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

                                   FORM 10-K/A
                                (Amendment No. 2)

                        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, 2001

                                       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 2002 Annual  Meeting are  incorporated  herein by reference
into Part III of this Report.

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the Registrant as of March 28, 2002 was approximately $90,576,000. The number of
outstanding  shares of the  Registrant's  common  stock as of March 28, 2002 was
31,967,492 shares.

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<PAGE>


                            VISUAL NETWORKS, INC. FORM 10-K

   TABLE OF CONTENTS

                                                                           Page
             PART I
   Item 1.        Business                                                   1
                  Overview                                                   1
                  Industry Background                                        2
                  Problems Managing Networks Based on IP and the             4
                  Internet
                  The Visual Networks Solution                               6
                  The Visual Networks Strategy                               7
                  Products                                                   8
                  The Visual Networks Selling Strategy                      11
                  Product Development                                       12
                  Customers                                                 12
                  Strategic Partnership                                     12
                  Competition                                               13
                  Manufacturing                                             14
                  Patents and Other Intellectual Property Rights            14
                  Employees                                                 15
   Item 2.        Properties                                                15
   Item 3.        Legal Proceedings                                         15
   Item 4.        Submission of Matters to a Vote of Security Holders       16

             PART II
   Item 5.        Market for Our Common Stock and Related Stockholder       16
                  Matters
   Item 6.        Selected Consolidated Financial Data                      17
   Item 7.        Management's Discussion and Analysis of Financial
                  Condition
                  and Results of Operations                                 18
   Item 7A.       Quantitative and Qualitative Disclosure about Market      33
                  Risk
   Item 8.        Financial Statements and Supplementary Data               33
   Item 9.        Changes in and Disagreements with Accountants on
                  Accounting
                  and Financial Disclosure                                  33

            PART III
   Item 10.       Our Directors and Executive Officers                      34
   Item 11.       Executive Compensation                                    34
   Item 12.       Security Ownership of Certain Beneficial Owners and
                  Management                                                34
   Item13.        Certain Relationships and Related Transactions            34

             PART IV
   Item 14.       Exhibits, Financial Statement Schedules and Reports       34
                  on Form 8-K
   Signatures                                                               37


<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 2002.  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.


<PAGE>





                                     PART I

     Item 1. Business.

     Overview


     We  design,  manufacture,   sell  and  support  systems  that  analyze  the
performance of data communications networks and services, as well as out-sourced
Web services.  These networks may be owned directly by an enterprise or owned by
another  company,  a service  provider,  that provides  network  services to the
end-user enterprise  customer.  Because of the critical enterprise  applications
being run on these  networks,  like  software  that operates key functions of an
enterprise's  business,  the  enterprise,  whether  as a  direct  owner or as an
end-user of a network,  needs a way to ensure that the network is operating at a
particular level of performance,  or service level. Our systems combine software
installed at key locations  throughout the network and software agents that link
with software that is located in the computer  servers that run the network,  to
allow an enterprise to monitor the data communications  traffic running over the
network.  This  constant  monitoring  allows a network  operator  to assess  the
network's performance,  engage in real-time troubleshooting for network problems
as they arise and, by knowing the traffic volumes and character running over the
network at any given time,  plan to address  network  capacity  issues.  We also
manufacture and sell hardware devices on which the software  resides  throughout
the  network.  Some of these  devices  also perform  other  network  interfacing
functions.

     Our products,  Visual UpTime,  Visual IP InSight,  Visual eWatcher and Cell
Tracer, provide network performance  measurement and analysis that allow network
and Web-hosting  operators to achieve the network performance levels required by
their end-users.  This helps end-users properly run their critical  applications
and lower operating costs by quickly  identifying network problems as they arise
and reducing network  downtime.  The availability of performance  monitoring and
troubleshooting  software  agents allows  customers to verify the service levels
promised by the service  providers.  The promised  service level is important to
the customer  because the customer is running  applications  on the network that
are critical to the  operations of the customer's  business and directly  affect
the customer's  ability to generate  revenue,  attract and retain  customers and
maintain a  competitive  position.  We believe  that our systems are deployed in
individual  configurations  managing up to 4,500 transport circuits and Internet
access for up to 1.5 million desktop computers.

     We believe that we are a worldwide leader in providing  service  management
systems,  having shipped  systems for deployment on an aggregate of over 140,000
transport circuits and over 40 million desktops. We have developed relationships
with major service  providers  including  AT&T,  BellSouth,  Earthlink,  Equant,
Prodigy , SBC,  Sprint,  Verizon and WorldCom.  These service  providers  either
resell our systems to their  subscribers  or  integrate  our systems  into their
network  infrastructure to enable them to offer enhanced network  services.  For
the year ended December 31, 2001, we had  consolidated  revenue of approximately
$74.2 million, of which 77% was attributable to service providers.

     In spite of the recent  downturn  in the  telecommunications  industry,  we
believe  that the market in which we sell our systems  will  continue to grow in
the near future.  Of the many types of network  technologies  being  deployed by
enterprises and service providers,  two dominate:  frame relay, and asynchronous
transfer  mode, or ATM.  Vertical  Systems Group  estimates  that  approximately
791,000 frame relay circuits and 51,000 ATM circuits will be installed worldwide
from 2002  through  2004.  This is in contrast to the use of  dedicated  private
lines,  the most  popular  alternative  to frame relay and ATM,  which  Vertical
Systems Group  estimates will decrease by 36,000 circuits in the U.S. during the
same period.  It also  estimates  that revenue  generated  from the use of frame
relay and ATM networks will increase from $12.3 billion in 2000 to $26.8 billion
in 2004.  Our products not only  support  both of these  technologies,  but also
serve as the basis for  high-margin  products and services,  which support these
technologies,  that are offered by our service  provider  customers.  We believe
that this anticipated growth in the market for both frame relay and ATM networks
bodes well for us.

     As networks continue to expand, we believe that customers will increasingly
demand that service providers provide a particular level of performance on their
networks. Our products can assist the network providers in improving the quality
and performance of these networks so that they are suitable for mission critical
applications.  To take advantage of the projected  growth in these  markets,  we
plan to continue to expand our relationships with our service provider customers
which together account for the majority of IP network traffic worldwide.

     Since 1997,  we have grown our business  from  revenues of $23.6 million to
$74.2  million  in  2001.  During  this  same  period,  we  have  made  numerous
enhancements  to our product  portfolio to address new  opportunities,  changing
customer needs and evolving technologies. We have made three acquisitions, which
were intended to extend our product portfolio into new areas.

     We acquired Net2Net  Corporation in 1998 in order to accelerate the time to
market for ATM service  performance  management by buying that technology rather
than building it. Products resulting from that acquisition form the basis of our
ATM  analysis  in  Visual  UpTime  and  the  Cell  Tracer  product  line.   This
functionality  is part of our Visual  UpTime  product  and  consistent  with our
target  market and business  development  strategies.  We  experienced  enhanced
revenue  by  reducing  time to market  for the  Visual  UpTime  and Cell  Tracer
products.   The  integration  of  the  Net2Net  operations  initially  increased
operating  expenses,  which  have  since been  substantially  eliminated  by the
relocation of the engineering  support to our Rockville,  Maryland  facility and
the closure of the separate Net2Net facility.

     We acquired Inverse Network Technology,  Inc. in 1999 in order to enter the
service   performance-management   space  for  the  public  Internet.   In  this
acquisition, we acquired Visual IP InSight for dial remote-access management and
Visual  Internet  BenchMark for Internet  Service  Providers  (ISP)  performance
reporting.  In addition,  with this acquisition,  we expanded our customer base,
and target market,  to include ISP's. The Inverse  acquisition  greatly modified
our asset and  operating  expense  structures  because it  included  significant
hardware,  personnel  and  infrastructure  used to support  the Visual  Internet
BenchMark  business  and the hosted  Visual IP InSight  business.  End users buy
Visual IP InSight either by directly licensing it for internal  installation and
operation or contracting with us or an Application Service Provider (ASP) for us
or the ASP to install and operate the software on our servers for the benefit of
the end user,  which we refer to as our  "hosted"  Visual IP  InSight  business.
Since the acquisition,  the Visual Internet  BenchMark  product was sold in 2001
and the hosted Visual IP InSight business has been phased out or transitioned to
our  resellers.  We did this for three  primary  reasons:  (i) to refocus on our
product business rather than on the service businesses;  (ii) to avoid the large
infrastructure  expenditures required to maintain these businesses; and (iii) to
support our overall  consolidation  of our locations and operations.  The Visual
Internet  BenchMark  business  would either be the sole location  outside of our
Maryland   headquarters  or  require  expensive   relocation  of  equipment  and
personnel.  Visual IP InSight  has been  enhanced  to address  broadband  remote
access,    direct   internet   access,   and   site-to-site    public   Internet
Protocol-Virtual Private Network (IP-VPN) service performance management.

     We  acquired  Avesta  Technologies,  Inc.  in 2000 in order to  expand  the
network  management  portfolio to include  products that could identify the root
causes for network problems, a technology known as fault management. We acquired
Visual Trinity, for fault management,  root cause analysis,  and business impact
analysis,  and  Visual  eWatcher,  for  web  site  hosting   service-performance
management.  This  acquisition  expanded our target market by adding  enterprise
customers,  and significantly  increased our operating expenses due to increased
headcount,  administrative  overhead,  and  expanded  locations.  We expected to
generate revenue from the Avesta products of approximately  $30 million in 2000.
Instead,  these products  generated  revenues of only $7.3 million,  despite our
significantly  increased 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 business plan,  which is  predominantly  focused on service
providers. As a result of an analysis performed 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.  The  product  also  needed  more  significant
development work than we originally  anticipated.  These factors, in conjunction
with  revenue  declines of  approximately  $9.9  million in our other  products,
resulted  in an  impairment  charge  of  $328.8  million  and  $7.0  million  in
restructuring  charges in the fourth quarter of 2000. We discontinued the Visual
Trinity product,  which was the primary product acquired with the acquisition of
Avesta,  in 2001,  and as of December  31, 2001,  we did not have any  remaining
assets related to Avesta.

     Our revenue  decreased from $91.7 million in 1999 to $89.0 million in 2000,
while our operating  expenses  increased  following the  acquisition  of Avesta,
which,  along  with  restructuring  and  impairment  charges,   amortization  of
intangible  assets and the  write-off of  in-process  research and  development,
resulted in a net loss in 2000 of $415.5 million.  In response to these results,
we made significant reductions in operating expenses in 2000 and 2001. Excluding
the  effects  of the  impairment  and  restructuring  charges,  amortization  of
intangible  assets and the  write-off of  in-process  research and  development,
operating  expenses  decreased  from $80.4  million in 2000 to $61.7  million in
2001.  However,  revenue declined from $89.0 million in 2000 to $74.2 million in
2001  resulting  in a net loss of $27.0  million and an  accumulated  deficit of
$515,000.  These  revenue  decreases  reflected  declines in sales of our Visual
UpTime  product due in part to the  telecommunications  downturn and our lack of
focus in  generating  demand for our  products,  as well as lower than  expected
revenue related to the Visual Trinity and Visual eWatcher products (the products
added  through  the  Avesta  acquisition).  Additionally,  in  the  most  recent
quarters, conditions in the overall economy and the telecommunications sector in
particular have caused a flattening of demand for our products. In an attempt to
refocus our efforts,  we have taken steps to increase focus on our core products
including the sale of certain products and the discontinuation of others and the
reduction of our  workforce by  approximately  230 people since October 2000. In
connection  with  these  efforts,  we  recorded a  restructuring  charge of $7.0
million  in  2000.  During  2001,  we  reversed  approximately  $723,000  of the
restructuring  charges recorded in 2000 and recorded new  restructuring  charges
totaling $3.1 million.  Due to the  significance of the developments in 2000, we
performed an evaluation of the  recoverability  of our assets,  including  those
assets  related  to the  Avesta  acquisition.  Based  upon this  evaluation,  we
concluded that the remaining values of the goodwill and other intangible  assets
related to the Avesta  acquisition  were impaired.  As a result,  we recorded an
impairment  charge of $328.8  million  in 2000  related  to  goodwill  and other
acquired  intangibles  from the Avesta  acquisition.  In 2001,  we  recorded  an
impairment charge of $3.3 million related to the remaining  intangibles from the
Avesta  acquisition  and $656,000  related to the value of our  investment in an
entity that was established as a distributor for the Visual Trinity product.

     As  a  result  of  our  cost  reductions  made  to  date,  we  returned  to
profitability  during the three months ended March 31, 2002.  We believe that we
have reduced  operating  expenses to a sufficient  level such that when combined
with the anticipated  revenue,  we will remain  profitable.  We believe that the
steps  that we have  taken  to  increase  our  focus on our  core  products  are
sufficient and that our key value  propositions  remain  relevant and intact and
that  demand  for  our   products   will  once  again  be   increasing   as  the
telecommunications industry recovers.

     Our  company  was  incorporated  in  Maryland in August 1993 under the name
Avail Networks,  Inc. and  reincorporated in Delaware in December 1994 as Visual
Networks, Inc. Our principal executive offices are located at 2092 Gaither Road,
Rockville, Maryland 20850. Our telephone number is (301) 296-2300.


<PAGE>



     Industry Background

     Wide Area Network Services Market

     The Wide Area Network,  or WAN,  services market has grown rapidly with the
increase in computing and the associated data traffic volumes carried over WANs.
WAN services are used to interconnect the computing facilities of geographically
dispersed sites within an enterprise, to connect the computing facilities of one
enterprise  to  another  and to allow  remote  users to utilize  the  enterprise
computing facilities.  Businesses and other organizations are becoming ever more
dependent on data  communications  and the myriad of computers  and devices that
facilitate data communications.

     Today's networks are deployed using a supply chain of various wholesale and
retail network  service  providers for network  access,  backbone  transport and
hosting,   including  traditional  telephone  companies  and  broadband  network
providers.  These service  providers may either be competing or cooperating with
one  another  to provide  the  complete  connectivity  service  solution  to the
ultimate customer, the enterprise. In this environment,  a high premium has been
placed on network  performance  and  availability.  This results in the need for
tools  that  offer  a  consistent,  reliable  way to  measure  service  quality,
end-to-end, across many ownership boundaries, vendors and types of access media.

     WAN Service Management Market Dynamics

     Frame relay and ATM are the generally  accepted  technologies for corporate
backbone WANs.  However,  in the past five years, the use of IP technologies and
networks to support mission-critical  applications is increasing.  Telecommuters
and field  sales and  support  people are  dependent  on remote  access  Virtual
Private Networks, or VPNs, to perform their jobs. In addition,  mission-critical
corporate   applications  and  e-commerce  are  being  provided  over  corporate
intranets and Internet technologies.

     The rapid  proliferation of new technologies to deliver IP services adds to
the  complexity  of these  services.  For example,  the Vertical  Systems  Group
predicts  that  the  worldwide  number  of  business  and  residential   Digital
Subscriber Line, or DSL,  subscribers will grow from 8.4 million in 2001 to 26.7
million  in 2004.  The  combination  of  mission-criticality  and the  increased
complexity of managing  multiple  technologies  causes  difficulties for network
providers  and their  subscribers  alike.  The scarcity of skilled labor strains
enterprise information technology, or IT, staffs, causing the need for solutions
that can help to manage the complexity.

     As a  result,  enterprises  are  delegating  more  responsibility  to their
service providers.  Both the service providers and their enterprise IT customers
need solutions to manage their out-sourced relationships. Service providers need
service  management  solutions for the myriad of new technologies  that they are
deploying.  IDC predicts that between 2001 and 2003 products  explicitly focused
on managing IP services  will  experience  an increase in  popularity as service
providers seek to get the most out of their IP equipment investments.

     The  simultaneous  increase in complexity and  mission-criticality  and the
dependence  on  service   providers  lead  to  opportunities  for  creating  new
value-added services.  Service providers, in a constant quest to protect margins
and retain customers, are aggressively competing on quality and other high-value
services such as bundled hosting  services.  Service  providers must now provide
comprehensive service offerings across all of the pertinent  technologies.  This
convergence  requires service management solutions that can manage across a wide
spectrum of services.

     At the same time,  economic conditions and fierce service price competition
have forced service  providers to become  intensely  focused on improving  their
margins through  operational cost savings.  As a result,  service  providers are
deploying systems and technologies that speed the resolution of customer trouble
tickets or prevent them altogether.

     WAN Network Deployment

     A typical WAN deployment supporting mission-critical  applications includes
various  types of  customer  premises  equipment,  or CPE,  owned by the network
service provider's  customer,  or subscriber,  deployed at the subscriber's site
and  interconnected  by the WAN  service.  It may also  include  Web servers and
applications that may be hosted at the customer site or in a service  provider's
Web data  center.  The point at which the  subscriber  CPE  connects  to the WAN
service is known as the service  demarcation (the "demarc"),  or the point where
the service provider hands off the service to the subscriber, and ultimately, is
the  point  where  the  services  are  defined.   The  subscriber  is  generally
responsible for network  performance on its side of the demarc while the service
provider is responsible for network performance on its side of the demarc.

     The equipment used for frame relay,  ATM, IP and Internet services includes
both the access  equipment  located at the subscriber  premises and the switches
located at the service provider's central office. Vertical Systems projects that
the market for this equipment will grow from approximately $10.3 billion in 2000
to  approximately  $14.2 billion in 2004. The equipment used for hosted services
includes  firewalls,  routers,  content  caches,  servers and  databases.  IDC's
current forecast shows annual market revenue increasing from $4.8 billion at the
end of 2001 to nearly $20.8 billion by the end of 2006.

     WAN Network Architectures

     WAN services are provided through two network architectures,  time division
multiplexing,  or TDM,  and  statistical  multiplexing.  TDM  services,  such as
leased-line  and  integrated   services  digital  network,   or  ISDN,  rely  on
architectures which provide dedicated circuits between computing  facilities and
provide  fixed  bandwidth  regardless  of traffic flow.  Unless  information  is
continuously transmitted, the dedicated bandwidth is often idle resulting in the
inefficient  use of expensive  bandwidth.  The use of dedicated  bandwidth does,
however, provide guaranteed throughput and fixed delay, ensuring high quality of
service  for all  network  traffic.  TDM  services  are  suitable  for the large
installed base of mainframe  computing  environments  running  mission-critical,
host-centric applications where the variability in traffic volume is low and the
traffic volume is relatively predictable.  Statistical multiplexing technologies
and their derivative  services are based on the concept of logical  connectivity
and shared  bandwidth  which is dynamically  allocated in real time according to
prevailing traffic patterns. As a result of this shared bandwidth, WANs based on
these statistical  multiplexing  services over private networks can be up to 50%
less  expensive  than  WANs  based on TDM  services  for  distributed  computing
applications. Because bandwidth in the WAN is shared among multiple subscribers,
however, these services are generally  characterized by "best effort" throughput
and  variable  delay.  WANs based on  statistical  multiplexing  over the public
Internet using technologies such as VPNs can be quite inexpensive,  but have the
least reliable  performance.  The challenge in each of these cases is to achieve
the cost savings and yet still  provide  network  performance  and  availability
suitable for mission-critical applications.

     Logical connectivity is provided via frame relay, ATM and public IP VPN, or
private IP VPN  running  over frame  relay and ATM.  Frame relay and ATM are the
predominant technologies used today for mission-critical  applications.  Private
IP VPN is rapidly  emerging to broaden the scope of coverage.  Vertical  Systems
estimates that worldwide  revenue for frame relay service,  the most widely used
service,  will grow at a compound  annual  growth rate of 19% from 2000  through
2004. The worldwide  number of installed  frame relay ports is projected to grow
from  approximately  1.5 million in 2000 to more than 2.6  million in 2004.  The
worldwide number of installed ATM ports is projected by Vertical Systems to grow
from approximately 26,400 in 2000 to approximately 87,700 in 2004.

