================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549-0001

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

                                   FORM 10-Q/A
                                (Amendment No. 1)

(MARK ONE)

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

                   For the three months ended March 31, 2002

                                       OR

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

                        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               (I.R.S. Employer
          incorporation or organization)              Identification No.)

         2092 Gaither Road, Rockville, MD                  20850-4013
     (Address of principal executive offices)              (Zip code)

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

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

      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 the
filing requirements for the past 90 days. Yes |X| No |_|

      The number of outstanding shares of the Registrant's Common Stock, par
value $.01 per share, as of August 15, 2002 was 32,173,420 shares.

================================================================================

<PAGE>

                              VISUAL NETWORKS, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                           FOR THE THREE MONTHS ENDED
                                 March 31, 2002

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I. FINANCIAL INFORMATION
  Item 1. Financial Statements:
     Consolidated Balance Sheets --  December 31, 2001
       and March 31, 2002 .................................................    3
     Consolidated Statements of Operations -- Three months
      ended March 31, 2001 and 2002 .......................................    4
     Consolidated Statements of Cash Flows -- Three months
      ended March 31, 2001 and 2002 .......................................    5
     Notes to Consolidated Financial Statements ...........................    6
  Item 2. Management's Discussion and Analysis of Financial
     Condition and Results of Operations ..................................   13
  Item 3. Qualitative and Quantitative Disclosure about
     Market Risk ..........................................................   17
PART II. OTHER INFORMATION
  Items 1 -- 6 ............................................................   18
  Signatures ..............................................................   23

<PAGE>

                          PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

      As more fully described in Note 1 of Notes to Consolidated Financial
Statements, this Form 10-Q/A is being filed to restate the financial statements
for the three months ended March 31, 2002.

                              VISUAL NETWORKS, INC.

                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                December 31,        March 31,
                                                                                    2001               2002
                                                                                ------------       ---------
                                                                                                   (restated)
<S>                                                                              <C>               <C>
ASSETS
Current assets:
  Cash and cash equivalents ............................................         $   5,921         $  10,221
  Restricted short-term investment .....................................             2,503             2,503
  Accounts receivable, net of allowance of $554 and $554,
     respectively ......................................................             7,488             8,719
  Inventory ............................................................             5,768             5,593
  Other current assets .................................................             1,161               854
                                                                                 ---------         ---------
          Total current assets .........................................            22,841            27,890

Property and equipment, net ............................................             6,061             5,669
Other assets ...........................................................                --               596
                                                                                 ---------         ---------
          Total assets .................................................         $  28,902         $  34,155
                                                                                 =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable and accrued expenses ................................         $  11,723         $  13,247
  Deferred revenue .....................................................            11,782            10,076
  Customer deposits ....................................................             3,588                --
  Line of credit .......................................................             1,663                --
  Current portion of long-term debt ....................................               661                --
                                                                                 ---------         ---------
          Total current liabilities ....................................            29,417            23,323
Convertible debentures .................................................                --             7,898
                                                                                 ---------         ---------
          Total liabilities ............................................            29,417            31,221
                                                                                 =========         =========

Stockholders' equity (deficit):
  Common stock, $.01 par value, 200,000,000 shares
     authorized, 31,915,752 and 31,969,458 shares issued
     and outstanding as of December 31, 2001 and
     March 31, 2002, respectively ......................................               319               320
  Warrants .............................................................                --             2,087
  Additional paid-in capital ...........................................           473,132           473,838
  Deferred compensation ................................................               (80)              (85)
  Accumulated other comprehensive income ...............................                21                --
  Accumulated deficit ..................................................          (473,907)         (473,226)
                                                                                 ---------         ---------
          Total stockholders' equity (deficit) .........................              (515)            2,934
                                                                                 ---------         ---------
          Total liabilities and stockholders' equity (deficit) .........         $  28,902         $  34,155
                                                                                 =========         =========
</TABLE>

          See accompanying notes to consolidated financial statements.

<PAGE>

                              VISUAL NETWORKS, INC.

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

<TABLE>
<CAPTION>
                                                                              For the Three Months
                                                                                 Ended March 31,
                                                                            -----------------------
                                                                              2001           2002
                                                                            --------       --------
                                                                                          (restated)
<S>                                                                         <C>            <C>
Revenue:
  Hardware revenue ...................................................      $ 12,093       $ 11,061
  Software revenue ...................................................           308          1,391
  Support and services revenue .......................................         4,985          4,341
                                                                            --------       --------
      Total revenue ..................................................        17,386         16,793
Cost of revenue:

  Product cost of revenue ............................................         4,589          4,232
  Support and services cost of revenue ...............................         2,373            744
                                                                            --------       --------
      Total cost of revenue ..........................................         6,962          4,976
                                                                            --------       --------
  Gross profit .......................................................        10,424         11,817
                                                                            --------       --------
Operating expenses:
  Research and development ...........................................         5,783          3,325
  Sales and marketing ................................................         9,450          5,935
  General and administrative .........................................         2,672          1,767
  Amortization of acquired intangibles ...............................           473             --
                                                                            --------       --------
          Total operating expenses ...................................        18,378         11,027
                                                                            --------       --------
Income (loss) from operations ........................................        (7,954)           790
Interest income (expense), net .......................................           287           (109)
                                                                            --------       --------
Income (loss) before income taxes ....................................        (7,667)           681
Income taxes .........................................................            --             --
                                                                            --------       --------
Net income (loss) ....................................................      $ (7,667)      $    681
                                                                            ========       ========
Basic earnings (loss) per share ......................................      $  (0.24)      $   0.02
                                                                            ========       ========
Diluted earnings (loss) per share ....................................      $  (0.24)      $   0.02
                                                                            ========       ========
Basic weighted average shares outstanding ............................        31,381         31,958
                                                                            ========       ========
Diluted weighted average shares outstanding ..........................        31,381         32,987
                                                                            ========       ========
</TABLE>

