<PAGE>

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

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

                             _______________________

                                    FORM 10-Q

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

                  For the three months ended September 30, 2003

                                       OR

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

                        Commission File Number 000-23699

                             _______________________

                              VISUAL NETWORKS, INC.
             (Exact name of registrant as specified in its charter)

             Delaware                               52-1837515
  (State or other jurisdiction of                (I.R.S. Employer
   incorporation or organization)                Identification No.)

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

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

                             _______________________

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes [X] No [_]

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]

     The number of outstanding shares of the Registrant's Common Stock, par
value $.01 per share, as of November 12, 2003 was 32,822,480 shares.

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

<PAGE>

                              VISUAL NETWORKS, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                       FOR THE THREE AND NINE MONTHS ENDED
                               SEPTEMBER 30, 2003

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                        ----
<S>                                                                                                     <C>
PART I. FINANCIAL INFORMATION
  Item 1. Financial Statements:
     Consolidated Balance Sheets -- December 31, 2002 and September 30, 2003 ........................    3
     Consolidated Statements of Operations -- Three and nine months ended September 30, 2002
      and 2003 ......................................................................................    4
     Consolidated Statements of Cash Flows-- Nine months ended September 30, 2002 and 2003 ..........    5
     Notes to Consolidated Financial Statements .....................................................    6
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .....   16
  Item 3. Qualitative and Quantitative Disclosure about Market Risk .................................   32
  Item 4. Controls and Procedures ...................................................................   32

PART II. OTHER INFORMATION
  Items 1 - 6 .......................................................................................   34
  Signatures ........................................................................................   39
</TABLE>

                                       2

<PAGE>

                          PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

                              VISUAL NETWORKS, INC.

                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                     December 31,  September 30,
                                                                                        2002          2003
                                                                                                   (Unaudited)
                                                                                     -----------   -----------
<S>                                                                                  <C>           <C>
ASSETS
Current assets:
    Cash and cash equivalents ......................................................  $  12,708       $ 10,071
    Restricted short-term investment ...............................................      2,503          1,530
    Accounts receivable, net of allowance of $358 as of
       December 31, 2002 and September 30, 2003 ....................................      7,185          6,083
    Inventory, net .................................................................      3,393          2,774
    Other current assets ...........................................................        259            400
                                                                                       --------       --------
                    Total current assets ...........................................     26,048         20,858
Property and equipment, net ........................................................      3,481          2,602
Deferred debt issuance costs .......................................................        768            591
                                                                                      ---------       --------
                    Total assets ...................................................  $  30,297       $ 24,051
                                                                                      =========       ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable and accrued expenses ..........................................  $   9,733       $  5,915
    Deferred revenue ...............................................................      5,974          5,678
    Customer deposit ...............................................................         --            250
                                                                                      ---------       --------
                    Total current liabilities ......................................     15,707         11,843
Convertible debentures, net of unamortized debt discount of $2,537 and
    $1,952 as of December 31, 2002 and September 30, 2003, respectively ............      7,963          8,548
                                                                                      ---------       --------
                    Total liabilities ..............................................     23,670         20,391
                                                                                      ---------       --------
Commitments and Contingencies (Note 5)
Stockholders' equity:
    Common stock, $.01 par value, 200,000,000 shares authorized, 32,398,856 and
       32,699,665 shares issued and outstanding as of December 31, 2002 and
       September 30, 2003, respectively ............................................        324            326
    Additional paid-in capital .....................................................    474,719        475,032
    Warrants .......................................................................      2,087          2,087
    Deferred compensation ..........................................................         (2)            --
    Accumulated deficit ............................................................   (470,501)      (473,785)
                                                                                      ---------       --------
                    Total stockholders' equity .....................................      6,627          3,660
                                                                                      ---------       --------
                    Total liabilities and stockholders' equity .....................  $  30,297       $ 24,051
                                                                                      =========       ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       3

<PAGE>

                              VISUAL NETWORKS, INC.

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

<TABLE>
<CAPTION>
                                                            For the Three Months        For the Nine Months
                                                             Ended September 30,         Ended September 30,
                                                             2002           2003         2002           2003
                                                          ---------      ---------     ---------     ---------
<S>                                                       <C>            <C>           <C>           <C>
Revenue:
  Hardware .............................................  $  12,045      $   7,057     $  31,865     $  20,203
  Software .............................................        102            141         5,196         1,169
  Support and services .................................      2,505          2,169         9,593         6,972
                                                          ---------      ---------     ---------     ---------
      Total revenue ....................................     14,652          9,367        46,654        28,344
                                                          ---------      ---------     ---------     ---------
Cost of revenue:
  Product ..............................................      4,051          2,891        11,354         7,175
  Support and services .................................        363            228         1,687           763
                                                          ---------      ---------     ---------     ---------
      Total cost of revenue ............................      4,414          3,119        13,041         7,938
                                                          ---------      ---------     ---------     ---------
  Gross profit .........................................     10,238          6,248        33,613        20,406
                                                          ---------      ---------     ---------     ---------
Operating expenses:
  Research and development .............................      3,064          2,621         9,526         7,940
  Sales and marketing ..................................      4,534          4,026        15,735        10,906
  General and administrative ...........................      1,619          1,743         5,357         4,203
                                                          ---------      ---------     ---------     ---------
      Total operating expenses .........................      9,217          8,390        30,618        23,049
                                                          ---------      ---------     ---------     ---------
Income (loss) from operations ..........................      1,021         (2,142)        2,995        (2,643)
Other income ...........................................         --             --            --           452
Interest expense, net ..................................       (356)          (373)         (834)       (1,093)
                                                          ---------      ---------     ---------     ---------
Net income (loss) ......................................  $     665      $  (2,515)    $   2,161     $  (3,284)
                                                          =========      =========     =========     =========
Basic earnings (loss) per share ........................  $    0.02      $   (0.08)    $    0.07     $   (0.10)
                                                          =========      =========     =========     =========
Diluted earnings (loss) per share ......................  $    0.02      $   (0.08)    $    0.07     $   (0.10)
                                                          =========      =========     =========     =========
Basic weighted-average shares outstanding ..............     32,175         32,648        32,080        32,550
                                                          =========      =========     =========     =========
Diluted weighted-average shares outstanding ............     32,195         32,648        32,432        32,550
                                                          =========      =========     =========     =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4

<PAGE>

                              VISUAL NETWORKS, INC.

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

<TABLE>
<CAPTION>
                                                                                   For the Nine Months
                                                                                   Ended September 30,
                                                                                ------------------------
                                                                                  2002            2003
                                                                                --------        --------
<S>                                                                             <C>             <C>
Cash flows from operating activities:
    Net income (loss) ........................................................  $  2,161        $ (3,284)
    Adjustments to reconcile net income (loss) to net cash
          used in operating activities:
          Depreciation and amortization ......................................     2,772           1,664
          Non-cash interest expense ..........................................       507             762
          Translation gain from foreign subsidiary ...........................       (21)             --
    Changes in assets and liabilities:
          Accounts receivable ................................................     1,107           1,102
          Inventory ..........................................................     2,251             619
          Other assets .......................................................       553            (141)
        Accounts payable and accrued expenses ................................    (3,222)         (3,818)
          Deferred revenue ...................................................    (2,992)           (296)
          Customer deposits ..................................................    (3,588)            250
                                                                                --------        --------
              Net cash used in operating activities ..........................      (472)         (3,142)
                                                                                --------        --------
Cash flows from investing activities:
    Net sales of short-term investments ......................................        --             973
    Expenditures for property and equipment ..................................      (852)           (785)
                                                                                --------        --------
              Net cash provided by (used in) investing activities ............      (852)            188
                                                                                --------        --------
Cash flows from financing activities:
    Exercise of stock options and employee stock purchase plan ...............       349             317
    Net repayments under credit agreements ...................................    (2,039)             --
    Proceeds from issuance of convertible debentures and warrants,
          net of issuance costs ..............................................     9,555              --
    Principal payments on capital lease obligations ..........................      (285)             --
                                                                                --------        --------
              Net cash provided by financing activities ......................     7,580             317
                                                                                --------        --------

Net increase (decrease) in cash and cash equivalents .........................     6,256          (2,637)
Cash and cash equivalents, beginning of period ...............................     5,921          12,708
                                                                                --------        --------
Cash and cash equivalents, end of period .....................................  $ 12,177        $ 10,071
                                                                                ========        ========
Supplemental cash flow information:

    Cash paid for interest ...................................................  $    327        $    413
                                                                                ========        ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       5

<PAGE>

                              VISUAL NETWORKS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2003
                                   (Unaudited)

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

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

Risks and Other Important Factors

     The Company has incurred significant losses since the second quarter of
2000 due primarily to decreased revenue. The Company made significant reductions
in operating expenses since 2000 to align its operating expenses to revised
business plans reflecting decreased revenue. These operating expense reductions
included those resulting from the closure of three facilities and the reduction
of its workforce by approximately 290 employees through the end of 2002. There
were no workforce reductions during the nine months ended September 30, 2003.
However, the Company has continued to reduce operating expenses through other
cost savings measures such as revised bonus and commission plans and reduced
marketing and other discretionary spending. Although operating expenses
decreased for the nine months ended September 30, 2003 from the nine months
ended September 30, 2002, operating expenses increased from the three months
ended June 30, 2003 to the three months ended September 30, 2003. This increase
was due to costs incurred for the Company's new product suite, Visual UpTime
Select, coupled with hiring the Company's new chief financial officer and
adjustments to commission plans resulting from our revised business plan. The
Company incurred a net loss of $3.3 million for the nine months ended September
30, 2003 due to significantly decreased revenue that declined from $46.7 million
for the nine months ended September 30, 2002 to $28.3 million for the nine
months ended September 30, 2003, reflecting a reduction in sales for each of the
Company's major products. As a result, the Company's balance of cash and cash
equivalents decreased by $2.6 million in the nine months ended September 30,
2003.

     The future success of the Company will be dependent upon, among other
factors, its ability to generate adequate cash for operating and capital needs.
The Company is relying on its existing balance of cash and cash equivalents,
together with future sales and the collection of the related accounts receivable
to meet its future operating cash requirements. If cash provided by these
sources is not sufficient to fund future operations, the Company will be
required to further reduce its expenditures for operations or to seek additional
capital through other means that may include additional borrowings, the sale of
equity securities or the sale of assets. There can be no assurances that
additional capital will be available, or available on terms that are reasonable
or acceptable to the Company, particularly in light of its history of losses and
accumulated deficit position.

     Under the terms of the senior secured convertible debentures (the
"Debentures") issued by the Company in March 2002 (see Note 3), if the Company's
earnings before interest, taxes, depreciation and amortization, less capital
expenditures ("adjusted EBITDA"), as defined in the Debentures, for the year
ended December 31, 2003 are less than $6.5 million, the Debenture-holders may
require that the Company prepay all or a portion of up to 100% of the
outstanding principal amount of the Debentures, plus accrued interest. The
redemption of each Debenture may be made in cash or common stock at the
Company's option provided certain conditions are satisfied. Issuance of common
stock to repay the debt could result in significant dilution.

     Based on the Company's projections, the Company will not meet the adjusted
EBITDA target. If the Company does not meet the target and is unsuccessful in
renegotiating this target, the Debenture-holders could require the Company to
prepay any or all of the Debentures at any time after the filing of the annual
report on Form 10-K for the year ended December 31, 2003. Based on the Company's
current cash

                                       6

<PAGE>

projections, the Company may be able to repay the Debentures in cash if such
repayment is required. However, the Company would not have sufficient cash
remaining to fund operations and would need to seek additional capital through
additional borrowings, a sale of additional securities or a sale of assets.
Although the Company believes that it has the ability to obtain additional
capital, the results of raising such capital may be dilutive. Further, there can
be no assurance that such additional capital will be available, or available on
terms that are reasonable or acceptable to the Company. If the Company is unable
to raise sufficient cash, the business and financial condition of the Company
would be materially adversely affected such that the Company may need to
consider other alternatives for the future of the Company. The Company's limited
capital resources and significant accumulated deficit could also result in the
Company's inability to continue as a going concern.

     The Company's operations are subject to certain other risks and
uncertainties, including among others, its accumulated deficit, uncertainty
about future profitability, substantial dilution if the Company is required to
raise capital through the sale of equity, dependence on major service provider
customers during a general economic downturn in the telecommunications industry,
unanticipated delays from subcontract manufacturers, potential failure to comply
with Nasdaq listing requirements, sufficiency of cash to repay the
Debenture-holders if early repayment is required, successful incorporation of
the Company's products into service providers' infrastructures, long sales
cycles, changes in the market's acceptance of and demand for the Company's
products, uncertainty of success of new product introductions, rapidly changing
technology, current and potential competitors with greater financial,
technological, production, and marketing resources, potential errors in the
Company's products or services, dependence on sole and limited source suppliers,
limited protection of intellectual property and proprietary rights, dependence
on key management personnel, ability to recruit and retain employees,
difficulties assimilating any future acquisitions and uncertainty of future
financial results.

Financial Statement Presentation

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of statements and
the reported amounts of revenue 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, 2002. In the opinion of management, the
comparative financial statements for the periods presented herein include all
adjustments that are normal and recurring which are necessary for a fair
presentation of results for the interim periods. The results of operations for
the three and nine months ended September 30, 2003 are not necessarily
indicative of the results that will be achieved for the entire year ending
December 31, 2003.

Principles of Consolidation

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

Investments

     The Company holds a certificate of deposit ("CD") in the amount of $1.5
million ($2.5 million as of December 31, 2002), that matures on December 30,
2003, to collateralize a $1.5 million letter of credit

                                       7

<PAGE>

issued in favor of one of the Company's contract manufacturers that expires on
September 30, 2004. The Company also holds a CD in the amount of $30,000, that
matures on November 30, 2003, to collateralize a $30,000 letter of credit issued
in favor of a customer that expires on July 30, 2004. The CDs have been included
as restricted short-term investments (see Note 2) in the accompanying
consolidated balance sheets as of December 31, 2002 and September 30, 2003.

Inventory and Cost of Revenue

     Cost of revenue consists of subcontract manufacturing costs, component
parts, warehouse costs, direct compensation costs, warranty and other
contractual obligations, royalties, license fees and other overhead expenses
related to the manufacturing operations. Product cost of revenue includes both
hardware and software cost of revenue in the accompanying consolidated
statements of operations. Cost of revenue related to software sales has not been
significant. Support and services cost of revenue includes benchmark services,
professional services and technical support costs in the accompanying
consolidated statements of operations.

     Inventory, stated at the lower of standard cost or market, with costs
determined on the first-in, first-out basis, consists of the following (in
thousands):

                                            December 31,    September 30,
                                               2002             2003
                                            -----------     ------------
                  Raw materials ...........   $   486         $   217
                  Work-in-progress ........        61             119
                  Finished goods ..........     2,846           2,438
                                              -------         -------
                                              $ 3,393         $ 2,774
                                              =======         =======

     The Company records a provision for excess and obsolete inventory whenever
such an impairment has been identified.