     There are many  established  and emerging  technologies  for  accessing the
service  provider's  logical  network.   The  predominant  access   technologies
facilitate traditional dial-up access over traditional telephone networks.  More
recently,  broadband access  technologies  such as DSL, cable and fixed wireless
are gaining momentum for branch and small office/home  office  connectivity.  At
high capacity data centers,  the use of optical access to achieve extremely high
transmission speeds is gaining momentum.

     The growth of logical connectivity services has resulted in increased focus
by  subscribers  on WAN service  levels  defined by  parameters  such as service
availability,   throughput   and   delay.   Because   of   the   importance   of
mission-critical applications such as enterprise resource planning,  transaction
processing,  work  group  collaboration,   remote  telecommuting,   sales  force
automation  and  electronic  order entry,  subscribers  are demanding that their
service providers offer, guarantee and achieve higher service levels.

     The  proliferation  of logical  connectivity  services has also resulted in
increased   administrative   costs  for  subscribers  as  network  managers  are
responsible for multiple networks  consisting of older  leased-line  services as
well as  multiple  access and  logical  connectivity  options.  The high cost of
administering  multiple networks coupled with the attractive  pricing of logical
connectivity  services is driving the need for  subscribers to outsource some of
the service management to their service provider,  without forfeiting control or
visibility  of  performance.  Subscriber  demand for  multiple,  guaranteed  and
verified WAN service levels presents  challenges to service  providers that must
be able to offer these service levels while maintaining profitability.

     When the  complexity of the network supply chain is added to the complexity
of multiple  technologies and derived service  offerings,  the result is the new
world of wide area  networking,  and it is often  characterized by confusion and
chaos. The goal of new world service  management  solutions is to bring order to
the chaos while meeting the requirements of both the service providers and their
enterprise customers.

     Where Service Provider and Enterprise Requirements Meet

     Service  providers  want  solutions that will enable the delivery of higher
performing  services to the  enterprise  customers.  Service  providers  want to
differentiate  themselves by the quality and breadth of their service offerings.
They  want to  rapidly  provision  network  services  and  troubleshoot  network
problems  without the costly effort of dispatching  technicians.  In this highly
competitive  industry,  service  providers  must be able to get  services up and
running  quickly.  By being  alerted to  degradations  of services  before their
customers are affected,  service providers ensure customer satisfaction with the
services,  thereby reducing customer  turnover.  Subscribers demand high network
performance  and want the  appropriate  tools to hold their  respective  service
providers accountable.

     Both parties want returns on their network  investments.  Service providers
want to  charge  more  for  enhanced  services  and  save on  operations  costs.
Enterprises want to optimize the performance of their network and minimize their
IT expenses. By optimizing network resources,  service providers and enterprises
will be able to reduce the cost of downtime.

     The  requirements  of the service  provider and the enterprise  meet at the
point of service  delivery,  the service demarc.  Service Level  Agreements,  or
SLAs,  are defined in terms of performance  attributes  such as average and peak
throughput,  availability and delay. Service management solutions must provide a
representation of the service  performance against their defining SLAs. In cases
where a service is not performing as defined,  service level management  becomes
the  tool  set  for  rapidly  isolating  problem  conditions  and  enabling  the
restoration  of service  performance  to required  levels.  It is  important  to
understand  that  service-affecting  conditions  can arise in either the service
provider's  or  the  subscriber's   infrastructure.   Effective   service  level
management  software must be able to distinguish between the two and monitor the
performance of the network at the point of service delivery.

     Problems Managing Networks Based on IP and the Internet

     In leased-line environments,  the performance,  quality and maintainability
of the service are  independent  of the volume and type of traffic  running over
the  service.   The  diagnostic  and   measurement   capabilities   required  to
sufficiently  maintain these services are fairly simple and are focused  largely
on physical transmission  characteristics such as bit error rates or line coding
violations.   These   capabilities  are  widely  available  within  the  service
providers'  facilities and work in conjunction with simplistic  devices deployed
by the subscribers. By contrast, the performance, quality and maintainability of
logical  connectivity  services  are highly  dependent on the volume and type of
traffic  running  over  the  service.   This  extensive  interplay  between  the
subscriber's   data   traffic  and  the  service   provider   service   requires
sophisticated  diagnostic  and  measurement  capabilities  that not only analyze
physical transmission characteristics but the traffic itself. Historically, this
level of measurement and analysis  capability has generally  required the use of
expensive  portable  protocol  analyzers,  which are typically not deployed on a
continuous  basis at the demarc.  This inability to measure service  performance
and quality has created the  following  difficulties  for both  subscribers  and
service providers:

     Suspect   service  levels  inhibit   subscriber   acceptance  of  services.
Subscribers want to be continuously assured that logical  connectivity  services
are performing  sufficiently to support  mission-critical  applications.  As the
demand for higher  service  levels and multiple  service  levels has  increased,
subscribers and their service providers need a mechanism to measure,  verify and
improve service levels.

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

     - Inefficient  service  provisioning.  The service  provider has difficulty
determining  whether the WAN service is properly deployed until the subscriber's
network has been connected to the service and the subscriber's  applications are
operational.  This often  results in multiple  dispatches  of  personnel  to the
subscriber site and extensive  interaction with the subscriber for its equipment
and  applications to be configured  properly.  The service provider is typically
restricted  from billing the subscriber  for the service until the  subscriber's
applications are working properly over the service.

     -  Extensive   troubleshooting  and  high  maintenance.   When  subscribers
experience  degraded  network  performance,  they  generally  assume  there is a
problem with the service supplied by their service  provider.  It can often take
days,  weeks or even  months to  diagnose  the  causes of  degraded  performance
requiring  highly  skilled  personnel  with  sophisticated  instrumentation  and
diagnostic tools. Although these degraded performance  conditions are frequently
caused by faulty or  misconfigured  subscriber  equipment or  applications,  the
service  provider  is forced  to  expend  significant  time and  effort  without
reimbursement to help diagnose the problem.

     - Inaccurate network engineering and planning.  The shared bandwidth nature
of WAN services coupled with subscriber  demand for many class of service levels
increases the importance of accurate  network planning and design to ensure that
the network  architecture  is optimized for performance and cost. If the network
is engineered with excess capacity, it may improve the performance of subscriber
applications,  but it will tend to negate the inherent bandwidth efficiencies of
logical connectivity technologies.  By contrast, if the network is designed with
inadequate capacity, performance will suffer. Successful network engineering and
planning is dependent on accurate historical usage information which, because of
the  inability of  traditional  equipment to measure  traffic at the demarc,  is
difficult to ascertain for these services.

     We believe that an essential element of logical connectivity services being
demanded by subscribers is the ability to manage and verify service  levels.  We
believe that service providers will experience difficulty meeting the increasing
demand for logical  connectivity  services  without  having systems for managing
service levels. The  labor-intensity of provisioning and maintaining the service
inhibits the service  providers'  ability to scale the WAN  services  profitably
without service level  management  capability.  As the service  providers' focus
shifts  to  profitability,  the  growth in frame  relay,  ATM,  IP and  Internet
services will depend,  in part, on the ability of service providers to implement
systems that can manage service  levels,  lower  operational  costs and increase
scalability.

     The Visual Networks Solution

     We offer a market-leading  family of WAN service level  management  systems
that  combine  WAN  access   functionality   with   planning,   monitoring   and
troubleshooting capabilities that enable customers to implement required service
levels while simultaneously decreasing the costs and complexity of achieving the
levels.  Our  systems  measure  and analyze  network  performance  at the demarc
through innovative software applications that address the historical problems of
managing service levels.  Our service  management systems apply to services that
account for 90% of wide area  connectivity.  Our systems  also  provide  service
management for hosted  application  services.  We believe that our systems offer
customers the following benefits:

     Increased   confidence  in  service  levels.  Our  systems  enable  service
providers and their  subscribers  to accurately  measure,  report on and improve
service  levels.  These  abilities  serve to clarify  the  relationship  between
subscriber and service provider, resulting in increased subscriber confidence in
running mission-critical computing applications on these services.

     Increased   scalability   and  lower  costs  of  service   providers'   and
subscribers'  operational  models.  Our systems  can reduce the  labor-intensive
nature of deploying  logical  connectivity  services,  thereby  decreasing  both
service  providers'  and  subscribers'  costs and  increasing  their  ability to
generate revenue, by enabling:

     - Rapid and  cost-effective  service  provisioning.  Our systems  allow the
service  provider to verify that its  service is  properly  provisioned  without
waiting  for  the  subscriber  network  or  applications  to  be  connected  and
configured.  This tends to reduce  customer  support costs during  initiation of
service and allows the service provider to begin billing for the service earlier
than was previously possible.

     - Reduced need for reactive  troubleshooting.  Our systems  reduce the need
for service providers to perform troubleshooting after the fact, by continuously
monitoring  network  performance  at the demarc  and  proactively  alerting  the
service provider and subscriber to anomalous performance characteristics.  These
early warnings allow the network  operator to take corrective  action before the
performance of any  application on the network is impaired.  Because many of the
anomalous characteristics are subscriber-related,  the subscriber is more likely
to take corrective action without involving the service provider. The net result
is that fewer  maintenance  personnel  are  required  to solve  fewer  problems,
thereby increasing service provider efficiency and subscriber satisfaction.

     - More rapid and less costly  troubleshooting.  Because our systems provide
information  that  enables  isolation of problems  between the service  provider
network and subscriber equipment and applications, the service provider can more
quickly diagnose the cause of faulty or degraded performance. Many problems that
would  otherwise  last for days and  require  on-site  visits of highly  skilled
personnel can be diagnosed  remotely within minutes by our systems.  Because our
systems are designed to allow both the service  provider and the  subscriber  to
access the same reports and analyses simultaneously, more problem conditions can
be resolved collaboratively.

     - Reduced impact of problem conditions.  Our systems automatically identify
applications  and users that are  effected by problem  conditions.  This enables
maintenance  personnel to attack those  problems that have the largest  business
impact first, thus reducing the overall business impact of faults.

     - More accurate network engineering and planning.  Our systems continuously
provide an accurate and detailed view of historical  WAN service usage  patterns
along with automated guidance  regarding the need to change circuit  capacities.
This allows  subscribers  and service  providers to  implement a network  design
optimized for cost and performance.

     The Visual Networks Strategy

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

     Capitalizing  on  our  strong   incumbency   position  with  major  service
providers.  We have an outstanding  customer list of top-tier service providers,
including AT&T, BellSouth,  Earthlink, Equant, Prodigy, SBC, Sprint, Verizon and
WorldCom.  These service  providers have  standardized  many of their  offerings
around our  service  management  solutions.  The Visual  Networks  brand is well
recognized and highly respected in this community. As the financial condition of
many of the emerging carriers has weakened, we have seen a flight to quality and
stability  in  the   communications   services  market  that  will  benefit  our
traditional  customer  base.  Because of the  requirement  to  provide  complete
services  solutions  regardless of the  underlying  technology,  we believe that
these well-capitalized  service providers are in the best position for long-term
success and will be the driving force behind  converged  service  offerings.  We
intend to  capitalize  on these  relationships  to expand  market  coverage  and
introduce new features and functions.

     Deploying our systems as part of service provider networks. We believe that
service  providers  will  become the  predominant  means for the  deployment  of
service  management  systems.  Although  these systems can be deployed by either
service  providers or  subscribers,  we believe that maximum  benefit is usually
achieved  when the systems  are  deployed  by the  service  providers  supplying
subscribers with access to performance data. In this deployment  model,  service
providers can employ collaborative fault and performance  management  techniques
that lead to greater network quality. More important, we believe the benefits of
lower provisioning and maintenance costs are generally most effectively captured
if the system is deployed by the service provider.

     Embedding  agent  technology  in the equipment of other  manufacturers.  In
order to fully  instrument  the network and  achieve the highest  possible  port
penetrations of our management  capabilities on both new and previously deployed
services,  we are partnering with leading  manufacturers  of access equipment to
embed our agent technology into their systems. To this end, we have entered into
strategic  partnerships with Cisco Systems and Kentrox.  Cisco Systems is in the
process of embedding our agent  technology  into the operating  system  software
(IOS) of its router  products and making other system  software  improvements to
support  tight  interoperability  with the Visual  UpTime  back  office  system.
Likewise,  Kentrox  has  embedded  our  agent  technology  into  its ATM  access
concentrator product line. Visual Networks will receive license revenue from the
end customers that use Visual UpTime to manage these agents.

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

     Deploying our systems to support  e-commerce and  application  hosting.  We
believe that our systems for e-commerce  and  Web-hosting  applications  will be
deployed  predominantly  for  performance  management  of Intranet and Web-based
services.  Used in  conjunction  with other  types of  management  systems,  our
systems can  significantly  improve network  availability for key business users
and applications.

     Expanding our business  globally.  Many of our largest service provider and
subscriber  customers  are  multinational  corporations.  We intend to develop a
presence outside of the U.S. with particular focus on the service providers that
have the largest share of the worldwide markets for remote access,  frame relay,
ATM, IP and Internet services.

     Products

     We have either created or acquired six products:  Visual UpTime,  Visual IP
InSight,  Visual  eWatcher,  Cell Tracer,  Visual Internet  BenchMark and Visual
Trinity.  As a result of an analysis  performed by a company-wide  task force in
early 2001,  we determined  that the Visual  Trinity  product,  as acquired from
Avesta,  did not fit within our  business  plan of  focusing on sales to service
providers and would require  significant  additional  development to address the
needs of our service provider customers. Accordingly, we discontinued the Visual
Trinity product in 2001. As part of our quarterly  business  reviews in 2000 and
2001, we determined  that we had shifted our focus from the sale of our products
to the  provision  of  services  in the form of the  Visual  Internet  BenchMark
service and the Visual IP InSight hosted  offerings.  In order to refocus on our
core business of selling our  products,  we sold the Visual  Internet  BenchMark
business in 2001 and have  transitioned the hosted Visual IP InSight business to
our reseller  customers.  Because we have incorporated much of Visual eWatcher's
functionality  into Visual IP InSight,  we do not anticipate  significant future
revenue from Visual eWatcher.  Because we anticipate greatly reduced demand from
Network  Associates,  Inc., the primary customer for Cell Tracer, we also do not
expect  significant  future revenue from the Cell Tracer product either.  Visual
UpTime and Visual IP InSight are our two most mature  products  and the products
on which we focus  the  majority  of our  development  and  which  generate  the
majority of our revenue,  and we  anticipate  this  situation  continuing in the
future.

     Visual UpTime

     Visual  UpTime  is  the  de  facto  standard  for  service   management  of
telecommunications  networks that use the frame relay and Asynchronous  Transfer
Mode (ATM)  technologies.  This complete service  management  system helps users
optimize network  performance and reduce overall costs of network ownership.  In
1999,  IDC  credited  Visual  UpTime with a 55.6% share of the Frame Relay aware
Data Service  Unit/Channel  Service Unit (DSU/CSU)  market over Paradyne  (17%),
Kentrox (6%) and Adtran (5%). A DSU/CSU,  or Data Service  Unit/Channel  Service
Unit,  is a digital  modem that  connects  customers'  networks to their service
providers'  networks.  Recent estimates based on the public financial statements
of these  companies  cause us to believe that our market share has  increased in
the years since. Visual UpTime and its Frame Relay aware DSUs are the technology
behind most managed Frame Relay service  offerings  including AT&T's Frame Relay
Plus and IP-enabled Frame Relay,  Worldcom's  Circuit View and Frame Relay Gold,
Sprint's  Web Based  Network  Manager  and Frame Relay  Performance  Manager and
Verizon's Frame Watch. Visual UpTime won Network World Magazine's "Best of Test"
award  for the best WAN  management  product  of 2000.  The  award  was based on
customer reviews  conducted  throughout the year.  Also,  Visual UpTime 7.0, our
latest  release,  was  selected  as  a  Finalist  for  the  ComNet  New  Product
Achievement Award in January 2002.

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

     ASE.  The  Analysis  Service  Element  (ASE) is a  combination  of embedded
proprietary  software and hardware  that performs  detailed  analysis of network
performance at the service  demarcation  point. Most versions of the ASE provide
the  functionality  of Wide  Area  Network  (WAN)  access  equipment,  such as a
DSU/CSU.   Visual  UpTime  ASEs  use  sophisticated   proprietary   software  in
conjunction with networking-specific  microprocessors and integrated circuits to
perform  detailed  analysis  of every  bit,  frame  and  packet  traversing  the
demarcation  point.  The ASEs generally  store the analysis  results  locally in
memory  and wait for the PAM to request  the  results.  When the ASE  detects an
anomalous  condition,  it sends an unsolicited  alert to the PAM so that network
operators can take prompt action.  Depending on customer requirements,  our core
ASE technology can be deployed in a number of  configurations  based on physical
circuit  speed,   number  of  virtual   circuits   supported,   type  of  access
functionality and the local area network environment.

     PAM.  The  Performance  Archive  Manager  (PAM) is the system  database and
manages requests  between the PACs,  described below, and either the database or
ASEs. Unlike traditional  management data collection  architectures which depend
on  continuous  gathering  of  management  data by  management  systems from the
agents, a bandwidth  consuming  process,  Visual UpTime  distributes most of the
processing  burden to the ASEs,  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.

     PAC.  The  Platform  Applicable  Client  (PAC) is  Visual  UpTime's  client
software for packaging  and  presenting  information  stored in the PAM and ASE.
Multiple PACs may access a single PAM or ASE. The PAC includes three  integrated
toolsets:

     - Performance monitoring. This toolset is an early warning system, alerting
network operators to impending service degradation that allows corrective action
to be taken  before the  subscriber's  application  performance  degrades.  This
toolset displays network  performance related events and alarms. The performance
monitoring toolset is tightly linked to the troubleshooting toolset, allowing an
operator to evaluate  quickly and precisely the conditions that caused the event
or alarm.

     -  Troubleshooting.  This  toolset  enables an operator to rapidly  perform
detailed  diagnostics  to identify  the cause of service  level  problems.  This
toolset displays real-time and historical network  performance  statistics.  The
troubleshooting  toolset can capture the data communication traffic and provides
analysis  capability used by network  operators to isolate problems arising from
the  interplay  between a  subscriber's  equipment or  applications  and the WAN
service.

     - Planning and  reporting.  This toolset is a report  generation  tool that
creates a wide  variety of reports from the network  performance  data stored in
the PAM.  This  toolset is used  primarily  for  capacity  planning  and network
engineering, management of service level agreements between service provider and
subscriber and executive  reporting from the network  operations staff to senior
management personnel. The planning and reporting toolset is accessible through a
PAC or a Web-browser.

     The Visual UpTime  components are sold as a complete  system which requires
at  least  one  PAC/PAM  per  deployment  along  with  one ASE  deployed  at the
demarcation point of each circuit on which service level management is required.
We believe the system is  currently  deployed in  configurations  managing up to
4,500  transport  circuits.  System  pricing  varies by size of  deployment  and
relative mix between circuit speeds. We are continuously enhancing Visual UpTime
with new features to address  service  performance  for private IP based Virtual
Private Networks (VPNs), higher speeds, and application performance management.

