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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended March 31, 2004

or

Commission File Number: 0-24983

NETSOLVE, INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

9500 Amberglen Blvd

Austin, Texas 78729

(Address of principal executive offices, including ZIP code)

(512) 340-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value Per Share

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 such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2). Yes ¨ No x

On April 30, 2004, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $54,655,853 (affiliates being, for these purposes only, directors, executive officers and holders of more than 5% of Registrant’s Common Stock). On April 30, 2004, there were 11,645,856 outstanding shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement pursuant to Regulation 14A for the Registrant’s 2004 Annual Meeting of Stockholders to be held on July 14, 2004, which will be filed with the Commission not later than 120 days subsequent to March 31, 2004, are incorporated by reference into Part III of this report.

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NETSOLVE, INCORPORATED

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NetSolve provides a range of information technology (IT) infrastructure management services that provide businesses an efficient and reliable alternative to managing their IT infrastructure internally. These services allow enterprises to selectively outsource some or all of their IT infrastructure management to increase availability, performance and security while reducing overall IT infrastructure operations cost, and simplifying timely migration to new technologies. Our services offerings are designed to operate our customers’ IT infrastructure, including monitoring, fault diagnosis, fault resolution, and performance management and reporting. We provide our IT infrastructure management services remotely 24 hours a day, 365 days a year from our Network Management Center (NMC) in Austin, Texas. We develop software tools as well as integrate commercial off-the-shelf (COTS) tools to operate an integrated suite of proactive management software. We use this software suite along with our processes to deliver our services and also to provide our customers access to real-time network status and other reports via a secure Internet portal. We have offered IT infrastructure management services since 1995 and currently have over 850 end user customers representing more than 35,000 managed sites in 75 countries. Our solutions are designed to meet the requirements of multiple industries and enterprises of all sizes. Our services are sold primarily on an indirect basis through reseller channels such as AT&T, Berbee, IBM and Intergraph, and directly to end users.

Our solutions

Our solutions allow our customers to focus on their core business while we manage their IT infrastructure and enable the implementation of new technologies. Customers benefit from our expertise, breadth of services and knowledge gained from managing thousands of devices without incurring the expense of acquiring, operating and maintaining tools and resources to operate their network. We apply proven (i.e., learned and continually improving) processes and tools to customers of all sizes in order to meet their individual requirements. By applying a common set of tools and processes across hundreds of customers, we achieve economies of scale that result in price and performance value to our customers.

Full breadth of IT infrastructure management services. Our services are generally marketed under the brand name ProWatch^®. Our ProWatch suite of services covers issues encountered by customers in the LAN (local area network), IPT (IP Telephony), WAN (wide area network), network security, server and certain software application infrastructure areas of their business. The ProWatch suite covers the entire operating lifecycle of an enterprise’s network requirements, including fault, configuration and performance management.

Reduced costs. Singularly focused on remote management of IT infrastructure, we are able to spread personnel-related costs, as well as costs of necessary network infrastructure, software and tools, across hundreds of end users. As a result, we are typically able to offer a more efficient management solution at a lower cost than internally managed solutions.

Increased business impact. Our end users do not have to use their internal resources to respond to the time-consuming and interrupt-driven responsibilities of daily IT infrastructure operations. Hence, these organizations can focus their resources on applying technology to improve their business.

Expertise. Our team of IT infrastructure professionals is continually trained on current and emerging IT infrastructure technologies. As IT infrastructure management is our only business, this team can focus on operating networks without being encumbered or distracted by other IT tasks. Our IT infrastructure management professionals act as an extension to our customer’s internal IT staff. Additionally, our customers benefit by having a skilled team of networking professionals and tools applied to their IT infrastructure. Our tools and people have applied knowledge that has resulted from managing hundreds of networks over many years. An issue may occur on one customer’s network that is unique to that network; nevertheless, because of our expertise, it may be an issue that is similar to ones we have faced in the past. Our team is able to apply that knowledge and potentially save time and costs associated with decreased downtime and shorter resolution. We also report to end users on a regular basis recommending upgrades or changes when appropriate.

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Enhanced customer service. We take ownership of IT infrastructure problems when issues arise and we work on behalf of our customers through issue identification and resolution. Our services include guarantees that provide customers up to 100% of their management fees back for any month in which we do not meet specified performance requirements.

