SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-0001




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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 June 30, 2001

OR



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

Commission File Number 000-23699



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VISUAL NETWORKS, INC.

(Exact name of registrant as specified in its
charter)


|                                                                          |  |                                                
|------------------------------------------------------------------------- |  | -----------------------------------------------
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Delaware(State or other jurisdiction of
	incorporation or organization)   |  | 52-1837515(I.R.S. Employer
	Identification No.)
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|2092 Gaither Road, Rockville, MD(Address of principal executive
	offices) |  | 20850-4013(Zip code)                           

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



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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 
o

The number of outstanding shares of the Registrants Common
Stock, par value $.01 per share, as of August 10, 2001 was
31,575,928 shares.









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VISUAL NETWORKS, INC.

QUARTERLY REPORT ON FORM 10-Q


FOR THE THREE MONTHS ENDED


JUNE 30, 2001


TABLE OF CONTENTS

|                              |                                                                                                |                                                                                             |  |    |   | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- |  | -- | - | 
|                              |                                                                                                | Page                                                                                       
|                              |                                                                                                |                                                                                            
|PART I. FINANCIAL INFORMATION |                                                                                                |                                                                                             |  |   
|                             
|                             
|                             
|                             
|                              | Item 1. Financial Statements:                                                                  |                                                                                             |  |    |  
|                             
|                             
|                             
|                             
|                              |                                                                                                | Consolidated Balance Sheets 
	June 30, 2001 and December 31, 2000.                         |  |    | 3 | 
|                             
|                             
|                             
|                             
|                              |                                                                                                | Consolidated Statements of Operations 
	Three and six months ended June 30, 2001 and 2000. |  |    | 4 | 
|                             
|                             
|                             
|                             
|                              |                                                                                                | Consolidated Statements of Cash Flows 
	Six months ended June 30, 2001 and 2000.           |  |    | 5 | 
|                             
|                             
|                             
|                             
|                              |                                                                                                | Notes to Consolidated Financial Statements                                                  |  |    | 6 | 
|                             
|                             
|                             
|                             
|                              | Item 2. Managements Discussion and
	Analysis of Financial Condition and Results of Operations |                                                                                             |  | 14 |  
|                             
|                             
|                             
|                             
|                              | Item 3. Qualitative and Quantitative
	Disclosure about Market Risk                             |                                                                                             |  | 20 |  
|PART II. OTHER INFORMATION    |                                                                                                |                                                                                             |  |   
|                             
|                             
|                             
|                             
|                              | Items 1  6                                                                                    |                                                                                             |  | 21 |  
|                             
|                             
|                             
|                             
|                              | Signatures                                                                                     |                                                                                             |  | 26 |  

2



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PART I:  FINANCIAL INFORMATION

Item  1:  Financial Statements

VISUAL NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(In thousands, except share data)


|                                       |                                                                                                                                                                                |                                            |       |              |        |  |        |          |        | 
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ----- | ------------ | ------ |  | ------ | -------- | ------ | 
|                                       |                                                                                                                                                                                | June 30,                                   |       | December 31,
|                                       |                                                                                                                                                                                | 2001                                       |       | 2000        
|                                       |                                                                                                                                                                                |                                            |       |             
|                                      
|                                      
|                                      
|                                      
|ASSETS                                
|                                      
|                                      
|                                      
|                                      
|Current assets:                        |                                                                                                                                                                                |                                            |       |              |        |  |        |         
|                                      
|                                      
|                                      
|                                      
|                                       | Cash and cash equivalents                                                                                                                                                      |                                            | $     | 6,518        |        |  | $      | 17,369   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Short-term investments                                                                                                                                                         |                                            |       | 5,578        |        |  |        | 3,700    |       
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts receivable, net of allowance of $937 and
	$1,103, respectively                                                                                                        |                                            |       | 5,912        |        |  |        | 7,615    |       
|                                      
|                                      
|                                      
|                                      
|                                       | Inventory                                                                                                                                                                      |                                            |       | 9,897        |        |  |        | 13,474   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Other current assets                                                                                                                                                           |                                            |       | 2,642        |        |  |        | 3,089    |       
|                                       |                                                                                                                                                                                |                                            |       |              |        |  |        |         
|                                       |                                                                                                                                                                                | Total current assets                       |       |              | 30,547 |  |        |          | 45,247 | 
|                                      
|                                      
|                                      
|                                      
|Property and equipment, net            |                                                                                                                                                                                |                                            | 7,851 |              |        |  | 10,738 |         
|                                      
|                                      
|                                      
|                                      
|Intangible assets, net                 |                                                                                                                                                                                |                                            | 211   |              |        |  | 8,510  |         
|                                      
|                                      
|                                      
|                                      
|Other assets                           |                                                                                                                                                                                |                                            | 3,713 |              |        |  | 9,562  |         
|                                       |                                                                                                                                                                                |                                            |       |              |        |  |        |         
|                                       |                                                                                                                                                                                | Total assets                               |       | $            | 42,322 |  |        | $        | 74,057 | 
|                                       |                                                                                                                                                                                |                                            |       |              |        |  |        |         
|                                      
|                                      
|                                      
|                                      
|LIABILITIES AND STOCKHOLDERS
	EQUITY 
|                                      
|                                      
|                                      
|                                      
|Current liabilities:                   |                                                                                                                                                                                |                                            |       |              |        |  |        |         
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts payable and accrued expenses                                                                                                                                          |                                            | $     | 19,907       |        |  | $      | 29,354   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Customer deposit                                                                                                                                                               |                                            |       | 1,664        |        |  |        |         |       
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred revenue                                                                                                                                                               |                                            |       | 14,012       |        |  |        | 17,769   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Current portion of long-term debt                                                                                                                                              |                                            |       | 682          |        |  |        | 606      |       
|                                       |                                                                                                                                                                                |                                            |       |              |        |  |        |         
|                                       |                                                                                                                                                                                | Total current liabilities                  |       |              | 36,265 |  |        |          | 47,729 | 
|                                      
|                                      
|                                      
|                                      
|Long-term debt, net of current portion |                                                                                                                                                                                |                                            | 312   |              |        |  | 243    |         
|                                       |                                                                                                                                                                                |                                            |       |              |        |  |        |         
|                                       |                                                                                                                                                                                | Total liabilities                          |       |              | 36,577 |  |        |          | 47,972 | 
|                                       |                                                                                                                                                                                |                                            |       |              |        |  |        |         
|Stockholders equity:                  |                                                                                                                                                                                |                                            |       |              |        |  |        |         
|                                      
|                                      
|                                      
|                                      
|                                       | Common stock, $.01 par value, 50,000,000 shares
	authorized, 31,513,993 and 31,296,383 shares issued and
	outstanding as of June 30, 2001 and December 31, 2000,
	respectively |                                            |       | 315          |        |  |        | 313      |       
|                                      
|                                      
|                                      
|                                      
|                                       | Additional paid-in capital                                                                                                                                                     |                                            |       | 472,476      |        |  |        | 473,108  |       
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred compensation                                                                                                                                                          |                                            |       | (111         | )      |  |        | (402     | )     
|                                      
|                                      
|                                      
|                                      
|                                       | Accumulated other comprehensive income                                                                                                                                         |                                            |       | 7            |        |  |        | 11       |       
|                                      
|                                      
|                                      
|                                      
|                                       | Accumulated deficit                                                                                                                                                            |                                            |       | (466,942     | )      |  |        | (446,945 | )     
|                                       |                                                                                                                                                                                |                                            |       |              |        |  |        |         
|                                       |                                                                                                                                                                                | Total stockholders equity                 |       |              | 5,745  |  |        |          | 26,085 | 
|                                       |                                                                                                                                                                                |                                            |       |              |        |  |        |         
|                                       |                                                                                                                                                                                | Total liabilities and stockholders equity |       | $            | 42,322 |  |        | $        | 74,057 | 
|                                       |                                                                                                                                                                                |                                            |       |              |        |  |        |         

See accompanying notes to consolidated financial statements.

