected to account for its stock-based compensation in
accordance with the provisions of APB Opinion No. 25 as interpreted by FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25, and present the pro forma
disclosures required by SFAS No. 123 as amended by SFAS No. 148.



If compensation expense had been determined based on the fair value of the options at the grant dates consistent with the method of accounting under SFAS No. 123 as amended by SFAS No. 148, the Companys net income (loss) and income
(loss) per share would adjust to the pro forma amounts indicated below (in thousands, except per share amounts):



|                                                                                                                |  |                          |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                |  | Years Ended December 31, |       
|                                                                                                                |  | 2002                     |        |   | 2003 |   |        | 2004 | 
|Net income (loss), as reported                                                                                  |  | $                        | 3,406  |   |      | $ | (4,289 | )    |  | $ | 15     |  
|Add: Stock-based employee compensation expense included in reported net income (loss)                           |  |                          | 126    |   |      |   | 2      |      |  |   | 187    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                          | (7,475 | ) |      |   | (5,253 | )    |  |   | (3,027 | )
|                                                                                                                |  |                          |        |   |      |   |        |      |  |   |        |  
|Pro forma net loss                                                                                              |  | $                        | (3,943 | ) |      | $ | (9,540 | )    |  | $ | (2,825 | )
|                                                                                                                |  |                          |        |   |      |   |        |      |  |   |        |  
|Income (loss) per share:                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Basic: as reported                                                                                              |  | $                        | 0.11   |   |      | $ | (0.13  | )    |  | $ | 0.00   |  
|                                                                                                                |  |                          |        |   |      |   |        |      |  |   |        |  
|Basic: pro forma                                                                                                |  | $                        | (0.12  | ) |      | $ | (0.29  | )    |  | $ | (0.08  | )
|                                                                                                                |  |                          |        |   |      |   |        |      |  |   |        |  
|Diluted: as reported                                                                                            |  | $                        | 0.11   |   |      | $ | (0.13  | )    |  | $ | 0.00   |  
|                                                                                                                |  |                          |        |   |      |   |        |      |  |   |        |  
|Diluted: pro forma                                                                                              |  | $                        | (0.12  | ) |      | $ | (0.29  | )    |  | $ | (0.08  | )
|                                                                                                                |  |                          |        |   |      |   |        |      |  |   |        |  



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, 2002, 2003 and 2004:



|                         |  |                          |   |  |      |   |  |      |  
|------------------------ |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                         |  | Years Ended December 31, |  
|                         |  | 2002                     |   |  | 2003 |   |  | 2004 |  
|Dividend yield           |  | None                     |   |  | None |   |  | None |  
|Expected volatility      |  | 121                      | % |  | 224  | % |  | 67   | %
|Risk-free interest rate  |  | 3.82                     | % |  | 2.97 | % |  | 3.41 | %
|Expected term (in years) |  | 5                        |   |  | 5    |   |  | 5    |  



The weighted-average
grant-date fair value per share of options granted was $0.97, $0.99 and $1.58 during the years ended December 31, 2002, 2003 and 2004.



Basic and Diluted Income (Loss) Per Share



SFAS No. 128, Earnings Per Share, requires dual presentation of basic and diluted income (loss) per share. Basic income (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 income (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 and warrants to purchase 9,191,930 shares of common stock that were outstanding at December 31, 2003 are not included in the computation of 2003 diluted loss per share as their effect would be anti-dilutive. The treasury stock
effect of options and warrants to purchase 8,097,086 and 9,468,527 shares of common stock that were outstanding at December 31, 2002 and 2004,

respectively, are included in the computation of diluted income per share. The effect of the convertible debentures issued in March 2002 (see Note 4) that are convertible into 2,986,093 shares of common stock has not been included in the
computation of diluted income per share for 2002 and diluted loss per share for 2003 as their effect would be anti-dilutive. The effect of the convertible debentures that are convertible into 2,559,509 shares of common stock has not been included in
the computation of diluted income per share for 2004 as their effect would be anti-dilutive.



