================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

         (MARK ONE)

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                                       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                   (IRS Employer
    Incorporation or Organization)                  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 |_|

      Documents incorporated by reference: Specified portions of the Definitive
Proxy Statement filed with the Commission pursuant to Regulation 14A in
connection with the 2003 Annual Meeting are incorporated herein by reference
into Part III of this Report.

                       Documents Incorporated by Reference

      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 |_| No |X|

      The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 21, 2003 was approximately $52,846,591. The number of
outstanding shares of the Registrant's common stock as of March 21, 2003 was
32,442,180 shares.

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<PAGE>

                         VISUAL NETWORKS, INC. FORM 10-K

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

                                     PART I
Item 1.  Business                                                              1
         Introduction                                                          1
         Industry Background                                                   2
         The Visual Networks Solution                                          4
         The Visual Networks Strategy                                          5
         Products and Technology                                               6
         Visual UpTime                                                         6
         Visual IP InSight                                                     8
         Marketing and Sales                                                   9
         Key Customers and Strategic Relationships                            11
         Customer Service                                                     11
         Research and Development                                             12
         Manufacturing                                                        12
         Competition                                                          12
         Proprietary Rights                                                   13
         Employees                                                            14
Item 2.  Properties                                                           14
Item 3.  Legal Proceedings                                                    14
Item 4.  Submission of Matters to a Vote of Security Holders                  15

                                     PART II
Item 5.  Market for Our Common Stock and Related Stockholder Matters          15
Item 6.  Selected Consolidated Financial Data                                 16
Item 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                  17
Item 7A. Quantitative and Qualitative Disclosure about Market Risk            35
Item 8.  Financial Statements and Supplementary Data                          35
Item 9.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure                                  36

                                    PART III
Item 10. Our Directors and Executive Officers                                 37
Item 11. Executive Compensation                                               37
Item 12. Security Ownership of Certain Beneficial Owners and
         Management                                                           37
Item 13. Certain Relationships and Related Transactions                       37
Item 14. Controls and Procedures                                              37

                                     PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K      38
         Signatures                                                           42
         Certifications                                                       43


                                       i
<PAGE>

                           FORWARD LOOKING STATEMENTS

      IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. FACTORS THAT MIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." READERS SHOULD CAREFULLY REVIEW THE RISKS
DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q
TO BE FILED BY THE COMPANY IN 2003. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF
THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY RELEASE ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.


                                       ii
<PAGE>

                                     PART I

      In addition to historical information, our annual report on Form 10-K
contains forward-looking statements that involve risks and uncertainties that
could cause our actual results to differ materially from our expectations.
Factors that might cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers should
carefully review the risks described in other documents we file from time to
time with the Securities and Exchange Commission, including our quarterly
reports on Form 10-Q to be filed by us in 2003. We caution you not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this annual report on Form 10-K. We undertake no obligation to revise
the forward-looking statements to reflect events or circumstances after the date
of this document.

Item 1. Business.

Introduction.

      We design, manufacture, sell and support performance management systems
for communications networks. Our products, Visual UpTime and Visual IP InSight,
allow providers of network services, which we call service providers, and the
businesses and organizations, which we call enterprises, that use the network
products and services provided by the service providers, to measure the
performance of their networks, to determine whether a network is performing
consistent with the requirements of the applications running on that network and
to determine whether the level of service being provided is meeting the
requirements of the enterprise. Our systems also help enterprises to plan
network capacity. Our systems constantly monitor the data traffic traveling
between service providers' and enterprises' networks. Network operators using
our systems can quickly identify and isolate network problems without sending
personnel to their customers' sites or their own remote sites. By knowing how
much traffic is traveling on the network and understanding the type of data on
the network, network operators can effectively address network capacity issues.
Network performance is critical to enterprises because networks carry data and
applications that are vital to an enterprise's operations. Enterprises require
tools to ensure the availability of their networks, to predict and validate
network performance and to optimize the price/performance balance of their
networks.

      Many service providers are designing their networks to cost effectively
transport data traffic by using both private and public networks. Private
networks, such as frame relay, asynchronous transfer mode (ATM), and private
Internet Protocol (IP) networks, are networks that connect the sites of an
enterprise over the network facilities of a single service provider. A public IP
network is a network that uses the Internet, or multiple providers' IP network
facilities, or backbones, to connect an enterprise's remote offices and
branches, remote users, business partners and public Web sites.

      The networking market is intensely competitive, and service providers are
constantly trying to increase revenue and reduce operating costs. Service
providers require tools to efficiently turn on service for their customers,
trouble-shoot problems collaboratively with their customers, offer and validate
the network performance that might be promised in a customer contract, and
effectively plan their customers' network requirements.

      We market our products to enterprises and service providers. Enterprises
use our products to enhance the performance of their networked applications,
improve their network efficiency and validate the network performance promised
by their service providers. As of December 31, 2002, we had shipped systems to
manage over 160,000 data transport circuits, or connections between service
providers' networks and enterprises' networks, and 13 million remote Internet
access users.

      Service providers use our products to create services that are
differentiated from their competitors and to reduce their operating costs and
the costs associated with initiating service for a customer. Our major service
provider customers include, among others: AT&T, BellSouth, Earthlink, Equant,
SBC, Sprint, Verizon, and WorldCom. The revenue we generated by selling our
products to service providers was 70%, 77%, and 82% of our consolidated revenue
in 2000, 2001 and 2002, respectively.

      Despite the growth of demand for data networking services, 2002 was a
challenging year as businesses continued to reduce spending. One of our most
significant customers, WorldCom, filed for bankruptcy in July 2002. Despite the
bankruptcy of


                                       1
<PAGE>

WorldCom and a number of emerging service providers, and the general economic
downturn of the telecommunications market, we were able to achieve and maintain
profitability, limit our bad debt write-offs and improve our cash balances. We
were able to accomplish this due primarily to the following factors:

      o     Our business is not related to the build-out of telecommunications
            infrastructure, but rather is tied to the sale and deployment of
            data networking services to enterprises.;

      o     In March 2002, we issued $10.5 million in convertible debentures to
            improve our cash position;

      o     Throughout 2002, we significantly reduced our operating expenses and
            realigned them with lower revenue expectations. Our research and
            development expense, sale and marketing expense and general and
            administrative expense declined from $61.7 million in 2001 to $39.7
            million in 2002; and

      o     In July 2002, we executed an agreement, later amended, with WorldCom
            that stipulated payment terms while WorldCom is in bankruptcy,
            enabling us to continue to sell our products to WorldCom during its
            restructuring period. We generated $6.3 million in revenue from
            WorldCom during 2002, and incurred $0.7 million in bad debts. We
            cannot assure you that we will continue to generate this level of
            revenue from sales of our products to WorldCom during 2003.

      We were incorporated in Maryland in August 1993 under the name Avail
Networks, Inc. and reincorporated in Delaware in December 1994 as Visual
Networks, Inc. In 1998, we acquired Net2Net Corporation to accelerate the time
to market for our ATM performance management products. Products resulting from
that acquisition form the basis of our ATM analysis in the Visual UpTime and
CellTracer product lines. In 1999, we acquired Inverse Network Technology in
order to enter the performance management space for the public Internet. In this
acquisition, we acquired the Visual IP InSight product and the Visual Internet
Benchmark service. In 2000, we acquired Avesta Technologies, Inc. in order to
expand our network management portfolio to include products that could identify
the underlying primary causes of network problems. With this acquisition, we
acquired the Visual Trinity and Visual eWatcher products. As we refined our
strategic direction during 2001, we determined that certain of these products
did not fit our strategy or were not as far along in development as we had
anticipated, and we began to divest or discontinue certain products. In 2001, we
sold the Visual Internet Benchmark service and discontinued the Visual Trinity
product. In 2002, the remaining customer for our CellTracer product, Network
Associates placed what they indicated would be final orders with us for this
product. Also, in 2002, we continued to evaluate the future of the Visual
eWatcher and CellTracer products. In their current form, neither product
produced significant revenue for the year ended December 31, 2002. We believe
that the technology of both products may be useful to other products in the
future and we are exploring alternatives for these technologies. However, we
decided not to focus our development or sales efforts on these products in 2003.
Therefore, we do not anticipate any significant revenue from these products
during 2003. The following table indicates our revenue from the discontinued
products for the periods indicated:

                                                     Years Ended December 31,
                                                   ----------------------------
                                                     2000       2001      2002
                                                   -------    -------    ------
                                                          (in thousands)
            Visual Internet Benchmark .........    $ 4,607    $ 4,025    $  814
            Visual Trinity and eWatcher .......      7,268      3,591       699
            CellTracer ........................      7,946      2,980     2,232
                                                   -------    -------    ------
               Discontinued product revenue ...    $19,821    $10,596    $3,745
                                                   =======    =======    ======

      Our principal executive offices are located at 2092 Gaither Road,
Rockville, Maryland, 20850. Our telephone number is (301) 296-2300. You may
obtain copies of this Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports free of charge on our corporate Web
site at www.visualnetworks.com.

Industry Background.

      Software applications used to operate enterprises, such as enterprise
resource planning, transaction processing, supply chain management, customer
relationship management, file transfers, software distribution, and e-commerce
have grown in number and complexity over the past decade. Many of these
applications require communication systems in order to work, resulting in
increased activity or "data traffic" across Wide Area Networks (WANs). This
growth in data traffic has led service providers to create, and sell to their
customers, data networking services that can cost effectively handle this data
traffic. Service providers provide both private and public networks.


                                       2
<PAGE>

      A private network connects an enterprise's internal sites over a single
service provider's network facilities, or backbone. A service provider will
often use the facilities of the local telephone company to connect the customer
to the backbone. In order to make this connection work well for the customer,
the main network facility needs to have a minimum capacity level and needs to be
able to provide additional capacity to accommodate the customer's increase in
traffic during peak usage times. Most private networks utilize one of two
technologies to move data: (1) frame relay; or (2) asynchronous transfer mode
(ATM). Existing frame relay or ATM networks are being modified to handle IP
traffic between the customer's internal sites. These networks are known as
"private IP networks" because they use the IP backbone of only a single service
provider who guarantees the security and performance of the customer's network
connections between its internal sites. Businesses often choose to use a private
IP network when they are concerned with network performance issues, such as
network availability, security and privacy.

      A public IP network is a network that uses the Internet, or multiple
service providers' IP networks, to interconnect sites. Businesses use public IP
networks to connect remote and mobile users to their corporate network, to
connect remote sites in situations where private network connections are not
available, such as in countries without frame relay or ATM networks, or cost
effective, to connect to the networks of business partners, and to connect to
public Web sites. A business might choose to use a public IP network when
performance guarantees and security are less critical, when cost is a major
issue, and when it needs to interconnect with suppliers and customers.

      Enterprises need networks that provide:

      High network availability. When networks are not available, businesses
      incur increased costs and reduced revenue. Businesses want tools that will
      warn them of pending network problems, quickly identify the source of
      problems, and cost-effectively trouble-shoot any problems that do occur.

      Predictable performance. The network must support the performance
      requirements of the business applications running on them. Businesses need
      tools that show them how the network is being utilized, what impact
      applications are having on the network, whether the network has adequate
      capacity to support the applications, and what the end user's experience
      is with the performance of the network.

      Appropriate price/performance. Business managers must also control network
      costs and validate that the network is performing as promised. They need
      tools to measure the performance of the network that may be the subject of
      a guarantee contained in their agreement with their service provider. They
      also need to be able to identify areas of the network where excess
      capacity exists.

      Competition for network services is intense. To improve their competitive
position, service providers are looking for ways to attract customers by
offering new and differentiated services. In addition, the service providers are
looking to improve their profitability by lower operating costs and increasing
revenue. As a result, service providers need:

      Efficient ways to install and maintain network services. Service providers
      need to install services quickly and efficiently. They need tools that
      enable them to verify that the newly installed network service is
      operational, independent of the readiness of the customer's networking
      equipment. The goal is to reduce the costs associated with installing
      network services and decrease the delay between service installation and
      when the service provider can begin billing the customer.

      Collaborative trouble-shooting. Service providers are typically the first
      place a customer will call with a network problem, regardless of the
      source of that problem. Service providers need tools that enable them to
      rapidly identify problems without sending personnel to the customers'
      locations. These tools must be able to identify whether the problem exists
      on the portion of the network provided by the service provider, the local
      telephone company or the customer. This would allow the customer to
      understand the source of the problem, rather than assuming that the
      problem is being caused by either the service provider or the local
      telephone company.

      Verifiable service performance. Because public and private networks use
      shared resources among all customers, a service provider must be able to
      offer the customers the ability to verify the quality of the service that
      is being provided. The service provider needs tools to accurately measure
      the class and level of service it provides and to report the performance
      levels to the customer. Many service providers actually enter into service
      level agreements, or SLA, with their customers which guarantee certain
      levels of performance. Without the ability to actually measure the service
      levels being provided, however, an SLA is meaningless.


                                       3
<PAGE>

      Effective network planning. The service provider and the customer can work
      together to create a network that satisfies the customer's requirements.
      The service provider needs tools to identify places on the customer
      network that have either insufficient or excess capacity and how software
      applications can affect capacity and performance, allowing the service
      provider to make recommendations to the customer for enhancing the
      efficiency and utilization of their network.

      Scalable management. Enterprises require networks that are scaleable to
      support their growth. Service providers and their customers need
      performance management tools that are scaleable to support future growth.

The Visual Networks Solution.

      We provide performance management systems for frame relay, ATM and private
and public IP networks. Our systems measure and analyze the performance of these
networks at the point on the network that divides the portion provided by the
service provider from the portion provided by the customer. We call this point
the service demarcation, or "demarc." Service providers and customers manage
network performance from this point of view because it is the place that defines
the service offering for which customers are paying.

      We provide software and hardware components that are placed at the demarc
to monitor and analyze network traffic, and utilization and performance. This
information is then stored in a database located in a network operations center,
either at the customer's location or at the service provider's location. We also
provide tool sets to the employees runoff an enterprise who are responsible for
the network, the network operators. These tool sets include customer care,
troubleshooting, service level monitoring and management, and network planning,
which network operators use to manage the performance of network services. The
network operator is also able to use the stored network performance history in
the database to observe times when the network may have been experiencing
performance problems. The network operator can use this information to help
solve problems that tend to be intermittent when they occur on data networks.
The network operator also has the ability to monitor network performance in real
time.

      Enterprises may either buy our products and operate them on their own, or
they may purchase from a service provider a service offering that includes our
performance management system. Enterprises use our systems to improve network
availability and performance, to insure that the performance levels that the
service provider has guaranteed are being met, to test and monitor the impact
business applications are having on network capacity and utilization, and to
reduce the total cost of network operations. Our solutions provide the following
capabilities:

      Performance monitoring and reporting. For frame relay and ATM networks,
      our systems monitor and report information on a number of service factors
      that are often contractually promised to the customer by the service
      providers. For private IP networks, our systems measure and report on
      these same metrics for a particular level or class of service. We also
      offer Service Advisor(TM) which gives a real time view of the service
      quality metrics. For public IP networks, our systems execute and report on
      tests that measure the availability and performance of IP services and
      protocols. In addition, for remote dial Internet access, our systems
      monitor and report on the connection and network performance from the
      user's point of view. These performance-monitoring tools enable a business
      to have an early indication of potential network problems.

      Network utilization. Our systems monitor and report on network utilization
      by type of service. Businesses use this capability for network planning to
      determine the impact that various applications have on network capacity
      and performance. In addition, a business can determine whether the
      applications and networking equipment are properly configured. One of the
      modules we offer is Burst Advisor(TM), which provides a view of the
      network usage in one-second increments. A business can use this
      information to determine if network capacity is sized appropriately for
      its needs, if more bandwidth should be procured, or if too much bandwidth
      has been provided.

      Trouble-shooting. Network operators can program the system to provide an
      early warning of potential problems if certain metrics are exceeded. When
      the established thresholds are exceeded, the system generates alarms to
      alert the network operator to the problem. The alarms can be automatically
      forwarded to an external fault management system. Our system then provides
      a number of trouble-shooting tools that enable the user to identify the
      source of the performance problem and to identify where the problem
      exists: on the equipment or service of the network service provider, the
      access line service provider, the customer equipment, or at the
      application. Our system can capture data traffic at the demarc and
      diagnose difficult problems. In addition to receiving a real-time view,
      the network operator can look back at the condition of the network at the
      point when the problem actually occurred. Using our system, a network
      operator can resolve performance problems without the need to dispatch
      technicians to a particular


                                       4
<PAGE>

      site, with expensive analysis equipment, and can quickly identify and
      diagnose hard-to-find, intermittent problems. The use of our system
      results in higher network availability and performance and lower operating
      costs.

      Planning and reporting. Our system generates a number of summary and
      detailed reports on network performance which a network operator can use
      for short and long-term network planning. Information Technology (IT)
      executives use the reports to assess the quality of the network services
      being provided and verify that service providers' contractual performance
      obligations are being met.

      Service providers purchase our systems in an effort to reduce their
operating costs and differentiate their services through better network
performance. Service providers also use our systems to offer and validate
service performance guarantees. In addition, service providers offer value-added
services by deploying our agents at the service demarc, hosting and operating
the system, and providing businesses with access to the tools sets and their
data for analysis. We provide the following additional capabilities to our
service providers:

      Service Creation. We assist service providers in defining and creating
      service offerings that incorporate our solutions. We help define the
      elements to be provided in the service, develop the methods and procedures
      for implementing and deploying the service, calculate the service
      provider's return on investment, develop marketing and sales materials,
      train the service provider sales force and generate demand for the new
      service.

      Service Validation. Service providers incorporate network performance
      metrics into their customer contracts and use the information provided by
      our solutions to validate the service quality they are contractually
      obligated to provide. These standards normally include delay of network
      traffic flow, availability of access ports, percentage of traffic dropped,
      validation of type of service provided and availability and performance of
      IP services and protocols. Our system's ability to measure service
      performance metrics allows the service provider to validate the service it
      is providing to customers and also provides a justification for the
      service provider's premium pricing on certain services.

      Collaborative Management. The service provider is typically the first to
      receive a trouble call if a business' network application is performing
      poorly. In many cases, the source of the problem is not the service
      provider, but rather the access line provided by the local telephone
      company, the configuration of the customer's equipment, or the application
      itself. Our systems enable the customer and the service provider to
      collaborate when solving network problems. For the private networks, the
      service provider and the enterprise will have access to the same data and
      trouble-shooting tools. The service provider can quickly isolate the
      source of the problem and demonstrate this to the customer, thus avoiding
      confusion as to the source of the problem and dispatching a technician. In
      addition, they will both have access to the same network utilization
      information, so that the proper network capacity can be established for
      the customer's applications. In the case of public IP networks, the
      service provider has access to configuration information on the end-user's
      workstation and has access to data on the end-user's usage experience. The
      service provider's customer care organization is able to quickly assist
      the user in resolving performance problems.

      Provisioning. Establishing initial service can be a lengthy and costly
      process. Typically, a service provider must wait until the customer has
      installed networking equipment at its business location before the service
      can be finally tested and billing can begin. This can often result in
      technicians visiting a customer's location multiple times prior to the
      time the service is fully operational. A service provider using our system
      can establish the service and test its availability independent of the
      customer's networking equipment.

      Scalability. Our systems can be increased in capacity to manage multiple
      customers' networks, large numbers of sites and vast amounts of traffic.

The Visual Networks Strategy.

      Our primary objective is to maximize shareholder value by maximizing the
number of network sites that are managed by our systems. Key elements of the
strategy include:

      Make it Visual Partner Program. Through our Make it Visual Partner Program
(MIVPP), we are seeking to have our systems deployed on the greatest number of
network access sites possible. We seek to partner with leading providers of
network access equipment to have components of our technology embedded into
their equipment. To date, we have entered into strategic relationships with
Cisco Systems and Kentrox, both of which are leading providers of network access
equipment. We intend to expend development, marketing, and sales resources to
support and expand these relationships and to extend the program to other


                                       5
<PAGE>

providers of private and public data networking access equipment.

      Private IP. We seek to have our systems further deployed as service
providers expand and enhance their private IP service offerings. Major service
providers such as AT&T, Sprint, WorldCom and Equant have introduced IP
capabilities to their frame relay services. In 2002, we introduced significant
enhancements to Visual UpTime to manage the performance of these services. We
see opportunities for additional revenue as these services grow and as existing
frame relay and ATM customers add IP capabilities. We intend to continue to
enhance our systems for use with these networks.

      Channel management. We intend to capitalize on our relationships with
major service providers to assist them in defining and selling service offerings
based on our systems. Service providers are the predominant means for the
deployment of service performance management capability for private networks,
and are an increasingly important provider of service performance management for
public IP networks. Our solutions are ideally suited for service provider
deployment and for collaborative management between the service provider and
their customers. Additionally, we intend to expand our market coverage in the
Value-Added Reseller (VAR) channel by supporting the marketing programs of our
master reseller, Interlink Communications Systems, and through our Cisco
relationship.

      Managed routers. We intend to have our solutions used by service providers
in outsourced network services, including those service providers that use the
router as the demarc, rather than the data service unit, or DSU, that serves as
the demarc in most service providers' offerings. Many service providers and
managed network service vendors offer complete packages of network services to
large businesses. Through the MIVPP initiatives described earlier, our solutions
can be used in these networks through the customer's router equipment. In other
offerings, our stand-alone analysis service elements, or ASE, are used as a
clearly-defined service demarc, even though the service provider also provides
further services and equipment on the customers' premises. We intend to expend
marketing and sales resources to create and market Visual Networks-based
performance management services for these offerings.

      Global expansion. We intend to use our customer relationships with large,
multinational corporations to expand our coverage outside the United States. We
intend to focus on service providers that have the largest share of frame relay,
ATM and private IP, and direct and remote Internet access markets, and by
leveraging our relationships with equipment providers. We are also establishing
reseller relationships globally with local and regional VARs and increasing our
international sales resources.

      Site-to-site public IP VPN. We intend to increase the revenue that we
receive from enterprises and service providers that deploy public IP VPNs as
part of their networking solution. In 2002, we introduced enhancements to Visual
IP InSight to manage the performance of public IP VPNs. We intend to continue to
enhance our solutions for use in these networks.

Products and Technology.

      We have two flagship products: Visual UpTime, which is a performance
management system for private data networks, including frame relay, ATM and
private IP, and Visual IP InSight, which is a performance management system for
public IP networks.

Visual UpTime.

      Visual UpTime is a performance management system for private data networks
which use frame relay, ATM, and private IP. It consists of the following tightly
integrated tools:

      o     Performance monitoring is an early warning system, alerting network
            operators to impending service degradation that allows them to take
            corrective action before application performance degrades.

      o     Trouble-shooting enables a network operator to rapidly perform
            detailed diagnostics to identify the cause of service level
            problems.

      o     Planning and reporting is a report generation tool that creates a
            wide variety of network performance reports.

      o     Visual Service Advisor proactively manages the status of network
            service level agreement requirements.

      o     Visual Burst Advisor accurately sizes wide area network bandwidth.

      Service providers use Visual UpTime to improve the performance of their
own networks, reduce network operating costs, differentiate their services from
other providers, validate contractual performance obligations and create
value-added services that are then sold to businesses. Several service providers
have based their value added services on Visual UpTime, including the following
services: AT&T Frame Relay Plus, AT&T IP-enabled Frame Relay Plus (IPeFR Plus),
Sprint Web-based Network Manager, Sprint Managed DSU, WorldCom Frame Relay
Platinum, WorldCom Private IP Platinum, and Verizon Frame Watch. Service
providers also resell the Visual UpTime system to businesses which host the
system and manage their own networks. Businesses use Visual


                                       6
<PAGE>

UpTime to improve their network availability, properly size their network
capacity, reduce their operating costs, and validate their service provider's
performance of its contractual obligations.

      We license private-label versions of Visual UpTime to Cisco. Visual UpTime
is the basis for their WAN Access Performance Management System (WAPMS). Our
private label version currently manages ATM networks, and Cisco plans to expand
into frame relay network management in 2003.

      The Visual UpTime system is composed of the following components: Analysis
Service Elements (ASE), the Performance Archive Manager (PAM), license keys, and
Platform Applicable Clients (PAC).

      ASE. The ASE is a combination of proprietary software and hardware that
performs detailed analyses of network performance at the service demarc. Most
versions of the ASE also provide the functionality of wide area network, or WAN,
access equipment known as a channel service unit/data service unit, or CSU/DSU.
A CSU/DSU is a "digital modem" that connects customers' networks to their
service providers' network. The ASE uses sophisticated, proprietary software in
conjunction with networking-specific microprocessors and integrated circuits to
perform detailed analyses of every bit of data traversing the demarc. The ASE
generally stores the analyses locally in memory and wait for the PAM, described
below, to request the results. When the ASE detects an anomalous condition on
the network, it alerts the network operator who can take prompt action to remedy
the situation. Our core ASE technology can be deployed in a number of
configurations and data speeds depending on customer requirements. The ASE can
also be deployed with restricted access to the management data. The customer can
remove the restrictions by purchasing and deploying license keys that "unlock"
the restricted area. Service providers use this arrangement when they make the
ASEs the default WAN access equipment deployed when they install a circuit, but
do not initially provide the management capabilities of Visual UpTime to their
customer, and subsequently purchase the management capability when value-added
services are sold to their customer

      PAM. The PAM is our system database, and it manages requests between the
PAC, described below, and either the database or an ASE. Traditional management
data collection architectures depend on the continuous gathering of data, a
bandwidth consuming process. In contrast, Visual UpTime distributes most of the
processing burden to the ASE, allowing the PAM-ASE data sharing to take place
less frequently, typically once a day. This feature is critical in WAN
environments where costly bandwidth makes continuous management data collection
impractical. The PAM is a partitioned database with secure access control,
meaning that only certain users can access certain parts of the database. This
enables a service provider to serve multiple customers from a single PAM.

      License keys. In order to use the management tools of Visual UpTime that
are embedded in the hardware components, a customer or a service provider needs
a software "key". These license keys are used in conjunction with the equipment
that is manufactured by Cisco and Kentrox and on which our system resides.