           See accompanying notes to consolidated financial statements

<PAGE>

                              VISUAL NETWORKS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                   For the Three Months
                                                                                      Ended March 31,
                                                                                 -------------------------
                                                                                   2001             2002
                                                                                 --------         --------
                                                                                              (restated)
<S>                                                                              <C>              <C>
Cash flows from operating activities:
  Net income (loss) ......................................................       $ (7,667)        $    681
  Adjustments to reconcile net income (loss) to net cash
     used in operating activities:
     Depreciation and amortization .......................................          1,838              971
     Translation gain from foreign subsidiary ............................             --              (21)
  Changes in assets and liabilities:
     Accounts receivable .................................................           (187)          (1,231)
     Inventory ...........................................................           (516)             175
     Other assets ........................................................           (520)             506
     Accounts payable and accrued expenses ...............................         (5,372)           1,524
     Deferred revenue ....................................................           (575)          (1,706)
     Customer deposits ...................................................          2,501           (3,588)
                                                                                 --------         --------
       Net cash used in operating activities .............................        (10,498)          (2,689)
                                                                                 --------         --------
Cash flows from investing activities:
  Net purchases of short-term investments ................................           (163)              --
  Expenditures for property and equipment ................................            (69)            (491)
                                                                                 --------         --------
       Net cash used in investing activities .............................           (232)            (491)
                                                                                 --------         --------
Cash flows from financing activities:
  Exercise of stock options and employee stock purchase
     plan ................................................................             59               99
  Proceeds from issuance of convertible debentures and
     warrants, net of issuance costs .....................................             --            9,705
  Net borrowings (repayments) under credit agreements ....................            451           (2,039)
  Principal payments on capital lease obligations ........................           (142)            (285)
                                                                                 --------         --------
       Net cash provided by financing activities .........................            368            7,480
                                                                                 --------         --------
Effect of exchange rate changes ..........................................              4               --
                                                                                 --------         --------
Net increase (decrease) in cash and cash equivalents .....................        (10,358)           4,300
Cash and cash equivalents, beginning of period ...........................         17,369            5,921
                                                                                 --------         --------
Cash and cash equivalents, end of period .................................       $  7,011         $ 10,221
                                                                                 ========         ========
Supplemental cash flow information:
  Cash paid for interest .................................................       $     20         $    161
                                                                                 ========         ========
</TABLE>

          See accompanying notes to consolidated financial statements.

<PAGE>

                              VISUAL NETWORKS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2002
                                   (Unaudited)

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

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

Risks and Other Important Factors

      The Company incurred significant losses from the second quarter of 2000
through the fourth quarter of 2001. The deterioration of the operating results
that began in 2000, excluding the effects of the impairment and restructuring
charges and the write-off of in-process research and development, was due
primarily to decreased revenue and increased operating expenses. In response to
these results, the Company made significant reductions in operating expenses in
2000, 2001 and 2002 resulting from the closure of three facilities and the
reduction of its workforce by approximately 260 employees from October 2000 to
May 2002, including approximately 30 employees who were terminated during or
subsequent to the first quarter of 2002. As a result of these actions, the
Company returned to profitability during the three months ended March 31, 2002.
Based on its current cost structure, the Company's ability to generate operating
income in the future is, in large part, dependent on its success in achieving
quarterly revenue of at least $14.0 million to $15.0 million and maintaining or
further 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 achieve adequate revenue in the future. In the event
that the anticipated revenue goals are not met, the Company may be required to
further reduce its cost structure. There can be no assurance that the Company
will remain profitable.

      The success of the Company is also dependent on its ability to generate
adequate cash for operating and capital needs. The Company is relying on its
existing cash and cash equivalents, together with future sales and the
collection of the related accounts receivable, to meet its future cash
requirements. If cash provided by these sources is not sufficient to fund future
operations, the Company will be required to further reduce its expenditures for
operations or to seek additional capital through other means that 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, uncertainty of future profitability and
possible fluctuations in financial results, substantial dilution to our
stockholders if we are required to raise additional capital through the sale of
equity, events that could trigger early repayment of our debentures, our
dependence on sales to telecommunications companies, the downturn of the
telecommunications market, dependence on sole and limited source suppliers, the
possibility of delisting of our common stock by Nasdaq based on the possibility
of our failure to comply with the Nasdaq listing requirements, long sales
cycles, current and potential competitors with greater financial, technological,
production, and marketing resources, errors in our products or services, claims
by others that we infringe their intellectual property, failure to protect our
own intellectual property and proprietary rights, dependence on key management
personnel, inability to recruit and retain employees, and costly litigation in
defense of a class action lawsuit.

Financial Statement Presentation

      The accompanying financial statements as of, and for the three months
ended, March 31, 2002 are being restated in this Form 10-Q/A to correct an
inadvertent clerical error. The effect of the restatement is to decrease
previously reported revenue, income from operations, income before taxes and net
income by $197,000. Basic and diluted earnings per share decreased to $0.02 per
share from the previously reported $0.03 per share.

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

<PAGE>

      These financial statements are unaudited and have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, and it is suggested
that these financial statements be read in conjunction with the financial
statements, and notes thereto, included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001. In the opinion of management, the
comparative financial statements for the periods presented herein include all
adjustments that are normal and recurring which are necessary for a fair
presentation of results for the interim periods. The results of operations for
the three months ended March 31, 2002 are not necessarily indicative of the
results that will be achieved for the entire year ending December 31, 2002.

Principles of Consolidation

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

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, 2001, the
Company held a certificate of deposit in the amount of $2.5 million that matures
on October 31, 2002. The certificate of deposit has been included as a
restricted short-term investment (see Note 2) in the accompanying consolidated
balance sheets as of December 31, 2001 and March 31, 2002. As of December 31,
2001 and March 31, 2002, unrealized gains and losses were not material.