3



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VISUAL NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


(In thousands, except per share data)


|                                                       |                                                 |                          |         |                    |        |      |         |        |        |   |         |        |        |   |         |        |        | 
|------------------------------------------------------ | ----------------------------------------------- | ------------------------ | ------- | ------------------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                       |                                                 |                          |         |                   
|                                                       |                                                 | For the three months     |         | For the six months
|                                                       |                                                 | ended June 30,           |         | ended June 30,    
|                                                       |                                                 |                          |         |                   
|                                                       |                                                 | 2001                     |         | 2000               |        | 2001 |         | 2000  
|                                                       |                                                 |                          |         |                    |        |      |         |       
|Revenue                                                |                                                 | $                        | 20,329  |                    |        | $    | 28,644  |        |        | $ | 37,715  |        |        | $ | 59,138  |       
|                                                      
|                                                      
|                                                      
|                                                      
|Cost of revenue                                        |                                                 |                          | 9,301   |                    |        |      | 9,490   |        |        |   | 16,263  |        |        |   | 18,785  |       
|                                                       |                                                 |                          |         |                    |        |      |         |        |        |   |         |        |        |   |         |       
|                                                       | Gross profit                                    |                          |         | 11,028             |        |      |         | 19,154 |        |   |         | 21,452 |        |   |         | 40,353 |       
|                                                       |                                                 |                          |         |                    |        |      |         |        |        |   |         |        |        |   |         |       
|Operating expenses:                                    |                                                 |                          |         |                    |        |      |         |        |        |   |         |        |        |   |         |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Research and development                        |                          |         | 5,377              |        |      |         | 6,251  |        |   |         | 11,160 |        |   |         | 11,308 |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Write-off of purchased research and development |                          |         |                   |        |      |         | 39,000 |        |   |         |       |        |   |         | 39,000 |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Sales and marketing                             |                          |         | 9,137              |        |      |         | 9,280  |        |   |         | 18,587 |        |   |         | 16,257 |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | General and administrative                      |                          |         | 2,346              |        |      |         | 2,376  |        |   |         | 5,018  |        |   |         | 4,627  |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Restructuring and impairment charges            |                          |         | 6,276              |        |      |         |       |        |   |         | 6,276  |        |   |         |       |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Amortization of acquired intangibles            |                          |         | 319                |        |      |         | 8,841  |        |   |         | 792    |        |   |         | 8,841  |       
|                                                       |                                                 |                          |         |                    |        |      |         |        |        |   |         |        |        |   |         |       
|                                                       |                                                 | Total operating expenses |         |                    | 23,455 |      |         |        | 65,748 |   |         |        | 41,833 |   |         |        | 80,033 | 
|                                                       |                                                 |                          |         |                    |        |      |         |        |        |   |         |        |        |   |         |       
|Loss from operations                                   |                                                 |                          | (12,427 | )                  |        |      | (46,594 | )      |        |   | (20,381 | )      |        |   | (39,680 | )     
|                                                      
|                                                      
|                                                      
|                                                      
|Interest income, net                                   |                                                 |                          | 97      |                    |        |      | 693     |        |        |   | 384     |        |        |   | 1,370   |       
|                                                       |                                                 |                          |         |                    |        |      |         |        |        |   |         |        |        |   |         |       
|Loss before income taxes                               |                                                 |                          | (12,330 | )                  |        |      | (45,901 | )      |        |   | (19,997 | )      |        |   | (38,310 | )     
|                                                      
|                                                      
|                                                      
|                                                      
|Income taxes                                           |                                                 |                          |        |                    |        |      | 3,582   |        |        |   |        |        |        |   | 1,532   |       
|                                                       |                                                 |                          |         |                    |        |      |         |        |        |   |         |        |        |   |         |       
|Net loss                                               |                                                 | $                        | (12,330 | )                  |        | $    | (42,319 | )      |        | $ | (19,997 | )      |        | $ | (36,778 | )     
|                                                       |                                                 |                          |         |                    |        |      |         |        |        |   |         |        |        |   |         |       
|Basic and diluted loss per share                       |                                                 | $                        | (0.39   | )                  |        | $    | (1.54   | )      |        | $ | (0.64   | )      |        | $ | (1.40   | )     
|                                                       |                                                 |                          |         |                    |        |      |         |        |        |   |         |        |        |   |         |       
|Basic and diluted weighted average shares
	outstanding |                                                 |                          | 31,514  |                    |        |      | 27,398  |        |        |   | 31,455  |        |        |   | 26,189  |       
|                                                       |                                                 |                          |         |                    |        |      |         |        |        |   |         |        |        |   |         |       

See accompanying notes to consolidated financial statements.

4



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VISUAL NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


(In thousands)


|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |         |        |        |  
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------ | ----------------------------------------------- | ---------------------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | ------ | -
|                                                                         |                                                                                            |                                                
|                                                                         |                                                                                            | For the six months                             
|                                                                         |                                                                                            | ended June 30,                                 
|                                                                         |                                                                                            |                                                
|                                                                         |                                                                                            | 2001                                            |                                                      | 2000   
|                                                                         |                                                                                            |                                                 |                                                      |        
|Cash flows from operating activities:                                    |                                                                                            |                                                 |                                                      |         |        |         |        |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Net loss                                                                                   |                                                 | $                                                    | (19,997 | )      |         | $      | (36,778 | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Adjustments to reconcile net loss to net cash
	provided by (used in) operating activities: |                                                 |                                                      |         |        |         |        |         |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Depreciation and amortization                   |                                                      |         | 3,459  |         |        |         | 11,324 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Write-off of purchased research and development |                                                      |         |       |         |        |         | 39,000 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Non-cash restructuring and impairment charges   |                                                      |         | 4,292  |         |        |         |       |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Deferred taxes                                  |                                                      |         |       |         |        |         | (1,532 | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Changes in assets and liabilities:                                                         |                                                 |                                                      |         |        |         |        |         |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Accounts receivable                             |                                                      |         | 1,703  |         |        |         | (8,865 | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Inventory                                       |                                                      |         | 3,577  |         |        |         | 504    |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Other assets                                    |                                                      |         | 741    |         |        |         | (921   | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Accounts payable and accrued expenses           |                                                      |         | (7,910 | )       |        |         | 7,188  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Customer deposits                               |                                                      |         | 1,664  |         |        |         |       |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                                            | Deferred revenue                                |                                                      |         | (1,925 | )       |        |         | 502    |       
|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |        
|                                                                         |                                                                                            |                                                 | Net cash provided by (used in) operating
	activities |         |        | (14,396 | )      |         |        | 10,422 |  
|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |        
|Cash flows from investing activities:                                    |                                                                                            |                                                 |                                                      |         |        |         |        |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Net maturities of short-term investments                                                   |                                                 |                                                      | 3,122   |        |         |        | 3,662   |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Expenditures for property and equipment                                                    |                                                 |                                                      | (328    | )      |         |        | (4,611  | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Merger-related transaction costs, net of cash
	acquired                                    |                                                 |                                                      |        |        |         |        | (5,039  | )     
|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |        
|                                                                         |                                                                                            |                                                 | Net cash provided by (used in) investing
	activities |         |        | 2,794   |        |         |        | (5,988 | )
|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |        
|Cash flows from financing activities:                                    |                                                                                            |                                                 |                                                      |         |        |         |        |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Exercise of stock options and employee stock
	purchase plan                                |                                                 |                                                      | 602     |        |         |        | 3,456   |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Net borrowings (repayments) under credit
	agreements                                       |                                                 |                                                      | 451     |        |         |        | (1,658  | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Principal payments on capital lease obligations                                            |                                                 |                                                      | (306    | )      |         |        | (219    | )     
|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |        
|                                                                         |                                                                                            |                                                 | Net cash provided by financing activities            |         |        | 747     |        |         |        | 1,579  |  
|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |        
|Effect of exchange rate changes                                          |                                                                                            |                                                 | 4                                                    |         |        |         | (4     | )      
|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |        
|Net increase (decrease) in cash and cash
	equivalents                    |                                                                                            |                                                 | (10,851                                              | )       |        |         | 6,009  |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Cash and cash equivalents, beginning of period                           |                                                                                            |                                                 | 17,369                                               |         |        |         | 54,629 |        
|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |        
|Cash and cash equivalents, end of period                                 |                                                                                            | $                                               | 6,518                                                |         |        | $       | 60,638 |        
|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |        
|Supplemental cash flow information:                                      |                                                                                            |                                                 |                                                      |         |        |         |        |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Cash paid for interest                                                                     |                                                 | $                                                    | 46      |        |         | $      | 81      |       
|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |        
|Supplemental disclosure of non-cash investing and
	financing activities: |                                                                                            |                                                 |                                                      |         |        |         |        |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Issuance of common stock, options and warrants in
	acquisition                             |                                                 | $                                                    | (990    | )      |         | $      | 378,847 |       
|                                                                         |                                                                                            |                                                 |                                                      |         |        |         |        |        

See accompanying notes to consolidated financial statements.

5



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VISUAL NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2001


(Unaudited)


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

Visual Networks, Inc. (Visual or the
Company) designs, manufactures, sells and supports
comprehensive service management systems for providers and users
of new world connectivity services and out-sourced Web services.