F-13



---

##### Table of Contents

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



|                                                                    |  |                          |        |      |   |        |      |  |   |       
|------------------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | ---- |  | - | ------
|                                                                    |  | Years Ended December 31,
|                                                                    |  | 2002                     |        | 2003 |   |        | 2004
|Net income (loss)                                                   |  | $                        | 3,406  |      | $ | (4,289 | )    |  | $ | 15    
|                                                                    |  |                          |        |      |   |        |      |  |   |       
|Basic weighted-average number of shares of common stock outstanding |  |                          | 32,139 |      |   | 32,610 |      |  |   | 33,257
|Treasury stock effect of options and warrants                       |  |                          | 295    |      |   |       |      |  |   | 2,498 
|                                                                    |  |                          |        |      |   |        |      |  |   |       
|Diluted weighted-average shares outstanding                         |  |                          | 32,434 |      |   | 32,610 |      |  |   | 35,755
|                                                                    |  |                          |        |      |   |        |      |  |   |       
|Income (loss) per common share:                                     |  |                          |        |      |   |        |      |  |   |       
|Basic income (loss) per share                                       |  | $                        | 0.11   |      | $ | (0.13  | )    |  | $ | 0.00  
|                                                                    |  |                          |        |      |   |        |      |  |   |       
|Diluted income (loss) per share                                     |  | $                        | 0.11   |      | $ | (0.13  | )    |  | $ | 0.00  
|                                                                    |  |                          |        |      |   |        |      |  |   |       



Recent Accounting Pronouncements



In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an Amendment of ARB No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company is currently evaluating the financial statement impact of the adoption of SFAS No. 151.



In December 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment, that is intended to provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees. Public entities (other than those filing as small business issuers) will be required to apply SFAS No. 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating
the financial statement impact of the adoption of SFAS No. 123(R).



Reclassifications



Certain prior period
amounts have been reclassified to conform to current period presentation.



2. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS



Prior to the Companys initial public offering in February 1998, a $1.7 million reserve was established to cover sales returns and allowances. The reserve has historically been classified as deferred revenue. In connection with
preparing its 2004 financial statements, management determined that such reserve should have been reversed prior to 2002. Consequently, the Company has restated is consolidated balance sheet as of December 31, 2003 to reduce deferred revenue by $1.7
million, with a corresponding decrease in accumulated deficit. The Company has similarly restated its consolidated statements of changes in stockholders equity for the years ended December 31, 2002 and 2003. This restatement did not have any
impact on the Companys consolidated statements of operations for the years ended 2002 and 2003.



3. BANK BORROWINGS



In
July 2004, the Company and Silicon Valley Bank (SVB) entered into a $6.0 million line of credit agreement. Borrowings under the line of credit are available once the convertible debentures (see Note 4) have been fully repaid. The Company
entered into this line of credit agreement primarily to provide additional capital in the event that the debenture holders exercise their right to require the Company to repay the Debentures in full prior to their due date, and the Company makes all
or a substantial portion of the repayment in cash. No amounts are outstanding under this line of credit at December 31, 2004.



F-14



---

##### Table of Contents

The line of credit agreement with SVB expires on July 22, 2005, at which time any outstanding advances
under the agreement are immediately payable. Under the agreement, the Company would be able to borrow amounts not exceeding the lesser of (i) $6.0 million or (ii) a borrowing base which is 80% of eligible accounts receivable as defined in the
agreement. Interest would be payable monthly at the greater of (i) SVBs prime rate plus 1.25% per annum or (ii) 5.25% per annum. Collateral under the agreement consists of the Companys right, title and interest in and to substantially
all of its assets other than its intellectual property. Once the convertible debentures are repaid, the agreement subjects the Company to certain financial and other covenants.



In December 2000, Silicon Valley Bank (SVB) had issued a standby letter of credit for $1.5 million, as amended,
in favor of the Companys contract manufacturer, Celestica, that was cancelled on August 20, 2004. There are no outstanding letters of credit at December 31, 2004.