Accounts Payable and Accrued Expenses

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

                                              December 31,    September 30,
                                                  2002            2003
                                              -----------     ------------
                  Accounts Payable ........     $ 3,429         $ 1,054
                  Accrued compensation ....       1,223             784
                  Accrued restructuring ...         580             446
                  Other accrued expenses ..       4,501           3,631
                                                -------         -------
                                                $ 9,733         $ 5,915
                                                =======         =======

Revenue Recognition

     The Company's network performance management products and services include
hardware, software, professional services and technical support. The Company
recognized the final revenue for existing benchmark services contracts, under
which the Company was still required to perform services during the nine months
ended September 30, 2003. Benchmark services, professional services and
technical support revenues are reported as service revenue in the accompanying
consolidated statements of operations. The Company recognizes revenue from the
sale or license of its products in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") No. 97-2, "Software
Revenue

                                       8

<PAGE>

Recognition" and SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition and Financial Statements," which summarizes existing accounting
literature and requires that four criteria be met prior to the recognition of
revenue. The accounting policies regarding revenue recognition are written to
comply with the following criteria: 1) persuasive evidence of an arrangement
exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4)
collectibility is probable. The third and fourth criteria may require the
Company to make significant judgments or estimates.

     To determine if a fee is fixed or determinable, the Company evaluates
rights of return, customer acceptance rights, if applicable, and
multiple-element arrangements of products and services to determine the impact
on revenue recognition. The Company's agreements generally have not included
rights of return except in certain reseller relationships that include stock
rotation rights. If offered, rights of return only apply to hardware. If an
agreement provides for a right of return, the Company typically recognizes
revenue when the right has expired, a specific end-user customer has been
identified, or the product has been resold by the distribution channel. If the
Company has sufficient historical information to allow it to make an estimate of
returns in accordance with the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue
Recognition When Right of Return Exists," the Company defers an estimate for
such returns and recognizes the remainder at the date of shipment. If an
agreement provides for evaluation or customer acceptance, the Company recognizes
revenue upon the completion of the evaluation process, acceptance of the product
by the customer and completion of all other criteria. Most of the Company's
sales are multiple-element arrangements and include hardware, software, and
technical support. The Company's software sales sometimes include professional
services for implementation but these services are not a significant source of
the Company's revenue. Training is also offered but is not a significant source
of the Company's revenue. Revenue from multiple-element arrangements is
recognized using the residual method whereby the fair value of any undelivered
elements, such as customer support and services, is deferred and any residual
value is allocated to the software and recognized as revenue upon delivery. The
fair values of any undelivered elements, typically professional services,
technical support and training, have been determined based on the Company's
specific objective evidence of fair value, which is based on the price that the
Company charges customers when the element is sold separately.

     The Company's technical support contracts require it to provide technical
support and unspecified software updates to customers on a when and if available
basis. The Company recognizes customer support revenue, including support
revenue that is bundled with product sales, ratably over the term of the
contract period, which generally ranges from one to three years. The Company
recognizes revenue from services when the services are performed. Subscription
fees for the Company's Visual Internet Benchmark reports are recognized upon
delivery of the reports. The remaining deferred subscription fee revenue was
recognized in the nine months ended September 30, 2003 when the final contract
under which the Company was obligated to provide service was completed. No
additional subscription fee revenue for this product is anticipated beyond
September 30, 2003. The Company receives royalty payments from the purchaser of
the Visual Internet Benchmark service on new contracts, which are included in
support and services revenue in the accompanying statements of operations for
the three and nine months ended September 30, 2002 and 2003.

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

     The Company also examines the specific facts and circumstances of all sales
arrangements with payment terms extending beyond its normal payment terms to
make a determination of whether the sales price is fixed or determinable and
whether collectibility is probable. Payment terms are not tied to milestone
deliverables or customer acceptance. The evaluation of the impact on revenue
recognition, if any,

                                        9

<PAGE>

includes the Company's history with the particular customer and the specific
facts of each arrangement. It is generally not the Company's practice to offer
payment terms that differ from its normal payment terms, and the Company has not
written off any accounts receivable related to extended payment term
arrangements.

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

     In May 2001, the Company announced the discontinuation of the Visual
Trinity product, the primary product acquired with Avesta Technologies, Inc.
("Avesta"), and stopped all development efforts. The Company provided technical
support for the Visual Trinity product through September 2002 and has no
remaining technical support obligations to the Visual Trinity customers. As a
result, revenue related to this product subsequent to May 2001 consisted
primarily of technical support revenue, all of which was recognized over the
terms of the relevant agreements. In addition, the Company receives royalty
payments from a third party who has certain distribution rights for the Visual
Trinity product. These royalties are included in support and services revenue
for the nine months ended September 30, 2003 and are insignificant. There were
no Visual Trinity royalties for the nine months ended September 30, 2002.

     In 2002, the remaining customer for the CellTracer product, Network
Associates, placed what they indicated would be final orders. In 2003, the
Company discontinued sales of the Visual eWatcher and CellTracer products.
Neither product produced significant revenue for the three and nine months ended
September 30, 2002 or 2003.

Credit Risk

     Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of accounts receivable. The
Company generally sells its products to large telecommunications and Internet
service provider companies primarily in the United States of America. The
Company grants credit terms without collateral to its customers and, other than
a loss related to the bankruptcy of one of the Company's significant customers
during 2002 as described below, has not experienced any significant credit
related losses. Accounts receivable include allowances to record receivables at
their estimated net realizable value. As of September 30, 2003, three customers
individually represented 22%, 11% and 10% of accounts receivable.

     A significant customer of the Company, MCI, filed for bankruptcy on July
21, 2002. Sales to MCI represented approximately $6.3 million in revenue for the
year ended December 31, 2002. The Company wrote off approximately $0.7 million
of accounts receivable due from MCI against the allowance for bad debts during
2002. The Company entered into an agreement to sell these previously written-off
receivables to an unrelated third party for approximately $0.3 million, which is
recorded as a reduction to bad debt expense in general and administrative
expense in the accompanying consolidated results of operations for the nine
months ended September 30, 2003.

     Due to the relationship that the Company has with MCI and its customers,
the Company is continuing to sell products to MCI during its bankruptcy. The
Company has taken steps to limit its financial exposure. In July 2002, the
Company signed an agreement (the "July Agreement") with MCI that established new
terms and conditions under which the Company shipped products to MCI during the
initial weeks of MCI's bankruptcy. After MCI made timely payment of the related
invoices, the Company entered into a subsequent agreement (the "August
Agreement") that changed MCI's payment terms to substantially those that existed
prior to the bankruptcy filing. MCI complied with the terms of the July
Agreement and August

                                       10

<PAGE>

Agreement during the year ended December 31, 2002 and continues to be in
compliance as of the date of this filing.

Warranty

     The Company warrants its hardware products for periods of up to five years.
The Company estimates its warranty obligation at the end of each period and
charges changes of the liability to cost of revenue in the respective period.
Such estimates are based on actual warranty cost experience.

     In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires the accounting
for and disclosure of guarantees and clarifies the requirements of FASB No. 5,
"Accounting for Contingencies." The disclosure requirements of this
interpretation are effective for periods ending after December 15, 2002 and
accounting for guarantees is required for periods beginning after December 15,
2002. Accordingly, in the first quarter of 2003, the Company adopted the
requirements of FIN 45. The adoption did not have a material effect on the
Company's financial position or results of operations.

     The following is a summary of the change in the Company's accrued warranty
during the nine months ended September 30, 2003 (in thousands):

         Balance as of December 31, 2002 ........................      $ 402
         Provisions for warranty ................................         69
         Settlements made .......................................        (47)
                                                                       -----
         Balance as of September 30, 2003 .......................      $ 424
                                                                       =====

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.

Segment Reporting and Significant Customers

     SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that these enterprises report selected information about operating
segments in interim financial reports. Management has concluded that the
Company's operations occur in one segment only based upon the information used
by management in evaluating the performance of the business. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The revenue and assets of the Company's
foreign subsidiaries have not been significant. For the nine months ended
September 30, 2002, three customers individually represented 35%, 12% and 12% of
revenue. For the nine months ended September 30, 2003, three customers
individually represented 32%, 20% and 12% of revenue. The agreements with the
Company's significant customers do not obligate these customers to make any
minimum purchases from the Company.

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

<TABLE>
<CAPTION>
                                                            Three Months Ended         Nine Months Ended
                                                               September 30,             September 30,
                                                            ------------------         -----------------
<S>                                                         <C>                        <C>
</TABLE>

                                       11

<PAGE>

<TABLE>
    <S>                                                   <C>           <C>          <C>          <C>
                                                            2002          2003         2002         2003
                                                          --------      ---------    --------     ---------
    Visual UpTime .....................................   $ 13,823      $   8,550    $ 37,886     $  25,300
    Visual IP InSight .................................        540            747       6,353         2,728
                                                          --------      ---------    --------     ---------
              Continuing products .....................     14,363          9,297      44,239        28,028
                                                          --------      ---------    --------     ---------
    Visual Internet Benchmark .........................         92              -         722            57
    Visual Cell Tracer ................................         68              -         836             -
    Visual Trinity and eWatcher .......................         49              -         495             -
                                                          --------      ---------    --------     ---------
              Discontinued products ...................        209              -       2,053            57
                                                          --------      ---------    --------     ---------
    Royalties .........................................         80             70         362           259
                                                          --------      ---------    --------     ---------
              Total revenue ...........................   $ 14,652      $   9,367    $ 46,654     $  28,344
                                                          ========      =========    ========     =========
</TABLE>

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. The treasury stock effect of options
and warrants to purchase 8,789,713 shares of common stock that were outstanding
at September 30, 2002 has been included in the computation of diluted earnings
per share for the three and nine months ended September 30, 2002. The effect of
the convertible Debentures issued in March 2002 (see Note 3) that are
convertible into 2,986,093 shares of common stock has not been included in the
computation of diluted earnings per share for the three and nine months ended
September 30, 2002 as their effect would be anti-dilutive. Options and warrants
to purchase 9,522,969 shares of common stock that were outstanding as of
September 30, 2003 were not included in the computation of diluted loss per
share for the three and nine months ended September 30, 2003 as their effect
would be anti-dilutive. The effect of the convertible Debentures has not been
included in the computation of diluted earnings per share for the three and nine
months ended September 30, 2003 as their effect would be anti-dilutive.

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

<TABLE>
<CAPTION>
                                                    Three Months Ended           Nine Months Ended
                                                        September 30,              September 30,
                                                  -----------------------    ------------------------
                                                     2002          2003         2002          2003
                                                  ----------    ---------    -----------   ----------
<S>                                               <C>           <C>          <C>           <C>
Net income (loss) ............................    $      665    $  (2,515)   $     2,161   $   (3,284)
                                                  ==========    =========    ===========   ==========
Basic weighted-average shares outstanding:
  Average number of shares of common stock
     outstanding .............................        32,175       32,648         32,080       32,550
Diluted weighted-average shares outstanding:
  Treasury stock effect of options and
     warrants ................................            20           --            352           --
                                                  ----------    ---------    -----------   ----------
Diluted weighted-average shares outstanding ..        32,195       32,648         32,432       32,550
                                                  ==========    =========    ===========   ==========
Earnings (loss) per common share:
  Basic earnings (loss) per share ............    $     0.02    $   (0.08)   $      0.07   $    (0.10)
                                                  ==========    =========    ===========   ==========
  Diluted earnings (loss) per share ..........    $     0.02    $   (0.08)   $      0.07   $    (0.10)
                                                  ==========    =========    ===========   ==========
</TABLE>

New Accounting Pronouncements

     In August 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." It addresses financial accounting
and reporting for costs associated with exit or

                                       12

<PAGE>

disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred
and establishes that fair value is the objective for initial measurement of the
liability. Under EITF Issue No. 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. The new
standard is effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS No. 146 did not have a material impact
on the Company's financial position or results of operations.

     In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of EITF
Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of this standard did not have a
material impact on the Company's financial position or results of operations.

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The statement requires that contracts with comparable characteristics
be accounted for similarly and clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except in certain circumstances, and for hedging relationships designated after
June 30, 2003. The adoption of this standard did not have a material impact on
the Company's financial position or results of operations.

Reclassifications

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

2.  Bank Borrowings:

     During 2001 through March 2002, the Company maintained a credit facility,
as amended, that included an accounts receivable-based arrangement providing for
borrowings up to the lesser of $10.0 million or 80% of eligible accounts
receivable (as defined in the credit facility and determined by the bank). The
bank credit facility included an equipment financing arrangement. In connection
with the issuance of the convertible Debentures (see Note 3), the Company repaid
the outstanding balance of the credit facility, and the related loan agreements
were terminated.

     In December 2000, the bank issued a standby letter of credit, as amended,
in favor of the Company's contract manufacturer, that expires on September 30,
2004 (the original expiration date was March 31, 2002) in the amount of $1.5
million. The letter of credit was $2.5 million as of December 31, 2002. The
Company secured the letter of credit with a pledge of a CD in the amount of $1.5
million that matures on December 30, 2003. The CD was $2.5 million at December
31, 2002. In July 2003, the bank issued a standby letter of credit in favor of
one of the Company's customers, that expires on July 30, 2004 in the amount of
$30,000. The Company secured the letter of credit with a pledge of a CD in the
amount of $30,000 that matures on November 30, 2003. The CDs are recorded as
restricted short-term investments in the accompanying consolidated balance
sheets as of December 31, 2002 and September 30, 2003.

3.  Convertible Debentures:

     In March 2002, the Company issued senior secured convertible Debentures in
the aggregate amount of $10.5 million in a private placement. The Debentures are
due March 25, 2006, are payable in cash or

                                       13

<PAGE>

common stock, at the Company's option provided certain conditions are satisfied,
and bear interest at an annual rate of 5% payable quarterly in cash or common
stock, at the Company's option, provided certain conditions are satisfied. To
date, all quarterly interest payments under the Debentures have been made in
cash. The Debentures may be converted initially into 2,986,093 shares of the
Company's common stock at the option of the holders at a price of $3.5163 per
share, subject to certain adjustments. The conversion price of the Debentures
will adjust if the Company issues additional shares of common stock or
instruments convertible into common stock at a price that is less than the
then-effective conversion price of the Debentures. The Company has the right to
require the holders to convert their Debentures into common stock if the closing
price of the Company's common stock exceeds 175% of the conversion price for 20
consecutive days after September 26, 2003.

     In connection with the issuance of the Debentures, the Company issued to
the holders warrants to purchase 828,861 shares of its common stock at an
initial exercise price of $4.2755 per share. If the Company issues additional
shares of common stock or instruments convertible into common stock at a lower
price than the then-effective exercise price, the exercise price would be
adjusted downward to such lower price until March 25, 2004, and thereafter would
be adjusted on a weighted average basis. The warrants expire on March 25, 2007.