Risks and Other Important Factors

The Company incurred a net loss of $20.0 million for the
six months ended June 30, 2001 and a net loss of
$415.5 million for the year ended December 31, 2000.
The net loss for the year ended December 31, 2000 included
an impairment charge of $328.8 million for the write-off of
goodwill and other intangibles related to the Avesta
Technologies, Inc. (Avesta) acquisition. The
deterioration in the operating results that occurred in 2000 was
due, in part, to decreased revenue and increased operating
expenses. In response to the trends, the Company announced a
plan in the fourth quarter of 2000 to realign its product
portfolio, streamline its operations and devote resources to the
markets and products that the Company believes have the greatest
opportunity for growth. The Companys revenues increased
from fourth quarter 2000 levels during the first and second
quarters of 2001. The Companys operating expenses
decreased from 2000 levels during the six months ended
June 30, 2001 as a result of the fourth quarter 2000
restructuring. In the second quarter of 2001, the Company
announced a plan to discontinue development and sales efforts on
the Visual Trinity product and eliminate the related costs. The
Companys ability to generate operating income in the
future is, in large part, dependent on its success in increasing
revenue and reducing operating expenses. The Company believes
that its 2001 plan to discontinue development and sales efforts
on the Visual Trinity product and eliminate the related costs
will result in further reductions in operating expenses that,
when combined with the anticipated revenue growth, will result
in a return to profitability. Due to market conditions,
competitive pressures and other factors beyond its control,
there can be no assurances that the Company will be able to
adequately increase revenue in the future. In the event that the
anticipated cost reductions are not realized or revenue does not
increase, the Company may be required to further reduce its cost
structure. There can be no assurance that the Company will
become profitable.

The success of the Company is also dependent on its ability to
generate adequate cash for operating and capital needs. The
Company is relying on its existing cash and cash equivalents,
investments and credit facility 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 and capital
requirements, the Company will be required to seek additional
capital through other means, which may include the sale of
assets, the sale of equity securities or additional borrowings.
There can be no assurance 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, successful
incorporation of the Companys products into service
provider company infrastructure, long sale cycles, dependence on
significant customers, rapidly changing technology, current and
potential competitors with greater financial, technological,
product and marketing resources, dependence on sole and limited
source suppliers, dependence on key management personnel,
ability to recruit and retain employees, defense against pending
litigation, limited protection of intellectual property and
proprietary rights, uncertainty of future profitability and
possible fluctuation 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

6



---



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

liabilities, the disclosure of contingent assets and liabilities
at the date of statements and the reported amounts of revenues
and expenses during the reporting periods. 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 notes thereto,
included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2000. 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 six
months ended June 30, 2001 are not necessarily indicative
of the results for the entire year ending December 31, 2001.

On May 24, 2000, Visual acquired Avesta in a merger
transaction accounted for using the purchase method of
accounting. Avesta was a provider of fault management and
application performance monitoring software systems to
e-business customers. The results of operations have been
included in the accompanying consolidated statements of
operations from the date of acquisition.

Principles of Consolidation

The consolidated financial statements include the accounts of
Visual and its wholly owned subsidiaries. All significant
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 June 30, 2001,
the Company held short-term investments in U.S. Treasury
obligations that mature within one year. The Company also held a
$2.5 million certificate of deposit that matures on
March 31, 2002. As of June 30, 2001, unrealized gains
and losses were not material.

The Company has an investment in an entity, accounted for using
the equity method of accounting, in which the Company has less
than a majority ownership interest but over which the Company
can exercise significant influence. The Company paid
approximately $797,000 for a 30% ownership interest in the
entity and recorded the investment, net of the Companys
share of the net losses of the entity, in other assets in the
accompanying balance sheet as of December 31, 2000. The
entity is a distributor for the Companys products,
primarily the Visual Trinity product. The Company has not had
any sales to the entity. As a result of the Companys
announcement to discontinue development and sales efforts on the
Visual Trinity product, the Company wrote-off the remaining
carrying value of this investment of $656,000 during the three
months ended June 30, 2001. The write-off is included in
the restructuring charge in the accompanying consolidated
statement of operations for the three months ended June 30,
2001. The Company also has an investment in an entity in which
the Company exercises no control or significant influence. Such
investment is accounted for under the cost method and its
carrying value of approximately $3.7 million is included in
other assets in the accompanying balance sheets. The Company
periodically reviews its investments for permanent impairments.

7



---



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Inventory

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

|                 |       |          |       |              |  |   |       |        | 
|---------------- | ----- | -------- | ----- | ------------ |  | - | ----- | ------ | 
|                 |       | June 30, |       | December 31,
|                 |       | 2001     |       | 2000        
|                 |       |          |       |             
|Raw materials    |       | $        | 3,130 |              |  | $ | 4,301 |       
|                
|                
|                
|                
|Work-in-progress |       |          | 69    |              |  |   | 151   |       
|                
|                
|                
|                
|Finished goods   |       |          | 6,698 |              |  |   | 9,022 |       
|                 |       |          |       |              |  |   |       |       
|                 | Total |          | $     | 9,897        |  |   | $     | 13,474 | 
|                 |       |          |       |              |  |   |       |       

Intangible Assets

Intangible assets consist of identifiable intangibles related to
the acquisition of Avesta (see Note 3). Intangible assets
consist of the following (in thousands) and such intangibles are
amortized using the straight-line method over the following
estimated useful lives:

|                       |       |          |     |              |  |             |       |       |  |  |         |  | 
|---------------------- | ----- | -------- | --- | ------------ |  | ----------- | ----- | ----- |  |  | ------- |  | 
|                       |       | June 30, |     | December 31, |  |            
|                       |       | 2001     |     | 2000         |  | Useful Life
|                       |       |          |     |              |  |            
|Assembled workforce    |       | $        |    |              |  | $           | 224   |       |  |  | 3 years | 
|                      
|                      
|                      
|                      
|Trademarks/ tradenames |       |          | 53  |              |  |             | 1,064 |       |  |  | 7 years | 
|                      
|                      
|                      
|                      
|Completed technology   |       |          | 158 |              |  |             | 7,222 |       |  |  | 5 years | 
|                       |       |          |     |              |  |             |       |       |  |  |         | 
|                       | Total |          | $   | 211          |  |             | $     | 8,510 |  |  |         |  | 
|                       |       |          |     |              |  |             |       |       |  |  |         | 

Long-Lived Assets

The Company reviews it long-lived assets, including property and
equipment, identifiable intangibles, and goodwill whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates
the probability that future estimated undiscounted net cash
flows will be less than the carrying amount of the assets. If
future estimated undiscounted net cash flows are more likely
than not to be less than the carrying amount of the long-lived
asses, then such assets are written down to their fair value.
The Company recorded impairment charges related to its
long-lived assets of $328.8 million in the fourth quarter
of 2000 and $3.1 million in the second quarter of 2001 (see
Notes 3 and 4). The Companys estimates of anticipated
revenues and profits or the remaining estimated lives of
tangible and intangible assets, or both, could be reduced
significantly in the future. As a result, the carrying amount of
long-lived assets, including intangibles, could be reduced
materially in the future.

Revenue Recognition

The Companys service management products and services
include hardware, software, benchmark services, professional
services and technical support. The Company generally recognizes
revenue from the sale or license of its products upon delivery
and passage of title to the customer. Where agreements provide
for evaluation or customer acceptance, the Company recognizes
revenue upon the completion of the evaluation process and
acceptance of the product by the customer. Maintenance contracts
require the Company to provide technical support and software
updates to customers. The Company recognizes technical support
revenue, including maintenance revenue that is bundled with
product sales, ratably over the term of the contract period,
which generally ranges from one to five years. Revenue
recognized from multiple-element software arrangements is
allocated to each element of the arrangement based on the
relative fair values of the

8



---



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

elements. The fair values of professional services, technical
support and training have been determined based on the
Companys specific objective evidence of fair value.
Revenue from services is recognized when the services are
performed. Subscription fees for the Companys benchmark
reports are recognized upon delivery of the reports.

The Company adopted the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2,
Software Revenue Recognition, in 1998. In 1999, the
Company adopted SOP 98-9, Modification of
SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions, which amends SOP 98-4,
Deferral of Effective Date of a Provision of SOP
97-2, to provide additional guidance regarding the
accounting for multiple-element software sales. The Company
recognizes software revenue in accordance with these SOPs.