4. CONVERTIBLE DEBENTURES



In March 2002, the Company issued senior secured convertible debentures (the Debentures) in the aggregate amount of $10.5 million in a private
placement transaction. The Debentures, now due on demand but no later than March 25, 2006, are payable in cash or common stock at the Companys option provided certain conditions are satisfied, which are currently satisfied. The Debentures bear
interest at an annual rate of 5% payable quarterly in cash or common stock, at the Companys option, provided certain conditions are satisfied, which are currently satisfied. To date, all quarterly interest payments under the Debentures have
been made in cash. The conversion price of the Debentures will adjust if the Company issues additional equity or instruments convertible into equity at a price that is less than the then-effective conversion price of the Debentures. The Company has
the right to require the holders to convert their Debenture holdings into common stock if the value weighted average price of the Companys common stock exceeds 175% of the conversion price for 20 consecutive trading days. The remaining
Debentures totaling $9.0 million are convertible currently into 2,559,509 shares of common stock at December 31, 2004 at a price of $3.5163 per share.



In connection with the issuance of the Debentures, the Company issued to the holders warrants to purchase 828,861 shares of its common stock at an
exercise price of $4.2755 per share. If the Company issues additional equity or instruments convertible into equity at a lower price than the then-effective exercise price, the exercise price would be adjusted downward on a weighted average basis.
The warrants expire on March 25, 2007.



The holders of the
Debentures also received the right to purchase shares of to-be-created Series A preferred stock and equity participation rights, which have now expired unexercised. The Debenture holders were also granted registration rights.



Because the Company did not meet the 2003 earnings target set forth in the
Debentures, the Debenture holders may require that the Company repay, in whole or in part, at any time and from time to time, the outstanding principal amount of their Debenture holdings, plus accrued interest. Accordingly, the Debentures, net of
unamortized debt discount, are classified as current liabilities in the accompanying consolidated balance sheets. Under the terms of the Debentures: (i) a Debenture holder electing payment for some portion of the Debentures must notify the Company
of this election; (ii) the Company, in turn, must notify the Debenture holder of the manner in which it intends to repay that Debenture holder (either all cash or all common stock); and (iii) the notifying Debenture holder then notifies the Company
of the amount to be paid in that form at that time. The redemption of each Debenture may be made in cash or common stock, at the Companys option, provided certain conditions are satisfied, which the Company currently satisfies. During 2004,
the Company elected to repay $1.5 million of the outstanding Debentures in cash subsequent to a repayment request from a Debenture holder.



In addition, under the terms of the Debentures, a number of events could trigger the Debenture holders right to force early repayment of 115% of the
outstanding principal plus accrued and unpaid interest owed under the Debentures. Events constituting a triggering event include:



| |  |  | default by the Company on other indebtedness or obligations under any other debenture, mortgage, credit agreement or other facility, indenture agreement, factoring agreement or
other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement in an amount exceeding $500,000;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure by the Company to have its common stock listed on an eligible market;
| | - |  | -----------------------------------------------------------------------------



| |  |  | failure to have an effective registration statement covering the shares of common stock issuable upon conversion of the Debentures or exercise of the warrants;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | bankruptcy of the Company;
| | - |  | --------------------------



| |  |  | engagement by the Company in certain change in control, sale of assets or redemption transactions; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | certain other failures by the Company to perform obligations under the Debenture agreement and/or the related agreements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



F-15



---

##### Table of Contents

The aggregate amounts of the Debentures are reflected in the accompanying balance sheets as a current
liability of $10.5 million and $9.0 million, net of unamortized debt discount of $1.8 million and $0.8 million, as of December 31, 2003 and December 31, 2004, respectively. The net amount reflects the fair market value on the date of issuance after
allocating the proceeds to the various additional components of the debt. $2.1 million in proceeds from the Debentures was allocated to the value of the warrants. Approximately $0.3 million in proceeds from the Debentures was allocated to additional
paid-in capital to recognize the value of the rights of the holders to purchase shares of preferred stock, which expired in 2002, as determined by an appraisal. On the date of issuance of the Debentures, the effective conversion price of the
Debentures was less than the quoted market price of the Companys common stock. Accordingly, $0.7 million in proceeds from the Debentures was allocated to additional paid-in capital to recognize this beneficial conversion feature. The discount
on the Debentures resulting from the allocation of proceeds to the value of the warrants, preferred stock rights and beneficial conversion feature is being amortized as a charge to interest expense over the four-year period until the Debentures
become due in March 2006. Debt issuance costs of $0.9 million were deferred and are being amortized over the term of the Debentures. Because of the early repayment of $1.5 million of the outstanding Debentures in June 2004, a proportionate amount of
the unamortized discount and debt issuance costs associated with this $1.5 million repayment was expensed. The related charge of $0.3 million is included in other expense in the accompanying statement of operations for 2004.



