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

                                   FORM 10-K

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

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 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, 20850
                                    Maryland
                   (Address of Principal Executive (Zip Code)
                                    Office)

       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 to be 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.  Such  proxy  statement  will be filed  with the
Securities   and  Exchange   Commission  not  later  than  120  days  after  the
Registrant's fiscal year ended December 31, 2001.

     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.


<PAGE>





                                TABLE OF CONTENTS


                                       PART I

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

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

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

                                       PART IV
  Item 14.       Exhibits, Financial Statement Schedules and Reports
                  on Form 8-K
  Signatures
<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 comprehensive service management
systems for providers and users of new world connectivity  services. Our systems
combine  software  components,  or agents,  installed at key places in a network
with  centralized  software  applications  designed for performance  monitoring,
real-time troubleshooting and network capacity planning. We manufacture and sell
hardware  devices that embody  these  software  agents as well as perform  other
network infrastructure functions. Our products, Visual UpTime, Visual IP InSight
and Cell Tracer, provide network performance measurement and analysis that allow
network  service  providers  to achieve  the  service  levels  required by their
subscriber  customers and to lower  operating  costs  associated  with new world
networks.   The  availability  of  performance  monitoring  and  troubleshooting
software agents also allows customers to verify service levels supplied by their
service providers and monitor traffic  traversing their networks,  a requirement
for many enterprises wishing to use public telecommunications  services to carry
mission-critical data. These applications are essential to both service provider
and  enterprise  customers  in  generating  revenue,  attracting  and  retaining
customers,  and maintaining a competitive  position. We believe that our systems
are  deployed in  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 155,000
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.

     Vertical  Systems  Group,  a  leading  industry  analyst,   estimates  that
approximately  791,000  frame relay  circuits  and 51,000 ATM  circuits  will be
installed worldwide from 2002 through 2004.  International Data Corporation,  or
IDC, a leading industry  analyst,  estimates that the number of Internet capable
devices in the United States will grow from 306 million in 2002 to more than 786
million by 2006. The Yankee Group,  another leading industry analyst,  estimates
that the annual market for e-commerce and Web site implementation and management
services  will grow from $370 million in 2000 to $850 million in 2003.  Vertical
Systems  estimates that worldwide  frame relay and ATM service revenue will grow
from  $12.3  billion  in 2000  to  $26.8  billion  in  2004.  To  support  these
applications and services,  networks are growing in size and complexity. We plan
to apply our  comprehensive  product  portfolio  for service  level  performance
monitoring and  troubleshooting  to improve 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 Internet Protocol, or IP, network traffic worldwide.

     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.

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.  We believe that WAN data traffic volumes will
continue  to expand  rapidly due to four key trends  driving  telecommunications
markets worldwide:

     - proliferation of distributed  computing  applications  such as electronic
mail,  electronic  transaction  processing,  enterprise  resource  planning  and
inter-enterprise information transfer based on Web technologies;

     -  deregulation  of the  telecommunications  services  industry,  which has
intensified competition and resulted in decreasing prices of WAN services;

     - availability of high capacity  fiber-optic  networks and the emergence of
high bandwidth network access technologies that increase the ability to transfer
large volumes of electronic information; and

     - rapid growth of remote applications that access enterprise resources such
as  telecommuting  and  e-commerce,  and the  availability  of broadband  access
technologies that enable them.

<PAGE>

     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 new world  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,  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 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.

<PAGE>

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  dedicated  service  as  well  as  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.

<PAGE>

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.

<PAGE>

     -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.

<PAGE>

     -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  has
embedded our agent  technology  into the operating  system software (IOS) of its
router  products and made 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.

<PAGE>

     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

Visual UpTime

     Visual  UpTime is the de facto  standard  for service  management  of frame
relay and ATM networks.  This  complete  service  management  system helps users
optimize  network  performance  and reduce  overall costs of network  ownership.
Visual  UpTime  won  Network  World'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 demarc.

     ASE. The ASE is a combination of embedded proprietary software and hardware
that  performs  detailed  analysis of network  performance  at the demarc.  Most
versions of the ASE provide the functionality of WAN access equipment, such as a
DSU/CSU.   Visual  UpTime  ASEs  use  sophisticated   proprietary   software  in
conjunction with networking-specific  microprocessors and integrated circuits to
perform detailed  analysis of every bit, frame and packet traversing the demarc.
The ASEs generally store the analysis results locally in memory and wait for the
PAM to request the  results.  When the ASE detects an  anomalous  condition,  it
sends an unsolicited  alert to the PAM so that network operators can take prompt
action.  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 PAM is the system database and request broker between the PACs and
either  the  database  or ASEs.  Unlike  traditional  data  transfer  management
architectures  which depend on continuous  polling between the manager (PAM) and
agents (ASEs), a bandwidth consuming process,  Visual UpTime distributes most of
the  processing  burden to the ASE,  allowing  the PAM-ASE  data sharing to take
place less  frequently,  typically  once a day.  This feature is critical in WAN
environments   where  costly  bandwidth  makes  continuous   management  polling
impractical.

     PAC.  The  PAC  is  Visual  UpTime's  client  software  for  packaging  and
presenting  information  stored in the PAM and ASE.  Multiple  PACs may access a
single PAM or ASE. 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.