The Company has agreements with certain resellers that provide
price protection in the event that more favorable prices and
terms are granted to any other customer. 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 reseller inventory levels and makes adjustments to these
reserves when management believes that actual price protection
credits may differ from established estimates.

Credit Risk and Significant Customers

Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash and cash equivalents, investments and accounts receivable.
The Company primarily sells its products to large
telecommunications companies and Internet service providers
primarily in the United States. The Company grants credit terms
without collateral to its customers and has not experienced any
significant credit related losses. Accounts receivable include
allowances to record receivables at their estimated net
realizable value. For the six months ended June 30, 2001,
three customers individually represented 31%, 14% and 11% of
revenue, respectively. For the six months ended June 30,
2000, three customers individually represented 27%, 17% and 10%
of revenue, respectively. As of June 30, 2001, four
customers individually represented 12%, 16%, 20% and 21% of
accounts receivable, respectively.

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.

Foreign Currency and International Operations

The functional currencies of certain of the Companys
subsidiaries are the respective local currencies. The financial
statements of these subsidiaries are translated to U.S. dollars
using period-end rates for assets and liabilities and average
rates during the relevant period for revenues and expenses.
Translation gains and losses are accumulated as a component of
other comprehensive loss in stockholders equity. Such
gains and loses have not been material.

Comprehensive Income (Loss)

The Company reports comprehensive loss in accordance with SFAS
No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes rules for the reporting and
presentation of comprehensive income (loss) and its components.
SFAS No. 130 requires foreign currency translation
adjustments and the unrealized gains

9



---



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and losses on marketable securities, net of tax, to be included
in other comprehensive income (loss). Because the Company has
not had any significant components of other comprehensive income
(loss), the reported net loss does not differ materially from
comprehensive income (loss) for the three and six months ended
June 30, 2001 and 2000.

Basic and Diluted Earnings (Loss) Per Share

SFAS No. 128, Earnings Per Share, requires dual
presentation of basic and diluted earnings (loss) 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 8,395,481 shares of common stock that were
outstanding at June 30, 2001, were not included in the
computations of diluted loss per share for the three and six
months ended June 30, 2001 as their effect would be
anti-dilutive. Options to purchase 4,537,418 shares of common
stock that were outstanding at June 30, 2000, were not
included in the computations of diluted loss per share for the
three or six months ended June 30, 2000 as their effect
would be anti-dilutive.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (the
FASB) issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards requiring every
derivative instrument to be reported on the balance sheet as
either an asset or liability measured at its fair value. It
requires that changes in the derivatives fair value be
recognized currently in earnings unless specific hedge
accounting criteria are met. The Company adopted SFAS
No. 133 for the fiscal year beginning January 1, 2001
and there was no material effect on the Companys financial
position or results of operations.

In June 2001 the FASB approved 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 that existed at June 30, 2001.
The amortization of existing goodwill will cease on
December 31, 2001. Any goodwill resulting from acquisitions
completed after June 30, 2001 will not be amortized. SFAS
No. 142 also establishes a new method of testing goodwill
for impairment on an annual basis or on an interim basis if an
event occurs or circumstances change that would reduce the fair
value of a reporting unit below is carrying value. The Company
is in the process of evaluating the financial statement impact
of adoption of SFAS No. 142.

Reclassifications

Certain prior period amounts have been reclassified to be
conform to current period presentation.

2.  Credit Agreements:

The Company has a credit facility, as amended, that includes an
asset-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) with a maximum of
$5.0 million available for issuing standby letters of
credit, provided that the Company either maintains a minimum of
$10.0 million cash on deposit with the bank, secures with cash
any outstanding letters of credit, or treats any unsecured
letters of credit as borrowings. In December 2000, the
Companys bank issued a standby letter of credit that
expires on March 31, 2002 in the amount of
$2.5 million, as amended. The Company has secured the
letter of credit with a pledge of a certificate of deposit in
the amount of $2.5 million. This credit facility also
includes an equipment financing facility. The credit

10



---



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

facility matures on February 28, 2002, and borrowings under
the credit facility bear interest at prime plus 2%. The credit
facility contains 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. The credit facility also provides for certain
administrative and facility fees. In May 2001,
modifications to the credit facility were completed that revised
the financial convenants and eliminated the Companys
ability to make additional borrowings under the equipment
financing arrangement. The Company borrowed approximately
$451,000 under the equipment financing facility, all of which is
outstanding as of June 30, 2001. The borrowing is repayable
over 36 months beginning in July 2001 at an interest
rate of 8.5%.

3.  Avesta Acquisition:

The acquisition of Avesta was completed on May 24, 2000 and
has been accounted for as a purchase business combination. At
closing, all of the outstanding preferred and common stock of
Avesta was exchanged for 5,413,530 shares of Visual common
stock. In addition, the outstanding stock options and warrants
of Avesta were converted into options and warrants to purchase
shares of Visual common stock. During the second quarter of
2001, approximately 134,000 shares of the original merger
consideration were returned to the Company in settlement of
certain indemnification claims.

The aggregate purchase price was determined as follows (in
thousands):

|                                   |       |          |         
|---------------------------------- | ----- | -------- | --------
|                                  
|                                  
|                                  
|                                  
|Fair value of common stock         |       | $315,790
|                                  
|                                  
|                                  
|                                  
|Fair value of options and warrants |       | 62,067  
|                                  
|                                  
|                                  
|                                  
|Transaction costs and other        |       | 14,874  
|                                   |       |         
|                                   | Total |          | $392,731
|                                   |       |         

The merger resulted in an allocation of purchase price to the
net tangible and intangible assets of Avesta, as well as a
write-off of the portion of the purchase price allocated to
in-process technology. Visual allocated the purchase price based
upon the fair values of the assets and the liabilities acquired
as follows (in thousands):

|                       |       |          |         
|---------------------- | ----- | -------- | --------
|                      
|                      
|                      
|                      
|Completed technology   |       | $125,301
|                      
|                      
|                      
|                      
|In-process technology  |       | 39,000  
|                      
|                      
|                      
|                      
|Assembled workforce    |       | 3,885   
|                      
|                      
|                      
|                      
|Trademarks/tradenames  |       | 18,455  
|                      
|                      
|                      
|                      
|Goodwill               |       | 238,723 
|                      
|                      
|                      
|                      
|Net tangible assets    |       | 1,424   
|                      
|                      
|                      
|                      
|Deferred tax liability |       | (34,058)
|                       |       |         
|                       | Total |          | $392,731
|                       |       |         

In connection with the Avesta acquisition, the Company recorded
approximately $854,000 in liabilities as the cost of closing a
redundant facility and terminating certain employees. The
accrual consisted primarily of severance and other employee
termination costs. These activities resulted in the termination
of approximately 20 employees in connection with a facility
closure, the elimination of duplicate positions and the
consolidation of certain operations. During the six months ended
June 30, 2001, the Company charged approximately $48,000
against the accrual for the amounts paid.

11



---



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The pro forma information presented below (unaudited, in
thousands, except per share data) reflects the Avesta
acquisition as if it occurred on January 1, 2000 but
excludes the write-off of purchased research and development of
$39.0 million. These results are not necessarily indicative
of future operating results or what would have occurred had the
acquisition been consummated on that date.

|                                           |  |                  |         |  
|------------------------------------------ |  | ---------------- | ------- | -
|                                           |  | Six Months Ended
|                                           |  | June 30, 2000   
|                                           |  |                 
|Pro forma net revenues                     |  | $                | 65,653  |  
|                                          
|                                          
|                                          
|                                          
|Pro forma net loss                         |  | $                | (38,644 | )
|                                          
|                                          
|                                          
|                                          
|Pro forma basic and diluted loss per share |  | $                | (1.27   | )

4.  Restructuring and Impairment Charges:

In the fourth quarter of 2000, the Company recorded a
restructuring charge of approximately $7.0 million in
connection with a plan to realign its product portfolio and
streamline operations. In the second quarter of 2001, the
Company reversed approximately $723,000 of this restructuring
charge. The reversal resulted primarily from the lower than
estimated costs related to facility closings.

In May 2001, the Company announced a plan to discontinue
development and sales efforts on the Visual Trinity product. As
a result, the Company will close its New York facility and has
recorded a $3.9 million restructuring charge that consists
of approximately $1.4 million in employee termination costs
for approximately 50 employees including severance and other
benefits, $1.3 million in leases and other contractual
obligations, and the write-off of $656,000 in investments (see
Note 1) and $487,000 in leasehold improvements and related
assets. As of June 30, 2001, $63,000 had been charged
against the restructuring accrual. The remaining accrual is
expected to be paid substantially in 2001 and 2002.