Inventory

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

                                                  December 31,     March 31,
                                                     2001             2002
                                                  -----------     ----------
                  Raw materials...............    $     1,137     $    1,797
                  Work-in-progress............            238             50
                  Finished goods..............          4,393          3,746
                                                  -----------     ----------
                                                  $     5,768     $    5,593
                                                  ===========     ==========

Accounts Payable and Accrued Expenses

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

                                                  December 31,    March 31,
                                                      2001           2002
                                                   ----------     --------
                  Accounts payable............     $    2,644     $  5,486
                  Accrued compensation........          1,794        1,000
                  Accrued restructuring.......          1,421        1,118
                  Other accrued expenses......          5,864        5,643
                                                   ----------     --------
                                                   $   11,723     $ 13,247
                                                   ==========     ========

Revenue Recognition

      The Company's service management products and services include hardware,
software, benchmark services, professional services and technical support.
Benchmark services, professional services and technical support revenue are
reported as support and service revenue in the accompanying consolidated
statements of operations. The Company recognizes revenue from the sale or
license of its products in accordance with the American Institute of Certified
Public Accountants Statement of Position No. 97-2, "Software Revenue
Recognition" and SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," which summarizes existing accounting literature and
require that four criteria are met prior to the recognition of revenue. Our
accounting policies regarding revenue recognition are written to comply with the
following criteria: 1) persuasive evidence of an arrangement exists; 2) delivery
has occurred or services have been rendered; 3) the fees are fixed and
determinable; and 4) collectibility is probable. Where agreements provide for
customer acceptance, the Company recognizes revenue upon acceptance of the
product by the customer. Generally, the Company's agreements have not included
any specific customer acceptance provisions. However, the

<PAGE>

Company does allow some of its customers to evaluate its products before making
a decision to purchase. The Company recognizes revenue under these arrangements
once the evaluation process is complete and other criteria are met. Revenue from
multiple-element software arrangements is recognized using the residual method
whereby the fair value of any undelivered elements, such as customer support and
services, is deferred and any residual value is allocated to the software and
recognized as revenue upon delivery and passage of title. The fair values of
professional services, technical support and training have been determined based
on the Company's specific objective evidence of fair value. The Company's
specific objective evidence of fair value is based on the price the Company
charges customers when the element is sold separately.

      Maintenance contracts require the Company to provide technical support and
unspecified software updates to customers on a when and if available basis. The
Company recognizes customer support revenue, including support revenue that is
bundled with product sales, ratably over the term of the contract period, which
generally ranges from one to five years. Revenue from professional services is
recognized when the services are performed. Subscription fees for the Company's
benchmark reports are recognized upon delivery of the reports.

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

      The Company examines the specific facts and circumstances of all sales
arrangements with payment terms extending beyond its normal payment terms to
make a determination of whether the sales price is fixed and determinable and
whether collectibility is probable. Payment terms are not tied to milestone
deliverables or customer acceptance. The examination of the impact on revenue
recognition, if any, includes the Company's history with its customers and the
specific facts of each arrangement. The Company generally does not offer payment
terms that differ from its normal payment terms, and the Company has never
written-off any accounts receivable related to extended payment term
arrangements. During the year ended December 31, 2001, the Company recognized
software license revenue of approximately $2.6 million on new arrangements with
three previously existing customers that contain payment terms beyond the normal
payment terms. Payments become due under these arrangements through July 2002.
As of May 15, 2002, all scheduled payments had been made in accordance with the
terms of the relevant arrangements.

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

      In May 2001, the Company announced the discontinuation of the Visual
Trinity product. The Company does not plan to continue development efforts on
the Visual Trinity product. As a result, future revenue related to this product
will consist primarily of technical support revenue, all of which is currently
included in deferred revenue. The Company plans to provide technical support for
the Visual Trinity product through September 2002.

      In June 2001, the Company announced the sale of the Visual Internet
Benchmark service. The Company will continue to recognize revenue from the
Visual Internet Benchmark service for existing contracts, under which the
Company is still required to perform services through May 2003, most of which is
currently in deferred revenue. The Company receives royalty payments from the
purchaser on new contracts.

Credit Risk

      Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
investments and accounts receivable. The Company generally sells its products to
large telecommunications and Internet service provider companies primarily in
the United States. The Company grants credit terms without collateral to its
customers and has not experienced any significant credit related losses.
Accounts receivable include allowances to record receivables at their estimated
net realizable value. As of March 31, 2002, three customers individually
represented 15%, 16% and 23% of accounts receivable. As of March 31, 2002, the
Company had approximately $1.8 million in accounts receivable balances that were
also included in deferred revenue.

<PAGE>

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.

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 three months ended March 31, 2001 and 2002. During 2002,
the Company converted operations for its Canadian subsidiary to U.S. Dollars and
recorded the translation gain in the accompanying consolidated statement of
operations.

Segment Reporting and Significant Customers

      SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that these enterprises report selected information about operating
segments in interim financial reports. Management has concluded that the
Company's operations occur in one segment only based upon the information used
by management in evaluating the performance of the business. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The revenue and assets of the Company's
foreign subsidiaries have not been significant. During the three months ended
March 31, 2002, the Company closed its branch in France and began efforts to
close its subsidiary in Singapore. For the three months ended March 31, 2001,
three customers individually represented 27%, 17% and 11% of revenue. For the
three months ended March 31, 2002, two customers individually represented 34%
and 12% of revenue.