5. STOCKHOLDERS EQUITY



1999 Employee Stock Purchase Plan



In May 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the
1999 Purchase Plan), which, as amended, provides for the issuance of a maximum of 2,150,000 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). Option Periods 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. The Company issued 406,573, 304,077 and 155,939 shares of common stock pursuant to the provisions of the 1999
Purchase Plan during 2002, 2003 and 2004, respectively.



6. STOCK OPTIONS



At December 31, 2004, the Company was authorized to grant
new options to purchase 3,616,936 shares of common stock pursuant to its stock option plans (the Option Plans). The Option Plans provide for the granting of both incentive stock options and non-statutory options. The Option Plans are
administered by the Compensation Committee of the Board of Directors, which has sole discretion and authority, consistent with the provisions of the Option Plans, to determine which eligible participants will receive options, 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 Plans.



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. In the case of non-statutory options, the exercise price may be equal to or greater than 85% of the fair value of the common stock at the time of the grant. Options typically become exercisable over five-year
periods; 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. Unless terminated sooner by the Board, the Option Plans terminate at various dates
through March 2013 or the date on which all shares available for issuance shall have been issued.



Under the terms of the Option Plans, members of the Board of Directors receive options to purchase 100,000 shares of common stock upon initial election or
appointment and options to purchase 25,000 shares of common stock on each annual meeting of stockholders.





F-16



---

##### Table of Contents

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



|                                         |  |                     |   |  |                        |          |                                  |   |       |  |   |     
|---------------------------------------- |  | ------------------- | - |  | ---------------------- | -------- | -------------------------------- | - | ----- |  | - | ----
|                                         |  | Options Outstanding |   |  | Option Price Per Share |          | Weighted- Average Exercise Price
|Options outstanding at December 31, 2001 |  | 8,472,017           |   |  | $                      | 0.07    |                                  | $ | 59.00 |  | $ | 4.88
|Granted                                  |  | 1,473,061           |   |  |                        | 0.65    |                                  |   | 4.37  |  |   | 1.28
|Canceled                                 |  | (2,732,494          | ) |  |                        | 0.40    |                                  |   | 54.45 |  |   | 4.01
|Exercised                                |  | (76,531             | ) |  |                        | 0.07    |                                  |   | 4.45  |  |   | 1.46
|                                         |  |                     |   |  |                        |          |                                  |   |       |  |   |     
|Options outstanding at December 31, 2002 |  | 7,136,053           |   |  |                        | 0.19    |                                  |   | 38.75 |  |   | 4.39
|Granted                                  |  | 3,113,092           |   |  |                        | 1.17    |                                  |   | 1.92  |  |   | 1.46
|Canceled                                 |  | (1,855,171          | ) |  |                        | 0.29    |                                  |   | 38.75 |  |   | 6.24
|Exercised                                |  | (163,077            | ) |  |                        | 0.19    |                                  |   | 1.90  |  |   | 1.46
|                                         |  |                     |   |  |                        |          |                                  |   |       |  |   |     
|Options outstanding at December 31, 2003 |  | 8,230,897           |   |  |                        | 0.19    |                                  |   | 38.75 |  |   | 2.93
|Granted                                  |  | 2,921,547           |   |  |                        | 2.14    |                                  |   | 3.67  |  |   | 2.68
|Canceled                                 |  | (1,552,887          | ) |  |                        | 0.65    |                                  |   | 38.75 |  |   | 2.96
|Exercised                                |  | (959,891            | ) |  |                        | 0.19    |                                  |   | 2.89  |  |   | 1.54
|                                         |  |                     |   |  |                        |          |                                  |   |       |  |   |     
|Options outstanding at December 31, 2004 |  | 8,639,666           |   |  |                        | 0.19    |                                  |   | 38.75 |  |   | 2.99
|                                         |  |                     |   |  |                        |          |                                  |   |       |  |   |     



At December 31, 2004,
options to purchase 5,171,874 shares of common stock were exercisable with a weighted-average exercise price of $3.49.



