<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                                   (MARK ONE)

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

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998

                                       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
        (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
                                      ---   ---

As of May 12, 1998, 17,778,385 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.


<PAGE>   2



                              VISUAL NETWORKS, INC.

                          QUARTERLY REPORT ON FORM 10-Q
                   FOR THE THREE MONTHS ENDED MARCH 31, 1998

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                         PART I . FINANCIAL INFORMATION

Item 1.           Financial Statements:                                                                           Page
                                                                                                                  ----
<S>               <C>                                                                                             <C>
                  Balance Sheets
                  March 31, 1998 and December 31, 1997                                                                3

                  Statements of Operations
                  Three months ended March 31, 1998 and 1997                                                          4 

                  Statements of Cash Flows
                  Three months ended March 31, 1998 and 1997                                                          5

                  Notes to Financial Statements                                                                       6

Item 2.           Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                                                          10

                           PART II. OTHER INFORMATION

Items 1. - 6.                                                                                                        15


Signatures                                                                                                           16
</TABLE>



<PAGE>   3
PART I: FINANCIAL INFROMATION

ITEM 1: FINANCIAL STATEMENTS

                              Visual Networks, Inc.

                                 Balance Sheets
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                             March 31,
                                                           Assets                              1998             December 31,
Current assets:                                                                             (unaudited)             1997
                                                                                            -----------         ------------
<S>                                                                                         <C>                 <C>
  Cash and cash equivalents ......................................................             $52,958               $8,693
  Accounts receivable, net of allowance of $405 and $392, respectively ...........               3,460                2,918
  Inventory ......................................................................               3,575                2,681
  Other current assets ...........................................................                 477                  567
                                                                                            -----------         ------------
      Total current assets .......................................................              60,470               14,859
Property and equipment, net ......................................................               1,818                1,507
                                                                                            -----------         ------------
       Total assets ..............................................................             $62,288              $16,366
                                                                                            ===========         ============

                                             Liabilities and Stockholders' Equity

Current liabilities:
  Accounts payable and accrued expenses ..........................................              $3,473               $3,171
  Customer deposits ..............................................................               2,914                3,068
  Accrued compensation ...........................................................                 853                1,448
  Deferred revenue ...............................................................               4,823                4,913
  Current portion of capital lease obligation ....................................                 223                  222
                                                                                            -----------         ------------
     Total current liabilities ...................................................              12,286               12,822
Capital lease obligation, net of current portion .................................                 199                  256
                                                                                            -----------         ------------
     Total liabilities ...........................................................              12,485               13,078
                                                                                            -----------         ------------

Redeemable convertible preferred stock:
  Series B, Series C, Series D and Series E redeemable convertible cumulative
     preferred stock, $.01 par value, 7,229,438 shares authorized in aggregate,
     7,228,473 issued and outstanding as of December 31, 1997 (aggregate
     liquidation preference of $14,484 as of December 31, 1997) ...................                  -               14,855

Stockholders' equity:
  Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued
     and outstanding .............................................................                   -                    -
  Series A convertible preferred stock, $.01 par value, 347,070 shares authorized,
     347,070 shares issued and outstanding as of December 31, 1997 (aggregate
     liquidation preference of $149 as of December 31, 1997) .....................                   -                    3
  Common stock, $.01 par value, 50,000,000 shares authorized, 17,762,257 and
     2,955,704 shares issued and outstanding as of March 31, 1998 and
     December 31, 1997, respectively .............................................                 178                   29
  Deferred compensation ..........................................................                (235)                (247)
  Additional paid-in capital .....................................................              60,906                  528
  Accumulated deficit ............................................................             (11,046)             (11,880)
                                                                                            -----------         ------------
     Total stockholders' equity ..................................................              49,803              (11,567)
                                                                                            -----------         ------------
      Total liabilities and stockholders' equity .................................             $62,288              $16,366
                                                                                            ===========         ============
</TABLE>


                 See accompanying notes to financial statements.