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

                                                     Three Months Ended
                                                          March 31,
                                                    -------------------
                                                      2001         2002
                                                    -------     -------
                                                         (restated)
         Visual UpTime ........................     $12,659     $13,617
         Visual Cell Tracer ...................         475         767
         Visual IP InSight ....................       1,096       1,552
                                                    -------     -------
         Royalties ............................          --          88
               Continuing products ............      14,230      16,024
         Visual Internet Benchmark ............       1,389         395
         Visual Trinity and eWatcher ..........       1,767         374
                                                    -------     -------
                   Discontinued products ......       3,156         769
                                                    -------     -------
                   Total  revenue .............     $17,386     $16,793
                                                    =======     =======

Basic and Diluted Earnings (Loss) Per Share

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

      Diluted earnings (loss) per share includes the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Options and warrants to purchase
2,806,796 shares of common stock that were outstanding as of March 31, 2001 were
not included in the computation of diluted loss per share for the three months
ended March 31, 2001 as their effect would be anti-dilutive. The treasury stock
effect of options and warrants to purchase 8,207,881 shares of common stock that
were outstanding at March 31, 2002 are included in the computation of diluted
earnings per share for the three months ended March 31, 2002. The effect of the
convertible debentures issued in March 2002 (see Note 3) that are convertible
into 2,986,093 shares of common stock has been included in the computation of
diluted earnings per share for the three months ended March 31, 2002.

<PAGE>

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

<TABLE>
<CAPTION>
                                                                     Three Months Ended
                                                                          March 31,
                                                                   ----------------------
                                                                     2001           2002
                                                                   --------       -------
                                                                                (restated)
<S>                                                                <C>            <C>
         Net income (loss) ................................        $ (7,667)      $   681
                                                                   ========       =======
         Weighted-average share calculation:
         Basic weighted-average shares outstanding:
           Average number of shares of common stock
              outstanding .................................          31,381        31,958
         Diluted weighted-average shares
         outstanding:
           Treasury stock effect of options and
              warrants ....................................              --           863
           Effect of convertible debentures ...............              --           166
                                                                   --------       -------
         Diluted weighted-average shares outstanding ......          31,381        32,987
                                                                   ========       =======
         Earnings (loss) per common share:
           Basic earnings (loss) per share ................        $  (0.24)      $  0.02
                                                                   ========       =======
           Diluted earnings (loss) per share ..............        $  (0.24)      $  0.02
                                                                   ========       =======
</TABLE>

Reclassifications

      Certain reclassifications have been made in the 2001 financial statements
to conform to the 2002 presentation.

New Accounting Pronouncements

      In June 2001, the Financial Accounting Standards Board (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 also 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. The Company also did not have any goodwill during 2001. Accordingly, no
pro forma disclosures related to the amortization of goodwill have been
provided. The adoption of SFAS No. 142 did not 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 adopted SFAS No. 144 during the three months ended
March 31, 2002 and the adoption did not have a material effect on the Company's
financial position or results of operations.

2. Credit Agreements and Long-Term Debt:

      During 2001 through March 2002, the Company maintained a credit facility,
as amended, that included an accounts receivable-based arrangement providing for
borrowings up to the lesser of $10.0 million or 80% of eligible accounts
receivable (as defined in the credit facility and determined by the bank). 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 the amount of
$2.5 million, as amended, which is recorded as a restricted short-term
investment in the accompanying consolidated balance sheets as of December 31,
2001 and March 31, 2002. The bank credit facility also included an equipment
financing facility. During the three months ended March 31, 2001, the Company
borrowed approximately $451,000 to be repaid over 36 months under

<PAGE>

the equipment financing facility, of which $376,000 was outstanding as of
December 31, 2001. As of December 31, 2001, the Company also had approximately
$1.7 million of borrowings outstanding at an interest rate of 6.75% under the
accounts receivable-based arrangement. The credit facility, as amended, was
scheduled to mature on April 29, 2002. In connection with the issuance of the
convertible debentures (see Note 3), the amounts borrowed from the bank under
the accounts receivable-based and equipment-financing arrangements were repaid,
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 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.

3. Convertible Debentures:

      In March 2002, the Company issued senior secured convertible debentures
(the "Debentures") in the aggregate amount of $10.5 million in a private
placement. The Debentures are due March 25, 2006, are payable in common stock or
cash at the Company's option provided certain conditions are satisfied, and bear
interest at an annual rate of 5% payable quarterly in common stock or cash at
the Company's option provided certain conditions are satisfied. The Debentures
are secured by a first priority lien on substantially all of the Company's
assets. The Debentures may be converted initially into 2,986,093 shares of the
Company's common stock at the option of the holders at a price of $3.5163 per
share, subject to certain adjustments. The conversion price of the Debentures
will adjust if the Company issues additional shares of common stock or
instruments convertible into common stock at a price that is less than the
then-effective conversion price of the Debentures. The Company has the right to
require the holders to convert their Debentures into common stock if the closing
price of the Company's common stock exceeds 175% of the conversion price for 20
consecutive days after September 26, 2003.

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

      In connection with the issuance of the Debentures, the Company issued to
the holders warrants to purchase 828,861 shares of its common stock at an
initial exercise price of $4.2755 per share. The exercise price will be adjusted
if the Company issues additional shares of common stock or instruments
convertible into common stock at a lower price than the then-effective exercise
price. The warrants expire on March 25, 2007. Approximately $2.1 million in
proceeds from the Debentures were allocated to the value of the warrants. The
discount on the Debentures resulting from the allocation of proceeds to the
warrants will be amortized as a charge to interest expense over the period until
the Debentures become due. The fair value of the warrants was determined using
the Black-Scholes valuation model with the following assumptions: no dividend
yield, expected volatility of 129%, risk-free interest rate of 4.85% and a term
of 5 years.

      The holders of the Debentures also had the right to purchase 575 shares of
to-be-created Series A preferred stock for $5.8 million prior to May 6, 2002.
The holders did not exercise the right to purchase these shares of Series A
preferred stock. The Company has also granted to the Debenture holders the right
to purchase $3.1 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.