     Visual IP InSight

     Visual IP  InSight is a WAN  service  management  system for remote  access
network technologies utilizing Internet Protocol (IP) and the Internet. It helps
both service  providers and enterprises  provide the highest quality IP services
to their end  users.  Visual  IP  InSight  helps  operations  managers,  network
managers and customer care (help desk) personnel proactively manage the complete
service  experience  whether  it is  for a  service  subscriber  or an  internal
enterprise  user.  Visual IP InSight has also become a cornerstone  for credible
service level agreement (SLA) offerings of Internet service providers. Visual IP
InSight won Internet Telephony  magazine's Product of the Year Award for 2001 in
the  category  of  Performance  Monitoring,  Network  Management  and Quality of
Service, from a field of over 150 entrants.

     The product includes three software applications:

     -  IP  InSight  Service  Operations.  This  function  provides  information
regarding  problems in real-time and monitors  performance  of IP  applications,
such as e-mail and domain name system (DNS) using metrics such as  availability,
throughput, latency and packet loss.

     - IP InSight  Customer Care. This feature allows customer care personnel to
call up a customer's history of network connections and PC configurations.

     - IP InSight Service Level Manager.  This function makes it easy to define,
monitor and  administer  SLAs. Its unique tools also map users to their specific
services, service providers and SLAs.

     System components for Visual IP InSight include agents, data collectors and
a data  repository.  These  components  communicate  with each  other over an IP
network providing a steady stream of real-time information.  Visual IP InSight's
architecture is distributed and  fault-tolerant,  and it scales to carrier class
networks.

     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 utilize  software that is embedded in hardware  devices called IP Service
Elements,  or ISEs,  that are  connected  to the network at suitable  monitoring
points.  ISEs  perform  active  tests on command as  configured  by the  network
manager.  Client  agents are software  products that are installed on the PCs of
service  subscribers.  The software runs  transparently  until  end-user help is
required.  Context-sensitive  online help  suggests  solutions  to more than 150
dial-access  problems  and  keeps a  descriptive  error log that  customer  care
personnel can use to solve  problems that end users cannot resolve on their own.
In 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,
Digital  Subscriber Line, ISDN or wireless  service.  All varieties of dedicated
agents and client  agents can be used together in the same network with the same
IP InSight systems.

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

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

     IP InSight is generally available,  and in use by many customers.  There is
on-going  development  of IP InSight to address  new  feature  requirements  for
dedicated internet access and public IP VPNs.

     Cell Tracer

     Our network  analyzer  product,  Cell Tracer,  is a combination of embedded
proprietary  software and hardware and Microsoft Windows  presentation  software
that performs  detailed  analysis of network  performance  on ATM circuits.  The
Windows software,  running on a Pentium-based computer,  connects either locally
or remotely to the hardware to perform detailed  analysis of every bit, cell and
packet  traversing  the ATM  circuit.  Cell  Tracer is designed to meet both the
network monitoring and troubleshooting  needs of field support personnel and the
centralized  operational needs for supporting remote ATM circuits.  Depending on
customer requirements, Cell Tracer can be utilized in a number of configurations
based on physical circuit speed,  access line type and monitoring  applications.
Cell Tracer is a mature product, sold as an OEM to a single customer.

     The Visual Networks Selling Strategy

     We implement a push -- pull sales strategy where market demand is generated
by marketing  programs,  cultivated  by the direct sales force and  fulfilled by
channel partners.  The channel partners are traditional service providers,  such
as AT&T,  Equant,  Sprint  and  WorldCom  and the  traditional  local  telephone
companies;   emerging   service   providers,   including  ISPs  and  competitive
telecommunications  providers;  value  added  resellers,  or  VARs;  and  system
integrators.

     In our sales model, marketing activities generate subscriber demand through
a variety of focused  marketing  programs.  The result of this demand generation
activity is a set of  qualified  leads that are  cultivated  by our direct field
sales force or our inside sales force  depending on the size and  complexity  of
the opportunity. Direct sales drives the opportunity towards closure by applying
our product to the prospective customer's network environment and describing the
associated value  proposition,  typically a lengthy process.  Upon completion of
these steps,  direct sales will determine the prospect's  preferred  fulfillment
channel and steer the opportunity through that channel. Direct sales will remain
engaged until the demand is satisfied.

     We have several  fulfillment  channels.  Customer  requirements  may be met
through the subscription to a service provider's managed service that embeds our
technology,  or by the  acquisition  of our products from a service  provider or
VAR. Demand could also be fulfilled by a system  integrator or service  provider
partner who  provides  out-sourced,  or hosted,  management  services  using our
technology.

     The development of a service  provider service based on our technology is a
complex sale to multiple  departments within a service provider's  organization.
We work with the service  provider to develop a service  definition and business
plan for the integration of Visual products into the service provider's existing
service.

     We provide  pre-sale  technical  support to each of our channels.  The time
required to develop a relationship  with a channel  partner can take from two to
12 months for VARs and system integrators,  and from 12 to 24 months for service
providers.  The sales cycle for  subscriber  deployment  through an  established
channel is typically four to six months long.

     We have sales and technical  support  teams  assigned to each major service
provider account.  In addition,  our senior management team devotes  significant
time furthering the business  relationships  with these service providers and we
invest  significant  marketing  resources to stimulate  sales with these service
providers.

     As of December 31, 2001, we employed 87 people in sales and marketing.  Our
expenditures for sales and marketing activities were approximately $24.4 million
in 1999, $41.9 million in 2000 and $33.5 million in 2001.

     Product Development

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

     In  recent  years,   we  have  made   significant   investments  in  system
architecture  and  feature   enhancement.   We  have  updated  our  products  to
incorporate new client  technologies  such as Java, and new server  technologies
such as symmetrical  multiprocessor arrays. And we have made numerous extensions
to our product lines to support new network access  technologies and speeds such
as OC3, DSL and IPSEC VPNs.  Through the  acquisitions  of Net2Net  Corporation,
Inverse  Network  Technology and Avesta  Technologies,  Inc., we accelerated the
pace of product  development in order to provide  customers with a single vendor
solution  for  end-to-end  service  encompassing  frame  relay,  ATM, IP and the
Internet. We will continue to expand Visual UpTime for managing frame relay, ATM
or IP connectivity  over broadband access  services.  We will continue to expand
Visual IP InSight for broadband  access  technologies as well. We are focused on
the further enhancement and refinement of our systems, including the development
of  the   architectural   scalability  that  will  be  required  for  wide-scale
implementation through the service provider deployment model.  Additionally,  we
expect to invest in system  refinements  that will increase the economic benefit
of deployments outside North America.

     As of December 31, 2001,  there were 59 persons working in our research and
development area. Our research and development  expenditures were  approximately
$16.7 million in 1999, $27.3 million in 2000 and $19.3 million in 2001.

     Customers

     Since  mid-1996,  we have developed  business  relationships,  currently at
different levels of maturity, with a number of service providers. Customers that
accounted  for more  than $1.0  million  in  consolidated  revenue  during  2001
include:  Agilent, AT&T, BellSouth,  Earthlink,  End to End, Equant,  Interlink,
Network  Associates,  Prodigy,  SBC,  Sprint,  Verizon,  and WorldCom.  Sales of
products or services to AT&T,  Sprint and  WorldCom  accounted  for 29%, 14% and
10%,  respectively,  of  consolidated  revenue for 2001.  Although none of these
contracts  require  minimum  purchases,  we believe  that  because our  products
support  high-margin  product and  service  offerings  of our  service  provider
customers,  we  will  receive  orders  from  these  service  provider  customers
sufficient to allow us to achieve projected revenues and maintain profitability.

     AT&T  Relationship.  In  December  1997,  we entered  into a  non-exclusive
procurement  agreement  with AT&T.  The  agreement  had an initial term of three
years and has automatically  renewed with the right by either party to terminate
the  agreement  upon 30 days'  notice.  Prices and  discounts  for all equipment
purchased  by AT&T are  fixed,  except in  certain  limited  circumstances.  The
equipment  carries a five-year  warranty.  If we offer more favorable prices and
terms to any other customer for the same quantity of products during the term of
the agreement,  we are obligated to amend the agreement to provide AT&T with the
same or comparable  overall terms.  The agreement does not obligate AT&T to make
any minimum purchases from us. We also provide certain support services to AT&T.

     WorldCom  Relationship.  In August 1997,  we entered  into a  non-exclusive
three-year reseller agreement with WorldCom, which, pursuant to the terms of the
agreement,  has automatically  renewed for successive  one-year term. Prices and
discounts  for all  equipment  purchased  by WorldCom are fixed.  The  equipment
carries a five-year  warranty.  If we offer more  favorable  prices to any other
customer for the same quantity of products  purchased  over a similar  period of
time, we are  obligated to adjust the pricing to WorldCom to the more  favorable
price.  The reseller  agreement  does not obligate  WorldCom to make any minimum
purchases from us.

     Sprint  Relationship.  In May 2000,  we  entered  into a new  non-exclusive
three-year  reseller  agreement with Sprint, in effect extending the basic terms
of our  earlier  agreement  with  Sprint  made in August  1996.  Prices  for all
equipment  purchased by Sprint are fixed for the term.  The equipment  carries a
five-year  warranty.  If we offer more  favorable  prices and terms to any other
customer  during  the term of the  agreement,  such  terms  and  prices  will be
applicable to Sprint's orders.  The reseller  agreement does not obligate Sprint
to make any minimum  purchases from us. We also provide certain support services
to Sprint.

     Equant  Relationship.  In  March  2002,  we  entered  into a  non-exclusive
one-year reseller agreement with Equant.  Prices and discounts for all equipment
purchased  by Equant are fixed,  except in certain  limited  circumstances.  The
equipment carries a five-year warranty. If we offer more favorable prices to any
other customer  purchasing in the same or lesser volumes and upon the same terms
during the term of the  agreement,  such prices will be  applicable  to Equant's
orders.  The agreement  does not obligate  Equant to make any minimum  purchases
from us. We also provide certain support services to Equant.


<PAGE>



     Strategic Partnerships

     An  increasingly  important  means for us to  achieve  our goals is through
strategic  partnerships.  Our  agent  software  technologies  need to  reside on
hardware  devices  that  are  attached  to the  network  in  locations  that are
interesting to monitor and analyze, such as the demarcation point. While we have
developed and sold various  devices for this purpose and will continue to do so,
fully meeting our customer's  requirements for broad and cost effective  support
of myriad access technologies  requires that we also expand our agent deployment
through devices  produced by other vendors.  These  partnerships  will generally
involve  transfer  of our  proprietary  technology  under  license,  significant
development  activities  on the part of one or both  partners,  as well as joint
sales, marketing and support activities.

     Cisco  Systems   Relationship.   In  December  2000,  we  entered  into  an
interoperability  and marketing  agreement with Cisco  Systems,  Inc. to provide
Cisco customers with integrated access solutions.

     Kentrox  Relationship.  In October 2000, we entered into a development  and
licensing agreement with ADC Telecommunications, Inc. to deliver a comprehensive
ATM managed service solution to Kentrox customers.

     Competition

     The markets for  telecommunications  equipment  and software are  intensely
competitive.  Our products  integrate key functionality  traditionally  found in
five distinct market segments:  the WAN access equipment  market;  the bandwidth
management  equipment market;  the network test and analysis market;  the market
for  operational  support  systems,  or OSSs;  and the market  for  client-based
network  management and Internet  infrastructure  testbeds.  We believe that our
products are the only  systems that  integrate  functional  attributes  from all
these market segments to cost-effectively  provide WAN service level management.
While  we may or may not lead any of the five  individual  market  segments,  we
believe  that we lead at their  intersection.  Because  of the  size and  growth
opportunity  associated with the WAN service level management  market, we expect
to encounter  increased  competition from current and potential  participants in
each of these segments.  Increased  competition may result in price  reductions,
reduced  profitability  and loss of  market  share,  any of which  would  have a
material  adverse  effect on our  business,  financial  condition and results of
operations.

     WAN access equipment. The WAN access equipment manufacturers typically have
not focused much attention on network analysis  capabilities.  However,  our ASE
products  redefined the WAN access  equipment  market by adding superior network
analysis  capabilities.  This caused  traditional  vendors in this space to lose
market  share and counter  our  products  with  improvements  to their own.  The
leading  vendors in this segment  include  Kentrox,  Paradyne and Adtran.  These
companies may partner with companies offering network test and analysis products
in order to compete in the WAN service level management  market. We are aware of
such an  arrangement  between  Paradyne  and NetScout  Systems.  Internetworking
providers  may  integrate  WAN  access  functionality  with  routers,  which may
adversely affect Visual UpTime's cost justification.  We are working to mitigate
this risk and turn it to our advantage  through a partnership with Cisco Systems
whereby our product's agent capabilities have been integrated into such products
and the cost justification is actually improved.

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

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

     Telecommunications  operational support systems.  OSSs encompass all of the
systems related to service deployment including  provisioning  systems,  billing
systems,   trouble-ticketing  systems,  and  fault  and  performance  management
systems.  Historically,  OSSs have been developed by the in-house  staffs of the
service  providers and have sometimes been a source of competitive  advantage to
service providers. A number of vendors also produce suites of OSS components for
the service provider market.  Major vendors in the OSS components market include
Telcordia,  Agilent,  Amdocs and Narus.  Visual  UpTime  provides a  significant
portion  of the  functionality  that  might  otherwise  be found in a fault  and
performance  management  system  for  statistically  multiplexed  WAN  services.
However, in some cases, a service provider may consider in-house  development as
an alternative to deployment of Visual UpTime.

     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  a
particularly  effective way to gather this type of data.  This technology can be
deployed  either as a  service  offering  using  simulated  desktops  or sold as
standalone software.

     Major suppliers of standalone software include Lucent Technologies, NetIQ,
Concord,  Jyra Research and NetScout  Systems.  Major suppliers of service-based
solutions include Keynote Software and Northgate Information Solutions.

     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.  We believe that these
relationships  and the services  these  providers have built around our products
constitute  high  barriers  to  entry  that  even  larger  and  more  well-known
competitors with access to greater resources will find difficult to overcome. As
competition in the WAN service level management market  intensifies,  we believe
that the  industry may be  characterized  by price  competition  similar to that
present in the broader networking market. In response to competitive  trends, we
expect  to  continue  to  reduce  the  cost of our  systems  in order to avoid a
deterioration of gross margins.

     Manufacturing

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

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

     Patents and Other Intellectual Property Rights

     We presently have four patents  issued in the United States:  (i) a "Method
and   Apparatus   for   Non-Intrusive   Measurement   of  Round  Trip  Delay  in
Communications  Networks",  which  expires  in  May  2015;  (ii) a  "Method  and
Apparatus for Measurement of Peak Throughput in Packetized Data Networks", which
expires in November 2016;  (iii) a "Method and Apparatus for Performing  Service
Level Analysis of Communications Network Performance Metrics",  which expires in
November  2018;  and (iv) a "Method  and  Apparatus  for  Performing  In-Service
Quality of Service Testing",  which expires in December 2017.  Additionally,  we
have been notified by the United  States  Patent and  Trademark  Office that our
application for a patent on a "Method and  Application  for Dynamic  Modeling of
Complex  Networks and Prediction of Impacts of Faults  Therein" has been allowed
and  should be  issued  shortly.  We also  have a number of patent  applications
pending in the United  States and our key foreign  markets.  No assurance can be
given that competitors will not successfully  challenge the validity or scope of
our patents or that such patents will provide a competitive advantage to us.

     We  expect  that  software  and  communications   product  developers  will
increasingly  be subject to claims of  infringement  of patents as the number of
products and competitors in our industry segment grows and the  functionality of
products  in the  industry  segment  overlaps.  We are not aware that any of our
products infringe the property rights of third parties.

     In  October  1997,  a  lawsuit  was  filed  against  Avesta  and one of its
employees alleging  infringement of two patents,  unfair competition,  breach of
contract  and  interference  with  contractual  relations  resulting  in  unjust
enrichment. See Item 3 for additional disclosure.

     As  part  of  our  confidentiality  procedures,  we  generally  enter  into
non-disclosure  agreements with our employees,  business  partners and customers
with respect to our software,  documentation and other proprietary  information.
Despite  these  precautions,  it may be  possible  for a third  party to copy or
otherwise obtain and use our products or technology without authorization, or to
develop  similar  technology  independently.  Policing  unauthorized  use of our
products is difficult.  Effective protection of intellectual  property rights is
unavailable or limited in certain foreign  countries.  There can be no assurance
that  protection  of our  proprietary  rights  will  be  adequate  or  that  our
competitors will not  independently  develop similar  technology,  duplicate our
products or design around any of our patents or other intellectual rights.

     Employees

     As of December 31, 2001,  we had 210 full-time  employees,  including 59 in
product  development,  78 in sales, 9 in marketing,  12 in  manufacturing,  9 in
customer service and 43 in finance, centralized services and administration.

    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  10,000 square
feet of this space under a sublease that expires in October 2002.

     Item 3. Legal Proceedings.

     In  July,  August  and  September  2000,  several  purported  class  action
complaints were filed against us and certain of the our former executives, these
complaints have since been combined into a single consolidated amended complaint
(the  "complaint").  The  complaint  alleges 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. The complaint does not
specify the amount of damages sought. We believe that the plaintiffs' claims are
without merit and intend to defend against these allegations vigorously. We have
filed a motion to dismiss the complaint,  which is now pending before the court.
We anticipate that a substantial  portion of the legal costs that we might incur
related to this matter will be paid by our  directors'  and officers'  insurance
policy.  We cannot  presently  determine the ultimate  outcome of this action. A
negative outcome could have a material adverse effect on our financial  position
or results of operations.  Failure to prevail in the litigation could result in,
among other things, the payment of substantial monetary or punitive damages.

     In  October  1997,  a  lawsuit  was  filed  against  Avesta  and one of its
employees alleging  infringement of two patents,  unfair competition,  breach of
contract  and  interference  with  contractual  relations  resulting  in  unjust
enrichment.  Avesta answered the complaint,  denying all  allegations,  and also
asserted   counterclaims   against  the  plaintiff  for  patent  misuse,  unfair
competition and interference with business and patent invalidity. Pursuant to an
agreement between the parties,  on June 13, 2001, the court dismissed the action
without  prejudice,  preserving  to the  parties  the right to refile the action
pending future developments of the Visual Trinity product.



<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
                                                       ----       ---

 2000
 ----
 First Quarter................................      $  83.50   $  50.31
 Second Quarter...............................         60.50      24.31
 Third Quarter................................         26.75       5.88
 Fourth Quarter...............................          6.94       2.03

 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 (from  April 1, 2002 through
  June 10, 2002 ..............................          2.97       1.13

     On June 10,  2002,  the last  reported  sale price of our common  stock was
$1.50 per share. As of March 28, 2002, we had  approximately 538 stockholders of
record.

     We have never paid or declared any cash  dividends on our common stock.  It
is our  present  policy to retain  earnings,  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.



<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 as of and for the years ended December
31, 1999, 2000 and 2001, are derived from our consolidated  financial statements
which have been audited by Arthur Andersen LLP,  independent public accountants.
The selected  consolidated  financial data for the years ended December 31, 1997
and 1998 is derived from audited consolidated  financial statements not included
in this Form 10-K.


