NETSCOUT SYSTEMS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

FORM 10-K

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MARCH 31, 2002
OR

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

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0000-26251
------------------------
NETSCOUT SYSTEMS, INC.

(Exact name of registrant as specified in charter)

DELAWARE
(State or other jurisdiction of incorporation 04-2837575
or organization) (IRS Employer Identification No.)

310 LITTLETON ROAD, WESTFORD, MA 01886
(978) 614-4000
------------------------

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 Par Value
------------------------

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/

The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 13, 2002 (based on the last reported sale price on The
Nasdaq National Market as of such date) was $81,218,803.26. As of June 26, 2002,
there were 29,885,997 shares of the registrant's Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

NETSCOUT SYSTEMS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2002
TABLE OF CONTENTS
INDEX

PART I

Item 1. Business.................................................... 3

Item 2. Properties.................................................. 13

Item 3. Legal Proceedings........................................... 13

Item 4. Submission of Matters to a Vote of Security Holders......... 13

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 14

Item 6. Selected Financial Data..................................... 15

Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 16

Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 30

Item 8. Financial Statements & Supplementary Data................... 31

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 31

PART III

Item 10. Directors and Officers...................................... 31

Item 11. Executive Compensation...................................... 33

Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 38

Item 13. Certain Relationships and Related Transactions.............. 41

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 42

Index to Consolidated Financial Statements................................. F-1

2

PART I.

ITEM 1. BUSINESS

GENERAL

NetScout Systems, Inc. designs, develops, manufactures, markets, sells and
supports a family of integrated products that enable optimization of the
performance and cost management of complex, high-speed networks, including their
ability to efficiently deliver critical business applications and content to
end-users. We manufacture and market these products in an integrated hardware
and software solution suite that is used by enterprise and service provider
businesses worldwide. NetScout manages its business as a single operating
segment.

Businesses are increasing their reliance on software applications and
computer networks, making them strategic assets for better competitive advantage
and essential business operations. To support the growing number of users and
their demands for faster and more reliable computer network access, new network
technologies and products are continually being introduced. The result is
increasingly large, complex and geographically dispersed networks with
infrastructures that are extremely difficult to manage. Computer network
malfunctions cause performance degradations that result in significant business
interruptions, lost revenue and customer dissatisfaction. As a result,
businesses are recognizing the critical importance of addressing network
performance problems quickly and proactively.

The NGenius-TM- Performance Management System is NetScout's solution suite
of integrated hardware and software products. Our NGenius products monitor,
collect and publish information on the traffic flows of individual software
applications (Voice-over-IP, e-commerce, supply chain management, customer
resource management, etc.), as well as the performance of the underlying network
(routers, switches and communication links) and its users' behaviors. The
NGenius information is generated from multiple sources, but most uniquely, from
data collected by NetScout's line of network monitoring appliances called
probes. The hardware probes attach to the network non-intrusively and collect
information from the network's traffic flows in real-time. As they record
traffic, the probes generate both in-depth information about network and traffic
activity that is unique to NetScout probes, as well as, industry-standard
performance data. By placing probes at strategic locations throughout a network,
enterprises and service providers are provided end-to-end visibility so they can
better understand and optimize traffic flows and application performance across
the network. In addition to probes, the NGenius system includes intelligent
software agents that simulate end-user transactions to measure and report the
response times that would be experienced by end-users throughout internal
networks and across the Internet. Using probe information, active agent data,
and data collected from network devices, our analysis and presentation software
tools provide current and historical analysis in Web-accessible, easy-to-use
graphical formats.

NetScout customers use the information generated by NGenius to proactively
detect problems, thereby reducing the severity and the frequency of network
slowdowns and service interruptions, to manage the delivery of services and the
fulfillment of service-level agreements, to assess infrastructure capacity
against future needs, and to justify requirements for additional resources.
These capabilities have a high return on investment for customers who need to
maintain high levels of service while controlling growth and costs of the
infrastructure. The information generated by NGenius products is analyzed and
published in both real-time displays and customizable reports that summarize the
status of network activity, service levels, application performance, device
capacity, and other critical aspects of network availability, utilization and
performance.

During fiscal year 2001, NetScout completed the introduction of its NGenius
Performance Management System to markets worldwide, and migrated all of
NetScout's key technologies and product functionalities onto the NGenius
platform. On July 7, 2000, NetScout acquired NextPoint Networks, Inc. to
accelerate the addition of key reporting and service level management
technologies into the NGenius suite. As part of the development effort,
NetScout's unique probe information was integrated with the new

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reporting capabilities brought by NextPoint's technology. This integration was a
significant milestone in the Company's strategy to drive growth by introducing
first-to-market, integrated solutions. NetScout has the first-to-market network
performance management solution that integrates the benefits of scalable,
industry-leading monitoring probes with broad-based reporting and service level
management technologies. During the fiscal year 2002, we made significant
enhancements to the NGenius product suite by providing additional features,
improving performance and increasing the ease-of-use for our customers.

On June 12, 2001, NetScout announced a change in the terms of its strategic
relationship with Cisco Systems, Inc. where Cisco discontinued private labeling
and reselling NetScout's probes and began referring sales opportunities for
probes directly to NetScout. During fiscal year 2002, NetScout successfully
transitioned Cisco customers to NetScout's direct and indirect sales channels.
The change was precipitated by the two companies' need to evolve their sales and
support model to better meet changing customer requirements and profitability
objectives. Currently, NetScout's NGenius Real-Time Monitor software is part of
Cisco's CiscoWorks2000 Routed LAN Management Solution software bundle. The
strategic aspect of the relationship involving the early exchange of technology
plans and the close collaboration of technology development continues. As one of
the key elements in our market strategy, we plan to continue our technology
collaboration with Cisco and to support Cisco's continued distribution of our
software products.

Our principal executive offices are located at 310 Littleton Road, Westford,
MA and our telephone number is 978-614-4000.

INDUSTRY BACKGROUND

Enterprises are increasingly dependent upon their computer data networks to
manage and deliver information and business services, both for internal
operations and to serve their many constituencies: customers, suppliers,
investors and employees. Their dependence on computer networks is approaching
the level of reliance which organizations have long had on the public telephone
voice network for internal communications and to reach constituents.

As they did with the voice network in the past, enterprises today are
turning to data network service providers to fulfill their need for available,
flexible, reliable network service in the face of serious internal skill and
resource constraints. Service providers and enterprises have been building
networks rapidly to be available to satisfy the anticipated growth in demand for
information and services.

The ultimate value of the data network to both enterprises and service
providers is determined not just by availability of the network, but by the
speed, flexibility, and cost with which it can deliver high quality information,
knowledge, productivity, reach and rapid execution to fulfill critical
enterprise missions. As enterprise network dependence grows and uses of the
network are increasingly business-critical, the need for network reliability,
performance and efficiency is growing even faster.

Network management tools to measure, analyze and maintain network
performance have necessarily lagged the development of the new technologies that
drive today's networks. Beyond that natural lag, however, the period of rapid
growth of network infrastructures from the late 1990's through 2000 caused
network management to be a secondary consideration for enterprises and service
providers who were striving for rapid network expansion to meet perceived market
opportunities or competitive threats. In recent years, this led to added network
complexity with excess capacity, or an over-provisioning approach to managing
networks, using high redundancy and high capacity to provide network
availability performance without adequate network measurement and management
tools.

Today, with the slowing of the e-commerce land rush, enterprises, and
consequently service providers, are focusing on obtaining productivity and
returns from their existing investments in network facilities, not just on
building them. In that environment, the appeal of network management solutions
is much greater. Solutions which can provide improved network availability,
application performance and network

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efficiency are increasingly important, especially in the face of lower IT
spending on network infrastructure equipment purchases and communications
bandwidth.

APPROACHES TO NETWORK PERFORMANCE MANAGEMENT

Network management solution providers have developed several approaches to
manage different aspects of the overall network management challenge. These
approaches are often broadly categorized as element management, operations
management, performance or service management, and business management.

Element management is dominated by tools from manufacturers of network
devices that are specific to managing each vendor's equipment. Element
management systems provide the basic functions of managing a network. Element
management systems often provide visualizations of device status and are used to
make configuration changes to network devices such as routers and switches. In
heterogeneous, or multiple vendor, network environments, multiple element
management systems are required. Alcatel's OmniVista and Nortel's Optivity are
examples of element managers.

Operations management focuses on collections of linked network devices.
Operations management systems discover network components, show network topology
and device status, support day-to-day administration and provide "break-fix"
fault and problem management, or troubleshooting, functions. Such systems
understand the relationships between multi-vendor network components. They are
often called "frameworks" because they provide a structure for managing
heterogeneous, or multi-vendor networks that element management systems do not.
Operations management does not provide traffic-based network performance
information. Hewlett-Packard's OpenView and MicroMuse's NetCool are examples of
operations management systems.

Performance or service management deals with the quality and level of
service provided by the network devices and communications links in delivering
business applications across the network. Performance management focuses on
comparing the expected performance of the network elements individually and in
the aggregate versus actual results. They collect and archive data over time for
baselining, trend analysis, historical usage analysis and service level
reporting. The most sophisticated systems collect data in real time for
on-the-spot analysis and management and do advanced analysis such as comparing
actual service levels to predefined metrics, predicting when service level
objectives will not be met and when performance deterioration will result in
business user impacts. NetScout's NGenius Performance Management System is a
leading performance management system.

Business management addresses the alignment of the network and network
service performance with the business processes that they enable. It is an
emerging area of network management which maps high priority business processes
or services to the chain of underlying network components, documents the
relationships and dependencies, integrates component status and performance
measurements to display performance at the business service level and correlates
network component problems to the affected business service. These advanced
functions provide understanding of the business impact of network problems to
help prioritize network support resources. They also add a business value
dimension to network planning and design efforts. NetScout's NGenius Performance
Management System with its capacity planning functions provides tools that
address aspects of business management.

NETSCOUT PRODUCTS AND TECHNOLOGY

NetScout develops, sells, and supports network performance management
solutions under the NGenius-TM- brand. The NGenius Performance Management System
is a robust, broad system implementation of the performance management approach
to network management. NGenius consists of

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integrated hardware and software products that monitor, measure and report on
the state of the network's ability to fulfill its performance, cost and
service-level objectives. The system is comprised of:

- PRESENTATION AND ANALYSIS SOFTWARE, which displays the network and
application performance information in real-time or historical views
through easy-to-use, graphical formats;

- REAL-TIME, APPLICATION-AWARE PROBES that generate, collect, aggregate and
analyze network and application performance information;

- ACTIVE INTELLIGENT SOFTWARE AGENTS that generate synthetic end-user
transactions, and measure and report on response times of the applications
supporting those transactions; and

- AGGREGATING SERVERS that accelerate the distribution and consumption of
the rich performance information by aggregating, sorting, simplifying and
storing data collected at remote sites.

PRESENTATION AND ANALYSIS SOFTWARE. The NGenius system includes a fully
integrated suite of presentation and analysis software applications that display
all of the real-time and historical information gathered and analyzed by
NetScout's probes and active agents, as well as information generated from
network devices. All of the presentation and analysis software products are
designed for intuitiveness, ease of use and Web-based distribution. They also
are designed with features that simplify and enable logical monitoring and
management of large, geographically dispersed networks. NGenius performance
management applications include the following:

- NGENIUS PERFORMANCE MANAGER-TM-, a unified performance management
solution, provides traffic monitoring and troubleshooting, voice-over-IP
management and capacity planning and reporting, integrating real-time and
historical information in a single platform. From data collected by
NetScout probes, Performance Manager provides logical, business-oriented
presentation of network performance, with the ability to drill-down into
layers of detail for faster problem resolution. Web-based access allows
sharing of information with business users, service providers and remote
sites.

- NGENIUS REAL-TIME MONITOR-TM-, like Performance Manager, delivers
continuous visibility of network and application behavior and performance
information generated by NetScout's probes. It helps IT professionals to
detect, analyze and resolve application and network traffic issues before
they affect end-users. NGenius Real Time Monitor includes traffic
monitoring, providing comprehensive views of aggregated voice, video and
data traffic for analyzing network segments simultaneously. Its
packet-level analysis provides packet capture and decode for Web-enabled
collaborative trouble-shooting.

- NGENIUS CAPACITY PLANNER-TM- increases the effectiveness of deployed
network resources and improves the efficiency of future network
investments by profiling and forecasting application, network, and device
utilization and behavior. NGenius Capacity Planner also reports on trends
in network consumption by individual software applications utilizing data
from both network devices and NetScout probes.

- NGENIUS APPLICATION SERVICE LEVEL MANAGER-TM- generates reports on
applications' service levels from information gathered by NetScout's
Active Agent technology. Network managers use the reports to validate
application response time and to manage relationships with business users
and service providers. The NGenius Active Agent is a Java application
deployed on or near the desktop to gather application response time
information from the customer perspective. It generates synthetic
transactions to "test" the application environment and report response
time. A single Active Agent can represent multiple applications, providing
a cost-effective approach to tracking business transactions.

INFORMATION COLLECTION AND GENERATION. At the heart of NetScout's value to
its customers is the unique network and application behavior and performance
information generated from data collected by

6

NetScout's real-time probes. NetScout probes attach to the network and passively
monitor traffic patterns on the network core, backbone and server connections,
collecting vital data, unique statistics, event monitoring, and protocol
decoding at the physical, network and application levels of the network. By
placing probes at strategic locations throughout a network, organizations gain
network-wide visibility of their traffic flows so they can better understand and
optimize performance and the applications being delivered across the network.
They can also be deployed to track and report on network usage by applications,
departments, or users, which can then be used to implement usage based billing.

NetScout continually enhances its probe technology to ensure visibility into
all types of network traffic and communications technologies. Today, NetScout's
probes monitor all business applications, as well as voice, video, and Web
applications. NetScout recently introduced expanded support for Voice-over-IP,
Voice-over-Frame-Relay and Virtual Private Networks to its monitoring
capabilities. NetScout has probes to support the widest range of network
topologies, including Gigabit Ethernet; Fast Ethernet; Fast EtherChannel;
Ethernet; Frame Relay and Wide Area Network T1/E1; Demarcation-point T1D/E1D;
Frame Relay and Wide Area Network HSS1, DS3/E3; Asynchronous Transfer Mode for
DS3/E3 and OC-3c/STM-1; and Packet-over-SONET for OC-3c/STM-1 and OC-12c/ATM-4.
Our track record of innovation began with the introduction of Ethernet probes in
1992, and we have continued to innovate probe technology with the addition of
more than thirty new probes over the past ten years. In conjunction with probe
innovation, we have continually expanded our network traffic monitoring
capabilities by innovating highly valuable, unique applications performance
information through new probe software extensions, including extensions for
application response time, web-application content response time and
Voice-over-IP. Maintenance customers with probes installed can upgrade them by
downloading new versions of the probe software over their network, keeping their
monitoring capability current with NetScout's industry leading innovations.

NetScout also offers value-added proprietary software enhancements to its
probes. Some of those enhancements include: NetFlow Monitor, which integrates
traffic information stored in Cisco routers with other traffic information;
Application Response Time Management Information Base, which enables monitoring
of application response time within the network; HTTP Content Response Time
Management Information Base, which provides monitoring of Web services'
responsiveness; Voice-over-IP Management Information Base, which provides
performance management for converged voice and data networks; and Virtual Local
Area Network Monitor, which allows traffic monitoring of specific sets of users
within a switched network for either increased troubleshooting or traffic
accounting.