<PAGE>   4
                             Visual Networks, Inc.
                                       
                                       
                           Statements of Operations
                                  (unaudited)
                (in thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                          For the three months ended March 31,
                                                          --------------------------------------
                                                                1998                1997
                                                          -----------------    -----------------

<S>                                                         <C>                 <C>         
Revenues ............................................             $9,162              $3,079
Cost of goods sold ..................................              2,968               1,051
                                                            ------------        ------------
   Gross profit .....................................              6,194               2,028
                                                            ------------        ------------

Operating expenses:
  Research and development ..........................              1,594                 880
  Sales and marketing ...............................              2,781               2,063
  General and administrative ........................                750                 483
                                                            ------------        ------------
   Total operating expenses .........................              5,125               3,426
                                                            ------------        ------------
Income (loss) from operations .......................              1,069              (1,398)
Interest income, net ................................                431                   8
                                                            ------------        ------------
Income (loss) before income taxes ...................              1,500              (1,390)
Income taxes ........................................                495                   -
                                                            ------------        ------------
Net income (loss) ...................................              1,005              (1,390)
Preferred dividends and accretion ...................               (142)               (364)
                                                            ============        ============
Net income (loss) applicable to common shareholders .               $863             ($1,754)
                                                            ============        ============
Basic earnings (loss) per common share ..............              $0.08              ($0.62)
                                                            ============        ============
Diluted earnings (loss) per common share ............              $0.06              ($0.62)
                                                            ============        ============
Pro forma diluted earnings (loss) per common share ..              $0.06              ($0.10)
                                                            ============        ============
Basic weighted average shares outstanding ...........         10,866,379           2,834,538
                                                            ============        ============
Diluted weighted average shares outstanding .........         17,403,610           2,834,538
                                                            ============        ============
Pro forma diluted weighted average shares outstanding         17,403,610          13,440,273
                                                            ============        ============
</TABLE>


                 See accompanying notes to financial statements.






<PAGE>   5
                              Visual Networks, Inc.

                            Statements of Cash Flows
                                   (unaudited)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                 For the three months ended
                                                                                          March 31,
                                                                         -------------------------------------
                                                                                 1998              1997
                                                                         -----------------    ----------------
                                                                                                                    
<S>                                                                           <C>                <C>                
Cash flows from operating activities:                                                                               
Net Income (loss) .....................................................       $  1,005           ($ 1,390)          
Adjustments to reconcile net income (loss) to net cash                                                              
  (used in) provided by operating activities:                                                                       
     Depreciation and amortization ....................................            191                 99           
     Deferred compensation ............................................             12               -              
Changes in assets and liabilities--                                                                                 
     Accounts receivable ..............................................           (542)               268           
     Inventory ........................................................           (894)               367           
     Other current assets .............................................             90                (53)          
     Accounts payable and accrued expenses ............................            302                484           
     Customer deposits ................................................           (154)                 0           
     Accrued compensation .............................................           (595)              (376)          
     Deferred revenue .................................................            (90)               545           
                                                                              --------           --------           
          Net cash used in operating activities .......................           (675)               (56)          
                                                                              --------           --------           
                                                                                                                    
Cash flows from investing activities:                                                                               
     Expenditures for property and equipment ..........................           (505)              (145)          
                                                                              --------           --------           
          Net cash used in investing activities .......................           (505)              (145)          
                                                                              --------           --------           
                                                                                                                    
Cash flows from financing activities:                                                                               
     Proceeds from issuance of common stock - option exercises ........             84                  6           
     Proceeds from issuance of common stock in initial public offering,                                             
          net of offering costs .......................................         45,447              -               
     Payment of Series A dividends ....................................            (30)                 0           
     Principal payments on capital lease obligations ..................            (56)               (13)          
                                                                              --------           --------           
          Net cash provided by (used in) financing activities .........         45,445                 (7)          
                                                                              --------           --------           
                                                                                                                    
Net increase (decrease) in cash and cash equivalents ..................         44,265               (208)          
Cash and cash equivalents, beginning of period ........................          8,693              3,404           
                                                                              ========           ========           
Cash and cash equivalents, end of period ..............................       $ 52,958           $  3,196           
                                                                              ========           ========           
                                                                                                                    
Supplemental cash flow information:                                                                                 
Cash paid for interest ................................................       $     20           $     25           
                                                                              ========           ========           
</TABLE>      
              