<TABLE>
<CAPTION>

                                                                            Years Ended December 31,
                                                               1997       1998        1999       2000        2001
                                                               ----       ----        ----       ----        ----
                                                                     (in thousands, except per share data)
               Consolidated Statement of Operations Data:
               <S>                                           <C>        <C>         <C>       <C>         <C>
               Revenue...................................    $ 29,300   $ 56,088    $ 91,719  $   89,041  $   74,248
               Cost of revenue...........................      11,179     20,829      30,888      32,515      29,431
                                                             --------   --------    --------  ----------  ----------
                   Gross profit..........................      18,121     35,259      60,831      56,526      44,817
                                                             --------   --------    --------  ----------  ----------
               Operating expenses:
                   Research and development..............       9,148     13,771      16,677      27,277      19,320
                   Write-off of in process research and
                     development(1)......................          --         --          --      39,000          --
                   Sales and marketing...................      14,555     19,759      24,447      41,907      33,484
                   General and administrative............       3,798      5,528       7,928      11,247       8,895
                   Merger-related costs(2)...............          --      4,318       6,776          --          --
                   Restructuring and impairment                    --        751          --     335,810       9,328
                     charges(3) (4)......................
                   Amortization of acquired intangibles(1)         --         --          --      53,426         805
                                                             --------   --------    --------  ----------  ----------
                        Total operating expenses.........      27,501     44,127      55,828     508,667      71,832
                                                             --------   --------    --------  ----------  ----------
               Income (loss) from operations.............      (9,380)    (8,868)      5,003    (452,141)    (27,015)
               Interest income, net......................         165      2,413       2,270       2,598         325
                                                             --------   --------    --------  ----------  ----------
               Income (loss) before income taxes.........      (9,215)    (6,455)      7,273    (449,543)    (26,690)
               Benefit (provision) for income taxes......          --         --      (3,722)     34,058        (272)
                                                             --------   --------    --------  ----------  ----------
               Net income (loss).........................      (9,215)    (6,455)      3,551    (415,485)    (26,962)
               Dividends and accretion on preferred stock      (1,457)      (171)         --          --          --
                                                             --------   --------    --------  ----------  ----------
               Net income (loss) attributable to common
                 Stockholders............................    $(10,672)  $ (6,626)   $  3,551  $ (415,485) $  (26,962)
                                                             =========  ========    ========  =========== ===========
               Basic earnings (loss) per share...........    $   (1.44) $  (0.30)   $   0.14  $   (14.46) $    (0.85)
                                                             =========  ========    ========  =========== ===========
               Diluted earnings (loss) per share.........    $   (1.44) $  (0.30)   $   0.13  $   (14.46) $    (0.85)
                                                             =========  ========    ========  =========== ===========
               Basic weighted-average shares(5)..........       7,431     21,946      24,583      28,733      31,585
                                                             =========  ========    ========  =========== ===========
               Diluted weighted-average shares(5)........       7,431     21,946      26,547      28,733      31,585
                                                             =========  ========    ========  =========== ===========

               Consolidated Balance Sheet Data:
               Cash and cash equivalents.................    $  9,601   $ 51,655    $ 54,629  $   17,369  $    5,921
               Working capital...........................        (782)    43,146      50,353      (2,482)     (6,576)
               Total assets..............................      21,036     71,780      83,154      74,057      28,902
               Long-term debt, net of current portion....         138      1,011         782         243          --
               Redeemable convertible preferred stock....      14,855         --          --          --          --
               Stockholders' equity (deficit)............     (13,251)    48,322      58,252      26,085        (515)

</TABLE>

     (1) In 2000, we acquired  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 5 of Notes
to Consolidated Financial Statements.

     (2) During 1998,  we incurred  certain  merger-related  costs in connection
with our acquisition of Net2Net  Corporation.  During 1999, we incurred  certain
merger-related  costs in  connection  with our  acquisition  of Inverse  Network
Technology. See Note 1 of Notes to Consolidated Financial Statements.

     (3)  In  1998,  we  recorded  a   restructuring   charge   related  to  the
consolidation of certain  functions and the  discontinuation  of certain 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  $723,000  of the
restructuring  charge recorded in the fourth quarter of 2000 resulting primarily
from 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  $385,000  that
consisted of severance  and other  termination  benefits  related to a workforce
reduction. See Notes 1 and 6 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 $7.1 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,  5  and  6 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.

     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 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 AT&T,  Equant,
Sprint 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,  Cell Tracer, 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.  During 2001, we also made a decision to add certain
functionality  of the  web  performance  management  technology  of  the  Visual
eWatcher product to the Visual IP InSight product.  Development  efforts related
to  incorporating  this  functionality  into a future  release  of the Visual IP
InSight product are expected to begin in 2002.  Subsequent to December 31, 2001,
we amended the agreement with Network Associates, Inc. (NAI) for the Cell Tracer
product so that NAI received the source code for the Visual Cell Tracer  product
to allow it to support and modify the product.  As a result of decreased  demand
from NAI, we  anticipate  that NAI will place final  orders with us during 2002,
and we do not anticipate any  significant  revenue from the sale of this product
to other customers. We continue to focus on sales of Visual UpTime and Visual IP
InSight.  In response to these  trends,  we have  revised our  business  plan to
reflect lower projected  revenues and reduced our operating  expenses to a level
that we believe is  sufficient to allow us to remain  profitable  even with this
reduced demand.

     We acquired  Avesta  Technologies  on May 24,  2000.  We believed  that the
acquisition of Avesta would provide critical pieces to our articulated  strategy
to  become  one  of the  largest  service  management  vendors  with  one of the
industry's broadest portfolios of products and functionality.  We also felt that
the  merger  would  bring us closer  to being  able to  provide a  single-vendor
solution  to  the  internet   infrastructure   management  needs  of  customers,
especially the 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 revenues of only $7.3 million,  despite
the significantly  increased 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  business  plan  that is  predominantly
focused  on  service  providers.  As a  result  of an  analysis  performed  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.  The product
also needed more significant  development  work than we originally  anticipated.
These  factors,  in  conjunction  with revenue  declines of  approximately  $9.9
million  in our  other  products,  resulted  in an  impairment  charge of $328.8
million and $7.0 million in restructuring charges in the fourth quarter of 2000.
We  discontinued  the Visual  Trinity  product,  which was the  primary  product
acquired with the  acquisition of Avesta,  in 2001, and as of December 31, 2001,
we did not have any remaining assets related to Avesta.

     With 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.  Our revenue  decrease from $91.7 million in
1999 to  $89.0  million  in 2000 in  conjunction  with our  increased  operating
expenses, due primarily to the increased headcount, administrative overhead, and
expanded  locations related to the Avesta  acquisition,  resulted in significant
losses from operations.  Our historical trend of increasing revenue each quarter
began to reverse in the second quarter of 2000. These revenue decreases were due
to lower than expected revenue related to the Visual Trinity and Visual eWatcher
products as well as decreases in the revenue provided by our other products. Our
total  revenue  decreased by $2.7 million from 1999 to 2000,  which was due to a
decrease in our combined  revenue from our Visual  UpTime  product,  Cell Tracer
product, Visual IP InSight product and Visual Internet Benchmark service of $9.9
million, offset by $7.3 million in revenue from the Avesta products. Despite the
revenue  decrease,  our  operating  expenses,   excluding  the  effects  of  the
impairment and restructuring charges,  amortization of intangible assets and the
write-off of  in-process  research and  development,  increased by more than $30
million  due, in large part,  to the  addition of the Avesta  operations.  In an
attempt to refocus our  efforts,  we  announced a plan in the fourth  quarter of
2000 to realign our product  portfolio,  streamline  our  operations  and devote
resources  to the  markets  and  products  that  offer  us the  greatest  growth
opportunities.  In connection with this plan, we recorded a restructuring charge
of $7.0 million in the fourth quarter of 2000. In the second quarter of 2001, we
discontinued  development  and sales efforts on the Visual  Trinity  product and
sold the Visual  Internet  Benchmark  service in an effort to further  focus our
product  portfolio and streamline  our operations and resources,  and recorded a
restructuring  charge of $3.9  million in  connection  with these  actions.  The
Visual Trinity product and the Visual Internet Benchmark service  represented 8%
and 5%,  respectively,  of our consolidated  revenue for the year ended December
31, 2000,  and revenue from these  products had  decreased  during 2001 prior to
their discontinuation or sale. The products were discontinued or sold because it
was determined  that they did not fit into our revised  business plan and we did
not see a  market  for  these  products  with  our  strategic  service  provider
customers without significant  modifications.  In the fourth quarter of 2001, we
completed an additional  workforce  reduction to continue reducing our operating
expenses and recorded a restructuring charge of $385,000.

     Due to the  significance  of the  developments  in 2000,  we  performed  an
evaluation of the  recoverability  of our long-lived  assets in accordance  with
Statement of Financial  Accounting  Standards  No. 121,  including  those assets
related to the Avesta acquisition. Based upon this evaluation, we concluded that
the remaining values of the goodwill and other intangible  assets related to the
Avesta  acquisition  were impaired.  This  conclusion was based upon our revised
estimate of the  undiscounted  cash flows  expected to be provided by 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, we 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  and  tradenames.  In the  second  quarter of 2001,  we  discontinued
development  and sales  efforts on the  Visual  Trinity  product.  In the fourth
quarter of 2001, we also made a decision to combine certain functionality of the
web performance  management  technology of the Visual eWatcher  product with the
Visual  IP  InSight  product.  As a result of these  actions,  we  performed  an
evaluation of the  recoverability  of our  long-lived  assets,  including  those
related to the Avesta  acquisition and concluded that the remaining  intangibles
were impaired as the Visual Trinity product and the Visual eWatcher product were
the only products acquired with Avesta. We recorded  impairment  charges of $3.1
million in the second quarter of 2001 and $197,000 in the fourth quarter of 2001
related to the remaining intangibles from the Avesta acquisition.  Additionally,
as a result of the  discontinuation of the Visual Trinity product,  we evaluated
the carrying  value of our  investment  in an entity that was  established  as a
distributor for the Visual Trinity product.  The entity's original business plan
anticipated  distributing  multiple  products in addition to the Visual  Trinity
product.  However,  as of the  date  that we  discontinued  the  Visual  Trinity
product,  the  entity had not  executed  this  business  plan.  As a result,  we
determined that our investment was impaired.  The carrying value of $656,000 was
written-off  during the second  quarter  of 2001.  During the fourth  quarter of
2001,  we completed a  settlement  agreement  with the entity and other  partner
whereby we  forfeited  our  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  us. As of December  31,  2001,  we did not have any  remaining
assets related to the acquisition of Avesta.

     Excluding  the  effects  of  the  impairment  and  restructuring   charges,
amortization of intangible  assets and the write-off of in-process  research and
development,  operating  expenses  decreased from $80.4 million in 2000 to $61.7
million in 2001.  However,  revenue declined from $89.0 million in 2000 to $74.2
million in 2001 resulting in a net loss of $27.0 million.  This revenue decrease
included  a  reduction  of $5.0  million  in  revenue  from Cell  Tracer,  which
consisted  almost  entirely  in reduced  demand  from our  primary  Cell  Tracer
customer,  Network  Associates,  Inc. The $4.2  million  decrease in 2001 Visual
UpTime revenue compared to 2000 reflected four significant  events:  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; our loss of focus resulting from the Avesta acquisition which took
away  from our  marketing  and sales  efforts,  especially  to our core  service
provider  customers;  tighter  inventory  control by AT&T,  our largest  service
provider  customer,  who  switched  from  purchasing  product  from us when they
received an order to  purchasing  product from us when they were ready to deploy
those products; and the events of September 11, 2001, which caused a significant
pause   and   subsequent    slowdown   in   acquisition    and   deployment   of
telecommunications  products  and  services,  including  those  based on  Visual
UpTime.  The drop in Visual IP InSight revenue from 2000 to 2001 of $1.4 million
resulted  from  both  the  bankruptcies  of  many of the  new  Internet  Service
Providers (ISPs) that were our primary target market for Visual IP InSight,  and
the  events  of  September  11,  2001,  which  caused a  significant  pause  and
subsequent slowdown in acquisition and deployment of telecommunications products
and  services,  including  those based on Visual IP  InSight.  We have seen some
increase in sales of our products and  services,  however,  we have not achieved
the sales levels  attained prior to September 11, 2001. The $4.3 million drop in
revenue from Visual  eWatcher,  Visual  Internet  Benchmark  and Visual  Trinity
reflects,  respectively,  the  reduced  sales  and  marketing  focus  on  Visual
eWatcher, the sale of Visual Internet Benchmark and the discontinuance of Visual
Trinity.

     In  response  to our  revenue  decreases,  we focused on  implementing  our
comprehensive plan to strengthen our business by:

     - Strengthening  our product  portfolio:  We released Visual UpTime 6.0 and
Visual  IP  Insight  5.5 and  eliminated  Visual  Trinity  and  Visual  Internet
Benchmark;

     - Strengthening  our senior  management  team:  During 2001, Elton King was
hired as  President  and Chief  Executive  Officer  and in  January  2002,  John
Saunders became our Chief Financial Officer;

     -  Concentrating  our sales,  marketing,  research and product  development
initiatives   around  service  providers  and  their  end  user  customers:   We
established a new service provider  relationship with Equant for IP-VPN services
worldwide  and  increased  our  total  revenue  from  service  providers,  as  a
percentage of total revenue, from 70% in 2000 to 77% in 2001; and

     - Reducing  our  operating  expenses:  We have  reduced  our  workforce  by
approximately  230 people since October 2000,  closed our  facilities in Ottawa,
Canada;  Sunnyvale,  California;  and  New  York,  New  York;  and  reduced  our
facilities  in  Rockville,  Maryland  resulting in a 23%  reduction in operating
expenses  (excluding  charges  related to  acquisitions  and  restructuring  and
impairment),  from $80.4  million in 2000 to $61.7  million in 2001.  We believe
that we have reduced  operating  expenses  sufficiently  to allow us to meet our
business plan if revenue goals are met and we maintain our operating expenses at
this reduced level.

     We have taken  concrete steps to address those factors that caused the 2000
to 2001  revenue  decline  that are within our control.  We have  refocused  our
sales,  marketing  and efforts on our core  Visual  UpTime and Visual IP InSight
products and our core service provider customers. 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 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 it does begin,  we have revised our business  plan to reflect lower
projected revenues and reduced our operating expenses to a level that we believe
is sufficient to allow us to remain profitable even with this reduced demand.

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,
                                                                           1999        2000        2001
                                                                           ----        ----        ----
                        Revenue:
                        <S>                                                <C>         <C>         <C>
                          Hardware revenue.........................         85.7%       73.6%       69.8%
                          Software revenue.........................          3.4        11.4         8.4
                          Support and services revenue.............         10.9        15.0        21.8
                                                                           -----       -----       -----
                           Total revenue...........................        100.0       100.0       100.0
                                                                           -----       -----       -----
                        Cost of revenue
                          Product cost of revenue......................     27.9        28.0        29.3
                          Support and services cost of revenue.........      5.8         8.5        10.3
                                                                           -----       -----       -----
                           Total cost of revenue.......................     33.7        36.5        39.6
                                                                           -----       -----       -----
                          Gross profit.................................     66.3        63.5        60.4
                                                                           -----       -----       -----
                         Operating expenses:
                             Research and development..............         18.2        30.6        26.0
                             Write-off of in process research and
                               development(1)......................          --         43.8         --
                             Sales and marketing...................         26.7        47.1        45.0
                             General and administrative............          8.6        12.6        12.0
                             Merger-related costs(2)...............          7.3         --           --
                             Restructuring and impairment charges(3)         --        377.2        12.6
                                 (4)...............................
                             Amortization of acquired intangibles(1)         --         60.0         1.1
                                                                           -----       -----       -----
                                  Total operating expenses.........         60.8       571.3        96.7
                                                                           -----       -----       -----

                        Income (loss) from operations...............         5.5      (507.8)      (36.3)
                        Interest income, net........................         2.4         2.9         0.4
                                                                           -----       -----       -----
                        Net income (loss) before income taxes.......         7.9      (504.9)      (35.9)
                        Benefit (provision) for income taxes........        (4.0)       38.3        (0.4)
                                                                           -----       -----       -----

                        Net income (loss)...........................         3.9%      (466.6)%    (36.3)%
                                                                           =====       =======     ======

</TABLE>

     The  following  table  presents  the  hardware,  software,  and support and
services revenue by product (in thousands):

<TABLE>
<CAPTION>

                                                                     Years Ended December 31,
                                                                    1999        2000       2001
                                                                    ----        ----       ----

                         <S>                                      <C>         <C>        <C>
                         Visual UpTime........................    $ 78,490    $ 59,754   $ 55,557
                         Cell Tracer..........................       6,056       7,946      2,980
                         Visual IP InSight....................       4,557       9,466      8,095
                                                                  --------    --------   --------

                               Continuing product  revenue....      89,103      77,166     66,632
                         Visual Internet Benchmark............       2,616       4,607      4,025
                         Visual Trinity and eWatcher..........         --        7,268      3,591
                                                                  --------    --------   --------

                               Discontinued product revenue...       2,616      11,875      7,616
                                                                  --------    --------   --------

                                   Total revenue..............    $ 91,719    $ 89,041   $ 74,248
                                                                  ========    ========   ========
</TABLE>


     The  following  table  presents  the  hardware,  software,  and support and
services revenue  attributable to customers that  individually  represented more
than 10% of our total revenue (in thousands):
<TABLE>
<CAPTION>

                                                                                Years Ended December 31,
                                                                             1999         2000        2001
                                                                             ----         ----        ----

                         <S>                                                <C>       <C>         <C>
                         AT&T.........................................      $23,368   $   17,500  $   21,689
                         Sprint.......................................       22,994       16,263      10,159
                         WorldCom.....................................        7,682       12,263       7,598
                         All other customers (each individually less         37,675       43,015      34,802
                            than 10%).................................
                                                                            -------   ----------  ----------

                          Total revenue...............................      $91,719   $   89,041  $   74,248
                                                                            =======   ==========  ==========

</TABLE>

     Revenues from two of our major  customers,  Sprint and  WorldCom,  declined
$6.1 million and $4.7  million,  respectively,  in 2001 from 2000.  This revenue
decrease was  partially  offset by increased  revenue of $4.2 million from AT&T,
our  largest  customer.   Our  three  major  service  providers   accounted  for
approximately  $6.6 million of the total $14.8 million  revenue decline in 2001.
In March 2002, we entered into a non-exclusive  one-year reseller agreement with
Equant.  We anticipate that we will continue to derive a significant  portion of
our revenue in 2002 from these four major service providers.

     Our primary sales and marketing strategy depends  predominantly on sales to
telecommunications service providers. 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.  In
addition, our service provider deployment strategy depends on the sale of Visual
UpTime and Visual IP  InSight to service  providers  for resale and as the basis
for value-added  services to their customers.  Pressure on capital  expenditures
and the decline in the telecommunications  markets may delay the roll-out 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 2002  will be
attributable  to sales of  Visual  UpTime  and  Visual  IP  InSight  to  service
providers.  The loss of any one of  AT&T,  WorldCom,  Sprint  or  Equant,  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. 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  potential that existing
service  providers  may merge or fail  because of the  current  downturn  in the
telecommunications  industry  may further  reduce their  number,  and would make
replacing a significant  service provider customer very difficult in the future.
Furthermore,  our small  number of  service  provider  customers  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  providers  will make the  relationship
between us and each service provider critically important to our business.  Both
AT&T and WorldCom posted losses in their most recent quarterly  reports.  We are
uncertain as to whether  these losses will affect the buying habits of these key
customers.  We currently have  contracts with all of our material  customers and
such contracts have automatic one-year renewal periods. 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.  There  can be no  assurance  that our  customers  will  not  elect to
terminate and renegotiate these contracts seeking more favorable terms.