      On the date of issuance of the Debentures, the conversion price of the
Debentures, after taking into consideration the allocation of proceeds to the
warrants, was less than the quoted market price of the Company's common stock at
that time. Accordingly, approximately $515,000 in proceeds from the Debentures
were allocated to additional paid-in capital to recognize this beneficial
conversion feature. The discount on the Debentures resulting from the allocation
of proceeds to the beneficial conversion feature will be amortized as a charge
to interest expense over the period until the Debentures become due.

<PAGE>

4. Commitments and Contingencies:

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 (collectively, the "defendants"). 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 has incurred and may continue to 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 damages.

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

<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

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 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 entered into agreements with AT&T, Equant, Sprint and WorldCom. During
1998, 1999 and 2000, we continued to focus on selling Visual UpTime, and added
to our product portfolio as a result of a series of acquisitions -- the Net2Net
product, Cell Tracer, in 1998; the Inverse products, Visual IP InSight and
Visual Internet Benchmark, in 1999; and the Avesta products, Visual Trinity and
Visual eWatcher, in 2000. During 2001, we discontinued development and sales
efforts of Visual Trinity and sold the Visual Internet Benchmark service. During
2001, we also made a decision to combine certain functionality of the web
performance management technology of the Visual eWatcher product with the Visual
IP InSight product. Development efforts related to incorporating this
functionality in a future release of the Visual IP InSight product are expected
to begin in 2002. We continue to focus on sales of Visual UpTime, Visual IP
InSight and Visual Cell Tracer.

      We incurred significant losses from the second quarter of 2000 through the
fourth quarter of 2001. The deterioration of our operating results that began in
2000, excluding the effects of the impairment and restructuring charges and the
write-off of in-process research and development, was due primarily to decreased
revenue and increased operating expenses. In response to these results, we made
significant reductions in operating expenses in 2000, 2001 and 2002 resulting
from the closure of three facilities and the reduction of our workforce by
approximately 260 employees from October 2000 to May 2002, including
approximately 30 employees who were terminated during or subsequent to the first
quarter of 2002. As a result of these actions, we returned to profitability
during the three months ended March 31, 2002. Based on our current cost
structure, our ability to generate operating income in the future is, in large
part, dependent on our success in achieving quarterly revenue of at least $14.0
million to $15.0 million and maintaining or further reducing operating expenses.
Due to market conditions, competitive pressures, and other factors beyond our
control, there can be no assurances that we will be able to achieve adequate
revenue in the future. In the event that the anticipated revenue goals are not
met, we may be required to further reduce our cost structure. There can be no
assurance that we will remain profitable.

Results of Operations

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

                                                             Three Months Ended
                                                                  March 31,
                                                             -------------------
                                                               2001        2002
                                                              -----       -----
         Revenue ..........................................   100.0%      100.0%
         Cost of revenue ..................................    40.0        29.6
                                                              -----       -----
           Gross profit ...................................    60.0        70.4
                                                              -----       -----
         Operating expenses:
           Research and development .......................    33.3        19.8
           Sales and marketing ............................    54.4        35.3
           General and administrative .....................    15.4        10.6
           Amortization of goodwill and other intangibles .     2.7          --
                                                              -----       -----
                Total operating expenses ..................   105.8        65.7
                                                              -----       -----
         Income (loss) from operations ....................   (45.8)        4.7
         Interest income (expense), net ...................     1.7        (0.6)
                                                              -----       -----
         Net income (loss) before income taxes ............   (44.1)        4.1
         Benefit (provision) for income taxes .............      --          --
                                                              -----       -----
         Net income (loss) ................................   (44.1)%       4.1%
                                                              =====       =====

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

                                                              Three Months Ended
                                                                   March 31,
                                                              ------------------
                                                               2001        2002
                                                              -------    -------
         Visual UpTime ...................................    $12,659    $13,617
         Visual Cell Tracer ..............................        475        767
         Visual IP InSight ...............................      1,096      1,552
         Royalties .......................................         --         88
                                                              -------    -------
               Continuing products .......................     14,230     16,024
         Visual Internet Benchmark .......................      1,389        395
         Visual Trinity and eWatcher .....................      1,767        374
                                                              -------    -------
               Discontinued products .....................      3,156        769
                                                              -------    -------
               Total  revenue ............................    $17,386    $16,793
                                                              =======    =======

<PAGE>

Results of Operations for the Three Months Ended March 31, 2002 Compared with
the Three Months Ended March 31, 2001

      Revenue. Revenue was $17.4 million for the three months ended March 31,
2001 compared to $16.8 million for the three months ended March 31, 2002, a
decrease of $0.6 million. The overall decrease in revenue of 3% was primarily
due to a decrease in discontinued products of $2.4 million offset by increases
in Visual UpTime revenue, Visual IP Insight revenue and Visual Cell Tracer
revenue. During the three months ended March 31, 2002, we amended the agreement
with our sole customer for that product so that the customer received the source
code for the Visual Cell Tracer product to allow it to support and modify the
product. As a result, our maintenance obligations to that customer were
terminated. The related technical support fees that were previously deferred
were recognized during the three months ended March 31, 2002. This customer
places orders based on its end-user demand. Based on our understanding of the
customer's forecasted demand, we anticipate that the customer will place final
orders with us during 2002, and we do not anticipate any significant revenue
from the sale of this product to other customers. Sales to all service providers
increased from approximately 71% of revenue for the three months ended March 31,
2001 to 82% for the three months ended March 31, 2002.

