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



                                    FORM 10-Q

(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          (IRS Employer
              incorporation or organization)        Identification No.)

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

       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 May 10, 2002 was 32,085,243 shares.

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






<PAGE>












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

                                TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements:

 Consolidated Balance Sheets - December 31, 2001 and March 31, 2002
 Consolidated Statements of Operations - Three months ended March 31, 2001
  and 2002
 Consolidated Statements of Cash Flows - Three months ended March 31, 2001
  and 2002
 Notes to Consolidated Financial Statements

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

 Item 3. Qualitative and Quantitative Disclosure about Market Risk


PART II. OTHER INFORMATION
 Items 1 - 6
 Signatures


<PAGE>



                          PART I: FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS


                              VISUAL NETWORKS, INC.

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

                                                     DECEMBER 31,     MARCH 31,
                                                         2001           2002
                                                    -------------    ----------
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          1,048
                                                       ---------      ---------
    Total current assets............................    22,841         28,084
 Property and equipment, net........................     6,061          5,475
 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          9,879
 Customer deposits..................................     3,588            --
 Line of credit.....................................     1,663            --
 Current portion of long-term debt..................       661            --
                                                       ---------      ----------
    Total current liabilities.......................    29,417         23,126
Convertible debentures...............................      --           7,898
                                                       ---------      ----------
    Total liabilities................................   29,417         31,024
                                                       ---------      ----------

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)      (473,029)
                                                       ---------      ----------
    Total stockholders' equity (deficit).............     (515)         3,131
                                                       ---------      ----------
    Total liabilities and stockholders' equity
    (deficit)........................................ $ 28,902      $  34,155
                                                      ==========     ===========


          See accompanying notes to consolidated financial statements.


<PAGE>






                              VISUAL NETWORKS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                        FOR THE THREE MONTHS
                                                           ENDED MARCH 31,
                                                         2001          2002
                                                      -----------   -----------
Revenue:
 Hardware revenue................................    $  12,093      $  11,061
 Software revenue................................          308          1,391
 Support and service revenue.....................        4,985          4,538
                                                     ---------       ----------
    Total revenue................................       17,386       16,990
Cost of revenue..................................        6,962        4,976
                                                     ---------       ----------
 Gross profit....................................       10,424       12,014
                                                     ---------       ----------
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)         987
Interest income (expense), net...................          287         (109)
                                                      ---------      ----------
Income (loss) before income taxes................       (7,667)         878
Income taxes.....................................          --           --
                                                      ---------      ----------
Net income (loss)................................    $  (7,667)     $   878
                                                     ==========     ===========
Basic earnings (loss) per share..................    $   (0.24)     $  0.03
                                                     ==========     ===========
Diluted earnings (loss) per share................    $   (0.24)     $  0.03
                                                     ==========     ===========
Basic weighted average shares outstanding........       31,381       31,958
                                                     ==========     ===========
Diluted weighted average shares outstanding......       31,381       32,987
                                                     ==========     ===========

          See accompanying notes to consolidated financial statements.


<PAGE>



                              VISUAL NETWORKS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (IN THOUSANDS)

                                                        FOR THE THREE MONTHS
                                                           ENDED MARCH 31,
                                                         2001          2002
                                                     ------------   -----------
Cash flows from operating activities:
 Net income (loss).................................  $  (7,667)      $   878
 Adjustments to reconcile net income (loss) to
  net cash used in operating activities:
  Depreciation and amortization....................      1,838           963
  Translation gain from foreign subsidiary.........        --            (21)
 Changes in assets and liabilities:
  Accounts receivable..............................       (187)       (1,231)
  Inventory........................................       (516)          175
  Other assets.....................................       (520)          312
  Accounts payable and accrued expenses............     (5,372)        1,009
  Deferred revenue.................................       (575)       (1,903)
  Customer deposits................................      2,501        (3,588)
                                                       ---------     ---------
   Net cash used in operating activities...........    (10,498)       (3,406)
                                                       ---------     ---------
 Cash flows from investing activities:
  Net purchases of short-term investments..........       (163)         --
  Expenditures for property and equipment..........        (69)        (297)
                                                       ---------     ---------
    Net cash used in investing activities..........       (232)        (297)
                                                       ---------     ---------
 Cash flows from financing activities:
  Exercise of stock options and employee stock
   purchase plan...................................         59          622
  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         8,003
                                                       ---------     --------
 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
                                                       =========     =========

          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  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.

<PAGE>

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 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.

<PAGE>

     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 not
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.

INCOME TAXES

     The Company  accounts  for income  taxes in  accordance  with SFAS No. 109,
"Accounting  for Income  Taxes."  Under SFAS No.  109,  deferred  tax assets and
liabilities are computed based on the difference between the financial statement
and income tax bases of assets and  liabilities  using the enacted  marginal tax
rate.  SFAS No. 109  requires  that the net  deferred  tax asset be reduced by a
valuation  allowance if, based on the weight of available  evidence,  it is more
likely than not that some  portion or all of the net deferred tax asset will not
be realized.


<PAGE>


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
                                                     -------   --------
     Visual UpTime..........................        $ 12,659   $ 13,814
     Visual Cell Tracer.....................             475        767
     Visual IP InSight......................           1,096      1,552
     Royalties..............................             --          88
                                                     -------   --------
           Continuing products..............          14,230     16,221
     Visual Internet Benchmark..............           1,389        395
     Visual Trinity and eWatcher............           1,767        374
                                                     -------     -------
           Discontinued products............           3,156        769
                                                     --------    --------
           Total  revenue...................        $ 17,386   $ 16,990
                                                      ========   ========

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):

                                                   THREE MONTHS ENDED
                                                        MARCH 31,
                                                     2001        2002
                                                   -------      -------
 Net income (loss) ..........................    $   (7,667)   $      878
                                                   =========    ==========
 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)    $     0.03
                                                   ==========    ==========
  Diluted earnings (loss) per share..........    $    (0.24)    $     0.03
                                                   ==========    ==========

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.