In the second quarter of 2000, the Company acquired Avesta in a
purchase business combination that resulted in approximately
$386.4 million in goodwill and other intangible assets.
During the third and fourth quarters of 2000, the Companys
results of operations deteriorated. In response to this
deterioration, the Company initiated a restructuring plan in the
fourth quarter of 2000. Due to the significance of these
developments, management performed an evaluation of the
recoverability of its long-lived assets, including those related
to the Avesta acquisition, in accordance with SFAS No. 121.
Based upon this evaluation, the Company concluded that the
remaining values of the goodwill and other intangible assets
related to the Avesta acquisition were impaired. As a result,
the Company recorded an impairment charge of $328.8 million
in the fourth quarter of 2000. In May 2001, the Company
announced a decision to discontinue development and sales
efforts on the Visual Trinity product As a result of this
decision, management performed an evaluation of the
recoverability of its long-lived assets, including those related
to the Avesta acquisition and concluded that the remaining
intangibles were impaired as the Trinity product was the primary
product acquired with Avesta. The Company recorded an impairment
charge of $3.1 million in the second quarter of 2001
related to the intangibles from the Avesta acquisition. The fair
values of the remaining Avesta long-lived assets were determined
based upon the estimated discounted cash flows to be derived
from Avesta operations.

5.  Revenue by Product:

In May 2001, the Company announced the release of its final
version of the Visual Trinity product. This product was the
primary product acquired with Avesta, and the Company does not
plan to continue development efforts on the Visual Trinity
product. As a result, the Company anticipates that future
revenues for the product will consist primarily of technical
support revenue, a substantial portion of which is currently in
deferred revenue. The Company plans to provide technical support
for the Visual Trinity product through September 2002.

12



---



VISUAL NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In June 2001, the Company announced the sale of its Visual
Internet Benchmark product. The Company will recognize revenue
from the Visual Internet Benchmark product for existing
contracts, under which the Company is still required to perform
services. The Company will receive royalty payments from the
purchaser on future contracts.

Revenue consists of the following (unaudited, in thousands):

|                            |       |                  |        |          |  |   |        |        | 
|--------------------------- | ----- | ---------------- | ------ | -------- |  | - | ------ | ------ | 
|                            |       |                 
|                            |       | Six Months Ended
|                            |       | June 30,         |        | June 30,
|                            |       | 2001             |        | 2000    
|                            |       |                  |        |         
|Visual UpTime               |       | $                | 28,109 |          |  | $ | 41,319 |       
|                           
|                           
|                           
|                           
|Visual Cell Tracer          |       |                  | 1,329  |          |  |   | 7,255  |       
|                           
|                           
|                           
|                           
|Visual IP Insight           |       |                  | 2,696  |          |  |   | 6,292  |       
|                           
|                           
|                           
|                           
|Visual Internet Benchmark   |       |                  | 2,658  |          |  |   | 2,382  |       
|                           
|                           
|                           
|                           
|Visual Trinity and eWatcher |       |                  | 2,923  |          |  |   | 1,890  |       
|                            |       |                  |        |          |  |   |        |       
|                            | Total |                  | $      | 37,715   |  |   | $      | 59,138 | 
|                            |       |                  |        |          |  |   |        |       

6.  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 executives. The complaints allege 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 complaints do 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 expects
that a substantial portion of the legal costs that it might
incur related to this matter will be paid by its directors
and officers insurance policy. The Company cannot
presently determine the ultimate outcome of this action. A
negative outcome could have a material adverse effect on the
Companys financial position or results of operations.
Failure to prevail in the litigation could result in, among
other things, the payment of substantial monetary or punitive
damages.

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

13



---





|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|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 for Frame Relay deployment
and to develop sales and marketing functions and general and
administrative infrastructure. Visual UpTime was first shipped
in mid-1995. We began generating significant revenue from sales
of Visual UpTime during 1996. In August 1996, we entered
into a master reseller agreement with Sprint, resulting in our
products being sold through Sprint to subscribers. In
October 1997, we entered into a similar master reseller
agreement with WorldCom, which also resulted in our shipping of
products through WorldCom to subscribers. In December 1997,
we entered into an agreement with AT&T, which provides for
the sale of our products to AT&T for deployment as part of
AT&Ts infrastructure. During 1998, 1999 and 2000, we
continued to focus on selling Visual UpTime, and added the
following products to our product portfolio as a result of a
series of acquisitions  the Cell Tracer product in
1998; Visual IP Insight and Visual Internet Benchmark, in 1999;
and the Avesta products, Visual Trinity and Visual eWatcher, in
2000. During the second quarter of 2001, the Company announced
the discontinuation of development efforts and the final version
release of the Visual Trinity product and the sale of the Visual
Internet Benchmark product.

We realize revenue from sales of hardware, software, benchmark
services, professional services and technical support. We
generally recognize revenue from the sale or license of our
products upon delivery of the product and passage of title to
the customer. Where the agreements provide for evaluation or
customer acceptance, we recognize revenue upon the completion of
the evaluation process and acceptance of the product by the
customer. Maintenance contracts call for us to provide technical
support and software updates to customers. We recognize
maintenance revenue, including maintenance revenue that is
bundled with product sales, ratably over the lengths of the
maintenance contracts, which currently range from one to five
years. Revenue recognized from multiple-element software
arrangements is allocated to each element of the arrangement
based on the relative fair values of the elements. The fair
values of professional services, technical support and training
have been determined based on the Companys specific
objective evidence of fair value. Revenue from services is
recognized when the services are performed. Subscription fees
for our benchmark reports are deferred and recognized upon
delivery of the reports. We currently contract with third party
subcontract manufacturers for most of the assembly, testing and
shipping of our products. We anticipate maintaining a portion of
our internal manufacturing function for the foreseeable future
at our Rockville, Maryland facility.

Our revenues decreased from 1999 to 2000 while our operating
expenses increased resulting in significant losses from
operations. With the acquisition of Avesta in May 2000 we
allowed our business strategy to become less focused, which
increased the complexity of our business and adversely affected
our results of operations. In an attempt to refocus our efforts,
we announced a plan in the fourth quarter of 2000 to realign our
product portfolio, streamline our operations and devote
resources to the markets and products that offer us the greatest
growth opportunities. As a result, our operating results
improved in the first and second quarter of 2001. Revenue
increased to $20.3 million in the second quarter of 2001
from $17.4 million in the first quarter of 2001 and
$15.3 million in the fourth quarter of 2000. Operating
expenses, excluding non-cash Avesta related amortization and
impairment charges and restructuring charges, decreased from
$24.0 million in the fourth quarter of 2000 to
$17.9 million in the first quarter of 2001 to
$16.9 million in the second quarter of 2001. In
May 2001, we decided to discontinue development and sales
efforts on the Visual Trinity product. This plan includes the
closure of the New York facility and elimination of the related
costs. We believe that these actions will further reduce
operating expenses.

In connection with these plans, we recorded a restructuring
charge of $7.0 million in the fourth quarter of 2000. We
reversed $0.7 million of that charge in the second quarter
of 2001 due primarily to lower than estimated costs related to
facility closures. We recorded a second restructuring charge of
$3.9 million in the second quarter of 2001 as a result of
our decision to discontinue development and sales efforts on the
Visual Trinity product. The failure to successfully implement
our plans would have a material adverse effect on our

14



---





Results of Operations for the Three Months Ended
June 30, 2001 Compared with the Three Months Ended
June 30, 2000

Revenue.We recognized $20.3 million in
revenue for the three months ended June 30, 2001, a 29.0%
decrease from revenue of $28.6 million for the three months
ended June 30, 2000. Revenue for the three months ended
June 30, 2001 and 2000 was comprised of the following (in
thousands):

|                            |       |                    |        |          |  |   |        |        | 
|--------------------------- | ----- | ------------------ | ------ | -------- |  | - | ------ | ------ | 
|                            |       |                   
|                            |       | Three Months Ended
|                            |       | June 30,           |        | June 30,
|                            |       | 2001               |        | 2000    
|                            |       |                    |        |         
|Visual UpTime               |       | $                  | 15,450 |          |  | $ | 19,349 |       
|                           
|                           
|                           
|                           
|Visual Cell Tracer          |       |                    | 854    |          |  |   | 4,045  |       
|                           
|                           
|                           
|                           
|Visual IP Insight           |       |                    | 1,600  |          |  |   | 2,179  |       
|                           
|                           
|                           
|                           
|Visual Internet Benchmark   |       |                    | 1,269  |          |  |   | 1,181  |       
|                           
|                           
|                           
|                           
|Visual Trinity and eWatcher |       |                    | 1,156  |          |  |   | 1,890  |       
|                            |       |                    |        |          |  |   |        |       
|                            | Total |                    | $      | 20,329   |  |   | $      | 28,644 | 
|                            |       |                    |        |          |  |   |        |       

The overall decrease in revenue was primarily due to a decrease
in Visual Uptime revenue of $3.9 million, primarily from
service providers, a decrease in Visual Cell Tracer of
$3.2 million, a decrease in Visual IP Insight revenue of
$0.6 million and a decrease in Visual Trinity and eWatcher
of $0.7 million. The decrease in sales of Visual Uptime and
Visual Cell Tracer were primarily attributable to a change in
purchasing behavior of our major customers. Sales to service
providers accounted for approximately 79% and 67% of revenue for
the three months ended June 30, 2001 and 2000, respectively.