<PAGE>

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

     -Planning and  reporting.  This toolset is a report  generation  tool that
creates a wide  variety of reports from the network  performance  data stored in
the PAM.  This  toolset is used  primarily  for  capacity  planning  and network
engineering, management of service level agreements between 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 demarc 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.

Visual IP InSight

     Visual IP  InSight is a WAN  service  management  system for remote  access
network  technologies  utilizing  IP and the  Internet.  It helps  both  service
providers  and  enterprises  provide  the  highest  quality IP services to their
customers.  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 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  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 are  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  that is  installed on the PCs of service
subscribers.   It  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 service agent
data they have  collected to one or more  aggregators  for data  validation  and
loading into various data repositories.  All of the performance data gathered is
stored in a high  performance  relational  database.  Data is presented  using a
secure web interface,  allowing  detailed  information on the performance of the
network and applications to be quickly distributed throughout an organization or
between customers and partners.

<PAGE>

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.

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
Visual systems 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.

<PAGE>

     We have made  significant  investments in system  architecture  and feature
development.  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,  including
AT&T, BellSouth,  Earthlink, Equant, 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.

     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 has automatically renewed for
a second  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 June 2001, 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.

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.

<PAGE>

     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.
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 market is highly fragmented.
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.  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.

<PAGE>

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.

<PAGE>

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.

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.

     Our common stock is traded on the Nasdaq  National  Market under the symbol
"VNWK." 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.

                                                       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 (from January 1, 2002 through
   March 28, 2002) .........................        $   4.94          $   2.94

     On March 28,  2002,  the last  reported  sale price of our common stock was
$2.94 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)
               <S>                                           <C>        <C>         <C>       <C>         <C>
               Consolidated Statement of Operations Data:
               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 charges(3) (4)    -          751         -       335,810       9,328
                   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 Trintiy 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  product.  During  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.  Development  efforts
relating to incorporating  this  functionality are expected to begin in 2002 and
be included  in a future  release of the Visual IP InSight  product in 2003.  We
continue to focus on sales of Visual UpTime, Visual IP InSight and Cell Tracer.

<PAGE>

     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.  The  estimates
included  in the  preparation  of our  financial  statements  relate to accounts
receivable allowances, inventory reserves, estimates of expense accruals and the
cash flow  estimates  used in evaluating  impairment of long-lived  assets under
Statement of Financial Accounting Standards No. 121. Our significant  accounting
policies  are  described  fully  in Note 2 of Notes  to  Consolidated  Financial
Statements.   We  believe  that  our  accounting  policies  related  to  revenue
recognition and the impairment of long-lived assets are the most critical to aid
in fully understanding and evaluating our reported financial results.

     We  recognize  revenue  from our service  management  products and services
including  hardware,  software,  benchmark services,  professional  services and
technical  support.  We generally  recognize revenue from the sale or license of
our  products  upon  delivery  and  passage  of  title  to the  customer.  Where
agreements provide for evaluation or customer  acceptance,  we recognize revenue
upon the completion of the  evaluation  process and acceptance of the product by
the customer.  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 our specific objective evidence of fair value. Our
maintenance  contracts  require us to provide  technical  support  and  software
updates  to  customers.  We  recognize  technical  support  revenue,   including
maintenance 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.

     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.

     With the  acquisition  of Avesta  in May  2000,  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  decreased from
$91.7  million in 1999 to $89.0  million in 2000  while our  operating  expenses
increased resulting 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 (the products added through the
Avesta  acquisition)  as well as decreases in the revenue  provided by our other
products.  Despite these revenue  decreases,  our operating  expenses  increased
significantly in the  corresponding  periods 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  product in an
effort to further focus our product  portfolio and streamline our operations and
resources.  In the fourth quarter of 2001, we completed a workforce reduction to
continue focusing on reducing our operating  expenses.  In connection with these
efforts, we recorded restructuring charges of $3.9 million in the second quarter
of 2001 and $385,000 in the fourth quarter of 2001.

     In determining the carrying amount of our long-lived  assets, we review our
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 our 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.

<PAGE>

     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  announced  a
decision to  discontinue  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
decisions,  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.

     During  2001,  our revenue  decreased  from $89.0  million in 2000 to $74.2
million in 2001.  This  revenue  decrease  during 2001 was due, in part,  to the
discontinuation  of the  Visual  Trinity  product  and the  sale  of the  Visual
Internet  Benchmark  product as well as  decreases  in all of our other  product
lines. In response to these revenue  decreases,  we focused on implementing  our
comprehensive plan to strengthen our business by:

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

     |X|  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;

     |X| 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

     |X|  Reducing  our  operating   expenses:   We  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,  MD, 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.