     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 Cell  Tracer,  was $65.5  million in 2000  compared to
$51.9 million in 2001, a decrease of $13.6  million.  The decrease was primarily
due to a decrease in Cell Tracer  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 Cell Tracer  revenue was
attributable to reduced demand from NAI. NAI places orders based on its end-user
demand.  Based on our  understanding of NAI's forecasted  demand,  we anticipate
that NAI will place final orders with us during 2002,  and we do not  anticipate
any significant  revenue from the sale of this product to other  customers.  The
decrease in sales of Visual UpTime was primarily  attributable  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 Cell Tracer. Sales to all service providers increased from
approximately  70% of revenue for 2000 to 77% for 2001. We  anticipate  that the
percentage  of revenue  attributable  to our service  providers for 2002 will be
consistent with the levels achieved in 2000 and 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 primarily attributable to the discontinuation of the Visual
Trinity product, the primary product acquired from Avesta, and decreased revenue
from IP  InSight.  As a result  of the  discontinuation  of the  Visual  Trinity
product,  we  anticipate  that  future  revenue  for the  product  will  consist
primarily of technical  support revenue,  all of which is currently  included in
deferred  revenue.  We plan to provide  technical support for the Visual Trinity
product through September 2002.

     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 primarily attributable
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.  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, most 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, direct
compensation  costs,   communication  costs,   warranty  and  other  contractual
obligations,  royalties,  license fees and other  overhead  expenses  related to
manufacturing  operations  and support of our software  products  and  benchmark
services.  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. 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.

     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
primarily  attributable to fewer high margin software sales primarily due 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 56.8% for 2000 and 47.8% for 2001.  The  decrease in
gross  profit  margin was  primarily  due to higher  fixed  costs to support the
Visual Internet Benchmark service for existing contracts.

     Research and development expense. Research and development expense consists
of  compensation  for research and development  staff,  depreciation of test and
development equipment, certain software development costs and costs of prototype
materials.  Research and development expense was $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.  During  2002,  we intend to
incur research and development  expense at or below the level of such expense in
the fourth  quarter of 2001 as a result of our continued  focus on the reduction
of operating expenses.

     Write-off of purchased  research and development.  A write-off of purchased
research  and  development  costs  of  $39.0  million  was  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 must charge to expenses as
of the acquisition date amounts assigned to in-process  research and development
("IPR&D") meeting the foregoing.

     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 only 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  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 $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. During 2002, we intend to incur sales and marketing expenses at or
below the level of such expense in the fourth quarter of 2001 as a result of our
continued focus on the reduction 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 $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.  During  2002,  we
intend to incur  general  and  administrative  expenses at or below the level of
such expense in the fourth quarter of 2001 as a result of our continued focus on
the reduction of operating expenses.

     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 $723,000 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,  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 $385,000 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.

     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 6 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  $805,000 in 2001.  The  decrease  was the result of
decreased  goodwill  and  intangibles  resulting  from  the  impairment  charges
recorded in 2000 and 2001.

     Interest  income,  net.  Interest  income,  net,  was $2.6 million for 2000
compared to $325,000 for 2001. The decrease of $2.3 million was primarily due to
decreased cash balances.

     Income  taxes.  The  provision  for income  taxes for 2001 was $272,000 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.

     2000 Compared with 1999

     Revenue

     Total  revenue was $91.7 million in 1999 compared to $89.0 million in 2001,
a decrease of $2.7 million.

     Hardware revenue.  Hardware  revenue,  which includes revenue from sales of
Visual  UpTime and Visual Cell  Tracer,  was $78.6  million in 1999  compared to
$65.5 million in 2000, a decrease of $13.1  million.  The decrease was primarily
due to a decrease in Visual UpTime  revenue,  primarily from service  providers,
offset by an increase in revenue  related to Cell Tracer.  The decrease in sales
of Visual UpTime was primarily attributable to a decrease in purchases from AT&T
and Sprint.  Sales to all service  providers  accounted for approximately 72% of
revenue for 1999 as compared to 70% for 2000.

     Software revenue.  Software  revenue,  which includes revenue from sales of
Visual IP  InSight,  Visual  Trinity,  and  eWatcher,  was $3.1  million in 1999
compared to $10.1 million in 2000, an increase of $7.0 million.  The increase in
software  revenue  was  primarily  attributable  to the  increase  in IP InSight
revenue and the addition of Avesta Trinity and eWatcher products.

     Support and services revenue.  Support and services revenue, which includes
revenue  from sales of Visual  Internet  Benchmark,  professional  services  and
technical  support,  was $9.9 million in 1999 and $13.4 million,  an increase of
$3.5  million.  The  increase in support  and  services  revenue  was  primarily
attributable to an increase in Visual Internet Benchmark revenue of $2.0 million
and the larger  installed  base of our Visual  UpTime  product  for which we are
selling technical support, offset by decreases in support revenue related to the
decreased sales of our hardware.

     Cost of revenue and gross profit

     Total cost of revenue was $30.9  million for 1999 compared to $32.5 million
for 2000, an increase of $1.6  million.  Gross profit was $60.8 million for 1999
compared to $56.5  million for 2000,  a decrease of $4.3  million.  Gross profit
margin was 66.3% of revenue for 1999 as compared to 63.5% of revenue for 2000.

     Product  cost of revenue.  Product  cost of revenue,  which  includes  both
hardware and software  cost of revenue,  was $25.6  million for 1999 compared to
$24.9  million  for 2000,  a decrease of $0.7  million.  Our  software  costs of
revenue are insignificant.  The gross profit margin attributable to products was
68.7% for 1999 and 67.1% for 2000.  The decrease in gross  profit was  primarily
attributable to approximately $1.9 million in inventory  write-downs,  offset by
high margins based on the product mix.

     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 $5.3 million for 1999 compared to $7.6 million for
2000, an increase of $2.3. The gross profit margin  attributable  to support and
services  was 46.8% for 1999 and 43.2% for 2000.  The  decrease in gross  profit
margin was  primarily  due to the  addition  of the costs of Visual  Trinity and
Visual  eWatcher  offset by lower fixed costs  associated  with  supporting  the
increased software and services sales.

     Research and  development  expense.  Research and  development  expense was
$16.7  million for 1999 as compared  to $27.3  million for 2000,  an increase of
$10.6  million.  The  increase  in  research  and  development  expense  was due
primarily to the costs of the Avesta research and development  staff  subsequent
to the date of acquisition, increased staffing levels and related support costs,
and  purchases  of  materials  and services  used in the  development  of new or
enhanced  products.  Research  and  development  expense  was 18.2% and 30.6% of
revenue for 1999 and 2000, respectively.

     Write-off of purchased  research and development.  A write-off of purchased
research  and  development  costs  of  $39.0  million  was  recorded  in 2000 in
connection with the acquisition of Avesta as described above.

     Sales and marketing expense.  Sales and marketing expense was $24.4 million
for 1999  compared to $41.9 million for 2000 an increase of $17.5  million.  The
increase in sales and marketing expense was due primarily to the costs of Avesta
sales and marketing staff and programs subsequent to the date of acquisition and
continued  growth in staffing,  commissions  and marketing  programs.  Sales and
marketing   expense   was  26.7%  and  47.1%  of  revenue  for  1999  and  2000,
respectively.

     General and administrative expense.  General and administrative expense was
$7.9 million for 1999  compared to $11.2  million for 2000,  an increase of $3.3
million. The increase in general and administrative expense was due primarily to
the  additional  costs of the Avesta staff and  professional  services  incurred
subsequent  to the date of  acquisition  and  increased  staffing,  professional
services and corporate facilities and network  infrastructure costs. General and
administrative   expense  was  8.6%  and  12.6%   revenue  for  1999  and  2000,
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. We also recorded an impairment  charge of $328.8 million for the write-off
of goodwill and other intangibles  related to the Avesta acquisition (see Note 6
of Notes to Consolidated Financial Statements).

     Amortization  of  acquired  intangibles.   We  recorded  $53.4  million  in
amortization of goodwill and other intangibles related to the Avesta acquisition
in 2000.

     Interest income, net. Interest income, net, for 1999 was approximately $2.3
million as compared to $2.6  million for 2000.  The increase of $0.3 million was
primarily due to decreased  interest expense related to capital leases and other
borrowings.

     Income taxes. The benefit for income taxes for 2000 was $34.1 million.  The
effective tax rate of 8% differed from the statutory  rates primarily due to the
income tax effect of the  Avesta  acquisition  and  increases  in the  valuation
allowance.

     Net income  (loss).  Net income for 1999 was $3.6  million as compared to a
net loss of $415.5 million for 2000. The decrease was due primarily to decreases
in revenue and gross  profit,  increased  operating  expenses,  the write-off of
purchased  research  and  development,  the  amortization  of goodwill and other
intangible assets and the restructuring and impairment charges.

     Liquidity and Capital Resources

     At December  31,  2001,  our  unrestricted  cash  balance was $5.9  million
compared to $17.4 million as of December 31, 2000, a decrease of $11.5  million.
This  decrease is  primarily  attributable  to cash used in  operations,  due to
operating  losses  as well  as the  payment  of  certain  restructuring  charges
recorded in 2000 relating primarily to the Avesta acquisition.  Net cash used in
operating  activities in 2001 was $19.7  million.  During the year, we also used
cash of $692,000  to purchase  equipment  and other  fixed  assets,  and we made
principal  payments on capital lease  obligations of $564,000.  Cash provided by
the maturities of short-term  investments  was $6.2 million,  the sale of common
stock  pursuant to the exercise of employee stock options and our employee stock
purchase  plan was $1.3  million,  and net  borrowings  from our bank  were $2.0
million.

     We require substantial  working capital to fund our business,  particularly
to finance inventories, accounts receivable, research and development activities
and capital  expenditures as well as to fund our operating  losses.  To date, we
have  financed  our  operations  and  capital  expenditures  primarily  with the
proceeds from our initial  public  offering  completed in February 1998 and from
our operating  income  generated  through the first quarter of 2000. In 2001, we
became  dependent on cash that was provided by our bank under a credit  facility
due to substantial  losses  incurred  following the  acquisition  of Avesta.  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  margin  and our  levels of  operating  expenses,
including product research and development,  sales and marketing and general and
administrative expenses.

     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 the  second  quarter of 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. In the fourth quarter of
2001, we made  additional  reductions in staff and other  operating  costs. As a
result of these  actions,  operating  expenses,  excluding  charges  related  to
acquisitions and restructuring charges and impairment charges, have been reduced
from a level of $24.0 million in the fourth  quarter of 2000 to $11.9 million in
the fourth quarter of 2001.

     Although  our  revenue  for the fourth  quarter  of 2001 was $17.3  million
compared to revenue of $15.3 million in the comparable  period of last year, our
fourth  quarter 2001 revenue  decreased from $19.2 million and $20.3 million for
the quarters ended September 30, 2001 and June 30, 2001,  respectively.  Revenue
decreased  from $89.0  million  for the year ended  December  31,  2000 to $74.2
million for the year ended December 31, 2001. As a result of our cost reductions
to date,  we returned to  profitability  during the three months ended March 31,
2002.

     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  roll-out 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.  Both AT&T and WorldCom posted losses
in their most recent  quarterly  reports.  We are  uncertain as to whether these
losses will affect the buying habits of these key customers. However, we believe
that our revenue goals are  achievable  based on the role that our products have
in directly  enhancing  our service  providers'  product  offerings  and related
profit  margins and mitigating  such losses.  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 sixty
days for the full effects of any such further expense  reductions to be felt. 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.  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 third quarter of
2000 have resulted in a significant  reduction in our cash.  Our balance of cash
and cash  equivalents  has decreased  from $54.6 million at December 31, 1999 to
$5.9  million at December  31, 2001.  Accounts  payable and accrued  liabilities
totaled $11.7  million at December 31, 2001,  and current  liabilities  exceeded
current assets by approximately $6.6 million.

     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. 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.

     The debentures  include  certain  financial  covenants  related to earnings
before interest,  taxes, depreciation and amortization for 2002 and 2003. If the
financial  covenants  are not  met,  the  holders  may  cause us to  redeem  the
debentures  at a price  equal to the  principal  amount of the  debentures  plus
accrued  interest.  The  redemption  may be made in common  stock or cash at our
option provided certain  conditions are satisfied.  Redemption of the debentures
also may be required upon a specified  change of control or upon the  occurrence
of any one of the other  triggering  events,  including  but not limited to, our
default on other  indebtedness,  our  failure to  register  the shares of common
stock that may be issued to the  debenture  holders  and our failure to maintain
our common stock listing on an eligible market.  In the event that the financial
covenant for 2002 is achieved, the first priority lien in favor of the debenture
holders shall be released.

     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 debentures also give
the holders the right to purchase 575 shares of to-be-created Series A preferred
stock for $5.8  million  prior to May 6, 2002.  The holders did not exercise the
right to purchase these shares of Series A preferred stock. We have also granted
to the  debenture  holders the right to purchase  $3.1 million  (this amount was
reduced  from $4.75  million  because the holders did not  exercise the right to
purchase the Series A preferred  stock) of  additional  shares of  to-be-created
preferred  stock at any time  after the  six-month  anniversary  but  before the
fifteen-month  anniversary  of the  issuance of the  debentures.  The  debenture
holders were also granted certain equity participation and registration rights.

     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, 2002 remains  outstanding  and secured with our pledge of a  certificate  of
deposit in the amount of $2.5 million that matures on October 31, 2002.

     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 and the net
proceeds  from  the  issuance  of the  convertible  debentures  discussed  above
together  with  future  sales  and  the  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,  inventory  valuation and the  impairment of long-lived
assets 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

     Our revenue recognition policies follow the American Institute of Certified
Public   Accountants   Statement  of  Position  No.  97-2,   "Software   Revenue
Recognition" and SEC Staff Accounting Bulletin 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 2 of Notes to Consolidated  Financial  Statements):
1) persuasive  evidence of an arrangement  exists; 2) delivery has occurred;  3)
the fee is fixed and 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 and  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 an
agreement  provides for a right of return,  we recognize  revenue when the right
has expired. 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.  Revenue from
multiple-element  software  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 professional  services,
technical  support  and  training  have been  determined  based on our  specific
objective evidence of fair value. Our vendor specific objective evidence of fair
value 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 five years. We recognize revenue from services when
the services are  performed.  Subscription  fees for our  benchmark  reports are
recognized upon delivery of the reports.

     We sell our products directly to service providers,  end-user customers and
through  indirect  channels.  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.

     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 and  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 lead  times to obtain  inventory  in our  industry  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. If future demand is lower than currently  estimated,  write-downs of our
inventory may be required.

     Impairment of Long-Lived Assets

     During 2000 and 2001, we had significant  long-lived  assets that consisted
of property and  equipment,  goodwill and  intangible  assets.  We accounted for
these assets in accordance with Statement of Financial  Accounting Standards No.
121,  "Accounting for Impairment of Long-Lived  Assets and for Long-Lived Assets
to be Disposed Of." As a result, we recorded impairment charges in 2000 and 2001
to write-off all of the intangible  assets related to our acquisition of Avesta.
As of December  31, 2001,  our  long-lived  assets  consist only of property and
equipment.  Whenever  events  or  changes  in  circumstances  indicate  that the
carrying  amount of the assets  may not be fully  recoverable,  we assess  those
events to  determine  if the carrying  amounts  should be reduced.  To determine
recoverability of its long-lived assets, we evaluate 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.  This  determination  includes
judgments and estimates.  Our estimates of  anticipated  revenue and profits and
the remaining estimated lives and carrying values of long-lived assets, could be
reduced significantly in the future.

     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 incurred losses of $27.0 million in 2001 and have an accumulated deficit
of $473.9 million.  Our largest  customers are network service  providers in the
depressed telecommunications industry. We may not be profitable in the future.

     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 $473.9 million,  and liabilities in excess of assets, at
December 31, 2000. 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. In response to these results,  we made significant  reductions
in  operating  expenses in 2001.  Excluding  the effects of the  impairment  and
restructuring  charges,  amortization of intangible  assets and the write-off of
in-process  research and development,  operating  expenses  decreased from $80.4
million in 2000 to $61.7 million in 2001.  However,  revenue declined from $89.0
million in 2000 to $74.2  million in 2001.  Our  ability to  generate  operating
income in the future is, in large part,  dependent on our success in  sustaining
revenue  and  reducing  operating  expenses.   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.  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.  Both AT&T and WorldCom,
our largest customers,  posted losses in their most recent quarterly reports. We
are  uncertain as to whether these losses will affect the buying habits of these
key  customers.  We  believe  that  we  have  reduced  operating  expenses  to a
sufficient level such that when combined with the 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 Shares    Warrant            % of Company
       Decline                   Issuance Price                            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,  Sprint or Equant 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 2002 will be attributable to sales of Visual UpTime and Visual IP
InSight to service providers.  The loss of any one of AT&T, WorldCom,  Sprint or
Equant,  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, 2001, AT&T, WorldCom and
Sprint  accounted  for  29%,  10% and  14%,  respectively,  of our  consolidated
revenue, and for the three months ended March 31, 2002, AT&T, WorldCom,  Equant,
and Sprint accounted for 34%, 12%, 8% and 8%, respectively,  of our consolidated
revenue.  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,   evidenced  by  the
significant  losses being incurred by the major service  providers,  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.  Both AT&T and WorldCom  posted losses in their most
recent  quarterly  reports.  We are  uncertain  as to whether  these losses will
affect the buying habits of these key  customers.  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 sole-source subcontract manufacturer could reduce revenue.

     We have outsourced the manufacture of our ASE units,  the analysis  service
element of our Visual UpTime system, to a single subcontract manufacturing firm,
Celestica  Corporation.  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
manufacturer.  Our bank has  issued  an  irrevocable  letter  of credit on their
behalf in the amount of $2.5 million that  expires on September  30, 2002.  This
letter of credit  mitigates,  but does not  eliminate  entirely,  the credit and
inventory risk for our outsourced manufacturer.  The withdrawal of the letter of
credit  by the bank or our  inability  to  obtain an  extension  to its  current
expiration  date, if required by the  subcontract  manufacturer,  could harm our
relationship   with  Celestica.   Similarly,   a  decision  by  the  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
an  alternative  subcontract  manufacturer,  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  manufacturer,  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.

     We recently  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
listing  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 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  requirement,  there is no assurance  that in the future we will continue to
satisfy 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:

     - 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 $500,000;

     - failure to have the resale  registration  statement declared effective by
June 24, 2002;

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

     - our bankruptcy;

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

     - failure to timely file our 2002 or 2003 annual reports; and

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

     In  addition  to  the  above,  if  our  earnings  before  interest,  taxes,
depreciation and amortization,  less capital  expenditures,  for the fiscal year
ended  December  31, 2002 is less than  $2,750,000,  our  debenture  holders may
require  that  we  prepay  all or a  portion  of up to  50%  of the  outstanding
principal amount of their  debentures.  If our earnings before interest,  taxes,
depreciation and amortization,  less capital  expenditures,  for the fiscal year
ended  December  31, 2003 is less than  $6,500,000,  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 deep and
sudden  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.  Both AT&T and WorldCom,
our largest customers,  posted losses in their most recent quarterly reports. We
are  uncertain as to whether these losses will affect the buying habits of these
key customers.

     The success of this  strategy in 2002 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 Internet performance measurement products and services.

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

     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.

     We have experienced errors with some of our products, including release 5.5
of our Visual IP InSight product.  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 fix the problems,  although all
such errors known to us,  including  those in Visual IP InSight v5.5,  have been
fixed. 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. 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,  we have  encountered
difficulties  in  the   implementation   of  the  product  in  certain  customer
environments  that have resulted in expending greater than twenty percent of the
budget for that product for sustaining engineering.  This has 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.