STRATEGY

Our objective is to enhance shareholder value through continued growth,
profitability and market leadership. We intend to pursue growth through
expanding our worldwide presence, expanding our customer base, and increasing
our ongoing business and penetration with our established customers. We intend
to extend our market leadership by continuing to develop the market's first
strategic, integrated, network performance management platform that overlays the
network and generates the information needed to proactively avoid network
failures and performance degradations. Key elements of our strategy include:

EXTEND TECHNOLOGY LEADERSHIP. We intend to continue to devote significant
development resources to expanding and enhancing our first-to-market, integrated
platform for performance management solutions that capitalizes on our extensive
experience with global companies and their very large computer networks. Key
aspects of our technology leadership include the ability to develop new and
groundbreaking performance management techniques, the ability to deliver
solutions across a multi-vendor environment, and our vision of emerging uses of
communications technology and networked environments. As part of our strategy,
we will enter into strategic relationships with, and/or acquire other companies
to complement our technologies. We intend to incorporate new technologies and
provide solutions that will enable

7

businesses, service providers and carriers to manage and optimize the
performance of their networks, network-delivered applications and network-based
service offerings.

EXPAND REPORTING AND ANALYSIS SOFTWARE SUITE. We plan to develop new
analysis, presentation and reporting software to capitalize on growing demands
for integrated performance management solutions and opportunities created by
changes in networking technologies and trends, such as Voice-over-IP and storage
networks. We also plan to leverage the unique information generated by our
probes and integrated reporting and analysis tools, through new nGenius software
products.

EXTEND PROBE SUITE. We plan to continue to expand our probe line to extend
our monitoring capabilities to meet emerging network environments, higher
speeds, new types of traffic, new communications architectures, new
communications technologies and new network topologies. To ensure that our
customers are able to achieve comprehensive oversight of their networks, we will
maintain older topologies while regularly introducing probes for newer ones. Our
probe suite covers topologies for both domestic and international markets.

LEVERAGE INSTALLED BASE OPPORTUNITIES. More than 80,000 network segments
are monitored by the more than 3,000 customers that have deployed NetScout
products worldwide. We have initiated steps to target existing users of our
products with marketing and sales programs designed to promote more extensive
use of our performance management solutions. Customers purchase products through
our reseller partners or direct from us. In both cases, we participate in
selling to them using a "high-touch" selling model. In this model, NetScout's
worldwide field sales force maintains a very high presence with customers and
prospects, consulting in both direct and reseller sales opportunities to satisfy
customers' needs.

TARGET MARKET OPPORTUNITIES. We target our products at markets that we
believe have the potential for growth. We have identified the following markets
as having the potential for increasingly strong demand for our integrated
products:

- Global enterprises;

- Global service providers, including carriers, Internet Service Providers,
or ISPs, Managed Service Providers, or MSPs, and outsourcers; and

- Professional technology services organizations, such as systems
integrators.

CISCO RELATIONSHIP. Since 1994, we have had a strategic relationship with
Cisco. Over time, the relationship expanded to include exchange of technology
development plans, the private labeling and reselling of NetScout's probes and
real-time monitoring software and joint field sales and support activities.
Development activities have included the quarterly exchange of technology and
product plans between NetScout and Cisco to guide development of network
management technologies that align with the future needs of Cisco-powered
networks. Standard functionality in NetScout's solutions has grown to include
support for Cisco's switch product line, ISL, Netflow and QoS, and the resale of
NetScout's software technology in the CiscoWorks2000 Routed LAN Management
Solution software bundle. On June 12, 2001, NetScout announced a change in the
Cisco relationship where Cisco discontinued private labeling and reselling
NetScout's probes and began referring sales opportunities for probes directly to
NetScout. During fiscal year 2002 NetScout successfully transitioned Cisco
customers to NetScout's direct and indirect sales channels. The change was
precipitated by the two companies' need to evolve their sales and support model
to better meet changing customer requirements and needs for profitability. The
addition in 2001 of NetScout's NGenius Real-Time Monitor software to Cisco's
CiscoWorks2000 Routed LAN Management Solution software bundle is the most recent
step in that strategy. The strategic aspect of the relationship involving the
early exchange of technology plans continues. The two companies' development
organizations collaborate closely on product direction. Our strategy is to
continue to

8

collaborate with Cisco on technology development and to support Cisco's
continued distribution of our software products.

EXPAND DISTRIBUTION CHANNELS. We plan to continue to increase our direct
field sales presence where it is advantageous to do so during fiscal year 2003.
We also seek to develop additional indirect distribution channels with systems
integrators, resellers and service providers. In addition to Cisco, our channel
relationships include GE CompuNet, Avnet Computer, Northrup Grumman, Acterna,
Siemens, TGS Telonic, Morse Limited and others. These and other important
partners facilitate the worldwide distribution and market acceptance of our
solutions.

FACILITATE DEVELOPMENT OF COMPLEMENTARY THIRD-PARTY PRODUCTS AND STRATEGIC
RELATIONSHIPS. Our probes generate rich performance information that can be
leveraged by third-party software products. As a means to increase demand for
our products, we encourage the development of applications that leverage our
solutions. Our NGenius product platform also facilitates delivery of
complementary performance management and reporting applications with its open
style architecture and user interface portal. OpNet, a partner, uses our unique
network information to develop sophisticated, predictive models of our joint
customers' networks' behavior. We expanded our partnership with OpNet, where
they are integrating our real time traffic and performance information into
their products. In addition, NetScout's NGenius Real Time Monitor is integrated
with Hewlett Packard's OpenView Network Node Manager.

NetScout intends to leverage the competitive advantage of its application
and user level network traffic information generating technology in probes,
agents and analysis software, to build the broadest, most robust network
performance management for the strategic enterprise networks of the future, a
solution on which all other network management will be based.

SALES AND MARKETING

NetScout targets corporations and service providers with large,
mission-critical networks through a combination of direct and indirect sales
channels. Our direct sales teams play an integral and influential role in
serving a large portion of our channel partners' accounts, providing the
consulting expertise needed to determine the technical and practical needs of
customers and designing and presenting the solutions that best suit those needs.
We prioritize hiring practices and training programs to ensure our sales
personnel are both highly talented and well trained. We continue to provide
programs for our direct sales force, as well as channel partners, throughout the
year, for in-depth product and technical training. We encourage joint
initiatives involving our sales teams and the teams of our partners.

NetScout's sales force utilizes a "high-touch" sales model that consists of
meetings with end-users to understand and identify their individual business
requirements. Our sales teams then translate those requirements into tailored
business solutions that would maximize performance of their network. Due to the
complexity of the systems and the capital expenditure involved, our sales cycle
can extend anywhere from three to twelve months. There is significant, ongoing
revenue opportunity with customers throughout the life of their networks and our
sales model is designed to capitalize on this opportunity.

Over the past several years, the largest portion of our indirect sales has
channeled through our strategic partner, Cisco Systems, Inc. Revenue derived
through the Cisco channel represented 50%, 51% and 32% of our total revenue for
the fiscal years ended March 31, 2000, 2001 and 2002, respectively.
Approximately 17%, 13% and 13% of total revenue for the fiscal years ended
March 31, 2000, 2001 and 2002, respectively, has been derived through royalties
we receive as compensation for our core monitoring technology being resold as
part of CiscoWorks2000 Routed software bundle. The remaining 33%, 38% and 19% of
total revenue for the fiscal years ended March 31, 2000, 2001 and 2002,
respectively, has been derived through ongoing sales and support of NetScout
probes to Cisco customers accomplished through joint selling by Cisco and
NetScout sales organizations. Through these joint sales and support activities,
NetScout has maintained relationships with many of the largest enterprises. The
recent change in the selling model for NetScout probes to Cisco customers
influences only sales associated with NetScout

9

probes. Sales of our software, in the CiscoWorks2000 software bundle, are not
affected. With our sales infrastructure strengthened over the last two years and
our historically close involvement with Cisco customers, we have been successful
in transitioning Cisco-filled sales to our direct and indirect channels. Our
strategic relationship with Cisco is governed by a project development and
license agreement dated as of January 13, 1994 and private labeling agreement
dated as of October 17, 1995, which terms expire October 31, 2002.

Our indirect channel partners include original equipment manufacturers,
distributors, resellers, service providers and system integrators. Total revenue
from indirect distribution channels represented 78%, 72% and 59% of total
revenue for the fiscal years ended March 31, 2000, 2001 and 2002, respectively.

Our sales force is organized into three main regions, North America,
Europe-Middle East-Africa and Asia Pacific. Revenue from sales outside North
America represented 13%, 10% and 13% of our total revenue in the fiscal years
ended March 31, 2000, 2001 and 2002, respectively. Sales outside North America
are primarily through indirect channel partners, which are generally responsible
for importing products and providing consulting and technical support and
service to customers within their territory. Our reported international revenue
does not include any revenue from sales to customers outside North America made
by any of our North American-based indirect channel partners. The North America
revenue figures include sales made by NetScout to these North American-based
indirect channel partners. These domestic resellers may sell NetScout product to
international locations, however, NetScout still accounts for these shipments as
North America revenue since NetScout ships the product to a domestic location.
We expect revenue from sales outside North America to continue to account for a
significant portion of our revenue in the future.

As of March 31, 2002, our North American field sales organization consisted
of 76 employees. Our international sales organization consisted of 27 employees
with offices in the United Kingdom, France, Hong Kong, Germany, Norway and
Singapore. In addition, we had 31 employees responsible for providing telesales,
training and sales and administrative support.

As of March 31, 2002, our marketing organization consisted of 14 employees.
Our marketing organization produces and manages a variety of programs such as
advertising, trade shows, public relations, direct mail, seminars, sales
promotions, and web marketing to promote the sale and acceptance of our
solutions and to build the NetScout brand name in the marketplace. Key elements
of our marketing strategy focus on demand generation in new target markets,
demand generation within our installed base, and acceleration of strategic
selling relationships with local and global resellers and systems integrators.

SUPPORT SERVICES

Customer satisfaction is a key driver of NetScout's success. NetScout
MasterCare support programs offer customers various levels of high quality
support services to assist in the deployment of our solutions. NetScout offers
premium 24/7 toll free support to its MasterCare Platinum customers in addition
to our standard MasterCare Gold support offering. We have support personnel
located in the United States and abroad with some support provided by qualified
third party support partners.

NetScout issues a monthly support newsletter, MasterCare News, which informs
our MasterCare customers of new releases, patches, technical tips and
documentation tips. MasterCare customers receive the benefits of an advanced
customer support web site that provides an on line database of FAQ's and the
latest down loadable patches as well as the on line trouble ticketing system. In
the past year, NetScout has made new investments in call center software, which
will further improve our ability to service our customers.

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RESEARCH AND DEVELOPMENT

Our success depends on our ability to anticipate and innovate solutions that
will meet emerging customer demands. We have extensive experience in market
development in conjunction with pioneering next generation network performance
management technologies. Our core technology for monitoring and troubleshooting
network and applications performance remains positioned at the forefront of a
rising market. In fiscal year 2001, we began new market development in
conjunction with our introduction of the market's first integrated network
performance management system. Our NGenius system leverages the two leading
principal forms of network performance management: real-time network and
applications monitoring and troubleshooting with historical-based capacity
planning. Our plans are to leverage the comprehensive benefits of this new
platform into emerging, growth-oriented markets.

As of March 31, 2002, our research and development organization consisted of
104 employees. In addition, we contract with third parties to perform specific
development projects. Research and development expenditures for the fiscal years
ended March 31, 2000, 2001 and 2002 were approximately $9.5 million,
$15.4 million and $19.8 million, respectively. To date, all research and
development expenses have been expensed as incurred.

We predominantly develop our products internally, with some third party
contracting. To promote industry standards and manifest technology leadership,
we engage actively in, contribute to, and often provide a leadership role in
Internet Engineering Task Force (IETF) standards-making activities. These
activities provide early insight into the direction of the network and
application performance management requirements going forward for current and
emerging technologies.

We also continue our technology collaboration within the framework of our
strategic relationship with Cisco Systems, Inc. As a part of this collaboration,
we review and address the network and application performance management needs
and plans engendered by Cisco-specific standards-implementations, extensions
thereto, technologies, and product and technology initiatives. These
collaborations, similar to the IETF activities, also provide NetScout with early
insight into Cisco-specific plans and directions, allowing NetScout quick
time-to-market with new products and technologies.

MANUFACTURING

Our manufacturing operations consist primarily of final product assembly,
configuration and testing. We purchase components and subassemblies from
suppliers and construct our hardware products in accordance with general
customer requirements. We inspect, test and use process control to ensure the
quality and reliability of our products. In February 1998, we obtained ISO 9001
quality systems registration, a certification showing that our corporate
procedures and manufacturing facilities comply with standards for quality
assurance and process control. NetScout successfully renewed its ISO 9001
certification in February 2002. As of March 31, 2002, our manufacturing
organization consisted of 21 employees.

Although we generally use standard parts and components for our products,
each of the computer network interface cards used in our probes is currently
available only from separate single source suppliers. We have generally been
able to obtain adequate supplies of components in a timely manner from current
suppliers. We have few supply commitments with our suppliers but believe that,
in most cases, alternate suppliers can be identified if current suppliers are
unable to fulfill our needs.

CUSTOMERS

We sell our products to businesses and organizations with large and
medium-sized, high-speed computer networks. We have sold a majority of our
products through indirect distribution channels to more than 3,000 customers
worldwide. Our products have been sold to customers operating in a wide variety
of industries, such as financial services, technology, manufacturing,
government, service provider, healthcare and retail. Due to rapid order
fulfillment we do not operate with significant backlog.

11

We have worked closely and extensively with Cisco in joint sales and support
activities involving Cisco customers during the past several years. We have
established strong relationships with a great portion of Cisco customers during
this time and we have successfully transferred relationships with those
customers over to NetScout. Other than Cisco, no other customer represented more
than 10% of our revenue for the fiscal years ended March 31, 2000, 2001 and
2002.

COMPETITION

The market for our products is new and rapidly evolving, and is expected to
become increasingly competitive as current competitors expand their product
offerings and new companies enter the market. Our principal competitors include
a number of companies offering one or more solutions for the network and
application performance management market, some of which compete directly with
our products. For example, we compete with probe vendors of portable network
traffic analyzers, such as Network Associates, Inc, and providers of network
performance management solutions such as Concord Communications. In addition,
leading network equipment providers could offer their own or competitors'
solutions in the future. We believe that the principal competitive factors in
the network and applications performance management solutions market include
product performance, functionality and price, name and reputation of vendor,
distribution strength, and alliances with industry partners.

Although we believe that we currently compete favorably with respect to
these factors, there can be no assurance that we can maintain our competitive
position against current and potential competitors, especially those with
greater financial, management, marketing, service, support, technical,
distribution or other resources.

INTELLECTUAL PROPERTY RIGHTS

Our success and competitiveness are dependent to a significant degree on the
protection of our proprietary technology. We rely primarily on a combination of
copyrights, trademarks, licenses, trade secret laws and restrictions on
disclosure to protect our intellectual property and proprietary rights. We also
enter into confidentiality agreements regarding proprietary information.

We pursue registration of some of our trademarks in the U.S. and in other
countries. We have registered the trademark NETSCOUT in the U.S., Canada and the
European Union and the NetScout Logo in the U.S., Canada and Japan. We also own
registrations in the U.S., Australia, Hong Kong, Japan, and Switzerland for
NEXTPOINT, in the U.S. and the European Union for SYNTHETIC TRANSACTIONS, in the
U.S., European Union, and Japan for TRAFFIC SIGNATURES, and in the European
Union and Japan for APPSCOUT and BUSINESS-CENTRIC NETWORK MANAGEMENT.