The weighted-average remaining contractual life and weighted-average exercise price of options outstanding at December 31, 2004 is as follows for selected
exercise price ranges:



|                         |  |                     |  |                                              |  |                                  |       |                   |           |                                  |   |      
|------------------------ |  | ------------------- |  | -------------------------------------------- |  | -------------------------------- | ----- | ----------------- | --------- | -------------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                         
|Range of Exercise Prices |  | Number of Options   |  | Weighted- Average Remaining Contractual Life |  | Weighted- Average Exercise Price |       | Number of Options |           | Weighted- Average Exercise Price
|$ 0.19  $ 1.21          |  | 1,468,227           |  | 7.83                                         |  | $                                | 1.12  |                   | 733,172   |                                  | $ | 1.08 
|1.22     1.75           |  | 891,495             |  | 7.34                                         |  |                                  | 1.54  |                   | 470,249   |                                  |   | 1.54 
|1.80     2.14           |  | 968,231             |  | 7.72                                         |  |                                  | 1.98  |                   | 757,873   |                                  |   | 1.96 
|2.26     2.54           |  | 1,026,732           |  | 9.47                                         |  |                                  | 2.43  |                   | 52,061    |                                  |   | 2.45 
|2.68     3.13           |  | 938,182             |  | 7.91                                         |  |                                  | 2.91  |                   | 415,755   |                                  |   | 3.07 
|3.18     3.90           |  | 746,205             |  | 8.16                                         |  |                                  | 3.44  |                   | 142,708   |                                  |   | 3.73 
|3.92     3.92           |  | 929,421             |  | 6.34                                         |  |                                  | 3.92  |                   | 929,421   |                                  |   | 3.92 
|4.00     4.69           |  | 976,713             |  | 6.39                                         |  |                                  | 4.24  |                   | 976,175   |                                  |   | 4.24 
|4.72   34.13            |  | 688,460             |  | 5.91                                         |  |                                  | 7.41  |                   | 688,460   |                                  |   | 7.41 
|38.75   38.75           |  | 6,000               |  | 5.39                                         |  |                                  | 38.75 |                   | 6,000     |                                  |   | 38.75
|                         |  |                     |  |                                              |  |                                  |       |                   |           |                                  |   |      
|0.19   38.75            |  | 8,639,666           |  | 7.52                                         |  |                                  | 2.99  |                   | 5,171,874 |                                  |   | 3.49 



During 2002, the
Company recorded deferred compensation of $100,000 related to 2002 stock option grants. Also during 2002, deferred compensation was reduced by $52,000 for the cancelled options resulting from terminated employees. During 2004, the Company granted
465,213 non-qualified stock options to employees, under the 1997 Omnibus Stock Plan, at an issuance price that was less than the fair market value of the Companys common stock. Deferred compensation of $330,000 is being amortized over the
vesting period of the stock options.



Deferred compensation
expense relating to stock option grants was $126,000, $2,000, and $187,000 during 2002, 2003 and 2004, respectively.



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. Other 401(k) plans obtained through various acquisitions were rolled in the Visual 401(k) Plan during 2002. Employee contributions are voluntary and are determined on an individual basis with a maximum annual amount equal
to 60% 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.



F-17



---

##### Table of Contents

There were no employer contributions to the Visual 401(k) Plan or any of the other plans during 2002,
2003 and 2004. The Companys Board of Directors approved a 401(k) matching contribution effective January 1, 2005. The Company will match $0.50 on the dollar for the first 4% of each employees contribution. The employees earn matching
dollars based on years of service with the Company as follows:



|                 |  |         
|---------------- |  | --------
|Years of Service |  | % Vested
|1                |  | 20      
|2                |  | 40      
|3                |  | 60      
|4                |  | 80      
|5                |  | 100     