     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 four United States patents and one foreign patent,
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 Elton King,  our President and Chief  Executive
Officer;  Steven Hindman, our Executive Vice President,  Sales and Marketing; or
John  Saunders,  our Chief  Financial  Officer,  or any other key employee could
adversely  affect  our  ability to execute  our  business  plan and could have a
material adverse effect on our 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. King, Hindman and Saunders.

     If we are unable to recruit and retain employees,  we may be unable to grow
to meet increased sales.

     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.

     Our defense of a class  action  lawsuit  relating to our alleged  false and
misleading  statements may result in costly  litigation,  divert the efforts and
attention of our management, and be unsuccessful.

     We are defending  ourselves  against a purported  class action lawsuit that
alleges  that  we and  our  former  chief  executive  officer,  made  false  and
misleading statements between February 7, 2000 and August 23, 2000 that inflated
the market price of our stock in  violation  of Sections  10(b) and 20(a) of the
Securities  Exchange  Act of 1934.  We believe that the  plaintiffs'  claims are
without merit and we are defending this case vigorously.  Although we anticipate
that a  substantial  portion of the legal costs that we might  incur  related to
this matter will be paid by our directors' and officers'  insurance  policy,  we
cannot  presently  determine  the  ultimate  outcome of this action or the final
costs to us. Furthermore,  although the complaint does not specify the amount of
damages  sought,  if we receive a negative  outcome,  we may be required,  among
other things,  to make  substantial  monetary  payments,  including  damages and
plaintiffs' legal costs, or pay punitive damages.

     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.

     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:

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

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

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

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

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

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

     In addition,  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.

     We are  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. We have cash flow exposure to
changing interest rates on our borrowings  against our equipment  financing line
at variable  interest rates.  Any borrowings  under our credit facility are also
sensitive to changes in interest  rates.  As of December  31, 2001,  we had $1.7
million  outstanding  under our accounts  receivable-based  credit  facility and
$376,000 outstanding under our equipment financing facility (see Note 2 of Notes
to Consolidated Financial Statements).  The estimated fair value of such debt is
also  subject to market risk.  As of December  31,  2001,  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.



<PAGE>


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

     None.


                                    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 2002 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 2002 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 2002 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 2002 Annual Meeting of Stockholders.



<PAGE>




                                     PART IV

     Item 14. 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) Report of Independent Public Accountants..........................       F-2
                      Consolidated Balance Sheets as of December 31, 2000 and 2001......       F-3
                      Consolidated Statements of Operations for the years ended
                        December 31, 1999, 2000 and 2001................................       F-4
                      Consolidated Statements of Changes in Stockholders' Equity
                        for the years ended December 31, 1999, 2000 and 2001............       F-5
                      Consolidated Statements of Cash Flows for the years ended
                        December 31, 1999, 2000 and 2001................................       F-7
                      Notes to Consolidated Financial Statements........................       F-8
                  (2) Financial Statement Schedule......................................       S-1
                  (3) Exhibits..........................................................


</TABLE>

<PAGE>



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

<TABLE>
<CAPTION>

     Exhibit Number                                        Description
      <S>                             <C>
       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.
      10.1 *                          1994 Stock Option Plan.
      10.2 *                          1997 Omnibus Stock Plan, as amended.
      10.3 *                          Amended and Restated 1997 Directors' Stock Option Plan.
      10.4 !!                         2000 Stock Incentive Plan, as amended.
      10.5 *+                         Reseller/Integration Agreement, dated August 29, 1997, by and between the Company
                                       and MCI Telecommunications Corporation.
      10.5.1$$$++                     Second Amendment, dated November 4, 1998, to the Reseller/Integration Agreement
                                       between the Company and MCI Telecommunications Corporation (relating to Exhibit 10.5).
      10.6 ****++                     Master Purchase of Equipment and Services Agreement, dated as of May 22, 2000,
                                       between Sprint/United Management Company And the Company.
      10.7 *+                         General Agreement for the Procurement of Equipment, Services And Supplies,
                                       dated November 26, 1997, between the Company And AT&T Corp.
      10.8 *                          Lease Agreement, dated December 12, 1996, by and between the Company and The Equitable
                                       Life Assurance Society of the United States.
      10.8.1 *                        Lease Amendment, dated September 2, 1997, by and between the Company and The Equitable
                                       Life Assurance Society of the United States (related to Exhibit 10.8).
      10.8.2$$$                       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.
      10.12 *                         Terms of Employment, dated June 11, 1997, by and between the Company and Peter J. Minihane,
                                       as amended.
      10.17 **                        Net2Net 1994 Stock Option Plan.
      10.20$$                         1999 Employee Stock Purchase Plan, as amended April 11, 2001.
      10.22%                          Inverse Network Technology 1996 Stock Option Plan.
      10.23 !!                        Avesta Technologies 1996 Stock Option Plan.
      10.24 ****                      Loan and Security Agreement, dated February 28, 2001, by and
                                      Between Silicon Valley Bank and the Company.
      10.24.1 !!!                     First Loan Modification to the Loan and Security Agreement, dated May 24, 2001
                                       (related to Exhibit 10.24).
      10.24.2                         Second Loan  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 Loan Modification to the Accounts Receivable Financing Agreement, dated May 24, 2001
                                       (related to Exhibit 10.25).
      10.25.2                         Second Loan Modification to the Accounts Receivable Financing Agreement,
                                       dated December 20, 2001, (related to Exhibit 10.25).
      10.25.3                         Third Loan 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.
      21.1 ****                       List of subsidiaries of the Company.
      23.1                            Consent of Arthur Andersen LLP.
      24.1                            Powers of Attorney (included in signature pages).
      99.1                            Letter regarding Arthur Andersen as our Independent Public Accountants.

</TABLE>
<TABLE>
    <S>      <C>
       *     Incorporated herein by reference to the Company's Registration Statement on Form S-1, No. 333-41517.
      **     Incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8, No. 333-53153.
     ***     Incorporated herein by reference to the Company's 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 Exhibit 10.1 to the Company's Registration Statement on Form S-8, No. 333-88719.
       @     Incorporated herein by reference to the Company's Registration Statement on Form S-4, No. 333-33946.
       $     Incorporated herein by reference to Exhibit 3.1 to the  Company's  Quarterly
             Report on Form 10-Q for the three months ended June 30, 1999.
      $$     Incorporated herein by reference to the Company's Definitive Proxy Statement on Schedule 14A filed April 30, 2001.
     $$$     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.

</TABLE>

     (b) Reports on Form 8-K

     None.

     (c) Exhibits

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

     (d) Financial Statement Schedules

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


<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 Amendment No.
2 to the Report to be signed on its behalf by the  undersigned,  thereunto  duly
authorized, in the City of Rockville, Maryland, on the 14th day of June, 2002.

VISUAL NETWORKS, INC.

By: /s/ JOHN H. SAUNDERS
---------------------------------
John H. Saunders
Chief Financial Officer

     Pursuant to the  requirements  of the  Securities  Exchange Act of 1934, as
amended,  this  Amendment  No.  2 to the  Report  has been  signed  below by the
following persons in the capacities and on the date indicated.

             Signature                        Title                   Date


/s/ ELTON R. KING                 President and Chief Executive       6/14/02
    Elton R. King                  Officer, Director


/s/     *                         Chairman of the Board of            6/14/02
    Scott E. Stouffer              Directors


/s/     *                         Director                            6/14/02
    Marc F. Benson


/s/     *                         Director                            6/14/02
    George Michael Cassity


/s/     *                         Director                            6/14/02
    Ted McCourtney


/s/     *                         Director                            6/14/02
    Peter J. Minihane


/s/     *                         Director                            6/14/02
    William J. Smith



*By:  /s/ Elton R. King
 Elton R. King
 Attorney-in-fact



<PAGE>



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                           Page
Report of Independent Public Accountants.............................      F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001.........      F-3
Consolidated Statements of Operations for the years ended
  December 31, 1999, 2000 and 2001...................................      F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
  for the years ended December 31, 1999, 2000 and 2001...............      F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1999, 2000 and 2001...................................      F-7
Notes to Consolidated Financial Statements...........................      F-8
Financial Statement Schedule.........................................      S-1


<PAGE>



                    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



<PAGE>
<TABLE>
<CAPTION>



                              VISUAL NETWORKS, INC.

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

                                                                                           December 31,
                                                                                      2000             2001
                                                                                      ----             ----
                    Assets
                    Current assets:
                    <S>                                                           <C>              <C>
                      Cash and cash equivalents..........................         $   17,369       $    5,921
                      Restricted short-term investment...................                 --            2,503
                      Short-term investments.............................              3,700               --
                      Accounts receivable, net of allowance of $1,103
                         and $554, respectively..........................              7,615            7,488
                      Inventory..........................................             13,474            5,768
                      Other current assets...............................              3,089            1,161
                                                                                  ----------       ----------
                              Total current assets.......................             45,247           22,841
                    Property and equipment, net..........................             10,738            6,061
                    Intangible assets....................................              8,510               --
                    Restricted investments...............................              5,037               --
                    Other assets.........................................              4,525               --
                                                                                  ----------       ----------
                              Total assets...............................         $   74,057       $   28,902
                                                                                  ==========       ==========

                    Liabilities and Stockholders' Equity (Deficit)
                    Current liabilities:
                      Accounts payable and accrued expenses..............         $   29,354       $   11,723
                      Deferred revenue...................................             17,769           11,782
                      Customer deposits..................................                 --            3,588
                      Line of credit.....................................                 --            1,663
                      Current portion of long-term debt..................                606              661
                                                                                  ----------       ----------
                              Total current liabilities..................             47,729           29,417
                    Long-term debt, net of current portion...............                243               --
                                                                                  ----------       ----------
                              Total liabilities..........................             47,972           29,417
                                                                                  ----------       ----------
                    Commitments and contingencies (Note 9)
                    Stockholders' equity (deficit):
                      Common stock, $.01 par value; 200,000,000 shares
                         authorized,  31,296,383 and 31,915,752 shares
                         issued and outstanding respectively.............                313              319
                      Additional paid-in capital.........................            473,108          473,132
                      Deferred compensation..............................               (402)             (80)
                      Accumulated other comprehensive income.............                 11               21
                      Accumulated deficit................................           (446,945)        (473,907)
                                                                                  ----------       ----------
                              Total stockholders' equity (deficit).......             26,085             (515)
                                                                                  ----------       ----------
                              Total liabilities and stockholders' equity
                               (deficit).................................         $   74,057       $   28,902
                                                                                  ==========       ==========
</TABLE>



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


<PAGE>
<TABLE>
<CAPTION>



                              VISUAL NETWORKS, INC.

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


                                                                               Years Ended December 31,
                                                                             1999        2000        2001
                                                                             ----        ----        ----
                       Revenue:
                       <S>                                                  <C>       <C>         <C>
                         Hardware revenue.............................      $78,640   $   65,500  $   51,855
                         Software revenue.............................        3,140       10,130       6,249
                         Support and services revenue.................        9,939       13,411      16,144
                                                                            -------   ----------  ----------
                          Total revenue...............................       91,719       89,041      74,248
                                                                            -------   ----------  ----------
                       Cost of revenue
                         Product cost of revenue......................       25,598       24,892      21,728
                         Support and services cost of revenue.........        5,290        7,623       7,709
                                                                             -------   ----------  ----------
                          Total cost of revenue.......................       30,888       32,515      29,431
                                                                            -------   ----------  ----------
                         Gross profit.................................       60,831       56,526      44,817
                       Operating expenses:
                         Research and development.....................       16,677       27,277      19,320
                         Write-off of in-process research and                    --       39,000          --
                       development....................................
                         Sales and marketing..........................       24,447       41,907      33,484
                         General and administrative...................        7,928       11,247       8,895
                         Merger-related costs.........................        6,776           --          --
                         Restructuring and impairment charges.........           --      335,810       9,328
                         Amortization of goodwill and other intangibles          --       53,426         805
                                                                            -------   ----------  ----------
                            Total operating expenses..................       55,828      508,667      71,832
                                                                            -------   ----------  ----------
                       Income (loss) from operations..................        5,003     (452,141)    (27,015)
                       Interest income, net...........................        2,270        2,598         325
                                                                            -------   ----------  ----------
                       Income (loss) before income taxes..............        7,273     (449,543)    (26,690)
                       Benefit (provision) for income taxes...........       (3,722)      34,058        (272)
                                                                            -------   ----------  ----------
                       Net income (loss)..............................      $ 3,551   $ (415,485) $  (26,962)
                                                                            =======   ==========  ==========
                       Basic income (loss) per share..................      $   0.14  $   (14.46) $    (0.85)
                                                                            =======   ==========  ==========
                       Diluted income (loss) per share................      $   0.13  $   (14.46) $    (0.85)
                                                                            =======   ==========  ==========
                       Basic weighted-average shares outstanding......       24,583       28,733      31,585
                                                                            =======   ==========  ==========
                       Diluted weighted-average shares outstanding....       26,547       28,733      31,585
                                                                            =======   ==========  ==========
</TABLE>

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


<PAGE>

                                 VISUAL NETWORKS, INC.

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

                                                                                  Notes                       Accumulated
                                                                   Additional   Receivable                      Other
                                               Common Stock         Capital     Stockholders   Compensation   Comprehensive
                                               ------------        ----------   ------------   ------------   -------------
                                               Shares     Amount
                                               ------     ------
<S>                                          <C>           <C>      <C>              <C>         <C>            <C>
Balance, December 31, 1998.............      24,190,219    $ 242    $ 83,977         $ (147)     $  (739)       $    --
  Exercise of stock options and
     warrants..........................         699,266        7       2,047             --           --             --
  Income tax benefit from exercise
   of stock options....................          --           --       3,722             --           --             --
  Issuance of common stock under
    employee stock purchase plan.......           4,182       --         132             --           --             --
  Repurchase of common stock...........         (60,058)      (1)        --              --           --             --
  Repayment of shareholder notes.......          --           --         --             147           --             --
  Deferred compensation................          --           --         291             --         (291)            --
  Amortization of deferred
    compensation.......................          --           --         --              --          325             --
  Net income...........................          --           --         --              --           --             --
                                             ----------      ---     -------          ------       ------         ------
Balance, December 31, 1999.............      24,833,609      248      90,169             --         (705)            --
  Issuance of common stock options
    and warrants in acquisition........       5,413,530       54     378,793             --           --             --
  Exercise of stock options and
    warrants...........................         866,366        9       3,173             --           --             --
  Issuance of common stock under
    employee stock purchase plan.......         182,878        2       1,047             --           --             --
  Deferred compensation adjustments....          --           --         (74)            --           74             --
  Amortization of deferred
     compensation......................          --           --         --              --          229             --
  Foreign currency translation
     adjustment........................          --           --         --              --           --             11
  Net loss.............................          --           --         --              --           --             --
                                             ----------      ---     -------          ------       ------         ------
Balance, December 31, 2000.............      31,296,383      313     473,108             --         (402)            11
  Return of shares in settlement
   of indemnification claims
   related to acquisition..............        (134,000)      (1)       (989)            --           --             --
  Exercise of stock options and
    warrants...........................         435,091        4         520             --           --             --
  Issuance of common stock under
    employee stock purchase plan.......         337,675        3         746             --           --             --
  Repurchase of common stock...........         (19,397)      --         (11)            --           --             --
  Deferred compensation adjustments....          --           --        (242)            --          242             --
  Amortization of deferred
   compensation........................          --           --         --              --           80             --
  Foreign currency translation
    adjustment.........................          --           --         --              --           --             10
  Net loss.............................          --           --         --              --           --             --
                                             ----------      ---     -------          ------       ------         ------

Balance, December 31, 2001.............      31,915,752    $ 319    $473,132         $   --      $   (80)       $    21
                                             ==========      ===     =======          ======       ======         ======

</TABLE>

<PAGE>





(continued)





                                               Accumulated
                                                 Deficit                Total
                                               -----------              -----

Balance, December 31, 1998.............       $  (35,011)            $ 48,322
  Exercise of stock options and
     warrants..........................              --                 2,054
  Income tax benefit from exercise
   of stock options....................              --                 3,722
  Issuance of common stock under
    employee stock purchase plan.......              --                   132
  Repurchase of common stock...........              --                    (1)
  Repayment of shareholder notes.......              --                   147
  Deferred compensation................              --                   --
  Amortization of deferred
    compensation.......................              --                   325
  Net income...........................            3,551                3,551
                                                 -------              -------
Balance, December 31, 1999.............          (31,460)              58,252
  Issuance of common stock options
    and warrants in acquisition........              --               378,847
  Exercise of stock options and
    warrants...........................              --                 3,182
  Issuance of common stock under
    employee stock purchase plan.......              --                 1,049
  Deferred compensation adjustments....              --                   --
  Amortization of deferred
     compensation......................              --                   229
  Foreign currency translation
     adjustment........................              --                    11
  Net loss.............................         (415,485)            (415,485)
                                                 -------              -------
Balance, December 31, 2000.............         (446,945)              26,085
  Return of shares in settlement
   of indemnification claims
   related to acquisition..............              --                  (990)
  Exercise of stock options and
    warrants...........................              --                   524
  Issuance of common stock under
    employee stock purchase plan.......              --                   749
  Repurchase of common stock...........              --                   (11)
  Deferred compensation adjustments....              --                   --
  Amortization of deferred
   compensation........................              --                    80
  Foreign currency translation
    adjustment.........................              --                    10
  Net loss.............................          (26,962)             (26,962)
                                                 -------              -------

Balance, December 31, 2001.............        $(473,907)            $   (515)
                                                 =======              =======

<PAGE>


                                                VISUAL NETWORKS, INC.

                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   (in thousands)
<TABLE>
<CAPTION>

                                                                                    Years Ended December 31,
                                                                               1999           2000           2001
                                                                               ----           ----           ----
                    <S>                                                       <C>          <C>            <C>
                    Cash Flows From Operating Activities:
                    Net income (loss)...................................      $ 3,551      $ (415,485)    $  (26,962)
                    Adjustments to reconcile net income (loss) to net cash
                      provided by (used in) operating activities:
                      Depreciation and amortization.....................        4,033          59,666          5,657
                      Write-off of purchased research and development...           --          39,000             --
                      Non-cash restructuring and impairment charges.....           --         329,910          8,203
                      Deferred taxes....................................           --         (34,058)            --
                      Changes in assets and liabilities
                         Accounts receivable............................       (3,426)          5,152            127
                         Inventory......................................       (2,912)         (5,476)         7,706
                         Other assets...................................         (312)           (113)         2,185
                         Accounts payable and accrued expenses..........        6,235           8,312        (16,094)
                         Deferred revenue...............................        3,841          (3,834)        (4,155)
                         Customer deposits..............................       (4,613)             --          3,588
                                                                               ------          ------         -------
                      Net cash provided by (used in) operating activities       6,397         (16,926)       (19,745)
                                                                               ------          ------         -------
                    Cash Flows From Investing Activities:
                      Net (purchases) sales/maturities of short-term
                         investments....................................        1,002          (3,145)         6,234
                      Proceeds from sale leaseback transactions.........          750              --             --
                      Expenditures for property and equipment...........       (5,828)         (7,623)          (692)
                      Investment in joint venture.......................           --            (797)            --
                      Merger-related transaction costs, net of cash
                       acquired.........................................           --         (10,234)            --
                                                                               ------          ------         -------
                      Net cash provided by (used in) investing activities      (4,076)        (21,799)         5,542
                                                                               ------          ------         -------
                    Cash Flows From Financing Activities:
                      Exercise of stock options and warrants and employee
                    stock purchase plan, net of stock repurchases.......        2,185           4,231          1,262
                      Repayments of notes receivable from stockholders..          147              --             --
                      Net borrowings (repayments) under credit agreements      (1,079)         (1,658)         2,039
                      Principal payments on capital lease obligations...         (600)         (1,119)          (564)
                                                                               ------          ------         -------
                      Net cash provided by financing activities.........          653           1,454          2,737
                                                                               ------          ------         -------
                    Effect of exchange rate changes.....................           --              11             18
                                                                               ------          ------         -------
                    Net Increase (Decrease) in Cash and Cash Equivalents        2,974         (37,260)       (11,448)
                    Cash and Cash Equivalents, Beginning of Year........       51,655          54,629         17,369
                                                                               ------          ------         -------
                    Cash and Cash Equivalents, End of Year..............      $54,629      $   17,369     $    5,921
                                                                               ======          ======         ======
                    Supplemental Cash Flow Information:
                      Cash paid for income taxes........................      $    18      $        9     $       22
                                                                               ======          ======         ======
                      Cash paid for interest............................      $   232      $      211     $      199
                                                                               ======          ======         ======
                    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.