In addition, we have applications for registration pending in the U.S. for
the following trademarks: ART MIB, NGENIUS (also in Canada and the European
Union), NGENIUS EVENT MANAGER, NGENIUS PACKET ANALYZER, NGENIUS PERFORMANCE
MONITOR, NGENIUS PROBES and NGENIUS TRAFFIC MONITOR.

Additionally, NetScout has rights in the unregistered trademarks NGENIUS
REAL-TIME MONITOR, NGENIUS CAPACITY PLANNER, and NGENIUS APPLICATION SERVICE
LEVEL MANAGER and to the NetScout slogan, "BECAUSE THE NETWORK IS THE BUSINESS".

NetScout has certain patents pending with the United States Patent and
Trademark Office as a result of the assignment of such patent applications by
NextPoint to NetScout pursuant to the NextPoint acquisition. These are
EVALUATING COMPUTER RESOURCES and MANAGING COMPUTER RESOURCES.

Additionally, NetScout has a provisional patent pending with the United
States Patent and Trademark office for NetScout's REAL TIME NETWORK PERFORMANCE
MONITORING SYSTEM AND RELATED METHODS.

12

EMPLOYEES

As of March 31, 2002, we had 355 employees, 243 of whom were based at our
headquarters in Westford, Massachusetts. None of our employees are subject to a
collective bargaining agreement. We believe that our relations with our
employees are good.

ITEM 2. PROPERTIES

We currently lease approximately 175,000 square feet of space in an office
building in Westford, Massachusetts for our headquarters. The current lease will
expire in August 2013 and we have an option to extend the lease for an
additional five-year term. We also lease office space in thirteen other cities
for our sales and support personnel, including 3,200 square feet of space in the
United Kingdom. We believe that these existing facilities are adequate to meet
our foreseeable requirements or that suitable additional or substitute space
will be available on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

Prior to the acquisition of NextPoint Networks, Inc. ("NextPoint"), a
reseller of NextPoint filed an action against NextPoint alleging breach of
contract. NextPoint denied the claim. An escrow balance was established at the
time of the acquisition to account for potential losses related to this suit and
this escrow balance significantly limited NetScout's exposure. NetScout recorded
an accrual to account for any additional expenses. The matter was settled in
January 2002. Subsequent to year end, escrow funds were released and NetScout
received the appropriate escrow balance to finalize this matter.

In addition to the matter noted above, from time to time, NetScout is
subject to legal proceedings and claims in the ordinary course of business. In
the opinion of management, the amount of ultimate expense with respect to any
other current legal proceedings and claims will not have a significant adverse
effect on NetScout's financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 2002.

13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

The Company completed its initial public offering on August 17, 1999 at a
price of $11.00 per share. Since that time, the Company's common stock has
traded on the Nasdaq National Market under the symbol NTCT. The following table
sets forth, for the periods indicated, the high and low closing sales prices for
the common stock. Such information reflects inter-dealer price, without retail
mark-up, markdown or commission and may not represent actual transactions.

As of June 14, 2002 there were approximately 4,435 stockholders of record of
the Company's common stock.

DIVIDEND POLICY

In fiscal years 2001 and 2002, we did not declare any cash dividends and do
not anticipate declaring cash dividends in the foreseeable future. In addition,
the terms of our bank loan agreement prohibit the payment of cash dividends on
our capital stock. It is our intention to retain all future earnings for
reinvestment to fund our expansion and growth. Any future cash dividend
declaration will be at the discretion of our Board of Directors and will depend
upon, among other things, our future earnings, general financial conditions,
capital requirements, and general business conditions.

USE OF PROCEEDS

On August 17, 1999, we completed our initial public offering of three
million shares of common stock at a price of $11.00 per share. The principal
underwriters for the transaction were Deutsche Banc Alex. Brown, Bear,
Stearns & Co. Inc. and Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated. The registration statement relating to this offering was declared
effective by the Securities and Exchange Commission (SEC File Number 333-76843)
on August 12, 1999. We received net proceeds of $29.6 million after deducting
$2.3 million in underwriting discounts and commissions and $1.1 million in other
offering expenses.

Upon the exercise of the over allotment option by the underwriters, certain
selling security holders sold 450,000 shares of common stock for net proceeds of
approximately $4.6 million after deducting underwriting discounts and
commissions.

Approximately $23.3 million of the proceeds from our initial public offering
were used in the acquisition of NextPoint. The balance of proceeds has been
invested primarily in U.S. Treasury obligations and other interest bearing
investment grade securities.

RECENT SALES OF UNREGISTERED SECURITIES

None.

14

ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below should be read in
conjunction with our audited consolidated financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of operations data for the years ended March 31, 2000,
2001 and 2002, and the consolidated balance sheet data as of March 31, 2001 and
2002, are derived from audited consolidated financial statements included
elsewhere in this Annual Report on Form 10-K. The consolidated statement of
operations data for the years ended March 31, 1998 and 1999, and the
consolidated balance sheet data as of March 31, 1998, 1999 and 2000, have been
derived from audited consolidated financial statements of NetScout that do not
appear in this Annual Report on Form 10-K. On July 7, 2000, NetScout acquired
all of the outstanding common and preferred stock of NextPoint. The results of
operations of NextPoint subsequent to July 7, 2000 have been included in
NetScout's consolidated statement of income and consolidated balance sheet for
fiscal year 2001. The historical results are not necessarily indicative of the
operating results to be expected in the future.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

The following information should be read in conjunction with the audited
consolidated financial information and the notes thereto included in this Annual
Report on Form 10-K.

In addition to the other information in this report, the following
Management's Discussion and Analysis should be considered carefully in
evaluating the Company and our business. This Annual Report on Form 10-K
contains forward-looking statements. These statements relate to future events or
our future financial performance and are identified by terminology such as
"may", "will", "could", "should", "expects," "plans," "intends," "seeks,"
"anticipates," "believes," "estimates," "potential," or "continue" or the
negative of such terms or other comparable terminology. These statements are
only predictions. You should not place undue reliance on these forward-looking
statements. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various important factors,
including the risks outlined under "Certain Factors Which May Affect Future
Results" in this section of this report and our other filings with the
Securities and Exchange Commission. These factors may cause our actual results
to differ materially from any forward-looking statement.

OVERVIEW

NetScout Systems, Inc. designs, develops, manufactures, markets, sells and
supports a family of integrated products that enable optimization of the
performance and cost management of complex, high-speed networks, including their
ability to efficiently deliver critical business applications and content to
end-users. NetScout manufactures and markets these products in an integrated
hardware and software solution suite that is used by enterprise and service
provider businesses worldwide. We manage our business as a single operating
segment.

NetScout was incorporated in 1984 as a consulting services company. In 1992,
we began to develop and market its first infrastructure performance management
products. Our operations have been financed principally through cash provided by
operations. On July 7, 2000, NetScout completed its acquisition of NextPoint
Networks, Inc. The transaction was valued at approximately $52.5 million.

CRITICAL ACCOUNTING POLICIES

NetScout considers accounting policies related to revenue recognition,
accounts receivable and allowance for doubtful accounts, valuation of
inventories and valuation of long-lived assets to be critical in fully
understanding and evaluating our financial results

REVENUE RECOGNITION

Product revenue consists of sales of our hardware products and licensing of
our software products. Product revenue is recognized upon shipment, provided
that evidence of an arrangement exists, title and risk of loss have passed to
the customer, fees are fixed or determinable and collection of the related
receivable is reasonably assured. Revenue is recorded net of estimated product
returns, which is based

16

upon our return policy, sales agreements, management estimates of potential
future product returns related to current period revenue, current economic
trends, changes in our customer composition and historical experience. If our
judgments and estimates relating to the product returns prove to be inadequate,
our financial results could be materially adversely affected in future periods.

Service revenue consists primarily of fees from customer support agreements,
consulting and training. NetScout generally provides three months of software
support and 12 months of hardware support as part of product sales. Revenue from
software support is deferred and recognized ratably over the three-month support
period. Revenue from hardware support is deferred and recognized ratably over
the 12-month support period. In addition, customers can elect to purchase
extended support agreements, typically for 12-month periods. Revenue from these
agreements is deferred and recognized ratably over the support period. Revenue
from consulting and training is recognized as the work is performed.

For multi-element arrangements, each element of the arrangement is analyzed
and a portion of the total fee under the arrangement is allocated to the
undelivered elements, primarily support agreements and training, using vendor
objective evidence of fair value of the element and the remaining portion of the
fee is allocated to the delivered elements (i.e., generally, hardware products
and licensed software products), regardless of any separate prices stated within
the contract for each element, under the residual method. Vendor objective
evidence of fair value is based on the price customers pay when the element is
sold separately.

License and royalty revenue consists primarily of royalties under license
agreements by original equipment manufacturers who incorporate components of our
data collection technology into their own products or who reproduce and sell our
software products. License revenue is recognized when delivery has occurred and
when we become contractually entitled to receive license fees, provided that
such fees are fixed or determinable and collection is probable. Royalty revenue
is recognized based upon product shipment by the license holder.

Revenue generated from indirect distribution channels, including original
equipment manufacturers, distributors, resellers, system integrators and service
providers, represented 78%, 72% and 59% of total revenue for the fiscal years
ended March 31, 2000, 2001 and 2002, respectively. Total revenue generated from
Cisco Systems, Inc. represented 50%, 51% and 32% of our total revenue for the
fiscal years ended March 31, 2000, 2001 and 2002, respectively. No other
customer or indirect channel partner accounted for 10% or more of our total
revenue during the fiscal years ended March 31, 2000, 2001 and 2002.

In the past, Cisco resold our probes to customers under their private label.
As of July 28, 2001, Cisco no longer marketed or sold NetScout probes under
their private label, however they continued to place their backlog orders with
us through December 31, 2001. Additionally, Cisco continues to incorporate
components of our software technology into their products. We will continue to
collaborate with Cisco on product development and marketing and to support
Cisco's continued distribution of our software products. We have completed the
transition of Cisco customers to a direct or reseller relationship with
NetScout. NetScout also sees continued opportunity in our relationship with this
computer networking industry leader and intend to continue increasing the sale,
visibility and accelerated market acceptance of our products via this
relationship worldwide.

Revenue from sales outside North America represented 13%, 10% and 13% of our
total revenue for the fiscal years ended March 31, 2000, 2001 and 2002,
respectively. Sales outside North America are primarily due to indirect channel
partners, which are generally responsible for importing products and providing
consulting and technical support and service to customers within their
territory. Our reported international revenue does not include any revenue from
sales to customers outside North America made by any of our North American-based
indirect channel partners. These domestic resellers may sell NetScout products
to international locations, however, NetScout still reports these shipments as
North America revenue since NetScout ships the products to a domestic location.
NetScout expects revenue from sales outside North America to continue to account
for a significant portion of our revenue in the future.

17

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable is reduced by an allowance for doubtful accounts. Our
normal payment terms are net 30 days. We monitor all payments from our customers
and assess any collection issues as they arise. Management believes its credit
policies are prudent and reflect normal industry terms and business risk. At
March 31, 2001 and 2002, one customer accounted for approximately 15% and 8%,
respectively, of our accounts receivable. Historically, we have not experienced
any significant non-performance by our customers nor do we anticipate
non-performance by our customers in the future and, accordingly, do not require
collateral from our customers. We perform full credit checks on all potential
new customers prior to acceptance of the order. We maintain allowances for
doubtful accounts for possible losses resulting from the failure of our
customers to make their required payments and any losses are recorded as general
and administrative expenses. The allowance for doubtful accounts is based upon
management estimates of the un-collectability of our accounts receivables.
Management specifically analyzes accounts receivable and historical bad debts,
customer credit-worthiness, current economic trends and customer concentrations
when evaluating the adequacy of the allowance for doubtful accounts. Significant
management judgments and estimates are made when establishing the allowance for
doubtful accounts. If our judgments and estimates relating to the allowance for
doubtful accounts prove to be inadequate, our financial results could be
materially adversely affected in future periods.

VALUATION OF INVENTORIES

Inventories are stated at actual cost. Inventories consist primarily of raw
materials and finished goods. Many components that are necessary for the
assembly of our probes are obtained from separate sole source suppliers or a
limited group of suppliers. Our reliance on sole or limited suppliers involves
several risks, including a potential inability to obtain an adequate supply of
required components and reduced control over pricing, quality and timely
delivery of components. Generally, we do not maintain long-term agreements with
any of our suppliers or large volumes of inventory. Our inability to obtain
adequate deliveries or the occurrence of any other circumstance that would
require us to seek alternative sources of these components would affect our
ability to ship our products on a timely basis. This could damage relationships
with current and prospective customers, cause shortfalls in expected revenue and
could materially adversely affect our business, operating results and financial
condition, thereby adversely effecting our financial condition and results of
operations.

Inventories are reduced by a reserve for obsolete and excess inventory.
Management regularly monitors our inventories for potential obsolete and excess
inventory. Our reserve for obsolete and excess inventory is based upon
management's estimated forecasts of unit sales and estimated timing and impact
of new product introductions. Management considers historical product demand,
current economic trends, expected market acceptance of our products and expected
customer buying patterns when evaluating the adequacy of the reserve for
obsolete and excess inventory. Significant management judgments and estimates
must be made when establishing the reserve for obsolete and excess inventory. If
our judgments and estimates relating to obsolete and excess inventory prove to
be inadequate, our financial results could be materially adversely affected in
future periods.

VALUATION OF LONG-LIVED ASSETS

NetScout regularly performs reviews on the carrying value of our long-term
assets to determine if any impairment is present. Items which could trigger
impairment could include but are not limited to significant underperformance
relative to historical product demand, significant negative industry or economic
trends, significant decline in our stock price for a sustained period and
significant decline in our technological value compared to the market.
Management considers historical product demand, current economic trends,
customer buying patterns, customer credit-worthiness and expected revenue
projections when estimating expected future cash flows. No such impairment has
been indicated to date. Significant management judgments and estimates must be
made when establishing criteria for future cash flows. If our

18

judgments and estimates relating to long-term assets prove to be inadequate, our
financial results could be materially adversely affected in future periods.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
total revenue of certain line items included in our Statements of Operations:

NETSCOUT SYSTEMS, INC.
STATEMENTS OF OPERATIONS PERCENTAGES

FISCAL YEARS ENDED MARCH 31, 2002 AND 2001

REVENUE

Total revenues were $82.3 million and $108.0 million for the fiscal years
ended March 31, 2002 and 2001, respectively, representing a decrease of 24% from
2001 to 2002.

PRODUCT. Product revenues were $51.6 million and $75.7 million for the
fiscal years ended March 31, 2002 and 2001, respectively, representing a
decrease of 32% from 2001 to 2002. This decrease was primarily due to a 49%
decrease in unit sales, which was attributable to the continued slowdown in
network management capital spending in many large enterprises as a result of the
economic downturn, offset by an increase in the average selling price of 28%
attributable to the sale of our higher-end probes. It is unknown what effect the
tight capital spending controls in the U.S. and abroad will continue to have on
this economic downturn and what impact, if any, it will have on our future
product revenue results.