      PAC. The PAC is software used for packaging and presenting the data stored
in the PAM and the ASE and enables access to the Visual UpTime toolsets,
including:

      o     Performance monitoring. This toolset is an early warning system
            which alerts the network operator to impending service degradation
            and allows the network operator to take corrective action before the
            end-user's application performance degrades. This toolset displays
            network performance related events and alarms. The performance
            monitoring toolset is tightly linked to the trouble-shooting
            toolset, allowing an operator to evaluate quickly and precisely the
            conditions that caused the event or alarm.

      o     Trouble-shooting. This toolset enables a network operator to rapidly
            perform detailed diagnostics to identify the cause of service
            problems. This toolset displays real-time and historical network
            performance statistics. The trouble-shooting toolset can capture the
            data communication traffic and provide analysis capability used by
            network operators to isolate problems arising from the interplay
            between a customer's equipment or application and the WAN service.

      o     Planning and reporting. This toolset is a report-generation tool
            that creates a wide variety of reports from the network performance
            data stored in the PAM. This toolset is used primarily for capacity
            planning, network engineering, management of contractual performance
            obligations, and executive reporting from the network operations
            staff to senior management.

      o     Visual Service Advisor. This tool proactively manages the status of
            network performance obligations. Service Advisor provides a
            real-time view into availability, throughput and delay. This enables
            the network manager to more effectively ascertain when contractual
            performance obligations are being met by specific sites in the
            network.


                                       7
<PAGE>

      o     Visual Burst Advisor. This tool accurately establishes WAN
            bandwidth. It archives usage of the network over one-second
            intervals and compiles a clear, detailed picture of usage
            distribution. It also automatically makes recommendations on proper
            bandwidth allocation. This eliminates the guesswork for determining
            the proper bandwidth for WAN circuits. With this tool, customers can
            reduce monthly expenditures if they are currently paying for more
            bandwidth than they are using or they can increase their bandwidth
            if it is insufficient to support the applications running on the
            network.

      We sell Visual UpTime as a complete system which includes at with a
minimum one PAM, one PAC and one ASE, or a license key, deployed at the demarc
point of each network circuit on which a customer or service provider wishes to
monitor and manage service levels. We are continuously enhancing Visual UpTime
with new features to support our equipment manufacturers, and to address service
performance requirements for private IP VPNs, higher network speeds, and new
applications and services.

Visual IP InSight.

      Visual IP InSight is a service performance management system for public IP
networks. It enables service providers and enterprises to manage IP connectivity
and accessibility to IP network services from the end-user's perspective. It
helps manage IP connectivity across all IP access technologies, including dial,
dedicated, broadband (DSL, wireless, cable and ISDN), and VPN connections.

            o     Visual IP InSight Dial Suite helps service providers and
                  businesses measure and monitor the performance of IP
                  connectivity and IP network services.

            o     Visual IP InSight Broadband Suite helps service providers and
                  businesses measure and monitor the performance of broadband
                  connections and remote access IP VPNs.

            o     Visual IP InSight Dedicated Suite solves the performance
                  management concerns associated with running mission-critical
                  applications across the public Internet by providing service
                  providers and their customers with the ability to view and
                  understand the functioning of dedicated IP connections and
                  site-to-site IP VPN service.

      Visual IP InSight contains three service performance management
applications.

            o     Visual IP InSight Service Operations provides information
                  regarding problems in real-time and monitors connection
                  performance and the performance of IP applications.

            o     Visual IP InSight Service Level Manager allows Internet
                  service providers, or ISP, to automatically monitor the
                  customer requirements with respect to service levels on a
                  customer-by-customer basis.

            o     Visual IP InSight Customer Care provides a look into the end
                  user's experiences by gathering connection history, system
                  configuration, and current network status from the end user's
                  personal computer.

      We license Visual IP InSight to public IP service providers to enable them
to improve the performance of their network, reduce network operating costs,
differentiate their services, validate contractual performance obligations and
create value-added services. We have several public IP service providers using
Visual IP InSight for performance management including BellSouth.Net dial
service, Earthlink Fastlane, Verizon On-Line and SBC dial and broadband
services. Value-added services that are based on Visual IP InSight include
WorldCom Dial Analysis and WorldCom Dedicated Analysis.

      System components for Visual IP InSight include agents, data collectors
and a data repository. These components communicate with each other over an IP
network providing real-time information. These components are packaged into
application suites that address various public IP networking environments: Dial
Suite, Broadband Suite, and Dedicated Suite. Visual IP InSight's architecture is
distributed, fault-tolerant, and scalable to carrier-class networks.

      Agents. Agents are the software clients that actually perform the tests
and collect the data used by the Visual IP InSight system. The system's agents
are the origin of quality of service and test data. There are two types of
agents: dedicated agents and client agents. Dedicated agents are embedded in
hardware devices called IP Service Elements (ISE). An ISE is connected to the
network at a suitable monitoring point and performs active tests on command as
configured by the network manager. Client agents are installed on the PC of
service subscribers. The software runs transparently until end-user assistance
is required. Context-sensitive online "help" suggests solutions to more than 150
dial-access problems and keeps a descriptive error log that customer care
personnel can use to solve problems that end users cannot resolve on their own.
In parallel, the client agent can passively monitor user activity on the network
or perform active tests when requested by the network manager. The client agent
can be deployed in any remote access environment - dial modem, cable modem, DSL,
ISDN or wireless services. All varieties of dedicated and client agents can be
used together in the same network with the same Visual IP InSight system.

      Visual IP InSight Collectors. The collectors gather data from the various
agents and transfer it to the Visual IP InSight


                                       8
<PAGE>

Aggregator, described below. A collector can be deployed either on the LAN side
of a firewall or at key points in the public IP network. A single collector can
handle hundreds of thousands of active agents.

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

      Visual IP InSight Service Operations. This application provides
information regarding problems in real-time and monitors connection performance
and the performance of IP applications, such as e-mail and domain name servers.

      Visual IP InSight Service Level Manager. This application allows an ISP to
define specific contractual arrangements with customers that are automatically
monitored on a customer-by-customer basis. It generates detailed service
reports, showing the end-user's actual experiences compared to the performance
metrics agreed upon by the customer and the ISP. Within the enterprise, an
internal IT department uses it to manage the performance of multiple ISP on a
partitioned basis, and to manage service level objectives across business
services. Visual IP InSight Service Level Manager helps service managers by
automating the service-monitoring process; measuring actual performance against
thresholds; and generating hourly, daily, weekly and monthly reports.

      Visual IP InSight Customer Care. This application monitors the end user's
experiences by gathering the connection history, system configuration, and
current network status from the end user's personal computer. This gives
customer care representatives the ability to more accurately identify problems,
effectively diagnose their cause and rapidly resolve the issues.

      Visual IP InSight Performance Management Suites. The capabilities of
Visual IP InSight are organized into application suites that address various
public IP networking environments:

      o     Visual IP InSight Dial Suite. This product helps service providers
            and businesses measure and monitor the performance of IP
            connectivity and IP network services.

      o     Visual IP InSight Broadband Suite. This product helps service
            providers and businesses measure and monitor the performance of
            broadband connections and remote access IP VPNs.

      o     Visual IP InSight Dedicated Suite. This product solves the
            performance management concern associated with running
            mission-critical applications across the public Internet by
            providing service providers and their customers with visibility into
            dedicated IP connections and site-to-site IP VPN service.

      We license Visual IP InSight as a complete system which requires at least
one back-end data base system, a Collector, an Aggregator, and the Service
Operation application per deployment along with one ISE or agent license for
each performance management point. System pricing is dependent on the number of
ISE and client agent management licenses authorized, and the applications
utilized.

Marketing and Sales.

      Our marketing programs are designed to generate demand for our products at
the enterprise - those organizations and businesses with network management
needs. Our sales force is responsible for this effort. These enterprises
purchase our products either through a service provider or one of our authorized
value-added resellers, or VARs. We have several support programs to educate the
sales forces of our service providers and VARs which are designed to shorten
sales cycles.

      We have also implemented an indirect channel strategy to businesses and
organizations and a direct channel strategy to service providers. Enterprises
that want to host their own systems procure them through a service provider
resale program or through a VAR. VARs place their orders with our master
distributor, Interlink Communication Systems (ICS). We have approximately 16
authorized VARs who have been instructed to purchase our products through ICS
under terms and conditions of our contracts with them. Other VARs, approved by
ICS, pursuant to ICS' Visual Networks Affiliate VAR Program, purchase our
products from ICS under terms and conditions established between ICS and the
approved VAR. At the end of 2002, ICS had 45 Visual Networks Affiliate VARs.
Revenue generated from our shipments to ICS for distribution to authorized and
affiliate VARs, was less than 10% of consolidated revenue for each of the three
years ended December 31, 2000, 2001 and 2002.


                                       9
<PAGE>

      Pursuant to agreements with us, our service provider customers purchase
our products for internal use, for resale to their customers or to serve as the
basis for a value-added service offering. Our major service provider customers
include AT&T, BellSouth, Earthlink, Equant, SBC, Sprint, Verizon and WorldCom.
Revenue related to our shipment of products to service providers represented
70%, 77% and 82% of our total revenue in 2000, 2001 and 2002, respectively. In
2002, AT&T, Sprint, Verizon and WorldCom represented 34%, 10%, 11% and 10% of
our total revenue, respectively. We describe below the terms of our contracts
with these providers. Although our service provider contracts do not require
minimum purchases and may be terminated by the service providers at any time, we
believe that our products support the service providers' high-margin product and
service offerings and that we will continue to receive orders from the service
providers in accordance with the terms and conditions contained in the
contracts. The loss of any one of these major service provider customers would
have a material adverse effect on our revenues and profitability.

      Although our business is predominantly within the United States, we market
our products to customers outside the United States pursuant to agreements with
international VARs. Currently, our most significant international reseller
partners are located in Canada and the United Kingdom. Although revenue from
international customers was less than 10% of our consolidated revenue for each
of the years ended December 31, 2000, 2001 and 2002, we have reorganized our
sales organization partly in order to allow us to aggressively pursue
international opportunities.

      Our sales organization consists of five groups, one sales group whose
members focus on all opportunities within a particular region in North America,
another sales group that focuses on North American channels, an international
sales group that addresses both enterprise sales support and developing and
supporting relationships with global channels, a systems engineering
organization that provides pre-sales technical support for the sales groups, and
a sales operations group that facilitates the efficient operation of the sales
organization.

      The North American regional sales group consists of sales people who
generate and cultivate leads. A regional sales person qualifies opportunities,
presents the value proposition to the prospective enterprise customer,
ascertains the preferred procurement alternative (the purchase of a product or a
service), determines the preferred channel partner or service provider, and
works with the selected channel to close the transaction. The group consists of
field sales people, systems engineers, and an inside sales organization. We
rarely take a product order directly from an enterprise customer.

      The North American channel sales group consists of dedicated account teams
that support individual service providers, including AT&T, Bellsouth, Equant,
SBC, Sprint and WorldCom, other Local Exchange Carriers, or LECs, and our
Value-Added Resellers, or VARs. The account teams work with the service
providers and LECs to create services based on our products, ensure that the
service providers' own sales teams are proficient in presenting the value
proposition to enterprise customers, and assure that sales opportunities are
closed in a timely fashion.

      The international sales group is responsible for both channel and
enterprise sales and relationship management in various regions throughout the
world. International sales regions from which we derive sales today include
Europe and the Asia-Pacific region, with other regions currently in various
stages of development.

      The individual members of the systems engineering organization are
assigned to specific sales teams to provide pre-sales technical support. The
systems engineers are responsible for making technical sales presentations,
answering technical questions from channel partners, supporting the product
certification and other evaluation efforts of existing and prospective
customers, and supporting the channel partners as required by their customers.

      The marketing group is responsible for generating leads for our solutions
and developing and delivering support programs to service providers and channel
partners. We use road shows, advertising, trade shows, Webinars, public
relations programs, our web page and inside sales programs to generate leads. We
have also developed a number of service creation templates and programs for both
public and private networks, to assist the service providers in developing,
implementing, and selling services based on our solutions.

      As of December 31, 2002, we employed 65 people in sales and marketing. In
addition, our senior management team and our product management organization
devote significant time furthering the business relationship with service
providers and channel partners. Our expenditures for sales and marketing
activities were approximately $41.9 million, $33.5 million and $20.5 million in
2000, 2001 and 2002, respectively. We intend to continue to invest significant
marketing and sales resources.


                                       10
<PAGE>

Key Customers and Strategic Relationships.

      AT&T. In December 1997, we entered into a non-exclusive procurement
agreement with AT&T. The agreement had an initial term of three years, but
continues indefinitely with the right by either party to terminate the agreement
upon thirty days notice. The discounted prices for most of the software licensed
and equipment purchased by AT&T are established in the contract. The contract
also contains the other terms and conditions of purchase by AT&T of the products
for incorporation into a service offering or for resale, including payment
terms, software licenses, product warranties and product support
responsibilities. If we offer more favorable prices and terms under a supply
agreement to any other customer for the same quantities of similar products
during the term of the agreement, we are obligated to provide AT&T with the same
or comparable overall terms. AT&T GNS, a group within AT&T, uses the Visual IP
InSight product pursuant to the terms and conditions of a separate software
agreement.

      Sprint. In May 2000, we entered into a master agreement with Sprint for
the purchase of equipment and services with a three-year term that Sprint may
terminate at any time with thirty days' prior notice. This succeeded a similar
agreement between the parties that was signed in August 1996. The discounted
prices for most of the Visual UpTime software licensed and equipment purchased
by Sprint are established in the contract. The contract, as amended, also
contains the other terms and conditions of purchase by Sprint of the product for
incorporation into a service offering or for resale, including payment terms,
software licenses, product warranties and product support responsibilities.
Under the contract, Sprint is entitled to a price rebate in the event that it
was determined that we provided more favorable prices or other terms and
conditions to another customer acquiring like quantities of our products. Sprint
uses the Visual IP InSight product pursuant to the terms and conditions of a
separate software agreement.

      Verizon. In July 1997, we entered into a non-exclusive integrator
agreement with Verizon, and a related support agreement, that was amended in
June 1999 to extend the term for five years. Unless terminated at the end of the
term, or any renewal term, the contract will renew automatically for successive
one-year terms. The discounted prices for most of the Visual UpTime software
licensed and equipment purchased by Verizon are established in the contract. The
contract, as amended, also contains the other terms and conditions of purchase
by Verizon of the products for incorporation into a service offering or for
resale, including payment terms, software licenses, product warranties and
product support responsibilities. Verizon uses the Visual IP InSight product
pursuant to the terms and conditions of a separate software license agreement.

      WorldCom. In August 1997, we entered into a non-exclusive
reseller/integration agreement with MCI Telecommunications, now WorldCom. The
agreement had an initial term of three years, but renews automatically for
successive one-year terms with the right by either party to terminate the
agreement for convenience at any time. The discounted prices for most of the
Visual UpTime software licensed and equipment purchased by WorldCom are
established in the contract. The contract, as amended, also contains the other
terms and conditions of purchase by WorldCom of the product for incorporation
into a service offering or for resale, including payment terms, software
licenses, product warranties, and product support responsibilities. The contract
contains our agreement to reduce WorldCom's prices if we offer lower prices to
another customer for the same quantities of products supplied over a similar
period of time under like conditions. Subsequent to WorldCom's Chapter 11
bankruptcy filing, in July 2002, we executed an agreement, as amended, that
documents the payment terms related to the fulfillment of orders received from
WorldCom. WorldCom uses the Visual IP InSight software product pursuant to the
terms and conditions of a separate software license agreement.

      Make it Visual Partner Program (MIVPP). In October 2000 and December 2000,
we entered into agreements with ADC, since sold and renamed Kentrox, and Cisco,
respectively, under which these hardware manufacturers are authorized to embed
certain Visual UpTime functionality into their hardware products. Both
agreements required either a license key from us or authorization under a
subsequent agreement for the embedded Visual UpTime functionality to be
activated and/or managed. We have been selling licenses to manage Kentrox
devices since the fourth quarter of 2001. In December 2002, we entered into an
OEM relationship with Cisco under which we provide a Cisco-branded version of
the Visual UpTime server product to Cisco which, when appropriate license keys
have been entered, is able to manage Visual UpTime-enabled Cisco devices as well
as all of the other devices that our current PAMs can manage. In addition to
these two existing relationships, we are pursuing various other opportunities
for further Visual UpTime and Visual IP InSight MIVPP relationships, both
domestically and internationally.

Customer Service.

      Our customer service organization provides 24 hour a day technical support
for products under warranty or maintenance contract. Level 1 and 2 support is
provided by our Visual Technical Assistance Center (VTAC). Problems that cannot
be resolved by VTAC are escalated to our engineering organization for level 3
problem resolution. We sell software maintenance and emergency equipment
replacement services to customers, typically under one-year contracts. Software
maintenance contracts entitle a customer to VTAC access, bug fixes, and product
upgrades. Equipment replacement contracts entitle customers to the emergency
replacement of problem units within 4 or 24 hours, on average, depending on the
level of the prearranged service. The customer services organization also


                                       11
<PAGE>

provides fee-based product training for the network managers and operators of
our service provider and other channel partners, and their customers. We
outsource our hardware installation and our emergency equipment replacement
service. Our customers continue to rank the quality of our customer service very
highly in our customer satisfaction surveys. We will continue to invest in
customer service to maintain or improve the quality of our service and to assure
that we have satisfied customers with minimal service outages. As of December
31, 2002, we employed six people in customer service.

Research and Development.

      The demands for performance management capability are constantly growing
and changing as new access technologies are deployed, new applications and
services create the demand for higher transmission speeds, and new networking
technologies result in lower cost alternatives for transporting mission-critical
information. We utilize a number of sources as input to our product development
process, including input from customers, our analysis of market and technical
trends, and data from industry analysts and market research. Research and
product development are critical to our continued success.

      In recent years, we have made significant investments in system
architecture and product enhancements. We have updated our products to
incorporate new client technologies such as Java, and new server technologies
such as symmetrical multiprocessor arrays. We have enhanced our architecture to
facilitate relationships with companies which seek to embed our technology into
their product offerings, which we call our "Make It Visual Partnership Program,"
(MIVPP). We have added support for new network access technologies such as DSL
and higher transmission speeds. We have expanded the product line to manage the
performance of private IP networks and public IP VPNs. We have also continued to
improve the ability to expand our systems.

      We plan to continue to devote significant research and development
resources to enhance our existing products and introduce new service management
capabilities. We plan to make additional architectural enhancements in order to
integrate our private and public network solutions, to facilitate our MIVPP and
to integrate with operations support systems. We plan to continue to enhance our
private and public IP VPN management, including performance management details
by class of service and voice over IP, or VOIP, performance management. We will
continue to invest to support higher speed access to ATM and private IP
networks. We will continue to focus on the scalability that is required for
wide-scale deployment by service providers. Additionally, we expect to invest in
system modifications that will increase the marketability of our products
outside North America.

      As of December 31, 2002, we had 52 employees in our research and
development group. Our research and development expenditures were approximately
$27.3 million, $19.3 million and $12.3 million in 2000, 2001 and 2002,
respectively.

Manufacturing.

      We outsource the manufacture and repair of our proprietary hardware
products to contract manufacturers. To mitigate the risks associated with our
prior dependency on a sole source manufacturer, we have established a
manufacturing supply contract with a second source. We acquire the hardware
platform for our ISE product from a third party. We generally use standard parts
and components in the manufacture of our products and acquire them from
suppliers in the United States. However, we currently acquire several key
components from sole, single or limited sources. Our engineering and
manufacturing personnel coordinate activities in order to replace unavailable
parts on a timely basis and acquire sufficient quantities of obsolete parts. To
date, we have not experienced any significant delays or material unanticipated
costs related to our use of a sole source subcontract manufacturer or an
inability to obtain required parts when needed. To support our manufacturing
partners, we provide material resource planning, quality assurance,
manufacturing and test engineering, and product and component planning and
purchasing. As of December 31, 2002, there were six employees in manufacturing
operations.

      Because we are embedded in network service offerings of many service
providers, high quality is essential to our continued success. Our Rockville,
Maryland facility is ISO 9001-1994 certified for the design and manufacture of
wide area network service management systems.

Competition.

      The market for network management solutions is intensely competitive. Our
products integrate key functionality found in six distinct market segments: WAN
access equipment; bandwidth management equipment; network test and analysis
equipment; performance management reporting software; telecommunications
operations support systems (OSSs); and client-based network management and
Internet infrastructure test beds. We believe our products are the only systems
that integrate functional attributes from all these market segments to provide
cost-effective WAN service performance management. We expect to encounter
increased


                                       12
<PAGE>

competition from current and potential participants in each of these segments.
Increased competition may result in price reductions, reduced profit margins,
reduced profitability, and the loss of market share, any of which would have a
material adverse effect on our business, financial condition, and results of
operations.

      WAN access equipment. Our introduction of our ASE products redefined the
WAN access equipment market by adding superior analysis capability for frame
relay, ATM, and private IP networks. This caused vendors in this space to lose
market share and counter our products with improvements to their own products.
The leading vendors in the segment include Kentrox, Paradyne and Adtran. These
companies may partner with companies offering network test and analysis
products, or performance reporting products in order to better compete with us.
Additionally, router vendors may integrate WAN access equipment and agent
technology in their routers, which may adversely affect Visual UpTime's cost
justification. We are working to mitigate these risks through our MIVPP
partnerships with Cisco and Kentrox.

      Bandwidth management equipment. The primary purpose of this equipment is
to adjust the flows of customer traffic into the network to improve the
perceived performance of the network services. To understand and manage the
traffic flows, this equipment must provide a certain degree of functionality,
which is also found in performance management systems. The major supplier in
this market is Packeteer.

      Network test and analysis. An essential element of WAN service performance
management is technology and expertise associated with network test and
analysis. Products in the market include portable and distributed protocol
analyzers, transmission test instruments, active testing agents, and passive
monitoring probes. The major suppliers in this market segment include Network
Associates, Agilent Technologies, Acterna, Fluke, Spirent and NetScout.

      Performance management reporting software. These software systems provide
a broad reporting capability of network and equipment status and performance
based on polling standard management information bases resident in network and
customer premises equipment. The major vendors in this market segment include
Concord, InfoVista, Agilent and Quallaby.

      Telecommunications operational support systems (OSS). OSS are systems
related to service deployment including provisioning systems, billing systems,
trouble-ticketing systems, and fault and performance management systems. OSS
have been developed by the in-house staffs of the service providers and have
sometimes been a source of competitive advantage to service providers. Providers
of switching, routing, and transmission equipment such as Lucent, Nortel, and
Cisco also provide OSS to support their systems. A number of vendors also
produce suites of OSS components for the service providers market. Major vendors
in this market segment include Telcordia, Agilent, Micromuse, Amdocs and Narus.
Our products provide a significant portion of the functionality that might
otherwise be found in a fault and performance management system for public and
private data network services.

      Client-based network management and Internet infrastructure test-beds. An
emerging trend in network management is increased emphasis on visibility of
actual user experience. Installing clients on end user desktops is an effective
way to gather this type of data. This technology can be deployed either as a
service offering using simulated desktops or sold as stand-alone software. Major
suppliers of stand-alone software include Lucent, NetIQ, Concord, Jyra Research
and NetScout. The major supplier of service-based solutions is Keynote Software.

      We intend to compete by offering superior features, performance,
reliability and flexibility at competitive prices. We also intend to compete on
the strength of our relationships with service providers. These relationships
and the services that have been built around our products constitute high
barriers to entry. As competition in the service performance management
intensifies, we may encounter price competition. In response to competitive
trends, we expect to continue to reduce the cost of our systems to avoid
deterioration of gross margins.

Proprietary Rights.

      Our success depends significantly upon our proprietary technology. We rely
on a combination of patent, copyright, trademark and trade secret laws,
non-disclosure agreements and other contractual provisions to establish,
maintain and protect our proprietary rights. However, use of contractual,
statutory and common law protections of our proprietary technologies offers only
limited protection.

      We have five issued U.S. patents and two pending U.S. patent applications,
as well as their various foreign counterparts. We have been informed that one of
our pending U.S. patent applications has been allowed and expect the patent to
be issued shortly; however, we cannot ensure that patents will issue from our
pending applications or from any future applications, or that, if issued, any
claims will be sufficiently broad to protect our technology. In addition, we
cannot ensure that any patents that have been or may be issued


                                       13
<PAGE>

will not be challenged, invalidated, or circumvented, or that any rights granted
by those patents would protect our proprietary rights. Failure of any patents to
protect our technology may make it easier for our competitors to offer
equivalent or superior technology.

      We have twenty registered U.S. trademarks and three pending U.S. trademark
registration applications, as well as their various foreign counterparts. We
will continue to evaluate the registration of additional trademarks as
appropriate. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or services, or to obtain
and use information that we regard as proprietary. Third parties may also
independently develop similar technology without breach of our proprietary
rights.

      In addition, the laws of some foreign countries do not protect proprietary
rights to as great an extent as do the laws of the United States. In addition,
some on our products are licensed under end user license agreements that are not
signed by licensees. The law governing the enforceability of these "shrink wrap"
license agreement is not settled in most jurisdictions. There can be no
guarantee that we would achieve success in enforcing one or more shrink wrap
license agreements if we sought to do so in a court of law.

Employees.

      As of December 31, 2002, we had a total of 158 employees; 65 in sales and
marketing; 12 in customer service and manufacturing; 52 in research and
development; and 29 in finance, human resources, and information technology. Our
future success will depend in significant part on the continued service of our
key technical, sales and senior management personnel. Competition for such
personnel is intense and there can be no assurance that we can retain our key
managerial, sales and technical employees, or that we can attract, assimilate or
retain other highly qualified technical, sales and managerial personnel in the
future. None of our employees are represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good.

Item 2. Properties.

      Our principal administrative, sales and marketing, research and
development and customer support facilities are located in approximately 75,000
square feet of office space in Rockville, Maryland, that we occupy under leases
that expire in December 2006. A third party currently occupies approximately
21,000 square feet of this space under a sublease that expires in December 2003.

Item 3. Legal Proceedings.