Ease of new technology adoption and IT infrastructure maintenance. We continually train our professionals on emerging technologies that are impacting the IT infrastructure, such as IPT. As a result, we are able to assist enterprises as they migrate their network to new technologies.

Enhanced IT infrastructure control. Our IT infrastructure management customers have access to Pro-Watch Exchange^®, our network management Web portal. With this tool, our customers can maintain ultimate control and visibility of critical network and device status and information through real-time status of every device we manage for them, as well as on-demand network performance reports.

Strategy

Our goal is to be the leading provider of selective outsourcing solutions for the remote management of IT infrastructure. The key elements of our strategy include the following:

Deliver targeted solutions and expand service offerings. We are focused on solving IT infrastructure management needs for enterprises that are assimilating new technology, attempting to solve complex IT issues, and/or wanting to increase performance or reduce costs. We believe that the market to provide end-to-end IT infrastructure management services for enterprises on a remote basis is still emerging and that most providers’ solutions are less comprehensive than our solutions. We intend to expand the technologies we support in terms of types of devices, network transport technologies, and networking equipment providers. We also intend to use these expanded capabilities to create specific applications support services such as those we have previously introduced for infrastructure security and IPT.

Add and enhance our reseller channel relationships. We intend to continue to market our services primarily through reseller channels although some customers may purchase services directly from us. We intend to adapt our services to be flexible add-ins to the needs of our larger reseller channels whose customers can benefit from the cost-effective, high performance management solutions we can jointly provide. In these instances, our goal will be for our reseller channels to utilize our services as a key component of their design solutions, transport services, consulting and integration services, or network equipment. By viewing these reseller channels as end-users, and focusing on their requirements and business drivers as opposed to just the requirements of the end-user customer, we believe we can ultimately meet the needs of more end-user customers and accelerate growth.

IT infrastructure management services

Our focus is on growing our recurring IT infrastructure management services revenues. NetSolve’s service offerings combine core IT infrastructure management capabilities such as remote router, switch, server and firewall management into comprehensive solutions offerings that help our customers assimilate new technologies and address complex IT management issues.

Our services include the remote management of channel service units (CSU), data service units (DSU), routers, switches, firewalls, network intrusion detection devices, host-based intrusion detection software, voice over Internet Protocol (IP) devices, servers, and software infrastructure applications. Historically, we have sold these services independently under our ProWatch brand such as ProWatch for WANs^®, ProWatch for LANs^® and ProWatch Secure^®.

The WAN service includes management of the WAN-attached router; the CSU connecting the router to the transport provider’s Frame Relay, asynchronous transfer mode (ATM), or IP service; and the transport provider’s network services. Our ProWatch for WANs service generally includes a guarantee to provide the customer end-to-end network availability for at least 99.5% of the time in any given month, with the customer generally receiving a

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refund of all or a portion of the management fee in any month the guaranteed availability rate is not achieved. Approximately 81% of our recurring IT infrastructure management services revenues were derived from our ProWatch for WANs and related WAN services in fiscal year 2004.

In addition to the management of the WAN infrastructure between customer locations, we provide management of the LAN, server, and virtual private network (VPN). With our LAN management service we measure, monitor and manage the routers, switches and intelligent hubs in a local area network.

ProWatch for Servers^SM is a server monitoring service that is available to ProWatch for LAN customers as an add-on service. The Server service provides for 24 X 365 monitoring, auto-ticketing and auto-notification for up/down availability; key Microsoft NT/Win2K services and Unix processes; environmentals (disk drives, fans, power supplies); key system parameters (CPU utilization, disk space, memory); basic application response service monitoring and auto-restart of standard services such as HTTP, SNMP and FTP; and fault validation that detected issues are a server issue and not a LAN issue.

Our security offering addresses security needs of an enterprise 24 hours a day, 365 days a year. These remote security management capabilities include firewall management, intrusion detection management, host-based intrusion detection management, and VPN configuration and management. These security services are designed to protect an enterprise’s critical IT infrastructure with around-the-clock monitoring and policy management services. The services described below may be sold separately or be combined for a more complete offering.