19

SERVICE. Service revenues were $21.1 million and $18.5 million for the
fiscal years ended March 31, 2002 and 2001, respectively, representing an
increase of 14% from 2001 to 2002. This increase was primarily due to an
increase in the number of customer support agreements attributable to new
product sales generated in recent reporting periods combined with continued
renewals of customer support agreements from our continually-expanding installed
base.

LICENSE AND ROYALTY. License and royalty revenues were $9.6 million and
$13.8 million for the fiscal years ended March 31, 2002 and 2001, respectively,
representing a decrease of 30% from 2001 to 2002. This decrease corresponded
with the continued slowdown in network management capital spending as a result
of the economic downturn. It is unknown what effect the tight capital spending
controls in the U.S. and abroad will continue to have on this economic downturn
and what impact, if any, it will have on our future license and royalty revenue
results.

COST OF REVENUE AND GROSS MARGIN

PRODUCT. Cost of product revenue consists primarily of components,
personnel costs, media duplication, manuals, packaging materials, licensed
technology fees and overhead. Cost of product revenue was $18.5 million and
$25.7 million for the fiscal years ended March 31, 2002 and 2001, respectively,
representing a decrease of 28% from 2001 to 2002. This decrease corresponds with
the 32% decrease in product revenue attributable to the overall current slowdown
in network management capital spending in many large enterprises as a result of
the economic downturn. Product gross margins were 64% and 66% for the fiscal
years ended March 31, 2002 and 2001, respectively. The decrease in gross margin
was mainly caused by an increase in fixed manufacturing costs, which was
allocated over the decreased number of units during the fiscal year.

SERVICE. Cost of service revenue consists primarily of personnel costs,
material and consulting costs. Cost of service revenues were $3.6 million and
$3.5 million for the fiscal years ended March 31, 2002 and 2001, respectively,
representing an increase of 5% from 2001 to 2002. Service gross margins were 83%
and 81% for the fiscal years ended March 31, 2002 and 2001, respectively. This
increase in cost was primarily due to an increase in our personnel costs,
partially offset by a decrease in consulting costs. While cost of service
revenue increased by 5%, service revenue itself increased by 14%, thereby
improving our gross margin.

Gross margins were $60.2 million and $78.8 million for the fiscal years
ended March 31, 2002 and 2001, respectively, representing a decrease of 24% from
2001 to 2002. Gross margin percentage was 73% for each of the fiscal years ended
March 31, 2002 and 2001, respectively. The decrease in margin dollars was
primarily due to the decrease in unit sales attributable to the overall current
slowdown in network management spending in many large enterprises as a result of
the economic downturn. Gross margin is primarily affected by the mix of product,
service, license and royalty revenue and by the proportion of sales through
direct versus indirect distribution channels. We realize significantly higher
gross margins on license and royalty revenue relative to product and service
revenue. We typically realize higher gross margins on direct sales relative to
indirect distribution channel sales.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel costs, fees for outside consultants and related costs
associated with the development of new products and the enhancement of existing
products. Research and development expenses were $19.8 million and
$15.4 million for the fiscal years ended March 31, 2002 and 2001, respectively,
representing an increase of 29% from 2001 to 2002. This increase was primarily
due to a 33% increase in personnel costs from 2001 to 2002, attributable to the
acquisition of NextPoint, the impact of a full year of personnel costs related
to employees hired during fiscal year 2001 and the reclassification of certain
job functions. In addition there was a 40% increase of stock-based compensation
charges related to the NextPoint acquisition from 2001 to

20

2002. We anticipate that we will decrease research and development expenses in
absolute dollars in the near future as we continue to maintain tight spending
controls during the current economic downturn. We will continue to monitor the
economic situation and will resume growth of our development investment once we
again achieve revenue and profit growth.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel costs and costs associated with marketing programs such as trade
shows, seminars, advertising and new product launch activities. Sales and
marketing expenses were $36.0 million and $40.0 million for the fiscal years
ended March 31, 2002 and 2001, respectively, representing a decrease of 10% from
2001 to 2002. This decrease was primarily due to a 60% decrease in marketing
programs spending and a decrease in travel expenses by 15% as a result of a
concerted expense control program and a decline in recruiting expenses of 79%
from 2001 to 2002. We anticipate that we will commit additional resources to
sales and marketing in the future and that sales and marketing expenses will
increase in absolute dollars year over year in our continued effort to promote
revenue growth and NetScout name recognition.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel costs for executive, financial, information services and
human resource employees. General and administrative expenses were $8.1 million
and $8.4 million for the fiscal years ended March 31, 2002 and 2001,
respectively, representing a decrease of 3% from 2001 to 2002. This decrease was
primarily due to a 6% decrease in personnel costs from 2001 to 2002. We
anticipate that we will decrease general and administrative expenses in absolute
dollars in the near future as we continue to maintain tight spending controls
during the current economic downturn. We will continue to monitor the economic
situation and reevaluate spending once the economy improves.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill and other intangible assets was $10.5 million and $7.9 million for the
fiscal years ended March 31, 2002 and 2001, respectively, due to the acquisition
of NextPoint in the beginning of the second quarter of fiscal year 2001. With
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," effective April 1, 2002, goodwill and
the un-amortized assembled workforce intangible asset will no longer be subject
to amortization.

IN-PROCESS RESEARCH AND DEVELOPMENT. In-process research and development
("IPR&D") was $268,000 for the fiscal year ended March 31, 2001 due to the
acquisition of NextPoint. A portion of the purchase price was allocated to
acquired IPR&D and completed technology. Completed technology and IPR&D were
identified and valued through interviews and analysis of data regarding products
under development. Developmental projects that had reached technological
feasibility were classified as completed technology. Projects that had not
reached technological feasibility and had no future alternative uses were
classified as IPR&D and charged as an expense on the day of the acquisition. The
value of IPR&D was determined considering the project's stage of completion, the
time and resources needed for completion, the contribution of core technology
and the projected discounted cash flows of completed products. The discount rate
was determined considering weighted average cost of capital and the risk
surrounding the successful completion of the projects under development.

INTEREST INCOME, NET. Interest income, net of interest expense, was
$1.9 million and $3.9 million for the fiscal years ended March 31, 2002 and
2001, respectively, representing a decrease of 51% from 2001 to 2002. This
decrease was primarily due to lower market interest rates on cash equivalents
and marketable securities.

PROVISION FOR (BENEFIT FROM) INCOME TAXES. The provision for (benefit from)
income taxes was ($927,000) and $7.0 million for the fiscal years ended
March 31, 2002 and 2001, respectively, as a result of lower taxable income.

21

NET INCOME (LOSS). Net income (loss) was ($11.4) million and $3.7 million
for the fiscal years ended March 31, 2002 and 2001, respectively. The net
decrease in net income year over year was primarily the result of lower revenues
attributable to the overall slowdown in network management capital spending in
many large enterprises as a result of the economic downturn and to a lesser
degree higher amortization of goodwill and other intangible assets and
stock-based compensation expense related to the timing of the acquisition of
NextPoint. Pro forma net income, excluding non-cash amortization of goodwill and
other intangible assets of $10.5 million and $8.2 million for the years ended
March 31, 2002 and 2001, respectively, and stock-based compensation of
$2.3 million and $1.8 million for the years ended March 31, 2002 and 2001,
respectively, was $1.4 million and $13.7 million for the years ended March 31,
2002 and 2001, respectively.

FISCAL YEARS ENDED MARCH 31, 2001 AND 2000

REVENUE

Total revenues were $108.0 million and $86.2 million for the fiscal years
ended March 31, 2001 and 2000, respectively, representing an increase of 25%
from 2000 to 2001.

PRODUCT. Product revenues were $75.7 million and $57.2 million for the
fiscal years ended March 31, 2001 and 2000, respectively, representing an
increase of 32% from 2000 to 2001. This increase was primarily due to a 26%
increase in average selling price attributable to the sale of our higher end
probes.

SERVICE. Service revenues were $18.5 million and $12.8 million for the
fiscal years ended March 31, 2001 and 2000, respectively, representing an
increase of 45% from 2000 to 2001. This increase was primarily due to an
increase in the number of support agreements attributable to new product sales.

LICENSE AND ROYALTY. License and royalty revenues were $13.8 million and
$16.2 million for the fiscal years ended March 31, 2001 and 2000, respectively,
representing a decrease of 15% from 2000 to 2001. This decrease was due to a
transition in a specific product line from one of our partners.

COST OF REVENUE AND GROSS MARGIN

PRODUCT. Cost of product revenue was $25.7 million and $21.1 million for
the fiscal years ended March 31, 2001 and 2000, respectively, representing an
increase of 22% from 2000 to 2001. This increase was primarily due to a 12%
increase in the average cost per unit attributable to the sale of our higher end
probes. Product gross margins were 66% and 63% for the fiscal years ended
March 31, 2001 and 2000, respectively. This increase was primarily due to an
increase in software sales, which have higher margins.

SERVICE. Cost of service revenues were $3.5 million and $1.7 million for
the fiscal years ended March 31, 2001 and 2000, respectively, representing an
increase of 101% from 2000 to 2001. Service gross margins were 81% and 87% for
the fiscal years ended March 31, 2001 and 2000, respectively. This increase in
cost and decrease in margins was primarily due to an increase in material and
consulting costs to support our increased installed customer base.

Gross margins were $78.8 million and $63.3 million for the fiscal years
ended March 31, 2001 and 2000, respectively, representing an increase of 24%
from 2000 to 2001. Gross margin percentage was 73% for each of the fiscal years
ended March 31, 2001 and 2000, respectively. Gross margin is primarily affected
by the mix of product, service, license and royalty revenue and by the
proportion of sales through direct versus indirect distribution channels. We
realize significantly higher gross margins on license and royalty revenue
relative to product and service revenue. We typically realize higher gross
margins on direct sales relative to indirect distribution channel sales. This
increase was primarily due to an increase in the sale of our higher end probes.

22

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses were
$15.4 million and $9.5 million for the fiscal years ended March 31, 2001 and
2000, respectively, representing an increase of 62% from 2000 to 2001. This
increase was primarily due to a 47% increase in personnel costs from 2000 to
2001 and the addition of stock-based compensation charges related to the
NextPoint acquisition.

SALES AND MARKETING. Sales and marketing expenses were $40.0 million and
$27.9 million for the fiscal years ended March 31, 2001 and 2000, respectively,
representing an increase of 43% from 2000 to 2001. This increase was primarily
due to a 51% increase in sales and marketing personnel costs from 2000 to 2001,
an increase in certain personnel related expenses and to a lesser degree a 21%
increase in marketing programs from 2000 to 2001.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$8.4 million and $4.6 million for the fiscal years ended March 31, 2001 and
2000, respectively, representing an increase of 81% from 2000 to 2001. This
increase was primarily due to a 51% increase in personnel costs from 2000 to
2001 and to a lesser degree an increase in expenses for ongoing operations from
2000 to 2001.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill and other intangible assets was $7.9 million for the fiscal year ended
March 31, 2001 due to the acquisition of NextPoint.

IN-PROCESS RESEARCH AND DEVELOPMENT. In-process research and development
("IPR&D") was $268,000 for the fiscal year ended March 31, 2001 due to the
acquisition of NextPoint. A portion of the purchase price was allocated to
acquired IPR&D and completed technology. Completed technology and IPR&D were
identified and valued through interviews and analysis of data regarding products
under development. Developmental projects that had reached technological
feasibility were classified as completed technology. Projects that had not
reached technological feasibility and had no future alternative uses were
classified as IPR&D and charged as an expense on the day of the acquisition. The
value of IPR&D was determined considering the project's stage of completion, the
time and resources needed for completion, the contribution of core technology
and the projected discounted cash flows of completed products. The discount rate
was determined considering weighted average cost of capital and the risk
surrounding the successful completion of the projects under development.

INTEREST INCOME, NET. Interest income, net of interest expense, was
$3.9 million and $2.6 million for the fiscal years ended March 31, 2001 and
2000, respectively, representing an increase of 54% from 2000 to 2001. This
increase was primarily due to an increase in our cash balances related to cash
generated by operations offset by cash used to acquire NextPoint.

PROVISION FOR INCOME TAXES. The provision for income taxes was
$7.0 million and $8.5 million for the fiscal years ended March 31, 2001 and
2000, respectively, representing a decrease of 18% from 2000 to 2001. NetScout's
effective tax rate increased to 65% for the fiscal year ended March 31, 2001
from 36% for the fiscal year ended March 31, 2000 as a result of non-deductible
amortization of goodwill and stock-based compensation expense related to the
acquisition of NextPoint.

NET INCOME. Net income was $3.7 million and $15.2 million for the fiscal
years ended March 31, 2001 and 2000, respectively, representing a decrease of
76% from 2000 to 2001. This decrease was primarily the result of amortization of
goodwill and other intangible assets and stock-based compensation related to the
acquisition of NextPoint. Pro forma net income, excluding non-cash amortization
of goodwill and other intangible assets of $8.2 million for the year ended
March 31, 2001 and stock-based compensation expense of $1.8 million and $442,000
for the years ended March 31. 2001 and 2000, respectively, and using a 34%
effective tax rate, was $13.7 million and $15.7 million for the fiscal years
ended March 31, 2001 and 2000, respectively, representing a 13% decrease from
2000 to 2001. This was primarily due to revenue growth offset by additional
operating expense resulting from the acquisition of NextPoint.

23

CONTRACTUAL OBLIGATIONS

As of March 31, 2002, we had the following current contractual obligations
(in thousands):

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2002, we had $19.3 million in cash and cash equivalents,
$44.8 million in short-term marketable securities and $5.1 million in long-term
marketable securities, together totaling to $69.3 million. We have a line of
credit with a bank, which allows us to borrow up to $10.0 million for working
capital purposes and to obtain letters of credit. The line of credit expires in
March 2003. Amounts available under the line of credit are a function of
eligible accounts receivable and bear interest at the bank's prime rate. As of
March 31, 2002, we had letters of credit outstanding under the line aggregating
$3.2 million. The bank line of credit is secured by our inventory and accounts
receivable.

Cash provided by operating activities was $15.3 million, $17.7 million, and
$13.7 million for the fiscal years ended March 31, 2000, 2001 and 2002,
respectively. In fiscal year 2000, cash provided by operating activities was
primarily derived from net income and to a lesser degree an increase in
depreciation and amortization, accrued compensation and other expenses and
deferred revenue. This was partially offset by increases in accounts receivable,
prepaids and other assets, and refundable income taxes and a decrease in
accounts payable. In fiscal year 2001, cash provided by operating activities was
primarily derived by net income and increases in depreciation and amortization,
amortization of goodwill and other intangible assets, deferred revenue and
compensation expense associated with equity awards. This was partially offset by
an increase in inventories. In fiscal year 2002, cash provided by operating
activities was primarily derived from increases in depreciation and amortization
and amortization of goodwill and other intangible assets, decreases in
inventories and increases in deferred revenue, accrued compensation and other
expenses and compensation associated with equity awards. These are offset by a
decrease in accounts payable, deferred income taxes and increases in accounts
receivable and other assets.

Cash used in investing activities was $24.2 million, $11.3 million and
$51.1 million for the fiscal years ended March 31, 2000, 2001 and 2002,
respectively. In fiscal year 2000, cash used in investing activities was
primarily due to the purchase of marketable securities and, to a lesser degree,
the purchase of fixed assets. For fiscal year 2001, cash used in investing
activities reflects cash paid for the acquisition of NextPoint, the purchase of
marketable securities and the purchase of fixed assets largely offset by the
proceeds from the maturity of marketable securities. For fiscal year 2002, cash
used in investing activities reflects the purchase of marketable securities and
the purchase of fixed assets offset by the proceeds from the maturity of
marketable securities.