8. INCOME TAXES



The provision for income taxes results in an effective rate that differs
from the Federal statutory rate as follows for 2002, 2003 and 2004:



|                                           |  |                         |   |  |      |    |  |        |  
|------------------------------------------ |  | ----------------------- | - |  | ---- | -- |  | ------ | -
|                                           |  | Years EndedDecember 31, |  
|                                           |  | 2002                    |   |  | 2003 |    |  | 2004   |  
|Statutory federal income tax rate          |  | 35                      | % |  | (35  | )% |  | 35     | %
|Effect of graduated rates                  |  | (1                      | ) |  | 1    |    |  |       |  
|State income taxes, net of federal benefit |  | 4                       |   |  | (3   | )  |  | 3      |  
|Permanent differences                      |  | 3                       |   |  | 2    |    |  | (3,938 | )
|Tax credits                                |  | (13                     | ) |  |     |    |  | (3,097 | )
|Change in valuation allowance              |  | (28                     | ) |  | 35   |    |  | 6,997  |  
|                                           |  |                         |   |  |      |    |  |        |  
|Effective tax rate                         |  |                        | % |  |     | %  |  |       | %
|                                           |  |                         |   |  |      |    |  |        |  



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



|                                 |  |              |         |   |      |   |         |  
|-------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                 |  | December 31, |        
|                                 |  | 2003         |         |   | 2004 |  
|Net operating loss carryforwards |  | $            | 42,724  |   |      | $ | 44,398  |  
|Depreciation                     |  |              | 33      |   |      |   | 112     |  
|Allowance for doubtful accounts  |  |              | 143     |   |      |   | 152     |  
|Inventory valuation              |  |              | 1,383   |   |      |   | 842     |  
|Accrued liabilities              |  |              | 981     |   |      |   | 769     |  
|Deferred revenue                 |  |              | 857     |   |      |   | 402     |  
|Tax credit carryforwards         |  |              | 4,332   |   |      |   | 5,043   |  
|Valuation allowance              |  |              | (50,453 | ) |      |   | (51,718 | )
|                                 |  |              |         |   |      |   |         |  
|Total net deferred tax asset     |  | $            |        |   |      | $ |        |  
|                                 |  |              |         |   |      |   |         |  



At December 31, 2004,
the Company had a valuation allowance of $51.7 million which fully offsets gross deferred tax assets of $51.7 million. The Company calculated the valuation allowance in accordance with the provisions of Statement of Financial Accounting Standard No.
109, Accounting for Income Taxes (SFAS No. 109) which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. Recent evidence, such as operating results during recent
years, is given more weight when assessing whether the level of future profitability needed to recognize the deferred assets will be achieved. The Companys cumulative loss in the last five fiscal years represents sufficient negative evidence
to require a full valuation allowance under the provisions of SFAS No. 109. The Company intends to maintain a full valuation allowance until sufficient positive evidence exists to support the reversal of any portion of the allowance.



The Company currently has net operating loss carryforwards to offset future
taxable income of $116.8 million at December 31, 2004. These net operating loss carryforwards expire through 2024. 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 prior acquisitions by the Company, the use of these acquired net operating losses will be limited and may not be available to offset future taxable income.



F-18



---

##### Table of Contents

9. COMMITMENTS AND CONTINGENCIES



Long-Term Debt and Leases



The Company leases office space and office equipment under non-cancelable operating leases expiring through December 2007. The Company recorded rent
expense of $1.3 million, $1.6 million and $1.6 million during 2002, 2003 and 2004, respectively.



Future minimum payments, assuming no additional early Debenture repayments, at December 31, 2004 under the Debentures and non-cancelable operating leases
are as follows (in thousands):



|                                         |  |            |       |   |                  |   |      
|---------------------------------------- |  | ---------- | ----- | - | ---------------- | - | -----
|                                         |  | Debentures |       |   | Operating Leases
|2005                                     |  | $          | 450   |   |                  | $ | 1,640
|2006                                     |  |            | 9,113 |   |                  |   | 1,132
|2007                                     |  |            |      |   |                  |   | 1,161
|2008                                     |  |            |      |   |                  |   | 1,170
|2009                                     |  |            |      |   |                  |   | 1,181
|                                         |  |            |       |   |                  |   |      
|Total minimum payments                   |  |            | 9,563 |   |                  | $ | 6,284
|                                         |  |            |       |   |                  |   |      
|Interest element of payments             |  |            | (563  | ) |                  |   |      
|                                         |  |            |       |   |                  |   |      
|Present value of future minimum payments |  |            | 9,000 |   |                  |   |      
|Unamortized debt discount                |  |            | (837  | ) |                  |   |      
|                                         |  |            |       |   |                  |   |      
|Total debentures                         |  | $          | 8,163 |   |                  |   |      
|                                         |  |            |       |   |                  |   |      



The Company has a
subtenant occupying a portion of its office space under a sublease that expires in December 2005. This sublease runs co-terminus with our lease on that office space. Future minimum lease payments due from the sublessee are $0.2 million at December
31, 2004.