Firewall Management. The firewall management service provides active management of the firewall, which is the electronic barrier between network segments. Security engineers review firewall logs and event streams to detect suspicious activity. Our ProWatch Secure Managed Firewall Service supports Cisco’s PIX Firewall series and Checkpoint firewalls.

Intrusion Detection Management. The intrusion detection management service uses Cisco’s IDS sensor to detect suspicious activity on customer networks, repel attacks and bar the potential intruder from accessing the end user’s network.

Host-Based Intrusion Detection Management. The host intrusion detection management service protects critical servers such as Web and mail servers. This service can prevent and alarm on those types of network attacks that cannot be fully prevented by a firewall or network intrusion detection device. This service utilizes Entercept’s Host IDS technology.

Virtual Private Network Management. The virtual private network configuration management service can be used by enterprises to establish and maintain point-to-point VPNs between routers and firewalls. NetSolve provides remote monitoring and management of this secure connection.

We combine remote router, switch, security and server management capabilities to provide a remote management solution for IPT. NetSolve’s IPT service currently delivers remote operations support services for Cisco’s Architecture for Voice, Video and Integrated Data (AVVID). AVVID integrates telephony functions onto IP-based LANs eliminating the need for PBX equipment and enabling converged voice and data applications. The IPT service is intended for use in conjunction with an AVVID IP Telephony Certified Cisco Partner that provides Plan, Design, Implement (PDI) services. Operations managed by NetSolve consist of the ongoing management and reporting services for an IP Network and its IP Telephony functionality after the PDI activities are complete.

Our Web-enabled IT infrastructure management tools provide end users with access to up-to-date status information of their networks and are designed to give end users increased understanding of their networks while they outsource the IT infrastructure management to NetSolve. Access to this information is included as a component of our standard IT infrastructure management services and is provided to end users at no additional charge. End users access these tools through a standard web browser using our ProWatch Exchange Web portal. ProWatch Exchange provides trouble ticket status and history. An active network map displays the status of all managed

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devices in an end user’s network and online viewing access to the monthly availability and on-demand performance reports included with the various IT infrastructure management services.

Maintenance and equipment services

We resell on-site maintenance services, primarily to customers who have purchased the associated equipment from us. These services address issues associated with hardware failures and software bugs, as well as software upgrades provided for under the equipment provider’s maintenance contract. These maintenance services are provided by Cisco, Vital Networks, Equant and 3Com or their successors. Our strategy is to focus on sales of our IT infrastructure management services and to de-emphasize maintenance services. We therefore anticipate that sales of new maintenance contracts will not be significant and that these revenues most likely will decline over time.

We have also historically resold customer premise equipment from leading network equipment manufacturers or their resellers in conjunction with the sale of our services. This equipment constitutes some of the primary components of the end-user networks we manage. Sales of equipment were less than one percent of total revenues in fiscal year 2004. We expect future sales will not be significant and that at some point these services could be eliminated from our offerings.

Customers and Reseller Channels

Our solutions have historically primarily addressed the needs of middle market enterprises, roughly defined as companies that have between 100 and 1,000 employees and annual revenues between $25 million and $500 million. While we believe this continues to be a key opportunity area for our solutions, we also provide services to larger enterprises that can utilize our standard packaged services without requiring significant customization and believe these enterprises also represent an opportunity for future sales. We currently have over 850 end users representing over 35,000 managed sites. Our end users consist of our direct customers as well as customers of our reseller channels. Substantially all sales of our services to date have been made in the U.S. However, we remotely manage locations in 74 other countries around the world for these U.S. based customers.

Most of our reseller channels use our brand; however, IBM, AT&T and some others resell our services under their trade and brand names. We receive our revenues directly from the resellers. In some situations, the resellers include the cost of our services in the pricing they establish for their related services while in other cases the services we provide are billed separately by the reseller. Our resellers currently include AT&T, IBM, Hewlett Packard, Berbee, Intergraph, Network Data Systems, Northrop Grumman IT, Broadwing and Solarcom.