     The holders of the Debentures also received the right to purchase shares of
to-be-created Series A preferred stock and equity participation rights, which
have now expired unexercised. The Debenture-holders were also granted
registration rights.

     The Debentures include a financial target related to the Company's
financial performance during 2003. If the Company's earnings before interest,
taxes, depreciation and amortization, less capital expenditures ("adjusted
EBITDA"), as defined in the Debentures, for the year ended December 31, 2003 are
less than $6.5 million, the Debenture-holders may require that the Company
prepay all or a portion of up to 100% of the outstanding principal amount of
their Debentures, plus accrued interest. The redemption of each Debenture may be
made in cash or common stock at the Company's option provided certain conditions
are satisfied. Issuance of common stock to repay the debt could result in
significant dilution.

     Based on our projections, the Company does not anticipate meeting the
adjusted EBITDA target. If the Company does not meet this target and are
unsuccessful in renegotiating the target, the Debenture-holders could require
the Company to prepay any or all of the Debentures at any time after the filing
of its annual report on Form 10-K for the year ended December 31, 2003. Based on
the Company's current cash projections, the Company may be able to repay the
Debentures in cash if such repayment is required. However, the Company would not
have sufficient cash remaining to fund operations and would need to seek
additional capital through additional borrowings, a sale of additional
securities or a sale of assets. Although the Company believes that it has the
ability to obtain additional capital, the results of raising such capital may be
dilutive. There can be no assurance that such additional capital will be
available, or available on terms that are reasonable or acceptable to us. If the
Company is unable to raise sufficient cash, the business and financial condition
of the Company would be materially adversely affected such that the Company may
need to consider other alternatives for the future of the Company. The Company's
limited capital resources and significant accumulated deficit could also result
in the Company's inability to continue as a going concern.

     In addition, under the terms of the Debentures, a number of events could
trigger the Debenture-holders' right to force early repayment of 115% of the
outstanding principal plus accrued and unpaid interest owed under the
Debentures. Events constituting a triggering event include:

     .   default by the Company on other indebtedness or obligations under any
         other debenture, mortgage, credit agreement or other facility,
         indenture agreement, factoring agreement or other instrument under
         which there may be issued, or by which there may be secured or
         evidenced, any indebtedness for borrowed money or money due under any
         long term leasing or factoring arrangement in an amount exceeding
         $500,000;

                                       14

<PAGE>

     .   failure by the Company to have its common stock listed on an eligible
         market;

     .   bankruptcy of the Company;

     .   engagement by the Company in certain change in control, sale of assets
         or redemption transactions;

     .   failure by the Company to file its 2003 annual report on Form 10-K no
         later than March 31, 2004; and

     .   certain other failures by the Company to perform obligations under the
         Debenture agreement and/or the related agreements.

     The aggregate amount of the Debentures, $10.5 million, is included in the
accompanying balance sheets as of December 31, 2002 and September 30, 2003, net
of unamortized debt discount of approximately $2.5 million and $2.0 million,
respectively. The net amount represents the fair market value after allocating
the proceeds to the various additional components of the debt. Approximately
$2.1 million in proceeds from the Debentures were allocated to the value of the
warrants. The fair value of the warrants was determined using the Black-Scholes
valuation model with the following assumptions: no dividend yield, expected
volatility of 129%, risk-free interest rate of 4.85% and a term of five years.
Approximately $0.3 million in proceeds from the Debentures was allocated to the
value of the Preferred Stock Rights as determined by an appraisal. On the date
of issuance of the Debentures, the conversion price of the Debentures, after
taking into consideration the allocation of proceeds to the warrants and
Preferred Stock Rights, was less than the quoted market price of the Company's
common stock. Accordingly, approximately $1.0 million in proceeds from the
Debentures was allocated to additional paid-in capital to recognize this
beneficial conversion feature. The discount on the Debentures resulting from the
allocation of proceeds to the value of the warrants, Preferred Stock Rights and
beneficial conversion is being amortized as a charge to interest expense over
the four-year period until the Debentures become due in March 2006.

4.  Stock-Based Compensation

     In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" that defines a "fair value based method" of accounting for
stock-based compensation. Under the fair value based method, compensation cost
is measured at the grant date based on the fair value of the award and is
recognized over the service period. Prior to the issuance of SFAS No. 123,
stock-based compensation was accounted for under the "intrinsic value method" as
defined by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Under the intrinsic value method, compensation is
the excess, if any, of the market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the stock.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." It provides additional transition
guidance for those companies that elect to voluntarily adopt the accounting
provisions of SFAS No. 123. SFAS No. 148 does not change the provisions of SFAS
No. 123 that allow companies to continue to apply the intrinsic value method of
APB No. 25. The new standard is effective for fiscal years beginning after
December 15, 2002. The standard also contains interim disclosure provisions that
are effective for the first interim period beginning after December 15, 2002.
The Company currently accounts for stock-based compensation under APB No. 25 and
does not plan to adopt the provisions of SFAS No. 123. However, the Company has
adopted the additional disclosure requirements required under SFAS No. 148.

     The Company recorded deferred compensation of approximately $100,000
related to stock option grants during the nine months ended September 30, 2002.
The Company amortized approximately

                                       15

<PAGE>

$124,000 and $2,000 of deferred compensation during the nine months ended
September 30, 2002 and 2003, respectively.

     If compensation expense had been determined based on the fair value of the
options at the grant dates consistent with the method of accounting under SFAS
No. 123, the Company's net income (loss) and earnings (loss) per share would
have been reported at the pro forma amounts indicated below (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                             Three Months Ended          Nine Months Ended
                                                               September 30,                September 30,
                                                         --------------------------   ------------------------
                                                            2002            2003         2002          2003
                                                         -----------    -----------   -----------   ----------
<S>                                                      <C>            <C>           <C>           <C>
Net income (loss), as reported .....................     $       665    $    (2,515)  $     2,161   $   (3,284)
Add: Stock-based employee compensation
  expense included in reported net income (loss) ...              20             --           124            2
Deduct:  Total stock-based employee
  compensation expense determined under fair
  value based method for all awards ................          (1,714)        (1,353)       (6,069)      (4,413)
                                                         -----------    -----------   -----------   ----------
Pro forma net loss .................................     $    (1,029)    $   (3,868)  $    (3,784)  $   (7,695)
                                                         ===========    ===========   ===========   ==========
Earnings (loss) per share:
  Basic: as reported ...............................     $      0.02    $     (0.08)  $      0.07   $    (0.10)
                                                         ===========    ===========   ===========   ==========
  Basic: pro forma .................................     $     (0.03)   $     (0.12)  $     (0.12)  $    (0.24)
                                                         ===========   ============   ===========   ==========
  Diluted: as reported .............................     $      0.02    $     (0.08)  $      0.07   $    (0.10)
                                                         ===========    ===========   ===========   ==========
  Diluted: pro forma ...............................     $     (0.03)   $     (0.12)  $     (0.12)  $    (0.24)
                                                         ===========    ===========   ===========   ==========
</TABLE>

     The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants during the three and nine months ended September 30, 2002 and 2003: no
dividend yield, expected volatility from 97% t o 206%, risk-free interest rates
from 2.9% to 4.1% and an expected term of 5 years.

5.  Commitments and Contingencies:

Litigation

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

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
create the corporate infrastructure necessary to support these efforts. We first
shipped Visual UpTime in mid-1995 and began generating significant revenue
during 1996. Since our inception, we have focused on establishing relationships
with service providers with the goal of having these service providers include
our products into their infrastructure or in their service offerings to their
subscribers. Consistent with this goal, we have established agreements with
major service providers such as AT&T, BellSouth, Equant, MCI, SBC, Sprint, and
Verizon. During 1998, 1999 and 2000, we continued to focus on selling Visual
UpTime and added to our product portfolio as a result of a series of
acquisitions -- the Net2Net product, CellTracer, in 1998; the Inverse products,
Visual IP InSight and Visual Internet Benchmark, in 1999; and the Avesta
products, Visual Trinity and Visual eWatcher, in 2000. During 2001, we
discontinued development and sales efforts of Visual Trinity and sold the Visual
Internet Benchmark service. In 2002, the remaining customer for our CellTracer
product, Network Associates, placed what they

                                       16

<PAGE>

indicated would be final orders. In 2003, we discontinued sales of the Visual
eWatcher and CellTracer products. Neither product produced significant revenue
during 2002 or the nine months ended September 30, 2003. We continue to focus
our sales efforts on Visual UpTime and Visual IP InSight.

     We acquired Avesta Technologies, Inc. ("Avesta") on May 24, 2000. We
believed that the acquisition of Avesta would provide critical pieces to our
strategy to become one of the largest network performance management vendors
with one of the industry's broadest portfolios of products and functionality. We
also anticipated that the merger would bring us closer to providing a
single-vendor solution to the internet infrastructure management needs of
customers, especially our intended integration of networks, systems and
applications into a unified service view for service providers and their
enterprise subscribers. We expected to generate revenue from the Avesta products
of approximately $30 million in 2000. Instead, these products generated revenue
of $7.3 million in 2000, and significantly increased our operating expenses.
Subsequent to the acquisition, we concluded that, without significant
modifications, the primary Avesta product, Trinity, was not a viable solution
for our strategic service provider customers. The product was more specifically
targeted to direct enterprise customers, which did not fit with our service
provider focused business plan. As a result of an analysis performed in early
2001 by a company-wide task force, we determined that the time and expense
required to make the Visual Trinity product competitive in its market space and
more suitable to our service provider customers would be prohibitive. These
factors, in conjunction with revenue declines in our other products, resulted in
a $328.8 million impairment charge and $7.0 million in restructuring charges in
2000. In 2001, we discontinued the Visual Trinity product, resulting in $3.3
million in additional impairment charges related to the remaining intangible
assets from the Avesta acquisition, $3.7 million in a write-down related to an
investment that was acquired with Avesta that was determined to be impaired as
of December 31, 2001 and $2.3 million (net of reversals) in restructuring
charges. We did not have any remaining assets related to Avesta included in our
balance sheet as of December 31, 2002 or September 30, 2003.

     Following the acquisition of Avesta, we allowed our business strategy to
become less focused, which increased the complexity of our business and
adversely affected our results of operations. We incurred significant losses
from the second quarter of 2000 through the fourth quarter of 2001. The
deterioration of our operating results that began in 2000, excluding the effects
of the impairment and restructuring charges and the write-off of in-process
research and development, was due primarily to decreased revenue and increased
operating expenses following the Avesta acquisition. In response, we made
significant reductions in operating expenses in the remainder of 2000, 2001 and
2002 by closing three facilities and by reducing our workforce by approximately
290 employees from October 2000 through December 2002.

     We returned to profitability for the three months ended March 31, 2002 and
remained profitable for each quarter in 2002. However, we incurred a net loss of
$3.3 million for the nine months ended September 30, 2003 due to significantly
decreased revenue that declined from $46.7 million for the nine months ended
September 30, 2002 to $28.3 million for the nine months ended September 30,
2003, reflecting a reduction in sales for each of the Company's major products.
Visual UpTime revenue decreased by $12.6 million due to a decrease in demand
reflecting: 1) the continued downturn in the telecommunications industry, which
continues to be reflected in a slowdown in demand for telecommunications
products and services, including those based on our products; 2) decreased
capital spending by end-user customers resulting in slower deployment of
inventory at our service providers, particularly AT&T; 3) tighter inventory
control at our service provider customers resulting from the decreased capital
spending by end-users, particularly AT&T and Equant; and 4) the loss of business
to competitors. Revenue from the Visual IP InSight product decreased $3.6
million due to a significant sale to Verizon for $3.5 million during the nine
months ended September 30, 2002. Revenue from the Visual IP InSight product
often fluctuates significantly from quarter to quarter due to the timing of
sizeable orders placed by a limited number of service providers. Such
fluctuations can also significantly affect our gross margin because our software
costs of revenue are so insignificant. The $2.0 million decrease in revenue from
Visual Internet Benchmark, Visual Trinity, Visual eWatcher and CellTracer
reflects, respectively, the sale of Visual Internet Benchmark and the
discontinuation of sales of Visual Trinity, Visual eWatcher and CellTracer.

                                       17

<PAGE>

     We have refocused our sales, marketing and other efforts on our core Visual
UpTime and Visual IP InSight products, our core service provider customers and
service creation over resale to end users. We introduced our new product suite,
Visual UpTime Select (discussed in detail later in this section) in an effort to
address market segmentation for Visual UpTime so we can sell more efficiently
and effectively in those segments. We have directed our Visual IP InSight
development efforts at making the product more suitable for our core service
provider customers and enabling the use of our product in higher-margin
broadband networks over, for example, cable lines and Digital Subscriber Lines
(DSL). We have also focused our efforts on training the Cisco sales force and
building our pipeline for the Cisco product that is based on Visual UpTime, the
Cisco Wide Area Performance Management System ("Cisco WAPMS"), that was
announced during 2002. During the nine months ended September 30, 2003, we
recorded our first revenue related to Cisco WAPMS. The amount for the three and
nine months ended September 30, 2003 was insignificant.

     We have also aggressively reduced our operating expenses by $7.6 million
for the nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002 to be more in line with our reduced revenue projections by
revising bonus and commission plans, revising employee benefits, and
significantly reducing marketing and other discretionary spending. Although, our
operating expenses have decreased significantly since September 30, 2002, our
operating expenses increased $0.9 million from the three months ended June 30,
2003 from $7.5 million to $8.4 million for the three months ended September 30,
2003. This increase is primarily due to hiring costs related to our chief
financial officer coupled with costs incurred for our new product launch
announced on October 27, 2003 and revised commission plans resulting from our
revised business plan.

     On October 27, 2003, we announced our new product suite, Visual UpTime
Select. The new architecture is intended to offer greater flexibility to fit the
evolving needs of our customers, resellers, and service providers. Increased
reliance on enterprise applications, such as customer relationship management
(CRM), supply chain management and Web-based services, has put greater emphasis
on the need for optimal performance and 24x7 availability of corporate IT
networks. Our new modular approach allows companies to buy what they need - when
they need it - in order to effectively optimize and manage for applications
delivery over their network infrastructure. We believe that the increased
flexibility of Visual UpTime Select is critical to meet the changing needs and
budgets of today's IT organizations. Visual UpTime Select includes new core
capabilities, the unbundling of proven Visual UpTime functionality into modular
software components, and flexible purchasing options. New core capabilities
include a service summary application, Web-based management capabilities, active
troubleshooting views, auto discovery of protocols, an enhanced reporting module
and an integration module providing interfaces to third-party reporting packages
and manager of manager platforms such as HP OpenView and Aprisma SPECTRUM. There
can be no assurance that our revenue will increase as a result of the release of
Visual UpTime Select or that we will return to profitability.