      In July, August and September 2000, several purported class action
complaints were filed against us and certain former executives (collectively,
the "defendants"). These complaints were combined into a single consolidated
amended complaint (the "complaint"). The complaint alleged that between February
7, 2000 and August 23, 2000, the defendants made false and misleading
statements, which had the effect of inflating the market price of our stock, in
violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On
August 20, 2002, United States District Judge Deborah K. Chasanow entered an
order in the United States District Court for the District of Maryland
dismissing the complaint. On September 17, 2002, the plaintiffs appealed the
District Court's decision to the United States Court of Appeals for the Fourth
Circuit. On December 30, 2002, the appeal was dismissed by the United States
Court of Appeals for the Fourth Circuit. This decision ends the matter.

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


                                       14
<PAGE>

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

      None.

                                     PART II

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

      On May 28, 2002, our common stock began to trade on the Nasdaq SmallCap
Market under the symbol "VNWK." Prior to May 28, 2002, our common stock traded
on the Nasdaq National Market. The following table sets forth, for the indicated
periods, the range of high and low closing per share sales prices for the common
stock as reported on the Nasdaq National Market and the Nasdaq SmallCap Market.

                                                                High      Low
                                                               -----    -----

            2001
            First Quarter .................................    $6.53    $2.50
            Second Quarter ................................     8.75     3.03
            Third Quarter .................................     8.61     2.12
            Fourth Quarter ................................     4.62     1.77

            2002
            First Quarter .................................    $4.94    $2.94
            Second Quarter ................................     2.97     1.13
            Third Quarter .................................     1.50     0.69
            Fourth Quarter ................................     1.84     0.65

            2003
            First Quarter (from January 1, 2003 through
             March 21, 2003) ..............................    $2.07    $1.40

      On March 21, 2003, the last reported sale price of our common stock was
$1.69 per share. As of March 21, 2003, we had approximately 511 stockholders of
record.

      We have never paid or declared any cash dividends on our common stock. It
is our present policy to retain cash flow from operations, if any, to finance
the growth and development of the business and, therefore, we do not anticipate
declaring or paying cash dividends on our common stock in the foreseeable
future.


                                       15
<PAGE>

Item 6. Selected Consolidated Financial Data.

      The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements, notes
thereto and other financial information included elsewhere in this Form 10-K.
The selected consolidated financial data for the years ended December 31, 2000
and 2001 is derived from our consolidated financial statements for those
periods, which were audited by Arthur Andersen LLP, an independent public
accounting firm which has ceased operations. The selected consolidated financial
data for the year ended December 31, 2002 is derived from our consolidated
financial statements for that period, which have been audited by
PricewaterhouseCoopers LLP, independent public accountants. The selected
consolidated financial data for the years ended December 31, 1998 and 1999 is
derived from our audited consolidated financial statements not included in this
Form 10-K.

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                            -------------------------------------------------------------
                                                              1998         1999          2000         2001         2002
                                                            --------     --------     ---------     --------     --------
                                                                      (in thousands, except per share data)
<S>                                                         <C>          <C>          <C>           <C>          <C>
      Consolidated Statement of Operations Data:
      Revenue ..........................................    $ 56,088     $ 91,719     $  89,041     $ 74,248     $ 61,461
      Cost of revenue ..................................      20,829       30,888        32,515       29,431       17,205
                                                            --------     --------     ---------     --------     --------
          Gross profit .................................      35,259       60,831        56,526       44,817       44,256
                                                            --------     --------     ---------     --------     --------
      Operating expenses:
          Research and development .....................      13,771       16,677        27,277       19,320       12,301
          Write-off of in process research and
            development(1) .............................          --           --        39,000           --           --
          Sales and marketing ..........................      19,759       24,447        41,907       33,484       20,541
          General and administrative ...................       5,528        7,928        11,247        8,895        6,821
          Merger-related costs(2) ......................       4,318        6,776            --           --           --
          Restructuring and impairment charges(3)(4) ...         751           --       335,810        9,328           --
          Amortization of acquired intangibles(1) ......          --           --        53,426          805           --
                                                            --------     --------     ---------     --------     --------
               Total operating expenses ................      44,127       55,828       508,667       71,832       39,663
                                                            --------     --------     ---------     --------     --------
      Income (loss) from operations ....................      (8,868)       5,003      (452,141)     (27,015)       4,593
      Interest income (expense), net ...................       2,413        2,270         2,598          325       (1,187)
                                                            --------     --------     ---------     --------     --------
      Income (loss) before income taxes ................      (6,455)       7,273      (449,543)     (26,690)       3,406
      Benefit (provision) for income taxes .............          --       (3,722)       34,058         (272)          --
                                                            --------     --------     ---------     --------     --------
      Net income (loss) ................................      (6,455)       3,551      (415,485)     (26,962)       3,406
      Dividends and accretion on preferred stock .......        (171)          --            --           --           --
                                                            --------     --------     ---------     --------     --------
      Net income (loss) attributable to common
        stockholders ...................................    $ (6,626)    $  3,551     $(415,485)    $(26,962)    $  3,406
                                                            ========     ========     =========     ========     ========
      Basic earnings (loss) per share ..................    $  (0.30)    $   0.14     $  (14.46)    $  (0.85)    $   0.11
                                                            ========     ========     =========     ========     ========
      Diluted earnings (loss) per share ................    $  (0.30)    $   0.13     $  (14.46)    $  (0.85)    $   0.11
                                                            ========     ========     =========     ========     ========
      Basic weighted-average shares(5) .................      21,946       24,583        28,733       31,585       32,139
                                                            ========     ========     =========     ========     ========
      Diluted weighted-average shares(5) ...............      21,946       26,547        28,733       31,585       32,434
                                                            ========     ========     =========     ========     ========

      Consolidated Balance Sheet Data:
      Cash and cash equivalents ........................    $ 51,655     $ 54,629     $  17,369     $  5,921     $ 12,708
      Working capital ..................................      43,146       50,353        (2,482)      (6,576)      10,341
      Total assets .....................................      71,780       83,154        74,057       28,902       30,759
      Long-term debt, net of current portion(6) ........       1,011          782           243           --        7,963
      Stockholders' equity (deficit) ...................      48,322       58,252        26,085         (515)       6,627
</TABLE>

(1)   In 2000, we acquired Avesta Technologies, Inc. ("Avesta") in a purchase
      business combination. The purchase price allocation included $39.0 million
      of in-process technology, which was expensed as of the acquisition date.
      The amortization of acquired intangibles in 2000 and 2001 relates to
      goodwill and other intangible assets recorded in connection with the
      Avesta acquisition. See Notes 1 and 6 of Notes to Consolidated Financial
      Statements.

(2)   In 1998, we incurred certain merger-related costs in connection with our
      acquisition of Net2Net Corporation ("Net2Net"). In 1999, we incurred
      certain merger-related costs in connection with our acquisition of Inverse
      Network Technology ("Inverse").

(3)   In 1998, we recorded a restructuring charge related to the consolidation
      of certain functions and the discontinuation of certain


                                       16
<PAGE>

      product development efforts related to the acquisition of Net2Net. In
      2000, we recorded a restructuring charge of $7.0 million that consisted
      primarily of severance and other termination benefits related to a
      workforce reduction and lease costs and associated leasehold improvement
      write-offs related to the closure of certain facilities. In the second
      quarter of 2001, we reversed $0.7 million of the restructuring charge
      recorded in the fourth quarter of 2000, primarily as a result of lower
      than estimated lease costs. In the second quarter of 2001, we also
      recorded a restructuring charge of $3.9 million that consisted primarily
      of employee termination costs including severance and other benefits,
      lease costs and associated leasehold improvement write-offs related to the
      closure of certain facilities resulting from the discontinuation of the
      Visual Trinity product, other contractual obligations and the write-off of
      an investment. During the fourth quarter of 2001, we reversed $1.2 million
      of the restructuring charge recorded in the second quarter of 2001 due to
      lower than estimated facility closure costs and other contractual
      obligations. During the fourth quarter of 2001, we also recorded a
      restructuring charge of $0.4 million that consisted of severance and other
      termination benefits related to a workforce reduction. See Notes 1 and 7
      of Notes to Consolidated Financial Statements.

(4)   In 2000, we recorded an impairment charge of $328.8 million for the
      write-off of goodwill and other intangibles related to the acquisition of
      Avesta. In 2001, we recorded an impairment charge of $7.0 million related
      to all of the remaining intangible assets from the Avesta acquisition
      based on the discontinuation of the Visual Trinity product and plans for
      the Visual eWatcher product. The impairment charge also included the
      write-off of an investment of $3.7 million. See Notes 1, 6 and 7 of Notes
      to Consolidated Financial Statements.

(5)   For an explanation of the determination of the weighted-average number of
      shares used in computing earnings (loss) per share amounts. See Note 1 of
      Notes to Consolidated Financial Statements.

(6)   In 2002, we issued senior secured convertible debentures in the amount of
      $10.5 million that become due in March 2006. See Note 3 of Notes to
      Consolidated Financial Statements.

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

      The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements, the related notes thereto, and other financial information included
elsewhere in this Form 10-K. References to "we", "us" or "our" refer to Visual
Networks, Inc. on a consolidated basis.

Overview

      From our incorporation in August 1993 through December 1996, our principal
objective was to secure sufficient equity financing to enable us to accelerate
product development efforts of Visual UpTime for frame relay deployment and
create the corporate infrastructure necessary to support these efforts. We first
shipped Visual UpTime in mid-1995 and began generating significant revenue
during 1996. Since our inception, we have focused on establishing relationships
with service providers with the goal of having these service providers include
our products into their infrastructure or in their service offerings to their
subscribers. Consistent with this goal, we have established agreements with
major service providers such as: AT&T, BellSouth, Earthlink, Equant, SBC,
Sprint, Verizon and WorldCom. During 1998, 1999 and 2000, we continued to focus
on selling Visual UpTime and added to our product portfolio as a result of a
series of acquisitions -- the Net2Net product, CellTracer, in 1998; the Inverse
products, Visual IP InSight and Visual Internet Benchmark, in 1999; and the
Avesta products, Visual Trinity and Visual eWatcher, in 2000. During 2001, we
discontinued development and sales efforts of Visual Trinity and sold the Visual
Internet Benchmark service. In 2002, the remaining customer for our CellTracer
product, Network Associates, placed what they indicated would be final orders.
Also, in 2002, we continued to evaluate the future of the Visual eWatcher and
CellTracer products. In their current form, neither product produced significant
revenue for the year ended December 31, 2002. We believe that the technology of
both products may be useful to other products in the future and we are exploring
alternatives for these products. However, we decided not to focus our
development or sales efforts on these products in 2003. Therefore, we do not
anticipate any significant revenue from these products during 2003. We continue
to focus our sales efforts on Visual UpTime and Visual IP InSight.

      We acquired Avesta Technologies, Inc. (Avesta) on May 24, 2000. We
believed that the acquisition of Avesta would provide critical pieces to our
strategy to become one of the largest network performance management vendors
with one of the industry's broadest portfolios of products and functionality. We
also anticipated that the merger would bring us closer to providing a
single-vendor solution to the internet infrastructure management needs of
customers, especially our intended integration of networks, systems and
applications into a unified service view for service providers and their
enterprise subscribers. We expected to generate revenue from the Avesta products
of approximately $30 million in 2000. Instead, these products generated revenue
of only $7.3 million in


                                       17
<PAGE>

2000, and significantly increased our operating expenses. Subsequent to the
acquisition, we concluded that, without significant modifications, the primary
Avesta product, Trinity, was not a viable solution for our strategic service
provider customers. The product was more specifically targeted to direct
enterprise customers, which did not fit with our service provider focused
business plan. As a result of an analysis performed in early 2001 by a
company-wide task force, we determined that the time and expense required to
make the Visual Trinity product competitive in its market space and more
suitable to our service provider customers would be prohibitive. These factors,
in conjunction with revenue declines in our other products, resulted in a $328.8
million impairment charge and $7.0 million in restructuring charges in 2000. In
2001, we discontinued the Visual Trinity product, resulting in $3.3 million in
additional impairment charges related to the remaining intangible assets from
the Avesta acquisition, $3.7 million in a write-down related to an investment
that was acquired with Avesta that was determined to be impaired as of December
31, 2001 and $2.3 million (net of reversals) in restructuring charges. We did
not have any significant remaining assets related to Avesta included in our
balance sheet as of December 31, 2001 or 2002.

      Following the acquisition of Avesta, we allowed our business strategy to
become less focused, which increased the complexity of our business and
adversely affected our results of operations. We incurred significant losses
from the second quarter of 2000 through the fourth quarter of 2001. The
deterioration of our operating results that began in 2000, excluding the effects
of the impairment and restructuring charges and the write-off of in-process
research and development, was due primarily to decreased revenue and increased
operating expenses following the Avesta acquisition. In response, we made
significant reductions in operating expenses in the remainder of 2000, 2001 and
2002 by closing three facilities and by reducing our workforce by approximately
290 employees from October 2000 through December 2002, including approximately
60 of whom were terminated during 2002.

      Despite the growth of data networking, 2002 was a challenging year as our
customers continued reducing spending. One of our most significant customers,
WorldCom, filed Chapter 11 bankruptcy in July 2002. Even with the bankruptcies
of WorldCom and a number of emerging service providers, and the general economic
downturn of the telecommunications market, we were able to achieve
profitability, limit our accounts receivable losses and maintain our cash
balances. This was accomplished due primarily to the following factors:

            o     Our business is not related to the build-out of
                  telecommunications infrastructure, but rather is tied to the
                  sale and deployment of data networking services to
                  enterprises;

            o     In March 2002, we issued $10.5 million in convertible
                  debentures to improve our cash position;

            o     Throughout 2002, we significantly reduced operating expenses
                  and realigned them with our lower revenue expectations.
                  Research and development expense, sales and marketing expense
                  and general and administrative expense declined from $61.7
                  million in 2001 to $39.7 million in 2002; and

            o     In July 2002, we executed an agreement, later amended, with
                  WorldCom that stipulated payment terms while WorldCom is in
                  bankruptcy, enabling us to continue to sell our products to
                  WorldCom during its restructuring period. We generated $6.3
                  million in revenue from WorldCom during 2002, and incurred
                  $0.7 million in bad debts. We cannot assure you that we will
                  continue to generate this level of revenue from sales of our
                  products to WorldCom during 2003.

      We returned to profitability for the three months ended March 31, 2002 and
have remained profitable since then. However, we have continued to experience
declining revenue from $74.2 million for the year ended December 31, 2001 to
$61.5 million for the year ended December 31, 2002, including a reduction in the
sale of each of our major products. Visual UpTime revenue decreased by $5.8
million due to a decrease in demand reflecting: 1) the overall downturn in the
telecommunications industry, which was reflected in a slowdown in demand for
telecommunications products and services, including those based on our products;
2) tighter inventory control at our service provider customers, specifically
AT&T; and 3) the loss of business to competitors. Revenue from the Visual IP
InSight product decreased $0.6 million resulting from decreased demand due to
the bankruptcies of many of the new Internet Service Providers ("ISPs") that
were our primary targets for Visual IP InSight. In addition, revenue from the
Visual IP InSight product often fluctuates significantly from year to year due
to the sizeable orders from a limited number of service providers that we are
dependent upon for sales of that product. Such fluctuations can also
significantly affect our gross margin percentage because our software costs of
revenue are so insignificant. The $6.9 million decrease in revenue from Visual
Internet Benchmark, Visual Trinity, Visual eWatcher and CellTracer reflects,
respectively, the sale of Visual Internet Benchmark and the discontinuation of
sales of Visual Trinity, Visual eWatcher and CellTracer.

      We have refocused our sales, marketing and other efforts on our core
Visual UpTime and Visual IP InSight products, our core service provider
customers and service creation over resale to end users. We have directed our
Visual IP InSight development efforts at making the product more suitable for
our core service provider customers and enabling the use of our product in
higher-margin broadband networks over, for


                                       18
<PAGE>

example, cable lines and Digital Subscriber Lines (DSL). We have also
aggressively reduced our operating expenses to be more in line with our reduced
revenue projections. While we do not know when the downturn in
telecommunications industry will end, or how robust the recovery will be once or
if it does begin, we have revised our business plan to reflect lower projected
revenue and reduced our operating expenses as we seek to remain profitable even
with this reduced demand. There can be no assurance that we will remain
profitable.

      Based on our current cost structure, including changes made during the
fourth quarter of 2002, our ability to generate net income in the future is, in
large part, dependent on our success in achieving quarterly revenue of at least
$13.0 million, achieving quarterly gross margins of 70% to 75% and maintaining
or further reducing operating expenses. Due to market conditions, competitive
pressures, and other factors beyond our control, there can be no assurances that
we will be able to meet these goals. In the event that the anticipated revenue
goals are not met, we may not be profitable and we may be required to further
reduce our cost structure.

Results of Operations

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

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                                           ------------------------------
                                                                            2000        2001        2002
                                                                           ------      ------      ------
<S>                                                                        <C>          <C>         <C>
            Revenue:
              Hardware ................................................      73.6%       69.8%       68.4%
              Software ................................................      11.4         8.4        11.2
              Support and services ....................................      15.0        21.8        20.4
                                                                           ------      ------      ------
               Total revenue ..........................................     100.0       100.0       100.0
                                                                           ------      ------      ------
            Cost of revenue:
              Product .................................................      28.0        29.3        24.6
              Support and services ....................................       8.5        10.3         3.4
                                                                           ------      ------      ------
               Total cost of revenue ..................................      36.5        39.6        28.0
                                                                           ------      ------      ------
            Gross profit ..............................................      63.5        60.4        72.0
                                                                           ------      ------      ------
             Operating expenses:
                 Research and development .............................      30.6        26.0        20.0
                 Write-off of in-process research and development .....      43.8          --          --
                 Sales and marketing ..................................      47.1        45.0        33.4
                 General and administrative ...........................      12.6        12.0        11.1
                 Restructuring and impairment charges .................     377.2        12.6          --
                 Amortization of acquired intangibles .................      60.0         1.1          --
                                                                           ------      ------      ------
                      Total operating expenses ........................     571.3        96.7        64.5
                                                                           ------      ------      ------
            Income (loss) from operations .............................    (507.8)      (36.3)        7.5
            Interest income (expense), net ............................       2.9         0.4        (2.0)
                                                                           ------      ------      ------
            Net income (loss) before income taxes .....................    (504.9)      (35.9)        5.5
            Benefit (provision) for income taxes ......................      38.3        (0.4)         --
                                                                           ------      ------      ------
            Net income (loss) .........................................    (466.6)%     (36.3)%       5.5%
                                                                           ======      ======      ======
</TABLE>

      The following table presents revenue by product (in thousands):

<TABLE>
<CAPTION>
                                                         Years Ended December 31,
                                                      -----------------------------
                                                        2000       2001       2002
                                                      -------    -------    -------
<S>                                                   <C>        <C>        <C>
            Visual UpTime ........................    $59,754    $55,557    $49,797
            Visual IP InSight ....................      9,466      8,095      7,477
                                                      -------    -------    -------
                  Continuing product revenue .....     69,220     63,652     57,274
                                                      -------    -------    -------
            Visual Internet Benchmark ............      4,607      4,025        814
            Visual Trinity and eWatcher ..........      7,268      3,591        699
            CellTracer ...........................      7,946      2,980      2,232
                                                      -------    -------    -------
                  Discontinued product revenue ...     19,821     10,596      3,745
                                                      -------    -------    -------
                  Royalties ......................         --         --        442
                                                      -------    -------    -------
                  Total revenue ..................    $89,041    $74,248    $61,461
                                                      =======    =======    =======
</TABLE>


                                       19
<PAGE>

      The following table presents revenue attributable to customers that
individually represented more than 10% of our total revenue (in thousands):

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                                           -----------------------------
                                                                             2000       2001       2002
                                                                           -------    -------    -------
<S>                                                                        <C>        <C>        <C>
            AT&T ......................................................    $17,500    $21,689    $20,753
            Sprint ....................................................     16,263     10,159      6,356
            Verizon ...................................................          *          *      6,893
            WorldCom ..................................................     12,263      7,598      6,319
            All other customers (each individually less than 10%) .....     43,015     34,802     21,140
                                                                           -------    -------    -------
              Total revenue ...........................................    $89,041    $74,248    $61,461
                                                                           =======    =======    =======
</TABLE>

      *     Less than 10%.

      Our primary sales and marketing strategy depends predominantly on sales of
Visual UpTime and Visual IP InSight to telecommunications service providers.
Service providers use our products as operations tools in their own network
infrastructures,base value-added services on our products and resell our
products to their customers. Pressure on capital expenditures and the decline in
the telecommunications markets may delay the rollout of new services based on
our products. Furthermore, any potential reduction in demand for value-added
services or products from the service providers' customers would directly impact
the volume of our products purchased.

      We expect that a significant portion of our revenue in 2003 will be
attributable to sales of Visual UpTime and Visual IP InSight to service
providers. The loss of any one of AT&T, Sprint or WorldCom, which together have
historically provided a majority of our revenue, would result in a substantial
loss of revenue that could have a material adverse effect on our business. For
the year ended December 31, 2002, AT&T, Sprint and WorldCom represented 34%, 10%
and 10%, respectively, our consolidated revenue. Revenue related to all service
providers represented 70%, 77%, and 82% of our consolidated revenue for the
years ended December 31, 2000, 2001 and 2002, respectively. This concentration
should continue because our customer base consists predominantly of service
providers. Existing service provider customers are not easily replaced because
of the relatively few participants in that market. High barriers to entry due to
extraordinary capital requirements and the increased possibility that existing
service providers may merge or fail because of the current downturn in the
telecommunications industry, may further reduce their number and make replacing
a significant network service provider customer very difficult in the future.
Furthermore, the small number of network service providers means that the
reduction, delay or cancellation of orders or a delay in shipment of our
products to any one service provider customer could have a material adverse
effect on our revenue for a quarter. Our anticipated dependence on sizable
orders from a limited number of service provider customers will make the
relationship between us and each service provider critically important to our
business. Further, because none of our agreements contain minimum purchase
requirements, there can be no assurance that the issuance of a purchase order
will result in significant recurring business.

2002 Compared with 2001

      Revenue.

      Our revenue can be divided into three types: hardware, software, and
support and services. Each of our products has components of each revenue type.
Sales of Visual UpTime are primarily classified as hardware revenue. We also
sell licenses related to Visual UpTime that are classified as software revenue.
Sales of Visual IP InSight are primarily classified as software revenue.
However, sales of our newest hardware product, the IP Service Element (ISE),
which embeds certain Visual IP InSight functionality in a hardware device, are
classified as hardware revenue. Sales of Visual eWatcher, prior to
discontinuation in 2002, are classified as software revenue. Sales of Visual
Trinity, prior to discontinuation in May 2001, were classified as software
revenue. Sales of our Visual IP InSight subscription service, which we no longer
offer to our customers, were classified as support and services revenue. Sales
of the Visual Internet Benchmark service, prior to sale of that product in June
2001, were classified as support and services revenue. Royalties from the Visual
Internet Benchmark service are classified as support and services revenue. Sales
of CellTracer are classified as hardware revenue. Sales of technical support,
professional services and training for all of our products are classified as
support and services revenue.

      Total revenue was $74.2 million in 2001 compared to $61.5 million in 2002,
a decrease of $12.7 million. Sales to all service providers increased from
approximately 77% of revenue in 2001 to 82% in 2002. We anticipate that the
percentage of revenue attributable to our service providers for 2003 will be
consistent with the levels achieved during 2002.

      Hardware revenue. Hardware revenue was $51.9 million in 2001 compared to
$42.1 million in 2002, a decrease of $9.8 million.


                                       20
<PAGE>

The decrease was due primarily to a decrease in demand for Visual UpTime from
AT&T, Sprint and WorldCom. We believe, in general, that the decrease in demand
for Visual UpTime was primarily the result of the overall downturn in the
telecommunications industry, which was reflected in a slowdown in demand for
telecommunications products and services and reduced spending. More
specifically, we believe that revenue from AT&T decreased due to tighter
inventory control and revenue from Sprint and WorldCom decreased due to the loss
of market share of these customers to their competitors coupled with our loss of
business to our competitors. We do not believe that the recent events at
WorldCom had a significant impact on our revenue from WorldCom for 2002.
However, there is a risk that WorldCom's bankruptcy could adversely affect our
future revenue. The decrease was also due to decreased revenue from CellTracer
of $1.5 million due to decreased demand from NAI.

      Software revenue. Software revenue was $6.2 million in 2001 compared to
$6.9 million in 2002, an increase of $0.7 million. The increase in software
revenue was due primarily to an increase of $0.9 million in licenses for Visual
UpTime resulting from Kentrox licenses, Cisco licenses and other license
upgrades for Visual UpTime. In addition, even though total Visual IP InSight
revenue decreased in 2002, license revenue related to that product increased by
$0.3 million. This increase is due to more license sales that replaced the sale
of the Visual IP InSight subscription service in 2002 following the
discontinuation of our subscription service. Since 2001, we sell Visual IP
InSight as a software license only. Prior to September 30, 2001, we offered both
a subscription service and software licenses for that product. These combined
increases are offset by decreases in license revenue of $0.5 million from Visual
Trinity and Visual eWatcher following the discontinuation of those products.

      Support and services revenue. Support and services revenue was $16.1
million in 2001 and $12.5 million in 2002, a decrease of $3.6 million. The
decrease in support and services revenue was due primarily to decreased revenue
from the Visual Trinity product, Visual eWatcher product and Visual Internet
Benchmark service of $4.9 million due to expired contracts that have not renewed
as a result of the discontinuation of these products. Subscription fees for
Visual IP InSight decreased by approximately $1.9 million as customers have
migrated to a perpetual license for that product. The larger installed base of
our Visual UpTime product for which we are selling technical support and the
accelerated recognition of terminated technical support for CellTracer as a
result of the transfer of the source code to NAI offsets these combined
decreases. We will continue to recognize revenue from the Visual Internet
Benchmark service that was sold during 2001, for existing contracts under which
we are still required to perform services through May 2003, all of which is
currently in deferred revenue. We also receive royalty payments from the
purchaser on new contracts.

      Cost of revenue and gross profit.

      Cost of revenue consists of subcontracting costs, component parts,
warehouse costs, direct compensation costs, warranty and other contractual
obligations, royalties, license fees and other overhead expenses related to the
manufacturing operations. Product cost of revenue includes both hardware and
software cost of revenue in the accompanying consolidated statements of
operations. Cost of revenue related to software sales has not been significant.
Support and services cost of revenue includes outsourced benchmark services,
professional services and technical support costs.