Our strategy includes building our reseller channels, and we expect that these channels will continue to represent a large percentage of our IT infrastructure management revenues for the foreseeable future. In an effort to create greater value in these relationships, we are working with selected reseller channels to focus on providing our reseller channels component services that form a part of a comprehensive solution to end-user customers. Several of our channel partners fill important gaps in planning, design and implementation services in order to more completely meet our customers’ needs. With this model, we believe we can help our channel partners support customers in assimilating, managing and implementing new technologies, and then assume responsibility for the ongoing operation of these networks.

We have derived a significant portion of our revenue from one reseller, AT&T. No other customer or reseller accounted for more than 10% of our revenues in any of the last three fiscal years.

Relationship with AT&T

At the beginning of fiscal year 2004, we had three primary reseller agreements with AT&T, one for Managed Router Service; one for Managed DSU Service marketed by AT&T as part of its Frame Relay Plus offering; and one for the management of the WAN for one large end user – The Home Depot. AT&T has sold our services to their customers in conjunction with AT&T’s overall network solution offering using AT&T’s trade and brand names. As with our other reseller arrangements, we receive our revenues for the resale of our services to AT&T customers

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directly from AT&T. AT&T accounted for 61% of our total revenues in fiscal year 2002, 52% of our total revenues in fiscal year 2003, and 39% of our total revenues in fiscal year 2004.

In February of 2003, we were notified by AT&T of its intention to terminate the Managed Router Service agreement over an eight-month transition period beginning July 1, 2003. In May 2003, we were notified by AT&T of its intention to terminate the Home Depot agreement in July of 2003. Primarily as a result of these terminations, total revenues from AT&T decreased to $17.9 million in fiscal year 2004 from $26.1 million in fiscal year 2003.

The agreement for Frame Relay Plus Service provides for NetSolve to deliver the services for the original end-user service term of each order (subject to certain exceptions specifically set forth in the agreement), up to a maximum service term of 36 months, and further provides AT&T the option to continue the services on a month-to-month basis following the expiration of the service term for individual end users. The Frame Relay Plus Service agreement with AT&T was renewed in July 2003 and currently terminates on June 30, 2004 with respect to placing new orders for service. Services under this agreement accounted for 21% of our total revenues in fiscal year 2002, 23% of our total revenues in fiscal year 2003, and 22% of our total revenues in fiscal year 2004. As of March 31, 2004, we are providing this service to 629 of AT&T’s end user customers. We anticipate that this agreement will be renewed effective in July 2004 at a discount to the pricing under the current agreement.

Sales and marketing

We market our services to reseller channels and directly to end users.

Primary marketing communications activities include lead generation, seminars, sales collateral and support, and design and maintenance of our web site. Our marketing organization is also responsible for public relations activities such as obtaining media coverage and public recognition of NetSolve and our services. Product marketing is primarily focused on ensuring that our services are designed to meet the needs of our reseller channels and end user customers. Activities include the creation of marketing, product, and business plans as well as the delivery of tools for our sales force and our reseller channels. These tools include service definitions and data sheets, pricing, competitive analysis, and sales presentation materials. The marketing group also works with our larger reseller channels to define, develop and implement their own services that embed a core NetSolve service. At March 31, 2003, we employed 12 people in marketing who are responsible for marketing communications, public relations, channel and product marketing.

Our sales organization is responsible for qualifying prospects and obtaining orders for our services. They work directly with customers and reseller channels to identify and define the service(s) that best fits their needs. Activities include the generation of proposals to potential customers and familiarizing the resellers’ sales forces with our services and networking options. In some cases these sales individuals sell our services directly to end users and in other cases they assist our resellers in their sales efforts. Additionally, a portion of our sales team is dedicated exclusively to supporting various reseller channel efforts. Reseller channel support by our sales organization includes training and engaging our reseller’s sales teams as well as assistance with responses to requests for proposals, IT infrastructure design and proposal generation, and participation in sales calls to potential customers. At March 31, 2004, we employed 32 people in sales and sales support.

Software and services development

The primary objective of our software development group is to develop or integrate the tools we utilize to manage IT infrastructure and to develop software applications, such as ProWatch Exchange, which become components of our services. A key requirement of these tools is to provide flexible, scalable technologies that create a sustainable platform for NetSolve to continue to innovate and deliver services on a large scale at low cost as compared to off-the-shelf software products or competitive service offerings. The applications and tools we develop utilize industry-standard protocols, tools such as Oracle and development environments, including Microsoft’s .Net framework, C#, C++, HTML, Java, and relational database software and development tools such as Oracle. Where appropriate, we integrate commercially available components into our tools, such as mapping functionality, that enrich the value of services we provide our customers.