      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 service that was sold during 2001, for existing contracts
under which we are still required to perform services through May 2003, most of
which is currently in deferred revenue. We 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 $10.4 million for the three months ended
March 31, 2001 compared to $11.8 million for the three months ended March 31,
2002, an increase of $1.4 million. Gross margin was 60.0% of revenue for the
three months ended March 31, 2001 as compared to 70.4% of revenue for the three
months ended March 31, 2002. The increase in gross margin percentage was due
primarily to significant revenue generated from our new higher margin Visual
UpTime product introduced in the first quarter of 2002, an increase in margin on
the Visual Cell Tracer product as a result of maintenance recognized resulting
from a new agreement with the customer (discussed above) and a higher proportion
of other maintenance revenue recorded during the quarter offset, in part, by
reduced revenue from the higher margin Visual Internet Benchmark and Visual
Trinity products. 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 $5.8 million for the
three months ended March 31, 2001 compared to $3.3 million in 2002, a decrease
of $2.5 million. The decrease in research and development expense was due
primarily to workforce reductions and facility closures during 2001 and
additional workforce reductions during 2002. Research and development expense
was 33.3% and 19.8% of revenue for the three months ended March 31, 2001 and
2002, respectively. For the remainder of 2002, we intend to incur research and
development expenses at or below the level consistent with the first quarter of
2002 as a result of our continued focus on the control of operating expenses.

      Sales and marketing expense. Sales and marketing expense consists of
compensation for the sales and marketing staff, commissions, pre-sales support,
travel and entertainment expense, trade shows and other marketing programs.
Sales and marketing expense was $9.5 million for the three months ended March
31, 2001 compared to $5.9 million for the three months ended March 31, 2002, a
decrease of $3.6 million. The decrease in sales and marketing expense was due
primarily to workforce reductions and facility closures during 2001 and 2002.
Sales and marketing expense was 54.4% and 35.3% of revenue for the three months
ended March 31, 2001 and 2002, respectively. For the remainder of 2002, we
intend to incur sales and marketing expenses at or below the level consistent
with the first quarter of 2002 as a result of our continued focus on the control
of operating expenses.

      General and administrative expense. General and administrative expense
consists of the costs of executive management, finance, administration and other
activities. General and administrative expense was $2.7 million for the three
months ended March 31, 2001 compared with $1.8 million for the three months
ended March 31, 2002, a decrease of $0.9 million. The decrease in general and

<PAGE>

administrative expense was due primarily to workforce reductions and facility
closures during 2001 and additional workforce reductions during 2002. General
and administrative expense was 15.4% and 10.6% of revenue for the three months
ended March 31, 2001 and 2002, respectively. For the remainder of 2002, we
intend to incur general and administrative expenses at or below the level
consistent with the first quarter of 2002 or decrease them in absolute dollars
during 2002 as a result of our continued focus on the control of operating
expenses.

      Amortization of acquired intangibles. We recorded $473,000 in amortization
of goodwill and other intangibles during the three months ended March 31, 2001
related to the Avesta acquisition. All amounts of goodwill and other intangible
assets were amortized or written-off as of December 31, 2001. Therefore, no
amortization was recorded during the three months ended March 31, 2002.

      Interest income, net. Interest income, net, was $287,000 for the three
months ended March 31, 2001 compared to expense of $109,000 for the three months
ended March 31, 2002. The decrease of $0.4 million was primarily due to
decreased cash balances and interest expenses incurred on borrowings under our
credit facility.

      Net income (loss). Net loss for the three months ended March 31, 2001 was
$7.7 million as compared to net income of $681,000 for the three months ended
March 31, 2002, an increase in income of $8.4 million. The increase was due
primarily to decreases in operating expenses and amortization of intangible
assets.

Liquidity and Capital Resources

      At December 31, 2001, our unrestricted cash balance was $5.9 million
compared to $10.2 million as of March 31, 2002, an increase of $4.3 million.
This increase is primarily attributable to $9.7 million in cash received from
the issuance of convertible debentures, net of issuance costs, in March 2002
offset by cash used in operations as well as the payment of the outstanding
balances under our credit facility and capital leases. Net cash used in
operating activities during the three months ended March 31, 2002 was $2.7
million. We also used cash of $491,000 to purchase equipment and other fixed
assets, made principal payments on capital lease obligations of $285,000 and
principal payments on our credit facility obligations of $2.0 million. Cash
provided by the sale of common stock pursuant to the exercise of employee stock
options and our employee stock purchase plan was $99,000.

      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, our
operating income and the proceeds from the issuance of convertible debentures.
In 2001, we became dependent on cash that was provided by our bank under a
credit facility. In addition, from time to time, we have obtained advance
payments in connection with certain customer purchase orders. In the fourth
quarter of 2001, we received an advance payment of approximately $3.6 million
that was classified as a customer deposit in the accompanying consolidated
balance sheet as of December 31, 2001; the related customer orders were
fulfilled in February 2002. We do not anticipate receiving customer advance
payments in the future. Our future capital requirements will depend on many
factors, including the rate of revenue growth, if any, as well as our gross
margin and our levels of operating expenses, including product research and
development, sales and marketing and general and administrative expenses.

      As discussed above, we incurred significant losses from the second quarter
of 2000 through the fourth quarter of 2001 due to decreased revenue and
increased operating expenses. In response to these losses, we made significant
reductions in operating expenses in 2000, 2001 and 2002 and we returned to
profitability during the three months ended March 31, 2002. Our ability to
generate operating income in the future is dependent upon not only our continued
success in maintaining or reducing operating expenses, but also our ability to
achieve quarterly revenue of at least $14.0 million to $15.0 million. General
market conditions, competitive pressures and other factors beyond our control
may adversely affect our ability to achieve adequate revenue to enable us to
remain profitable. In the event that the anticipated revenue goals are not met,
we may be required to further reduce our cost structure. There can be no
assurance that we will remain profitable.