The Company has commitments related to inventory
purchased by certain suppliers on its behalf. If such inventory is not used within a specified period of time, the Company discontinues a product for which the suppliers have made purchases, or the Company terminates a relationship with the supplier
for which the Company has set minimum inventory requirements, the Company is required to purchase the excess inventory from the suppliers. Additionally, if the Company cancels a purchase order placed with a supplier, the Company may be subject to
certain costs and fees. Because of the nature of this obligation, the potential liability at December 31, 2004 associated with the commitment to purchase excess inventory cannot be estimated.



Litigation



In January 2004, the Company received notice that a lawsuit had been filed by Paradyne Networks, Inc. (Paradyne
Networks) of Largo, Florida, in the United States District Court for the Middle District of Florida, Tampa Division (the  Florida Court) against the Company, seeking damages, and injunctive and declaratory relief, for the
Companys alleged infringement of patents owned by Paradyne Corporation (Paradyne), a subsidiary of Paradyne Networks.



On May 14, 2004, the Florida Court granted the Companys motion to dismiss the case for lack of subject matter jurisdiction and denied
plaintiffs motion for leave to amend its complaint and its motion for preliminary injunction. The plaintiff did not appeal the decision.



In a related matter, one of the Companys subsidiaries, Visual Networks Operations, Inc. (VNO), filed a lawsuit in United States District
Court for the District of Maryland, Southern Division (the Maryland Court), against Paradyne. This lawsuit requests declaratory judgment that Visual UpTime and Visual IP InSight do not infringe certain patents owned by Paradyne and that
those patents are invalid and unenforceable and alleges that Paradynes assertion of its patents against the Company is baseless and has been for the sole purpose of obtaining an unfair competitive advantage, and that Paradyne has infringed
certain patents owned by the Company. Paradyne filed counterclaims alleging that VNO infringes its patents, mirroring the Florida claims. On October 15, 2004, Paradyne Corporation filed amended counterclaims, adding allegations of willful patent
infringement and unenforceability of two of the Companys patents in the lawsuit. The Maryland lawsuit presently is in the fact discovery phase of the litigation. The Maryland Court conducted a hearing concerning patent claim construction on
February 7, 2005. The Maryland Court has not yet ruled on that hearing and a trial date has not yet been scheduled.



Pursuant to the terms of a confidential settlement agreement entered into on March 11, 2005 between Paradyne and VNO, Paradyne has agreed to dismiss its
patent claims against Visual IP Insight. VNO has agreed to dismiss its unfair competition claim against Paradyne with respect to Visual IP Insight and pay royalties to Paradyne through the remaining life of Paradynes patents in the amount of
1% of revenue recognized by the Company from the licensing and distribution of Visual IP Insight.



F-19



---

##### Table of Contents

Despite the Companys belief that its products do not infringe upon Paradynes patents and that
Paradynes claims are frivolous and without merit, the defense of these claims is expensive and may divert the Companys resources from other activities, which could have a material adverse effect on the Companys business and results
of operations. At this point in the litigation, the likelihood of any outcome cannot be determined and the adverse effect, if any, cannot be estimated.



The Company is periodically a party to disputes arising from normal business activities including various employee-related matters. In the opinion of
management, resolution of these various employee-related matters will not have a material adverse effect upon the Companys financial position or future operating results.



Litigation costs are expensed as incurred.