              
                 See accompanying notes to financial statements.               
























<PAGE>   6


                              VISUAL NETWORKS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                                 MARCH 31, 1998

(1)        NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Visual Networks, Inc. (the "Company") is engaged in developing, manufacturing
and marketing wide-area-network service level management systems. The Company's
operations are subject to certain risks and uncertainties including, among
others, successful implementation of the Company's sales and distribution model,
dependence on a very limited number of significant customers, rapidly changing
technologies, current and potential competitors with greater financial,
technological, production, and marketing resources, dependence on key management
personnel, limited protection of intellectual property and proprietary rights,
uncertainty of future profitability and possible fluctuations in financial
results.

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 the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

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
the notes thereto, included in the Company's prospectus dated February 5, 1998
and its Annual Report on Form 10-K for the year ended December 31, 1997. In the
opinion of management, the comparative financial statements for the fiscal
periods presented herein include all adjustments that are normal and recurring
which are necessary for a fair statement of the results for the interim periods.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results for the entire year ending December 31,
1998.

REVENUE RECOGNITION

The Company generally recognizes revenue from sales of its products upon
delivery and passage of title to the customer. Revenue is recognized provided
that no significant obligations remain and that collection of the resulting
receivable is probable. Where agreements provide for evaluation or customer
acceptance, the Company recognizes revenue upon completion of the evaluation
process and acceptance of the product by the customer. Maintenance contracts
call for the Company to provide technical support and software



<PAGE>   7


updates to customers. The Company recognizes product support and maintenance
revenue, including maintenance revenue that is bundled with product sales,
ratably over the term of the contract period, which ranges from one to three
years.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid instruments with an original maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents are currently invested in short-term U.S. Treasury obligations and
repurchase agreements collateralized by U.S. Treasury securities.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of current assets and current liabilities approximate fair
value because of the relatively short maturities of these instruments.

INVENTORY

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

<TABLE>
<CAPTION>
                                                           March 31,         December 31,
                                                             1998                1997
                                                           ------------------------------
      <S>                                                  <C>               <C>
      Raw materials.................................       $  331               $  221
      Work-in progress..............................          711                  471
      Finished goods................................        2,533                1,989
                                                           ------------------------------
                                                           $3,575               $2,681
</TABLE>

INCOME TAXES

The Company accounts for income taxes in accordance with Statements of Financial
Accounting Standards ("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.

Income tax expense for the three months ended March 31, 1998 was calculated
utilizing an effective tax rate of 33%. This rate reflects the expected benefit
of the utilization of net operating loss carryforwards to offset taxable income
for the year ended December 31, 1998.

BASIC, DILUTED AND PRO FORMA EARNINGS PER COMMON SHARE

The Company has implemented SFAS No. 128, "Earnings Per Share" for 1998. This
pronouncement requires dual presentation of basic and diluted earnings or loss
per share. Basic earnings or loss per share includes no dilution and is computed
by dividing reported earnings available to common shareholders by the weighted
average number of shares outstanding for the period. Diluted earnings 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.
For the three months ended March 31, 1997, options to purchase 1,296,976 shares
of common stock that were outstanding at March 31, 1997 were not included in the
computation of diluted loss per share as their effect would have been
anti-dilutive. The effect of preferred stock convertible into 10,605,735 shares
of common stock has also not been included in the computation of diluted loss
per share as such effect would have been anti-dilutive. As a result, the basic
and diluted loss per share amounts are identical for the three months ended
March 31, 1997. Pro forma net income (loss) per share




<PAGE>   8

has been presented since the conversion of the preferred stock into common stock
at the time of the initial public offering has a significant effect on the
calculation. Pro forma earnings or loss per common share is computed by dividing
net income or loss for the respective periods by the pro forma weighted average
shares outstanding, which includes the assumed conversion of all outstanding
convertible preferred stock into common stock. See Exhibit 11.1 for the
calculation of earnings or loss per common share.




<PAGE>   9


(2)        NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and No. 131, "Disclosures about Segments of an
Enterprise and Related Information." These statements become effective for the
Company's 1998 financial statements. The adoption of these new pronouncements
will not have a material impact on the Company's results of operations,
financial position or cash flows.