     While we do not know when the downturn in the telecommunications industry
will end, or how robust the recovery will be once or if it does begin, we
continue to revisit our business plan as we seek to return to profitability. We
anticipate that the introduction of Visual UpTime Select, coupled with the
control of operating expenses, will result in a return to profitability within
nine to twelve months. There can be no assurance that we will return to
profitability.

     Based on our anticipated cost structure, our ability to generate net income
in the future is, in large part, dependent on our success in achieving quarterly
revenue of at least $12.0 million to $13.0 million, achieving quarterly gross
margins of 65% to 70% and reducing quarterly operating expenses to $8.0 million
or less. Due to market conditions, competitive pressures, and other factors
beyond our control, there can be no assurances that we will be able to meet
these goals. In the event that the anticipated revenue goals are not met, we may
not be profitable and we may be required to further reduce our cost structure.

     Our Debentures include a financial target related to our financial
performance during 2003. If our earnings before interest, taxes, depreciation
and amortization, less capital expenditures ("adjusted

                                       18

<PAGE>

EBITDA"), as defined in the Debentures, for the year ended December 31, 2003 are
less than $6.5 million, our Debenture holders may require that we prepay all or
a portion of up to 100% of the outstanding principal amount of their Debentures,
plus accrued interest. The redemption of each Debenture may be made in cash or
common stock at our option provided certain conditions are satisfied. Issuance
of common stock to repay the debt could result in significant dilution.

     It is not our intention to provide the adjusted EBITDA numbers for purposes
of evaluating our operating results. Our management does not use adjusted EBITDA
as a measure of operating results. However, we are including this number in this
Form 10-Q because we believe that it provides our investors and industry
analysts with additional information in order to evaluate our ability to meet
the financial target contained in the Debentures. Adjusted EBITDA is not a
recognized term under generally accepted accounting principles ("GAAP") and
should not be considered as an alternative to net income (loss) or cash flow
provided by (used in) operating activities determined in accordance with GAAP.
Because adjusted EBITDA, as defined in the Debentures, excludes some, but not
all, items that affect net income, it may not be comparable to EBITDA, or other
similarly titled measures used by other companies. The following table sets
forth (i) the calculation of adjusted EBITDA and (ii) a reconciliation of
adjusted EBITDA to our net cash used in operating activities for the nine months
ended September 30, 2003 (unaudited, in thousands):

         Net loss, as reported ...........................   $    (3,284)
         Interest expense ................................         1,175
         Depreciation and amortization ...................         1,664
         Capital expenditures ............................          (785)
                                                             -----------
             Adjusted EBITDA .............................        (1,230)
         Cash interest expense ...........................          (413)
         Capital expenditures ............................           785
         Changes in assets and liabilities ...............        (2,284)
                                                             -----------
             Net cash used in operating activities .......   $    (3,142)
                                                             ===========

     In order for us to meet the financial target that is specified in the
Debentures for 2003, we must achieve adjusted EBITDA during the remainder of
2003 in excess of $7.7 million. Based on our projections, we do not expect to
meet this financial target. If we do not meet this target and are unsuccessful
in renegotiating the target, the Debenture-holders could require us to prepay
any or all of the Debentures at any time after the filing of our annual report
on Form 10-K for the year ended December 31, 2003. Based on our current cash
projections, we may be able to repay the Debentures in cash if such repayment is
required. However, we would not have sufficient cash remaining to fund
operations and would need to seek additional capital through additional
borrowings, a sale of additional securities or a sale of assets, none of which
may be available on terms reasonably acceptable to us. Although we believe that
we have the ability to obtain additional capital, the results of raising such
capital may be dilutive. There can be no assurance that such additional capital
will be available, or available on terms that are reasonable or acceptable to
us. If we are unable to raise sufficient cash, our business and financial
condition would be materially adversely affected such that we may need to
consider other alternatives for our future. Our limited capital resources and
significant accumulated deficit could also result in our inability to continue
as a going concern.

On July 31, 2003, the U.S. General Services Administration ("GSA") informed MCI
that it had initiated debarment proceedings against MCI and its affiliates. The
debarment makes MCI and its affiliates ineligible to compete for new Federal
government contracts, to renew or extend existing Federal government contracts,
to act as an agent of another Federal contractor in its dealings with the
government or to receive any subcontracts of Federal government contracts in
excess of twenty-five thousand dollars ($25,000). We are uncertain what impact,
if any, this debarment will have on our business.

     Subsequent to our earnings announcement on October 16, 2003, we revised our
previously reported results of operations for the three months ended September
30, 2003. The change resulted from our

                                       19

<PAGE>

decision to not recognize $172,000 of revenue related to a sale of Visual IP
InSight due to failure by our reseller to complete the sale to the specified
end-user customer or identify an alternative end-user customer. As a result, the
following changes occurred from our October 16, 2003 earnings announcement to
the results in this Form 10-Q, respectively: revenue decreased from $9.5 million
to $9.4 million; gross profit decreased from $6.4 million to $6.2 million or
gross margin of 67.3% to 66.7%; net loss increased from $2.3 million to $2.5
million; and our net loss per share increased from $0.07 to $0.08 per share.

Results of Operations

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

<TABLE>
<CAPTION>
                                              Three Months Ended   Nine Months Ended
                                                 September 30,       September 30,
                                              ------------------   ------------------
                                                2002      2003       2002      2003
                                              ------    -------    ------    -------
   <S>                                        <C>       <C>        <C>       <C>
   Revenue:
     Hardware .............................     82.2%      75.3%     68.3%      71.3%
     Software .............................      0.7        1.5      11.1        4.1
     Support and services .................     17.1       23.2      20.6       24.6
                                              ------     ------    ------    -------
             Total revenue ................    100.0      100.0     100.0      100.0
                                              ------     ------    ------    -------
   Cost of revenue:
     Product ..............................     27.6       30.9      24.4       25.3
     Support and services .................      2.5        2.4       3.6        2.7
                                              ------     ------    ------    -------
             Total cost of revenue ........     30.1       33.3      28.0       28.0
                                              ------     ------    ------    -------
     Gross profit .........................     69.9       66.7      72.0       72.0
                                              ------     ------    ------    -------
   Operating expenses:
     Research and development .............     20.9       28.0      20.4       28.0
     Sales and marketing ..................     31.0       43.0      33.7       38.5
     General and administrative ...........     11.0       18.6      11.5       14.8
                                              ------     ------    ------    -------
             Total operating expenses .....     62.9       89.6      65.6       81.3
                                              ------     -----      -----    -------
   Income (loss) from operations ..........      7.0      (22.9)      6.4       (9.3)
   Other income ...........................       --         --        --        1.6
   Interest expense, net ..................     (2.5)      (3.9)     (1.8)      (3.9)
                                              ------     ------    ------    -------
   Net income (loss) ......................      4.5%     (26.8)%     4.6%     (11.6)%
                                              ======     ======    ======    =======
</TABLE>

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

<TABLE>
<CAPTION>
                                              Three Months Ended   Nine Months Ended
                                                 September 30,       September 30,
                                              ------------------   ------------------
                                                2002       2003      2002       2003
                                              --------   -------   --------   -------
   <S>                                       <C>        <C>       <C>        <C>
   Visual UpTime ..........................   $ 13,823   $ 8,550   $ 37,886   $25,300
   Visual IP InSight ......................        540       747      6,353     2,728
                                              --------   -------   --------   -------
         Continuing products ..............     14,363     9,297     44,239    28,028
                                              --------   -------   --------   -------
   Visual Internet Benchmark ..............         92         -        722        57
   Visual Cell Tracer .....................         68         -        836         -
   Visual Trinity and eWatcher ............         49         -        495         -
                                              --------   -------   --------   -------
             Discontinued products ........        209         -      2,053        57
                                              --------   -------   --------   -------
   Royalties ..............................         80        70        362       259
                                              --------   -------   --------   -------
             Total  revenue ...............   $ 14,652   $ 9,367   $ 46,654   $28,344
                                              ========   =======   ========   =======
</TABLE>

     The following table presents the hardware, software, and support and
services revenue attributable to customers that individually represented more
than 10% of our total revenue for each period presented (unaudited, in
thousands):

                                       20

<PAGE>

<TABLE>
<CAPTION>
                                                  Three Months Ended       Nine Months Ended
                                                      September 30,          September 30,
                                                  ---------------------   -------------------
                                                     2002        2003        2002        2003
                                                  ---------   ---------   ---------   -------
<S>                                               <C>         <C>         <C>         <C>
  AT&T .......................................    $   5,466   $   2,583   $  16,483   $ 9,148
  Interlink Communications Systems ...........        1,733       1,356           *     3,330
  MCI ........................................        2,090       1,084       5,675         *
  Sprint .....................................        1,747       1,647           *     5,670
  Verizon ....................................            *           *       5,260         *
  All other customers (each individually
       less than 10%) ........................        3,616       2,697      19,236    10,196
                                                  ---------   ---------   ---------   -------
   Total revenue .............................    $  14,652   $   9,367   $  46,654   $28,344
                                                  =========   =========   =========   =======
</TABLE>

*Less than 10%

     Our primary sales and marketing strategy depends predominantly on sales of
Visual UpTime and Visual IP InSight to telecommunications service providers.
Service providers use our products as operations tools in their own network
infrastructures, base value-added services on our products and resell our
products to their customers. Pressure on capital expenditures and the decline in
the telecommunications markets may delay the rollout of new services based on
our products. Furthermore, any potential reduction in demand for value-added
services or products from the service providers' customers would directly impact
the volume of our products purchased.

     We expect that a significant portion of our revenue in 2003 will be
attributable to sales of Visual UpTime and Visual IP InSight to service
providers. Visual UpTime Select is not expected to have a significant impact on
2003. The loss of any one of AT&T, Sprint or MCI, which together have
historically provided a majority of our revenue, would result in a substantial
loss of revenue that could have a material adverse effect on our business. For
the nine months ended September 30, 2003, AT&T, Sprint and Interlink
Communications Systems represented 32%, 20%, and 12%, respectively, of our
consolidated revenue. Revenue related to all service providers represented 85%
and 82% of our consolidated revenue for the nine months ended September 30, 2002
and 2003, respectively. This concentration should continue because our customer
base consists predominantly of service providers. Existing service provider
customers are not easily replaced because of the small number of participants in
that market. High barriers to entry due to extraordinary capital requirements
and the increased possibility that existing service providers may merge or fail
because of the current downturn in the telecommunications industry, may further
reduce their number and make replacing a significant network service provider
customer very difficult. Furthermore, the small number of network service
providers means that the reduction, delay or cancellation of orders or a delay
in shipment of our products to any one service provider customer could have a
material adverse effect on our revenue for a quarter. Our anticipated dependence
on sizable orders from a limited number of service provider customers will make
the relationship between us and each service provider critically important to
our business. Further, because none of our agreements contain minimum purchase
requirements, there can be no assurance that the issuance of a purchase order
will result in significant recurring business.

     Our operations and financial position are subject to certain other risks
and uncertainties, including among others, our accumulated deficit, uncertainty
of future profitability and possible fluctuations in financial results, our
likely inability to meet the financial target in our Debentures for 2003,
substantial fixed operating costs, possible dilution to our common stockholders
due to the conversion features of our convertible Debentures, dependence on
sales to key customers, dependence on MCI as a significant customer, dependence
on a sole-source subcontract manufacturer for some product materials, potential
delisting and reduced liquidity of our shares resulting from failure to meet
Nasdaq listing requirements, the potential triggering of early repayment of our
Debentures, the continued downturn in the telecommunications industry,
uncertainty of success of new product introductions, long sales cycles,
improvements to the infrastructure of the Internet, rapid technological change,
growing competition from several market segments, errors in our products,
dependence upon sole and limited source suppliers, potential fluctuations in
component pricing, potential claims of patent infringement by third parties,
potential failure to protect our intellectual property rights, dependence upon
key employees and the ability

                                       21

<PAGE>

to retain employees. Failure to meet any of these and other challenges could
adversely affect our future operating results.

Results of Operations for the Three Months Ended September 30, 2002 Compared
with the Three Months Ended September 30, 2003

     Revenue.

     Our revenue can be divided into three types: hardware, software, and
support and services. Each of our products has components of each revenue type.
Sales of Visual UpTime are primarily classified as hardware revenue. We also
sell licenses related to Visual UpTime that are classified as software revenue.
Revenue related to the Cisco WAPMS product are included in Visual UpTime revenue
and are classified as software revenue. Sales of Visual IP InSight are primarily
classified as software revenue. However, sales of our hardware product, the IP
Service Element (ISE), which embeds certain Visual IP InSight functionality in a
hardware device, are classified as hardware revenue. Sales of Visual eWatcher
and Visual Trinity, both discontinued products, were classified as software
revenue. Sales of our Visual IP InSight subscription service, which we no longer
offer to our customers, were classified as support and services revenue. Sales
of the Visual Internet Benchmark service, which was sold in 2001, were
classified as support and services revenue. Royalties from the Visual Internet
Benchmark service and the Visual Trinity product are classified as support and
services revenue. Sales of CellTracer are classified as hardware revenue. Sales
of technical support, professional services and training for all of our products
are classified as support and services revenue.

     Total revenue was $14.7 million for the three months ended September 30,
2002 compared to $9.4 million for the three months ended September 30, 2003, a
decrease of $5.3 million. The share of our revenue related to service providers
decreased from approximately 79% of revenue for the three months ended September
30, 2002 to 78% for the three months ended September 30, 2003. We anticipate
that the percentage of revenue attributable to our service providers for the
remainder of 2003 will be consistent with the levels achieved during the three
months ended September 30, 2003.

     Hardware revenue. Hardware revenue was $12.0 million for the three months
ended September 30, 2002 compared to $7.1 million for the three months ended
September 30, 2003, a decrease of $4.9 million. The decrease was due primarily
to a decrease in demand for Visual UpTime from AT&T, MCI, Sprint, Equant and our
reseller channel. We believe, in general, that the decrease in demand for Visual
UpTime was primarily the result of increased competition and the continued
downturn in the telecommunications industry, which was reflected in a continued
slowdown in demand for telecommunications products and services and reduced
capital spending by end-user customers. More specifically, we believe that
revenue from AT&T and Equant decreased due to slower deployment of inventory
resulting from decreased spending by end-user customers, thereby resulting in
tighter inventory controls coupled with our loss of business to our competitors.
Revenue from MCI, Sprint and our reseller channel decreased due to decreased
spending by end-user customers coupled with our loss of business to our
competitors.

     Software revenue. Software revenue was $0.1 million for the three months
ended September 30, 2002 and 2003. License revenue for Visual UpTime and Visual
IP InSight was essentially flat from the three months ended September 30, 2002
to the three months ended September 30, 2003. The revenue related to Cisco WAPMS
was insignificant for the three months ended September 30, 2003.