In May 2001, we announced the release of our final version
of the Visual Trinity product. This product was the primary
product acquired with Avesta, and we do not plan to continue
development efforts on the Visual Trinity product. As a result,
we anticipate that future revenues for the product will consist
primarily of technical support revenue, a substantial portion of
which is currently in deferred revenue. We plan to provide
technical support for the Visual Trinity product through
September 2002.

In June 2001, we announced the sale of our Visual Internet
Benchmark product. We will recognize revenue from the Visual
Internet Benchmark product for existing contracts, under which
we are still required to perform services. We will receive
royalty payments from the purchaser on future 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 our manufacturing operations and to supporting our
software products and benchmark services. Gross profit was
$11.0 million for the three months ended June 30,
2001, as compared to $19.2 million for the three months
ended June 30, 2000, a decrease of $8.1 million. Gross
margin was 54% of revenue for the three months ended
June 30, 2001, as compared to 67% of revenue for the three
months ended June 30, 2000. The decrease in gross margin
percentage was due primarily to higher fixed product support and
manufacturing costs supporting a lower revenue base, a decrease
in the higher margin software sales of Visual IP Insight, Visual
Trinity and Visual eWatcher and approximately $1.9 million
in inventory write-downs. Our future gross margins may be
adversely affected by a number of factors, including product
mix, the proportion of sales to providers, competitive pricing,
manufacturing volumes and an increase in component part costs.

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
$5.4 million for the three months ended June 30, 2001,
as compared to $6.3 million for the three months ended
June 30, 2000, a decrease of $0.9 million. The
decrease in research and development expense was due primarily
to the workforce reductions, facility closures and other
reductions resulting from our fourth quarter 2000 restructur-

15



---





Write-off of Purchased Research and Development.A
write-off of purchased research and development costs of
$39.0 million was recorded in the three months ended
June 30, 2000. We recorded this expense in connection with
the acquisition of Avesta. At the date of acquisition, Avesta
had in-process technology which represented research and
development projects of Avesta that had not reached
technological feasibility and that had no alternative future use
in research and development activities or otherwise. Amounts
assigned to in-process research and development meeting the
above criteria must be charged to expense at the date of
consummation of the purchase business combination.

Sales and Marketing Expense.Sales and marketing
expense consists of compensation for the sales and marketing
staff, commissions, pre-sales support, travel and entertainment,
trade shows and other marketing programs. Sales and marketing
expense was $9.1 million for the three months ended
June 30, 2001, as compared to $9.3 million for the
three months ended June 30, 2000, a decrease of
$0.2 million. The decrease in sales and marketing expense
was due primarily to the workforce reductions resulting from our
fourth quarter 2000 restructuring, offset by the full quarter
effect of the Avesta acquisition. Sales and marketing expense
was 44.9% and 32.4% of revenue for the three months ended
June 30, 2001 and 2000, respectively. We expect that sales
and marketing expenditures may remain at current levels or
continue to decrease in absolute dollars and may decrease as a
percentage of revenue, during the remainder of 2001. This
decrease in absolute dollars is primarily expected to result
from workforce reductions, facility closures and other
reductions resulting from our second quarter 2001 restructuring.

General and Administrative Expense.General and
administrative expense consists of finance, administration and
general management activities. General and administrative
expense was $2.3 million for the three months ended
June 30, 2001, as compared to $2.4 million for the
three months ended June 30, 2000, a decrease of
$0.1 million. The decrease in general and administrative
expense was due to the workforce reductions, facility closures
and other reductions resulting from our fourth quarter 2000
restructuring, offset by the full quarter effect of the Avesta
acquisition. General and administrative expense was 11.5% and
8.3% of revenue for the three months ended June 30, 2001
and 2000, respectively. We expect that general and
administrative expenditures may remain at current levels or
decrease in absolute dollars and may decrease as a percentage of
revenue, during the remainder of 2001. This decrease in absolute
dollars is primarily expected to result from workforce
reductions, facility closures and other reductions resulting
from our second quarter 2001 restructuring.

Restructuring and Impairment Charges.We reversed
approximately $0.7 million of the fourth quarter 2000
restructuring charge in the three months ended June 30,
2001. The reversal resulted primarily from the lower than
estimated costs related to facility closings. We recorded a
restructuring charge in the three months ended June 30,
2001 in the amount of $3.9 million related primarily to a
workforce reduction of approximately 50 employees and the
closure of the New York facility as a result of our plans to
discontinue development and sales efforts on the Visual Trinity
product. We recorded an impairment charge of $3.1 million
in the three months ended June 30, 2001 for the write-off
of intangible assets related to the Avesta acquisition (see
Notes 3 and 4 of Notes to Consolidated Financial
Statements).

Amortization of Acquired Intangibles. The Company
recorded $0.3 million in amortization of intangibles during
the three months ended June 30, 2001.

Interest Income, Net. Interest income, net, for
the three months ended June 30, 2001, was approximately
$0.1 million as compared to $0.7 million for the three
months ended June 30, 2000, a decrease of
$0.6 million. The decrease was primarily due to decreased
cash and investment balances.

16



---



Income Taxes. There was no income tax benefit for
the three months ended June 30, 2001 due to increases in
the valuation allowance. The benefit for income taxes for the
three months ended June 30, 2000, was $3.6 million,
which represents an effective tax rate of approximately 8%.

Net Loss. Net loss for the three months ended
June 30, 2001, was $12.3 million as compared to
$42.3 million for the three months ended June 30,
2000, a decrease of $30.0 million. This decrease was due
primarily to the $39.0 million write-off of purchased
research and development during the three months ended
June 30, 2000 and the decrease in goodwill and other
intangible asset amortization of $8.5 million, offset by a
decrease in gross profit of $8.1 million and restructuring
and impairment charges of $6.3 million.

Results of Operations for the Six Months Ended June 30,
2001 Compared with the Six Months Ended June 30, 2000

Revenue.We recognized $37.7 million in
revenue for the six months ended June 30, 2001, a 36.2%
decrease from revenue of $59.1 million for the six months
ended June 30, 2000. Revenue for the six months ended
June 30, 2001 and 2000 was comprised of the following (in
thousands):

|                            |       |                  |        |          |  |   |        |        | 
|--------------------------- | ----- | ---------------- | ------ | -------- |  | - | ------ | ------ | 
|                            |       |                 
|                            |       | Six Months Ended
|                            |       | June 30,         |        | June 30,
|                            |       | 2001             |        | 2000    
|                            |       |                  |        |         
|Visual UpTime               |       | $                | 28,109 |          |  | $ | 41,319 |       
|                           
|                           
|                           
|                           
|Visual Cell Tracer          |       |                  | 1,329  |          |  |   | 7,255  |       
|                           
|                           
|                           
|                           
|Visual IP Insight           |       |                  | 2,696  |          |  |   | 6,292  |       
|                           
|                           
|                           
|                           
|Visual Internet Benchmark   |       |                  | 2,658  |          |  |   | 2,382  |       
|                           
|                           
|                           
|                           
|Visual Trinity and eWatcher |       |                  | 2,923  |          |  |   | 1,890  |       
|                            |       |                  |        |          |  |   |        |       
|                            | Total |                  | $      | 37,715   |  |   | $      | 59,138 | 
|                            |       |                  |        |          |  |   |        |       

The overall decrease in revenue was primarily due to a decrease
in Visual Uptime revenue of $13.2 million, primarily from
service providers, a decrease in Visual Cell Tracer of
$5.9 million and a decrease in Visual IP Insight revenue of
$3.6 million offset by an increase in Visual Trinity and
eWatcher. The decrease in sales of Visual Uptime and Visual Cell
Tracer were primarily attributable to a change in purchasing
behavior of our major customers. The increase in Visual Trinity
and eWatcher is due to the full period effect of the Avesta
acquisition. Sales to service providers accounted for
approximately 81% and 69% of revenue for the six months ended
June 30, 2001 and 2000, respectively.