Cash provided by financing activities was $32.0 million, $1.5 million and
$426,000 for the fiscal years ended March 31, 2000, 2001 and 2002, respectively.
For fiscal year 2000, cash provided by financing activities was due to the
initial public offering proceeds. For fiscal year 2001, cash provided by
financing activities was due to proceeds from the issuance of common stock
partially offset by the repayment of

24

notes payables assumed with the acquisition of NextPoint. For fiscal year 2002,
cash provided by financing activities was due to proceeds from the issuance of
common stock offset by the purchase of treasury stock.

We believe that our current cash balances and the cash flows generated by
operations will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. If demand for
our product were to decrease substantially there could be a material effect on
our ability to generate cash flow sufficient for our short-term working capital
and expenditure needs. If cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
convertible debt securities. The sale of additional equity or debt securities
could result in additional dilution to our stockholders. A portion of our cash
may be used to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. From time to time, in the
ordinary course of business, we evaluate potential acquisitions of such
businesses, products or technologies.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that all business combinations be accounted for under the
purchase method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS No. 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is after
June 30, 2001. The provisions of SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001, and will be adopted by the Company, as
required, in the first quarter of fiscal year 2003. On April 1, 2002, NetScout
reclassified the remaining un-amortized assembled workforce intangible asset to
goodwill and ceased amortization of goodwill. NetScout does not expect that the
adoption of SFAS No. 142 will have a significant impairment impact on its
consolidated financial statements.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is effective March 2003. SFAS No. 143 addresses the
financial reporting for obligations and retirement costs relating to the
retirement of tangible long-lived assets. NetScout does not expect that the
adoption of SFAS No. 143 will have a significant impact on its consolidated
financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective March 1, 2002. SFAS
No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." NetScout does not expect that
the adoption of SFAS No. 144 will have a significant impact on its consolidated
financial statements.

CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS

Our operating results and financial condition have varied in the past and
may in the future vary significantly depending on a number of factors. Except
for the historical information in this report, the matters contained in this
report include forward-looking statements that involve risks and uncertainties.
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report. Additional risks that are not yet identified or that we currently think
are immaterial may also impair our business operations. Such factors, among
others, may have a material adverse effect upon our business, results of
operations and financial condition.

25

A REDUCTION IN ORDERS FROM CUSTOMERS OF CISCO SYSTEMS, INC. COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS. Although Cisco continues to incorporate some of
our software into their products, as of July 28, 2001, Cisco no longer sold our
probes to third parties under its private label. Cisco did, however, continue to
place their backlog orders with us through December 31, 2001. By selling our
probes under their private label, Cisco accounted for 33%, 38% and 19% of our
total revenue for the fiscal years ended March 31, 2000, 2001 and 2002,
respectively. We now sell to Cisco customers, both directly or through indirect
channel partners but if we are unable to continue to sell our products directly
or through indirect channel partners to customers of Cisco in the future, our
business, operating results and financial condition could be materially
adversely affected.

A TERMINATION OF OUR STRATEGIC RELATIONSHIP WITH CISCO MAY MATERIALLY
ADVERSELY AFFECT OUR BUSINESS. Our strategic relationship with Cisco provides
us with early insight into the development of new technologies. Additionally,
Cisco incorporates some of our software in their products and provides license
and royalty revenue to NetScout. License and royalty revenue and other revenue
from software sales to Cisco accounted for 17%, 13% and 13% of our total revenue
for the fiscal years ended March 31, 2000, 2001 and 2002, respectively. Cisco
may decide to cease purchasing our software and/or to internally develop
products that compete with our solutions or partner with our competitors or
bundle or sell competitors' solutions, possibly at lower prices. If our
strategic relationship with Cisco were terminated or further adversely affected
for any reason, our business, operating results and financial condition could be
materially adversely affected.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE. Our quarterly revenue and
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. Most of our expenses, such as employee compensation and
rent, are relatively fixed in the short term. Moreover, our expense levels are
based, in part, on our expectations regarding future revenue levels. As a
result, if revenue for a particular quarter is below our expectations, we may
not be able to reduce operating expenses proportionately for that quarter, and
therefore, this revenue shortfall would have a disproportionately negative
effect on our operating results for that quarter.

Our quarterly revenue may fluctuate as a result of a variety of factors,
many of which are outside of our control, including the following:

- current technology spending by actual and potential customers;

- the market for network management solutions is in an early stage of
development and therefore, demand for our solutions may be uneven;

- the timing and receipt of orders from customers, especially in light of
our lengthy sales cycle;

- the timing and market acceptance of new products or product enhancements
by us or our competitors;

- distribution channels through which our products are sold could change;

- the timing of hiring sales personnel and the speed at which such personnel
become productive;

- we may not be able to anticipate or adapt effectively to developing
markets and rapidly changing technologies;

- our prices or the prices of our competitors' products may change; and

- economic slowdowns and the occurrence of unforeseeable events, such as the
tragic events of September 11, 2001, which contribute to such slowdowns.

We operate with minimal backlog because our products typically are shipped
shortly after orders are received. As a result, product revenue in any quarter
is substantially dependent upon orders booked and shipped in that quarter and
revenue for any future quarter is not predictable to any degree of certainty.
Therefore, any significant deferral of orders for our products would cause a
shortfall in revenue for that quarter.

26

OUR CONTINUED GROWTH DEPENDS ON OUR ABILITY TO EXPAND OUR SALES FORCE. We
must increase the size of our sales force in order to increase our direct sales
and support our indirect sales channels. Because our products are very
technical, sales people require a long period of time to become productive,
typically three to twelve months. This lag in productivity, as well as the
challenge of attracting qualified candidates, may make it difficult to meet our
sales force growth targets. Further, we may not generate sufficient sales to
offset the increased expense resulting from growing our sales force. If we are
unable to successfully expand our sales capability, our business, operating
results and financial condition could be materially adversely affected.

OUR SUCCESS DEPENDS ON OUR ABILITY TO MANAGE INDIRECT DISTRIBUTION
CHANNELS. Sales to our indirect distribution channels accounted for 78%, 72%
and 59% of our total revenue for the fiscal years ended March 2000, 2001 and
2002, respectively. While Cisco no longer resold our probes as of July 28, 2001,
they did continue to place backlog orders with us through December 31, 2001.
Cisco accounted for 50%, 51% and 32% of our total revenue for the fiscal years
ended March 31, 2000, 2001 and 2002, respectively. To increase our sales, in
addition to growing our direct sales model, we must develop new and further
expand and manage existing indirect distribution channels, including original
equipment manufacturers, distributors, resellers, systems integrators and
service providers. Our indirect channel partners have no obligation to purchase
any products from us. In addition, they could internally develop products, which
compete with our solutions or partner with our competitors or bundle or resell
competitors' solutions, possibly at lower prices. The potential inability to
develop new relationships and to expand and manage our existing relationships
with partners, the potential inability or unwillingness of our partners to
effectively market and sell our products or the loss of existing partnerships
could have a material adverse effect on our business, operating results and
financial condition.

IF WE FAIL TO INTRODUCE NEW PRODUCTS AND ENHANCE OUR EXISTING PRODUCTS TO
KEEP UP WITH RAPID TECHNOLOGICAL CHANGE, DEMAND FOR OUR PRODUCTS MAY
DECLINE. The market for network management solutions is relatively new and is
characterized by rapid changes in technology, evolving industry standards,
changes in customer requirements and frequent product introductions and
enhancements. Our success is dependent upon our ability to meet our customers'
needs, which are driven by changes in computer networking technologies and the
emergence of new industry standards. In addition, new technologies may shorten
the life cycle for our products or could render our existing or planned products
obsolete. If we are unable to develop and introduce new network and application
infrastructure performance management products or enhancements to existing
products in a timely and successful manner, it could have a material adverse
effect on our business, operating results and financial condition.

OUR RELIANCE ON SOLE SOURCE SUPPLIERS COULD ADVERSELY AFFECT OUR
BUSINESS. Many components that are necessary for the assembly of our probes are
obtained from separate sole source suppliers or a limited group of suppliers.
These components include some of our network interface cards, which are produced
for us solely by SBS Technologies, Inc., SysKonnect, Inc., Adaptec, Inc, and
JNI. Our reliance on sole or limited suppliers involves several risks, including
a potential inability to obtain an adequate supply of required components and
reduced control over pricing, quality and timely delivery of components. We do
not generally maintain long-term agreements with any of our suppliers or large
volumes of inventory. Our inability to obtain adequate deliveries or the
occurrence of any other circumstance that would require us to seek alternative
sources of these components would affect our ability to ship our products on a
timely basis. This could damage relationships with current and prospective
customers, cause shortfalls in expected revenue and could materially adversely
affect our business, operating results and financial condition.

WE FACE SIGNIFICANT COMPETITION FROM OTHER TECHNOLOGY COMPANIES. The market
for network management solutions is intensely competitive. We believe customers
make network management system purchasing decisions based primarily upon the
following factors:

- product performance, functionality and price;

27

- name and reputation of vendor;

- distribution strength; and

- alliances with industry partners.

We compete with providers of network performance management solutions, such
as Concord Communications, Inc. and providers of portable network traffic
analyzers and probes, such as Network Associates, Inc. In addition, leading
network equipment providers could offer their own or competitors' solutions in
the future. Many of our current and potential competitors have longer operating
histories, greater name recognition and substantially greater financial,
management, marketing, service, support, technical, distribution and other
resources than we do. Therefore, they may be able to respond more quickly than
we can to new or changing opportunities, technologies, standards or customer
requirements.

As a result of these and other factors, we may not be able to compete
effectively with current or future competitors, which could have a material
adverse effect on our business, operating results and financial condition.

THE SUCCESS OF OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH IN THE MARKET
FOR AND THE COMMERCIAL ACCEPTANCE OF NETWORK MANAGEMENT SOLUTIONS. We derive
all of our revenue from the sale of products and services that are designed to
allow our customers to manage the performance of computer networks. The market
for network management solutions is in an early stage of development. Therefore,
we cannot accurately assess the size of the market and may be unable to predict
the appropriate features and prices for products to address the market, the
optimal distribution strategy and the competitive environment that will develop.
In order for us to be successful, our potential customers must recognize the
value of more sophisticated network management solutions, decide to invest in
the management of their networks and, in particular, adopt our management
solutions. Any failure of this market to continue to develop would materially
adversely affect our business, operating results and financial condition.
Businesses may choose to outsource the management of their networks to service
providers. Our business may depend on our ability to develop relationships with
these service providers and successfully market our products to them.

FAILURE TO PROPERLY MANAGE GROWTH COULD ADVERSELY AFFECT OUR BUSINESS. The
growth in size and complexity of our business and our customer base has been and
will continue to be a challenge to our management and operations. To manage
further growth effectively, we must enhance our financial information and
accounting systems and controls, integrate new personnel and manage expanded
operations. If we are unable to effectively manage our growth, our costs, the
quality of our products, the effectiveness of our sales organization, and our
ability to retain key personnel, our business, operating results and financial
condition could be materially adversely affected.

LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS. Our future
success depends to a significant degree on the skills, experience and efforts of
Anil Singhal, our President, Chief Executive Officer and co-founder, and
Narendra Popat, our Chairman of the Board and co-founder. We also depend on the
ability of our other executive officers and senior managers to work effectively
as a team. The loss of one or more of our key personnel could have a material
adverse effect on our business, operating results and financial condition.

WE MUST HIRE AND RETAIN SKILLED PERSONNEL. Our success depends in large
part upon our ability to attract, train, motivate and retain highly-skilled
employees, particularly sales and marketing personnel, software engineers, and
technical support personnel. We have had difficulty hiring and retaining these
highly-skilled employees in the past. If we are unable to attract and retain the
highly-skilled technical personnel that are integral to our sales, marketing,
product development and customer support teams, the rate at which we can
generate sales and develop new products or product enhancements may be limited.
This inability could have a material adverse effect on our business, operating
results and financial condition.

28

OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY
RIGHTS. Our business is heavily dependent on our intellectual property. We rely
upon a combination of patent, copyright, trademark and trade secret laws and
non-disclosure and other contractual arrangements to protect our proprietary
rights. The reverse engineering, unauthorized copying, or other misappropriation
of our intellectual property could enable third parties to benefit from our
technology without compensating us. Legal proceedings to enforce our
intellectual property rights could be burdensome and expensive and could involve
a high degree of uncertainty. In addition, legal proceedings may divert
management's attention from growing our business. There can be no assurance that
the steps we have taken to protect our intellectual property rights will be
adequate to deter misappropriation of proprietary information, or that we will
be able to detect unauthorized use by third parties and take appropriate steps
to enforce our intellectual property rights. Further, we also license software
from third parties for use as part of our products, and if any of these licenses
were to terminate, we may experience delays in product shipment until we develop
or license alternative software.

OTHERS MAY CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS. We
may be subject to claims by others that our products infringe on their
intellectual property rights. These claims, whether or not valid, could require
us to spend significant sums in litigation, pay damages, delay product
shipments, reengineer our products or acquire licenses to such third-party
intellectual property. We may not be able to secure any required licenses on
commercially reasonable terms or secure them at all. We expect that these claims
could become more frequent as more companies enter the market for network and
application infrastructure performance management solutions. Any of these claims
or resulting events could have a material adverse effect on our business,
operating results and financial condition.

IF OUR PRODUCTS CONTAIN ERRORS, THEY MAY BE COSTLY TO CORRECT, REVENUE MAY
BE DELAYED, WE COULD BE SUED AND OUR REPUTATION COULD BE HARMED. Despite
testing by our customers and us, errors may be found in our products after
commencement of commercial shipments. If errors are discovered, we may not be
able to successfully correct them in a timely manner or at all. In addition, we
may need to make significant expenditures of capital resources in order to
eliminate errors and failures. Errors and failures in our products could result
in loss of or delay in market acceptance of our products and could damage our
reputation. If one or more of our products fail, a customer may assert warranty
and other claims for substantial damages against us. The occurrence or discovery
of these types of errors or failures could have a material adverse effect on our
business, operating results and financial condition.

OUR SUCCESS DEPENDS ON OUR ABILITY TO EXPAND AND MANAGE OUR INTERNATIONAL
OPERATIONS. Sales outside North America accounted for a significant percentage
of our total revenue for the twelve months ended March 31, 2002 and 2001. We
currently expect international revenue to continue to account for a significant
percentage of total revenue in the future. We believe that we must continue to
expand our international sales activities in order to be successful. Our
international sales growth will be limited if we are unable to:

- expand international indirect distribution channels;

- hire additional sales personnel;

- adapt products for local markets; and

- manage geographically dispersed operations.

The major countries outside of North America, in which we do, or intend to
do business, are the United Kingdom, Germany, Japan and China. Our international
operations, including our operations in the United Kingdom, Germany, Japan and
China, are generally subject to a number of risks, including:

- failure of local laws to provide the same degree of protection as the laws
in the United States provide against infringement of our intellectual
property;

29

- protectionist laws and business practices that favor local competitors;

- dependence on local indirect channel partners;

- multiple conflicting and changing governmental laws and regulations;

- longer sales cycles;

- greater difficulty in collecting accounts receivable; and

- foreign currency exchange rate fluctuations and political and economic
instability.