      The future success of our company will be dependent upon, among other
factors, our ability to generate adequate cash for operating and capital needs.
We are relying on our existing balance of cash and cash equivalents together
with future sales and the collection of the related accounts receivable to meet
our future cash requirements. If cash provided by these sources is not
sufficient to fund future operations, 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 assurances 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.

<PAGE>

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

      To determine if a fee is fixed and determinable, we evaluate rights of
return, customer acceptance rights, if applicable, and multiple-element
arrangements of products and services to determine the impact on revenue
recognition. Our agreements generally have not included rights of return except
in certain reseller relationships that include stock rotation rights. If an
agreement provides for a right of return, we recognize revenue when the right
has expired. If an agreement provides for evaluation or customer acceptance, we
recognize revenue upon the completion of the evaluation process, acceptance of
the product by the customer and completion of all other criteria. Revenue from
multiple-element software arrangements is recognized using the residual method
whereby the fair value of any undelivered elements, such as customer support and
services, is deferred and any residual value is allocated to the software and
recognized as revenue upon delivery. The fair values of professional services,
technical support and training have been determined based on our specific
objective evidence of fair value. Our vendor specific objective evidence of fair
value is based on the price that we charge customers when the element is sold
separately.

      Our maintenance contracts require us to provide technical support and
unspecified software updates to customers on a when and if available basis. We
recognize customer support revenue, including support revenue that is bundled
with product sales, ratably over the term of the contract period, which
generally ranges from one to five years. We recognize revenue from services when
the services are performed. Subscription fees for our benchmark reports are
recognized upon delivery of the reports.

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

      We also examine the specific facts and circumstances of all sales
arrangements with payment terms extending beyond our normal payment terms to
make a determination of whether the sales price is fixed and determinable and
whether collectibility is probable. Payment terms are not tied to milestone
deliverables or customer acceptance. Our evaluation of the impact on revenue
recognition, if any, includes our history with our customers and the specific
facts of each arrangement. It is generally not our practice to offer payment
terms that differ from our normal payment terms, and we have not written off any
accounts receivable related to extended payment term arrangements.

Inventory

      Because of the order lead times required to obtain manufactured product,
we must maintain sufficient quantities of inventory of all of our products to
meet expected demand. If actual demand is much lower than forecasted, we may not
be able to dispose of our inventory at or above its cost. We write down our
inventory for estimated excess and obsolete amounts to the lower of cost or
market value. If future demand is lower than currently estimated, additional
write-downs of our inventory may be required.

<PAGE>

Factors That May Affect Future Results

      The market for our products is growing rapidly and our business
environment is characterized by rapid technological changes, changes in customer
requirements and new emerging market segments. Consequently, to compete
effectively, we must make frequent new product introductions and enhancements
and deploy sales and marketing resources to take advantage of new business
opportunities. Our operations are also subject to certain other risks and
uncertainties including, among other things, uncertainty of future profitability
and possible fluctuations in financial results, substantial dilution to our
stockholders if we are required to raise additional capital through the sale of
equity, events that could trigger early repayment of our debentures, our
dependence on sales to telecommunications companies, the downturn of the
telecommunications market, dependence on sole and limited source suppliers, the
possibility of delisting of our common stock by Nasdaq based on the possibility
of our failure to comply with the Nasdaq listing requirements, long sales
cycles, current and potential competitors with greater financial, technological,
production, and marketing resources, errors in our products or services, claims
by others that we infringe their intellectual property, failure to protect our
own intellectual property and proprietary rights, dependence on key management
personnel, inability to recruit and retain employees, and costly litigation in
defense of a class action lawsuit. Failure to meet any of these challenges could
adversely affect future operating results.

      The foregoing discussion contains forward-looking information within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and is subject to the safe harbor created by
those sections. Our future results may be impacted by the various important
factors summarized above and more fully discussed in our Annual Report on Form
10-K for the year ended December 31, 2001.

Item 3. Qualitative and Quantitative Disclosure About Market Risk

      During the three months ended March 31, 2002, we issued long-term debt in
the form of the convertible debentures discussed in Note 3 of Notes to
Consolidated Financial Statements. The convertible debentures bear interest at a
fixed annual rate of 5%. There have been no other material changes in the market
risks faced by us or in how those risks are managed since December 31, 2001.
Refer to our Annual Report on Form 10-K for year ended December 31, 2001 for a
discussion about such market risk.

      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.

<PAGE>

                          PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

      In July, August and September 2000, several purported class action
complaints were filed against us and certain of our former executives
(collectively the "defendants"). 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 that 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 filed a motion to dismiss the complaint, which is now
pending before the court. We expect that a substantial portion of the legal
costs that we have incurred and may continue to 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 damages.

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

Item 2. Changes in Securities and Use of Proceeds

      In March 2002, we issued senior secured convertible debentures (the
"Debentures") in the aggregate amount of $10.5 million in a private placement
offering. The Debentures are due March 25, 2006, are payable in common stock or
cash at the Company's option provided certain conditions are satisfied, and bear
interest at an annual rate of 5% payable in common stock or cash at the
Company's option provided certain conditions are satisfied. The Debentures may
be converted initially into 2,986,093 shares of our common stock at the option
of the holders at a price of $3.5163 per share, subject to certain adjustments.
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 that, if not met, will allow the
holders to redeem the Debentures prior to their maturity.

      In connection with the issuance of the Debentures, we issued to the
holders warrants to purchase 828,861 shares of our common stock at an initial
exercise price of $4.2755 per share. The warrants expire on March 25, 2007.

      The holders of the Debentures had the right to purchase 575 shares of
to-be-created Series A preferred stock for $5.8 million prior to May 6, 2002.
The holders did not exercise the right to purchase these shares of Series A
preferred stock. We have also granted to the Debenture holders the right to
purchase $3.1 million 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.

      We sold the debentures and warrants in reliance upon an exemption from
registration pursuant to Section 4 (2) of the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities

      None.