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The objective of our services development group is to research new technologies and develop new service offerings, including early operations processes that address the needs of our target customers with respect to these technologies.

Our software and services development groups consisted of 29 people as of March 31, 2004.

Service Delivery

Our service delivery organization is responsible for delivery of our services to end users. By defining IT infrastructure management tasks into sets of tightly defined services, we are able to deliver functionality to our end users at cost-effective prices. Our services generally are provided using a team approach where each customer is assigned to a team of customer engineers, with one member of the team being assigned primary customer responsibility and each member providing backup when the primary engineer is not available.

Other groups within our service delivery group support these customer engineer teams. The first level of service delivery is our NMC, which is staffed 24 hours a day, 365 days a year with IT infrastructure engineers and technicians who have a broad range of technical expertise. Our NMC continuously monitors responses to polls on managed devices and opens trouble tickets in response to IT infrastructure outages. The goal of this group is to provide the end user with notice and a diagnosis within 15 minutes of an IT infrastructure failure. Upon isolation of the problem, the problem is fixed remotely by our staff or the end user’s appropriate service provider is dispatched (to the end user’s premises if required) to repair the outage. NMC employees can electronically enter and escalate trouble tickets into selected transport provider’s systems to enable faster resolution of carrier network issues.

Other groups within service delivery include project managers, process managers, installation engineers, and equipment staging and configuration personnel. The Integrated Systems Support team handles all server, security, telephony and network infrastructure for internal business users as well as maintaining all customer connections. The process and tools automation team’s primary focus is to drive down the unit cost of our products while increasing quality of service to our customers.

We deliver our services utilizing a workforce having a wide range of skills, from entry-level to highly trained networking professionals. We use a strict operational methodology combined with proprietary software tools to leverage our workforce. We believe that we can meet our resource requirements by hiring experienced networking professionals and by recruiting and training recent college graduates.

Our approach to minimizing the possibility of loss of the critical systems and management network infrastructure utilized to manage customer networks is one of disaster avoidance. To minimize the potential for loss of network access to local telecommunications infrastructure, we employ a SONET ring which is served from two separate local exchange carrier serving offices and maintain on and off-site fail over technologies for critical server and database components. The customer network management infrastructure and major critical server and database components are replicated in a backup location in order to mitigate the impact of a complete loss of our primary facility. Using NetSolve branded services as well as other products, the infrastructure is monitored 24 hours a day, 365 days a year with certified professionals available to resolve any issues.

We have preventive and monitoring security measures in operation to control unauthorized access and respond to any unauthorized activity within our networks and to/from our customers’ networks. Customer networks are connected to NetSolve’s management infrastructure with separate connections (Frame Relay PVC or VPN, for example) for each customer, which, by their nature, restrict traffic flow to only the two endpoint networks. NetSolve also carefully screens all employees upon hiring. All prospective candidates undergo behavioral as well as technical interviews. NetSolve employs a range of physical site security measures to help prevent unauthorized access to NetSolve systems and information. Using third party security engineers, we periodically evaluate our security posture to ensure that we are providing a high level of protection and are diligent in detecting and controlling unauthorized activity within our own and to/from customers’ networks. This serves to periodically and independently validate the environment and controls for potential weaknesses.

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Our service delivery organization consisted of 199 people as of March 31, 2004.

Competition

We compete with the internal IT organizations of actual or potential end users of our services as well as with a number of providers of services similar to ours. Many of these end users have internal network support capabilities and can choose to satisfy their needs through internal resources rather than through outside service providers. In order to compete effectively with internal organizations, NetSolve is focusing on helping customers assimilate new technology where internal resources are untrained and unproven, or helping customers manage complex technologies where internal resources are best focused on their core business or where there are ongoing problems. Our strategy to broaden the IT infrastructure components and technologies that our services support should help us compete with internal resources and create a closer partnership with the customer by addressing a broader set of needs. Other important factors necessary for our success include quality of service and support, price, functionality and features, product reputation and distribution.