(3)        INITIAL PUBLIC OFFERING

In February 1998, the Company completed an initial public offering ("IPO") of
4,025,000 shares of the Company's common stock, par value $.01, resulting in net
proceeds of approximately $45.4 million. All of the shares sold were issued and
sold by the Company. Concurrent with the offering, the Series A convertible
preferred stock and its Series B, C, D, and E redeemable convertible preferred
stock were converted into 485,890 and 10,119,845 shares of common stock,
respectively.

(4)        SUBSEQUENT ACQUISTION

On April 16, 1998, the Company announced the execution of a definitive merger
agreement to acquire Net2Net Corporation ("Net2Net"), a provider of Asynchronous
Transmission Mode ("ATM") analysis and management systems. The acquisition
combines the Company's Visual UpTime, a service level management system for
frame relay and IP networks, with Net2Net's high-speed ATM management and
analysis platform. The combination of the two product offerings will allow the
Company to provide its customers with a single-vendor solution for end-to-end
service level management, encompassing frame relay, IP and ATM at speeds ranging
from 56Kbps up to OC-3, both at the service demarcation and in the core
backbone.

Under the terms of the merger agreement, the Company will issue 2,250,000
shares of the Company's common stock in exchange for all of the equity of
Net2Net. Based on the April 15, 1998 closing price of the Company's common
stock, the transaction is valued at approximately $70 million. The transaction
is to be accounted for as a pooling of interests and is to be treated as a
tax-free reorganization for federal tax purposes. The transaction has been
approved by both companies' Boards of Directors and is expected to close within
60 days, subject to approval of Net2Net stockholders and other customary
closing conditions.




<PAGE>   10


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                         AND RESULTS OF OPERATIONS

OVERVIEW

Visual Networks, Inc. (the "Company) designs, manufactures and sells
wide-area-network ("WAN") service level management systems for statistically
multiplexed technologies such as frame relay and IP/Internet. The Company's
Visual UpTime system combines WAN access functionality with innovative software
for performance monitoring, troubleshooting and network planning. Visual UpTime
provides instrumentation for network performance measurement and analysis that
allows WAN service providers ("providers") to achieve service levels required by
their customers ("subscribers") and to lower operating costs associated with
statistically multiplexed services. The availability of performance monitoring
and troubleshooting instrumentation also allows subscribers to verify service
levels being supplied by their WAN provider and monitor traffic traversing the
WAN, a requirement for many subscribers wishing to use statistically multiplexed
services to carry mission-critical data traffic.

The Company was incorporated in Maryland in August 1993 as Avail Networks, Inc.
and reincorporated in Delaware in December 1994 as Visual Networks, Inc. From
incorporation through December 1994, the Company's principal objective was to
secure sufficient equity financing to enable the Company to accelerate product
development efforts. The Company secured its initial round of equity financing
in December 1994.

During 1995 and 1996, the Company devoted substantial resources to developing
Visual UpTime for frame relay deployment and to developing sales and marketing
functions and general and administrative infrastructure. Visual UpTime was first
shipped in mid-1995. The Company began generating significant revenue from sales
of Visual UpTime during 1996.

During 1995 and 1996, most of the Company's sales were to subscribers. In August
1996, the Company entered into a master reseller agreement with Sprint/United
Management Company ("Sprint"), resulting in the Company's products shipping
through Sprint to subscribers. In October of 1997, the Company entered into a
similar master reseller agreement with MCI, which also resulted in shipments of
the Company's products through MCI to subscribers. In December 1997, the Company
entered into an agreement with AT&T, which will result in the sale of the
Company's products to AT&T for deployment as part of AT&T's infrastructure.
During 1997 and the first quarter of 1998, the Company has expanded its sales
force and distribution capabilities in order to sell Visual UpTime directly to
providers as part of their network infrastructure, similar to the current
arrangement that the Company has with AT&T.

The Company currently contracts with third parties for board assembly and has a
manufacturing operation that performs final assembly, testing and shipping of
its product at its facility in Rockville, Maryland. The Company anticipates
maintaining a portion of its internal manufacturing function for the forseeable
future, but is exploring opportunities with contract manufacturers to have its
products assembled, tested and shipped at a third party location.