     Support and services revenue. Support and services revenue was $2.5 million
for the three months ended September 30, 2002 compared to $2.2 million for the
three months ended September 30, 2003, a decrease of $0.3 million. The decrease
in support and services revenue was due primarily to decreased revenue for the
Visual Internet Benchmark service of $0.1 million resulting from the
discontinuation of this product. We recognized the final revenue from the Visual
Internet Benchmark service during the three months ended June 30, 2003 when the
last contract expired. We also receive royalty payments from the purchaser on
new contracts. Revenue from royalty payments was flat for the period. Technical
support

                                       22

<PAGE>

revenue was down $0.4 million due to expired contracts for Visual UpTime and IP
InSight that were not renewed. These decreases were offset by an increase in
training and professional services of $0.1 million due to increased demand for
these services.

     Cost of revenue and gross profit.

     Cost of revenue consists of subcontracting costs, component parts,
warehouse costs, direct compensation costs, warranty and other contractual
obligations, royalties, license fees and other overhead expenses related to the
manufacturing operations. Product cost of revenue includes both hardware and
software cost of revenue in the accompanying consolidated statements of
operations. Cost of revenue related to software sales has not been significant.
Support and services cost of revenue includes outsourced benchmark services,
professional services and technical support costs.

     Total cost of revenue was $4.4 million for the three months ended September
30, 2002 compared to $3.1 million for the three months ended September 30, 2003,
a decrease of $1.3 million. Gross profit was $10.2 million for the three months
ended September 30, 2002 compared to $6.2 million for the three months ended
September 30, 2003, a decrease of $4.0 million. Gross margin was 69.9% of
revenue for the three months ended September 30, 2002 compared to 66.7% of
revenue for the three months ended September 30, 2003. The decrease in gross
margin percentage was due primarily to shipments of lower margin hi-speed Visual
Uptime products. This is offset by decreased fixed costs (such as fees paid to
third parties to provide the Visual Internet Benchmark service to customers for
which we had existing contracts), increased high gross margin revenue related to
the recognition of technical support and overall decreased fixed costs in our
manufacturing and support operations due to our cost reduction initiatives
implemented since the fourth quarter of 2000. Our future gross margins may be
affected by a number of factors, including the impact of the rollout of Visual
UpTime Select, product mix, the proportion of sales to service providers,
competitive pricing, manufacturing volumes and an increase in the cost of
component parts. Based on our current product offerings and the level of fixed
cost reductions that has been achieved to date, we expect our future gross
margins to be in the range of 65% to 70%.

     Product cost of revenue. Product cost of revenue, which includes both
hardware and software cost of revenue, was $4.1 million for the three months
ended September 30, 2002 compared to $2.9 million for the three months ended
September 30, 2003, a decrease of $1.2 million. Our software costs of revenue
are insignificant. The gross margin attributable to products was 66.7% and 59.8%
for the three months ended September 30, 2002 and 2003, respectively. The
decrease in gross margin percentage was due primarily to shipments of lower
margin high-speed Visual Uptime products during the three months ended September
30, 2003 partially offset by increased sales of higher margin software.

     Support and services cost of revenue. Support and services cost of revenue,
which includes Visual Internet Benchmark services, professional services and
technical support costs, was $0.4 million for the three months ended September
30, 2002 compared to $0.2 million for the three months ended September 30, 2003,
a decrease of $0.2 million. The gross margin attributable to support and
services was 85.5% and 89.5% for the three months ended September 30, 2002 and
2003, respectively. The increase in gross margin was due primarily to decreased
fixed costs such as fees paid to third parties to provide the Visual Internet
Benchmark service to customers for which we had existing contracts.

     Operating Expenses.

     Research and development expense. Research and development expense consists
primarily 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 $3.1 million for the
three months ended September 30, 2002 compared to $2.6 million for the three
months ended September 30, 2003, a decrease of $0.5 million. The decrease in
research and development expense was due primarily to the workforce reductions
and other cost cutting initiatives implemented during 2002 and 2003 offset by
costs incurred for the release of Visual UpTime Select. For the remainder of the
year,

                                       23

<PAGE>

we intend to incur research and development expense at the level of such expense
in the third quarter of 2003 as a result of our continued investment in Visual
UpTime Select.

     Sales and marketing expense. Sales and marketing expense consists of
compensation for the sales and marketing staff, commissions, pre-sales support,
travel and entertainment expense, trade shows and other marketing programs.
Sales and marketing expense was $4.5 million for the three months ended
September 30, 2002 compared to $4.0 million for the three months ended September
30, 2003, a decrease of $0.5 million. The decrease in sales and marketing
expense was due primarily to the workforce reductions and other cost cutting
initiatives implemented during 2002 and 2003 offset by revised commission plans
resulting from our revised business plan and costs incurred for the release of
Visual UpTime Select. For the remainder of the year, we intend to incur sales
and marketing expense at the level of such expense in the third quarter of 2003
as a result of our continued focus on the control of operating expenses.

     General and administrative expense. General and administrative expense
consists of the costs of executive management, finance, administration and other
activities. General and administrative expense was $1.6 million for the three
months ended September 30, 2002 compared to $1.7 million for the three months
ended September 30, 2003, an increase of $0.1 million. The increase is related
to the hiring costs of our new chief financial officer. For the remainder of the
year, we intend to incur general and administrative expense at the level of such
expense in the second quarter of 2003 as a result of our continued focus on the
control of operating expenses and the one-time nature of the increase in the
third quarter of 2003.

     Interest expense, net. Interest expense, net, was $0.4 million for the
three months ended September 30, 2002 and 2003, which consisted of both cash and
non-cash interest expense related to the convertible Debentures we issued in
March 2002 (see Note 3 of Notes to the Consolidated Financial Statements).

     Net income (loss). Net income for the three months ended September 30, 2002
was $0.7 million compared to net loss of $2.5 million for the three months ended
September 30, 2003, a decrease in income of $3.2 million. The decrease was due
primarily to decreased revenue and decreased gross margin offset by decreases in
operating expenses.

Results of Operations for the Nine Months Ended September 30, 2002 Compared with
the Nine Months Ended September 30, 2003

     Revenue.

     Total revenue was $46.7 million for the nine months ended September 30,
2002 compared to $28.3 million for the nine months ended September 30, 2003, a
decrease of $18.3 million. The share of our revenue related to service providers
decreased from approximately 85% of revenue for the nine months ended September
30, 2002 to 82% for the nine months ended September 30, 2003. We anticipate that
the percentage of revenue attributable to our service providers for the
remainder of 2003 will be consistent with the levels achieved during the nine
months ended September 30, 2003.

     Hardware revenue. Hardware revenue was $31.9 million for the nine months
ended September 30, 2002 compared to $20.2 million for the nine months ended
September 30, 2003, a decrease of $11.7 million. The decrease was due primarily
to a decrease in demand for Visual UpTime from AT&T, Equant, MCI, other service
providers and our reseller channel. We believe, in general, that the decrease in
demand for Visual UpTime was primarily the result of increased competition and
the continued downturn in the telecommunications industry, which was reflected
in a continued slowdown in demand for telecommunications products and services
and reduced capital spending by end-user customers. More specifically, we
believe that revenue from AT&T and Equant decreased due to slower deployment of
inventory resulting from decreased spending by end-user customers, thereby
resulting in tighter inventory control coupled with our loss of business to our
competitors; revenue from MCI and our reseller channel decreased due to
decreased spending by end-user customers coupled with our loss of business to
our competitors. These decreases were offset by an increase in Sprint due to
increased demand.

                                       24

<PAGE>

     Software revenue. Software revenue was $5.2 million for the nine months
ended September 30, 2002 compared to $1.2 million for the nine months ended
September 30, 2003, a decrease of $4.0 million. The decrease in software revenue
was due primarily to a $3.5 million sale of Visual IP Insight to Verizon during
the nine months ended September 30, 2002. Visual IP InSight license revenue from
other customers decreased $0.6 million during the nine months ended September
30, 2003 reflecting the typical quarterly fluctuation in revenue from the sale
of that product due to the timing of sizeable orders from a limited number of
service providers. License revenue for Visual UpTime increased $0.1 million from
the nine months ended September 30, 2002 to the nine months ended September 30,
2003. We recorded our first revenue related to the Cisco WAPMS product during
the nine months ended September 30, 2003. However, the revenue related to Cisco
WAPMS was insignificant.

     Support and services revenue. Support and services revenue was $9.6 million
for the nine months ended September 30, 2002 compared to $7.0 million for the
nine months ended September 30, 2003, a decrease of $2.6 million. The decrease
in support and services revenue was due primarily to decreased technical support
revenue for the Visual UpTime product and Visual Cell Tracer product of $2.0
million. This decrease was due to: 1) the recognition of $0.7 million from
Network Associates ("NAI") for Cell Tracer based on an amended agreement with
NAI that terminated the maintenance obligations during the nine months ended
September 30, 2002 and 2) expired contracts for Visual UpTime support that were
not renewed. Support and services revenue from the Visual Internet Benchmark
service and Visual IP InSight subscription service also decreased by $1.0
million due to expired contracts that have not renewed as a result of the
discontinuation of these products. We recognized the final revenue from the
Visual Internet Benchmark service during the nine months ended September 30,
2003 when the last contract expired. We also receive royalty payments from the
purchaser on new contracts. Royalties also decreased $0.1 million. These
decreases were offset by an increase in training and professional services of
$0.5 million due to increased demand for these services.

     Cost of revenue and gross profit.

     Total cost of revenue was $13.0 million for the nine months ended September
30, 2002 compared to $7.9 million for the nine months ended September 30, 2003,
a decrease of $5.1 million. Gross profit was $33.6 million for the nine months
ended September 30, 2002 compared to $20.4 million for the nine months ended
September 30, 2003, a decrease of $13.2 million. Gross margin was 72.0% of
revenue for the nine months ended September 30, 2002 and 2003. Gross margin
percentage remained unchanged primarily due to decreased fixed costs (such as
fees paid to third parties to provide the Visual Internet Benchmark service to
customers for which we had existing contracts), increased high gross margin
revenue related to the recognition of technical support and overall decreased
fixed costs in our manufacturing and support operations due to our cost
reduction initiatives implemented since the fourth quarter of 2000. This is
offset by a significant sale of Visual IP Insight during the nine months ended
September 30, 2002, which is high gross margin revenue. Our future gross margins
may be affected by a number of factors, including product mix, the proportion of
sales to service providers, competitive pricing, manufacturing volumes and an
increase in the cost of component parts.

     Product cost of revenue. Product cost of revenue was $11.4 million for the
nine months ended September 30, 2002 compared to $7.2 million for the nine
months ended September 30, 2003, a decrease of $4.2 million. Our software costs
of revenue are insignificant. The gross margin attributable to products was
69.4% and 66.4% for the nine months ended September 30, 2002 and 2003,
respectively. The decrease in gross margin was due primarily to a significant
sale of Visual IP Insight during the nine months ended September 30, 2002, which
is high gross margin revenue. This revenue is partially offset by increased
sales of our lower margin high-speed Visual UpTime products.

     Support and services cost of revenue. Support and services cost of revenue
was $1.7 million for the nine months ended September 30, 2002 compared to $0.8
million for the nine months ended September 30, 2003, a decrease of $0.9
million. The gross margin attributable to support and services was 82.4% and

                                       25

<PAGE>

89.1% for the nine months ended September 30, 2002 and 2003, respectively. The
increase in gross margin was due primarily to decreased fixed costs such as fees
paid to third parties to provide the Visual Internet Benchmark service to
customers for which we had existing contracts.

     Operating Expenses.

     Research and development expense. Research and development expense was $9.5
million for the nine months ended September 30, 2002 compared to $7.9 million
for the nine months ended September 30, 2003, a decrease of $1.6 million. The
decrease in research and development expense was due primarily to the workforce
reductions and other cost cutting initiatives implemented during 2002 and 2003
offset by costs incurred for the release of Visual UpTime Select.

     Sales and marketing expense. Sales and marketing expense was $15.7 million
for the nine months ended September 30, 2002 compared to $10.9 million for the
nine months ended September 30, 2003, a decrease of $4.8 million. The decrease
in sales and marketing expense was due primarily to the workforce reductions and
other cost cutting initiatives implemented during 2002 and 2003 offset by
revised commission plans resulting from our revised business plan and costs
incurred for the release of Visual UpTime Select.

     General and administrative expense. General and administrative expense was
$5.4 million for the nine months ended September 30, 2002 compared to $4.2
million for the nine months ended September 30, 2003, a decrease of $1.2
million. The decrease in general and administrative expense was due primarily to
the workforce reductions and other cost cutting initiatives implemented during
2002 and 2003 offset by hiring and transition costs related to our new CFO. In
addition, during 2003, we sold the previously written-off receivables related to
the bankruptcy of WorldCom to an unrelated third party for $0.3 million and
recorded the sale as a reduction to bad debt expense in general and
administrative expense.

     Other income. Other income was $0.5 million for the nine months ended
September 30, 2003, which consisted of a gain on the sale of a previously
written-off investment.

     Interest expense, net. Interest expense, net, was $0.8 million for the nine
months ended September 30, 2002 compared to $1.1 million for the nine months
ended September 30, 2003. The increase of $0.3 million was primarily due to both
cash and non-cash interest expense related to the convertible Debentures we
issued in March 2002 (see Note 3 of Notes to the Consolidated Financial
Statements).

     Net income (loss). Net income for the nine months ended September 30, 2002
was $2.2 million compared to net loss of $3.3 million for the nine months ended
September 30, 2003, a decrease in income of $5.5 million. The decrease was due
primarily to decreased revenue offset by decreases in cost of revenue and
operating expenses.

Liquidity and Capital Resources

     At September 30, 2003, our unrestricted balance of cash and cash
equivalents was $10.1 million compared to $12.7 million as of December 31, 2002,
a decrease of $2.6 million. This decrease was due primarily to cash used in
operations of $3.1 million due to the reduction in accounts payable of $3.8
million offset by other cash provided by operating activities of $0.7 million.
We used $0.8 million of cash to purchase equipment and other fixed assets. Cash
provided by the reduction of our restricted short-term investment (see Notes 1
and 2) was $1.0 million and cash provided by the sale of common stock pursuant
to the exercise of employee stock options and our employee stock purchase plan
was $0.3 million. Current assets exceeded current liabilities by approximately
$9.0 million as of September 30, 2003, down $1.3 million from December 31, 2002.

     We require substantial working capital to fund our business, particularly
to finance inventories, accounts receivable, research and development activities
and capital expenditures. To date, we have

                                       26

<PAGE>

financed our operations and capital expenditures primarily with the proceeds
from our initial public offering completed in February 1998, our operating
income, bank borrowings and the proceeds from the issuance of convertible
Debentures in March 2002. Our future capital requirements will depend on many
factors, including the repayment of the Company's convertible Debentures, the
rate of future revenue growth, if any, as well as our gross margins and our
levels of operating expenses, including product research and development, sales
and marketing and general and administrative expenses.