<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  compared  to 1999.  In  response to these  results,  the Company  made
significant  reductions in operating expenses in 2001.  Excluding the effects of
the impairment and restructuring charges,  amortization of intangible assets and
the write-off of IPR&D,  operating expenses decreased from $80.4 million in 2000
to $61.7 million in 2001.  However,  revenue declined from $89.0 million in 2000
to $74.2 million in 2001. 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.  The Company
believes that it has reduced operating  expenses to a sufficient level such that
when  combined  with  the  anticipated   revenue,   the  Company  will  maintain
profitability.  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,  investments  and the net proceeds from the
issuance of the convertible debentures (see Note 10), 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.

     The   Company's   operations   are  subject  to  certain  other  risks  and
uncertainties,  including  among others,  dependence  on major service  provider
customers,  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,   changes   in   the
telecommunications  industry including consolidation and break-up of significant
customers,  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,  defense  against  pending
litigation, and uncertainty of future profitability and possible fluctuations in
financial results.

     Business Combinations and Basis of Presentation

     On  September  30,  1999,   Visual  acquired  Inverse  Network   Technology
("Inverse")  in a merger  transaction  accounted  for as a pooling of interests.
Inverse  was a provider  of service  level  management  software  solutions  and
Internet  measurement  services.  Visual issued  4,096,429  shares of its common
stock in  exchange  for all of the  outstanding  preferred  and common  stock of
Inverse.  In addition,  outstanding  Inverse  stock  options and  warrants  were
converted into options and warrants to purchase  425,088 shares of Visual common
stock.  In  connection  with  the  Inverse  acquisition,  the  Company  recorded
merger-related  transaction  costs of approximately  $6.8 million that consisted
primarily of fees for investment bankers, attorneys, and accountants.

     The accompanying  consolidated financial statements have been retroactively
restated to reflect the combined  financial  position  and  combined  results of
operations  and cash  flows  for all  periods  presented,  giving  effect to the
acquisition  of Inverse as if it had  occurred at the  beginning of the earliest
period presented.



<PAGE>


     Results of operations for the separate and combined  companies prior to the
pooling transaction are as follows (in thousands):

                                   Six Months Ended
                                    June 30, 1999
                                      (unaudited)
                                   ----------------
              Revenue:
                Visual..........        $36,005
                Inverse.........          3,793
                                        -------
                                        $39,798
                                        =======

              Net Income (Loss):
                Visual..........        $ 6,178
                Inverse.........         (5,074)
                                         -------
                                        $ 1,104
                                        ========

     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 5). The results of operations
of Avesta have been  included in the  accompanying  consolidated  statements  of
operations from the date of acquisition  (hereafter,  Visual, Inverse 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 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's cash equivalents, as of December 31, 2000,
consisted  primarily  of  investments  in money market funds that invest in U.S.
Treasury  obligations,  repurchase  agreements  collateralized  by U.S. Treasury
securities,   and  high   quality   corporate   obligations.   The  Company  had
approximately  $10.8  million  invested in money market funds as of December 31,
2000. The Company did not have any cash equivalents as of December 31, 2001.

     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 as a separate
component of comprehensive income, if significant.  As of December 31, 2000, the
Company held short-term investments in U.S. Treasury obligations maturing within
one year. The Company also held a $5.0 million certificate of deposit related to
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, 2000.  During 2001, the  certificate of deposit was reduced to $2.5
million;  it matures on October 31, 2002.  The  certificate  of deposit has been
included as a restricted short-term investment in the accompanying  consolidated
balance  sheet as of  December  31,  2001.  As of  December  31,  2000 and 2001,
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 carrying value of this investment of $747,000 was
included in other assets in the  accompanying  consolidated  balance sheet as of
December 31, 2000. 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.  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 and its carrying value of  approximately  $3.7 million was
included in other assets in the  accompanying  consolidated  balance sheet as of
December 31, 2000. The Company  reviewed the carrying  value of this  investment
for impairment  throughout  2001 and determined in the fourth quarter that there
was an  other  than  temporary  decline  in the  value of the  investment  based
primarily on the  Company's  assessment  of the  continued  declining  financial
condition  of  the  entity.   The  Company   wrote-off  the  entire  balance  of
approximately  $3.7 million.  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.

     Inventory

     Cost of revenue consists of subcontracting  costs,  component parts, direct
compensation  costs,   communication  costs,   warranty  and  other  contractual
obligations,  royalties, license fees and other overhead expenses related to 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,  and
consists of the following (in thousands):

                                          December 31,
                                         2000      2001
                                         ----      ----
                   Raw materials...     $ 4,301   $ 1,137
                   Work-in-progress         151       238
                   Finished goods..       9,022     4,393
                                        -------   -------
                                        $13,474   $ 5,768
                                        =======   =======

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,
                                                      2000       2001
                                                      ----       ----
                   Equipment and software.....    $  17,480   $ 18,046
                   Furniture and fixtures.....        2,370      2,351
                   Leasehold improvements.....        2,942      2,208
                                                  ----------  ---------
                                                     22,792     22,605
                   Less-Accumulated depreciation    (12,054)   (16,544)
                                                  ----------  ---------
                                                  $  10,738   $  6,061
                                                  ==========  =========

     Intangible Assets

     As of December  31,  2000,  intangible  assets  consisted  of  identifiable
intangibles  related to the acquisition of Avesta (see Note 5). During 2001, the
Company determined that all of the remaining intangible assets were impaired and
recorded an impairment  charge to write-off the remaining  balances.  Intangible
assets consisted of the following (in thousands) at December 31, 2000:


                  Assembled workforce........      $   224
                  Trademarks/tradenames......        1,064
                  Completed technology.......        7,222
                                                   -------
                       Total.................      $ 8,510
                                                   =======


     Long-Lived Assets

     In  accordance  with  SFAS  No.  121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to be  Disposed  Of," 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 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  related to the Avesta acquisition.  The
Company  also  recorded  impairment  charges of $3.3 million  during  2001.  The
impairment charge related to the remaining acquired  intangibles from the Avesta
acquisition and resulted from the  discontinuation of the Visual Trinity product
and the Company's plans to combine certain  functionality of the Visual eWatcher
product with the Visual IP InSight  product (see Notes 5 and 6). The  impairment
charges  for the years  ended  December  31,  2000 and 2001 are  included in the
restructuring and impairment charge in the accompanying  consolidated statements
of operations.  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.

     Accounts Payable and Accrued Expenses

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

                                                  December 31,
                                                 2000       2001
                                                 ----       ----
               Accounts payable.............   $ 4,391    $ 2,644
               Accrued compensation.........     6,936      1,794
               Accrued restructuring........     4,306      1,421
               Other accrued expenses.......    13,721      5,864
                                               -------    -------
                                               $29,354    $11,723
                                               =======    =======

     Revenue Recognition


     The Company's  service  management  products and services include hardware,
software,  benchmark  services,  professional  services and  technical  support.
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  the  American   Institute  of  Certified  Public
Accountants  Statement of Position No. 97-2,  "Software Revenue Recognition" and
SEC Staff  Accounting  Bulletin  No.  101,  "Revenue  Recognition  in  Financial
Statements," which summarizes  existing  accounting  literature and require that
four  criteria  are met prior to the  recognition  of  revenue.  Our  accounting
policies regarding revenue  recognition are written to comply with the following
criteria:  1)  persuasive  evidence of an  arrangement  exists;  2) delivery has
occurred or services have been rendered; 3) the fees are fixed and determinable;
and 4)  collectibility  is  probable.  Where  agreements  provide  for  customer
acceptance, the Company recognizes revenue upon acceptance of the product by the
customer.  Generally,  the Company's  agreements  have not included any specific
customer  acceptance  provisions.  However,  the Company  does allow some of its
customers  to evaluate its products  before  making a decision to purchase.  The
Company  recognizes revenue under these arrangements once the evaluation process
is  complete  and all other  criteria  are met.  Revenue  from  multiple-element
software  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  and passage of title.  The fair values of  professional
services,  technical  support and  training  have been  determined  based on the
Company's  specific  objective  evidence of fair value.  The Company's  specific
objective  evidence  of fair  value is based on the  price the  Company  charges
customers when the element is sold separately.

     Maintenance  contracts require the Company to provide technical support and
unspecified  software updates to customers on a when and if available basis. The
Company recognizes technical 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 five years.  Revenue from professional  services is
recognized when the services are performed.  Subscription fees for the Company's
benchmark reports are recognized upon delivery of the reports.

     The Company sells its products  directly to service  providers and end-user
customers, as well as through indirect channels. 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.

     The Company  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 and  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. The Company generally does not offer payment
terms that  differ from its normal  payment  terms.  However,  in the year ended
December  31,  2001,  the  Company   recognized   software  license  revenue  of
approximately  $2.6  million  on  new  arrangements  with  previously   existing
customers that contain  payment terms beyond the normal payment terms.  Payments
become due under these arrangements  through July 2002. As of June 10, 2002, all
scheduled  payments had been made in  accordance  with the terms of the relevant
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.  This product was the primary product acquired with Avesta, and
the Company does not plan to continue  development efforts on the Visual Trinity
product.  As a result,  future  revenue  related to this  product  will  consist
primarily of technical  support revenue,  all of which is currently  included in
deferred revenue.  The Company plans to provide technical support for the Visual
Trinity product through September 2002.

     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 will receive royalty  payments from
the purchaser on new contracts.

     Credit Risk

     Financial  instruments that potentially  subject the Company to significant
concentrations of credit risk consist  principally of cash and cash equivalents,
investments and accounts receivable. The Company generally sells its products to
large  telecommunications  and Internet service provider companies  primarily in
the United  States.  The Company  grants credit terms without  collateral to its
customers  and  has not  experienced  any  significant  credit  related  losses.
Accounts  receivable include allowances to record receivables at their estimated
net realizable  value.  As of December 31, 2000,  three  customers  individually
represented  29%, 13% and 11% of accounts  receivable.  As of December 31, 2001,
three  customers   individually   represented  24%,  17%  and  15%  of  accounts
receivable. As of December 31, 2000 and 2001, the Company had approximately $1.8
million in  accounts  receivable  balances  that were also  included in deferred
revenue.

     Warranty

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

     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, 1999, 2000 and 2001, 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 difference between the financial statement
and income tax bases of assets and  liabilities  using the enacted  marginal tax
rate.  SFAS No. 109  requires  that the net  deferred  tax asset be reduced by a
valuation  allowance if, based on the weight of available  evidence,  it is more
likely than not that some  portion or all of the net deferred tax asset will not
be realized.

     Fair Value of Financial Instruments

     SFAS No.  107,  "Disclosures  about Fair Value of  Financial  Instruments,"
requires  disclosures of fair value  information  about  financial  instruments,
whether or not recognized in the  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,  could not be realized in immediate
settlement of the instrument.  The carrying values of current assets and current
liabilities approximate fair value because of the relatively short maturities of
these  instruments.  The fair value of the Company's  long-term debt,  which was
comprised  of capital  leases as of December  31,  2000,  is  estimated  using a
discounted cash flow analysis based on the Company's  borrowing cost for similar
credit facilities.  The Company estimates that as of December 31, 2000, the fair
value of its long-term debt did not differ  materially  from its carrying value.
During  2001,  the Company also had  borrowings  under its  equipment  financing
facility  that were  classified  as  long-term  debt.  The Company  paid off the
balance of $376,000  subsequent  to year-end and  therefore,  these  amounts are
classified  as  current in the  accompanying  consolidated  balance  sheet as of
December 31, 2001.

     Foreign Currency and International Operations

     The functional  currency of one of the Company's  subsidiaries is the local
currency.  The financial  statements of this  subsidiary  are translated to U.S.
dollars  using  period-end  rates for assets and  liabilities  and average rates
during the  relevant  period for revenue  and  expenses.  Translation  gains and
losses  are  accumulated  as  a  component  of  other  comprehensive  income  in
stockholders' equity (deficit). Such gains and losses have not been material.

     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, 1999, 2000 and 2001.

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 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,
1999, two customers each represented 25% of revenue. 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.

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

                                                  Years Ended December 31,
                                                 1999        2000       2001
                                                 ----        ----       ----
 Visual UpTime..............................   $ 78,490    $ 59,754   $ 55,557
 Cell Tracer................................      6,056       7,946      2,980
 Visual IP InSight..........................      4,557       9,466      8,095
                                               --------    --------   --------
       Continuing products..................     89,103      77,166     66,632
 Visual Internet Benchmark..................      2,616       4,607      4,025
 Visual Trinity and eWatcher................         --       7,268      3,591
                                               --------    --------   --------
       Discontinued products................      2,616      11,875      7,616
                                               --------    --------   --------
           Total  revenue...................   $ 91,719    $ 89,041   $ 74,248
                                               ========    ========   ========

     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.  The treasury stock effect of options
to  purchase  3,953,444  shares of common  stock  that  were  outstanding  as of
December 31, 1999 was included in the computation of diluted  earnings per share
for the year ended December 31, 1999. 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 following  details the  computation  of the income (loss) per share (in
thousands, except per share data):

                                                   Years Ended December  31,
                                                 1999        2000       2001
                                                 ----        ----       ----

Net income  (loss).........................   $ 3,551     $(415,485)  $ (26,962)
                                              =======     =========   =========
Weighted-average share calculation:
Basic weighted-average  shares outstanding:
Average number of shares of common stock
outstanding................................    24,583        28,733      31,585
Diluted weighted-average shares outstanding:
 Treasury stock effect of options
  and  warrants............................     1,964            --          --
                                              --------     -----------  --------
Diluted weighted-average shares outstanding.   26,547        28,733      31,585
                                              ========     ===========  ========

Earnings (loss) per common share:
 Basic earnings (loss) per  share...........  $ 0.14        $ (14.46)    $(0.85)
                                             ========      ===========  ========
 Diluted earnings (loss) per share..........  $ 0.13        $ (14.46)    $(0.85)
                                             ========      ===========  ========

 Reclassifications

    Certain  reclassifications  have  been  made in the 1999 and 2000  financial
statements to conform to the 2001 presentation.

     New Accounting Pronouncements

     In June 2001, the FASB issued SFAS No. 141,  "Business  Combinations,"  and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interest method of accounting for business combinations
initiated  after  June  30,  2001.  SFAS No.  142  requires  companies  to cease
amortizing  goodwill on December  31, 2001 that  existed at June 30,  2001.  Any
goodwill  resulting from acquisitions  completed after June 30, 2001 will not be
amortized.  SFAS No. 142 also  establishes a new method of testing  goodwill for
impairment  on an  annual  basis or on an  interim  basis if an event  occurs or
circumstances  change that would reduce the fair value of a reporting unit below
its carrying value.  The Company did not have any outstanding  goodwill or other
intangibles  as of December  31, 2001.  Therefore,  the Company does not believe
that  SFAS No.  142 will  have a  material  effect  on the  Company's  financial
position or results of operations.

     In June  2001,  the  FASB  issued  SFAS  No.  143,  "Accounting  for  Asset
Retirement  Obligations." It requires an entity to recognize the fair value of a
liability  for an  asset  retirement  obligation  in the  period  in which it is
incurred if a  reasonable  estimate of fair value can be made.  If a  reasonable
estimate  of fair  value  cannot  be made in the  period  the  asset  retirement
obligation  is incurred,  the liability  shall be  recognized  when a reasonable
estimate of fair value can be made.  This new standard is effective in the first
quarter of 2003.  The  Company  does not  believe  that SFAS No. 143 will have a
material effect on the Company's financial position or results of operations.

     In  August  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets,"  which  supersedes  SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be  Disposed  Of."  Though it  retains  the basic  requirements  of SFAS No. 121
regarding  when  and how to  measure  impairment  loss,  SFAS No.  144  provides
additional  implementation  guidance.  SFAS No.  144 is  effective  in the first
quarter of 2002.  The  Company  does not  believe  that SFAS No. 144 will have a
material effect on the Company's financial position or results of operations.

     2. Credit Agreements and Long-Term Debt:

     During 2000 and 2001, the Company had 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)  with a maximum  of $5.0
million  available  for issuing  standby  letters of credit,  provided  that the
Company  either  maintain a minimum of $10.0  million  cash on deposit  with the
bank, secure with cash any outstanding letters of credit, or treat any unsecured
letters of credit as  borrowings.  In December  2000,  the bank issued a standby
letter of credit,  as amended,  that expires on September 30, 2002 in the amount
of $2.5  million.  The  Company  secured the letter of credit with a pledge of a
certificate  of deposit in an original  amount of $5.0 million that was recorded
as a restricted  investment as of December 31, 2000. The  certificate of deposit
was  reduced  to $2.5  million  in  2001,  which  is  recorded  as a  restricted
short-term  investment  in the  accompanying  consolidated  balance  sheet as of
December 31, 2001. The bank credit facility also included an equipment financing
facility.  During 2001, the Company  borrowed  approximately  $451,000 under the
equipment financing  facility,  of which $376,000 was outstanding as of December
31, 2001. The borrowing is repayable over 36 months beginning in July 2001 at an
interest  rate of prime plus 2%, or 6.75% at December 31,  2001.  As of December
31, 2001,  the Company also had  approximately  $1.7 million  outstanding  at an
interest  rate of 6.75%  for  borrowings  under  the  accounts  receivable-based
arrangement. The credit facility, as amended, was anticipated to mature on April
29, 2002. In connection  with the issuance of the  convertible  debentures  (see
Note 10),  the  outstanding  amounts  borrowed  from the bank under the accounts
receivable-based and equipment financing arrangements were paid, and the related
loan agreements were terminated.  As a result, the borrowings under the accounts
receivable-based and equipment financing  arrangements are classified as current
in the  accompanying  consolidated  balance  sheet as of December 31, 2001.  The
standby  letter of credit  remains  outstanding  and secured with the  Company's
pledge of a certificate of deposit in the amount of $2.5 million.

     The credit facility contained restrictive  financial covenants,  including,
but not limited to,  requirements  related to liquidity and operating results as
well as restrictions related to other borrowings, acquisitions,  dispositions of
assets,  distributions and investments. In May 2001, modifications to the credit
facility were completed that revised the financial  covenants and eliminated the
ability to make additional borrowings under the equipment financing arrangement.
For the third quarter of 2001, the Company's net loss, as defined,  exceeded the
covenant  amount  permitted  by the bank.  The Company  received a waiver of the
noncompliance  from the  bank,  and the bank  agreed to  reduce  the net  income
covenant amount for the fourth quarter. The Company complied with all covenants,
as amended, for the fourth quarter of 2001.