On April 16, 1998, the Company announced the execution of a definitive merger
agreement to acquire Net2Net. Consummation of this transaction will affect the
future results of the operations reported by the Company. See Item 1: Financial
Statements, Note 4.




<PAGE>   11
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH
THE THREE MONTHS ENDED MARCH 31, 1997


REVENUE. The Company recognized $9.2 million in revenue for the three months
ended March 31, 1998, a 197% increase over revenue of $3.1 million reported for
the three months ended March 31, 1997. The increase was due primarily to
acceptance of Visual UpTime in the frame relay market, with a significant
increase in sales to providers, particularly Sprint. Sales to providers
accounted for approximately 58% of the revenue for the three months ended March
31, 1998 as compared to approximately 30% for the same period in 1997. Revenue
from Sprint totaled approximately 44% and 22% of the revenues for the three
months ended March 31, 1998 and 1997, respectively.

GROSS PROFIT. Cost of goods sold consists of component parts, direct
compensation costs, warranty and other contractual obligations, royalties,
license fees and other overhead expenses related to manufacturing operations.
Gross profit was $6.2 million for the three months ended March 31, 1998, as
compared to $2.0 million for the three months ended March 31, 1997, an increase
of $4.2 million. Gross margin was 67.6% for thee three months ended March 31,
1998, as compared to 65.9% for the same period in 1997. The increase in gross
margin percentage was due primarily to product cost reductions. The Company's
future gross margins may be affected by the product mix and by the amount of
sales to providers. The Company's future gross margins also may be adversely
affected by a number of factors, including competitive pricing, manufacturing
volumes, and an increase in 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 $1.6 million for the three
months ended March 31, 1998 as compared to $0.9 million for the three months
ended March 31, 1997, an increase of $0.7 million. The increase in research and
development expense was due primarily to increased staffing levels and, to a
lesser extent, purchases of materials used in the development of new or enhanced
products. Research and development expense was 17.4% and 28.6% of revenue for
the three months ended March 31, 1998 and 1997, respectively. The Company
expects that research and development expenditures will increase in absolute
dollars, and may decrease as a percentage of revenue, during 1998 and
thereafter. The increase in absolute dollars will support continued development
of new and enhanced products and the exploration of new or complementary
technologies.

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 $2.8 million for the three months ended March
31, 1998 as compared to $2.1 million for the three months ended March 31, 1997,
an increase of $0.7 million. The increase in sales and marketing expense was due
primarily to increased staffing levels and related costs, such as commissions.
Sales and marketing expense was 30.4% and 67.0% of revenue for the three
months ended March 31, 1998 and 1997, respectively. The Company expects that
sales and marketing expenditures will increase in absolute dollars, and may
decrease as a percentage of revenue, during 1998 and thereafter. The increase in
absolute dollars is expected to be incurred as additional personnel are hired,
field offices are opened and promotional expenditures increase to allow the
Company to increase its market penetration and to pursue market opportunities.

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense consists
of finance, administration and general management activities. General and
administrative expense was $0.8 million for the three months ended March 31,
1998 as compared to $0.5 million for the three months ended March 31, 1997, an
increase of $0.3 million. The increase in general and administrative expense was
due primarily to increased staffing levels. General and administrative expense
was 8.2% and 15.7% of revenue for the three months ended March 31, 1998 and
1997, respectively. The Company expects that general and administrative
expenditures will increase in absolute dollars, and may decrease as a percentage
of revenue, during 1998 and thereafter. The increase in absolute dollars is
expected to be required for the expansion of the Company's administrative staff
and internal systems to support expanding operations




<PAGE>   12


and operating as a public company.

INTEREST INCOME, NET. Interest income, net for the three months ended
March 31, 1998 was approximately $431,000 as compared to $8,000 for the three
months ended March 31, 1997. The increase was due to the significant increase
in cash and cash equivalents between periods resulting from the proceeds of the
Company's initial public offering in February 1998.