THE PRICE OF OUR COMMON STOCK MAY DECREASE DUE TO MARKET VOLATILITY. The
market price of our common stock has been highly volatile and has fluctuated
significantly since the initial public offering of our common stock on
August 12, 1999. The market price of our common stock may continue to fluctuate
significantly in response to a number of factors, some of which are beyond our
control. In addition, the market prices of securities of technology companies
have been extremely volatile and have experienced fluctuations that often have
been unrelated or disproportionate to the operating performance of these
companies. Also, broad market fluctuations could adversely affect the market
price of our common stock.

Recently, when the market price of a stock has been volatile, holders of
that stock have occasionally instituted securities class action litigation
against the company that issues that stock. If any of our stockholders brought
such a lawsuit against us, even if the lawsuit is without merit, we could incur
substantial costs defending the lawsuit. The lawsuit could also divert the time
and attention of our management.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We consider all highly liquid marketable securities purchased with a
maturity of three months or less to be cash equivalents and those with
maturities greater than three months are considered to be marketable securities.
Cash equivalents and short-term marketable securities are stated at cost plus
accrued interest, which approximates fair value. Long-term marketable securities
are stated at fair value based on quoted market prices. Cash equivalents and
marketable securities consist primarily of money market instruments and U.S.
Treasury bills. We currently do not hedge interest rate exposure, but do not
believe that a fluctuation in interest rates would have a material effect on the
value of our cash equivalents.

The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's exposure to
interest rates based on outstanding debt has been and is expected to continue to
be modest due to the fact that although the Company currently has a
$10.0 million line of credit with $3.2 million of letters of credit secured
against it, it has no amounts outstanding under the line and no other
outstanding interest-bearing debt. The Company's exposure to currency exchange
rate fluctuations has been and is expected to continue to be modest. The impact
of currency exchange rate movements on inter-company transactions was immaterial
for the twelve months ended March 31, 2002. Currently, the Company does not
engage in foreign currency hedging activities.

Effective January 1, 2002 there is a single currency within certain
countries of the European Union, known as the Euro, and one organization, the
European Central Bank, responsible for setting European monetary policy. We have
reviewed the impact the Euro has on our business and whether this gives rise to
a need for significant changes in our commercial operations or treasury
management functions. Because our transactions are denominated in U.S. dollars,
we do not believe that the Euro conversion or any other currency exchange will
have any material effect on our business, financial condition or results of
operations.

30

ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA

NetScout's Consolidated Financial Statements and Schedule and the Report of
the Independent Accountants appear beginning on page F-1 attached to this
report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters in the past.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of NetScout are as follows:

- ------------------------

ANIL K. SINGHAL co-founded NetScout in June 1984 and has served as
NetScout's President, Chief Executive Officer, Treasurer and Director since
January 2001. Prior to this, Mr. Singhal had served as Chairman of the Board,
Chief Executive Officer and Treasurer from July 1993 to December 2000. From
NetScout's inception until July 1993, Mr. Singhal was President of NetScout.
Mr. Singhal has served as a director of NetScout since its inception. Prior to
founding NetScout, he was a Senior Architect and Project Manager at Wang
Laboratories, a provider of computer systems, from 1979 until June 1984.

NARENDRA POPAT co-founded NetScout in June 1984 and has served as NetScout's
Chairman of the Board and Secretary since January 2001. Prior to that,
Mr. Popat had served as President, Chief Operating Officer and Secretary from
July 1993 to December 2000. From NetScout's inception until July 1993,
Mr. Popat was Chairman of the Board and Treasurer of NetScout. Mr. Popat has
served as a director of NetScout since its inception. Prior to founding
NetScout, Mr. Popat was a Senior Software Engineer at Wang Laboratories from
1980 until June 1984.

DAVID P. SOMMERS has served as NetScout's Senior Vice President, General
Operations and Chief Financial Officer since January 2001. Prior to this,
Mr. Sommers served as NetScout's Vice President and Chief Financial Officer from
April 2000 to December 2000. From November 1998 until January 2000, Mr. Sommers
was Senior Vice President and Chief Financial Officer of FlexiInternational
Software, Inc., a publicly-held developer and marketer of financial accounting
software. During 1998, Mr. Sommers was a consultant on mergers and acquisitions
to the Senior Vice President and Chief Financial Officer of Lotus

31

Development Corporation, an IBM subsidiary, which develops group collaboration
software. From January 1996 through August 1997, he was Chief Financial Officer
of SystemSoft Corporation, a publicly-held developer and marketer of system
level firmware. He also served as Vice President and Chief Financial Officer of
Advanced Media, Inc., a publicly-held developer and marketer of interactive
multimedia systems, from September 1993 through December 1996.

JOHN DOWNING has served as NetScout's Vice President, Worldwide Sales
Operations since September 2000, when he joined the company. Prior to joining
NetScout, he was Vice President of Sales at GenRad Corporation, a manufacturer
of electronic testing equipment and production solutions, from April 1998 until
September 2000 and was Vice President of North American Sales from January 1996
until March 1998.

LISA A. FIORENTINO has served as NetScout's Vice President, Finance and
Administration since January 2001. In January 2002, Ms. Fiorentino was also
appointed to the position of Chief Accounting Officer. Ms. Fiorentino joined
NetScout in August 1995 and served as Vice President, Finance from January 2000
until December 2000, as Director of Finance from May 1997 until January, 2000
and as Controller from August 1995 until April 1997. Prior to joining NetScout,
she served as Finance Manager and held various other financial management
positions for Orbotech, Inc., a manufacturer of automated optical inspection
equipment for the printed circuit board industry, from January 1989 until
August 1995.

MICHELLE FLAHERTY has served as NetScout's Vice President, Human Resources
since September 2000, when she joined the company. Prior to joining NetScout,
she was Vice President of Business Development for Lee Hecht Harrison, Inc. from
November 1997 to September 2000. Prior to that, she operated her own business,
M & M Solutions, an Executive Search and Recruitment firm from January 1990 to
January 2000. Also, she served as President of the Metrowest Chamber of Commerce
from June 1979 to December 1990.

BRUCE KELLEY, JR. co-founded NextPoint Networks, Inc. in November 1996 and
served as a director and as Vice President and Chief Technology Officer of
NextPoint. Since the acquisition of NextPoint by NetScout in July 2000,
Mr. Kelley had served as Vice President, Engineering, Service Level Management
of NetScout from July 2000 to December 2000. In January 2001, Mr. Kelley assumed
the position of NetScout's Vice President and Chief Technology Officer. Prior to
founding NextPoint, he held various engineering positions at Digital Equipment
Corporation from 1982 to 1996, including Consultant Software Engineer and
Network Management Technical Director within Digital's Network Management
Engineering Group.

MICHAEL SZABADOS has served as NetScout's Senior Vice President, Product
Operations since January 2001. Mr. Szabados joined NetScout in August 1997 and
served as Vice President, Marketing from August 1997 to December 2000. Prior to
joining NetScout, he served as Chief Executive Officer of Jupiter
Technology, Inc., a developer of frame relay access drives, from March 1997 to
August 1997. He also served as Vice President, Product Management/Marketing at
UB Networks, a computer networking company, from July 1994 until March 1997 and
served as Director of Marketing at SynOptics Communications, a computer
networking company, from 1991 until July 1994.

JOHN R. EGAN has been a director of NetScout since October 2000. Mr. Egan is
a founding managing partner of Egan-Managed Capital, a Boston based venture
capital fund specializing in New England, information technology, early stage
investments, which began in the fall of 1996. Since 1992, he has been a member
of the Board of Directors at EMC Corporation, a provider of computer storage
systems and software. Mr. Egan is also a member of the Board of Trustees at
Children's Hospital Trust, and serves as director for four privately-held
companies.

JOSEPH G. HADZIMA, JR. has been a director of NetScout since July 1998.
Mr. Hadzima has been a Managing Director of Main Street Partners LLC, a venture
capital investing and technology commercialization company, since April 1998.
Since June 1996, he has also served as Of Counsel at Sullivan & Worcester LLP, a
law firm where he was a partner from October 1987 to June 1996.

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Mr. Hadzima served as Senior Vice President and General Counsel of Quantum
Energy Technologies Corporation, an energy and environmental products research
and development company, from June 1996 to December 1998. Mr. Hadzima is also a
Senior Lecturer at MIT Sloan School of Management.

VINCENT J. MULLARKEY has been a director of NetScout since November 2000.
Mr. Mullarkey was the Senior Vice President, Finance and Chief Financial Officer
of Digital Equipment Corporation from 1994 until his retirement in
September 1998. From 1971 until 1994, Mr. Mullarkey held various positions
within Digital Equipment Corporation including Vice President, Corporate
Controller. Since leaving Digital Equipment Corporation, Mr. Mullarkey has also
been involved with several companies in the real estate industry.

KENNETH T. SCHICIANO has been a director of NetScout since January 1999.
Mr. Schiciano has been a Managing Director of TA Associates, Inc., a venture
capital firm, since December 1999. Mr. Schiciano served as a Vice President of
TA Associates from August 1989 to December 1994, and as Principal from
January 1995 to December 1999. Prior to that, Mr. Schiciano was a member of the
technical staff of AT&T Bell Laboratories, a telecommunications company.
Mr. Schiciano serves as a Director of Martin Group, Inc., Datek Online Holdings,
The Island ECN and several privately-held companies.

The Board of Directors is currently fixed at six members. NetScout's amended
and restated certificate of incorporation divides the Board of Directors into
three classes. The members of each class of directors serve for staggered
three-year terms. The Board of Directors is composed of:

- two Class I directors--Messrs. Schiciano and Mullarkey--whose terms expire
upon the election and qualification of directors at the annual meeting of
stockholders to be held in 2003;

- two Class II directors--Messrs. Singhal and Egan--whose terms expire upon
the election and qualification of directors at the annual meeting of
stockholders to be held in 2004; and

- two Class III directors--Messrs. Popat and Hadzima--whose terms expire
upon the election and qualification of directors at the annual meeting of
stockholders to be held in 2002.

Our officers are elected by and serve at the discretion of the Board of
Directors. There are no family relationships among any of our executive officers
and directors.

SECTION 16 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

Based on a review of the forms and written representations received by
NetScout pursuant to Section 16(a) of the Securities Exchange Act of 1934,
NetScout believes that, with respect to the fiscal year ended March 31, 2002,
the directors and executive officers complied with all applicable Section 16
filing requirements on a timely basis.

ITEM 11. EXECUTIVE COMPENSATION

The following summary compensation table sets forth the total compensation
paid or accrued for the fiscal years ended March 31, 2002, 2001 and 2000 to
(i) the Chief Executive Officer of NetScout during the fiscal year ended
March 31, 2002; and (ii) each of the four other most highly compensated
executive officers of NetScout during the fiscal year ended March 31, 2002. The
Chief Executive Officer and the four other most highly compensated executive
officers of NetScout listed below are collectively referred to below as the
Named Executive Officers. The dollar amounts listed in the column entitled "All
Other Compensation" are comprised of contributions to a defined contribution
plan, relocation expense, tax consulting reimbursement and other miscellaneous
taxable benefits.

33

SUMMARY COMPENSATION TABLE

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information regarding option grants made
during the fiscal year ended March 31, 2002 pursuant to NetScout's 1999 Stock
Option and Incentive Plan to each of the Named Executive Officers. The 5% and
10% appreciation rates are set forth in the Securities and Exchange Commission
rules and no representation is made that the common stock will appreciate at
these assumed rates or at all. Actual gains, if any, on stock option exercises
and common stock holdings are dependent on the timing of such exercises and the
future performance of NetScout's common stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that the
amounts reflected below will be received by the individuals.

STOCK OPTION GRANTS FISCAL YEAR 2002
INDIVIDUAL GRANTS

34

YEAR-END OPTION TABLE

The following table sets forth information regarding exercisable and
unexercisable stock options held as of March 31, 2002 by each of the Named
Executive Officers. The value realized upon exercise of stock options is
calculated by determining the difference between the exercise price per share
and the fair market value on the date of exercise. The value of unexercised
in-the-money options has been calculated by multiplying the number of shares
underlying the option by the difference between the exercise price per share
payable upon exercise of such options and the fair market value at March 31,
2002 of $7.16 per share.

AGGREGATED FISCAL YEAR-END OPTION VALUES

COMMITTEES OF THE BOARD OF DIRECTORS

The current members of the Audit Committee are Messrs. Egan, Hadzima and
Mullarkey. The Audit Committee is responsible for reviewing the results and
scope of audits and other services provided by our independent public
accountants and reviewing our system of internal accounting and financial
controls. The Audit Committee also reviews such other matters with respect to
our accounting, auditing and financial reporting practices and procedures as it
may find appropriate or may be brought to its attention.

The current members of the Compensation Committee are Messrs. Egan and
Hadzima. The Compensation Committee evaluates the salaries and incentive
compensation of management and employees of NetScout and administers our equity
incentive plans.

DIRECTOR COMPENSATION

Non-employee directors are compensated $12,500 annually for their services
and also receive compensation of $1,500 for each regular Board of Directors
meeting attended and $2,000 annually for serving on a committee of the Board of
Directors. They are also reimbursed for their reasonable out-of-pocket expenses
incurred in attending meetings of the Board of Directors or of any committee
thereof. In addition, in fiscal year 2001, non-employee directors were granted
options to purchase 30,000 shares of common stock of NetScout, which vest over a
three year term.

EMPLOYMENT AGREEMENTS

Anil Singhal and Narendra Popat entered into employment agreements with
NetScout on June 1, 1994, which were amended on January 14, 1999. Under the
terms of these employment agreements, each of Messrs. Singhal and Popat receive
an annual base salary of at least $250,000 and a year-end, non-discretionary
bonus of at least $250,000. For the fiscal year ended March 31, 2002, the
year-end bonus for each of Messrs. Singhal and Popat (with their consent) was
$190,000. In the event that either Mr. Singhal or Mr. Popat is terminated
without cause, or either decides to terminate his own employment for "good
reason" each is entitled to receive severance benefits for three years as
follows:

- for the first twelve months following termination, the greater of $175,000
or base salary as of the date of termination; and

- for each of the following twelve-month period, an amount equal to 120% of
the amount received in the immediately preceding twelve months.

35

"Good reason" includes a change in executive responsibilities or a reduction in
salary or benefits. Severance benefits will be discontinued if the executive
secures alternative employment that is comparable as to position and pay. During
any period in which Mr. Singhal or Mr. Popat is entitled to receive severance
benefits, he shall also continue to receive all other benefits under the
employment agreements including life insurance, medical insurance, and
reimbursement for company car expenses. Each of Messrs. Singhal and Popat are
also entitled to reimbursement of job placement expenses of up to $25,000 plus
related travel expenses. If either Mr. Singhal or Mr. Popat is terminated with
cause, he will not be entitled to any severance payments or other benefits
except as required by law. Each employment agreement provides for a five-year
term commencing June 1, 1994 with automatic one-year renewals.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee was at any time during the past year
an officer or employee of NetScout, was formerly an officer of NetScout or any
of its subsidiaries, or had any employment relationship with NetScout. During
the last year, none of our executive officers served as:

- a member of the Compensation Committee (or other committee of the Board of
Directors performing equivalent functions or, in the absence of any such
committee, the entire Board of Directors) of another entity, of which one
of whose executive officers served on the Compensation Committee of
NetScout;

- a director of another entity, one of whose executive officers served on
the Compensation Committee of NetScout; or

- a member of the Compensation Committee (or other committee of the Board of
Directors performing equivalent functions or, in the absence of any such
committee, the entire Board of Directors) of another entity, of which one
of whose executive officers served as a director of NetScout.