      Total cost of revenue was $29.4 million in 2001 compared to $17.2 million
in 2002, a decrease of $12.2 million. Gross profit was $44.8 million in 2001
compared to $44.3 million in 2002, a decrease of $0.5 million. Gross profit
margin was 60.4% of revenue in 2001 as compared to 72.0% of revenue in 2002. The
increase in gross profit margin percentage was due primarily to the overall high
gross margin of our new Visual UpTime 7.0 and 7.1 releases, decreased lower
margin CellTracer revenue, decreased fixed costs (such as fees paid to third
parties to provide the Visual IP InSight subscription service and Visual
Internet Benchmark service to customers for which we had existing contracts) and
overall decreased fixed costs in our manufacturing and support operations due to
our cost reduction initiatives implemented since the fourth quarter of 2000. Our
future gross margins may be affected by a number of factors, including product
mix, the proportion of sales to service providers, competitive pricing,
manufacturing volumes and an increase in the cost of component parts. Based on
our current product offerings and the level of fixed cost reductions that has
been achieved to date, we expect our future margins to be in the range of 70% to
75%.

      Product cost of revenue. Product cost of revenue, which includes both
hardware and software cost of revenue, was $21.7 million in 2001 compared to
$15.1 million in 2002, a decrease of $6.6 million. Our software costs of revenue
are insignificant. The gross profit margin attributable to products was 62.6%
and 69.1% in 2001 and 2002, respectively. The increase in gross profit margin
was due primarily to the overall high gross margin of our new Visual UpTime 7.0
and 7.1 releases, decreased low gross margin CellTracer revenue and overall
decreased fixed costs in our manufacturing and support operations due to our
cost cutting initiatives implemented since the fourth quarter of 2000.

      Support and services cost of revenue. Support and services cost of
revenue, which includes Visual Internet Benchmark services, Visual IP InSight
subscription services, professional services and technical support costs, was
$7.7 million in 2001 compared to $2.1


                                       21
<PAGE>

million in 2002, a decrease of $5.6 million. The gross profit margin
attributable to support and services was 52.3% and 83.4% in 2001 and 2002,
respectively. The increase in gross profit margin was due primarily to decreased
fixed costs such as fees paid to third parties to provide the Visual IP InSight
subscription service and Visual Internet Benchmark service to customers for
which we had existing contracts.

      Operating expenses.

      Research and development expense. Research and development expense
consists primarily of compensation for research and development staff,
depreciation of test and development equipment, certain software development
costs and costs of prototype materials. Research and development expense was
$19.3 million for 2001 compared to $12.3 million in 2002, a decrease of $7.0
million. The decrease in research and development expense was due primarily to
the full period effect of workforce reductions and facility closures that
occurred in 2001 and additional workforce reductions during 2002. Research and
development expense was 26.0% and 20.0% of revenue in 2001 and 2002,
respectively. We intend to incur research and development expense at or below
the level of such expense in 2002 as a result of our continued focus on the
control of operating expenses.

      Sales and marketing expense. Sales and marketing expense consists of
compensation for the sales and marketing staff, commissions, pre-sales support,
travel and entertainment expense, trade shows and other marketing programs.
Sales and marketing expense was $33.5 million in 2001 compared to $20.5 million
in 2002, a decrease of $13.0 million. The decrease in sales and marketing
expense was due primarily to the full period effect of workforce reductions and
facility closures during 2001 and 2002. Sales and marketing expense was 45.0%
and 33.4% of revenue in 2001 and 2002, respectively. We intend to incur sales
and marketing expense at or below the level of such expense in 2002 as a result
of our continued focus on the control of operating expenses.

      General and administrative expense. General and administrative expense
consists of the costs of executive management, finance, administration and other
activities. General and administrative expense was $8.9 million in 2001 compared
to $6.8 million in 2002, a decrease of $2.1 million. The decrease in general and
administrative expense was due primarily to the full period effect of workforce
reductions and facility closures that occurred in 2001 and additional workforce
reductions during 2002. General and administrative expense was 12.0% and 11.1%
of revenue in 2001 and 2002, respectively. We intend to incur general and
administrative expense at or below the level of such expense in 2002 as a result
of our continued focus on the control of operating expenses.

      Restructuring and impairment charges. During the second quarter of 2001,
we reversed $0.7 million of the restructuring charge recorded in the fourth
quarter of 2000 due primarily to lower than estimated costs related to facility
closures. We recorded a restructuring charge of $3.9 million in the second
quarter of 2001 that consisted primarily of severance and other termination
benefits related to a workforce reduction of approximately 50 employees and
lease costs and leasehold improvement write-offs related to the closure of our
New York facility following our announcement to discontinue the Visual Trinity
product. During the fourth quarter of 2001, we reversed $1.2 million of the
restructuring charge recorded in the second quarter of 2001 due to lower than
estimated costs related to facility closures and other contractual obligations.
We recorded another restructuring charge of $0.4 million in the fourth quarter
of 2001 that consisted of severance and other termination benefits related to a
workforce reduction of approximately 40 people resulting from our continued
focus on the reduction of our operating expenses (see Note 7 of Notes to
Consolidated Financial Statements). There were no restructuring or impairment
charges in 2002. Costs associated with the workforce reductions in 2002 of
approximately 60 employees have been charged to operating expenses as incurred.

      We recorded an impairment charge of $3.1 million in the second quarter of
2001 as a result of our discontinuation of the Visual Trinity product. We also
recorded an impairment charge of $3.9 million in the fourth quarter of 2001
related to the impairment of an investment acquired with the Avesta acquisition
and the write-off of the remaining intangible assets related to the Avesta
acquisition as a result of our plans for the eWatcher product (see Note 7 of
Notes to Consolidated Financial Statements).

      Amortization of acquired intangibles. We recorded $0.8 million in
amortization of goodwill and other intangibles in 2001 related to the Avesta
acquisition. All amounts of goodwill and other intangible assets were amortized
or written-off as of December 31, 2001. Therefore, no amortization was recorded
during 2002.

      Interest income (expense), net. Interest income, net, was $0.3 million in
2001 compared to interest expense of $1.2 million in 2002. The decrease of $1.5
million was due primarily to both cash and non-cash interest expense related to
the convertible debentures we issued in March 2002 (see Note 3 of Notes to
Consolidated Financial Statements) plus interest expense incurred on borrowings
under our line of credit facility prior to payment and cancellation of the line
offset by interest income on cash balances after the issuance of the convertible
debentures.


                                       22
<PAGE>

      Income taxes. The provision for income taxes for 2001 was $0.3 million and
related primarily to state income taxes and other non-recoverable income tax
payments. There was no provision for income taxes for 2002.

      Net income (loss). Net loss for 2001 was $27.0 million as compared to net
income of $3.4 million for 2002, an increase of $30.4 million. The increase was
due primarily to decreases in cost of sales, operating expenses, restructuring
and impairment charges and amortization of intangible assets offset by decreased
revenue.

2001 Compared with 2000

      Revenue.

      Total revenue was $89.0 million in 2000 compared to $74.2 million in 2001,
a decrease of $14.8 million.

      Hardware revenue. Hardware revenue, which includes revenue from sales of
Visual UpTime and Visual CellTracer, was $65.5 million in 2000 compared to $51.9
million in 2001, a decrease of $13.6 million. The decrease was due primarily to
a decrease in CellTracer revenue of $5.0 million, from one customer, with the
remaining decrease in Visual UpTime revenue, primarily from service providers
and value-added resellers. The decrease in CellTracer revenue was due to reduced
demand from NAI. The decrease in sales of Visual UpTime was due primarily to a
decrease in purchases from Sprint and WorldCom due to the loss of market share
of one of these service providers to its competitors and to increased market
penetration by a competitor. As a result, the overall decrease was due to
decreased demand for Visual UpTime and CellTracer. Sales to all service
providers increased from approximately 70% of revenue for 2000 to 77% for 2001.

      Software revenue. Software revenue, which includes revenue from sales of
Visual IP InSight, Visual Trinity, and eWatcher, was $10.1 million in 2000
compared to $6.2 million in 2001, a decrease of $3.9 million. The decrease in
software revenue was due primarily to the discontinuation of the Visual Trinity
product, the primary product acquired from Avesta, and decreased revenue from IP
InSight.

      Support and services revenue. Support and services revenue, which includes
revenue from sales of Visual Internet Benchmark, professional services and
technical support, was $13.4 million and $16.1 million, an increase of $2.7
million. The increase in support and services revenue was due primarily to the
larger installed base of our Visual UpTime product for which we are selling
technical support and the full year effect of the support related to the Visual
Trinity product.

      Cost of revenue and gross profit.

      Total cost of revenue was $32.5 million for 2000 compared to $29.4 million
for 2001, a decrease of $3.1 million. Gross profit was $56.5 million for 2000
compared to $44.8 million for 2001, a decrease of $11.7 million. Gross profit
margin was 63.5% of revenue for 2000 as compared to 60.4% of revenue for 2001.

      Product cost of revenue. Product cost of revenue, which includes both
hardware and software cost of revenue, was $24.9 million for 2000 compared to
$21.7 million for 2001, a decrease of $3.2 million. Our software costs of
revenue are insignificant. The gross profit margin attributable to products was
67.1% for 2000 and 62.6% for 2001. The decrease in gross profit margin was due
primarily to fewer high gross margin software sales due primarily to the
discontinuation of the Visual Trinity product.

      Support and services cost of revenue. Support and services cost of
revenue, which includes Visual Internet Benchmark services, professional
services and technical support costs, was $7.6 million for 2000 compared to $7.7
million for 2001, an increase of $0.1 million. The gross profit margin
attributable to support and services was 43.2% for 2000 and 52.3% for 2001. The
decrease in gross profit margin was due primarily to higher fixed costs to
support the Visual Internet Benchmark service for existing contracts.

      Operating expenses.

      Research and development expense. Research and development expense was
$27.3 million for 2000 compared to $19.3 million in 2001, a decrease of $8.0
million. The decrease in research and development expense was due primarily to
workforce reductions and facility closures during 2000 and 2001. Research and
development expense was 30.6% and 26.0% of revenue for 2000 and 2001,
respectively.

      Write-off of purchased research and development. A write-off of purchased
research and development costs of $39.0 million was


                                       23
<PAGE>

recorded in 2000 in connection with the acquisition of Avesta. Avesta had
in-process technology which represented research and development projects of
Avesta that had not reached technological feasibility and that had no
alternative future use in research and development activities or otherwise. We
charged as an expense as of the acquisition date amounts assigned to in-process
research and development ("IPR&D"), which met the foregoing criteria.

      The evaluated projects were future releases of the Trinity, eWatcher and
other products. The products in process included both upgrades to existing
products as well as major modifications for future releases. Additional products
that had been started but not yet assigned a numerical designation and were
considered to be approximately 1% complete were excluded from the evaluation.
The Trinity related projects represented the majority of the value assigned to
the IPR&D projects. We valued the acquired IPR&D based upon an independent
appraisal. The values of the IPR&D projects were determined by estimating the
future cash flows from the projects, once commercially feasible, discounting the
net cash flows back to their present values and then applying a percentage of
completion to the calculated values to reflect the uncertainty of technical
success of the projects. The rates used to discount the net cash flows to their
present values were based on Avesta's weighted average cost of capital. The
percentage of completion was based on management's estimates of the amount of
resources spent to date and on the expected use of future resources.

      As of the valuation date, Avesta was offering version 1.3 of the Trinity
product. Versions 2.0, 2.1 and 3.0 were considered IPR&D projects and were
estimated to be 95%, 15% and 5% complete, respectively. The eWatcher product had
been acquired by Avesta in 1998 and versions 2.0 and 2.5 were considered IPR&D
projects and were estimated to be 25% and 4% complete, respectively. Certain
risks and uncertainties are associated with the completion of the development of
these products within a reasonable projected period of time. Each of the
acquired IPR&D projects had not demonstrated technological feasibility as of the
acquisition date.

      Sales and marketing expense. Sales and marketing expense was $41.9 million
for 2000 compared to $33.5 million for 2001, a decrease of $8.4 million. The
decrease in sales and marketing expense was due primarily to workforce
reductions during 2000 and 2001. Sales and marketing expense was 47.1% and 45.1%
of revenue for 2000 and 2001, respectively.

      General and administrative expense. General and administrative expense was
$11.2 million for 2000 compared with $8.9 million for 2001, a decrease of $2.3
million. The decrease in general and administrative expense was due primarily to
workforce reductions and facility closures during 2000 and 2001. General and
administrative expense was 12.6% and 12.0% of revenue for 2000 and 2001,
respectively.

      Restructuring and impairment charges. We recorded a restructuring charge
of $7.0 million in the fourth quarter of 2000 that consisted primarily of
severance and other termination benefits related to a workforce reduction of
approximately 140 employees and lease costs and leasehold improvement write-offs
related to the closure of facilities in Ottawa, Canada and Sunnyvale, California
and the reduction in size of our facilities in Rockville, Maryland and New York,
New York. These facility closures were the result of our efforts to consolidate
and integrate the acquisition of Avesta as well as an effort to downsize our
operations and reduce our cost structure. During the second quarter of 2001, we
reversed $0.7 million of the restructuring charge recorded in the fourth quarter
of 2000 due primarily to lower than estimated costs related to facility
closures. We recorded a restructuring charge of $3.9 million in the second
quarter of 2001 that consisted primarily of severance and other termination
benefits related to a workforce reduction of approximately 50 employees and
lease costs and leasehold improvement write-offs related to the closure of our
New York facility following our announcement to discontinue the Visual Trinity
product. During the fourth quarter of 2001, we reversed $1.2 million of the
restructuring charge recorded in the second quarter of 2001 due to lower than
estimated costs related to facility closures and other contractual obligations.
We recorded another restructuring charge of $0.4 million in the fourth quarter
of 2001 that consisted of severance and other termination benefits related to a
workforce reduction of approximately 40 people resulting from our continued
focus on the reduction of our operating expenses (see Note 7 of Notes to
Consolidated Financial Statements).

      We recorded an impairment charge of $328.8 million in the fourth quarter
of 2000 for the write-off of goodwill and other intangibles related to the
Avesta acquisition. We recorded an additional impairment charge of $3.1 million
in the second quarter of 2001 as a result of our discontinuation of the Visual
Trinity product. We also recorded an impairment charge of $3.9 million in the
fourth quarter of 2001 related to the impairment of an investment acquired with
the Avesta acquisition and the write-off of the remaining intangible assets
related to the Avesta acquisition as a result of our plans for the eWatcher
product (see Note 7 of Notes to Consolidated Financial Statements).

      Amortization of acquired intangibles. We recorded $53.4 million in
amortization of goodwill and other intangibles in 2000 related to the Avesta
acquisition compared with $0.8 million in 2001. The decrease was the result of
decreased goodwill and intangibles resulting from the impairment charges
recorded in 2000 and 2001.


                                       24
<PAGE>

      Interest income, net. Interest income, net, was $2.6 million for 2000
compared to $0.3 million for 2001. The decrease of $2.3 million was due
primarily to decreased cash balances.

      Income taxes. The provision for income taxes for 2001 was $0.3 million and
related primarily to state income taxes and other non-recoverable income tax
payments.

      Net loss. Net loss for 2000 was $415.5 million as compared to $27.0
million for 2001, a decrease of $388.5 million. The decrease was due primarily
to a decrease in restructuring and impairment charges, amortization of
intangibles and operating expenses, offset in part by decreases in revenue,
gross profit, interest income and income tax benefits.

Liquidity and Capital Resources

      At December 31, 2002, our unrestricted cash balance was $12.7 million
compared to $5.9 million as of December 31, 2001, an increase of $6.8 million.
This increase was due primarily to $9.6 million in cash received from the
issuance of convertible debentures, net of issuance costs, in March 2002, offset
by the payment of the outstanding balances under our credit facility and capital
leases. We used $1.0 million of cash to purchase equipment and other fixed
assets, made principal payments on capital lease obligations of $0.3 million and
made principal payments on our credit facility obligations of $2.0 million. Cash
provided by the sale of common stock pursuant to the exercise of employee stock
options and our employee stock purchase plan was $0.5 million.

      We require substantial working capital to fund our business, particularly
to finance inventories, accounts receivable, research and development activities
and capital expenditures. To date, we have financed our operations and capital
expenditures primarily with the proceeds from our initial public offering
completed in February 1998, our operating income and the proceeds from the
issuance of convertible debentures in March 2002. In 2001, we became dependent
on cash that was provided by our bank under a credit facility. In addition, from
time to time, we have obtained advance payments in connection with certain
customer purchase orders. In the fourth quarter of 2001, we received an advance
payment of approximately $3.6 million that was classified as a customer deposit
in the accompanying consolidated balance sheet as of December 31, 2001; the
related customer orders were fulfilled in February 2002. We do not anticipate
receiving customer advance payments in the future. Our future capital
requirements will depend on many factors, including the rate of revenue growth,
if any, as well as our gross margins and our levels of operating expenses,
including product research and development, sales and marketing and general and
administrative expenses.

      Our revenue for 2002 was $61.5 million, which was a decrease of $12.7
million compared to 2001. In response to the trends of decreasing revenue and
increasing operating expenses that began in the second quarter of 2000 following
our acquisition of Avesta, we initiated a restructuring plan in the fourth
quarter of 2000 to realign our product portfolio, streamline our operations and
devote resources to the markets and products that we believe have the greatest
opportunity for growth. In 2001, we announced a plan to discontinue development
and sales efforts on the Visual Trinity product, the primary product acquired
from Avesta, and eliminate the related costs. Also in 2001, we sold the Visual
Internet Benchmark service and discontinued our subscription service of Visual
IP InSight. In 2002, the remaining customer for our CellTracer product, Network
Associates placed what they indicated would be final orders with us for this
product. Also, in 2002, we continued to evaluate the future of the Visual
eWatcher and CellTracer products. In their current form, neither product
produced significant revenue for the year ended December 31, 2002. We believe
that the technology of both products may be useful to other products in the
future and we are exploring alternatives for these technologies. However, we
decided not to focus our development or sales efforts on these products in 2003.
Therefore, we do not anticipate any significant revenue from these products
during 2003. In 2000, 2001 and 2002, we made significant reductions in staff and
other operating costs. As a result of these actions, research and development
expense, sales and marketing expense and general and administrative expense,
were reduced from a level of $61.7 million for 2001 to $39.7 million for 2002.
As a result these cost reductions, we returned to profitability in the first
quarter of 2002 and have remained profitable since then.

      Our ability to generate operating income in the future is dependent upon
not only our continued success in reducing operating expenses, but also our
ability to sustain revenue. General market conditions, competitive pressures and
other factors beyond our control may adversely affect our ability to generate
sufficient revenue to enable us to remain profitable. Our ability to sustain
revenue may be negatively affected by our dependence on sales to our service
providers. Pressure on capital expenditures and the decline in the
telecommunications industry may delay the rollout of new services offered by our
service providers based on our products. Furthermore, any potential reduction in
demand for value added services or products from the service providers'
customers directly impacts the volume of our products purchased and may impact
our ability to sustain revenue.

                                       25
<PAGE>

      We do not believe that the recent events at WorldCom had a significant
impact on our revenue from WorldCom in 2002. However, WorldCom's bankruptcy
could have a material adverse impact on our future revenue. As of December 31,
2002, WorldCom owed us $0.3 million that is included in accounts receivable in
the accompanying balance sheet. We wrote-off approximately $0.7 million in
accounts receivable related to amounts WorldCom owed to us prior to the
bankruptcy filing against the allowance for bad debts during 2002. Any future
recoveries of these written-off receivables will be recorded when and if they
are received. Subsequent to December 31, 2002, we entered into an agreement to
sell these previously written-off receivables to an unrelated third party for
approximately $0.3 million. We anticipate that this cash will be collected and
recorded as a reduction of bad debt expense during the three months ended March
31, 2003.

      The current level of our operating expenses, which include a substantial
fixed component in the form of compensation, other employee-related costs,
occupancy costs and other costs incurred under contractual arrangements, is
based, in part, on our expectation of future revenue. In the event that the
anticipated cost reductions are not realized or we do not meet our revenue
goals, we may be required to further reduce our cost structure. While we are
able to further reduce these expenses, should reductions become appropriate, it
would take at least thirty to ninety days for the full effects of any such
further expense reductions to be realized. If revenue levels are below
expectations, operating results are likely to be materially and adversely
affected because we may not be able to reduce operating expenses in sufficient
time to compensate for an unexpected reduction in revenue. There can be no
assurances that we will be able to sustain revenue or remain profitable. Failure
to sustain revenue and remain profitable coupled with our limited capital
resources and significant accumulated deficit could also result in our inability
to continue as a going concern.

      The significant operating losses incurred by us since the second quarter
of 2000 through the end of 2001 have resulted in a significant reduction in our
cash. In order to strengthen our financial position and provide cash for working
capital purposes, in March 2002, we issued senior secured convertible debentures
in the aggregate amount of $10.5 million in a private placement. The debentures
are due March 25, 2006, are payable in common stock or cash, at our option
provided certain conditions are satisfied, and bear interest at an annual rate
of 5% payable quarterly in common stock or cash, at our option, provided certain
conditions are satisfied. The debentures are secured by a first priority lien on
substantially all of our assets which is to be released based on the
achievement, as documented in this annual report, of certain financial goals.
The debentures may be converted initially into 2,986,093 shares of our common
stock at the option of the holders at a price of $3.5163 per share, subject to
certain adjustments. The conversion price will adjust if we issue certain
additional shares of our common stock or instruments convertible into common
stock at a price that is less than the conversion price of the debentures. We
have the right to require the holders to convert their debentures into common
stock if the closing price of our common stock exceeds 175% of the conversion
price for 20 consecutive days after September 26, 2003.

      In connection with the issuance of the debentures, we also issued warrants
to purchase 828,861 shares of our common stock at an initial exercise price of
$4.2755 per share. The exercise price may be adjusted if we issue certain
additional shares of our common stock or instruments convertible into common
stock at a lower price than the initial exercise price. 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 (the "Preferred Stock
Rights") at certain dates in the future. The first Preferred Stock Right for 575
shares for $5.8 million expired on May 6, 2002. The holders did not exercise the
right to purchase these shares of Series A preferred stock. A second Preferred
Stock Right for 307 shares for $3.1 million may be exercised at any time after
the six-month anniversary but before the fifteen-month anniversary of the
issuance of the debentures. A third Preferred Stock Purchase Right for 170
shares for $1.7 million also expired on May 6, 2002. The holders did not
exercise the right to purchase these shares of Series A preferred stock. The
debenture holders were also granted certain equity participation and
registration rights.

      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:

      o     our default on other indebtedness or obligations under any other
            debenture, any 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 $0.5 million;

      o     failure to have our common stock listed on an eligible market;

      o     our bankruptcy;

      o     engaging in certain change in control, sale of assets or redemption
            transactions;

      o     failure to timely file our 2003 annual report; and


                                       26
<PAGE>

      o     certain other failures to perform our obligations under the
            debenture agreement and/or the related agreements.

      In addition, the debentures include certain financial covenants related to
2002 and 2003. We met the financial covenant for 2002. If our earnings before
interest, taxes, depreciation and amortization, less capital expenditures, for
the year ended December 31, 2003 are less than $6.5 million, our debenture
holders may require that we prepay all or a portion of up to 100% of the
outstanding principal amount of their debentures, plus accrued interest. The
redemption may be made in common stock or cash at our option provided certain
conditions are satisfied.

      If we do not have sufficient cash to repay these amounts early and are
required to do so, we may be required to seek additional capital through a sale
of assets, sale of additional securities or through additional borrowings, none
of which may be available on terms reasonably acceptable to us.

      In connection with the issuance of the debentures, the outstanding amounts
borrowed from the bank under our accounts receivable-based and our equipment
financing arrangements were repaid, and the related loan agreements were
terminated. The standby letter of credit, as amended, issued by the bank in
December 2000 in the amount of $2.5 million with an expiration date of September
30, 2003 remains outstanding and secured with our pledge of a certificate of
deposit in the amount of $2.5 million that matures on May 31, 2003.

      Proceeds from the issuance of the $10.5 million of debentures
significantly improved our cash position and working capital; and our cash
position and working capital have continued to improve as a result of our cash
flow from operations. Our balance of cash and cash equivalents was $12.7 million
as of December 31, 2002, up $6.8 million from December 31, 2001. Accounts
payable and accrued expenses totaled $9.7 million at December 31, 2002, down
$2.0 million from December 31, 2001, and current assets exceeded current
liabilities by approximately $10.3 million as of December 31, 2002.

      Based on our current cost structure coupled with changes made during the
fourth quarter of 2002, our ability to generate net income in the future is, in
large part, dependent on our success in achieving quarterly revenue of at least
$13.0 million, achieving quarterly gross margins of 70% to 75% and maintaining
or further reducing operating expenses. Due to market conditions, competitive
pressures, and other factors beyond our control, there can be no assurances that
we will be able to meet these goals. In the event that the anticipated revenue
goals are not met, we may be required to further reduce our cost structure.

      Future minimum payments as of December 31, 2002 under the debentures and
non-cancelable operating leases are as follows (in thousands):

                                                                       Operating
                                                           Debentures    Leases
                                                           ----------  ---------
            2003 .......................................    $    528     $1,846
            2004 .......................................         528      1,883
            2005 .......................................         528      1,863
            2006 .......................................      10,622      1,886
            Thereafter .................................          --         --
                                                            --------     ------
                      Total minimum payments ...........      12,206     $7,478
                                                                         ======
            Interest element of payments ...............      (1,706)
                                                            --------
            Present value of future minimum payments ...      10,500
            Unamortized debt discount ..................      (2,537)
            Current portion ............................          --
                                                            --------
            Long-term portion ..........................    $  7,963
                                                            ========

      We have purchase commitments for inventory purchased by certain suppliers
on our behalf. If such inventory is not used within a specified period of time,
we discontinue a product for which the suppliers have made purchases or we
terminate a relationship with the supplier for which we have set minimum
inventory requirements, we are required to purchase the inventory from the
suppliers. Additionally, if we cancel a purchase order placed on a supplier, we
may be subject to certain costs and fees.

      We do not engage in any off-balance sheet financing arrangements. In
particular, we do not have any interest in so-called limited purpose entities,
which include special purpose entities and structured finance entities.