PROVISION FOR INCOME TAXES. The provision for income taxes for the three months
ended March 31, 1998 totaled approximately $495,000. For the three months ended
March 31, 1997, the income tax provision was comprised primarily of a deferred
tax benefit related to operating losses incurred which was offset by a valuation
allowance. The effective tax rate of 33% for the three months ended March 31,
1998 reflects the expected utilization of net operating loss carryforwards
eligible to offset taxable income.

NET INCOME (LOSS). Net income for the three months ended March 31, 1998 was
$1.0 million as compared to a net loss of $1.4 million for the same period in
1997, an increase of $2.4 million. This increase was due primarily to the
revenue, gross profit and interest income increases described above offset by
the increased operating expenses described above.




<PAGE>   13


LIQUIDITY AND CAPITAL RESOURCES

In the three months ended March 31, 1998, the Company's combined balance of cash
and cash equivalents increased from $8.7 million to $53.0 million, an increase
of $44.3 million. This increase is primarily attributed to the $45.4 million in
net proceeds that the Company received from the sale of common stock in its IPO
in February 1998. During the three months ended March 31, 1998, $1.2 million of
cash was used (excluding the proceeds from the IPO), primarily to fund inventory
purchases, to purchase computer and other equipment and to pay bonuses and
commissions related to the year ended December 31, 1997.

On April 16, 1998, the Company entered into a definitive merger agreement to
acquire Net2Net in a stock transaction to be accounted for as a pooling of
interests. This transaction is subject to customary closing conditions and is
expected to close within 60 days. The Company expects merger and restructuring
costs related to this transaction of approximately $10 million, which will
result in a significant use of cash by the Company during 1998. 

FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company raised $45.4 million (net of issuance costs), in its IPO in February
1998. The Company has also had four consecutive quarters of profitability, and
generated cash of $5.3 million in the year ended December 31, 1997. The Company
also has a $7.0 million line of credit with a bank. As of March 31, 1998, there
were no borrowings outstanding under this bank credit facility. The Company
requires substantial working capital to fund its business, particularly to
finance inventories, accounts receivable, research and development and capital
expenditures. The Company's future capital requirements will depend on many
factors, including the rate of revenue growth, if any, the timing and extent of
spending to support product development efforts and expansion of sales and
marketing, the timing of introductions of new products and enhancements to
existing products and market acceptance of the Company's products. The Company
believes that its current cash position combined with the $7.0 million line of
credit are sufficient to meet its capital expenditures and working capital
requirements for the next 18 to 24 months. The Company may consider from time to
time various alternatives and may seek to raise additional capital through
equity or debt financing or to enter into strategic agreements. There can be no
assurance, however, that any of such financing alternatives will be available on
terms acceptable to the Company, if at all.

The market for the Company's products is growing rapidly and the Company's
business environment is characterized by rapid technological changes, changes in
customer requirements and new emerging market segments. Consequently, to compete
effectively, the Company must make frequent new product introductions and
enhancements and deploy sales and marketing resources to take advantage of new
business opportunities. The Company's operations are also subject to certain
other risks and uncertainties including, among other things, the effectiveness
of actual and potential competition, the success of the Company's relationships
with its current strategic partners, the continued development of reseller
relationships with new service providers, and the risks associated with
acquisitions and international expansion. Failure to meet any of these
challenges could adversely affect future operating results.

Although a significant majority of the Company's sales to date have been made
to customers in the United States and Canada, the Company intends to increase
its sales efforts in international markets. The Company plans to sell its
products to international customers at prices denominated in U.S. dollars.
However, if the company experiences material levels of sales at prices not
denominated in U.S. dollars, the Company intends to adopt a strategy to hedge
against currency fluctuations.

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




<PAGE>   14


liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

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. The Company assumes no obligations to update the information contained
in this press release. The Company's future results may be impacted by various
important factors including, but not limited to, its ability to implement its
provider deployment model, its lengthy sales cycle, dependence on its major
customers, risks associated with rapid technological change and the emerging
services market, potential fluctuations in quarterly results, its dependence on
sole and limited source suppliers and fluctuations in component pricing and its
dependence on key employees and other risk factors set forth in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.