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
                                                                             ----        ----        ----
                 <S>                                                        <C>         <C>         <C>
                 Revenue.............................................       100.0%      100.0%      100.0%
                 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 purchased research and development...          -         43.8          -
                   Sales and marketing...............................        26.7        47.1        45.0
                   General and administrative........................         8.6        12.6        12.0
                   Merger-related costs..............................         7.3         -            -
                   Restructuring and impairment charges..............          -        377.2        12.6
                   Amortization of goodwill and other intangibles....          -         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>

<PAGE>

     The following table presents the 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
                         Visual 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>

2001 Compared with 2000

     Revenue.  Revenue was $89.0  million in 2000  compared to $74.2  million in
2001, a decrease of $14.8 million.  The overall decrease in revenue of 16.6% was
primarily due to a decrease in Visual Cell Tracer revenue of $5.0 million,  from
one  customer,  a decrease in Visual UpTime  revenue of $4.2 million,  primarily
from value  added  resellers  and  service  providers,  a decrease  in Visual IP
Insight revenue of $1.4 million and a decrease in Visual Trinity revenue of $3.7
million as a result of the discontinuation of the product.  The decrease in Cell
Tracer revenue was attributable to reduced demand from our sole customer for the
product. The decrease in sales of Visual UpTime was primarily  attributable to a
decrease in purchases from one of our major service provider customers. Sales to
all service  providers  increased from  approximately 70% of revenue for 2000 to
77% for 2001.

     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.

     We will continue to recognize  revenue from the Visual  Internet  Benchmark
product that we sold during 2001,  for  existing  contracts,  under which we are
still  required  to perform  services.  We  receive  royalty  payments  from the
purchaser on new contracts.

     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.  Gross profit was $56.5  million for 2000 compared to $44.8
million for 2001, a decrease of $11.7 million. Gross margin was 63.5% of revenue
for 2000 as compared to 60.4% of revenue for 2001.  The decrease in gross margin
percentage was due primarily to significant fixed  manufacturing and other costs
supporting a lower revenue base,  fewer high margin software sales primarily due
to the  discontinuation  of the Visual Trinity product and higher fixed costs to
support the Visual Benchmark  service for existing  contracts.  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.

     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.  We intend to incur  research
and development  expenses at a level  consistent with the fourth quarter of 2001
or decrease  them in absolute  dollars  during 2002 as a result of our continued
focus on the reduction of operating  expenses.

<PAGE>

     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 date 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.  We  intend  to incur  sales  and  marketing  expenses  at a level
consistent with the fourth quarter of 2001 or decrease them in absolute  dollars
during 2002 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.  We intend to incur
general  and  administrative  expenses  at a level  consistent  with the  fourth
quarter of 2001 or decrease them in absolute  dollars during 2002 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.   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  closure  costs.  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.

<PAGE>

    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.  We recognized $91.7 million in revenue for 1999 compared to $89.0
million in revenue for 2000, a 2.9% decrease. The decline was due primarily to a
decrease in Visual  UpTime  revenue of $18.7  million,  primarily  from  service
providers,  offset by increases in revenue related to Visual Cell Tracer, Visual
IP InSight and Visual  Internet  Benchmark and the effect of the  acquisition of
the Avesta Trinity and eWatcher products. The decrease in sales of Visual UpTime
was  primarily  attributable  to a change in  purchasing  behavior  of two major
service  providers.  Sales to all service providers  accounted for approximately
72% of revenue for 1999 as compared to 70% for 2000.

     Gross  profit.  Gross profit was $60.8  million for 1999  compared to $56.5
million for 2000, a decrease of $4.3 million.  Gross margin was 66.3% of revenue
for 1999  compared to 63.5% of revenue for 2000.  The  decrease in gross  margin
percentage  was due  primarily to higher fixed costs  supporting a lower revenue
base and approximately $1.9 million in inventory write-downs offset, in part, by
the  addition  of  higher-margin  software  sales of Visual  Trinity  and Visual
eWatcher.

     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.

<PAGE>

     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 loss for 1999 was $3.6 million for 1999 as compared
to $415.5 million for 2000, an increase of $419.1 million.  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  $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.  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, as
indicated above, we became dependent on cash that was provided by our bank under
a credit  facility.  In addition,  from time to time, we have  obtained  advance
payments in connection  with certain  customer  purchase  orders.  In the fourth
quarter of 2001, we received an advance  payment of  approximately  $3.6 million
that was  classified  as a  customer  deposit in the  accompanying  consolidated
balance  sheet as of  December  31,  2001;  the  related  customer  orders  were
fulfilled in February  2002. We do not  anticipate  receiving  customer  advance
payments  in the future.  Our future  capital  requirements  will depend on many
factors,  including  the rate of revenue  growth,  if any,  as well as our gross
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,  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 and eliminate the
related costs. In the fourth quarter of 2001, we made  additional  reductions in
workforce and other  operating  costs.  As a result of these actions,  operating
expenses,  excluding  charges  related to  acquisitions  and  restructuring  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.

<PAGE>

     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. 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
become  profitable.  There can be no assurances  that we will be able to sustain
revenue or become profitable.  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.

     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 $6.64 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  offering.  The
debentures are due March 25, 2006, payable in common stock or cash at our option
provided certain conditions are satisfied, bear interest at an annual rate of 5%
payable quarterly, and are secured by a first priority lien on substantially all
of our assets.  The  debentures  may be  converted  into our common stock at the
option of the  holders  at a price of  $3.5163  per  share,  subject  to certain
adjustments.  The debentures are  convertible  into a number of shares of common
stock equal to the principal amount of the debentures  divided by the conversion
price,  or 2,986,093  shares on the date of issuance.  We are required to adjust
the conversion price 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 cash or common  stock at our
option subject to certain  conditions.  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.