STOCK PLANS

1990 STOCK OPTION PLAN. The 1990 Stock Option Plan was adopted by the Board
of Directors and approved by the stockholders on October 4, 1990. In general,
options granted pursuant to the 1990 Stock Option Plan are exercisable within
ten years of the original grant date and become exercisable over a period of
four years from a specific date; and an additional 25% of unexercisable options
shall become exercisable immediately prior to the closing of a merger,
acquisition, business combination or similar transaction which results in our
existing stockholders owning less than 50% of NetScout's equity securities or
assets. Options are not assignable or transferable except by wills or the laws
of descent or distribution. We have a right of repurchase for shares issued upon
the exercise of options under certain circumstances, including unauthorized
transfers of the shares and termination of the optionee's relationship with
NetScout in certain situations. As of March 31, 2002, options to purchase an
aggregate of 671,487 shares of common stock at a weighted average exercise price
of $3.21 per share were outstanding under the 1990 Stock Option Plan. No
additional options grants will be made under the 1990 Stock Option Plan.

1999 STOCK OPTION AND INCENTIVE PLAN. Our 1999 Stock Option and Incentive
Plan ("1999 Stock Option Plan") was adopted by the Board of Directors in
April 1999 and was approved by our stockholders in June 1999. The 1999 Stock
Option Plan provides for the grant of stock-based awards to our employees,
officers and directors, consultants or advisors. Under the 1999 Stock Option
Plan, we may grant options that are intended to qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code, options
not intended to qualify as incentive stock options, restricted stock and other
stock-based awards. Incentive stock options may be granted only to employees of
NetScout. A total of 4,500,000 shares of common stock were originally reserved
for issuance under the 1999 Stock Option Plan. In September 2001, at the annual
meeting of stockholders, an additional 5,000,000 shares were approved, for a
total of 9,500,000 shares reserved for issuance under the 1999 Stock Option
Plan. The maximum number

36

of shares with respect to which awards may be granted to any employee under the
1999 Stock Option Plan shall not exceed 1,000,000 shares of common stock during
any calendar year.

The 1999 Stock Option Plan is administered by the Compensation Committee.
Subject to the provisions of the 1999 Stock Option Plan, the Compensation
Committee has the authority to select the persons to whom awards are granted and
determine the terms of each award, including the number of shares of common
stock subject to the award. Payment of the exercise price of an award may be
made in cash or, if approved by the Compensation Committee, shares of common
stock, a combination of cash and stock, a promissory note or by any other method
approved by the Compensation Committee. Unless otherwise permitted by the
Compensation Committee, awards are not assignable or transferable except by will
or the laws of descent and distribution, and, during the participant's lifetime,
may be exercised only by the participant.

The 1999 Stock Option Plan provides, subject to certain conditions, that
upon an acquisition of NetScout, 25% of each unvested portion of any awards will
accelerate and become exercisable, with the remaining 75% of each unvested
portion to continue vesting throughout the term of such awards.

The Compensation Committee may, in its sole discretion, amend, modify or
terminate any award granted or made under the 1999 Stock Option Plan, so long as
such amendment, modification or termination would not materially and adversely
affect the participant. The Compensation Committee may also provide that any
option shall become immediately exercisable, in full or in part, or that any
restricted stock granted under the 1999 Stock Option Plan shall be free of some
or all restrictions.

As of March 31, 2002, options to purchase an aggregate of 3,923,872 shares
of common stock at an average exercise price of $14.47 per share were
outstanding under the 1999 Stock Option Plan.

1999 EMPLOYEE STOCK PURCHASE PLAN. The 1999 Employee Stock Purchase Plan
was adopted by the Board of Directors in April 1999 and was approved by our
stockholders in June 1999. The 1999 Purchase Plan was amended by the Board of
Directors on January 17, 2001. The 1999 Purchase Plan provides for the issuance
of a maximum of 500,000 shares of common stock.

The 1999 Purchase Plan is administered by the Compensation Committee. All
employees of NetScout whose customary employment is for more than 20 hours per
week and for more than three months in any calendar year are eligible to
participate in the 1999 Purchase Plan. Employees who would own 5% or more of the
total combined voting power or value of NetScout's stock immediately after the
grant of the option may not participate in the 1999 Purchase Plan. To
participate in the 1999 Purchase Plan, an employee must authorize us to deduct
an amount not less than one percent nor more than 10 percent of a participant's
total cash compensation from his or her pay during six-month payment periods.
The first payment period commenced on October 1, 1999 and ended on March 31,
2000. The second and third payment periods consisted of six-month periods
commencing on April 1, 2000 and October 1, 2000 and ending on September 30, 2000
and March 31, 2001, respectively. The fourth payment period commenced on
April 1, 2001 and ended on October 31, 2001. For the remainder of the duration
of the plan, payment periods will consist of six-month periods commencing on
May 1 and November 1 and ending on October 31 and April 30 of each calender
year, respectively. In no case shall an employee be entitled to purchase more
than 1,000 shares in any one payment period. The exercise price for the option
granted in each payment period is 85% of the lesser of the last reported sale
price of the common stock on the first or last business day of the payment
period, in either event rounded up to the nearest cent. If an employee is not a
participant on the last day of the payment period, such employee is not entitled
to exercise his or her option, and the amount of his or her accumulated payroll
deductions will be refunded. Options granted under the 1999 Purchase Plan may
not be transferred or assigned. An employee's rights under the 1999 Purchase
Plan terminate upon his or her voluntary withdrawal from the plan at any time or
upon termination of employment. As of March 31, 2002, an aggregate of 117,402
shares of common stock were issued to date under the 1999 Purchase Plan.

37

NEXTPOINT NETWORKS, INC. STOCK INCENTIVE PLANS. Upon the consummation of
our acquisition of NextPoint Networks, Inc., we assumed NextPoint's 1997 Stock
Incentive Plan and 2000 Stock Incentive Plan and all outstanding options which
had been issued pursuant to each plan. Options to purchase shares of NextPoint
common stock were converted into options to purchase shares of NetScout common
stock. In general, options granted pursuant to the 1997 Stock Incentive Plan or
the 2000 Stock Incentive Plan are not transferable or assignable except by wills
or the laws of descent and distribution. The 1997 Stock Incentive Plan provided
that all outstanding options become immediately exercisable upon the
consummation of the NextPoint acquisition. However, certain NextPoint option
holders executed an agreement providing that (i) only fifty percent (50%) of
such option holder's options would become exercisable immediately following the
acquisition and (ii) the remainder of the unexercisable options would become
exercisable in equal quarterly amounts over the two years following the
acquisition. Under the 2000 Stock Incentive Plan, options generally become
exercisable over a four year period from a specific date. As of March 31, 2002,
options to purchase an aggregate of 89,357 shares of NetScout common stock at a
weighted average exercise price of $3.08 were outstanding under the 1997 Stock
Incentive Plan and options to purchase an aggregate of 20,015 shares of NetScout
common stock at a weighted average exercise price of $10.43 were outstanding
under the 2000 Stock Incentive Plan. No additional option grants will be made
under the 1997 Stock Incentive Plan or the 2000 Stock Incentive Plan.

401(k) PLAN

We maintain a 401(k) plan qualified under Section 401 of the Internal
Revenue Code. All of our employees who are at least 21 years of age are eligible
to participate in the 401(k) plan. Under the 401(k) plan, a participant may
contribute a maximum of 15% of his or her pre-tax salary, commissions and
bonuses through payroll deductions, up to the statutorily prescribed annual
limit which was $10,500 in calendar year 2001, to the 401(k) plan. The
percentage elected by more highly compensated participants may be required to be
lower. At the discretion of the Board of Directors, we may make matching
contributions to the 401(k) plan. During the plan year ended December 31, 2001,
we matched $.50 for each $1.00 of employee contributions up to 6% of
compensation. In addition, at the discretion of the Board of Directors, we may
make profit-sharing contributions to the 401(k) plan for all eligible employees.
During the plan year ending December 31, 2001, we made no profit-sharing
contributions to the 401(k) plan.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth securities authorized for issuance under
NetScout's stock option plans:

EQUITY COMPENSATION PLAN INFORMATION

38

The number of securities to be issued upon exercise of options assumed in
the NextPoint acquisition are 109,372 shares at a weighted average exercise
price of $3.60 per share.

The following table sets forth certain information regarding beneficial
ownership of our common stock as of June 13, 2002, and as adjusted to reflect
the sale of the shares of common stock offered hereby, by:

- each beneficial owner of more than 5% of our common stock;

- each Named Executive Officer;

- each director; and

- all executive officers and directors as a group.

Unless otherwise noted, the address of each person listed on the table is
c/o NetScout Systems, Inc., 310 Littleton Road, Westford, MA 01886, and each
person has sole voting and investment power over the shares shown as
beneficially owned, except to the extent authority is shared by spouses under
applicable law or as unless otherwise noted below.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock issuable by NetScout
to a person or entity named below pursuant to options which may be exercised
within 60 days after June 13, 2002 are deemed to be beneficially owned and
outstanding for purposes of calculating the number of shares and the percentage
beneficially owned by that person or entity. However, these shares are not
deemed to be beneficially owned and outstanding for purposes of computing the
percentage beneficially owned by any other person or entity.

- ------------------------

* Less than 1% of the outstanding common stock.

(1) Includes 23,273 shares issuable upon the exercise of options exercisable
within 60 days of June 13, 2002. Includes an aggregate of 398,205 shares
held in trust for the benefit of Mr. Singhal's children; Mr. Singhal is one
of two trustees of each such trust. Includes 340,000 shares held by a family
limited partnership of which Mr. Singhal and his spouse are the general
partners and trusts for the benefit of their children are the limited
partners. Does not include 250,000 shares held directly by Mr. Singhal's
spouse and an aggregate of 2,000,000 shares held in two grantor retained
annuity trusts for the benefit of Mr. Singhal's spouse.

(2) Includes 23,273 shares issuable upon the exercise of options exercisable
within 60 days of June 13, 2002. Includes an aggregate of 215,660 shares
held in trust for the benefit of Mr. Popat's children; Messrs. Popat and
Hadzima are the two trustees of each such trust. Includes 340,000 shares
held by a family limited partnership of which Mr. Popat and his spouse are
the general partners and trusts for the benefit of their children are the
limited partners. Does not include 136,056 shares held in trust for the
benefit of Mr. Popat's children; Mr. Popat's spouse and Mr. Hadzima are the
two trustees of such trust. Does not include an aggregate of 2,500,000
shares held in two grantor retained annuity trusts for the benefit of
Mr. Popat's spouse.

(3) Includes 153,125 shares issuable upon the exercise of options exercisable
within 60 days of June 13, 2002.

(4) Includes 154,719 shares issuable upon the exercise of options exercisable
within 60 days of June 13, 2002. Includes 1,400 shares owned by
Mr. Szabados' daughters.

(5) Entirely comprised of shares issuable upon the exercise of options
exercisable within 60 days of June 13, 2002.

(6) Entirely comprised of shares issuable upon the exercise of options
exercisable within 60 days of June 13, 2002.

(7) Includes 70,000 shares issuable upon the exercise of options exercisable
within 60 days of June 13, 2002. Includes 136,056 shares held in trust for
the benefit of Mr. Popat's children; Mr. Popat's spouse and Mr. Hadzima are
the two trustees of such trust. Includes an aggregate of 215,660 shares held
in trust for the benefit of Mr. Popat's children; Messrs. Popat and Hadzima
are the two trustees of each such trust. Mr. Hadzima disclaims beneficial
ownership of all shares held in trust for the benefit of Mr. Popat's
children. The shares deemed to be beneficially owned by Mr. Hadzima do not
include 53,328 shares held in trust for the benefit of Mr. Hadzima's
children.

(8) Includes 16,263 shares of TA Investors LLC and 2,946 shares of High Street
Partners L.P. beneficially owned by Mr. Schiciano. Includes 5,613 shares
held directly by Mr. Schiciano and 10,000 shares issuable upon the exercise
of options exercisable within 60 days of June 13, 2002. Mr. Schiciano is a

40

Managing Director of TA Associates, Inc. Mr. Schiciano disclaims beneficial
ownership of the shares held by the TA Entities, except to the extent of his
pecuniary interest therein.

(9) Includes 10,000 shares issuable upon the exercise of options exercisable
within 60 days of June 13, 2002.

(10) Includes 3,798,950 shares held by TA/Advent VIII L.P.; 993,561 shares held
by Advent Atlantic and Pacific III L.P.; 100,680 shares held by TA
Executives Fund LLC; and 105,979 shares held by TA Investors LLC, TA/Advent
VIII L.P., Advent Atlantic and Pacific III L.P., TA Executives Fund LLC and
TA Investors LLC are part of an affiliated group of investment partnerships
referred to, collectively, as the "TA Entities." The general partner of
TA/Advent VIII L.P. is TA Associates VIII LLC. The general partner of Advent
Atlantic and Pacific III L.P. is TA Associates AAP III Partners L.P. TA
Associates, Inc. is the general partner of TA Associates AAP III Partners
L.P. and is the sole manager of TA Associates VIII LLC, TA Executives Fund
LLC and TA Investors LLC. In such capacity, TA Associates, Inc., through an
executive committee, exercises sole voting and investment power with respect
to all shares held of record by the named investment partnerships;
individually, no stockholder, director or officer of TA Associates, Inc. is
deemed to have or share such voting or investment power. Also includes
23,574 shares held by High Street Partners, L.P., a general partnership
whose individual general partners have voting and investment power over the
shares beneficially owned by such general partner.

(11) Based solely on a Schedule 13G/A filed with the Securities and Exchange
Commission on February 5, 2002.

(12) Includes an aggregate of 668,721 shares issuable upon exercise of options
exercisable within 60 days of June 13, 2002. Does not include 500 shares
held directly by the spouse of an executive officer.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On March 15, 2001, NetScout Systems India Pvt. Ltd. and Frontier Software
Development (India) Pvt. Ltd. entered into a Leave and License Agreement
pursuant to which NetScout Systems India Pvt. Ltd. leases office space owned by
Frontier Software Development (India) Pvt. Ltd. The term of the agreement is
from March 15, 2001 through March 15, 2006 and NetScout Systems India Pvt. Ltd.
will continue to make monthly payments of approximately $1,350 per month to
Frontier Software Development (India) Pvt. Ltd. during the term. Anil Singhal,
NetScout's President and Chief Executive Officer and a member of NetScout's
Board of Directors, and Narendra Popat, NetScout's Chairman of the Board, each
own 33 1/3% of Frontier Software Development (India) Pvt. Ltd. NetScout Systems
India Pvt. Ltd. was organized under the laws of India to serve as a wholly owned
subsidiary of NetScout; and in accordance with the laws of India, its shares
were issued to two individuals who are residents of India. Those shares were
then transferred to NetScout, upon approval by the government of India.

NetScout believes that the transaction described above was made on terms no
less favorable to it than would have been obtained from unaffiliated third
parties. All future transactions, if any, with our executive officers, directors
and affiliates will be on terms no less favorable to us than could be obtained
from unrelated third parties and will be approved by a majority of the Board of
Directors and by a majority of the disinterested members of the Board of
Directors.

41

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Consolidated Financial Statements.

For a list of the consolidated financial information included
herein, see Index to Consolidated Financial Statements on Page F-1.