Gross Profit.Gross profit was $21.5 million
for the six months ended June 30, 2001, as compared to
$40.4 million for the six months ended June 30, 2000,
a decrease of $18.9 million. Gross margin was 57% of
revenue for the six months ended June 30, 2001, as compared
to 68% of revenue for the six months ended June 30, 2000.
The decrease in gross margin percentage was due primarily to
higher fixed product support and manufacturing costs supporting
a lower revenue base and the decrease in the higher margin
software sales of Visual IP Insight and approximately
$1.9 million in inventory write-downs, offset in part, by
the addition of higher margin software sales of the Visual
Trinity and Visual eWatcher products.

Research and Development Expense.Research and
development expense was $11.2 million for the six months
ended June 30, 2001, as compared to $11.3 million for the
six months ended June 30, 2000, a decrease of
$0.1 million. The decrease in research and development
expense was due primarily to the workforce reductions, facility
closures and other reductions resulting from our fourth quarter
2000 restructuring, offset by the full period effect of the
Avesta acquisition. Research and development expense was 29.6%
and 19.1% of revenue for the six months ended June 30, 2001
and 2000, respectively.

Write-off of Purchased Research and Development.A
write-off of purchased research and development costs of
$39.0 million was recorded in the three months ended
June 30, 2000. We recorded this expense in connection with
the acquisition of Avesta. At the date of acquisition, Avesta
had in-process technology which represented research and
development projects of Avesta that had not reached
technological feasibility and that had no alternative future use
in research and development activities or otherwise. Amounts
assigned to in-

17



---





Sales and Marketing Expense. Sales and marketing
expense was $18.6 million for the six months ended
June 30, 2001, as compared to $16.3 million for the
six months ended June 30, 2000, an increase of
$2.3 million. The increase in sales and marketing expense
was due primarily to the full period effect of the Avesta
acquisition, offset by the decreases resulting from workforce
reductions, facility closures and other reductions resulting
from our fourth quarter 2000 restructuring. Sales and marketing
expense was 49.3% and 27.5% of revenue for the six months ended
June 30, 2001 and 2000, respectively.

General and Administrative Expense. General and
administrative expense was $5.0 million for the six months
ended June 30, 2001, as compared to $4.6 million for
the six months ended June 30, 2000, an increase of
$0.4 million. The increase in general and administrative
expense was due primarily to the full period effect of the
Avesta acquisition, offset by the decreases resulting from
workforce reductions, facility closures and other reductions
resulting from our revised strategic focus initiated in the
fourth quarter of 2000. General and administrative expense was
13.3% and 7.8% of revenue for the six months ended June 30,
2001 and 2000, respectively.

Restructuring and Impairment Charges. We reversed
approximately $0.7 million of the fourth quarter 2000
restructuring charge in the six months ended June 30, 2001.
The reversal resulted primarily from the lower than estimated
costs related to facility closings. We recorded a restructuring
charge in the six months ended June 30, 2001 in the amount
of $3.9 million related primarily to a workforce reduction
of approximately 50 employees and the closure of the New York
facility as a result of our plans to discontinue development and
sales efforts on the Visual Trinity product. We recorded an
impairment charge of $3.1 million in the six months ended
June 30, 2001 for the write-off of intangible assets
related to the Avesta acquisition (see Notes 3 and 4 of
Notes to Consolidated Financial Statements).

Amortization of Acquired Intangibles. The Company
recorded $0.8 million in amortization of intangibles
related to the acquisition of Avesta during the six months ended
June 30, 2001.

Interest Income, Net. Interest income, net, for
the six months ended June 30, 2001, was approximately
$0.4 million as compared to $1.4 million for the six
months ended June 30, 2000, a decrease of
$1.0 million. The decrease was primarily due to decreased
cash and investment balances.

Income Taxes. There was no income tax benefit for
the six months ended June 30, 2001 due to increases in the
valuation allowance. The benefit for income taxes for the six
months ended June 30, 2000, was $1.5 million, which
represents an effective tax rate of approximately 4%.

Net Loss. Net loss for the six months ended
June 30, 2001, was $20.0 million as compared to
$36.8 million for the six months ended June 30, 2000,
a decrease of $16.8 million. This decrease was due
primarily to the $39.0 million write-off of purchased
research and development during the six months ended
June 30, 2000 and the decrease in goodwill and other
intangible asset amortization of $8.0 million, offset by a
decrease in gross profit of $18.9 million and restructuring and
impairment charges of $6.3 million.

Liquidity and Capital Resources

At June 30, 2001, our combined balance of cash and cash
equivalents and investments was $12.1 million as compared
to $26.1 million as of December 31, 2000, a decrease
of $14.0 million. This decrease is primarily attributable
to cash used in operations, including the payment of certain
restructuring charges. We require substantial working capital to
fund our core business, particularly to finance inventories,
accounts receivable, research and development activities and
capital expenditures. To date, we have financed our operations
and capital expenditures with the proceeds from our initial
public offering completed in February 1998 and from our
income from operations generated through the first quarter of
2000. We currently anticipate that capital expenditures for 2001
will not exceed $1.0 million. Our 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 sales and marketing, the
timing of introductions of new products and enhancements to
existing products and market acceptance of our products.

18



---



In addition to our cash, cash equivalents and investments,
another potential source of liquidity is our bank credit
facility. The credit facility, as amended, includes an
asset-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) with a maximum of
$5.0 million available for issuing standby letters of
credit, provided that we either maintain a minimum of
$10.0 million cash on deposit with the bank, secure with
cash any outstanding letters of credit, or treat any unsecured
letters of credit as borrowings. In December 2000, our bank
issued a standby letter of credit that expires on March 31,
2002 in the amount of $2.5 million, as amended. We secured
the letter of credit with a pledge of a certificate of deposit
in the amount of $2.5 million. This credit facility also
includes an equipment financing facility. The credit facility
matures on February 28, 2002, and borrowings under the
credit facility bear interest at prime plus 2%. The credit
facility contains 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. The credit facility also provides for certain
administrative and facility fees. In May 2001,
modifications to the credit facility were completed that revised
the financial convenants and eliminated our ability to make
additional borrowings under the equipment financing arrangement.
We borrowed approximately $451,000 under the equipment financing
facility, all of which is outstanding as of June 30, 2001.
The borrowing is repayable over 36 months beginning in
July 2001 at an interest rate of 8.5%.

The deterioration of our operating results in 2000, excluding
the effects of the non-cash Avesta-related charges and the
restructuring charge, was due primarily to decreased revenue and
increased operating expenses. In response to the trends, we
initiated a restructuring plan in the fourth quarter of 2000 to
realign our product portfolio, streamline our operations and
devote resources to the markets and products that we believe
have the greatest opportunity for growth. As a result of the
plan, revenue increased to $20.3 million in the second
quarter of 2001 from $17.4 million in the first quarter of
2001 and $15.3 million in the fourth quarter of 2000.
Operating expenses, excluding the non-cash Avesta-related
amortization and impairment charges and restructuring charges,
decreased from $24.0 million in the fourth quarter of 2000
to $17.9 million in the first quarter of 2001 to
$16.9 million in the second quarter of 2001. In the second
quarter of 2001, we announced a plan to discontinue development
and sales efforts on the Visual Trinity product and eliminate
the related costs. Our ability to generate operating income in
the future is, in large part, dependent upon our success in
continuing to increase revenue and reduce operating expenses.
While we believe that our restructuring plans will result in a
growth in revenue, there can be no assurances that we will be
able to adequately increase revenue in the future due to market
conditions, competitive pressures and other factors beyond our
control. We also believe that our 2001 restructuring will result
in a further reduction in operating expenses that, when combined
with the anticipated revenue growth, will result in a return to
profitability. In the event that the anticipated cost reductions
are not realized or revenue does not increase, we may be
required to further reduce our cost structure. There can be no
assurance that we will become profitable.

Our success is also dependent on our ability to generate
adequate cash for operating and capital needs. We are relying on
our existing cash and cash equivalents, investments and credit
facility 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. Although we believe that we have the ability to
generate additional cash through such actions, the results of
such actions may be dilutive. There can be no assurance that
additional capital will be available, or available on terms that
are reasonable or acceptable to us. If we are unable to generate
additional cash, our business and financial condition would be
materially and adversely affected such that we may need to
consider other alternatives for the future of the Company.