     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 Series A preferred  stock will
accrue dividends at an annual rate of 5% that are payable quarterly beginning on
June 30, 2002.  We will have the right to cause the  redemption  of the Series A
preferred stock on the fourth anniversary of the issuance of such stock based on
similar terms to the debentures.  We have 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 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, 2001.

<PAGE>

     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
to meet our future cash  requirements.  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.

Additional Risk Factors

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

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

     Our  limited  history,   operating  losses  and  accumulated  deficit  make
predicting our future operating results difficult.  Our company was organized in
1993 and we  introduced  Visual  UpTime  in  mid-1995.  Visual  IP  InSight  was
introduced in 1997.  Accordingly,  we have only a limited operating history upon
which an evaluation  of our products and prospects can be based.  As of December
31,  2001,  we had an  accumulated  deficit  of  approximately  $473.9  million.
Although  we reported  net income of $3.6  million  for 1999,  we have  incurred
consolidated  net  losses  in the  years  ended  December  31,  2000 and 2001 of
approximately $415.5 million and $27.0 million,  respectively.  The loss in 2000
related to the year-end write-down of impaired intangible assets recorded in the
Avesta acquisition, the write-off of purchased research and development related
to  the  Avesta  acquisition,  the  amortization  of  the  acquired  intangibles
including goodwill prior to the write-down, the restructuring charge recorded in
the fourth quarter as well as reduced revenue and increased  operating expenses.
The loss in 2001 was due to a reduction  in revenue as well as the  write-off of
the remaining intangible assets related to the Avesta acquisition, restructuring
charges  recorded in the second and fourth  quarters,  and the  write-off  of an
investment.  While we believe that our restructuring  activities and new product
strategies  will result in  sufficient  revenue and reduced  operating  expenses
compared to 2001 such that we will return to profitability in 2002, there can be
no assurances that we will become profitable.

Failure to achieve  expected  revenue  levels may  adversely  affect future
operating results.

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

The loss of AT&T, WorldCom or Sprint as customers could harm our business.

<PAGE>

     Our primary sales and marketing strategy depends  predominantly on sales to
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 or Sprint, which together have
historically  provided a majority of our revenue,  would result in a substantial
loss of  revenue  that could have a  material  adverse  effect on our  business,
financial  condition and results of  operations.  For 2001,  AT&T,  WorldCom and
Sprint  accounted  for  29%,  10% and  14%,  respectively,  of our  consolidated
revenue.  This  concentration  should continue as our customer base will consist
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 likelihood
that mergers of existing service  providers may further reduce their number mean
that replacing a significant network provider company customer will be even more
difficult in the future.  Furthermore,  the small number of customers means that
the  reduction,  delay or  cancellation  of orders or a delay in shipment of our
products  to any one service  provider  customer  could have a material  adverse
effect on our  business,  financial  condition  and results of  operations.  Our
anticipated  dependence  on  sizable  orders  from a limited  number of  service
providers  will  make the  relationship  between  us and each  service  provider
critically  important to our business.  As our relationships  with these service
providers evolve over time, we will make adjustments to product  specifications,
forecasts and delivery  timetables in response to service  provider  demands and
expectations.  Further,  because none of our agreements contain minimum purchase
requirements,  there can be no assurance  that the issuance of a purchase  order
will result in  significant  recurring  business.  Any  inability  to manage our
service provider relationships successfully could have a material adverse effect
on our business, financial condition and results of operations.


Failure  of  service  providers  to  incorporate  our  products  into their
infrastructure may adversely affect the level of future revenue.

     Our  service  provider  deployment  strategy  depends on the sale of Visual
UpTime  and  Visual IP  InSight  to  service  providers  for  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. The success of our 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 future
revenue  could be  significantly  lower than  anticipated.  We believe  that the
success  of the  service  provider  deployment  strategy  depends on a number of
factors over which we may have little or no control, including:

     -acceptance of and satisfaction  with our systems by service providers and
their customers;

     -our ability to convince the service providers of the operational benefits
of Visual UpTime and Visual IP InSight;

     -the realization of operating cost  efficiencies by service  providers and
their customers upon the deployment of Visual UpTime and Visual IP InSight;

     -the demand  generation  for these systems from  customers and support for
the systems by the service provider sales forces;

     -the  competitive   dynamics  between  service   providers  that  provide
communication  networks for wide area use and the development of service for new
world networks overall;

     -our  successful  development  of systems and  products  that  address the
requirements   for   systems   deployed   as  part  of  a   service   provider's
infrastructure;

     -the timing and successful  completion of integration  development work by
service providers to incorporate our service management functionality into their
operational infrastructure; and

     -the  absence  of new  technologies  that make our  products  and  systems
obsolete before they become standardized in network systems.