<PAGE>   15

                           PART II-- OTHER INFORMATION

Item 1.    Legal Proceedings................................................None

Item 2.    Changes in Securities............................................None

Item 3.    Defaults upon Senior Securities..................................None

Item 4.    Submission of Matters to Vote of Security Holders................None

Item 5.    Other Information................................................None

Item 6.    (a) Exhibits

Exhibit
Number                           Description
------        ---------------------------------------------------------------
3.1*          Restated Certificate of Incorporation of the Registrant.
3.2*          Restated By-Laws of the Registrant.
10.1*         1994 Stock Option Plan.
10.2*         1997 Omnibus Stock Plan.
10.3*         Amended and Restated 1997 Directors' Stock Option Plan.
10.4*         Third Amended and Restated Stockholders and Registration Rights
              Agreement, dated as of September 19, 1996, by and among the
              Company and certain stockholders.
10.5**        Reseller/Integration Agreement, dated August 29, 1997, by and
              between the Company and MCI Telecommunication Corporation.
10.6**        Master Reseller Agreement, dated as of August 23, 1996, between
              Sprint/United Management Company and the Company.
10.7**        General Agreement for the Procurement of Equipment, Services and
              Supplies and the Licensing of Software, dated as of December 3,
              1997, between the Company and AT&T Corp.
10.8*         Lease Agreement, dated December 12, 1996, by and between the
              Company and The Equitable Fire Assurance Society of The United
              States.
10.9*         Lease Amendment, dated September 2, 1997, by and between the
              Company and The Equitable Fire Assurance Society of The United
              States (relating to Exhibit 10.8).
10.10*        Loan and Security Agreement dated April 5, 1996, by and between
              Silicon Valley Bank and the Company.
10.11*        Revolving Promissory Note issued by the Company on April 5, 1996,
              to Silicon Valley Bank.
10.11.1*      Equipment Term Note No. 1 issued by the Company on April 5, 1996,
              to Silicon Valley Bank.
10.11.2*      First Amendment to Loan and Security Agreement dated November 8,
              1996, by and between Silicon Valley Bank and the Company (relating
              to Exhibit 10.10).
10.11.3*      Second Amendment to Loan and Security Agreement dated February 27,
              1997, by and between Silicon Valley Bank and the Company (relating
              to Exhibit 10.10).
10.12*        Standby Letter of Credit Agreement, dated December 10, 1996 by and
              between the Company and Silicon Valley Bank.
10.12.1*      Amendment No. 1 to Standby Letter of Credit Agreement dated
              September 5, 1997, by and between the Company and Silicon Valley
              Bank (relating to Exhibit 10.12).
10.13*        Employment Agreement dated December 15, 1994, by and between the
              Company and Scott E. Stouffer, as amended.
10.14*        Employment Agreement dated December 15, 1994, by and between the
              Company and Robert Troutman, as amended.
10.15*        Terms of Employment dated June 11, 1997, by and between the
              Company and Peter J. Minihane, as amended.
10.16*        Terms of Employment dated March 5, 1997, by and between the
              Company and Henri A. Cheli, as amended.
10.17*        Terms of Employment dated November 12, 1996, by and between the
              Company and Gregory J. Langford, as amended.
10.18*        Loan and Security Agreement dated January 8, 1998, by and between
              Silicon Valley Bank and the Company.
10.18.1*      Revolving Promissory Note issued by the Company as of January 8,
              1998, to Silicon Valley Bank.
11.1          Statement of computation of loss per share.
27            Financial Data Schedule.

----------

* Incorporated herein by reference to the Company's Registration Statement on
Form S-1, No. 333-41517.

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

           (b) Reports on Form 8-K

                      The Company filed a Current Report on Form 8-K on
                      April 20, 1998, reporting as an Item 5 Event the
                      execution of a definitive merger agreement with
                      Net2Net Corporation.


<PAGE>   16


                                   SIGNATURES

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

                               Visual Networks, Inc.
                               ----------------------

May 14, 1998                   By: /s/ Scott S. Stouffer
                                   ---------------------
                               Scott S. Stouffer
                               Chief Executive Officer and President

May 14, 1998                   By: /s/ Peter J. Minihane
                                   ---------------------
                               Peter J. Minihane
                               Executive Vice President, Chief Financial Officer
                                 and Treasurer (principal financial and 
                                 accounting officer)