Selective outsourcing of IT infrastructure management is an emerging market that is highly fragmented, rapidly evolving and largely undefined. There are few substantial barriers to entry, and we expect that we will face increasing competition from existing competitors and new market entrants in the future. We believe that the principal competitive factors in this market include a wide range of integrated services, skilled and targeted marketing, networking and security engineering expertise, scalable management tools, reliability and quality of service, large scale, the ability to maintain and expand distribution channels, price, the timing of introductions of new services, and conformity with industry standards. While we believe that we currently are able to provide end users with reliable IT infrastructure management and security services at prices that allow us to compete favorably with respect to other service providers, there can be no assurance that we will have the resources or expertise to compete successfully in the future.

In addition to the competition we face with internal IT departments, we also compete with other IT infrastructure management companies including telecommunications providers such as AT&T, SBC, Sprint and MCI; network equipment vendors such as Vanguard and Avaya; computer systems vendors such as Hewlett Packard/Compaq and Unisys; and other independent providers of IT infrastructure management services. With respect to our security services, we compete with computer systems vendors such as IBM, network security software and services vendors such as ISS, and security services vendors such as Symantec and Counterpane. We face potential competition from IT consulting firms, systems integrators, VARs, and local and regional network services firms and other new entrants into our markets. Our competitors also include certain of our resellers, including AT&T, Hewlett Packard and IBM.

Many of these current and potential competitor companies have significantly greater financial, technical and marketing resources and greater name recognition than we have and generate greater service revenue than we do. There can be no assurance that we will be able to compete successfully against current or potential competitors. If we fail to successfully compete on a sustained basis it could significantly damage our business.

With respect to on-site equipment maintenance services, we compete primarily with the equipment manufacturers and their resellers.

Intellectual property rights

We rely on a combination of patent, trademark, service mark and trade secret laws and contractual restrictions to establish and protect certain proprietary rights in technology underlying our services. We have three patents and have applied for extensions and additional coverage with the United States Patent Office. These patents relate to software and computer technology, which allow us to poll, or communicate with, large numbers of devices over multiple WANs. We intend to continue to evaluate the appropriateness of these protections and to seek additional patent protection for our inventions when appropriate. There can be no assurance that additional patents will be issued from our currently pending or any future applications, or that any patents that may be issued will be sufficient

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in scope or strength to provide meaningful protection or any commercial advantage to us. We have registered our logo, and the NetSolve name together as one mark, and other marks, including ProWatch, ProWatch IV, ProWatch for WANs, ProWatch for LANs, ProWatch Secure, ProWatch for Servers and ProWatch Exchange as separate service marks in the U. S. We have also filed service mark and trademark applications in Japan to seek protection for these marks in Japan. We have not made any other foreign patent or trademark filings.

We have entered into proprietary rights and confidentiality agreements with our employees, and generally enter into nondisclosure agreements with our suppliers, distributors and appropriate customers in order to limit access to and disclosure of our proprietary information. There can be no assurance that these contractual arrangements or the other steps taken by us to protect our intellectual property will prove sufficient to prevent infringement or misappropriation of our technology or to deter independent third-party development of similar technologies. Any infringement or misappropriation, should it occur, could significantly damage our business. Furthermore, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation could result in substantial costs and diversion of resources. We may be unable to protect our intellectual property, and we could incur substantial costs enforcing our intellectual property against infringement or defending against claims of infringement.

In June 1996, in connection with our federal registration of a service mark that includes the NetSolve name, GRC International, Inc. claimed that our use of the name NetSolve infringed GRC’s common law intellectual property rights. This claim was settled by an agreement with GRC, and GRC withdrew its opposition and consented to our service mark registration. GRC retained the right to use the name NetSolve to describe a particular software product, and we retain the full right to our corporate name. We also agreed with GRC to refrain from using NetSolve as a brand name to describe a product. We believe that the limited joint use of the name NetSolve by GRC will not have a material adverse effect on us. With the exception of GRC, we have not, to date, been notified that our services infringe the proprietary rights of third parties; however, there can be no assurance that third parties will not claim infringement or indemnification by us with respect to current or future services or products. We expect that participants in our markets will be increasingly subject to infringement claims as the number of services and competitors in our industry segment grows. Any of these claims, whether meritorious or not, could be time-consuming, result in costly litigation, cause delays in product and service installation and implementation, prevent us from using important technologies or methods, subject us to substantial damages, or require us to enter into royalty or licensing agreements. These royalty or licensing agreements might not be available on terms acceptable to us or at all. As a result, any of these claims could materially harm our business.