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

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

<PAGE>

     If we do not  generate  additional  revenue  from our sales  and  marketing
efforts,  the  expended  resources  and lack of increased  revenue  could have a
material  adverse  affect on our  business,  financial  condition and results of
operations.  Our future  business  prospects  depend on growing the sales of our
products and services. The incorporation of our products into the infrastructure
of  service   providers  is   characterized  by  a  long  sales  cycle  to  turn
opportunities  into sales. The risks inherent in the long sales cycle for Visual
UpTime and Visual IP  InSight,  over  which we have  little or no control  over,
include:

    -service providers' internal acceptance reviews;

    -service providers' budgetary constraints and technology assessment;

    -service providers' lengthy decision-making processes;

    -the  attendant  delays  frequently  associated  with  service  providers'
internal procedures to approve large capital expenditures; and

    -the substantial commitment of capital from service providers.

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

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

     We have  outsourced the manufacture of  substantially  all of our ASE units
(the  analysis  service  element  of  our  Visual  UpTime  system)  to a  single
subcontract  manufacturing  firm. 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 such 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 the supplier.  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 business. 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
harm our  business.  Any  resulting  interruption  or delay in the supply of our
products by the subcontract manufacturer could result in a loss of revenue.

Failure of the market to accept new world network services would reduce the
demand for our products.

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

Failure  of  broadband  access  services  to  achieve   significant  market
penetration could impact the effectiveness of our new product strategy.

     Our  new  product   strategy   anticipates   that  customers  will  provide
comprehensive  service  management  for  the new  world  networks  running  over
broadband access facilities such as DSL, fixed wireless,  and cable. There is no
assurance  that  these  access  technologies  will  achieve  broad-based  market
acceptance for  mission-critical  applications for the business customers of the
service providers.  Failure of these technologies to achieve  broad-based market
acceptance  could adversely  affect future  revenue,  financial  condition,  and
results of operations.

Failure of businesses to use the Internet for corporate networking purposes
would reduce the demand for our products.

<PAGE>

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

     -security  concerns  including  the potential for fraud or theft of stored
data and information communicated over the Internet;

     -inconsistent  quality of service,  including  well-publicized  outages of
popular web sites;

     -lack of availability of cost-effective, high-speed service;

     -limited numbers of local access points for corporate users;

     -delay in the  development  of  enabling  technologies  or adoption of new
standards;

     -inability to integrate business applications with the Internet;

     -the need to operate with multiple and frequently incompatible products;
        and

     -a lack of tools to simplify access to and use of the Internet.

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

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

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. Failure to achieve any one of these objectives could have a material
adverse effect on our business, financial condition and results of operations.

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

<PAGE>

     The  market  for  service  management  systems  for new world  connectivity
services is new and rapidly  evolving.  We expect  competition in this market to
intensify  in the  future.  Our  competitors  vary in size and in the  scope and
breadth of the products and services that they offer.  Many of these competitors
have greater  financial,  technical,  marketing and other resources than us, and
some  have  well-established   relationships  with  our  current  and  potential
customers.  As a result,  these  competitors  may be able to  respond  to new or
emerging technologies and changes in customer requirements more effectively than
us, or devote greater  resources than us to the development,  promotion and sale
of  products.  Increased  competition  may result in price  reductions,  reduced
profitability  and loss of market  share,  any of which  could  have a  material
adverse effect on our business,  financial  condition and results of operations.
We may experience  competition  from less  expensive  products and services that
provide  only a  portion  of the  functionality  provided  by our  products  and
services. In particular, as prices for network equipment components such as data
service units/channel  service units decrease,  customers may decide to purchase
these less expensive  products even though they lack certain features offered by
our products,  particularly  when these units are integrated in customer routers
and switches.  For example, we expect that participants with strong capabilities
in these various  segments  could partner with each other to offer products that
supply functionality  approaching that provided by Visual UpTime. The success of
such products could have a material  adverse  effect on our business,  financial
condition and results of operations.  If we expand the scope of our products and
services, we may encounter many additional,  market-specific competitors.  These
potential  competitors  include  large  companies  that sell network  management
software.  The success of such products could have a material  adverse effect on
our business, financial condition and results of operations.

The  consolidation  of the  telecommunications  industry  could result in a
lengthened sales cycle.

     Many companies in the  telecommunications  industry,  particularly Internet
service providers,  DSL providers and competitive local exchange  carriers,  are
consolidating  with each other. As a result,  the managements of these companies
may be more focused on internal  integration  and other  integration  issues and
less focused on the purchasing of additional  equipment and services for service
creation.  This is likely to affect our business by lengthening our sales cycle,
which could adversely  affect our business,  financial  condition and results of
operations.

The pending  break-up of AT&T could  lengthen  sales  cycles and  adversely
affect our business.

     Potential disruption caused by the pending break-up of AT&T could result in
delays by AT&T's  customers  in ordering  services  based on our  equipment  and
delays in  installation  of services  by AT&T.  Both of these  conditions  could
adversely  affect our business,  financial  condition and results of operations.
The  separation by AT&T of its Business  unit,  Broadband unit and Wireless unit
into three different  companies could impact  adversely the potential  synergies
realized from integrated  service  management  across multiple  broadband access
technologies,  resulting  in a reduction  in the demand for our  products  which
would have a material  adverse effect on our business,  financial  condition and
results of operations.