      The future success of our company will be dependent upon, among other
factors, our ability to generate adequate cash for operating and capital needs.
We are relying on our existing balance of cash and cash equivalents together
with future sales and the


                                       27
<PAGE>

collection of the related accounts receivable, at least at the levels set forth
in our business plan, to meet our future cash requirements for at least the next
twelve months. If cash provided by these sources is not sufficient, we will be
required to further reduce our expenditures for operations or to seek additional
capital through other means that may include the sale of assets, the sale of
equity securities or additional borrowings. There can be no assurance that
additional capital will be available, or available on terms that are reasonable
or acceptable to us. If we are unable to generate additional cash, our business
and financial condition may be materially and adversely affected such that we
may need to consider other alternatives for our future.

Critical Accounting Policies and Estimates

      Our significant accounting policies are described in Note 1 of Notes to
Consolidated Financial Statements. We consider the accounting policies related
to revenue recognition and inventory valuation to be critical to the
understanding of our results of operations. Our critical accounting policies
also include the areas where we have made the most difficult, subjective or
complex judgments in making estimates, and where these estimates can
significantly impact our financial results under different assumptions and
conditions. We prepare our financial statements in conformity with generally
accepted accounting principles in the United States. As such, we are required to
make certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the periods
presented. Actual results could differ from those estimates.

Revenue Recognition

      We recognize revenue from hardware, software and support and services. Our
revenue recognition policies follow the American Institute of Certified Public
Accountants Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition" and SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements," which summarizes existing accounting
literature and requires that four criteria be met prior to the recognition of
revenue. Our accounting policies regarding revenue recognition are written to
comply with the following criteria (see Note 1 of Notes to Consolidated
Financial Statements): 1) persuasive evidence of an arrangement exists; 2)
delivery has occurred; 3) the fee is fixed or determinable; and 4)
collectibility is probable. The third and fourth criteria may require us to make
significant judgments or estimates.

      To determine if a fee is fixed or determinable, we evaluate rights of
return, customer acceptance rights, if applicable, and multiple-element
arrangements of products and services to determine the impact on revenue
recognition. Our agreements generally have not included rights of return except
in certain reseller relationships that include stock rotation rights. If
offered, rights of return only apply to hardware. If an agreement provides for a
right of return, we typically recognize revenue when the right has expired or
the product has been resold by the master distributor. If we have sufficient
historical information to allow us to make an estimate of returns in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue
Recognition When Right of Return Exists," we defer an estimate for such returns
and recognize the remainder at the date of shipment. If an agreement provides
for evaluation or customer acceptance, we recognize revenue upon the completion
of the evaluation process, acceptance of the product by the customer and
completion of all other criteria. Most of our sales are multiple-element
arrangements and include hardware, software, and technical support. Our software
sales sometimes include professional services for implementation but these
services are not a significant source of our revenue. Training is also offered
but is not a significant source of our revenue. Revenue from multiple-element
arrangements is recognized using the residual method 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 values of any undelivered elements, typically professional
services, technical support and training, have been determined based on our
specific objective evidence of fair value, which is based on the price that we
charge customers when the element is sold separately.

      Our maintenance contracts require us to provide technical support and
unspecified software updates to customers on a when and if available basis. We
recognize customer support revenue, including support revenue that is bundled
with product sales, ratably over the term of the contract period, which
generally ranges from one to three years. We recognize revenue from services
when the services are performed. Subscription fees for our benchmark reports are
recognized upon delivery of the reports. The remaining subscription fees will be
complete in May 2003 when the final contract under which we are obligated to
provide service will be complete.

      We sell our products directly to service providers, through indirect
channels and to end-user customers. Certain reseller customers have stock
rotation rights, under which the customer can exchange previously purchased
products for other products of equal or greater cost, subject to certain
limitations, based on their end-user customers' requirements. We recognize
revenue under these arrangements once the stock rotation right expires or the
product has been resold by our master distributor.


                                       28
<PAGE>

      We also examine the specific facts and circumstances of all sales
arrangements with payment terms extending beyond our normal 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. Our evaluation of the impact on revenue
recognition, if any, includes our history with our customers and the specific
facts of each arrangement. It is generally not our practice to offer payment
terms that differ from our normal payment terms, and we have not written off any
accounts receivable related to extended payment term arrangements.

Inventory

      Because of the order lead times required to obtain manufactured product,
we must maintain sufficient quantities of inventory of all of our products to
meet expected demand. If actual demand is much lower than forecasted, we may not
be able to dispose of our inventory at or above its cost. We write down our
inventory for estimated excess and obsolete amounts to the lower of cost or
market value. The estimates are based on historical trends, forecasts and
specific customer or transaction information. It is generally our policy to
write-down inventory to the amount that we expect to sell within a one-year
period. If future demand is lower than currently estimated, additional
write-downs of our inventory may be required.

Allowance for Bad Debt

      We grant credit terms without collateral to our customers and, prior to
2002, had not experienced any significant credit related losses. During 2002,
the Company wrote-off approximately $0.7 million in receivable balances due from
WorldCom, following WorldCom's bankruptcy filing against the allowance for bad
debts. Any future recoveries of these written-off receivables will be recorded
when and if they are received. Subsequent to December 31, 2002, we entered into
an agreement to sell these previously written-off receivables to an unrelated
third party for approximately $0.3 million. We anticipate that this cash will be
collected and recorded as a reduction of bad debt expense during the three
months ended March 31, 2003. Accounts receivable include allowances to record
receivables at their estimated net realizable value, which is determined based
on estimates for bad debt. The estimates are based on historical information and
specific review of outstanding receivables at the end of each reporting period.
If future events occur that impact our customers, additional write-downs of our
accounts receivable may be required.

Additional Risk Factors

      In addition to the other information provided or incorporated by reference
in this document, stockholders should also consider the following factors
carefully in evaluating whether to make an investment decision. Stockholders
should also refer to the section entitled "Forward Looking Statements".

We have an accumulated deficit of $470.5 million.

      The acquisition of Avesta in May 2000 added a significant level of
operating expenses to our company without a commensurate addition of revenue at
the same time as we began to feel the effects of the economic downturn in the
telecommunications sector in our core hardware business. These factors, plus the
effects of impairment and restructuring charges, amortization of intangible
assets and the write-off of in-process research and development, all of which
were recorded in connection with the acquisition of Avesta, have resulted in an
accumulated deficit of $470.5 million as of December 31, 2002. As a result, we
could be unable to raise equity financing, to arrange bank financing or to
arrange credit from suppliers on reasonable or acceptable terms.

We may not be profitable in the future.

      Our ability to generate operating income in the future is, in large part,
dependent on our success in sustaining revenue and reducing operating expenses.
Research and development expense, sales and marketing expense and general
administrative expense decreased from $61.7 million in 2001 to $39.7 million in
2002. However, revenue declined from $74.2 million in 2001 to $61.5 million in
2002. Market conditions, competitive pressures, and other factors beyond our
control, may adversely affect our ability to adequately sustain revenue in the
future. In particular, our ability to sustain revenue may be negatively affected
by our dependence on our service provider customers, including WorldCom.
Pressure on capital expenditures in and the decline of the telecommunications
industry may delay the roll-out of new services based on our products offered by
our service provider customers. Any potential reduction in demand for value
added services or products, which our products support, from the service
providers' customers, directly impacts the purchase volume of our products and
may impact our ability to sustain revenue. WorldCom, one of our largest
customers, declared bankruptcy during 2002 and there is no guarantee that it


                                       29
<PAGE>

will be able to emerge from bankruptcy protection or that we will continue to
achieve significant levels of revenue from WorldCom in the future. We are
uncertain as to whether bankruptcy will affect the buying habits of WorldCom in
the future. We believe that we have reduced operating expenses to a sufficient
level such that when combined with our anticipated revenue, we will remain
profitable. In the event that we do not remain profitable, we may be required to
further reduce our cost structure. Failure to sustain revenue and remain
profitable coupled with our significant accumulated deficit could also result in
our inability to continue as a going concern.

Because our operating expenses include substantial fixed costs, we may not
achieve future profitability if our expected revenue levels are not achieved.

      The level of our operating expenses, which include a substantial fixed
component in the form of compensation, employee-related costs, occupancy costs
and other costs incurred under contractual arrangements, is based, in part, on
our expectation of future revenue. These expenses cannot be reduced quickly. If
revenue levels are below expectations, operating results are likely to be
materially and adversely affected because we may not be able to reduce operating
expenses in sufficient time to compensate for the reduction in revenue.

Substantial dilution to our common stockholders could result if we are required
to raise additional capital through the sale of equity at less than $4.2755 per
share.

      In connection with our March 2002 financing, investors purchased
debentures for $10.5 million that will initially convert into 2,986,093 shares
of our common stock at the rate of $3.5163 per share plus warrants to purchase
828,861, exercisable for $4.2755 per share. In connection with this financing,
the investors received "full ratchet" anti-dilution price protection on the
conversion of their debentures and upon exercise of their warrants. This means
that if we are required to issue additional shares of common stock in connection
with a financing or under other circumstances at a price lower than $3.5163 per
share, the debentures would become convertible into a greater number of shares
of common stock than they are today, or if we issue additional shares at less
than $4.2755 per share, the warrants would become exercisable at a lower price
and for an additional number of shares. Issuances of common stock that do not
trigger this anti-dilution protection include: issuances as part of an
acquisition or strategic investment, issuances under our stock incentive plan or
employee stock purchase plan, issuances or issuances as part of a public
offering of more than $30 million. The following table shows the number of
shares that the currently outstanding debentures would be convertible into and
the warrants would be exercisable for if we were to issue additional shares of
common stock at prices 25%, 50% and 75% below $3.5163, the price that the
investors originally paid for the debentures.

<TABLE>
<CAPTION>
                                               Debenture       Warrant       % of Company
      Decline               Issuance Price     Shares          Shares        (Total)
      -------               --------------     ------          ------        -------
<S>                         <C>                <C>             <C>           <C>
      No anti-dilution             --           2,986,093        828,861     10.6%
      -----------------------------------------------------------------------------------
      25%                   $  2.6372           3,981,458      1,343,759     14.2%
      -----------------------------------------------------------------------------------
      50%                   $  1.7582           5,972,187      2,015,639     19.9%
      -----------------------------------------------------------------------------------
      75%                   $  0.8791          11,944,373      4,031,277     33.2%
      -----------------------------------------------------------------------------------
</TABLE>

We are highly dependent on sales to telecommunications companies, and the loss
of AT&T, WorldCom or Sprint as customers could severely harm our business.

      Our primary sales and marketing strategy depends predominantly on sales to
telecommunications service providers. We expect that a significant portion of
our revenue in 2003 will be attributable to sales of Visual UpTime and Visual IP
InSight to service providers. The loss of any one of AT&T, WorldCom or Sprint,
which together have historically provided a majority of our revenue, would
result in a substantial loss of revenue that could have a material adverse
effect on our business. For the year ended December 31, 2002, AT&T, WorldCom and
Sprint accounted for 34%, 10% and 10%, respectively, of our consolidated
revenue. Revenue related to our shipment of products to service providers
represented 70%, 77% and 82% of our consolidated revenue for the years ended
December, 31, 2000, 2001 and 2002, respectively. This concentration should
continue because our customer base consists predominantly of service providers.
Existing service provider customers are not easily replaced because of the
relatively few participants in that market. High barriers to entry due to
extraordinary capital requirements and the increased possibility that existing
service providers may merge or fail because of the current downturn in the
telecommunications industry, may further reduce their number and make replacing
a significant network service provider customer very difficult in the future.
Furthermore, the small number of network service providers means that the
reduction, delay or cancellation of orders or a delay in shipment of our
products


                                       30
<PAGE>

to any one service provider customer could have a material adverse effect on our
revenue for a quarter. WorldCom, one of our largest customers, declared
bankruptcy during 2002 and there is no guarantee that it will be able to emerge
from bankruptcy protection or that we will continue to achieve significant
levels of revenue from WorldCom in the future. We are uncertain as to whether
bankruptcy will affect the buying habits of WorldCom in the future. Our
anticipated dependence on sizable orders from a limited number of service
provider customers will make the relationship between us and each service
provider critically important to our business. Further, because none of our
agreements contain minimum purchase requirements, there can be no assurance that
the issuance of a purchase order will result in significant recurring business.

An unanticipated interruption or delay in the scheduled receipt of products from
our subcontract manufacturers could reduce revenue.

      We have outsourced the manufacture of our ASE units, the analysis service
element of our Visual UpTime system, to two subcontract manufacturing firms. We
derive a substantial portion of our revenue from the sale of these units. Our
ability to meet the delivery dates requested by customers depends on the timely
supply of products from the subcontract manufacturers. A decision by a
subcontract manufacturer to reduce or eliminate the amount of credit extended to
us or to stop the shipment of products due to concerns about our financial
condition or the amount of their credit and inventory risk could delay delivery
of product to our customers and cause a delay in our revenue. If we are required
to establish alternative subcontract manufacturers, there can be no assurances
that we would be able to do so, or to do so on terms acceptable to us.
Furthermore, if we were required to replace our current contract manufacturers,
we could face substantial production delays and could be required to pay
substantially higher prices in order to complete delivery of our customers'
orders. Such a delay or price increase could substantially damage our ability to
generate sufficient revenues to achieve profitability.

Our failure to comply with Nasdaq's listing standards could result in our
delisting by Nasdaq from the Nasdaq Small Cap Market and severely limit the
ability of investors to sell our common stock.

      In 2002, we moved the trading of our common stock to the Nasdaq Small Cap
Market. To maintain the listing on this market, we are required to meet certain
requirements, including a minimum bid price of $1.00 per share. If our stock is
traded below the minimum bid price for 30 consecutive business days, we will
receive a deficiency notice and will have a grace period of 180 calendar days to
cure the deficiency by meeting the minimum bid price per share trading price for
ten (10) consecutive days. There can be no assurance that we will maintain
compliance with the minimum bid price. If we fail to meet the minimum bid price
for 10 consecutive days during the grace period our common stock may be delisted
from the Nasdaq Small Cap Market. Even if we are able to comply with the minimum
bid price requirement, there is no assurance that in the future we will continue
to satisfy the other Nasdaq listing requirements, with the result that our
common stock may be delisted. Should our common stock be delisted from the
Nasdaq Small Cap Market, it would likely be traded on the so-called "pink
sheets" or the "Electronic Bulletin Board" maintained by the National
Association of Securities Dealers, Inc. Consequently, it would likely be more
difficult to trade in or obtain accurate quotations as to the market price of
our common stock. Furthermore, if we are no longer listed on the Nasdaq Small
Cap Market, our outstanding debentures may be accelerated and become immediately
due and payable upon demand by the debenture holders.

Various events could trigger early repayment of our debentures and we may not
have enough cash to repay our debenture holders.

      Under the terms of the $10.5 million of convertible debentures that we
sold in March 2002, 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:

            o     our default on other indebtedness or obligations under any
                  other debenture, any 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 $0.5 million;

            o     failure to have our common stock listed on an eligible market;

            o     our bankruptcy;

            o     engaging in certain change in control, sale of assets or
                  redemption transactions;

            o     failure to timely file our 2003 annual report; and

            o     certain other failures to perform our obligations under the
                  debenture agreement and/or the related agreements.


                                       31
<PAGE>

      In addition to the above, if our earnings before interest, taxes,
depreciation and amortization, less capital expenditures, for the fiscal year
ended December 31, 2003 is less than $6.5 million, our debenture holders may
require that we prepay all or a portion of up to 100% of the outstanding
principal amount of their debentures.

      If we do not have sufficient cash to repay these amounts early, we may be
required to seek additional capital through a sale of assets, sale of additional
securities or through additional borrowings, none of which may be available on
terms reasonably acceptable to us.

The downturn in the telecommunications market may make it more difficult for us
to generate sufficient revenue from our service provider customers incorporating
our products into their infrastructure.

      Aspects of our service provider deployment strategy depend on the sale of
Visual UpTime and Visual IP InSight to service providers for use as operations
tools in their own network infrastructures. However, capital expenditures by
service providers have decreased as they attempt to recover from the ongoing
decline in the telecommunications markets. This decrease may directly affect a
service provider's purchases of our products for such purposes.

      Pressure on capital expenditures in and the decline of the
telecommunications industry may delay the roll-out of new services based on our
products offered by our service provider customers. Any potential reduction in
demand for value added services or products, which our products support, from
the service providers' customers, directly impacts the purchase volume of our
products and may impact our ability to sustain revenue.

      The success of this strategy in 2003 will depend, in part, on our ability
to demonstrate that our product solutions reduce service provider operating
expenses and enable the creation of new revenue-generating services. We cannot
be sure that we will be successful in demonstrating the value of our products to
service providers. If we are unsuccessful, our revenue could be significantly
lower than anticipated.

Our long sales cycle, which has had a median length of approximately five to six
months, requires us to expend significant resources on potential sales
opportunities that may never be consummated.

      Sales of Visual UpTime and Visual IP InSight can involve significant
capital outlays by our customers and significant testing and education. Because
of the delays inherent in large organizations making significant capital
expenditures on complicated systems, our sales cycles are relatively long. For
enterprise customers, our historical sales cycle has ranged from approximately
one to twelve months, with a median of approximately five to six months. This
extended cycle further increases the risk that a potential customer might suffer
a reduction in their capital budgets or a change in their need for our products.
Because we are required to commit substantial sales and marketing resources
during this extended time period without any assurance of consummating an
eventual sale, we risk incurring significant losses without generating any
revenue.

Improvements to the infrastructure of the Internet could reduce or eliminate
demand for our network performance management products.

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


                                       32
<PAGE>

Failure to adapt to rapid technological change could adversely affect our
ability to compete effectively.

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

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

      We face competition from several market segments whose functionality our
products integrate. We expect competition in each of these market segments to
intensify in the future. Our current competitors, include, and in the future may
include, the following: Brix, Kentrox, Paradyne, Adtran, Packeteer, NetScout,
Lucent Technologies and Concord. Our competitors vary in size and in the scope
and breadth of the products and services that they offer. While we intend to
compete by offering superior features, performance, reliability and flexibility
at competitive prices and on the strength of our relationships with service
providers, many of these competitors have greater financial, technical,
marketing and other resources than us, and some have well-established
relationships with our current and potential customers. As a result, these
competitors may be able to respond to new or emerging technologies and changes
in customer requirements more effectively than us, or devote greater resources
than us to the development, promotion and sale of products. In addition, we
believe that competitors from one or more of our market segments could partner
with each other to offer products that supply functionality approaching that
provided by Visual UpTime. Increased competition may result in price reductions,
reduced profitability and loss of market share, any of which could have a
material adverse effect on our business.

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

      Products and services as complex as those we offer may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by us and by current and potential
customers, errors will not be found in new products and services until
commercial shipments have commenced. Such errors can substantially delay the
time until we are able to generate revenue from new product releases and could
force us to divert additional development resources to correct the errors. If
such errors are detected after shipments have been made, then our reputation may
be damaged, and we may incur substantial costs covering warranty claims.

      In our research and development spending plan, we allocate twenty percent
of the engineering budget for "sustaining issues." "Sustaining issues" include
fixing problems in released products that were not identified in the development
and testing cycle. If during a given period, problems are found that cause the
allocation of more than twenty percent of our resources to fixing these
problems, then the next round of product feature releases can be delayed by this
diversion of resources. In the case of Visual IP InSight, in 2001, we
encountered difficulties in the implementation of the product in certain
customer environments that resulted in expending greater than twenty percent of
the budget for that product for sustaining engineering. This resulted in delays
in new Visual IP InSight feature development.

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

      Many key components used in the manufacture of our products are purchased
only from sole or limited sources. We presently use sole-source suppliers for
many of the components in our products, including: Dallas Semiconductor for
framers, Lucent for FPGAs, Motorola for embedded communications processors,
Mindspeed for communication controllers and Level One for line interface
components. Although these components represent less than one percent of the
contents of our products, if a sole or limited source supplier raises their
prices, delays shipments or becomes unable or unwilling to supply a key
component, we may be forced to obtain these components from alternative sources
if they are available, which could impair our ability to deliver our products to
our customers in a timely and cost-effective manner, or could force us to
increase our prices or reduce our gross profit margins.


                                       33
<PAGE>

Claims by others that we infringe their intellectual property rights may harm
our business.

      If others claim that our products infringe on their intellectual property
rights, whether the claims are valid or not, we may be forced to spend
significant sums in litigation, pay damages, delay product shipments, reengineer
our products or acquire licenses to the claimant's intellectual property. We may
be unable to develop non-infringing technology or to obtain licenses on
commercially-reasonable terms. We expect that these claims may become more
common as the number of products in the network management industry increases
and the functionality of these products further overlaps. If a claimant is
successful in a lawsuit arising from such a claim, it could have a material
adverse effect on our business. Adverse publicity related to any intellectual
property litigation also could harm the sale of our products and damage our
competitive position.

Failure to protect our own intellectual property rights may harm our business.

      Our success is dependent on the competitive advantage we gain from our
proprietary technology and intellectual property rights. If we are unable to
adequately protect our intellectual property, including our patented technology,
others may be able to more easily compete by developing functionally equivalent
technology. We currently hold five United States patents, and also rely on
copyright and trade secret laws, trademarks, confidentiality procedures and
contractual provisions to protect our proprietary software, documentation and
other proprietary information. These protection methods may not be adequate to
prevent competitors from developing similar technology. Litigation to enforce
our intellectual property rights, regardless of its success or failure, could be
burdensome and expensive and could involve a high degree of uncertainty. In
addition, legal proceedings may divert management's attention from growing our
business. We may be subject to additional risk as we enter into transactions in
countries where intellectual property laws are not well developed or enforced
effectively. Legal protection of our rights may be ineffective in such
countries, and technology developed or used in such countries may not be
protected in jurisdictions where protection is ordinarily available.

The loss of key people could jeopardize our growth prospects.

      The loss of the services of Peter Minihane, our interim President and
Chief Executive Officer, without an organized succession plan; Patrick Clark,
Our Executive Vice President for Global Sales; Steven Hindman, our Executive
Vice President for Product Management and Marketing; Wayne Fuller, our Executive
Vice President for Product Operations, or any other key employee could adversely
affect our ability to execute our business plan and could have a material
adverse effect on our short and long term revenue. Our success depends to a
significant degree upon the continuing contributions of our key management and
technical employees, particularly Messrs. Minihane, Clark, Hindman and Fuller.

If we are unable to recruit and retain employees, particularly a permanent
president and CEO and CFO, we may be unable to grow to meet increased sales.

      We are currently engaged in searches for a permanent president and Chief
Executive Officer and a Chief Financial Officer. Due to the various risk factors
described herein, we may find it very difficult or be unable to find qualified
candidates for these positions at all, or on terms suitable to us. Additionally,
although we have recently reduced our operating costs, including personnel, our
future depends on increasing sales which will eventually require hiring and
retaining additional highly skilled managerial, sales, marketing, customer
support and product development personnel. Intense competition for technically
trained sales and product development personnel makes recruiting and keeping
qualified personnel difficult. There can be no assurance that we will be
successful in continuing to attract and retain skilled employees. Failure to do
so could hamper our ability to grow and meet future customer orders.

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

      Although we have no current acquisition plans, we may seek to acquire or
invest in businesses, products or technologies that we feel could complement or
expand our business, augment our market coverage, enhance our technical
capabilities or that may otherwise offer growth opportunities. In the past we
have suffered substantial difficulties in assimilating companies that we have
acquired, particularly with respect to our acquisition of Avesta.

      Our failure to successfully assimilate companies or technologies acquired
by us or the occurrence of unanticipated costs that may arise in connection with
such acquisitions could have a material adverse effect on our business. By
example, problems with assimilating Avesta and its technology contributed to a
substantial diversion of our personnel and financial resources and eventually
resulted in our write-off of many of the Avesta assets, including intangible
assets and the discontinuation of the Avesta products, that we were unable to
integrate into our service line.


                                       34
<PAGE>

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

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

      o     our board of directors, without stockholder approval, may issue up
            to 5,000,000 shares of preferred stock on terms that they determine.
            This preferred stock could be issued quickly with terms that delay
            or prevent the change in control of our company, make removal of
            management more difficult or depress the price of our stock;

      o     certain provisions of our certificate of incorporation and bylaws
            and of Delaware law could delay or make more difficult a merger,
            tender offer or proxy contest;

      o     we are subject to the anti-takeover provisions of Section 203 of the
            Delaware General Corporation Law which prohibits a publicly held
            Delaware corporation from engaging in a "business combination" with
            an "interested stockholder" for a period of three years after the
            date of the transaction in which the person became an interested
            stockholder, unless the business combination is approved in a
            prescribed manner;

      o     our board of directors is "staggered" so that only a portion of its
            members are elected each year;

      o     only our board of directors, our chairman of the board, our
            president or stockholders holding a majority of our stock can call
            special stockholder meetings; and

      o     special procedures must be followed in order for stockholders to
            present proposals at stockholder meetings.

      In addition, the $10.5 million of debentures that we issued in March 2002
may become immediately due and payable upon a change of control, which could
have the effect of discouraging an acquisition that might otherwise benefit our
stockholders.

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

      During 2002, we issued long-term debt in the form of the convertible
debentures discussed in Note 3 of Notes to Consolidated Financial Statements.
The convertible debentures bear interest at a fixed annual rate of 5%. We are
also exposed to market risk from changes in interest rates. Our investment
policy restricts us to investing only in investment-grade securities. A failure
of these investment securities to perform at their historical levels could
reduce the interest income realized by us. As of December 31, 2002, the fair
value of our long-term debt did not differ materially from its carrying value.

      While substantially all of our product sales to date have been made to
customers in the United States, we plan to sell our products to foreign
customers at prices denominated in U.S. dollars. However, if we commence selling
material volumes of product to such customers at prices not denominated in U.S.
dollars, we intend to adopt a strategy to hedge against fluctuations in foreign
currency.

Item 8. Financial Statements and Supplementary Data.

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


                                       35
<PAGE>

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

      On June 17, 2002, our Audit Committee decided to terminate the engagement
of Arthur Andersen LLP ("Andersen") as our independent accountants and appointed
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") as our new independent
accountants.