F-20



---

##### Table of Contents

10. 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,
|                                |  | 2003                                     |       |   | 2004     |   |        | 2003          |  |              | 2004  |   |  | 2003 |        |   | 2004 |   | 2003   |   |  | 2004
|                                |  | (in thousands, except per share amounts)
|Revenue                         |  | $                                        | 9,204 |   |          | $ | 11,841 |               |  | $            | 9,773 |   |  | $    | 12,823 |   |      | $ | 9,367  |   |  | $    | 13,817 |  | $ | 10,835 |   |  | $ | 14,161
|Gross profit                    |  |                                          | 6,950 |   |          |   | 8,518  |               |  |              | 7,208 |   |  |      | 8,821  |   |      |   | 6,248  |   |  |      | 9,533  |  |   | 8,426  |   |  |   | 9,890 
|Income (loss) from operations   |  |                                          | (188  | ) |          |   | (130   | )             |  |              | (313  | ) |  |      | 184    |   |      |   | (2,142 | ) |  |      | 541    |  |   | (640   | ) |  |   | 956   
|Net income (loss)               |  |                                          | (92   | ) |          |   | (490   | )             |  |              | (677  | ) |  |      | (414   | ) |      |   | (2,515 | ) |  |      | 246    |  |   | (1,005 | ) |  |   | 673   
|Basic income (loss) per share   |  |                                          | (0.00 | ) |          |   | (0.01  | )             |  |              | (0.02 | ) |  |      | (0.01  | ) |      |   | (0.08  | ) |  |      | 0.01   |  |   | (0.03  | ) |  |   | 0.02  
|Diluted income (loss) per share |  |                                          | (0.00 | ) |          |   | (0.01  | )             |  |              | (0.02 | ) |  |      | (0.01  | ) |      |   | (0.08  | ) |  |      | 0.01   |  |   | (0.03  | ) |  |   | 0.02  



The quarterly basic
and diluted income (loss) per share amounts may not total to the annual basic and diluted income (loss) per share amounts due to rounding.



F-21



---

##### Table of Contents

SCHEDULE II



VISUAL NETWORKS, INC.



VALUATION AND QUALIFYING ACCOUNTS

(in thousands)



|                                           |  |                              |        |                               |   |            |  |                        |     |  |   |       
|------------------------------------------ |  | ---------------------------- | ------ | ----------------------------- | - | ---------- |  | ---------------------- | --- |  | - | ------
|Description                                |  | Balance at Beginning of Year |        | Charged to Costs and Expenses |   | Write-offs |  | Balance at End of Year
|Allowance for doubtful accounts            |  |                              |        |                               |   |            |  |                        |     |  |   |       
|Year ended December 31, 2002               |  | $                            | 554    |                               | $ | 500        |  | $                      | 696 |  | $ | 358   
|Year ended December 31, 2003               |  |                              | 358    |                               |   | 69         |  |                        | 50  |  |   | 377   
|Year ended December 31, 2004               |  |                              | 377    |                               |   | 136        |  |                        | 114 |  |   | 399   
|Valuation allowance for deferred tax asset |  |                              |        |                               |   |            |  |                        |     |  |   |       
|Year ended December 31, 2002               |  | $                            | 47,083 |                               | $ | 856        |  | $                      |    |  | $ | 47,939
|Year ended December 31, 2003               |  |                              | 47,939 |                               |   | 2,514      |  |                        |    |  |   | 50,453
|Year ended December 31, 2004               |  |                              | 50,453 |                               |   | 1,265      |  |                        |    |  |   | 51,718



F-22



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm on Supplemental Information



Board of Directors and Stockholders

Visual Networks, Inc.



In connection with our audit of the consolidated financial statements of Visual Networks, Inc., referred to in our report dated February 28, 2005, which
is included in the Annual Report on Form 10-K, we have also audited Schedule II for the year ended December 31, 2004. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.



/s/ Grant Thornton
LLP



Vienna, Virginia

February 28, 2005



F-23



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule



To the Board of Directors

of Visual Networks, Inc.:



Our
audit of the consolidated financial statements referred to in our report dated March 30, 2004, except as to Note 2, as to which the date is March 15, 2005, appearing in this Annual Report on Form 10-K/A also included an audit of the financial
statement schedule as of and for the years ended December 31, 2002 and 2003 listed in Item 15 (a)(2) of this Form 10-K/A. In our opinion, the financial statement schedule as of and for the years ended December 31, 2002 and 2003 presents fairly, in
all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.



/s/ PricewaterhouseCoopers LLP



McLean, Virginia

March 30, 2004, except as to Note 2, as to which the date is March 15, 2005



F-24