<PAGE>


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 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.


<PAGE>

     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.

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 in a
future  release of the Visual IP InSight  product.  During 2001,  we also made a
decision to combine  certain  functionality  of the web  performance  management
technology of the Visual  eWatcher  product with the Visual IP InSight  product.
Development  efforts related to incorporating  this  functionality into a future
release  of the  Visual IP  InSight  productare  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.




<PAGE>



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        29.3
                                                      -----       -----
    Gross profit...............................        60.0        70.7
                                                      -----       -----
   Operating expenses:
    Research and development...................        33.3        19.6
    Sales and marketing........................        54.4        34.9
    General and administrative.................        15.4        10.4
    Amortization of goodwill and other
     intangibles...............................         2.7         --
                                                      -----       -----

             Total operating expenses..........       105.8        64.9
                                                      ------      -----
   Income (loss) from operations...............       (45.8)        5.8
   Interest income (expense), net..............         1.7        (0.6)
                                                      -------     ------
   Net income (loss) before income taxes.......       (44.1)        5.2
   Benefit (provision) for income taxes........         --          --
                                                      -------     ------
   Net income (loss)...........................       (44.1)%       5.2%
                                                      =======     ======

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

                                                      THREE MONTHS ENDED
                                                           MARCH 31,
                                                      ------------------
                                                       2001         2002
                                                      ------       ------
   Visual UpTime..............................      $ 12,659    $ 13,814
   Visual Cell Tracer.........................           475         767
   Visual IP InSight..........................         1,096       1,552
   Royalties..................................            --          88
                                                   ---------   ---------
         Continuing products..................        14,230      16,221
   Visual Internet Benchmark..................         1,389         395
   Visual Trinity and eWatcher................         1,767         374
                                                    --------    --------
         Discontinued products................         3,156         769
                                                    --------    --------
         Total  revenue.......................      $ 17,386    $ 16,990
                                                    ========    ========


<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 $17.0  million for the three  months  ended March 31,  2002, a
decrease of $0.4  million.  The overall  decrease in revenue of 2% 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 technical support  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 $12.0  million for the three  months ended March 31,
2002,  an increase of $1.6  million.  Gross  margin was 60.0% of revenue for the
three  months ended March 31, 2001 as compared to 70.7% 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 19.6% 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 expense at or
below the level of such expense in 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 34.9% 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  expense  at or below  the level of such
expense in the first quarter of 2002 as a result of our  continued  focus on the
control of operating expenses.


<PAGE>

     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
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 10.4% 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 expense at or below the level of such
expense in the first quarter of 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 $878,000  for the three  months ended
March 31,  2002,  an increase in income of $8.5  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 $3.4
million.  We also used cash of $297,000 to  purchase  equipment  and other fixed
assets,  made  principal  payments on capital lease  obligations of $285,000 and
made principal payments on our credit facility obligations of $2.0 million. Cash
provided by the sale of common stock  pursuant to the exercise of employee stock
options and our employee stock purchase plan was $622,000.

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


<PAGE>



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

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.


<PAGE>

     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.

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).

<PAGE>



     10.25 ****     Accounts Receivable Financing Agreement dated February 28,
                     2001, by and between Silicon Valley Bank and the Company.
     10.25.1 !!!    First Loan Modification to the Accounts Receivable Financing
                     Agreement, dated May 24, 2001 (related to Exhibit 10.25).
     10.25.2 !!!!   Second Loan Modification to the Accounts Receivable
                     Financing Agreement, dated December 20, 2001
                     (related to Exhibit 10.25).
     10.25.3 !!!!   Third Loan Modification to the
                     Accounts Receivable Financing Agreement,
                     dated February 28, 2002 (related to Exhibit 10.25).
     10.26 ****      Intellectual Property Security Agreement dated February 28,
                      2001, by and between Silicon Valley Bank and the Company.
     10.28 !!!      Employment Agreement, dated May 3, 2001, by and between the
                     Company and Elton King.
     10.29 !!!      Nonstatutory Stock Option Grant Agreement, dated May 3,
                     2001, by and between the Company and Elton King.
     10.30 !!!      Terms of Employment, dated July 27, 2000, by and between the
                     Company and Steve Hindman.
     10.31 !!!!     Terms of Employment, dated October 23, 2001, by and between
                     the Company and John Saunders.
     10.32 !!!!     Consulting Agreement, dated February 16, 2002, by and
                     between the Company and Peter J. Minihane.
     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.




<PAGE>



     *              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 ompany'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.
     ++             Portions of this Exhibit were omitted and have been filed
                     separately with the Secretary of the Commission pursuant to
                     the Company's Application Requesting Confidential Treatment
                     under Rule 24b-2 of the Securities Exchange Act.
     !!             Incorporated herein by reference to the Company's Quarterly
                     Report on Form 10-Q for the three months ended
                     June 30, 2000.
     !!!            Incorporated herein by reference to the Company's Quarterly
                     Report on Form 10-Q for the three months ended
                     June 30, 2001.
     !!!!           Incorporated herein by reference to the Company's Annual
                     Report on Form 10-K 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.

(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/ JOHN H. SAUNDERS
                                  ---------------------------------------
                                      John H. Saunders
                                      Chief Financial Officer

May 15, 2002