      During the two fiscal years ended December 31, 2001, and the subsequent
interim period through June 17, 2002, the date of the dismissal of Andersen, (i)
there were no disagreements with Andersen on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of Andersen, would have
caused Andersen to make reference in connection with its report to the subject
matter of the disagreement and (ii) Andersen has not advised us of any
reportable events as defined in paragraphs (A) through (D) of Regulation S-K
Item 304 (a)(1)(v).

      The accountant's report of Andersen on our consolidated financial
statements and our subsidiaries as of and for the years ended December 31, 2001
and 2000 did not contain any adverse opinion or disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles. During our two most recent fiscal years ended December 31, 2001, and
the subsequent interim period through June 17, 2002, Visual Networks did not
consult with PricewaterhouseCoopers regarding any of the matters or events set
forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.


                                       36
<PAGE>

                                    PART III

Item 10. Our Directors and Executive Officers.

      The information required by Item 10 is hereby incorporated by reference
from the Proxy Statement for our 2003 Annual Meeting of Stockholders.

Item 11. Executive Compensation.

      The information required by Item 11 is hereby incorporated by reference
from the Proxy Statement for our 2003 Annual Meeting of Stockholders.

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

      The information required by Item 12 is hereby incorporated by reference
from the Proxy Statement for our 2003 Annual Meeting of Stockholders.

Item 13. Certain Relationships and Related Transactions.

      The information required by Item 13 is hereby incorporated by reference
from the Proxy Statement for our 2003 Annual Meeting of Stockholders.

Item 14. Controls and Procedures

      Our management, under the supervision and with the participation of Peter
J. Minihane, our President and Chief Executive Officer and principal financial
officer, performed an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures within 90 days before the
filing of this report. Based on that evaluation, Mr. Minihane concluded that our
disclosure controls and procedures are effective. There have been no significant
changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to this evaluation.


                                       37
<PAGE>

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

<TABLE>
<CAPTION>
                                                                                       Page
                                                                                      Number
                                                                                      ------
<S>                                                                                     <C>
      (a) Documents filed as part of the report:
        (1) Reports of Independent Accountants ...................................      F-2
             Consolidated Balance Sheets as of December 31, 2001 and 2002 ........      F-4
             Consolidated Statements of Operations for the years ended
                December 31, 2000, 2001 and 2002 .................................      F-5
             Consolidated Statements of Changes in Stockholders' Equity for the
                years ended December 31, 2000, 2001 and 2002 .....................      F-6
             Consolidated Statements of Cash Flows for the years ended
                December 31, 2000,  2001 and 2002 ................................      F-8
             Notes to Consolidated Financial Statements ..........................      F-9
        (2) Financial Statement Schedule .........................................      S-1
             Report of Independent Accountants on Financial
                Statement Schedule................................................      S-1
        (3) Exhibits .............................................................
</TABLE>


                                       38
<PAGE>

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)

      10.5*+            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.

      10.7*+            General Agreement for the Procurement of Equipment,
                        Services and Supplies, dated November 26, 1997, 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).

      10.10*            Employment Agreement, dated December 15, 1994, by and
                        between the Company and Scott E. Stouffer, as amended.

      10.11!!           Lease Agreement, dated April 7, 2000, by and between
                        Visual Networks, Inc. and TA/ Western, LLC.

      10.20$$           1999 Employee Stock Purchase Plan, as amended April 11,
                        2001 and January 9, 2002.

      10.24****         Loan and Security Agreement, dated February 28, 2001, by
                        and between Silicon Valley Bank and the Company.

      10.24.1!!!        First Modification to the Loan and Security Agreement,
                        dated May 24, 2001 (related to Exhibit 10.24).

      10.24.2!!!!       Second Modification to the Loan and Security Agreement,
                        dated December 20, 2001 (related to Exhibit 10.24).

      10.25****         Accounts Receivable Financing Agreement dated February
                        28, 2001, by and between Silicon Valley Bank and the
                        Company.

      10.25.1!!!        First Modification to the Accounts Receivable Financing


                                       39
<PAGE>

                        Agreement, dated May 24, 2001 (related to Exhibit
                        10.25).

      10.25.2!!!!       Second Modification to the Accounts Receivable Financing
                        Agreement, dated December 20, 2001 (related to Exhibit
                        10.25).

      10.25.3!!!!       Third Modification to the Accounts Receivable Financing
                        Agreement, dated February 28, 2002 (related to Exhibit
                        10.25).

      10.26****         Intellectual Property Security Agreement dated February
                        28, 2001, by and between Silicon Valley Bank and the
                        Company.

      10.28!!!          Employment Agreement, dated May 3, 2001, by and between
                        the Company and Elton King.

      10.29!!!          Nonstatutory Stock Option Grant Agreement, dated May 3,
                        2001, by and between the Company and Elton King.

      10.30!!!          Terms of Employment, dated July 27, 2000, by and between
                        the Company and Steve Hindman.

      10.31!!!!         Terms of Employment, dated October 23, 2001, by and
                        between the Company and John Saunders.

      10.32!!!!         Consulting Agreement, dated February 16, 2002, by and
                        between the Company and Peter J. Minihane.

      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).

      10.34@@           Security Agreement, dated as of March 25, 2002, between
                        Visual Networks, Inc. and the Secured Parties named
                        therein (filed as Exhibit 99.5 to the Form 8-K).

      10.35@@           IP Security Agreement, dated as of March 25, 2002,
                        between Visual Networks, Inc., its subsidiaries and the
                        Secured Parties named therein (filed as Exhibit 99.6 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.

      10.37             OEM Software License Agreement between Cisco Systems,
                        Inc. and the Company, dated December 3, 2002.

      10.37.1           Amendment No. 1 to the OEM Software License Agreement
                        between Cisco and the Company, effective December 3,
                        2002 (relating to Exhibit 10.37).

      21.1****          List of subsidiaries of the Company.

      23.1              Consent of PricewaterhouseCoopers LLP.

      *                 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,
                        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
                        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 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.

      +                 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
                        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
                        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.


                                       40
<PAGE>

(b) Reports on Form 8-K

      (1)   The Company filed a Current Report on Form 8-K on November 20, 2002,
            announcing that the Company had taken additional cost reduction
            initiatives.

      (2)   The Company filed a Current Report on Form 8-K on December 3, 2002,
            announcing a definitive agreement with Cisco.

(c) Exhibits

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

(d) Financial Statement Schedules

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


                                       41
<PAGE>

                                   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 25th day of March, 2003.

                                        VISUAL NETWORKS, INC.


                                        By: /s/ PETER J. MINIHANE
                                            ------------------------------------
                                                       Peter J. Minihane
                                            President, Chief Executive Officer
                                            and Director

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

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

              Signature                          Title                  Date
              ---------                          -----                  ----


      /s/  SCOTT E. STOUFFER            Chairman of the Board of        3/9/03
      ---------------------------       Directors
           Scott E. Stouffer


        /s/ TED MCCOURTNEY              Director                        3/1/03
      ---------------------------
            Ted McCourtney


        /s/ WILLIAM J. SMITH            Director                        3/4/03
      ---------------------------
            William J. Smith


                                       42
<PAGE>

                                 CERTIFICATIONS

I, Peter J. Minihane, certify that:

1. I have reviewed this annual report on Form 10-K of Visual Networks, Inc. (the
"registrant");

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:

      a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities, particularly
during the period in which this annual report is being prepared;

      b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

      c) Presented in this annual report my conclusions about the effectiveness
of the disclosure controls and procedures based on my evaluation as of the
Evaluation Date;

5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):

      a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

      b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.


March 25, 2003                           By: /s/ Peter J. Minihane
                                            ------------------------------------
                                            Name: Peter J. Minihane
                                            Title: President, Chief Executive
                                                     Officer and Director
                                                     (Principal Executive
                                                     Officer and Principal
                                                     Financial and Accounting
                                                     Officer)


                                       43
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----
Reports of Independent Accountants ....................................      F-2
Consolidated Balance Sheets as of December 31, 2001 and 2002 ..........      F-4
Consolidated Statements of Operations for the years ended
  December 31, 2000, 2001 and 2002 ....................................      F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
  for the years ended December 31, 2000, 2001 and 2002 ................      F-6
Consolidated Statements of Cash Flows for the years ended
  December 31, 2000, 2001 and 2002 ....................................      F-8
Notes to Consolidated Financial Statements ............................      F-9
Financial Statement Schedule ..........................................      S-1
Report of Independent Accountants on Financial Statement Schedule .....      S-1


                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To Board of Directors and
Stockholders of Visual Networks, Inc.:

      In our opinion, the accompanying consolidated balance sheet as of December
31, 2002 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, 2002, and the results of their operations and their cash flows for the year
then ended 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 audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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
audit provides a reasonable basis for our opinion. The financial statements of
the Company as of December 31, 2001, and for each of the two years in the period
ended December 31, 2001, prior to the revision discussed in Note 1, were audited
by other independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements in
their report dated March 27, 2002.

      As discussed above, the financial statements of the Company as of December
31, 2001, and for each of the two years in the period ended December 31, 2001,
were audited by other independent accountants who have ceased operations. As
described in Note 1, these financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets", which was adopted by the
Company as of January 1, 2002. We audited the transitional disclosures described
in Note 1. In our opinion, the transitional disclosures for 2001 and 2000 in
Note 1 are appropriate. However, we were not engaged to audit, review, or apply
any procedures to the 2001 or 2000 financial statements of the Company other
than with respect to such disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 or 2000 financial statements
taken as a whole.


PricewaterhouseCoopers LLP

March 21, 2003
McLean, Virginia


                                      F-2
<PAGE>

      This is a copy of the audit report previously issued by Arthur Andersen
LLP in connection with the Company's filing on Form 10-K for the year ended
December 31, 2001. This audit report has not been reissued by Arthur Andersen
LLP in connection with this filing on Form 10-K nor has Arthur Andersen LLP
provided a consent to the inclusion of its report in this Form 10-K. In 2002,
the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). As disclosed in Note 1,
the Company has presented transitional disclosures for 2000 and 2001 required by
SFAS No. 142. This change is not covered by this copy of the report of Arthur
Andersen LLP and was audited by PricewaterhouseCoopers LLP as described in their
report.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Visual Networks, Inc.:

      We have audited the accompanying consolidated balance sheets of Visual
Networks, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000
and 2001, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Visual Networks, Inc. and
subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

      Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states, in all material respects, the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.


                                        ARTHUR ANDERSEN LLP

Vienna, Virginia
March 27, 2002


                                      F-3
<PAGE>

                              VISUAL NETWORKS, INC.

                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                          -----------------------
                                                                             2001          2002
                                                                          ---------     ---------
<S>                                                                       <C>           <C>
Assets
Current assets:
  Cash and cash equivalents ..........................................    $   5,921     $  12,708
  Restricted short-term investment ...................................        2,503         2,503
  Accounts receivable, net of allowance of $554 and $358,
     respectively ....................................................        7,488         7,647
  Inventory ..........................................................        5,768         3,393
  Other current assets ...............................................        1,161           259
                                                                          ---------     ---------
          Total current assets .......................................       22,841        26,510
Property and equipment, net ..........................................        6,061         3,481
Deferred debt issuance costs .........................................           --           768
                                                                          ---------     ---------
          Total assets ...............................................    $  28,902     $  30,759
                                                                          =========     =========

Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
  Accounts payable and accrued expenses ..............................    $  11,723     $   9,733
  Deferred revenue ...................................................       11,782         6,436
  Customer deposits ..................................................        3,588            --
  Line of credit .....................................................        1,663            --
  Current portion of long-term debt ..................................          661            --
                                                                          ---------     ---------
          Total current liabilities ..................................       29,417        16,169
Convertible debentures, net of unamortized debt discount of $2,537 ...           --         7,963
                                                                          ---------     ---------
          Total liabilities ..........................................       29,417        24,132
                                                                          ---------     ---------
Commitments and contingencies (Note 10)
Stockholders' equity (deficit):
  Common stock, $.01 par value; 200,000,000 shares
     authorized, 31,915,752 and 32,398,856 shares issued and
     outstanding, respectively .......................................          319           324
  Additional paid-in capital .........................................      473,132       474,719
  Warrants ...........................................................           --         2,087
  Deferred compensation ..............................................          (80)           (2)
  Accumulated other comprehensive income .............................           21            --
  Accumulated deficit ................................................     (473,907)     (470,501)
                                                                          ---------     ---------
          Total stockholders' equity (deficit) .......................         (515)        6,627
                                                                          ---------     ---------
          Total liabilities and stockholders' equity (deficit) .......    $  28,902     $  30,759
                                                                          =========     =========
</TABLE>

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


                                      F-4
<PAGE>

                              VISUAL NETWORKS, INC.

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

<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                                           -----------------------------------
                                                              2000         2001         2002
                                                           ---------     --------     --------
<S>                                                        <C>           <C>          <C>
Revenue:
  Hardware ............................................    $  65,500     $ 51,855     $ 42,062
  Software ............................................       10,130        6,249        6,857
  Support and services ................................       13,411       16,144       12,542
                                                           ---------     --------     --------
     Total revenue ....................................       89,041       74,248       61,461
                                                           ---------     --------     --------
Cost of revenue:
  Product .............................................       24,892       21,728       15,129
  Support and services ................................        7,623        7,703        2,076
                                                           ---------     --------     --------
     Total cost of revenue ............................       32,515       29,431       17,205
                                                           ---------     --------     --------
  Gross profit ........................................       56,526       44,817       44,256
                                                           ---------     --------     --------
Operating expenses:
  Research and development ............................       27,277       19,320       12,301
  Write-off of in-process research and development ....       39,000           --           --
  Sales and marketing .................................       41,907       33,484       20,541
  General and administrative ..........................       11,247        8,895        6,821
  Restructuring and impairment charges ................      335,810        9,328           --
  Amortization of goodwill and other intangibles ......       53,426          805           --
                                                           ---------     --------     --------
     Total operating expenses .........................      508,667       71,832       39,663
                                                           ---------     --------     --------
Income (loss) from operations .........................     (452,141)     (27,015)       4,593
Interest income (expense), net ........................        2,598          325       (1,187)
                                                           ---------     --------     --------
Income (loss) before income taxes .....................     (449,543)     (26,690)       3,406
Benefit (provision) for income taxes ..................       34,058         (272)          --
                                                           ---------     --------     --------
Net income (loss) .....................................    $(415,485)    $(26,962)    $  3,406
                                                           =========     ========     ========
Basic income (loss) per share .........................    $  (14.46)    $  (0.85)    $   0.11
                                                           =========     ========     ========
Diluted income (loss) per share .......................    $  (14.46)    $  (0.85)    $   0.11
                                                           =========     ========     ========
Basic weighted-average shares outstanding .............       28,733       31,585       32,139
                                                           =========     ========     ========
Diluted weighted-average shares outstanding ...........       28,733       31,585       32,434
                                                           =========     ========     ========
</TABLE>

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


                                      F-5
<PAGE>

                              VISUAL NETWORKS, INC.

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                        (in thousands, except share data)

<TABLE>
<CAPTION>


                                                                                               Accumulated
                                         Common Stock     Additional                              Other
                                    --------------------   Paid-in               Deferred     Comprehensive  Accumulated
                                       Shares     Amount   Capital    Warrants  Compensation      Income       Deficit      Total
                                    -----------   ------  ----------  --------  ------------  -------------  -----------  ---------
<S>                                  <C>          <C>     <C>         <C>          <C>             <C>        <C>         <C>
Balance, December 31, 1999 .......   24,833,609   $ 248   $  90,169   $   --       $(705)          $ --       $ (31,460)  $  58,252
  Issuance of common stock,
    options and warrants
    in acquisition ...............    5,413,530      54     378,793       --          --             --              --     378,847
  Exercise of stock options and
    warrants .....................      866,366       9       3,173       --          --             --              --       3,182
  Issuance of common stock
    under employee stock
    purchase plan ................      182,878       2       1,047       --          --             --              --       1,049
  Deferred compensation
    adjustments ..................           --      --         (74)      --          74             --              --          --
  Amortization of deferred
    compensation .................           --      --          --       --         229             --              --         229
  Foreign currency translation
    adjustment ...................           --      --          --       --          --             11              --          11
  Net loss .......................           --      --          --       --          --             --        (415,485)   (415,485)
                                    -----------   -----   ---------   ------       -----           ----       ---------   ---------
Balance, December 31, 2000 .......   31,296,383     313     473,108       --        (402)            11        (446,945)     26,085
  Return of shares in settlement
    of indemnification claims
    related to acquisition .......     (134,000)     (1)       (989)      --          --             --              --        (990)
  Exercise of stock options and
    warrants .....................      435,091       4         520       --          --             --              --         524
  Issuance of common stock
    under employee stock
    purchase plan ................      337,675       3         746       --          --             --              --         749
  Repurchase of common stock .....      (19,397)     --         (11)      --          --             --              --         (11)
  Deferred compensation
    adjustments ..................           --      --        (242)      --         242             --              --          --
  Amortization of deferred
    compensation .................           --      --          --       --          80             --              --          80
  Foreign currency translation
    adjustment ...................           --      --          --       --          --             10              --          10
  Net loss .......................           --      --          --       --          --             --         (26,962)    (26,962)
                                    -----------   -----   ---------   ------       -----           ----       ---------   ---------
Balance, December 31, 2001 .......   31,915,752     319     473,132       --         (80)            21        (473,907)       (515)
  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 3) .................           --      --       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)          $ --       $(470,501)  $   6,627
                                    ===========   =====   =========   ======       =====           ====       =========   =========
</TABLE>

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


                                      F-6
<PAGE>

                              VISUAL NETWORKS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                          -----------------------------------
                                                                            2000          2001         2002
                                                                          ---------     --------     --------
<S>                                                                       <C>           <C>          <C>
Cash Flows from Operating Activities:
Net income (loss) ....................................................    $(415,485)    $(26,962)    $  3,406
Adjustments to reconcile net income (loss) to net cash
  used in operating activities:
  Depreciation and amortization ......................................       59,666        5,657        3,656
  Write-off of purchased research and development ....................       39,000           --           --
  Non-cash restructuring and impairment charges ......................      329,910        8,203           --
  Deferred taxes .....................................................      (34,058)          --           --
  Non-cash interest expense ..........................................           --           --          761
  Translation gain from foreign subsidiary ...........................           --           --          (21)
  Changes in assets and liabilities--
     Accounts receivable .............................................        5,152          127         (159)
     Inventory .......................................................       (5,476)       7,706        2,375
     Other assets ....................................................         (113)       2,185          904
     Accounts payable and accrued expenses ...........................        8,312      (16,094)      (1,990)
     Deferred revenue ................................................       (3,834)      (4,155)      (5,346)
     Customer deposits ...............................................           --        3,588       (3,588)
                                                                          ---------     --------     --------
  Net cash used in operating activities ..............................      (16,926)     (19,745)          (2)
                                                                          ---------     --------     --------
Cash Flows from Investing Activities:
  Net (purchases) sales/maturities of short-term
     investments .....................................................       (3,145)       6,234           --
  Expenditures for property and equipment ............................       (7,623)        (692)        (951)
  Investment in joint venture ........................................         (797)          --           --
  Merger-related transaction costs, net of cash acquired .............      (10,234)          --           --
                                                                          ---------     --------     --------
  Net cash provided by (used in) investing activities ................      (21,799)       5,542         (951)
                                                                          ---------     --------     --------
Cash Flows from Financing Activities:
  Exercise of stock options and warrants and employee stock
     purchase plan, net of stock repurchases .........................        4,231        1,262          509
  Net borrowings (repayments) under credit agreements ................       (1,658)       2,039       (2,039)
  Principal payments on capital lease obligations ....................       (1,119)        (564)        (285)
  Proceeds from issuance of convertible debentures and warrants,
     net of issuance costs ...........................................           --           --        9,555
                                                                          ---------     --------     --------
  Net cash provided by financing activities ..........................        1,454        2,737        7,740
                                                                          ---------     --------     --------
Effect of exchange rate changes ......................................           11           18           --
                                                                          ---------     --------     --------
Net Increase (Decrease) in Cash and Cash Equivalents .................      (37,260)     (11,448)       6,787
Cash and Cash Equivalents, Beginning of Year .........................       54,629       17,369        5,921
                                                                          ---------     --------     --------
Cash and Cash Equivalents, End of Year ...............................    $  17,369     $  5,921     $ 12,708
                                                                          =========     ========     ========
Supplemental Cash Flow Information:
  Cash paid for income taxes .........................................    $       9     $     22     $     --
                                                                          =========     ========     ========
  Cash paid for interest .............................................    $     211     $    199     $    480
                                                                          =========     ========     ========
Supplemental Disclosure of Non-cash Investing and Financing
  Activities:
  Issuance of common stock, options and warrants in
     acquisition .....................................................    $ 378,847     $     --     $     --
                                                                          =========     ========     ========
  Return of shares in settlement of indemnification claims related
     to acquisition ..................................................    $      --     $   (990)    $     --
                                                                          =========     ========     ========
</TABLE>

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


                                      F-7
<PAGE>

                              VISUAL NETWORKS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

      Visual Networks, Inc. ("Visual" or the "Company") designs, manufactures,
sells and supports systems that manage the level of service provided over
telecommunications networks, including networks that support the Internet.

Risks and Other Important Factors

      The Company incurred net losses of $415.5 million and $27.0 million for
the years ended December 31, 2000 and 2001, respectively. The deterioration of
the operating results in 2000, excluding the effects of the impairment and
restructuring charges and the write-off of in-process research and development
("IPR&D"), was due primarily to decreased revenue and increased operating
expenses. In response to these results, the Company made significant reductions
in operating expenses in 2000, 2001 and 2002 and returned to profitability in
2002 by generating net income of $3.4 million for the year ended December 31,
2002. Research and development expense, sales and marketing expense and general
and administrative expense decreased from $80.4 million in 2000 to $61.7 million
in 2001 to $39.7 million in 2002. However, revenue declined from $89.0 million
in 2000 to $74.2 million in 2001 to $61.5 million in 2002. The Company's ability
to generate operating income in the future is, in large part, dependent on its
success in sustaining revenue and reducing operating expenses. Due to market
conditions, competitive pressures, and other factors beyond its control, there
can be no assurances that the Company will be able to adequately sustain revenue
in the future. In the event that the anticipated cost reductions are not
realized or revenue goals are not met, the Company may be required to further
reduce its cost structure. There can be no assurance that the Company will
remain profitable.

      The success of the Company is also dependent on its ability to generate
adequate cash for operating and capital needs. The Company is relying on its
existing cash and cash equivalents, together with future sales and the
collection of the related accounts receivable to meet its future cash
requirements. If cash provided by these sources is not sufficient to fund future
operations, the Company will be required to further reduce its expenditures for
operations or to seek additional capital through other means which may include
the sale of assets, the sale of equity securities or additional borrowings.
There can be no assurances that additional capital will be available, or
available on terms that are reasonable or acceptable to the Company,
particularly in light of our accumulated deficit position.

      Under the terms of the senior secured convertible debentures ("the
Debentures") issued by the Company in March 2002 (see Note 3), a number of
events could force early repayment of 115% of the outstanding principal plus
accrued and unpaid interest owed under the Debentures. In addition, if the
Company's earnings before interest, taxes, depreciation and amortization, less
capital expenditures, for the year ended December 31, 2003 are less than $6.5
million, the Debenture holders may require that the Company prepay all or a
portion of up to 100% of the outstanding principal amount of their Debentures,
plus accrued interest. If the Company does not have sufficient cash to repay
these amounts early and is required to do so, the Company may be required to
seek additional capital through a sale of assets, sale of additional securities
or through additional borrowings, none of which may be available on terms
reasonably acceptable to the Company.

      The Company's operations are subject to certain other risks and
uncertainties, including among others, its accumulated deficit, uncertainty
about future profitability, substantial dilution if the Company is required to
raise capital through the sale of equity, dependence on major service provider
customers during a general economic downturn in the telecommunications industry,
unanticipated delays from subcontract manufacturers, potential failure to comply
with Nasdaq listing requirements, insufficient cash to repay the debenture
holders if early repayment was required, successful incorporation of the
Company's products into service providers' infrastructures, long sales cycles,
changes in the market's acceptance of and demand for the Company's products,
rapidly changing technology, current and potential competitors with greater
financial, technological, production, and marketing resources, potential errors
in the Company's products or services, dependence on sole and limited source
suppliers, limited protection of intellectual property and proprietary rights,
dependence on key management personnel, ability to recruit and retain employees,
difficulties assimilating future acquisitions and uncertainty of future
financial results.


                                      F-8
<PAGE>

Business Combinations and Basis of Presentation

      On May 24, 2000, Visual acquired Avesta Technologies, Inc. ("Avesta") in a
merger transaction accounted for using the purchase method of accounting. Avesta
was a provider of fault management and application performance monitoring
software systems to enterprise customers (see Note 6). The results of operations
of Avesta have been included in the accompanying consolidated statements of
operations from the date of acquisition (hereafter, Visual and Avesta are
collectively referred to as the "Company").

Principles of Consolidation

      The consolidated financial statements include the accounts of Visual
Networks, Inc. and its wholly owned subsidiaries. All significant 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
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
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.
The Company maintains its cash and cash equivalents with high credit quality
financial institutions. The Company did not have any cash equivalents as of
December 31, 2001. The Company's cash equivalents consist of investments in a
money market fund that invests in first-tier short-term debt securities
primarily including commercial paper, bank obligations, U.S. government and
agency obligations, corporate bonds and notes and repurchase agreements secured
by first-tier securities as of December 31, 2002.

Investments

      Investments in marketable securities are classified as available-for-sale
and are reported at fair value in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The fair values are based on quoted market prices.
Unrealized gains and losses on marketable securities are reported in accumulated
other comprehensive income. Realized gains and losses and declines in value
determined to be any other than temporary, if any, on available-for-sale
securities will be reported in other income and expense as incurred. The Company
held a $2.5 million certificate of deposit securing a letter of credit issued to
its contract manufacturer that was included as a restricted investment in the
accompanying consolidated balance sheet as of December 31, 2001 and 2002. As of
December 31, 2001 and 2002, unrealized gains and losses were not material.