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

19



---





Although a significant majority of our sales to date have been
made to customers in the United States and Canada, we intend to
continue our sales efforts in other international markets. We
plan to sell our products to international customers at prices
denominated in U.S. dollars. However, if we experience material
levels of sales at prices not denominated in U.S. dollars, we
intend 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 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
periods. 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. Our future results may be impacted by various
important factors including, but not limited to, successful
implementation of new business strategic initiatives, failure of
broadband access services to achieve market penetration, lack of
profitability, inability to sustain historical revenue trends,
successful incorporation of products into service provider
company infrastructure, long sales cycles, dependence on
significant customers, rapidly changing technology, current and
potential competitors with greater financial, technological,
production, and marketing resources, dependence on sole and
limited source suppliers, dependence on key management
personnel, ability to recruit and retain employees, limited
protection of intellectual property and proprietary rights,
integration of acquisitions, uncertainty of future profitability
and possible fluctuations in financial results, and other risk
factors set forth in our Annual Report on Form 10-K for the
year ended December 31, 2000.



|        |                                                           
|------- | ----------------------------------------------------------
|Item 3. | Qualitative and Quantitative Disclosure About Market
	Risk

There have been no material changes in the market risks faced by
the Company or in how those risks are managed since
December 31, 2000. Refer to the Companys Annual
Report on Form 10-K for the year ended December 31,
2000 for a discussion about such market risk.

20



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PART II  OTHER INFORMATION

Item  1.  Legal Proceedings

In July, August and September 2000, several purported class
action complaints were filed against the Company and certain of
the Companys executives. The complaints 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 complaints do 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 expects
that a substantial portion of the legal costs that it might
incur related to this matter will be paid by its directors
and officers insurance policy. The Company cannot
presently determine the ultimate outcome of this action. A
negative outcome could have a material adverse effect on the
Companys financial position or results of operations.
Failure to prevail in the litigation could result in, among
other things, the payment of substantial monetary or punitive
damages.

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

Item  2.  Changes in Securities and Use of
Proceeds

On May 3, 2001, we issued to Elton King, pursuant to a
nonstatutory stock option grant agreement, options to purchase
1,000,000 shares of our common stock at an exercise price of
$3.92 per share, for an aggregate consideration of $3,920,000
upon exercise of the options. The options vest over
36 months with 20% vesting on Mr. Kings
commencement of employment with the Company and the remaining
80% vesting monthly over a 30-month period that commences on
January 15, 2002. Securities issued in this transaction
were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Securities Act,
relating to sales by an issuer not involving any public offering.

Item  3.  Defaults Upon Senior
Securities

None.

Item  4.  Submission of Matters to Vote of
Security Holders

(a)  The Company held its annual meeting of Stockholders on
May 29, 2001 (the Annual Meeting).

(b)  Not applicable

(c)  The following matters were voted upon at the Annual
Meeting:



| |     |                                                                                                                                                                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) | One director was elected to serve until the 2004 annual meeting
	of stockholders, and until his successor is elected and duly
	qualified, with 76% of the total outstanding shares of common
	stock present and voting at the meeting voting for Mr. 
	Behrman, as follows:

|                 |  |     |            |                     |  |  |         | 
|---------------- |  | --- | ---------- | ------------------- |  |  | ------- | 
|Nominee          |  | For |            | Against or Withheld
|                 |  |     |            |                    
|Grant G. Behrman |  |     | 25,072,434 |                     |  |  | 333,422 | 



| |      |                                                                                                                                                                                                                                                                                                                         
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) | An amendment to our 1999 Employee Stock Purchase Plan to make
	available for purchase under the Plan an additional 750,000
	shares of common stock was approved by 73% of the shares of
	common stock present and voting at the meeting. (Votes
	for:  24,447,976; votes against or withheld: 950,039;
	abstain: 7,841).

21



---





| |       |                                                                                                                                                                                                                                                                               
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (iii) | The appointment of Arthur Andersen LLP as our independent
	auditors for the year ending December 31, 2001 was ratified
	by 75% of the shares of common stock present and voting at the
	meeting. (Votes for: 25,069,791; votes against or withheld:
	327,401; abstain: 8,664).

Item 5.  Other Information

None.

22



---



Item  6.  (a) Exhibits

|        |  |                     |  |                                                                                                                                                                                                                           
|------- |  | ------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  |                    
|Exhibit |  |                    
|Number  |  | Exhibit 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.                                                                                                                                                                                          
|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   |  | @                   |  | Merger Agreement, dated February 7, 2000, by
        and among Visual Networks, Inc., Visual Acquisitions Three, Inc.
        and Avesta Technologies, Inc.                                                               
|10.23.1 |  | !!                  |  | 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).                                                                                                

23



---



|        |  |                     |  |                                                                                                                         
|------- |  | ------------------- |  | ------------------------------------------------------------------------------------------------------------------------
|        |  |                    
|Exhibit |  |                    
|Number  |  | Exhibit Description
|        |  |                    
|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).
|10.26   |  | ****                |  | 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.                                
|16.2    |  | @                   |  | Letter regarding change in certified accountants.                                                                       
|21.1    |  | ****                |  | List of subsidiaries of the Company.                                                                                    




|     |  |                                                                                                                                                                                                                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*    |  | Incorporated herein by reference to the
	Companys Registration Statement on Form S-1,
	No. 333-41517.                                                                                                                                                                                          
|**   |  | Incorporated herein by reference to
	Exhibit 10.1 to the Companys Registration Statement
	on Form S-8, No.  333-53153.                                                                                                                                                                         
|***  |  | Incorporated herein by reference to the
	Companys Annual Report on Form 10-K for the year
	ended December 31, 1999.                                                                                                                                                                            
|**** |  | Incorporated herein by reference to the
	Companys Annual Report on Form 10-K for the year
	ended December 31, 2000.                                                                                                                                                                            
|%    |  | Incorporated herein by reference to the
	Companys Registration Statement on Form S-3,
	No. 333-90105.                                                                                                                                                                                          
|%%   |  | Incorporated herein by reference to
	Exhibit 10.1 to the Companys Registration Statement
	on Form S-8, No.  333-88719.                                                                                                                                                                         
|@    |  | Incorporated herein by reference to the
	Companys Registration Statement on Form S-4,
	No. 333-33946.                                                                                                                                                                                          
|$    |  | Incorporated herein by reference to
	Exhibit 3.1 to the Companys Quarterly Report on
	Form 10-Q for the three months ended June 30, 1999.                                                                                                                                                      
|$$   |  | Incorporated herein by reference to the
	Companys Definitive Proxy Statement on Schedule 14A
	filed April 30, 2001.                                                                                                                                                                            
|$$$  |  | Incorporated herein by reference to the
	Companys Annual Report on Form 10-K for the year
	ended December 31, 1998.                                                                                                                                                                            
|    |  | Portions of this Exhibit were omitted and have
	been filed separately with the Secretary of the Commission
	pursuant to the Companys Application Requesting
	Confidential Treatment under Rule 406 of the Securities
	Act, filed on December  22, 1997, January 28, 1998 and
	February 4, 1998.
|   |  | Portions of this Exhibit were omitted and
	have been filed separately with the Secretary of the Commission
	pursuant to the Companys Application Requesting
	Confidential Treatment under Rule 24b-2 of the Securities
	Exchange Act.                                                         
|!!   |  | Incorporated herein by reference to the
	Companys Quarterly Report on Form 10-Q for the three
	months ended June 30, 2000.                                                                                                                                                                     

24



---



(b)  Reports on Form 8-K

(1)  The Company filed a Current Report on Form 8-K on
June 14, 2001, reporting under Item 5 the termination
of the development of its Visual Trinity product and the closing
of the New York office that primarily supports this software.
The Company also announced the conclusion of two outstanding
disputes. The first dispute relating to the patent infringement
lawsuit that was filed against Avesta Technologies, Inc., a
wholly-owned subsidiary of Visual, in 1997, by System Management
Arts Incorporated. Pursuant to an agreement between the parties,
on June 13, 2001, the court dismissed the action without
prejudice, preserving to the parties the right to refile the
action pending future developments of the Visual Trinity
product. The second dispute resolution affects the common stock
placed in escrow in favor of the former Avesta stockholders.

(2)  The Company filed a Current Report on Form 8-K on
June 18, 2001, reporting under Item 5 that Elton King
was named the Companys new President, Chief Executive
Officer and Director.

25



---



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/ PETER J. MINIHANE                  
| |                                             
| | Peter J. Minihane                           
| | Executive Vice President,                   
| | Chief Financial Officer,                    
| | Treasurer and Director                      
| | (principal financial and accounting officer)

August 14, 2001

26