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

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

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

<PAGE>

     -we  have  not  identified  alternative  suppliers  for  all  of  our  key
components and we may not be able to find alternative  suppliers,  if necessary,
or find alternative components of comparable quality;

     -we will have to  qualify  alternative  suppliers  before  components  are
purchased  from them  which  will,  even if  successful,  necessarily  delay the
process of procuring the replacement components;

     -most of our suppliers do not have long-term  agreements with us, so these
suppliers could suddenly increase component prices;

     -even minor delays in shipments of key components from suppliers, which we
have experienced in the past, could delay the shipment of our products;

     -although  all of our sole or limited  source  suppliers  are based in the
United States,  some of them may manufacture or acquire  components from outside
of the United States and thus they may be unable to deliver their  components if
their own supplies are interrupted by events in other countries; and

     -some of the  components,  including  dynamic  random access  memories and
embedded   communications   processors,   are  subject  to   significant   price
fluctuations.

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

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
expect that these claims may become more common as the number of products in the
network  management  industry  increases and the functionality of these products
further  overlaps.  If a claimant is successful in a lawsuit arising from such a
claim,  it could  have a  material  adverse  effect on our  business,  financial
condition and results of operations.

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

     Our success is dependent on our  proprietary  technology  and  intellectual
property  rights.  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.  Moreover, in the absence of patent protection,  our business may be
adversely   affected  by  competitors  that  develop   functionally   equivalent
technology.  Litigation to enforce our intellectual property rights,  regardless
of its success or failure, could be burdensome and expensive and could involve a
high  degree  of  uncertainty.   In  addition,   legal  proceedings  may  divert
management's  attention  from  growing  our  business.  We  may  be  subject  to
additional risk as we enter into  transactions  in countries where  intellectual
property laws are not well developed or enforced  effectively.  Legal protection
of our rights may be ineffective in such countries,  and technology developed or
used in such countries may not be protected in jurisdictions where protection is
ordinarily  available.  Failure to adequately protect our intellectual  property
rights could have a material adverse effect on our business, financial condition
and results of operations.

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  business,  financial  condition and results of
operations.  Our success  depends to a  significant  degree upon the  continuing
contributions  of our  key  management  and  technical  employees,  particularly
Messrs. King, Hindman and Saunders.

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

     Our future  success  depends on our  ability to attract  and retain  highly
skilled managerial,  sales, marketing,  customer support and product development
personnel.  Intense  competition  for  technically  trained  sales  and  product
development   personnel  makes  recruiting  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 have a material
adverse effect on our business, financial condition and results of operations.

<PAGE>

Our defense of the litigation  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 the claims discussed in "Item 3. Legal
Proceedings."  We believe that the  plaintiffs'  claims are without merit and we
intend to defend this case vigorously.  We may, however, incur significant legal
costs related to this  litigation.  We cannot  presently  determine the ultimate
outcome of this action and the effects, if any, on our financial  statements.  A
negative outcome could have a material adverse effect on our business, financial
condition  and results of  operations.  Failure to prevail in the  shareholder's
suit could result in the payment of substantial damages and the reimbursement of
plaintiffs' legal costs.

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

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

     -difficulties  in  assimilation  of acquired  personnel,  operations  and
technologies;

     -unanticipated costs associated with the acquisition;

     -diversion of management's attention from our core business;

     -adverse effects on existing business  relationships with channel partners
of our products and services and our customers; and

     -use of  substantial  portions of our  available  cash to  consummate  the
acquisition.

     Our failure to successfully  assimilate companies 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,
financial condition and results of operations.

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;

<PAGE>

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

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

     In addition, our credit facility with Silicon Valley Bank prohibits us from
engaging in a merger  with or being  acquired by another  entity  without  their
consent,  unless  we are the  surviving  entity  and the  transaction  does  not
otherwise create an event of default.

Risks Pertaining to Arthur Andersen LLP

     Our  access to  capital  markets  and  timely  financial  reporting  may be
impaired if we need to engage a new independent public accounting firm. On March
14, 2002, our independent public  accountant,  Arthur Andersen LLP, was indicted
on  federal  obstruction  of  justice  charges  arising  from  the  government's
investigation of Enron. Arthur Andersen has indicated that it intends to contest
vigorously  the  indictment.  The SEC has said that it will  continue  accepting
financial   statements  audited  by  Arthur  Andersen,   and  interim  financial
statements  reviewed by it, so long as Arthur  Andersen is able to make  certain
representations  to its  clients.  Our  access to the  capital  markets  and its
ability to make timely SEC filings could be impaired if the SEC ceases accepting
financial  statements  audited by Arthur  Andersen,  if Arthur Andersen  becomes
unable to make the  required  representations  to us or if for any other  reason
Arthur Andersen is unable to perform required  audit-related services for us. In
such a  case,  we  would  promptly  seek  to  engage  a new  independent  public
accounting  firm or take such other  actions as may be necessary to enable us to
maintain access to the capital markets and to timely file our financial reports.


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.

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.



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.