     Our revenue for the nine months ended September 30, 2003 was $28.3 million,
which was a decrease of $18.3 million compared to the nine months ended
September 30, 2002. In response to the trends of decreasing revenue and
increasing operating expenses that began in the second quarter of 2000 following
our acquisition of Avesta, we initiated restructuring plans beginning 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. We made significant reductions in staff and
other operating costs such as bonus and commission plans, employee benefits,
marketing and other discretionary spending. As a result of these actions and the
reduction of general and administrative expense due to the reversal of bad debt
expense of $0.3 million, our operating expenses were reduced from $30.6 million
for the nine months ended September 30, 2002 to $23.0 million for the nine
months ended September 30, 2003. As a result of these cost reductions, we
returned to profitability in the first quarter of 2002 and remained profitable
for each quarter in 2002. However, due to the significant reduction in revenue
in the first nine months of 2003, we incurred a net loss of $3.3 million for the
period.

     Our ability to generate operating income in the future is dependent upon
not only our continued success in reducing operating expenses, but also our
ability to increase revenue. General market conditions, competitive pressures
and other factors beyond our control may adversely affect our ability to
generate sufficient revenue to enable us to return to profitability. Our ability
to increase revenue may be negatively affected by our dependence on sales to our
service providers. Pressure on capital expenditures and the decline in the
telecommunications industry may delay the rollout of new services offered by our
service providers based on our products. Furthermore, any potential reduction in
demand for value added services or products from the service providers'
customers directly impacts the volume of our products purchased and may impact
our ability to increase revenue.

     The current level of our operating expenses, which includes a substantial
fixed component in the form of compensation, other employee-related costs,
occupancy costs and other costs incurred under contractual arrangements, is
based, in part, on our expectation of future revenue. In the event that the
anticipated operating expense targets are not realized or we do not meet our
revenue goals, we may be required to further reduce our cost structure. While we
are able to further reduce these expenses, should reductions become appropriate,
it would take at least thirty to ninety days for the full effects of any such
further expense reductions to be realized. If revenue levels are below
expectations, operating results are likely to be materially and adversely
affected because we may not be able to reduce operating expenses in sufficient
time to compensate for an unexpected reduction in revenue. There can be no
assurances that we will be able to increase revenue or return to profitability.
Failure to increase revenue and return to profitability coupled with our limited
capital resources and significant accumulated deficit could also result in our
inability to continue as a going concern.

     Based on our anticipated cost structure, our ability to generate net income
in the future is, in large part, dependent on our success in achieving quarterly
revenue of at least $12.0 million to $13.0 million, achieving quarterly gross
margins of 65% to 70% and reducing quarterly operating expenses to $8.0 million
or less. Due to market conditions, competitive pressures, and other factors
beyond our control, there can be no assurances that we will be able to meet
these goals. In the event that the anticipated revenue goals are not met, we may
not be profitable and we may be required to further reduce our cost structure.

     In order to strengthen our financial position and provide cash for working
capital purposes, in March 2002, we issued senior secured convertible Debentures
in the aggregate amount of $10.5 million in a private placement. The Debentures
are due March 25, 2006, are payable in cash or common stock, at our option

                                       27

<PAGE>

provided certain conditions are satisfied, and bear interest at an annual rate
of 5% payable quarterly in cash or common stock, at our option, provided certain
conditions are satisfied. To date, all quarterly interest payments under the
Debentures have been made in cash. The Debentures may be converted currently
into 2,986,093 shares of our common stock at the option of the holders at a
price of $3.5163 per share, subject to certain adjustments. The conversion price
would adjust if we issue certain additional shares of our common stock or
instruments convertible into common stock at a price that is less than the
conversion price of the Debentures. We have the right to require the holders to
convert their Debentures into common stock if the closing price of our common
stock exceeds 175% of the conversion price for 20 consecutive days after
September 26, 2003.

     In connection with the issuance of the Debentures, we also issued warrants
to purchase 828,861 shares of our common stock at an exercise price of $4.2755
per share. If we issue additional shares of common stock or instruments
convertible into common stock at a lower price than the then-effective exercise
price, the exercise price would be adjusted downward to such lower price until
March 25, 2004, and thereafter would be adjusted on a weighted average basis The
warrants expire on March 25, 2007. The holders of the Debentures also received
the right to purchase shares of to-be-created Series A preferred stock and
equity participation rights, which have now expired unexercised. The
Debenture-holders were also granted registration rights.

     The Debentures include a financial target related to our financial
performance during 2003. If our earnings before interest, taxes, depreciation
and amortization, less capital expenditures ("adjusted EBITDA"), as defined in
the Debentures, for the year ended December 31, 2003 are less than $6.5 million,
our Debenture-holders may require that we prepay all or a portion of up to 100%
of the outstanding principal amount of their Debentures, plus accrued interest.
The redemption of each Debenture may be made in cash or common stock at our
option provided certain conditions are satisfied. Issuance of common stock to
repay the debt could result in significant dilution.

     Our adjusted EBITDA for the nine months ended September 30, 2003 was a loss
of $1.2 million. In order for us to meet the financial target for 2003 under the
Debentures, we must achieve adjusted EBITDA during the remainder of 2003 in
excess of $7.7 million. Based on our projections, we do not anticipate meeting
this financial target. If we do not meet this target and are unsuccessful in
renegotiating the target, the Debenture-holders could require us to prepay any
or all of the Debentures at any time after the filing of our annual report on
Form 10-K for the year ended December 31, 2003. Based on our current cash
projections, we may be able to repay the Debentures in cash if such repayment is
required. However, we would not have sufficient cash remaining to fund
operations and would need to seek additional capital through additional
borrowings, a sale of additional securities or a sale of assets. Although we
believe that we have the ability to obtain additional capital, the results of
raising such capital may be dilutive. There can be no assurance that such
additional capital will be available, or available on terms that are reasonable
or acceptable to us. If we are unable to raise sufficient cash, our business and
financial condition would be materially adversely affected such that we may need
to consider other alternatives for our future. Our limited capital resources and
significant accumulated deficit could also result in our inability to continue
as a going concern.

     In addition, under the terms of the Debentures, a number of events could
trigger the Debenture-holders' right to force early repayment of 115% of the
outstanding principal plus accrued and unpaid interest owed under the
Debentures. Events constituting a triggering event include:

     .   our default on other indebtedness or obligations under any other
         debenture, any mortgage, credit agreement or other facility, indenture
         agreement, factoring agreement or other instrument under which there
         may be issued, or by which there may be secured or evidenced, any
         indebtedness for borrowed money or money due under any long term
         leasing or factoring arrangement in an amount exceeding $0.5 million;

     .   failure to have our common stock listed on an eligible market;

                                       28

<PAGE>

     .   our bankruptcy;

     .   engaging in certain change in control, sale of assets or redemption
         transactions;

     .   failure to timely file our 2003 annual report on Form 10-K no later
         than March 31, 2004; and

     .   certain other failures to perform our obligations under the Debenture
         agreement and/or the related agreements.

     In connection with the issuance of the Debentures, the outstanding amounts
borrowed from the bank under our accounts receivable-based and our equipment
financing arrangements were repaid, and the related loan agreements were
terminated. The standby letter of credit, as amended, issued by the bank in
December 2000, in the amount of $1.5 million, with an expiration date of
September 30, 2004 (the original expiration date was March 31, 2002), remains
outstanding and secured with our pledge of a CD in the amount of $1.5 million
that matures on December 30, 2003. The letter of credit was $2.5 million as of
December 31, 2002. As the result of an updated analysis of their inventory and
credit risk, our subcontract manufacturer agreed in the first quarter of 2003 to
a reduction of the letter of credit from $2.5 million to $2.0 million. The
corresponding $500,000 reduction in the amount of the pledged CD was a source of
cash for us in the first quarter of 2003. In the third quarter of 2003, our
subcontract manufacturer agreed to reduce the letter of credit again from $2.0
million to $1.5 million. The corresponding $500,000 reduction in the amount of
the pledged CD was a source of cash for us in the third quarter of 2003. We do
not expect this requirement to change again during the remainder of the year. In
July 2003, the bank issued a standby letter of credit in favor of one of the
Company's customers, that expires on July 30, 2004 in the amount of $30,000. We
secured the letter of credit with a pledge of a CD in the amount of $30,000 that
matures on November 30, 2003. The CDs are recorded as restricted short-term
investments in the accompanying consolidated balance sheets as of December 31,
2002 and September 30, 2003.

     Future minimum payments as of September 30, 2003 under the Debentures and
non-cancelable operating leases are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                  Operating
                                                                    Debentures     Leases
                                                                    ----------    ---------
<S>                                                                 <C>           <C>
          2003 ................................................     $      132    $     464
          2004 ................................................            528        1,883
          2005 ................................................            528        1,863
          2006 ................................................         10,622        1,886
          Thereafter ..........................................             --           --
                                                                    ----------    ---------
               Total minimum payments .........................         11,810    $   6,096
                                                                                  =========
          Interest element of payments ........................         (1,310)
                                                                    ----------
          Present value of future minimum payments ............         10,500
          Unamortized debt discount ...........................         (1,952)
          Current portion .....................................             --
                                                                    ----------
          Long-term portion ...................................     $    8,548
                                                                    ==========
</TABLE>

     We have purchase commitments for inventory purchased by certain suppliers
on our behalf. If such inventory is not used within a specified period of time,
we discontinue a product for which the suppliers have made purchases or we
terminate a relationship with the supplier for which we have set minimum

                                       29

<PAGE>

inventory requirements, we are required to purchase the inventory from the
suppliers. Additionally, if we cancel a purchase order placed on a supplier, we
may be subject to certain costs and fees.

     We do not engage in any off-balance sheet financing arrangements. In
particular, we do not have any interest in so-called limited purpose entities,
which include special purpose entities and structured finance entities.

     The future success of our Company will be dependent upon, among other
factors, our ability to generate adequate cash for operating and capital needs.
We are relying on our existing balance of cash and cash equivalents together
with future sales and the collection of the related accounts receivable, at
least at the levels set forth in our business plan, to meet our future cash
requirements for at least the next twelve months. If cash provided by these
sources is not sufficient, we will be required to further reduce our
expenditures for operations or to seek additional capital through other means
that may include additional borrowings, the sale of equity securities or the
sale of assets. There can be no assurance that additional capital will be
available, or available on terms that are reasonable or acceptable to us. If we
are unable to generate additional cash, our business and financial condition may
be materially and adversely affected such that we may need to consider other
alternatives for our future.

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

     To determine if a fee is fixed or determinable, we evaluate rights of
return, customer acceptance rights, if applicable, and multiple-element
arrangements of products and services to determine the impact on revenue
recognition. Our agreements generally have not included rights of return except
in certain reseller relationships that include stock rotation rights. If
offered, rights of return only apply to hardware. If an agreement provides for a
right of return, we typically recognize revenue when the right has expired, a
specific end-user customer has been identified, or the product has been resold
by the master distributor. If we have sufficient historical information to allow
us to make an estimate of returns in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return
Exists," we defer an estimate for such returns and recognize the remainder at
the date of shipment. If an agreement provides for evaluation or customer
acceptance, we recognize revenue upon the completion

                                       30

<PAGE>

of the evaluation process, acceptance of the product by the customer and
completion of all other criteria. Most of our sales are multiple-element
arrangements and include hardware, software, and technical support. Our software
sales sometimes include professional services for implementation but these
services are not a significant source of our revenue. Training is also offered
but is not a significant source of our revenue. Revenue from multiple-element
arrangements is recognized using the residual method whereby the fair value of
any undelivered elements, such as customer support and services, is deferred and
any residual value is allocated to the software and recognized as revenue upon
delivery. The fair values of any undelivered elements, typically professional
services, technical support and training, have been determined based on our
specific objective evidence of fair value, which is based on the price that we
charge customers when the element is sold separately.

     Our technical support contracts require us to provide technical support and
unspecified software updates to customers on a when and if available basis. We
recognize customer support revenue, including support revenue that is bundled
with product sales, ratably over the term of the contract period, which
generally ranges from one to three years. We recognize revenue from services
when the services are performed. Subscription fees for our Benchmark reports are
recognized upon delivery of the reports. The remaining subscription fees were
complete in May 2003 when the final contract under which we were obligated to
provide service was complete. We do not anticipate any future revenue from the
Visual Internet Benchmark service.

     We sell our products directly to service providers, through indirect
channels and to end-user customers. Certain reseller customers have stock
rotation rights, under which the customer can exchange previously purchased
products for other products of equal or greater cost, subject to certain
limitations, based on their end-user customers' requirements. We recognize
revenue under these arrangements once the stock rotation right expires, a
specific end-user customer has been identified, or the product has been resold
by our master distributor.

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

Inventory

     Because of the order lead times required to obtain manufactured product, we
must maintain sufficient quantities of inventory of all of our products to meet
expected demand. If actual demand is much lower than forecasted, we may not be
able to dispose of our inventory at or above its cost. We write down our
inventory for estimated excess and obsolete amounts to the lower of cost or
market value. The estimates are based on historical trends, forecasts and
specific customer or transaction information. It is generally our policy to
write-down inventory to the amount that we expect to sell within a one-year
period. If future demand is lower than currently estimated, additional
write-downs of our inventory may be required.

Allowance for Bad Debt

     We grant credit terms without collateral to our customers and, prior to
2002, had not experienced any significant credit related losses. During 2002,
the Company wrote-off approximately $0.7 million in receivable balances due from
MCI, following MCI's bankruptcy filing, against the allowance for bad debts.
During the nine months ended September 30, 2003, we sold the previously
written-off receivables for MCI to an unrelated third party for approximately
$0.3 million. Accounts receivable include allowances to record receivables at
their estimated net realizable value, which is determined based on estimates for
bad debt. The estimates are based on historical information and specific review
of outstanding receivables at

                                       31

<PAGE>

the end of each reporting period. If future events occur that impact our
customers, additional write-downs of our accounts receivable may be required.

Factors That May Affect Future Results

     Our operations and financial condition are subject to certain other risks
and uncertainties, including among others, our accumulated deficit and
uncertainty of future profitability and possible fluctuations in financial
results, our likely inability to meet the financial target in our Debentures
during 2003, dependence on network service providers, substantial fixed
operating costs, possible dilution to our common stockholders, dependence on
sales to key customers, including MCI, dependence on a sole-source subcontract
manufacturer for some product materials, potential delisting and reduced
liquidity of our shares resulting from failure to meet Nasdaq listing
requirements, the potential triggering of early repayment of our Debentures, the
downturn in the telecommunications industry, uncertainty of success of new
product introductions, long sales cycles, improvements to the infrastructure of
the Internet, rapid technological change, growing competition from several
market segments, errors in our products, dependence upon sole and limited source
suppliers, potential fluctuations in component pricing, potential claims of
patent infringement by third parties, potential failure to protect our
intellectual property rights, dependence upon key employees and our ability to
retain employees. In addition the military actions being taken in Iraq by the
United States and its allies have increased the already substantial economic and
political uncertainties that could have an adverse effect on Visual Networks'
business. The market for our products is growing 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. Failure to
meet any of these and other challenges could adversely affect our future
operating results.