      As of December 31, 2000, the Company had an investment in an entity
accounted for using the equity method of accounting. The Company's investment
represented a one-third ownership interest with the remaining two-thirds owned
by a partner. The Company's investment represented less than a majority
ownership interest but the Company had the ability to exercise significant
influence over the entity. The entity was established as a distributor for the
Visual Trinity product, but the Company did not have any sales to the entity. As
a result of the Company's announcement to discontinue development and sales
efforts on the Visual Trinity product, the Company wrote-off the remaining
carrying value of $656,000 during the three months ended June 30, 2001 (see Note
7). During the fourth quarter of 2001, the Company completed a settlement
agreement with the entity and other partner whereby the Company forfeited its
ownership interest in the entity in exchange for a release of all claims the
entity, the other partner and a related customer may have had against the
Company. The write-off is included in the restructuring and impairment charge in
the accompanying consolidated statement of operations for the year ended
December 31, 2001.

      The Company also has an investment in an entity in which the Company
exercises no control or significant influence. Such investment was accounted for
under the cost method. The Company wrote-off the entire balance of approximately
$3.7 million during the three months ended December 31, 2001. The write-off is
included in the restructuring and impairment charge in the accompanying
consolidated statement of operations for the year ended December 31, 2001.
Subsequent to December 31, 2002, the Company reached an agreement with another
shareholder in this entity to sell the Company's investment for approximately
$450,000. The amount will be recorded as a gain on investment in the statement
of operations for the three months ended March 31, 2003.


                                      F-9
<PAGE>

Inventory and Cost of Revenue

      Cost of revenue consists of subcontracting costs, component parts,
warehouse costs, direct compensation costs, warranty and other contractual
obligations, royalties, license fees and other overhead expenses related to the
manufacturing operations. Product cost of revenue includes both hardware and
software cost of revenue in the accompanying consolidated statements of
operations. Cost of revenue related to software sales has not been significant.
Support and services cost of revenue includes benchmark services, professional
services and technical support costs in the accompanying consolidated statements
of operations.

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

                                                December 31,
                                              ----------------
                                               2001      2002
                                              ------    ------
                  Raw materials ..........    $1,137    $1,339
                  Work-in-progress .......       238        66
                  Finished goods .........     4,393     1,988
                                              ------    ------
                      Total ..............    $5,768    $3,393
                                              ======    ======

      The Company records a provision for excess and obsolete inventory whenever
such an impairment has been identified.

Property and Equipment

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

                                                             December 31,
                                                        ---------------------
                                                          2001         2002
                                                        --------     --------
            Equipment and software .................    $ 18,046     $ 12,112
            Furniture and fixtures .................       2,351        2,355
            Leasehold improvements .................       2,208        2,227
                                                        --------     --------
                 Total property and equipment ......      22,605       16,694
            Less-Accumulated depreciation ..........     (16,544)     (13,213)
                                                        --------     --------
                Total property and equipment, net ..    $  6,061     $  3,481
                                                        ========     ========

      The Company disposed of approximately $6.9 million in retired assets
during 2002. The loss on disposal of these assets was insignificant.

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, identifiable intangibles and goodwill,
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 such assets are
written down to their fair value. The Company recorded impairment charges of
$3.3 million during 2001. The impairment charges related to the remaining
acquired intangibles from the Avesta acquisition and resulted from the
discontinuation of the Visual Trinity (see Notes 6 and 7). The impairment
charges for the year ended December 31, 2001 are included in the restructuring
and impairment charge in the accompanying consolidated statement of operations.
There were no impairment charges recorded during the year ended December 31,
2002. The Company's estimates of anticipated revenue and profits and the
remaining estimated lives of long-lived assets, could be reduced significantly
in the future. As a result, the carrying amount of long-lived assets could be
reduced in the future.

Goodwill and Acquired Intangible Assets - Adoption of Statement 142

      The Company recorded goodwill and acquired intangible assets related to
the acquisition of Avesta in 2000 (see Note 6). Purchased intangible assets were
carried at cost less accumulated amortization. Amortization was computed using
the straight-line method over


                                      F-10
<PAGE>

the economic lives of the respective assets, three to seven years. The Company
recorded an impairment charge to write-off the remaining unamortized goodwill
during the year ended December 31, 2000 and a second impairment charge to
write-off the remaining unamortized acquired intangibles during the year ended
December 31, 2001.

      In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 addresses how
intangible assets that are acquired individually or with a group of other assets
should be accounted for in financial statements upon their acquisition. This
statement requires the amortization of goodwill to cease and remaining balances
of goodwill to be periodically reviewed for impairment for fiscal years
beginning after December 15, 2001. SFAS No. 142 supercedes APB Opinion No. 17,
"Intangible Assets". The Company adopted the provisions of this standard during
the year ended December 31, 2002.

      The following table presents the impact of SFAS No. 142 on net income
(loss) and earnings (loss) per share had SFAS No. 142 been in effect for the
years ended December 31, 2000, 2001 and 2002 (in thousands):

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                                        ----------------------------------
                                                                           2000         2001        2002
                                                                        ---------     --------     -------
<S>                                                                     <C>           <C>          <C>
            Net income (loss) ......................................    $(415,485)    $(26,962)    $ 3,406
              Amortization of goodwill .............................       36,333           39          --
                                                                        ---------     --------     -------
            Adjusted net income (loss) .............................    $(379,152)    $(26,923)    $ 3,406
                                                                        =========     ========     =======
            Basic weighted-average shares outstanding ..............       28,733       31,585      32,139
                                                                        =========     ========     =======
            Diluted weighted-average shares outstanding ............       28,733       31,585      32,434
                                                                        =========     ========     =======
            Basic and diluted earnings (loss) per share ............    $  (14.46)    $  (0.85)    $  0.11
                                                                        =========     ========     =======
            Adjusted basic and diluted earnings (loss) per share ...    $  (13.20)    $  (0.85)    $  0.11
                                                                        =========     ========     =======
</TABLE>

Accounts Payable and Accrued Expenses

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

                                                  December 31,
                                                -----------------
                                                  2001      2002
                                                -------    ------
                  Accounts payable .........    $ 2,644    $3,429
                  Accrued compensation .....      1,794     1,223
                  Accrued restructuring ....      1,421       580
                  Other accrued expenses ...      5,864     4,501
                                                -------    ------
                      Total ................    $11,723    $9,733
                                                =======    ======

Revenue Recognition

      The Company's network performance management products and services include
hardware, software, professional services and technical support. In 2001, the
Company also provided benchmark services. Benchmark services, professional
services and technical support revenues are reported as service revenue in the
accompanying consolidated statements of operations. The Company recognizes
revenue from the sale or license of its products in accordance with SOP No.
97-2, "Software Revenue Recognition" and SAB No. 101, "Revenue Recognition and
Financial Statements," which summarizes existing accounting literature and
requires that four criteria be met prior to the recognition of revenue. The
accounting policies regarding revenue recognition are written to 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. The third and fourth criteria may require the Company to make
significant judgments or estimates.

      To determine if a fee is fixed or determinable, the Company evaluates
rights of return, customer acceptance rights, if applicable, and
multiple-element arrangements of products and services to determine the impact
on revenue recognition. The Company's agreements generally have not included
rights of return except in certain reseller relationships that include stock
rotation rights. If offered, rights of return only apply to hardware. If an
agreement provides for a right of return, the Company typically recognizes
revenue when the right has expired or the product has been resold by the master
distributor. If the Company has sufficient historical information to allow it to
make an estimate of returns in accordance with SFAS No. 48, "Revenue Recognition
When Right of Return Exists," the Company defers an estimate for such returns
and recognizes the remainder at the date of shipment. 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. Most of the Company's sales are
multiple-element arrangements and include hardware, software, and technical
support. The Company's software sales sometimes include professional services
for implementation but these services are not a significant source of the
Company's revenue. Training is also offered but is not a significant source of
the Company's revenue. Revenue from multiple-element arrangements is recognized
using the residual method 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
values 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.

      The Company's maintenance 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 generally ranges from one to three years. The Company
recognizes revenue from services when the services are performed. Subscription
fees for the Company's benchmark reports are recognized upon delivery of the
reports. The remaining subscription fees will be complete in May 2003 when the
final contract under which the Company is obligated to provide service will be
complete.


                                      F-11
<PAGE>

      The Company sells its products directly to service providers, through
indirect channels and to end-user customers. Certain reseller customers have
stock rotation rights, under which the customer can exchange previously
purchased products for other products of equal or greater cost, subject to
certain limitations, based on their end-user customers' requirements. The
Company recognizes revenue under these arrangements once the stock rotation
right expires or the product has been resold by the master distributor.

      The Company also examines the specific facts and circumstances of all
sales arrangements with payment terms extending beyond its normal 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 its customers and the
specific facts of each arrangement. It is generally not the Company's practice
to offer payment terms that differ from its normal payment terms, and the
Company has not written off any accounts receivable related to extended payment
term arrangements.

      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.

      In May 2001, the Company announced the discontinuation of the Visual
Trinity product, the primary product acquired with Avesta, and stopped all
development efforts. The Company provided technical support for the Visual
Trinity product through September 2002 and has no remaining technical support
obligations to the Visual Trinity customers. As a result, revenue related to
this product subsequent to May 2001 consisted primarily of technical support
revenue, all of which was recognized over the terms of the relevant agreements.

      In June 2001, the Company announced the sale of the Visual Internet
Benchmark service. The Company will continue to recognize revenue from the
Visual Internet Benchmark service for existing contracts, under which the
Company is still required to perform services through May 2003, most of which is
currently in deferred revenue. The Company receives royalty payments from the
purchaser of the Visual Internet Benchmark service on new contracts, which are
included in support and services revenue in the accompanying statement of
operations for the year ended December 31, 2002.

      In 2002, the remaining customer for the CellTracer product, Network
Associates, placed what they indicated would be final orders. Also, in 2002, the
Company continued to evaluate the future of the Visual eWatcher and CellTracer
products. In their current form, neither product produced significant revenue
for the year ended December 31, 2002. The Company believes that the technology
of both products may be useful to other products in the future and the Company
is exploring alternatives for these technologies. However, the Company decided
not to focus its development or sales efforts on these products in 2003.

Credit Risk

      Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of accounts receivable. The
Company generally 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 bankruptcy of one of the Company's significant customers during the year
ended December 31, 2002 as described below, has not experienced any significant
credit related losses. Accounts receivable include allowances to record
receivables at their estimated net realizable value. As of December 31, 2001,
three customers individually represented 24%, 17% and 15% of accounts
receivable. As of December 31, 2002, three customers individually represented
45%, 15% and 10% of accounts receivable.

      A significant customer of the Company, WorldCom, filed for bankruptcy on
July 21, 2002. Sales to WorldCom represented approximately $6.3 million in
revenue for the year ended December 31, 2002. The Company wrote off
approximately $0.7 million of accounts receivables due from WorldCom against the
allowance for bad debts during 2002. Any future recoveries of these written-off
receivables will be recorded when and if they are received. Subsequent to
December 31, 2002, we entered into an agreement to sell these previously
written-off receivables to an unrelated third party for approximately $0.3
million. The Company anticipates that this cash will be collected and recorded
as a reduction of bad debt expense during 2003.


                                      F-12
<PAGE>

      Due to the relationship that the Company has with WorldCom and its
customers, the Company is continuing to sell products to WorldCom during its
bankruptcy. The Company has taken steps to limit its financial exposure. In July
2002, the Company signed an agreement (the "July Agreement") with WorldCom that
established new terms and conditions under which the Company shipped products to
WorldCom during the initial weeks of WorldCom's bankruptcy. After WorldCom
demonstrated timely payment of the related invoices, the Company entered into a
subsequent amendment (the "August Amendment") that changed WorldCom's payment
terms to substantially those that existed prior to the bankruptcy filing.
WorldCom complied with the terms of the July Agreement and August Amendment
during the year ended December 31, 2002 and continues to be in compliance as of
March 21, 2003.

Warranty

      The Company warrants its hardware products for periods of up to five
years. The Company estimates its warranty obligation at the end of each period
and charges changes to the liability to cost of revenue in the respective
period. Such estimates are based on actual warranty cost experience.

      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." The disclosure requirements of this
interpretation are effective for periods ending after December 15, 2002 and
accounting for guarantees is required for periods beginning after December 15,
2002. Accordingly, the Company adopted the disclosure requirements of FIN 45 for
the year ended December 31, 2002 and the accounting requirements will be adopted
for the quarter ended March 31, 2003. The Company does not believe that FIN 45
will have a material effect on the Company's financial position or results of
operations.

      The following is a summary of the change in the company's accrued warranty
during the year ended December 31, 2002 (in thousands):

            Balance as of December 31, 2001 .....    $ 441
            Provisions for warranty .............      153
            Settlements made ....................     (192)
                                                     -----
            Balance as of December 31, 2002 .....    $ 402
                                                     =====

Research and Development

      Research and development costs are expensed as incurred.

      The Company accounts for software development costs in accordance with
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed." Costs incurred prior to establishment of technological
feasibility are expensed as incurred and reflected as research and development
costs in the accompanying consolidated statements of operations. For the years
ended December 31, 2000, 2001 and 2002, 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 otherwise capitalizable after technological
feasibility were expensed as they were immaterial.

Income Taxes

      The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are computed based on the 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 carrying values of the Company's current
assets and current liabilities approximate fair


                                      F-13
<PAGE>

value because of the relatively short maturities of these instruments. The fair
value of the Company's long-term debt, which was comprised of the convertible
debentures issued in March 2002 (see Note 3), is estimated using a discounted
cash flow analysis based on the Company's borrowing cost for similar
instruments. The Company estimates that as of December 31, 2002, the fair value
of its long-term debt did not differ materially from its carrying value.

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 the years ended December 31, 2000, 2001 and 2002.

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 have not been significant. For the year ended December 31,
2000, three customers individually represented 20%, 18% and 14% of revenue. For
the year ended December 31, 2001, three customers individually represented 29%,
14% and 10% of revenue. For the year ended December 31, 2002, four customers
individually represented 34%, 11%, 10% and 10% of revenue. The agreements with
the Company's significant customers do not obligate these customers to make any
minimum purchases from the Company.

      The following table presents the Company's revenue by product (in
thousands):

<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                                                  -----------------------------
                                                                    2000       2001       2002
                                                                  -------    -------    -------
<S>                                                               <C>        <C>        <C>
                  Visual UpTime ..............................    $59,754    $55,557    $49,797
                  Visual IP InSight ..........................      9,466      8,095      7,477
                                                                  -------    -------    -------
                           Continuing product revenue ........     69,220     63,652     57,274
                                                                  -------    -------    -------
                  Visual Internet Benchmark ..................      4,607      4,025        814
                  Visual Trinity and eWatcher ................      7,268      3,591        699
                  CellTracer .................................      7,946      2,980      2,232
                                                                  -------    -------    -------
                            Discontinued product revenue .....     19,821     10,596      3,745
                                                                  -------    -------    -------
                            Royalties ........................         --         --        442
                                                                  -------    -------    -------
                            Total revenue ....................    $89,041    $74,248    $61,461
                                                                  =======    =======    =======
</TABLE>

Basic and Diluted Earnings (Loss) Per Share

      SFAS No. 128, "Earnings Per Share," requires dual presentation of basic
and diluted earnings per share. Basic earnings (loss) per share includes no
dilution and is computed by dividing net income (loss) available to common
stockholders by the weighted-average number of common shares outstanding for the
period.

      Diluted earnings (loss) per share includes the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Options and warrants to purchase
3,121,313 and 8,613,245 shares of common stock that were outstanding at December
31, 2000 and December 31, 2001, respectively, were not included in the
computation of diluted loss per share as their effect would be anti-dilutive.
The treasury stock effect of options and warrants to purchase 8,097,086 shares
of common stock that were outstanding at December 31, 2002 are included in the
computation of diluted loss per share for the year ended December 31, 2002. The
effect of the convertible debentures issued in March 2002 (see Note 3) that are
convertible into 2,986,093 shares of common stock has not been included in the
computation of diluted earnings per share for the year ended December 31, 2002
as their effect would be anti-dilutive.


                                      F-14
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                                        ----------------------------------
                                                                           2000         2001        2002
                                                                        ---------     --------     -------
<S>                                                                     <C>           <C>          <C>
                  Net income (loss) ................................    $(415,485)    $(26,962)    $ 3,406
                                                                        =========     ========     =======
                  Weighted-average share calculation:
                  Basic weighted-average shares outstanding:
                    Average number of shares of common stock
                       outstanding .................................       28,733       31,585      32,139
                  Diluted weighted-average shares outstanding:
                    Treasury stock effect of options and
                       warrants ....................................           --           --         295
                                                                        ---------     --------     -------
                  Diluted weighted-average shares outstanding ......       28,733       31,585      32,434
                                                                        =========     ========     =======
                  Earnings (loss) per common share:
                    Basic earnings (loss) per share ................    $  (14.46)    $  (0.85)    $  0.11
                                                                        =========     ========     =======
                    Diluted earnings (loss) per share ..............    $  (14.46)    $  (0.85)    $  0.11
                                                                        =========     ========     =======
</TABLE>

Other New Accounting Pronouncements

      In August 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." It addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred and establishes that fair
value is the objective for initial measurement of the liability. Under EITF
Issue No. 94-3, a liability for an exit cost is recognized at the date of an
entity's commitment to an exit plan. The new standard is effective for exit or
disposal activities that are initiated after December 31, 2002, with early
adoption encouraged. The Company does not believe that SFAS No. 146 will have a
material effect on the Company's financial position or results of operations.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." It provides additional
transition guidance for those companies that elect to voluntarily adopt the
accounting provisions of SFAS No. 123. SFAS No. 148 does not change the
provisions of SFAS No. 123 that allow companies to continue to apply the
intrinsic value method of APB No. 25. The new standard is effective for fiscal
years beginning after December 15, 2002, with early adoption permitted. The
standard also contains interim disclosure provisions that are effective for the
first interim period beginning after December 15, 2002. The Company currently
accounts for stock-based compensation under APB 25 and does not plan to adopt
the provisions of SFAS No. 123. However, there are additional disclosure
requirements of SFAS No. 148 that will affect the disclosures of the Company
beginning with the interim period ended March 31, 2003.

2. Credit Agreements and Long-Term Debt:

      During 2001 through March 2002, the Company maintained a credit facility,
as amended, that included an accounts receivable-based arrangement providing for
borrowings up to the lesser of $10.0 million or 80% of eligible accounts
receivable (as defined in the credit facility and determined by the bank). The
bank credit facility included an equipment financing arrangement. During the six
months ended September 30, 2001, the Company borrowed approximately $0.5 million
that was to be repaid over 36 months under the equipment financing facility, of
which $0.4 million was outstanding as of December 31, 2001. As of December 31,
2001, the Company also had approximately $1.7 million of borrowings outstanding
at an interest rate of 6.75% under the accounts receivable-based arrangement. In
connection with the issuance of the convertible debentures (see Note 3), the
Company repaid the outstanding balance of the credit facility, and the related
loan agreements were terminated. As a result, the borrowings under the accounts
receivable-based and equipment financing arrangements were classified as current
in the accompanying consolidated balance sheet as of December 31, 2001.

      In December 2000, the bank issued a standby letter of credit, as amended,
in favor of the Company's contract manufacturer, that expires on September 30,
2003 (the original expiration date was March 31, 2002) in the amount of $2.5
million. The Company secured the letter of credit with a pledge of a certificate
of deposit in the amount of $2.5 million that expires on May 31, 2003, as
amended, which is recorded as a restricted short-term investment in the
accompanying consolidated balance sheets as of December 31, 2001 and 2002.

3. Convertible Debentures:

      In March 2002, the Company issued senior secured convertible debentures in
the aggregate amount of $10.5 million in a private placement. The Debentures are
due March 25, 2006, are payable in common stock or cash, at the Company's option
provided certain conditions are satisfied, and bear interest at an annual rate
of 5% payable quarterly in common stock or cash, at the Company's option,
provided certain conditions are satisfied. The Debentures are secured by a first
priority lien on substantially all of the Company's


                                      F-15
<PAGE>

assets, which is to be released based on the achievement, as documented in this
annual report, of certain financial goals. The Debentures may be converted
initially into 2,986,093 shares of the Company's common stock at the option of
the holders at a price of $3.5163 per share, subject to certain adjustments. The
conversion price of the Debentures will adjust if the Company issues additional
shares of common stock or instruments convertible into common stock 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 Debentures into
common stock if the closing price of the Company's common stock exceeds 175% of
the conversion price for 20 consecutive days after September 26, 2003.

      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
initial exercise price of $4.2755 per share. The exercise price will be adjusted
if the Company issues additional shares of common stock or instruments
convertible into common stock at a lower price than the then-effective exercise
price. 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 (the "Preferred Stock Rights") at
certain dates in the future. The first Preferred Stock Right for 575 shares for
$5.8 million expired on May 6, 2002. The holders did not exercise the right to
purchase these shares of Series A preferred stock. A second Preferred Stock
Right for 307 shares for $3.1 million may be exercised at any time after
September 2002 but before June 2003. A third Preferred Stock Purchase Right for
170 shares for $1.7 million also expired on May 6, 2002. The holders also did
not exercise the right to purchase these shares of Series A preferred stock. The
Debenture holders were also granted certain equity participation and
registration rights.

      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:

      o     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;

      o     failure by the Company to have its common stock listed on an
            eligible market;

      o     bankruptcy of the Company;

      o     engagement by the Company in certain change in control, sale of
            assets or redemption transactions;

      o     failure by the Company to timely file its 2003 annual report on
            Form 10-K; and

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

      In addition, the Debentures include certain financial covenants related to
2002 and 2003. The Company met the financial covenant for 2002. If the Company's
earnings before interest, taxes, depreciation and amortization, less capital
expenditures, for the year ended December 31, 2003 are less than $6.5 million,
the Debenture holders may require that the Company prepay all or a portion of up
to 100% of the outstanding principal amount of their Debentures, plus accrued
interest. The redemption may be made in common stock or cash at the Company's
option provided certain conditions are satisfied.

      If the Company does not have sufficient cash to repay these amounts and is
required to do so due to the occurrence of a triggering or other event, the
Company may be required to seek additional capital through a sale of assets,
sale of additional securities or through additional borrowings, none of which
may be available on terms reasonably acceptable to the Company.

      The aggregate amount of the Debentures, $10.5 million, is included in the
accompanying balance sheet as of December 31, 2002, net of unamortized debt
discount of approximately $2.5 million. The net amount represents the fair
market value after allocating the proceeds to the various additional components
of the debt. Approximately $2.1 million in proceeds from the Debentures were
allocated to the value of the warrants. The fair value of the warrants was
determined using the Black-Scholes valuation model with the following
assumptions: no dividend yield, expected volatility of 129%, risk-free interest
rate of 4.85% and a term of five years. Approximately $0.3 million in proceeds
from the Debentures was allocated to the value of the Preferred Stock Rights as
determined by an appraisal. On the date of issuance of the Debentures, the
conversion price of the Debentures, after taking into consideration the
allocation of proceeds to the warrants and Preferred Stock Rights, was less than
the quoted market price of the Company's common stock. Accordingly,
approximately $1.0 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


                                      F-16
<PAGE>

the warrants, Preferred Stock Rights and beneficial conversion is being
amortized as a charge to interest expense over the four-year period until the
Debentures become due in March 2006.

4. 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 182,878, 337,675 and 406,573 shares
of common stock pursuant to the provisions of the 1999 Purchase Plan during
2000, 2001 and 2002, respectively.

5. Stock Options:

Employee Stock Option Plans

      As of December 31, 2002, the Company was authorized to grant options to
purchase 3,488,067 shares of common stock pursuant to its employee stock option
plans (the "Option Plans"). The Option Plans provide for grants of options to
employees, consultants, and directors of the Company. 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 (110% of the fair market value of such
common stock with respect to any optionee who immediately before any option is
granted, directly or indirectly, possesses more than 10% of the total combined
voting power of all classes of stock of the Company ("10% Owners")). In the case
of non-statutory options, the exercise price may be equal to or greater than 85%
of the fair value of the common stock at the time of the grant. The Compensation
Committee has the authority to determine the time or times at which options
granted under the Option Plans become exercisable (typically up to five years);
provided that, for any option intended to qualify as an incentive stock option,
such option must expire no later than ten years from the date of grant (five
years with respect to 10% Owners). Unless terminated sooner by the Board, the
Option Plans terminate at various dates from December 2004 through December 2010
or the date on which all shares available for issuance shall have been issued
pursuant to the exercise or cancellation of options granted under the Option
Plans.

1997 Directors' Stock Option Plan

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

      Under the terms of the Director Plan, upon a member's initial election or
appointment to the Board of Directors, such member was granted options to
purchase 24,000 shares of common stock, vesting over four years, with options to
purchase 6,000 shares vesting at the first anniversary of the grant and options
to purchase the remaining 18,000 shares vesting thereafter, in 36 equal monthly
installments (the "Initial Options"). Annual options to purchase 6,000 shares of
common stock (the "Annual Options") were granted to each Eligible Director on
the date of each annual meeting of stockholders. Annual Options vest at the rate
of one-twelfth of the total grant per month, and vest in full at the earlier of
(i) the first anniversary of the date of the grant or (ii) the date of the next
annual


                                      F-17
<PAGE>

meeting of stockholders. The exercise price of options granted under the
Director Plan has been equal to the fair market value per share of the common
stock on the date of grant. In January 2003, the Board of Directors amended the
Director Plan to discontinue the automatic grant of Initial and Annual Options
under the Director Plan. Instead, members of the Board of Directors will 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 at each annual
meeting under the Option Plans.