(a) Documents filed as part of the report:

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


<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 *t           Reseller/Integration Agreement, dated August 29, 1997, by and between the Company and
                         MCI Telecommunications Corporation.
      10.5.1$$$tt       Second Amendment, dated November 4, 1998, to the Reseller/Integration Agreement between
                         the Company and MCI Telecommunications Corporation (relating to Exhibit 10.5).
      10.6 ****tt       Master Purchase of Equipment and Services Agreement, dated as of May 22, 2000, between
                         Sprint/United Management Company and the Company.
      10.7 *t           General Agreement for the Procurement of Equipment, Services and Supplies, dated
                         November 26, 1997, between the Company and AT&T Corp.
      10.8 *            Lease Agreement, dated December 12, 1996, by and between the Company and The Equitable
                         Life Assurance Society of the United States.
      10.8.1 *          Lease Amendment, dated September 2, 1997, by and between the Company and The Equitable
                         Life Assurance Society of The United States (related to Exhibit 10.8).
      10.8.2 $$$        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>
<PAGE>

<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.
                 t        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.
                tt        Portion's 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 Report to be
signed on its behalf by the undersigned,  thereunto duly authorized, in the City
of Rockville, Maryland, on the 1st day of April, 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  Report has been  signed  below by the  following  persons in the
capacities and on the date indicated.

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

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

    /s/ ELTON R. KING              President and Chief                  4/01/02
        Elton R. King              Executive Officer, Director

    /s/ SCOTT E. STOUFFER          Chairman of the Board                4/01/02
        Scott E. Stouffer            of Directors


    /s/ MARC F. BENSON             Director                             4/01/02
        Marc F. Benson


    /s/ GEORGE MICHAEL CASSITY     Director                             4/01/02
        George Michael Cassity

    /s/ TED MCCOURTNEY             Director                             4/01/02
        Ted McCourtney


    /s/ PETER J. MINIHANE          Director                             4/01/02
        Peter J. Minihane


    /s/ WILLIAM J. SMITH           Director                             4/01/02
        William J. Smith


<PAGE>

                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


 Report of Independent Public Accountants
 Consolidated Balance Sheets as of December 31, 2000 and 2001
 Consolidated Statements of Operations for the years ended
   December 31, 1999, 2000 and 2001
 Consolidated Statements of Changes in Stockholders' Equity (Deficit)
   for the years ended December 31, 1999, 2000 and 2001
 Consolidated Statements of Cash Flows for the years ended
   December 31, 1999, 2000 and 2001
 Notes to Consolidated Financial Statements
 Financial Statement Schedule



                  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>

                              VISUAL NETWORKS, INC.

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

                                                               December 31,
                                                             2000        2001
                                                             ----        ----
Assets
Current assets:
  Cash and cash equivalents ..........................   $  17,369    $   5,921
  Restricted short-term investments ..................     -------        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 .   $  74,057    $  28,902
          (deficit) ..................................   ==========   ==========

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
                                                                             ----        ----        ----
                    <S>                                                <C>          <C>          <C>
                    Revenue ........................................   $  91,719    $  89,041    $  74,248
                    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
                       development .................................        --         39,000         --
                      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
                                                                        ==========  ==========    ==========

                        The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>


<TABLE>
<CAPTION>

                                                         VISUAL NETWORKS, INC.

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

                                                                                                          Notes
                                                                                      Additional        Receivable
                                                                                        Paid-in            from
                                                              Common Stock              Capital         Stockholders
                                                       Shares              Amount
<S>                                                 <C>                 <C>             <C>            <C>
Balance, December 31, 1998 ....................     24,190,219          $     242       $ 83,977       $   (147)
  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              -
  Amortization of deferred compensation .......           -                     -             -               -
  Net income ..................................           -                     -             -               -

Balance, December 31, 1999 ....................     24,833,609                248         90,169              -
  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)             -
  Amortization of deferred
     compensation .............................           -                     -             -               -
  Foreign currency translation
     adjustment ...............................           -                     -             -               -
  Net loss ....................................           -                     -             -               -

Balance, December 31, 2000 ....................     31,296,383                313        473,108              -
  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)             -
  Amortization of deferred
    compensation ..............................            -                    -             -               -
  Foreign currency translation
    adjustment ................................            -                    -             -               -
  Net loss ....................................            -                    -             -               -

Balance, December 31, 2001.....................     31,915,752          $     319       $    473,132   $      -
                                                    ==========          =========       ============    ===========

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                                         Accumulated
                                                                           Other
                                                    Deferred            Comprehensive     Accumulated        Total
                                                  Compensation             Income         Deficit
                                                  ------------          --------------    -----------      -------
<S>                                               <C>                  <C>            <C>               <C>
Balance, December 31, 1998 ....................   $       (739)        $       -          $(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 .......................           (291)                -              -                 -
  Amortization of deferred
    compensation ..............................            325                 -              -                325
  Net income ..................................           -                    -             3,551           3,551
Balance, December 31, 1999 ....................          (705)                 -           (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 ...........            74                  -              -                 -
  Amortization of deferred
     compensation .............................           229                  -              -                229
  Foreign currency translation
     adjustment ...............................           -                    11             -                  11
  Net loss ....................................           -                    -          (415,485)        (415,485)
Balance, December 31, 2000 ....................          (402)                 11         (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 ...........           242                  -              -                  -
  Amortization of deferred
    compensation ..............................            80                  -              -                 80
  Foreign currency translation
    adjustment ................................           -                    10             -                10
  Net loss ....................................           -                    -           (26,962)         (26,962)

Balance, December 31, 2001...........             $       (80)         $       21     $   (473,907)     $      (515)
                                                  ===========         ===========     ============      =============



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

</TABLE>
<PAGE>


<TABLE>
<CAPTION>
                                               VISUAL NETWORKS, INC.