     This Quarterly Report on Form 10-Q contains forward-looking information
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, and is subject to the safe harbor
created by those sections. Our future results may be impacted by the various
important factors summarized in this Quarterly Report and more fully discussed
in our Annual Report on Form 10-K for the year ended December 31, 2002.

Item 3. Qualitative and Quantitative Disclosure About Market Risk

     During 2002, we issued long-term debt in the form of the convertible
Debentures discussed in Note 3 of Notes to Consolidated Financial Statements.
The convertible Debentures bear interest at a fixed annual rate of 5%. We are
also exposed to market risk from changes in interest rates. Our investment
policy restricts us to investing only in investment-grade securities. A failure
of these investment securities to perform at their historical levels could
reduce the interest income realized by us. As of September 30, 2003, the fair
value of our long-term debt did not differ materially from its carrying value.

     While substantially all of our product sales to date have been made to
customers in the United States, we plan to sell our products to foreign
customers at prices denominated in U.S. dollars. However, if we commence selling
material volumes of product to such customers at prices not denominated in U.S.
dollars, we intend to adopt a strategy to hedge against fluctuations in foreign
currency.

Item 4. Controls and Procedures

     Our management, under the supervision and with the participation of
Lawrence S. Barker, our President and Chief Executive Officer, and George J.
Roberts, Executive Vice President and Chief Financial Officer, performed an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the end of the quarter covered by this report. Based on that
evaluation, Messrs. Barker and Roberts have concluded that our disclosure
controls and procedures were effective and assure that the information required
to be

                                       32

<PAGE>

included in this report has been properly collected, processed, and timely
communicated to those responsible in order that it may be included in this
report. There have been no significant changes in the Company's internal
controls over financial reporting in connection with this evaluation that has
materially affected, or is reasonably likely to materially affect, the company's
internal control over financial reporting.

                                       33

<PAGE>

                          PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 2.  Changes in Securities and Use of Proceeds

     None.

Item 3.  Defaults Upon Senior Securities

     None.

Item 4.  Submission of Matters to Vote of Security Holders

      None.

Item 5.  Other Information

     None.

Item 6.  (a) Exhibits

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

Exhibit      Number Description

3.1$         Amended and Restated Certificate of Incorporation of the Company.

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

3.2*         Restated By-Laws of the Company.

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

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

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

10.1*        1994 Stock Option Plan.

10.2*        1997 Omnibus Stock Plan, as amended.

10.2.1**     Amendment No. 2 to the 1997 Omnibus Stock Plan (related to Exhibit
             10.2).

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

                                       34

<PAGE>

10.3.1**        Amendment No. 2 to the 1997 Directors' Stock Option Plan
                (related to Exhibit 10.3).

10.4!!          2000 Stock Incentive Plan, as amended.

10.4.1**        Amendment No. 1 to the 2000 Stock Incentive Plan (related to
                Exhibit 10.4).

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).

10.5.2&&        Agreement, dated July 25, 2002, by and between the Company and
                MCI WorldCom Network Services, Inc.

10.5.3!         Amendment to the Agreement by and between the Company and MCI
                WorldCom  Network  Services,  Inc.  (related to Exhibit 10.5.2).

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

10.6.1          Amendment No. Two to Master Purchase Agreement,  dated as of May
                23, 2003, between  Sprint/United  Management Company and the
                Company (related to Exhibit 10.6).

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).

10.9&&&         2003 Stock Incentive Plan.

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

10.20$$         1999 Employee Stock Purchase Plan, as amended April 11, 2001
                and January 9, 2002.

10.28@@@        Employment Agreement, dated April 28, 2003, by and between the
                Company and Lawrence S. Barker.

                                       35

<PAGE>

10.29@@@        Nonstatutory Stock Option Grant Agreement, dated April 28, 2003,
                by and between the Company and Lawrence S. Barker.

10.30!!!        Terms of Employment, dated July 27, 2000, by and between the
                Company and Steve Hindman.

10.31&&&&       Terms of Employment, dated January 2, 2003, by and between the
                Company and Wayne Fuller.

10.32&&&&       Terms of Employment, dated December 31, 2002, by and between the
                Company and Patrick Clark.

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

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

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

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

10.37**         OEM Software License Agreement between Cisco Systems, Inc. and
                the Company, dated December 3, 2002.

10.37.1**       Amendment No. 1 to the OEM Software License Agreement between
                Cisco and the Company, effective December 3, 2002 (related to
                Exhibit 10.37).

10.38&&&&       Separation Agreement, dated May 8, 2003, by and between the
                Company and Peter J. Minihane.

10.39           Employment Agreement, dated August 1, 2003, by and between the
                Company and George J. Roberts.

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

31.1            Certification of the Principal Executive Officer pursuant to
                Section 302 of the Sarbanes-Oxley Act of 2002.

31.2            Certification of the Principal Financial Officer pursuant to
                Section 302 of the Sarbanes-Oxley Act of 2002.

32.1            Certification of the Principal Executive Officer pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002.

32.2            Certification of the Principal Financial Officer pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002.

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

                                       36

<PAGE>

**              Incorporated herein by reference to the Company's Annual Report
                on Form 10-K for the year ended December 31, 2002.

***             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-4, No. 333-33946.

@@              Incorporated herein by reference to the Company's Current Report
                on Form 8-K filed March 27, 2002.

@@@             Incorporated  herein by reference to the Company's Quarterly
                Report on Form 10-Q for the three months ended March 31, 2003.

$               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 24, 2002.

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

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

++              Portions of this Exhibit were omitted and have been filed
                separately with the Secretary of the Commission pursuant to the
                Company's Application Requesting Confidential Treatment under
                Rule 24b-2 of the Securities Exchange Act.

!               Incorporated  herein by reference to the Company's Quarterly
                Report on Form 10-Q for the three months ended September 30,
                2002.

!!              Incorporated  herein by reference to the Company's Quarterly \
                Report on Form 10-Q for the three months ended June 30, 2000.

!!!             Incorporated  herein by reference to the Company's  Quarterly
                Report on Form 10-Q for the three months ended June 30,
                2001.

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

&               Incorporated  herein by reference to the Company's Quarterly
                Report on Form 10-Q for the three months ended March 31, 2002.

&&              Incorporated  herein by reference to the Company's  Quarterly
                Report on Form 10-Q for the three months ended June 30, 2002.

                                       37

<PAGE>

&&&             Incorporated herein by reference to the Company's Definitive
                Proxy Statement on Schedule 14A filed April 29, 2003.

&&&&            Incorporated herein by reference to the Company's Quarterly
                Report on Form 10-Q for the three months ended June 30, 2003.


(b)   Reports on Form 8-K

      (1)   On July 17, 2003, we filed a Form 8-K announcing actual financial
            results for the second quarter of 2003.

      (2)   On August 19, 2003, we filed a Form 8-K announcing the appointment
            of George J. Roberts as Executive Vice President and Chief Financial
            Officer of the Company.

                                       38

<PAGE>

                                   SIGNATURES

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

                                       VISUAL NETWORKS, INC.

                                       By: /s/ Lawrence S. Barker
                                           -----------------------
                                           Lawrence S. Barker
                                           President and Chief Executive Officer

Date:  November 14, 2003

                                       39

<PAGE>

                                                                  Exhibit 10.6.1

                              AMENDMENT NO. TWO TO
                            MASTER PURCHASE AGREEMENT

                                     BETWEEN

                        SPRINT/UNITED MANAGEMENT COMPANY
                                       AND
                        VISUAL NETWORKS OPERATIONS, INC.

         This Amendment No. Two ("Amendment No. Two") to Master Purchase
Agreement CM90573FJC ("Agreement") effective May 23, 2003 ("Amendment No. Two
Effective Date") is between Sprint/United Management Company, a Kansas
corporation ("Sprint") and Visual Networks Operations, Inc., a Delaware
corporation ("Supplier"). Except as otherwise indicated, defined terms in this
Amendment have the same meaning as in the Agreement.

Background

         Supplier and Sprint entered into the Agreement May 22, 2000.

         Previous amendments to the Agreement are as follows:
                .    Amendment No. One effective June 27, 2002
                .    Distribution Annex between Visual and Sprint North Supply
                     effective December 20, 2002

Sprint and Supplier agree to modify the Agreement as set forth in this Amendment
No. Two.

         The parties agree as follows:

Amendment

The following sentence is added to the end of Section 2.1 Term.

                Upon the expiration of the initial thirty-six (36) month term,
         the Agreement will renew for another thirty-six (36) month term.

The following section is added to section 2.0 TERM AND TERMINATION

                2.5  Sprint Services

     Supplier will use Sprint as a primary provider of telecommunications
services. Sprint will offer services at competitive prices based on Supplier's
volume. Supplier will give Sprint an opportunity to bid on each of Supplier's
telecommunications services as its current commitments expire and, if Sprint's
bid is the most competitive, will select Sprint as its primary services provider
for that service. Telecommunications services include voice (wireline and
wireless), data, Internet connectivity, local, phone systems, teleconferencing
including audio and video.

         C.     The following new section is added to section 11.0 PRICE AND
                PRICE WARRANTY

                11.3 Sprint Discounts

                                       40

<PAGE>

                                       ***

         D.     Section 12.2 under Section 12.0 INVOICING AND PAYMENT is deleted
                in its entirety and replaced with the following:

     Sprint may specify additional reasonable invoicing instructions on the
Order. Supplier may not invoice Sprint until Deliverables are shipped, or
Services including Support Service have been accepted by Sprint. Payment is due
*** from the later of (a) receipt of valid invoice, or (b) Sprint's receipt of
the Deliverables or acceptance of the Services.

         E.     Section 29.6 Support Service Fee is deleted in its entirety and
                replaced with the following:

                                       ***

         F.     Section 33.3 Training is deleted in its entirety and replaced
                with the following:

                *** If a Sprint employee registers for training and does not
                cancel at least 5 business days prior to the training, then the
                appropriate number of days will be subtracted from Sprint's
                annual total. Exceptions may be granted at the discretion of the
                Supplier. Supplier shall provide a quarterly training report
                within 10 days after the end of each quarter. The report shall
                include the number of training days used, number of days
                remaining, names of employees who were trained, courses taken,
                and dates for the courses. This report will be provided to
                Jennifer Wallis.

         G.     The following section is added to Section 33 Other

                33.5  Installation Reports

     Sprint agrees to provide monthly Installation reports to Supplier no later
than ten (10) days after the end of the month to which the report relates. These
Installation reports shall contain information regarding the end users or
customers of Sprint at whose premises Sprint installed Equipment during a month.
The Installation reports will contain the following: the customer/end user name,
the installation address(es) and the Equipment installed at the customer or end
user during the month.

         H.     The parties agree to modify Exhibit B, Deliverables, Services,
                Prices and Discounts. Therefore, Exhibit B is deleted and
                replaced with the amended Exhibit B attached to this Amendment
                No. Two.

         I.     The following sentence is added to the end of Section 7.2
                Cancellation of Order for Convenience:

     If Sprint desires to return equipment within 10 days of receipt, VNWK will
use commercially reasonable efforts to assist Sprint to resolve that situation
to Sprint's satisfaction.


*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission pursuant to a confidential treatment request.

                                       41

<PAGE>

General

           Other than as set forth above, the Agreement remains unchanged and in
                   full force and effect. In the event of a conflict between the
                   terms of the Agreement, (previous Amendments) and this
                   Amendment No. Two, this Amendment No. Two will control.

           This Amendment No. Two executed by authorized representatives of
                   Sprint and Supplier incorporates the terms and conditions of
                   the Agreement.

SPRINT/UNITED MANAGEMENT                 VISUAL NETWORKS OPERATONS
COMPANY                                  INC.

/s/ David B. Heyner                      /s/ Jefferson D. Norton
----------------------------------       ---------------------------------------
 (signature)                             (signature)

David B. Heyner, Group Manager           Jefferson D. Norton, Corporate Counsel
----------------------------------       ---------------------------------------
(typed name and title)                   (typed name and title)

August 14, 2003                          August 21, 2003
----------------------------------       ---------------------------------------
(date)                                   (date)


                                    Exhibit B


                                       ***




*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission pursuant to a confidential treatment request.

                                       42

<PAGE>

                                                                   Exhibit 10.39

                              EMPLOYMENT AGREEMENT

    This Employment Agreement (this "Agreement") is entered into as of August 1,
2003, by and between Visual Networks Operations, Inc., a company organized under
the laws of Delaware ("Visual" or the "Employer"), and George J. Roberts, an
individual (hereafter the "Executive").

                                   WITNESSETH:

    WHEREAS, VISUAL desires to employ the Executive, and the Executive desires
to accept such employment, on the terms and conditions set forth herein;

    WHEREAS, VISUAL and the Executive have entered into a Confidentiality,
Non-Disclosure, And Non-Solicitation Agreement (the "Non-Solicitation
Agreement");

    NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, and for other good and valuable consideration, the sufficiency of
which is hereby acknowledged, and intending to be legally bound hereby, VISUAL
and Executive hereby agree as follows:

                                    ARTICLE 1

                             POSITION OF EMPLOYMENT

1.1    Title and Position. VISUAL agrees to employ Executive in the following
       position: Executive Vice President and Chief Financial Officer.

1.2    Start Date. August 19, 2003.

1.3    Exclusive Devotion of Business Time. VISUAL agrees to employ the
       Executive and the Executive agrees to devote his full business time,
       effort, skills and loyalty to the business of VISUAL, to effectively
       carry out his responsibilities to VISUAL hereunder and to render his
       services and skills in the furtherance of the business of VISUAL, except
       for during permitted vacation periods and reasonable periods of illness
       or other incapacity. This Section 1.2 does not prevent the Executive
       from: (i) serving on civic and charitable boards, subject to VISUAL's
       policies and standards; and (ii) managing his investments and the
       investments of his immediate family, subject VISUAL's policies and
       standards. Despite anything in this Section 1.2 to the contrary, the
       activities referenced in clauses (i) and (ii) above shall not,
       individually or in the aggregate, interfere with the performance of the
       Executive's duties under this Agreement. To the extent that Executive
       desires to act as a member of the Board of Directors of another entity,
       VISUAL and the Executive shall reasonably discuss and attempt to come to
       an arrangement suitable to both the Executive and VISUAL.

1.4    Conflict with Company Policies. The terms and conditions of Executive's
       employment will, to the extent not addressed in this Agreement, be
       governed by VISUAL's company policies ("Policies"). In the event of a
       conflict between this Agreement and the Policies, the terms of this
       Agreement shall govern.

                                    ARTICLE 2

                        DUTIES, AUTHORITY AND PERFORMANCE

                                       43

<PAGE>

2.1    Performance. Executive acknowledges and agrees that he is being offered a
       position of employment by VISUAL with the understanding that he possesses
       a unique set of skills, abilities, and experiences which will benefit
       VISUAL. Executive agrees that his continued employment with VISUAL is
       contingent upon his successfully performing his duties as set forth in
       this Agreement.