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

<TABLE>
<CAPTION>
                                                               Option Price          Weighted-Average
                                              Options            Per Share            Exercise Price
                                            ------------   ----------------------    ---------------
<S>                                         <C>            <C>             <C>            <C>
Options outstanding at December 31, 1999     3,953,444     $ 0.03    --    $59.00         $21.41
  Granted ..............................     7,248,440       0.40    --     63.06          12.93
  Canceled .............................    (7,647,979)      0.29    --     54.45          18.64
  Exercised ............................      (636,326)      0.07    --     32.25           4.49
                                            ----------     ----------------------         ------
Options outstanding at December 31, 2000     2,917,579       0.03    --     63.06          11.49
  Granted ..............................     8,363,039       1.85    --      7.42           4.19
  Canceled .............................    (2,373,510)      0.19    --     63.06          10.89
  Exercised ............................      (435,091)      0.19    --      3.00           1.23
                                            ----------     ----------------------         ------
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
                                            ==========     ======================         ======
</TABLE>

      As of December 31, 2002 options to purchase 3,997,330 shares of common
stock were exercisable with a weighted-average exercise price of $5.60. The
weighted-average remaining contractual life and weighted-average exercise price
of options outstanding at December 31, 2002, for selected exercise price ranges
are as follows:

<TABLE>
<CAPTION>
                                              Options Outstanding                        Options Exercisable
                                -------------------------------------------------   -------------------------------
                                                   Weighted-
                                                    Average          Weighted-                        Weighted-
                                 Number of         Remaining          Average        Number of         Average
Range of Exercise Prices          Options      Contractual Life    Exercise Price     Options       Exercise Price
------------------------        -----------    ----------------    --------------    ---------      --------------
<S>          <C>                 <C>                  <C>             <C>             <C>              <C>
$  0.19  --  $  0.19                 7,069            3.05            $   0.19           7,069         $   0.19
   0.29  --     0.97               999,446            9.47                0.94         143,340             0.90
   1.07  --     1.75               374,769            7.56                1.41         176,621             1.58
   1.90  --     1.90               954,760            8.79                1.90         410,707             1.90
   3.00  --     3.90               543,987            7.76                3.31         321,220             3.31
   3.92  --     3.92             1,028,650            8.34                3.92         648,518             3.92
   3.94  --     4.09               768,285            8.42                4.03         458,839             4.03
   4.19  --     4.69               929,913            8.44                4.47         640,232             4.44
   4.72  --     6.66             1,063,237            8.40                6.02         759,543             6.10
   6.70  --    38.75               465,937            6.37               18.43         431,241            19.20
--------------------             ---------            ----            --------       ---------         --------
$  0.19  --  $ 38.75             7,136,053            8.37            $   4.39       3,997,330         $   5.60
====================             =========            ====            ========       =========         ========
</TABLE>

      In October 2000, the Company offered each employee an opportunity to
cancel certain stock options (the "Option Trade-In") in exchange for the right
to receive a future stock option grant for the same number of shares six months
and one day from the date of cancellation with a strike price equal to the
market price on the new date of grant. Options to purchase 5,382,588 shares were
cancelled in 2000 pursuant to the Option Trade-In. Options to purchase 5,303,984
shares were granted in 2001 pursuant to the Option Trade-In. The new options
vested 20% on the grant date, with the remaining 80% vests monthly over 36
months. The Company granted the stock options as a combination of incentive
options and non-statutory options consistent with the proportion of options that
were cancelled.

      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. Prior to the issuance of SFAS No. 123,
stock-based compensation was accounted for under the "intrinsic value method" as
defined by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Under the intrinsic value method, compensation is
the excess, if any, of the market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the stock.

      SFAS No. 123 allows an entity to continue to use the intrinsic value
method. However, entities electing the accounting in APB Opinion No. 25 must
make pro forma disclosures as if the fair value based method of accounting had
been applied. The Company applies APB Opinion No.


                                      F-18
<PAGE>

25, the Company recorded deferred compensation of approximately $291,000 and
$100,000 related to stock option grants in 1999 and 2002. The Company amortized
approximately $229,000, $80,000 and $126,000 of deferred compensation in the
years ended December 31, 2000, 2001 and 2002, respectively. During 2001 and
2002, deferred compensation was reduced by $242,000 and $52,000, respectively,
for cancelled options resulting from workforce reductions.

      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, the Company's net income (loss) and earnings (loss) per share would
have decreased or increased to the pro forma amounts indicated below (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                                      ------------------------------
                                                         2000       2001       2002
                                                      ---------   --------   -------
<S>                                                   <C>         <C>        <C>
Net income (loss), as reported                        $(415,485)  $(26,962)  $ 3,406
Add: Stock-based employee compensation
  expense included in reported net income                   229         80       126
Deduct: Total stock-based employee compensation
  expense determined under fair value based method
  for all awards                                        (20,538)   (45,123)   (7,475)
                                                      ----------  ---------  -------
Pro forma net income (loss)                           $(435,794)  $(72,005)  $(3,943)
                                                      ==========  =========  =======

Earnings (loss) per share:
  Basic: as reported                                  $  (14.46)  $  (0.85)  $  0.11
                                                      ==========  =========  =======
  Basic: pro forma                                    $  (15.17)  $  (2.28)  $ (0.12)
                                                      ==========  =========  =======

  Diluted: as reported                                $  (14.46)  $  (0.85)  $  0.11
                                                      ==========  =========  =======
  Diluted: pro forma                                  $  (15.17)  $  (2.28)  $ (0.12)
                                                      ==========  =========  =======
</TABLE>

      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, 2000, 2001 and 2002: no dividend
yield, expected volatility from 100% to 120%, risk-free interest rates from 3.8%
to 6.2% and an expected term of 5 years.

6. Avesta Acquisition:

      The acquisition of Avesta was completed on May 24, 2000 and has been
accounted for as a purchase business combination. At closing, all of the
outstanding preferred and common stock of Avesta was exchanged for 5,413,530
shares of Visual common stock. In addition, the outstanding stock options and
warrants of Avesta were converted into options and warrants to purchase 673,338
and 445,463 shares of Visual common stock, respectively. The equity holders of
Avesta also were entitled to receive up to an aggregate of 2,000,000 additional
shares (the "Additional Shares") of Visual common stock, which were placed into
escrow, if certain sales goals of Avesta were achieved in calendar 2000. None of
the Additional Shares were earned and all of the Additional Shares were returned
to Visual. The determination of the aggregate purchase price includes only the
fair value of the equity securities that were issued by Visual to the Avesta
equity holders at closing. The fair value of the Additional Shares was not
included in the determination of the purchase price. During the second quarter
of 2001, 134,000 shares from the initial merger consideration were returned to
the Company by the Avesta equity holders as settlement of certain
indemnification claims made by the Company. For purposes of determining the
purchase price, the shares of Visual common stock issued at closing were valued
at $59.30 per share based upon the average closing price of Visual common stock
surrounding and including the date that the merger was agreed to and announced.

      Avesta's outstanding options and warrants were converted to equivalent
options and warrants of Visual. The number of shares exercisable under these
options and warrants and the exercise prices were adjusted such that Visual
options and warrants issued for Avesta options and warrants had an equivalent
intrinsic value per option and warrant. The terms and vesting periods of the
options and warrants were not modified. Accordingly, the estimated fair value of
these options and warrants, based upon the Black-Scholes valuation model, was
included in the determination of the purchase price.

      The aggregate purchase price was determined as follows (in thousands):

               Fair value of common stock.........     $  315,790
               Fair value of options and warrants.         62,067
               Transaction costs and other........         14,874
                                                       ----------
                         Total....................     $  392,731
                                                       ==========

      The merger resulted in an allocation of purchase price to the net tangible
and intangible assets of Avesta, as well as a write-off of the portion of the
purchase price allocated to IPR&D. Visual has allocated the purchase price based
upon the fair values of the assets and the liabilities acquired and allocated
the purchase price accordingly.


                                      F-19
<PAGE>

      The purchase price has been allocated as follows (in thousands):

                Completed technology................    $   125,302
                In-process technology...............         39,000
                Assembled workforce.................          3,885
                Trademarks/tradenames...............         18,455
                Goodwill............................        238,723
                Net tangible assets.................          1,424
                Deferred tax liability..............        (34,058)
                                                        -----------
                          Total.....................    $   392,731
                                                        ===========

      Of the total purchase price, $39.0 million was allocated to in-process
technology, which represented research and development projects of Avesta that
had not reached technological feasibility as of the date of the acquisition and
that had no alternative future use in research and development activities or
otherwise. In accordance with SFAS No. 2, "Accounting for Research and
Development Costs," as interpreted by the FASB Interpretation No. 4, amounts
assigned to IPR&D meeting the above criteria must be charged to expense at the
date of consummation of the purchase business combination. As a result, the
Company recorded an expense of $39.0 million during the year ended December 31,
2000. The Company valued the acquired IPR&D based upon an independent appraisal
of the projects under development, which were related to future releases of the
Trinity, eWatcher and other products. The values of the IPR&D projects were
determined by estimating the future cash flows from the projects, once
commercially feasible, discounting the net cash flows back to their present
values and then applying a percentage of completion to the calculated values to
reflect the uncertainty of technical success of the projects. The rates used to
discount the net cash flows to their present values were based on Avesta's
weighted average cost of capital. The percentage of completion was based on
management's estimates of the amount of resources spent to date and on the
expected use of future resources.

      In connection with the Avesta acquisition, the Company recognized
approximately $900,000 in liabilities as the cost of closing a redundant
facility and terminating certain employees. The accrual consisted primarily of
severance and other employee termination costs. These activities resulted in the
termination of approximately 20 employees in connection with the facility
closure, the elimination of duplicate positions and the consolidation of certain
operations. For the year ended December 31, 2000, the Company charged $806,000
against the accrual for amounts paid. The remaining amounts were paid in 2001.

      The pro forma information presented below (in thousands, except per share
data) reflects the Avesta acquisition as if it had occurred on January 1, 2000
but excludes the write-off of purchased research and development and the
impairment charge of $328.8 million (see Note 7). These results are not
necessarily indicative of future operating results or those that would have
occurred had the merger been consummated on that date.

           Pro forma net revenue......................     $   94,851
           Pro forma net loss.........................        (92,944)
           Pro forma basic and diluted loss per share.     $    (3.02)

      In December 1999, Avesta acquired all of the outstanding stock of Telecoms
Data Systems SAS ("TDS") for a combination of cash and shares of Avesta common
stock. In the event that Avesta did not consummate an initial public offering
within eight months from the date of closing, the former stockholder of TDS had
the right to repurchase the TDS stock and related technology. As a result of the
Avesta merger, the stockholder held 71,541 shares of Visual common stock. In
October 2000, the stockholder notified the Company of his intent to exercise the
repurchase option and the shares of Visual common stock were returned in 2001.
Accordingly, the value of these shares was not included in the determination of
the purchase price of Avesta. Because of this repurchase option, the Company did
not consolidate TDS. However, amounts paid by the Company to fund the operations
of TDS that were not expected to be repaid were charged to expense in the
accompanying consolidated statement of operations for the year ended December
31, 2000.

7. Restructuring and Impairment Charges:

      In the fourth quarter of 2000, the Company announced a plan to realign its
product portfolio, consolidate its operations and devote resources to the
markets and products that offer the Company the greatest growth opportunities.
The Company's revised strategic focus and reorganization included a workforce
reduction of approximately 140 employees throughout the Company and a plan to
close its facilities in Ottawa, Canada and Sunnyvale, California, and to reduce
the size of its facilities in Rockville, Maryland and New York, New York. In
connection with this plan, the Company recorded a $7.0 million restructuring
charge that consisted of $4.2


                                      F-20
<PAGE>

million in employee termination costs including severance and other benefits,
$1.7 million in lease obligations related to facilities and $1.1 million in
leasehold improvement write-offs.

      In the second quarter of 2001, the Company reversed $723,000 of this
restructuring charge resulting primarily from lower than estimated costs related
to facility closures. In the second quarter of 2001, the Company announced a
plan to discontinue development and sales efforts on the Visual Trinity product.
As a result, the Company reduced its workforce by approximately 50 employees and
closed the New York, New York facility. The Company recorded a $3.9 million
restructuring charge that consisted of $1.4 million in employee termination
costs including severance and other benefits, $1.3 million related to leases and
other contractual obligations and the write-off of a $656,000 investment (see
Note 1) and $487,000 in leasehold improvements and related assets. In October
2001, the Company announced a plan for an additional reduction in workforce of
approximately 40 employees to further reduce operating expenses and recorded a
restructuring charge of $385,000 for severance and other benefits. During the
fourth quarter of 2001, the Company reversed $1.2 million of the restructuring
charge recorded in the second quarter of 2001 due to lower than estimated
facility closure costs and other contractual obligations. There were no
restructuring or impairment charges in 2002. Costs associated with the workforce
reductions of approximately 60 people in 2002 were charged to operating expenses
as incurred.

      The Company recorded approximately $386.4 million in goodwill and other
intangibles, excluding purchased research and development, related to the
acquisition of Avesta. During the third and fourth quarters of 2000, the
Company's results of operations deteriorated. In particular, revenue decreased
significantly while operating expenses increased. The revenue decreases were due
to lower than expected revenue related to the Avesta products as well as
decreases in the revenue provided by the Company's other products. The addition
of the Avesta products and markets did not result in the revenue growth
anticipated at the time of the acquisition. Despite the lower than anticipated
revenue, the Company's operating expenses increased significantly in the
corresponding periods, due in large part, to the addition of the Avesta
operations. In response to these trends, the Company initiated a restructuring
plan in the fourth quarter of 2000 to realign its product portfolio and
streamline its operations. Due to the significance of these developments,
management performed an evaluation of the recoverability of its long-lived
assets, including those related to the Avesta acquisition, in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Based upon this evaluation, the Company
concluded that the goodwill and other intangible assets related to the Avesta
acquisition were impaired. This conclusion was based upon the Company's revised
estimate of the undiscounted cash flows expected to be derived from the Avesta
operations. The estimate of such cash flows was substantially less than the
carrying values of the related long-lived assets. As a result, the Company
recorded an impairment charge of $328.8 million in the fourth quarter of 2000.
This charge included $203.2 million related to goodwill, which represented the
entire remaining unamortized balance, and $125.6 million related to the other
acquired intangibles including the completed technology, the assembled workforce
and the trademarks/tradenames. The fair values of the remaining Avesta
long-lived assets were determined based upon the estimated discounted cash flows
to be derived from the Avesta operations. The discount rate used was based upon
an assessment of the risks associated with these cash flows.

      Due to the discontinuation of the Visual Trinity product in the second
quarter of 2001 and the Company's decision to combine certain functionality of
the Visual eWatcher product with the Visual IP InSight product in the fourth
quarter of 2001, management performed an evaluation of the recoverability of its
remaining long-lived assets related to the Avesta acquisition in accordance with
SFAS No. 121. Based upon these evaluations, the Company concluded that these
intangible assets were impaired as Visual Trinity and Visual eWatcher were the
only products acquired with Avesta. The conclusion was based upon the Company's
revised estimate of the undiscounted cash flows expected to be derived from the
remaining Avesta operations. The estimate of such cash flows was substantially
less than the carrying values of the related long-lived assets. As a result, the
Company recorded impairment charges of $3.1 million in the second quarter of
2001 and $197,000 in the fourth quarter of 2001.

8. 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. 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. There have been no employer contributions under the Visual 401(k)
Plan. The Company had additional 401(k) plans obtained through acquisitions.
During 2002, the Company merged all of the acquired plans into the Visual 401(k)
Plan. There were no employer contributions to these plans during the three years
ended December 31, 2002.


                                      F-21
<PAGE>

9. Income Taxes:

      The components of the provision (benefit) for income taxes consist of the
following for the years ended December 31, 2000, 2001 and 2002 (in thousands):

<TABLE>
<CAPTION>
                                                            Years Ended
                                                            December 31,
                                                -----------------------------------
                                                    2000        2001         2002
                                                ----------  ----------   ----------
<S>                                             <C>         <C>          <C>
Current...................................      $   (9,585) $      272   $       --
Deferred..................................         (24,473)         --           --
                                                ----------  ----------   ----------
        Income tax provision (benefit)....      $  (34,058) $      272   $       --
                                                ==========  ==========   ==========
</TABLE>

      The provision for income taxes results in an effective rate that differs
from the Federal statutory rate as follows for the years ended December 31,
2000, 2001 and 2002:

<TABLE>
<CAPTION>
                                                        Years Ended
                                                       December 31,
                                                ---------------------------
                                                 2000      2001       2002
                                                ------    ------     ------
<S>                                              <C>       <C>         <C>
Statutory federal income tax rate.........       (35)%     (35)%       35%
Effect of graduated rates.................         1         1         (1)
State income taxes, net of federal benefit        (4)       (3)         4
Net operating loss carryforward...........        --        --         --
Non-deductible expenses...................        21         6          3
Tax credits...............................        --        --        (13)
Change in valuation allowance.............         9        32        (28)
                                                  --        --        ---
          Total effective rate............        (8)%       1%        --%
                                                  ==        ==        ===
</TABLE>

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

                                                             December 31,
                                                        ----------------------
                                                           2001         2002
                                                        ---------    ---------
 Net operating loss carryforwards...................    $  39,659    $  39,684
 Depreciation.......................................         (684)        (367)
 Allowance for doubtful accounts....................          210          136
 Inventory valuation................................        1,800        1,890
 Accrued liabilities................................        1,288          660
 Deferred revenue...................................        1,408        1,604
 Tax credit carryforwards...........................        3,402        4,332
 Valuation allowance................................      (47,083)     (47,939)
                                                        ---------    ---------
         Total net deferred tax asset...............    $      --    $      --
                                                        =========    =========

      The Company currently has net operating loss carryforwards to offset
future taxable income of approximately $104.4 million as of December 31, 2002.
These net operating loss carryforwards expire through 2022. Under the provisions
of the Tax Reform Act of 1986, when there has been a change in an entity's
ownership, utilization of net operating loss carryforwards may be limited.
Because of the changes in the ownership of Net2Net, Inverse and Avesta, the use
of their net operating losses will be limited and may not be available to offset
future taxable income.

10. Commitments and Contingencies:

Long-Term Debt and Leases

      The Company leases office space and office equipment under non-cancelable
operating leases expiring through December 2006. The Company recorded rent
expense of approximately $3.3 million, $1.9 million and $1.3 million during
2000, 2001 and 2002, respectively.

      Future minimum payments as of December 31, 2002 under the Debentures and
non-cancelable operating leases are as follows (in thousands):

<TABLE>
<CAPTION>

                                                                  Operating
                                                 Debentures        Leases
                                                 ----------       ---------
<S>                                              <C>              <C>
 2003........................................    $     528        $  1,846
 2004........................................          528           1,883
 2005........................................          528           1,863
 2006........................................       10,622           1,886
 Thereafter..................................           --              --
                                                 ---------        --------
           Total minimum payments............       12,206        $  7,478
 Interest element of payments................       (1,706)       ========
                                                 ---------
 Present value of future minimum payments....       10,500
 Unamortized debt discount...................       (2,537)
 Current portion.............................           --
                                                 ---------
 Long-term portion...........................    $   7,963
                                                 =========
</TABLE>


                                      F-22
<PAGE>

      The Company has a sublease for a portion of its office space that expires
in December 2003. Future minimum lease payments due from the lessee are
approximately $389,000 for 2003.

Litigation

      In July, August and September 2000, several purported class action
complaints were filed against the Company and certain former executives
(collectively, the "defendants"). These complaints were combined into a single
consolidated amended complaint (the "complaint"). The complaint alleged that
between February 7, 2000 and August 23, 2000, the defendants made false and
misleading statements, which had the effect of inflating the market price of the
Company's stock, in violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. On August 20, 2002, United States District Judge Deborah
K. Chasanow entered an order in the United States District Court for the
District of Maryland dismissing the complaint. On September 17, 2002, the
plaintiffs appealed the District Court's decision to the United States Court of
Appeals for the Fourth Circuit. On December 30, 2002, the appeal was dismissed
by the United States Court of Appeals for the Fourth Circuit. This decision ends
the matter.

      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 matters will not have a material adverse
effect upon the Company's financial position or future operating results.

11. Interim Financial Data -- Unaudited:

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

<TABLE>
<CAPTION>
                                         March 31,              June 30,                 September 30,            December 31,
                                  --------------------   ----------------------     ----------------------   ----------------------
                                    2001        2002      2001(1)        2002         2001          2002      2001(2)        2002
                                  --------    --------   --------      --------     --------      --------   --------      --------
                                                             (in thousands, except per share amounts)
<S>                               <C>         <C>        <C>           <C>          <C>           <C>        <C>           <C>
Revenue.........................  $ 17,386    $ 16,793   $ 20,329      $ 15,209     $ 19,208      $ 14,652   $ 17,325      $ 14,807
Gross profit....................    10,424      11,817     11,028        11,558       12,109        10,238     11,256        10,643
Income (loss) from operations...    (7,954)        790    (12,427)        1,184       (2,989)        1,021     (3,645)        1,598
Net income (loss)...............    (7,667)        681    (12,330)          815       (2,979)          665     (3,986)        1,245
Basic income (loss) per share...     (0.24)       0.02      (0.39)         0.03        (0.09)         0.02      (0.13)         0.04
Diluted income (loss) per share.     (0.24)       0.02      (0.39)         0.03        (0.09)         0.02      (0.13)         0.04
</TABLE>

(1)   The net loss for the three months ended June 30, 2001 includes a reversal
      of the restructuring charge recorded in December 2000 of approximately
      $723,000, an additional restructuring charge of approximately $3.9 million
      and an impairment charge of $3.1 million related to the write-off of
      intangible assets from the Avesta acquisition (see Note 7).

(2)   The net loss for the three months ended December 31, 2001 includes the
      reversal of $1.2 million of the restructuring charge recorded in the
      second quarter of 2001, an additional restructuring charge of
      approximately $385,000 and an impairment charge of $3.9 million (see Note
      7).

      The sum of the per share amounts may not equal the annual amounts because
of the changes in the weighted-average number of shares outstanding during the
year.


                                      F-23
<PAGE>

                                                                     SCHEDULE II

                              VISUAL NETWORKS, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                         Balance at Beginning     Additions Charged to                   Balance at End
              Description                      of Period           Costs and Expenses     Deductions        of Period
--------------------------------------   --------------------    ----------------------  ------------   ----------------
<S>                                        <C>                        <C>                   <C>           <C>
 For the year ended December 31, 2000:
   Deducted from asset accounts:
      Allowance for doubtful
        accounts....................       $       754                $      430            $     81      $   1,103
   Included in current liabilities:
      Reserves related to
        restructuring...............                --                     6,800               2,494          4,306

 For the year ended December 31, 2001:
   Deducted from asset accounts:
      Allowance for doubtful
        accounts....................             1,103                         5                 554            554
   Included in current liabilities:
      Reserves related to
        restructuring...............             4,306                     3,092               5,977(1)       1,421

 For the year ended December 31, 2002:
   Deducted from asset accounts:
      Allowance for doubtful
        accounts....................               554                       500                 696            358
   Included in current liabilities:
      Reserves related to
        restructuring...............             1,421                        --                 841            580
</TABLE>

(1)   Included in these deductions were costs of $4,010,000 charged against the
      reserve and the reversal of $1,967,000 of the restructuring charges for
      the year ended December 31, 2001. See Note 7 of the Notes to Consolidated
      Financial Statements.

--------------------------------------------------------------------------------

                      Report of Independent Accountants 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 21, 2003 appearing in this Annual Report on Form 10-K also included
an audit of the financial statement schedule as of and for the year ended
December 31, 2002 listed in Item 15 (a)(2) of this Form 10-K. In our opinion,
the financial statement schedule as of and for the year ended December 31, 2002
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. The
financial statement schedules of Visual Networks, Inc. for the years ended
December 31, 2000 and 2001, were audited by other independent accountants who
have ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statement schedules in their report dated March 27,
2002.

PricewaterhouseCoopers LLP


McLean, Virginia
March 21, 2003


                                      S-1
<PAGE>

                                  EXHIBIT INDEX

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)

   10.5*+             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.

   10.7*+             General Agreement for the Procurement of Equipment,
                      Services and Supplies, dated November 26, 1997, 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).

  10.10*              Employment Agreement, dated December 15, 1994, by and
                      between the Company and Scott E. Stouffer, as amended.

  10.11!!             Lease Agreement, dated April 7, 2000, by and between
                      Visual Networks, Inc. and TA/ Western, LLC.

  10.20$$             1999 Employee Stock Purchase Plan, as amended April 11,
                      2001 and January 9, 2002.

  10.24****           Loan and Security Agreement, dated February 28, 2001, by
                      and between Silicon Valley Bank and the Company.

10.24.1!!!            First Modification to the Loan and Security Agreement,
                      dated May 24, 2001 (related to Exhibit 10.24).

10.24.2!!!!           Second Modification to the Loan and Security Agreement,
                      dated December 20, 2001 (related to Exhibit 10.24).

  10.25****           Accounts Receivable Financing Agreement dated February
                      28, 2001, by and between Silicon Valley Bank and the
                      Company.

10.25.1!!!            First Modification to the Accounts Receivable Financing
                      Agreement, dated May 24, 2001 (related to Exhibit 10.25).

<PAGE>

10.25.2!!!!           Second Modification to the Accounts Receivable Financing
                      Agreement, dated December 20, 2001 (related to Exhibit
                      10.25).

10.25.3!!!!           Third Modification to the Accounts Receivable Financing
                      Agreement, dated February 28, 2002 (related to Exhibit
                      10.25).

  10.26****           Intellectual Property Security Agreement dated February
                      28, 2001, by and between Silicon Valley Bank and the
                      Company.

  10.28!!!            Employment Agreement, dated May 3, 2001, by and between
                      the Company and Elton King.

  10.29!!!            Nonstatutory Stock Option Grant Agreement, dated May 3,
                      2001, by and between the Company and Elton King.

  10.30!!!            Terms of Employment, dated July 27, 2000, by and between
                      the Company and Steve Hindman.

  10.31!!!!           Terms of Employment, dated October 23, 2001, by and
                      between the Company and John Saunders.

  10.32!!!!           Consulting Agreement, dated February 16, 2002, by and
                      between the Company and Peter J. Minihane.

  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).

  10.34@@             Security Agreement, dated as of March 25, 2002, between
                      Visual Networks, Inc. and the Secured Parties named
                      therein (filed as Exhibit 99.5 to the Form 8-K).

  10.35@@             IP Security Agreement, dated as of March 25, 2002,
                      between Visual Networks, Inc., its subsidiaries and the
                      Secured Parties named therein (filed as Exhibit 99.6 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.

  10.37               OEM Software License Agreement between Cisco Systems,
                      Inc. and the Company, dated December 3, 2002.

10.37.1               Amendment No. 1 to the OEM Software License Agreement
                      between Cisco and the Company, effective December 3, 2002
                      (relating to Exhibit 10.37).

   21.1****           List of subsidiaries of the Company.

   23.1               Consent of PricewaterhouseCoopers LLP.

       *              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, 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
                      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 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.

       +              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
                      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
                      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.