Employees

As of March 31, 2004, we had 293 full-time employees, including 44 in sales and marketing, 29 in development, 199 in service delivery and 21 in finance, administration and human resources. Our success depends to a significant degree upon the continued contributions of our executive management, IT infrastructure management and engineering teams, and our ability to attract and retain highly skilled and qualified personnel.

None of our employees are represented by a collective bargaining agreement. We believe relations with our employees are good.

Our corporate headquarters are located in a leased facility in Austin, Texas that covers approximately 80,000 square feet. Previously, we had occupied an additional 70,000-square-foot facility. We consolidated operations into one facility in the quarter ending June 2002. As a result, we recorded a one-time charge of $2.7 million in March 2002 primarily for future rentals for the lease of the 70,000-square-foot facility. We continue to lease approximately 6,400 square feet in the 70,000-square-foot facility for disaster recovery purposes. We maintain dual computer rooms in these two geographically separate facilities and have redundant mission critical equipment and customer connections in order to provide safeguards in the event of a fire or similar emergency. All mission critical portions of the 6,400-square-foot facility and all portions of the new facility are covered by uninterrupted power supply

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systems backed up by a power generator to guard against system failures and to provide emergency power in the event of an outage.

In December 2001, the Company and certain of its officers and directors, as well as the underwriters of its initial public offering (“IPO”) and hundreds of other companies (“Issuers”), directors and officers and IPO underwriters, were named as defendants in a series of class action shareholder complaints filed in the United States District Court for the Southern District of New York. Those cases are now consolidated under the caption In re Initial Public Offering Securities Litigation, Case No. 91 MC 92. In the amended complaint, the plaintiffs allege that the Company, certain of our officers and directors and our IPO underwriters violated section 11 of the Securities Act of 1933 based on allegations that the Company’s registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The complaint also contains a claim for violation of section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and other relief.

In February 2003, the Court issued a decision denying the motion to dismiss the Section 11 claims against the Company and almost all of the other Issuers, and granting the motion to dismiss the Section 10(b) claim against the Company. The Court dismissed the Section 10(b) claim against the Company without leave to amend. In June 2003, the Issuers and plaintiffs reached a tentative settlement agreement that would, among other things, result in the dismissal with prejudice of all claims against the Issuers and their officers and directors in the IPO lawsuits. A special committee of disinterested directors appointed by the board of directors received and analyzed the settlement proposal and determined that, subject to final documentation, the settlement proposal should be accepted. Although the Company has approved this settlement proposal in principle, it remains subject to a number of procedural conditions, including formal approval by the Court. It is not feasible to predict or determine the final outcome of this proceeding, and if the outcome were to be unfavorable, the Company’s business, financial condition, cash flow and results of operations could be materially adversely affected.

No matters were submitted to a vote of security holders during the three months ended March 31, 2004.

PART II

Market information

Our common stock trades on the Nasdaq National Market under the symbol “NTSL.” The following table sets forth the high and low per share sales prices of our common stock for each of the last eight quarters in the period ended March 31, 2004 as reported by the Nasdaq National Market System.

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Holders of our common stock

At the close of business on May 10, 2004, there were approximately 109 holders of record of the common stock and approximately 1,788 shareholders of beneficial interest.

Dividends

We have not paid any dividends on our common stock and do not intend to pay any dividends in the foreseeable future.

Securities authorized for issuance under equity compensation plans

See the information provided under Item 12 of this report.

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Index to Financial Statements

The following selected consolidated financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes appearing elsewhere in this document. The following selected consolidated financial data for fiscal years 2002, 2003 and 2004 and as of March 31, 2003 and 2004 are derived from our consolidated financial statements included elsewhere in this document, which have been audited by Ernst & Young LLP, independent auditors. The following selected consolidated financial data for fiscal years 2000 and 2001 and as of March 31, 2000, 2001 and 2002 are derived from our audited consolidated financial statements not included in this document.