                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (in thousands)

                                                                                        Years Ended December 31,
                                                                                      1999        2000        2001
                                                                                      ----        ----        ----
          Cash Flows from Operating Activities:
          <S>                                                                       <C>       <C>          <C>
          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)
                                                                                     =======  $  ========      ======


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

</TABLE>
<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  comprehensive  service  management systems for providers and
users of new world connectivity services and out-sourced Web services.

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  return  to
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
become 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.

     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 cycle, 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.

<PAGE>

     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.

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 e-business 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
consistd  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.


<PAGE>

     As of  December  31,  2000,  the Company  had an  investment  in an entity,
accounted  for using the equity method of  accounting,  in which the Company had
less  than a  majority  ownership  interest  but over  which the  Company  could
exercise  significant  influence.  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 for no  consideration.  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  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 in the  fourth  quarter  of 2001.  The  Company  wrote-off  of 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

     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/trade names.....        1,064
                 Completed technology.......        7,222
                      Total.................      $ 8,510
                                                  =======



<PAGE>

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/trade names 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. The
Company  generally  recognizes  revenue from the sale or license of its products
upon delivery and passage of title to the customer. Where agreements provide for
evaluation  or customer  acceptance,  the Company  recognizes  revenue  upon the
completion  of the  evaluation  process  and  acceptance  of the  product by the
customer.  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.  Maintenance  contracts  require the Company to provide technical support
and software  updates to customers.  The Company  recognizes  technical  support
revenue,  including  maintenance  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 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  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.  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 March
2002, all scheduled  payments had been made in accordance  with the terms of the
relevant arrangements.


<PAGE>

     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 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 release of the  discontinuance  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  product.  The Company  will  continue to  recognize  revenue from the
Visual  Internet  Benchmark  product  for  existing  contracts,  under which the
Company is still required to perform services.  The Company will receive royalty
payments from the purchaser on new contracts.

Credit Risk and Significant Customers

     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 providers' 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.  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.  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.


<PAGE>

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

     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.  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.  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.

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
 Visual 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.


<PAGE>

     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.


<PAGE>

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.


<PAGE>

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.


<PAGE>

    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>
                 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

                                                         Weighted
                                         Number           Average        Weighted-            Number of      Weighted-
            Range of Exercise          of Options        Remaining    Average Exercise        Options         Average
            -----------------          ----------       Contractual       Price               -------      Exercise Price
                                                        -----------       -----                            --------------
           <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>
<PAGE>


     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.


<PAGE>

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/trade names.........       18,455
       Goodwill.......................      238,723
       Net tangible assets............        1,424
       Deferred tax liability.........      (34,058)
                                            -------
                 Total................    $ 392,731
                                          =========


<PAGE>

     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 a 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.
<PAGE>

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 the 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/trade  names.  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.


<PAGE>

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    $     -           -
                                             =========   =========
<PAGE>

     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.


<PAGE>

     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,  payable in common
stock or cash at the Company's option provided certain conditions are satisfied,
bear  interest at an annual rate of 5% payable  quarterly,  and are secured by a
first priority lien on substantially all of the Company's assets. The Debentures
may be converted into the Company's common stock at the option of the holders at
a price of $3.5163 per share, subject to certain adjustments. The Debentures are
convertible  into a number  of shares of  common  stock  equal to the  principal
amount of the Debentures divided by the conversion price, or 2,986,093 shares on
the date of issuance.  The Company is required to adjust the conversion price 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 cash or common  stock at the
Company's  option  subject to certain  conditions.  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.

     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 Series A preferred  stock will
accrue dividends at an annual rate of 5% that are payable quarterly beginning on
June 30, 2002.  The Company will have the right to cause the  redemption  of the
Series A preferred stock on the fourth anniversary of the issuance of such stock
based on similar  terms to the  Debentures.  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.
<PAGE>

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 *t            Reseller/Integration Agreement, dated August 29, 1997, by and between the Company
                                and MCI Telecommunications Corporation.
           10.5.1 $$$tt       Second Amendment, dated November 4, 1998, to the Reseller/Integration Agreement
                                between the Company and MCI Telecommunications Corporation (relating to Exhibit 10.5).
           10.6 ****tt        Master Purchase of Equipment and Services Agreement, dated as of May 22, 2000, between
                               Sprint/United Management Company and the Company.
           10.7 *t            General Agreement for the Procurement of Equipment, Services and Supplies,
                                dated November 26, 1997, between the Company and AT&T Corp.
           10.8 *             Lease Agreement, dated December 12, 1996, by and between the Company and The Equitable
                                Life Assurance Society of the United States.
           10.8.1 *           Lease Amendment, dated September 2, 1997, by and between the Company and The Equitable
                                Life Assurance Society of The United States (related to Exhibit 10.8).
           10.8.2 $$$         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 page.
           99.1               Letter regarding Arthur Andersen as our Independent Public Accountants.

</TABLE>
<PAGE>
<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.
      t    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.
     tt    Portion's 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>