Item 4. Submission of Matters to Vote of Security Holders

      None.

Item 5. Other Information

      None.

<PAGE>

Item 6. (a) Exhibits

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

        Exhibit Number                            Description
        --------------                            -----------
            3.1$              Amended and Restated Certificate of Incorporation
                              of the Company.

            3.1.1@            Certificate of Amendment to Amended and Restated
                              Certificate of Incorporation.

            3.2*              Restated By-Laws of the Company.

            4.1@@             Registration Rights Agreement, dated as of March
                              25, 2002, between Visual Networks Inc. and the
                              Purchasers named therein (filed as Exhibit 99.3 to
                              the Form 8-K).

            4.2@@             Form of 5% Senior Secured Convertible Debenture of
                              Visual Networks, Inc. due March 25, 2006 (filed as
                              Exhibit 99.2 to the Form 8-K).

            4.1@@             Form of Warrant of Visual Networks, Inc., dated
                              March 25, 2002 (filed as Exhibit 99.4 to the Form
                              8-K).

            10.1*             1994 Stock Option Plan.

            10.2*             1997 Omnibus Stock Plan, as amended.

            10.3*             Amended and Restated 1997 Directors' Stock Option
                              Plan.

            10.4!!            2000 Stock Incentive Plan, as amended.

            10.5*+            Reseller/Integration Agreement, dated August 29,
                              1997, by and between the Company and MCI
                              Telecommunications Corporation.

            10.5.1$$$++       Second Amendment, dated November 4, 1998, to the
                              Reseller/Integration Agreement between the Company
                              and MCI Telecommunications Corporation (relating
                              to Exhibit 10.5).

            10.6****++        Master Purchase of Equipment and Services
                              Agreement, dated as of May 22, 2000, between
                              Sprint/United Management Company and the Company.

            10.7*+            General Agreement for the Procurement of
                              Equipment, Services and Supplies, dated November
                              26, 1997, between the Company and AT&T Corp.

            10.8*             Lease Agreement, dated December 12, 1996, by and
                              between the Company and The Equitable Life
                              Assurance Society of the United States.

            10.8.1*           Lease Amendment, dated September 2, 1997, by and
                              between the Company and The Equitable Life
                              Assurance Society of The United States (related to
                              Exhibit 10.8).

            10.8.2$$$         Second Lease Amendment, dated February 8, 1999, by
                              and between the Company and TA/Western, LLC,
                              successor to The Equitable Life Assurance Society
                              of The United States (relating to Exhibit 10.8).

            10.8.3***         Third Lease Amendment, dated January 10, 2000, by
                              and between the Company and TA/ Western, LLC
                              (relating to Exhibit 10.8).

            10.8.4!!          Fourth Lease Amendment, dated May 17, 2000, by and
                              between the Company and TA/ Western, LLC (relating
                              to Exhibit 10.8).

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

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

            10.12*            Terms of Employment, dated June 11, 1997, by and
                              between the Company and Peter J. Minihane, as
                              amended.

            10.17**           Net2Net 1994 Stock Option Plan.

            10.20$$           1999 Employee Stock Purchase Plan, as amended
                              April 11, 2001.

            10.22%            Inverse Network Technology 1996 Stock Option Plan.

            10.23!!           Avesta Technologies 1996 Stock Option Plan.

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

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

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

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

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

            10.25.2!!!!       Second Loan Modification to the Accounts
                              Receivable Financing

<PAGE>

                              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.

            10.33@@           Securities Purchase Agreement, dated as of March
                              25, 2002, between Visual Networks, Inc. and the
                              Purchasers named therein (filed as Exhibit 99.1 to
                              the Form 8-K).

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

            10.35@@           IP Security Agreement, dated as of March 25, 2002,
                              between Visual Networks, Inc., its subsidiaries
                              and the Secured Parties named therein (filed as
                              Exhibit 99.6 to the Form 8-K).

            10.36++           Agreement for Electronic Manufacturing Services,
                              dated March 1, 2000, by and between Visual
                              Networks Operations, Inc. and Celestica
                              Corporation.

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

            *                 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 the Company's
                              Current Report on Form 8-K filed March 27, 2002.

            $                 Incorporated herein by reference to Exhibit 3.1 to
                              the Company's Quarterly Report on Form 10-Q for
                              the three months ended June 30, 1999.

            $$                Incorporated herein by reference to the Company's
                              Definitive Proxy Statement on Schedule 14A filed
                              April 30, 2001.

            $$$               Incorporated herein by reference to the Company's
                              Annual Report on Form 10-K for the year ended
                              December 31, 1998.

            +                 Portions of this Exhibit were omitted and have
                              been filed separately with the Secretary of the
                              Commission pursuant to the Company's Application
                              Requesting Confidential Treatment under Rule 406
                              of the Securities Act, filed on December 22, 1997,
                              January 28, 1998 and February 4, 1998.

            ++                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.

            !!!!              Incorporated herein by reference to the Company's
                              Annual Report on Form 10-K for the year ended
                              December 31, 2001.

(b) Reports on Form 8-K

      (1)   The Company filed a Current Report on Form 8-K on February 28, 2002,
            reporting under Item 5 that the Company and Silicon Valley Bank
            reached an agreement to extend for an additional 60 days the
            Company's existing credit facility, which was to have expired on
            February 28, 2002. In addition, the parties executed a commitment
            letter for a new facility.

<PAGE>

      (2)   The Company filed a Current Report on Form 8-K on March 27, 2002,
            reporting under Item 5 the issuance of senior secured convertible
            debentures and warrants in a private placement to four institutional
            investors.

<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                   VISUAL NETWORKS, INC.


                                   By: /s/ ELTON R. KING
                                       -----------------------------------------
                                                    Elton R. King
                                        President and Chief Executive Officer

August 19, 2002