     Long-term  debt  as of  December  31,  2000,  consisted  of  capital  lease
obligations (see Note 9).


     3. Stockholders' Equity:

     Common Stock

     During the second quarter of 2000, the Board of Directors and  shareholders
approved  an increase in the number of  authorized  shares of common  stock from
50,000,000 to 200,000,000.

     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 1,150,000 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 4,182, 182,878 and 337,675 shares of common stock pursuant to the
provisions of the 1999 Purchase Plan during 1999, 2000 and 2001, respectively.

     4. Stock Options:

     Employee Stock Option Plans

     The Company's  employee stock option plans (the "Option  Plans")  authorize
the issuance of an aggregate of  12,982,291  shares of common stock  pursuant to
the exercise of stock options. 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.

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

     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, 1998    2,600,019        $ 0.03 -- $34.50         $ 6.50
                   Granted..............................     2,394,873          0.06 --  59.00          31.48
                   Canceled.............................      (345,836)         0.17 --  34.50          14.91
                   Exercised............................      (695,612)         0.03 --  32.25           3.27
                                                            ----------        ----------------         ------
                 Options outstanding at December 31, 1999    3,953,444          0.03 --  59.00          21.41
                   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
                                                            ==========        ================         ======

</TABLE>

     As of December 31,  2001,  options to purchase  2,981,278  shares of common
stock were  exercisable  with a  weighted-average  exercise price of $6.61.  The
weighted-average  remaining contractual life and weighted-average exercise price
of options  outstanding at December 31, 2001, for selected exercise price ranges
are as follows:
<TABLE>
<CAPTION>

                                                      Options Outstanding                    Options Exercisable
                                              -------------------------------------      -----------------------------


                                               Number        Weighted-      Weighted      Number
                   Range of Exercise            of            Average       Average        of           Weighted-
                        Prices                Options        Remaining      Exercise     Options        Average
                                                             Contractual     Price                      Exercise Price
                   -----------------          -------        -----------    --------     -------        --------------
                                                               Life
                   <S>                        <C>              <C>          <C>          <C>            <C>
                   $ 0.07 --    $ 1.85          396,430        4.37         $  1.48      228,082        $  1.22
                     1.90 --      1.90        1,140,601        9.67            1.90       63,234           1.90
                     3.00 --      3.90          761,966        6.71            3.35      232,736           3.31
                     3.92 --      3.92        2,101,139        9.34            3.92      613,855           3.92
                     4.00 --      4.07          961,698        9.34            4.02      347,396           4.02
                     4.19 --      4.69        1,139,357        8.93            4.49      489,116           4.40
                     4.72 --      6.66        1,357,069        9.39            5.96      543,593           5.97
                     6.70 --     35.65          587,918        7.39           16.52      431,654          18.46
                    38.75 --     38.75           24,000        8.39           38.75       24,000          38.75
                    54.45 --     54.45            1,839        7.92           54.45        1,362          54.45
                    ------------------        ---------        ----         -------    ---------        -------
                   $ 0.07 --    $54.45        8,472,017        8.73         $  4.88    2,975,078        $  6.50
                   ===================        =========        ====         =======    =========        =======

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

     SFAS No.  123  allows an  entity to  continue  to use the  intrinsic  value
method.  However,  entities  electing the  accounting in APB Opinion No. 25 must
make pro forma  disclosures  as if the fair value based method of accounting had
been  applied.   The  Company  applies  APB  Opinion  No.  25  and  the  related
interpretations  in  accounting  for its  stock-based  compensation.  Under  APB
Opinion No. 25, the Company  recorded  deferred  compensation  of  approximately
$291,000  related  to  stock  option  grants  in  1999.  The  Company  amortized
approximately  $325,000,  $229,000 and $80,000 of deferred  compensation  in the
years  ended  December  31,  1999,  2000 and 2001,  respectively.  During  2001,
deferred  compensation was reduced by $242,000 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):

                                                  Years Ended December 31,
                                                1999        2000        2001
                                                ----        ----        ----
     Net income (loss) attributable to
     common stockholders:
       As reported.......................      $ 3,551   $ (415,485) $  (26,962)
       Pro forma.........................      $(4,620)  $ (435,794) $  (72,005)
     Diluted earnings (loss) per share:
       As reported.......................      $  0.13   $   (14.46) $    (0.85)
       Pro forma.........................      $ (0.19)  $   (15.17) $    (2.28)

     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, 1999,  2000 and 2001:  no dividend
yield,  expected volatility from 81% to 100%, risk-free interest rates from 4.6%
to 6.9% and an expected term of 5 years.

     5. 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.

     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, 1999
but  excludes  the  write-off of  purchased  research  and  development  and the
impairment  charge  of  $328.8  million  (see  Note 6).  These  results  are not
necessarily  indicative  of future  operating  results  or those that would have
occurred had the merger been consummated on that date.

                                                             Years Ended
                                                             December 31,
                                                             (unaudited)
                                                          1999        2000
                                                          ----        ----
    Pro forma net revenue.........................     $ 98,689    $ 94,851
    Pro forma net loss............................      (98,851)    (92,944)
    Pro forma basic and diluted loss per share....     $  (3.31)   $  (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.

     6. 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 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.

     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 these results, 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. 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 an impairment  charge of $3.1 million in the second quarter of
2001 and $197,000 in the fourth quarter of 2001.

     7. Employee Benefit Plans:

     Effective January 1, 1996, the Company adopted a defined  contribution plan
(the "Visual 401(k) Plan"),  available to all eligible full-time  employees upon
employment.  Employee  contributions  are  voluntary  and are  determined  on an
individual basis with a maximum annual amount equal to 15% of compensation  paid
during  the plan  year,  not to  exceed  the  annual  Internal  Revenue  Service
contribution   limitations.   All   participants   are  fully  vested  in  their
contributions. There have been no employer contributions under the Visual 401(k)
Plan. The Company has additional  401(k) plans  obtained  through  acquisitions.
Subsequent to December 31, 2001,  the Company  merged all of the acquired  plans
into the Visual 401(k) Plan.  There were no  contributions to these plans during
the three years ended December 31, 2001.

     8. Income Taxes:

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

                                                         December 31,
                                                       2000       2001
                                                       ----       ----
   Income tax provision (benefit):
     Current..............................         $  (9,585)   $   272
     Deferred.............................           (24,473)        --
                                                   ----------   -------
             Total provision (benefit)....         $ (34,058)   $   272
                                                   ==========   =======


     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
and 2001:

                                                           Years Ended
                                                           December 31,
                                                      1999     2000     2001
                                                      ----     ----     ----
   Statutory federal income tax rate............       35%     (35)%    (35)%
   Effect of graduated rates....................       (1)       1        1
   State income taxes, net of federal benefit...        4       (4)      (3)
   Net operating loss carryforward..............      (28)      --       --
   Non-deductible expenses......................       41       21        6
   Increase in valuation allowance..............       --        9       32
                                                      ----     ----     ----
             Total effective rate...............       51%      (8)%      1%
                                                      ====     ====     ====

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

                                                                  December 31,
                                                               2000        2001
                                                               ----        ----
  Deferred tax asset:
    Net operating loss carryforwards..................     $ 35,038    $ 39,659
    Depreciation......................................         (836)       (684)
    Allowance for doubtful accounts...................          419         210
    Inventory valuation...............................        1,128       1,800
    Accrued liabilities...............................        2,658       1,288
    Deferred revenue..................................        2,558       1,408
    Tax credit carryforwards..........................        2,203       3,402
    Basis differences attributable to
     purchase accounting..............................       (3,733)         --
    Valuation allowance...............................      (39,435)    (47,083)
                                                           ---------   ---------
            Total net deferred tax asset..............     $     --    $     --
                                                           ========    ========

     The Company had net operating loss  carryforwards  to offset future taxable
income of  approximately  $104.4  million as of  December  31,  2001.  These net
operating  loss  carryforwards  expire through 2021. In computing its income tax
expense,  the Company  recognizes  the tax  benefits of current and prior years'
stock option  deductions  after the  utilization  of net  operating  losses from
operations  (operating losses determined  without deductions for exercised stock
options) to reduce income tax expense.  Net operating loss  carryforwards,  when
realized  related to stock  option  deductions,  are  credited to  stockholders'
equity.  Under the provisions of the Tax Reform Act of 1986, when there has been
a  change  in  an  entity's   ownership,   utilization  of  net  operating  loss
carryforwards  may be  limited.  Because  of the  changes  in the  ownership  of
Net2Net,  Inverse and  Avesta,  the use of the  Net2Net,  Inverse and Avesta net
operating  losses  will be limited  and may not be  available  to offset  future
taxable income.

     9. Commitments and Contingencies:

     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  $1.7  million,  $3.3 million and $1.9 million  during
1999, 2000 and 2001, respectively.

     In May 1999,  Inverse  entered into a master lease  agreement,  as amended,
with a leasing  company to provide up to $1.8  million in  financing to purchase
furniture  and  equipment  through April 2000.  During 1999,  Inverse  purchased
approximately  $1.4 million of furniture  and  equipment  under the master lease
agreement.  Inverse  also  entered into a  sale-leaseback  transaction  with the
leasing  company  in which  equipment  was sold at its net book value and leased
back under non-cancelable  capital leases. No gain or loss was recognized on the
transaction. In connection with the master lease and sale-leaseback transaction,
Inverse issued the leasing company a warrant to purchase common stock.  The fair
value of this warrant was not material.

     Future minimum lease payments as of December 31, 2001 under  non-cancelable
capital and operating leases are as follows (in thousands):

                                                            Capital   Operating
                                                            Leases     Leases
                                                            -------   ---------
  2002.................................................    $  296     $ 1,985
  2003.................................................        --       1,686
  2004.................................................        --       1,676
  2005.................................................        --       1,608
  2006.................................................        --       1,575
  Thereafter...........................................        --          --
                                                           ------     -------
            Total minimum lease payments...............       296     $ 8,530
                                                                      =======
  Interest element of lease payment....................       (11)
                                                           ------
  Present value of future minimum lease payments.......       285
   Current portion.....................................      (285)
                                                           ------
  Long-term portion....................................    $   --
                                                           ======

     The  Company  has a sublease  for a portion of the  operating  leases  that
expires in October 2002.  Future  minimum lease payments due from the lessee are
approximately $180,000 for 2002.

     Litigation

     In  July,  August  and  September  2000,  several  purported  class  action
complaints  were filed against the Company and certain of the  Company's  former
executives. These complaints have since been combined into a single consolidated
amended complaint (the "complaint"). The complaint alleges 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.
The  complaint  does not  specify  the amount of  damages  sought.  The  Company
believes  that the  plaintiffs'  claims are without  merit and intends to defend
against these allegations vigorously.  The Company has filed a motion to dismiss
the complaint, which is now pending before the court. The Company expects that a
substantial  portion  of the legal  costs  that it might  incur  related to this
matter  will be paid by its  directors'  and  officers'  insurance  policy.  The
Company  cannot  presently  determine  the ultimate  outcome of this  action.  A
negative outcome could have a material adverse effect on the Company's financial
position or results of operations.  Failure to prevail in the  litigation  could
result in, among other things,  the payment of substantial  monetary or punitive
damages.

     In  October  1997,  a  lawsuit  was  filed  against  Avesta  and one of its
employees alleging  infringement of two patents,  unfair competition,  breach of
contract  and  interference  with  contractual  relations  resulting  in  unjust
enrichment.  Avesta answered the complaint,  denying all  allegations,  and also
asserted   counterclaims   against  the  plaintiff  for  patent  misuse,  unfair
competition and interference with business and patent invalidity. Pursuant to an
agreement between the parties,  on June 13, 2001, the court dismissed the action
without  prejudice,  preserving  to the  parties  the right to refile the action
pending future developments of the Visual Trinity product.

     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 financial position or future operating results.

     10. Subsequent Events:

     In March 2002,  the Company issued senior  secured  convertible  debentures
(the  "Debentures")  in the  aggregate  amount  of $10.5  million  in a  private
placement offering. 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  assets.  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 certain additional shares of common
stock or instruments  convertible into common stock at a price that is less than
the 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.

     The Debentures  include  certain  financial  covenants  related to earnings
before interest,  taxes, depreciation and amortization for 2002 and 2003. If the
financial covenants are not met, the holders may cause the Company to redeem the
Debentures  at a price  equal to the  principal  amount of the  Debentures  plus
accrued  interest.  The  redemption  may be made in common  stock or cash at the
Company's option provided that certain  conditions are satisfied.  Redemption of
the Debentures  also may be required upon a specified  change of control or upon
the  occurrence  of any one of the other  triggering  events,  including but not
limited to,  default on other  indebtedness,  failure to register  the shares of
common stock that may be issued to the Debenture holders and failure to maintain
the common stock listing on an eligible market.  In the event that the financial
covenant for 2002 is achieved, the first priority lien in favor of the Debenture
holders shall be released.

     The Company also issued  warrants to purchase  828,861 shares of its common
stock at an initial  exercise price of $4.2755 per share. The exercise price may
be adjusted if the Company issues certain  additional  shares of 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 Debentures also give
the holders the right to purchase 575 shares of to-be-created Series A preferred
stock for $5.8 million prior to May 6, 2002. The Company has also granted to the
Debenture  holders the right to purchase  $4.75 million of additional  shares of
to-be-created  preferred  stock at any time after the six-month  anniversary but
before the  fifteen-month  anniversary  of the issuance of the  Debentures.  The
Debenture   holders  were  also  granted   certain  equity   participation   and
registration rights.

     In connection with the issuance of the Debentures,  the outstanding amounts
borrowed  from  the bank  under  the  Company's  accounts  receivable-based  and
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,  2002  remains  outstanding  and  secured  with the  Company's  pledge  of a
certificate of deposit in the amount of $2.5 million that matures on October 31,
2002.

     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,
                                      2000        2001       2000(1)   2001(3)_      2000       2001       2000(2)   2001(4)_
                                      ----        ----       ----      ----          ----       ----       ----      ----
                                                             (in thousands, except per share amounts)
    <S>                               <C>         <C>         <C>        <C>         <C>        <C>        <C>         <C>
    Revenue.........................  $ 30,494    $ 17,386    $ 28,644   $ 20,329    $ 14,607   $ 19,208   $  15,296   $ 17,325
    Gross profit....................    21,199      10,424      19,154     11,028       7,100     12,109       9,073     11,256
    Income (loss) from operations...     6,914      (7,954)    (46,594)   (12,427)    (39,142)    (2,989)   (373,319)    (3,645)
    Net income (loss)...............     5,541      (7,667)    (42,319)   (12,330)    (30,709)    (2,979)   (347,998)    (3,986)
    Basic income (loss) per share...     0.22       (0.24)      (1.54)     (0.39)      (0.99)     (0.09)     (11.17)     (0.13)
    Diluted income (loss) per share.     0.20       (0.24)      (1.54)    ( 0.39)      (0.99)     (0.09)     (11.17)     (0.13)

</TABLE>


     (1) The net loss for the three  months  ended June 30,  2000  includes  the
write-off of IPR&D of $39.0 million (see Note 5).

     (2) The net loss for the three  months ended  December 31, 2000  includes a
restructuring  charge of approximately  $7.0 million and an impairment charge of
approximately  $328.8  million  related to the  write-off  of goodwill and other
intangibles from the Avesta acquisition (see Note 6).

     (3) 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 6).

     (4) 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 6).

     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.


<PAGE>


<TABLE>
<CAPTION>


                                                                                                          SCHEDULE II

                                                         VISUAL NETWORKS, INC.

                                                  VALUATION AND QUALIFYING ACCOUNTS
                                                             (in thousands)

                                                Balance at Beginning      Additions Charged to                  Balance at End
              Description                             of Period            Costs and Expenses      Deductions     of Period
              -----------                       --------------------      --------------------     ----------   --------------
    <S>                                                <C>                     <C>                  <C>            <C>
    For the year ended December 31, 1999:
      Deducted from asset accounts:
       Allowance for doubtful accounts........         $ 493                   $  301               $   40         $ 754


    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

</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 6 of the Notes to Consolidated  Financial
Statements.



<PAGE>
<TABLE>
<CAPTION>

                                      EXHIBIT INDEX


Exhibit Number                                        Description
      <S>                             <C>
       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.
      10.1 *                          1994 Stock Option Plan.
      10.2 *                          1997 Omnibus Stock Plan, as amended.
      10.3 *                          Amended and Restated 1997 Directors' Stock Option Plan.
      10.4 !!                         2000 Stock Incentive Plan, as amended.
      10.5 *+                         Reseller/Integration Agreement, dated August 29, 1997, by and between the Company
                                       and MCI Telecommunications Corporation.
      10.5.1$$$++                     Second Amendment, dated November 4, 1998, to the Reseller/Integration Agreement
                                       between the Company and MCI Telecommunications Corporation (relating to Exhibit 10.5).
      10.6 ****++                     Master Purchase of Equipment and Services Agreement, dated as of May 22, 2000,
                                       between Sprint/United Management Company And the Company.
      10.7 *+                         General Agreement for the Procurement of Equipment, Services And Supplies,
                                       dated November 26, 1997, between the Company And AT&T Corp.
      10.8 *                          Lease Agreement, dated December 12, 1996, by and between the Company and The Equitable
                                       Life Assurance Society of the United States.
      10.8.1 *                        Lease Amendment, dated September 2, 1997, by and between the Company and The Equitable
                                       Life Assurance Society of the United States (related to Exhibit 10.8).
      10.8.2$$$                       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.
      10.12 *                         Terms of Employment, dated June 11, 1997, by and between the Company and Peter J. Minihane,
                                       as amended.
      10.17 **                        Net2Net 1994 Stock Option Plan.
      10.20$$                         1999 Employee Stock Purchase Plan, as amended April 11, 2001.
      10.22%                          Inverse Network Technology 1996 Stock Option Plan.
      10.23 !!                        Avesta Technologies 1996 Stock Option Plan.
      10.24 ****                      Loan and Security Agreement, dated February 28, 2001, by and
                                      Between Silicon Valley Bank and the Company.
      10.24.1 !!!                     First Loan Modification to the Loan and Security Agreement, dated May 24, 2001
                                       (related to Exhibit 10.24).
      10.24.2                         Second Loan  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 Loan Modification to the Accounts Receivable Financing Agreement, dated May 24, 2001
                                       (related to Exhibit 10.25).
      10.25.2                         Second Loan Modification to the Accounts Receivable Financing Agreement,
                                       dated December 20, 2001, (related to Exhibit 10.25).
      10.25.3                         Third Loan 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.
      21.1 ****                       List of subsidiaries of the Company.
      23.1                            Consent of Arthur Andersen LLP.
      24.1                            Powers of Attorney (included in signature pages).
      99.1                            Letter regarding Arthur Andersen as our Independent Public Accountants.

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    <S>      <C>

       *     Incorporated herein by reference to the Company's Registration Statement on Form S-1, No. 333-41517.
      **     Incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8, No. 333-53153.
     ***     Incorporated herein by reference to the Company's 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 Exhibit 10.1 to the Company's Registration Statement on Form S-8, No. 333-88719.
       @     Incorporated herein by reference to the Company's Registration Statement on Form S-4, No. 333-33946.
       $     Incorporated herein by reference to Exhibit 3.1 to the  Company's  Quarterly
             Report on Form 10-Q for the three months ended June 30, 1999.
      $$     Incorporated herein by reference to the Company's Definitive Proxy Statement on Schedule 14A filed April 30, 2001.
     $$$     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.

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