2.2    Duties and responsibilities. VISUAL agrees to employ the Executive as the
       Executive Vice President and Chief Financial Officer of VISUAL. Executive
       shall report to the Chief Executive Officer (the "CEO") of Visual
       Networks, Inc. The primary responsibilities of the Executive shall be
       determined by the CEO from time to time. On the date hereof, the duties
       and responsibilities of the Executive generally are as follows:

       2.2.1  Executive shall render to the very best of his ability, on behalf
              of VISUAL, and shall undertake diligently, all duties assigned to
              him by the CEO.

       2.2.2  In the performance of the Executive's duties hereunder, he must
              comply in each and every respect with applicable laws, rules and
              regulations applicable to VISUAL.

       2.2.3  As Executive Vice President and Chief Financial Officer of VISUAL,
              and in support of the duties assigned to him by the CEO, Executive
              is responsible for structuring and running the financial
              operations of VISUAL and providing functional leadership in the
              areas of accounting, reporting, treasury, cash management,
              planning/forecasting, capital spending, risk management, and
              legal. Executive must also effectively manage and administer the
              day-to-day execution of these areas.

       2.2.4  This position is based in Rockville, Maryland, and the Executive
              understands and agrees that he is expected to live in the
              Washington, D.C. metropolitan area. The Executive acknowledges,
              however, that he may have to travel and work in different
              locations for business reasons from time to time as is reasonably
              necessary or advisable for the performance of his duties
              hereunder.

2.3    Cooperation. During the term of this Agreement and any time thereafter,
       the Executive agrees to give prompt written notice to VISUAL of any claim
       or injury relating to VISUAL, and to fully cooperate in good faith and to
       the best of his ability with VISUAL in connection with all pending,
       potential or future claims, investigations or actions which directly or
       indirectly relate to any transaction, event or activity about which the
       Executive may have knowledge because of his employment with VISUAL. Such
       cooperation shall include all assistance that VISUAL, its counsel, or its
       representatives may reasonably request, including reviewing and
       interpreting documents, meeting with counsel, providing factual
       information and material, and appearing or testifying as a witness.
       Should Executive be required to cooperate under the provisions of this
       Section 2.3 after termination of his employment with VISUAL, then he
       shall be reimbursed by VISUAL for all reasonable costs and expenses
       related to his cooperation hereunder.

2.4    Duty of Loyalty. Executive acknowledges and agrees that he owes a
       fiduciary duty of loyalty to act at all times in the best interests of
       VISUAL.

2.5    Business Opportunities. All business opportunities presented to
       Executive: (i) by reason of Executive's employment by VISUAL; or (ii)
       relating to the businesses and activities engaged in (or contemplated to
       be engaged in) by VISUAL or any affiliate of VISUAL prior to and as of
       the date hereof or during the term hereof, shall be owned by, and belong
       exclusively to, VISUAL, and the Executive shall have no personal interest
       or rights therein or thereto. Executive shall promptly disclose any such
       business opportunity to VISUAL and execute and deliver to VISUAL, without
       additional compensation, such instruments as

                                       44

<PAGE>

         VISUAL may require from time to time to evidence its ownership of any
         such business opportunity.

                                    ARTICLE 3

                            COMPENSATION AND BENEFITS

3.1      Base Salary. Executive shall be paid a base salary of two hundred
         twenty-five thousand dollars ($225,000) annually (the "Base Salary"),
         subject to applicable federal, state, and local withholding, such Base
         Salary to be paid to Executive on a semi-monthly basis. VISUAL may, in
         its sole discretion, increase the amount of Base Salary effective for
         any specified year or part thereof during the term of this Agreement.

3.2      Options. Executive shall be granted nonstatutory stock options to
         purchase three hundred twenty-five thousand (325,000) shares of common
         stock of VISUAL (the "Initial Grant"), issued and pursuant to the
         Nonstatutory Stock Option Grant Agreement (the "Grant Agreement") dated
         August 18, 2003 between VISUAL and Executive. Vesting of the Initial
         Grant shall be as described in the Grant Agreement.

3.3      Annual Bonus. A bonus pool equal to forty percent (40%) of Executive's
         Base Salary shall be available for Executive. The CEO, with approval
         from the Board of Directors of Visual (the "Board"), will determine the
         performance metrics required for payment of all or part of the annual
         bonus as well as payout intervals, if any. The CEO, with approval from
         the Board, shall, in his sole discretion, determine what portion of the
         bonus pool, if any, will be paid.

3.4      Signing Bonus. Executive shall receive a one time signing bonus of
         twenty-five thousand dollars ($25,000). This bonus will be paid on the
         first regularly scheduled payroll following Executive's date of hire
         and will be subject to all federal, state, and local withholdings as
         required by law.

3.5      Relocation Costs. VISUAL agrees to pay directly for packing,
         transporting, and delivering of Executive's household goods from the
         original, primary residences in Omaha, NE and Princeton, NJ to the new
         residence in the Washington, D.C. metropolitan area, including
         reasonable packing materials, insuring such goods during the move and
         reasonable appliance disconnect and hook-up charges. Additionally,
         VISUAL shall pay to Executive a one-time moving allowance of fifty
         thousand dollars ($50,000) for all other moving incidentals including,
         but not limited to, automobile and drivers' license fees and cable,
         phone, DSL and/or satellite hook-up and disconnect fees. The moving
         allowance will be "grossed up" such that after all applicable taxes,
         Executive receives the full fifty thousand dollars ($50,000). For up to
         ninety (90) days after Executive's start date, for so long as Executive
         has not completed his move to the metropolitan Washington, D.C. area,
         VISUAL will reimburse Executive for reasonable transportation, meal and
         temporary housing expenses incurred by Executive in travelling to
         Rockville, Maryland for the performance of his duties.

3.6      Employee Benefits. During the period that Executive is employed by
         VISUAL and for such longer period as required by applicable law,
         Executive shall be eligible to participate in all employee benefit
         plans, policies, programs, or perquisites in which other VISUAL
         employees participate. Executive shall accrue Paid Time Off ("PTO") at
         the rate of twenty (20) days per year.

         Details of VISUAL's insurance plans, including benefit amounts,
         limitations and restrictions are described in the summary plan
         descriptions provided to the Executive. If there is any difference
         between the summary plan descriptions and the information set

                                       45

<PAGE>

         forth in this Agreement, then the information contained in the summary
         plan descriptions takes precedence.

3.7      Reimbursement for expenses. VISUAL shall reimburse the Executive for
         all ordinary, necessary and reasonable out-of-pocket expenses incurred
         by the Executive for the benefit of VISUAL upon presentation of
         appropriate documentation in accordance with VISUAL's policies in
         effect from time to time.

                                    ARTICLE 4

                            TERMINATION OF EMPLOYMENT

4.1      Term. Executive`s employment by VISUAL shall extend for a one (1) year
         term from August 18, 2003 through August 17, 2004. Additionally, either
         VISUAL or Executive may terminate this employment relationship at any
         time, for any reason or for no reason, as provided in Sections 4.2 and
         4.3 hereof.

4.2      Executive's Right to Terminate. The Executive has the right to
         terminate his employment under this Agreement at any time during the
         course of this Agreement by giving ninety (90) days notice in writing
         to the Board (the "Notice"). The Notice period may be shortened by
         mutual agreement of the parties. During the Notice period, Executive
         must fulfill all his duties and responsibilities set forth in this
         Agreement, and use his best efforts to train and support his
         replacement, if any. Executive's salary and benefits will remain
         unchanged during the Notice period.

4.3      VISUAL's Right to Terminate. VISUAL has the right to terminate
         immediately the Executive's employment under this Agreement at any time
         for any of the following reasons:

         4.3.1  Executive's death; or

         4.3.2  Executive's "Disability", which for purposes of this Agreement
                means the Executive's incapacitation by accident, sickness or
                other circumstances which, in the reasonable good faith
                determination of the Board, renders Executive mentally or
                physically incapable of performing the duties and services
                required of him hereunder in substantially the same manner and
                to the extent required hereunder prior to the commencement of
                such Disability, either with or without reasonable
                accommodation, on a full-time basis for a period of at least 90
                consecutive days or for a period of six (6) non-consecutive
                months of the preceding eighteen (18) month period; or

         4.3.3  For "Cause", which for purposes of this Agreement shall mean:

                4.3.3.1 The Executive has engaged in conduct which: (A) resulted
                in a conviction of or plea of guilty or no contest to a
                misdemeanor involving moral turpitude or involving the property
                of VISUAL; or (B) resulted in a conviction of or plea of guilty
                or no contest to a felony under the laws of the United States or
                any state or political subdivision thereof; or

                4.3.3.2 The Executive: (A) commits a breach of his fiduciary
                duty to VISUAL or any of its affiliates; or (B) commits an act
                of gross negligence; or (C) engages in willful misconduct; or
                (D) engages in any transaction which the Executive knows or
                should have known would constitute self-dealing or a conflict of
                interest between the Executive and VISUAL and in which the
                Executive does or would

                                       46

<PAGE>

                receive any direct or indirect economic or pecuniary benefit
                without prior disclosure of such transaction to VISUAL; or

                4.3.3.3 The Executive violates the internal procedures or
                policies of VISUAL in a manner which has a material adverse
                effect on the reputation, business or prospects of VISUAL, such
                as conduct constituting employment discrimination or sexual
                harassment; or

                4.3.3.4 Material default or other material breach by Executive
                of his obligations hereunder; or

                4.3.3.5 Failure by to perform diligently and competently his
                duties hereunder after written notice from VISUAL of such
                failure and thirty (30) days to remedy the deficiency described
                in such notice.

4.4      Effect of Termination on Compensation.

         4.4.1  Termination by VISUAL Without Cause or Upon Change of Control.
         If Executive's employment hereunder shall be terminated by the Employer
         without Cause, or upon a Change of Control, VISUAL agrees to provide
         Executive with severance pay, payable according to normal payroll
         practice, amounting to twelve (12) months of the Executive's then
         applicable Base Salary, (the "Severance Pay"). In the event that
         Executive breaches any of the provisions of this Agreement (including
         but not limited to Executive's obligation to cooperate during the
         Notice period and/or the Non-Solicitation Agreement), all compensation
         and benefits hereunder shall cease immediately, Executive's termination
         shall be treated as if it had been a termination for Cause, and
         Executive shall be required to repay VISUAL any Severance Pay received
         hereunder.

         4.4.2  Termination by Executive's Resignation or by Employer for Cause,
         Death or Disability. If Executive's employment is terminated by
         Executive by a voluntary resignation (for any reason or no reason), or
         for death, Disability or Cause (as those terms are defined in sections
         4.3.2 and 4.3.3 herein), all compensation and benefits payable
         hereunder shall terminate contemporaneously with the date of the
         Executive's termination of employment. Additionally, If Executive's
         employment is terminated by Executive by a voluntary resignation (for
         any reason or no reason), or for Cause (as that term is defined in
         section 4.3.3 herein) before August 18, 2004, Executive will repay to
         VISUAL a pro-rated amount of all amounts paid by VISUAL under Sections
         3.4 and 3.5 hereof.

                                    ARTICLE 5

                               GENERAL PROVISIONS

5.1      Notices. All notices and other communications required or permitted by
this Agreement to be delivered by VISUAL or Executive to the other party shall
be delivered in writing to the address shown below, either personally, by
facsimile transmission or by registered, certified or express mail, return
receipt requested, postage prepaid, to the address for such party specified
below or to such other address as the party may from time to time advise the
other party, and shall be deemed given and received as of actual personal
delivery, on the first business day after the date of delivery shown on any such
facsimile transmission (with confirmed receipt) or upon the date or actual
receipt shown on any return receipt if registered, certified or express mail is
used, as the case may be.

                                       47

<PAGE>

         Employer:         Visual Networks Operations, Inc.
                           Attention:  Tracy Behzad
                           Vice President of Human Resources
                           2092 Gaither Road
                           Rockville, Maryland 20850

         Executive:        George J. Roberts
                           10 Springhill Drive
                           Princeton Junction, NJ  08550

5.2      Amendments and Termination; Entire Agreement. This Agreement may not be
amended or terminated except by a writing executed by all of the parties hereto.
This Agreement constitutes the entire agreement of VISUAL and Executive relating
to the subject matter hereof, and supersedes all prior oral and written
understandings and agreements, whether written or oral. Notwithstanding anything
herein to the contrary, this Agreement shall not affect the applicability of the
Non-Solicitation Agreement executed by Executive, and the Non-Solicitation
Agreement shall remain in full force and effect notwithstanding this Agreement.

5.3      Severability; Provisions Subject to Applicable Law. All provisions of
this Agreement shall be applicable only to the extent that they do not violate
any applicable law, and are intended to be limited to the extent necessary so
that they will not render this Agreement invalid, illegal or unenforceable under
any applicable law. If any provision of this Agreement or any application
thereof shall be held to be invalid, illegal or unenforceable, the parties agree
and stipulate that any court of competent jurisdiction may enforce these
restrictions to the maximum extent deemed reasonable, rather than declare any
provision unenforceable.

5.4      Waiver of Rights. No waiver by VISUAL or Executive of a right or remedy
hereunder shall be deemed to be a waiver of any other right or remedy or of any
subsequent right or remedy of the same kind.

5.5      Definitions, Headings and Number. A term defined in any part of this
Employment Agreement shall have the defined meaning wherever such term is used
herein. The headings contained in this Agreement are for reference purposes only
and shall not affect in any manner the meaning or interpretation of this
Employment Agreement. Where appropriate to the context of this Agreement, use of
the singular shall be deemed also to refer to the plural, and use of the plural
to the singular.

5.6      Counterparts. This Agreement may be executed in separate counterparts,
each of which shall be deemed an original but all of which taken together shall
constitute but one and the same instrument.

5.7      Governing Law. The parties acknowledge and expressly agree that this
Agreement shall be governed by and interpreted in accordance with federal law
and the laws of the State of Maryland. The parties hereto agree that any
disputes shall be resolved by the District Court of Maryland for Montgomery
County, the Circuit Court of Maryland for Montgomery County, or the United
States District Court for the District of Maryland, as may be appropriate.

5.8      Attorneys Fees. If VISUAL incurs costs to enforce the terms of this
Agreement (including but not limited to a declaratory judgment action),
Executive shall reimburse VISUAL all of its costs and expenses, including
reasonable attorneys' fees.

IN WITNESS WHEREOF, VISUAL and Executive have signed this Agreement.

                                       48

<PAGE>

VISUAL NETWORKS OPERATIONS, INC.

By:      /s/ LAWRENCE S. BARKER
         ----------------------
         Lawrence S. Barker
         President and Chief Executive Officer

Date:    August 17, 2003

EXECUTIVE

         /s/ GEORGE J. ROBERTS
         ---------------------
         George J. Roberts

Date:    July 31, 2003

                                       49