2. Financial Statement Schedules.

Valuation and Qualifying Accounts................. S-1

3. List of Exhibits.

The following exhibits are filed or incorporated by reference as part of
this Report.

3.1, 4.1 Third Amended and Restated Certificate of Incorporation of
NetScout (filed as Exhibit 3.3, 4.1 to NetScout's
Registration Statement on Form S-1 (No. 333-76843) and
incorporated herein by reference).
3.2, 4.2 Form of Amended and Restated By-laws of NetScout (filed as
Exhibit 3.2, 4.2 to NetScout's Annual Report on Form 10-K
for the fiscal year ended March 31, 2000 and incorporated
herein by reference).
4.3 Specimen Certificate for shares of NetScout's Common Stock
(filed as Exhibit 4.3 to NetScout's Annual Report on Form
10-K for the fiscal year ended March 31, 2001 and
incorporated herein by reference).
10.1 1990 Stock Option Plan, as amended (filed as Exhibit 10.1 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.2 1999 Stock Option and Incentive Plan, as amended (filed as
Exhibit 10.1 to NetScout's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2001 and
incorporated herein by reference).
10.3 1999 Employee Stock Purchase Plan, as amended (filed as
Exhibit 10.2 to NetScout's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2001 and
incorporated herein by reference).
10.4 Stock Purchase and Redemption Agreement dated December 31,
1998 by and among NetScout, Greylock Equity Limited
Partnership, certain affiliates of TA Associates, Inc. and
Egan-Managed Capital, L.P. (filed as Exhibit 10.4 to
NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.5 Amended and Restated Rights Agreement entered into as of
January 15, 1999 by and among NetScout, Greylock Equity
Limited Partnership, certain affiliates of TA Associates,
Inc. and Egan-Managed Capital, L.P. (filed as Exhibit 10.5
to NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.6 Amended and Restated Loan and Security Agreement dated March
12, 1998 by and between NetScout and Silicon Valley Bank
(filed as Exhibit 10.7 to NetScout's Registration Statement
on Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.7 Loan Modification Agreement entered into March 11, 1999
between NetScout and Silicon Valley Bank (filed as
Exhibit 10.8 to NetScout's Registration Statement on
Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.8 OEM Agreement dated as of February 3, 1998 by and between
SDL Communications, Inc. and NetScout (filed as Exhibit 10.9
to NetScout's Registration Statement on Form S-1
(No. 333-76843) and incorporated herein by reference).
10.9 Project Development and License Agreement dated as of
July 13, 1994 by and between Cisco Systems, Inc. and
NetScout (filed as Exhibit 10.10 to NetScout's Registration
Statement on Form S-1 (No. 333-76843) and incorporated
herein by reference).

42

10.10 Amendment No. 1 to the Project Agreement and Design License
Agreement dated as of January 4, 1995 by and between Cisco
and NetScout (filed as Exhibit 10.11 to NetScout's
Registration Statement on Form S-1 (No. 333-76843) and
incorporated herein by reference).
10.11 Private Label Agreement effective as of October 17, 1995 by
and between Cisco and NetScout (filed as Exhibit 10.12 to
NetScout's Registration Statement on Form S-1
(No. 333-76843) and incorporated herein by reference).
10.12 Amendment to Private Label Agreement and Project Development
and License Agreement dated May 15, 1996 by and between
Cisco and NetScout (filed as Exhibit 10.13 to NetScout's
Registration Statement on Form S-1 (No. 333-76843) and
incorporated herein by reference).
10.13 Amendment No. 3 to the Private Label Agreement and Project
Development and License Agreement by and between Cisco and
NetScout (filed as Exhibit 10.14 to NetScout's Registration
Statement on Form S-1 (No. 333-76843) and incorporated
herein by reference).
10.14 Amendment No. 4 to Private Label Agreement and Project
Development and License Agreement by and between Cisco and
NetScout effective as of February 23, 1998 (filed as Exhibit
10.15 to NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.15 Amendment No. 5 to Private Label Agreement and Project
Development and License Agreement between Cisco and NetScout
effective as of December 26, 1999 (filed as Exhibit 10.1 to
NetScout's Quarterly Report on Form 10-Q and incorporated
herein by reference).
10.16 Amendment No. 6 to Private Label Agreement and Project
Development and License Agreement between Cisco and NetScout
effective as of April 13, 2001 (filed as Exhibit 10 to
NetScout's Quarterly Report on a Form 10-Q for the quarterly
period ended June 30, 2001 and incorporated herein by
reference).
10.17* Agreement Relating to Employment dated June 1, 1994 by and
between NetScout and Anil Singhal (filed as Exhibit 10.16 to
NetScout's Registration Statement on Form S-1
(No. 333-76843) and incorporated herein by reference).
10.18* Amendment No. 1 to Agreement Relating to Employment dated
January 14, 1999 by and between NetScout and Anil Singhal
(filed as Exhibit 10.17 to NetScout's Registration Statement
on Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.19* Agreement Relating to Employment dated June 1, 1994 by and
between NetScout and Narendra Popat (filed as Exhibit 10.18
to NetScout's Registration Statement on Form S-1 (No.
333-76843) and incorporated herein by reference).
10.20* Amendment No. 1 to Agreement Relating to Employment dated
January 14, 1999 by and between NetScout and Narendra Popat
(filed as Exhibit 10.19 to NetScout's Registration Statement
on Form S-1 (No. 333-76843) and incorporated herein by
reference).
10.21 Loan Modification Agreement entered into March 10, 2000
between NetScout and Silicon Valley Bank (filed as Exhibit
10.25 to NetScout's Annual Report on Form 10-K for the
fiscal year ended March 31, 2000 and incorporated herein by
reference).
10.22 Loan Modification Agreement entered into June 27, 2000
between NetScout and Silicon Valley Bank (filed as Exhibit
10.22 to NetScout's Annual Report on Form 10-K for the
fiscal year ended March 31, 2001 and incorporated herein by
reference).
10.23 Loan Modification Agreement entered into March 9, 2001
between NetScout and Silicon Valley Bank (filed as Exhibit
10.23 to NetScout's Annual Report on Form 10-K for the
fiscal year ended March 31, 2001 and incorporated herein by
reference).
10.24 Loan Modification Agreement entered into March 10, 2002
between NetScout and Silicon Valley Bank.
10.25 Registration Rights Agreement dated as of July 7, 2000, by
and among NetScout, certain NextPoint stockholders, certain
NextPoint Warrant Holders and Silicon Valley Bank (filed as
Exhibit 10.1 to NetScout's current report on Form 8-K filed
on July 20, 2000 and incorporated herein by reference).

43

10.26 Lease between Arturo J. Gutierrez and John A. Cataldo,
Trustees of Nashoba Westford Realty Trust, U/D/T dated April
27, 2000 and recorded with the Middlesex North Registry of
Deeds in Book 10813, Page 38 and NetScout for Westford
Technology Park West, as amended (filed as Exhibit 10.26 to
NetScout's Annual Report on Form 10-K for the fiscal year
ended March 31, 2001 and incorporated herein by reference).
10.27 1997 Stock Incentive Plan of NextPoint Networks, Inc.,
assumed by NetScout (filed as Exhibit 4.3 to NetScout's
Registration Statement on Form S-8 (No. 333-41880) and
incorporated herein by reference).
10.28 2000 Stock Incentive Plan of NextPoint, assumed by NetScout
(filed as Exhibit 4.4 to NetScout's Registration Statement
on Form S-8 (No. 333-41880) and incorporated herein by
reference).
21 Subsidiaries of NetScout.
23 Consent of PricewaterhouseCoopers LLP.

- ------------------------

* Indicates a management contract or compensatory plan or arrangement.

b. Reports on Form 8-K

There were no reports on Form 8-K filed by the Company during the fourth
quarter of fiscal year 2002.

The Company hereby files as part of this Annual Report on Form 10-K the
financial statement schedule listed in Item 14(a)(2) above, which is attached
hereto.

44

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Westford, Massachusetts on June 28, 2001.

NETSCOUT SYSTEMS, INC.

By:
-----------------------------------------
Anil K. Singhal
PRESIDENT, CHIEF EXECUTIVE OFFICER,
TREASURER AND DIRECTOR

Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons in the capacities and on the dates
indicated.

NETSCOUT SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of March 31, 2001 and 2002... F-3
Consolidated Statements of Operations for the Three Years
Ended March 31, 2000, 2001 and 2002....................... F-4
Consolidated Statement of Redeemable Convertible Common
Stock and Stockholders' Equity (Deficit) for the Three
Years Ended March 31, 2000, 2001 and 2002................. F-5
Consolidated Statements of Cash Flows for the Three Years
Ended March 31, 2000, 2001 and 2002....................... F-6
Notes to Consolidated Financial Statements.................. F-7

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders

of NetScout Systems, Inc.:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1) on page 42 present fairly, in all material
respects, the financial position of NetScout Systems, Inc. and its subsidiaries
at March 31, 2001 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ending March 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14 (a) (2) on page 42, presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
April 19, 2002

F-2

NETSCOUT SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

NETSCOUT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

NETSCOUT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

CLASS B REDEEMABLE COMMON STOCK
SERIES A -----------------------------------
CONVERTIBLE COMMON CONVERTIBLE
STOCK PREFERRED STOCK VOTING NON-VOTING
--------------------- ------------------- ---------------------- ----------
SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE SHARES
---------- -------- -------- -------- ---------- --------- ----------

Balance, March 31, 1999........................ 6,977,254 $ 44,161 631,579 $ 5,964 16,000,000 $16 4,035,858
Conversion of issued shares into common
stock........................................ (6,977,254) (44,161) (631,579) (5,964) 13,624,678 14 (4,121,108)
Issuance of common stock pursuant to exercise
of options................................... 1,051,056 1 85,250
Issuance of common stock pursuant to employee
stock purchase plan.......................... 21,963 --
Amortization of deferred compensation..........
Reversal of deferred compensation upon
termination of employees.....................
Issuance of common stock upon NetScout's
initial public offering, net of offering
costs........................................
Tax benefits of disqualifying dispositions of
stock options................................
Net income.....................................
---------- -------- -------- ------- ---------- --- ----------
Balance, March 31, 2000........................ -- -- -- -- 30,697,697 31 --
Issuance of common stock pursuant to exercise
of options................................... 636,119 --
Issuance of common stock pursuant to employee
stock purchase plan.......................... 53,985 --
Issuance of common stock, options and warrants
for the acquisition of NextPoint............. 2,099,120 2
Issuance of common stock pursuant to exercise
of warrants.................................. 11,319 --
Amortization of deferred compensation..........
Reversal of deferred compensation upon
termination of employees.....................
Tax benefits of disqualifying dispositions of
stock options................................
Net income.....................................
---------- -------- -------- ------- ---------- --- ----------
Balance, March 31, 2001........................ -- $ -- -- $ -- 33,498,240 $33 --
Issuance of common stock pursuant to exercise
of options................................... 247,568 1
Issuance of common stock pursuant to employee
stock purchase plan.......................... 41,454
Amortization of deferred compensation..........
Reversal of deferred compensation upon
termination of employees.....................
Tax benefits of disqualifying dispositions of
stock options................................
Repurchases of common stock as Treasury........
Net loss.......................................
---------- -------- -------- ------- ---------- --- ----------
Balance, March 31, 2002........................ -- $ -- -- $ -- 33,787,262 $34 --
========== ======== ======== ======= ========== === ==========

---------------------- TOTAL
ADDITIONAL STOCKHOLDERS'
--------- PAID IN DEFERRED TREASURY RETAINED EQUITY
PAR VALUE CAPITAL COMPENSATION STOCK EARNINGS (DEFICIT)
--------- ---------- ------------ -------- -------- -------------
Balance, March 31, 1999........................ $ 4 $ 2,143 $(1,312) $(44,394) $24,455 $(13,124)
Conversion of issued shares into common
stock........................................ (4) 50,115 44,161
Issuance of common stock pursuant to exercise
of options................................... -- 2,094 2,095
Issuance of common stock pursuant to employee
stock purchase plan.......................... 313 313
Amortization of deferred compensation.......... 442 442
Reversal of deferred compensation upon
termination of employees..................... (234) 234 --
Issuance of common stock upon NetScout's
initial public offering, net of offering
costs........................................ 10,486 19,088 29,574
Tax benefits of disqualifying dispositions of
stock options................................ 2,449 2,449
Net income..................................... 15,212 15,212
--- -------- ------- -------- ------- --------
Balance, March 31, 2000........................ -- 67,366 (636) (25,306) 39,667 81,122
Issuance of common stock pursuant to exercise
of options................................... 2,313 2,313
Issuance of common stock pursuant to employee
stock purchase plan.......................... 397 397
Issuance of common stock, options and warrants
for the acquisition of NextPoint............. 34,615 (4,961) 29,656
Issuance of common stock pursuant to exercise
of warrants.................................. --
Amortization of deferred compensation.......... 1,834 1,834
Reversal of deferred compensation upon
termination of employees..................... (354) 354 --
Tax benefits of disqualifying dispositions of
stock options................................ 2,017 2,017
Net income..................................... 3,706 3,706
--- -------- ------- -------- ------- --------
Balance, March 31, 2001........................ $-- $106,354 ($3,409) ($25,306) $43,373 $121,045
Issuance of common stock pursuant to exercise
of options................................... 698 699
Issuance of common stock pursuant to employee
stock purchase plan.......................... 176 176
Amortization of deferred compensation.......... 2,318 2,318
Reversal of deferred compensation upon
termination of employees..................... (28) 28 --
Tax benefits of disqualifying dispositions of
stock options................................ 329 329
Repurchases of common stock as Treasury........ (449) (449)
Net loss....................................... (11,411) (11,411)
--- -------- ------- -------- ------- --------
Balance, March 31, 2002........................ $-- $107,529 $(1,063) $(25,755) $31,962 $112,707
=== ======== ======= ======== ======= ========

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

NETSCOUT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The accompanying notes are an integral part of these consolidated financial
statements.

F-6

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. NATURE OF BUSINESS

NetScout Systems, Inc. designs, develops, manufactures, markets, sells and
supports a family of integrated products that enable optimization of the
performance and cost management of complex, high-speed networks, including their
ability to efficiently deliver critical business applications and content to
end-users. NetScout manufactures and markets these products in an integrated
hardware and software solution suite that is used by enterprise and service
provider businesses worldwide. NetScout manages its business as a single
operating segment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of NetScout and
its wholly-owned subsidiaries. All significant inter-company transactions and
balances have been eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates in these financial statements
include revenue recognition, allowances for doubtful accounts, valuation of
inventories, and valuation of long-lived assets. These items are continuously
monitored and analyzed by management for changes in facts and circumstances and
material changes in these estimates could occur in the future.

CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

We consider all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents and those with maturities greater than
three months are considered to be marketable securities. Cash equivalents and
short-term marketable securities are stated at cost plus accrued interest, which
approximates fair value. Long-term marketable securities are stated at fair
value based on quoted market prices. Cash equivalents and marketable securities
consist primarily of money market instruments and U.S. Treasury bills.

Cash, cash equivalents and marketable securities consist of the following:

NetScout accounts for its investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under

F-7

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the provision of SFAS No. 115, NetScout has classified its investments as
"available-for-sale" and associated unrealized gains or losses are recorded as a
separate component of stockholders' equity until realized. At March 31, 2001 and
2002, any unrealized gains or losses were not significant.

At March 31, 2002 and periodically throughout the year, NetScout has
maintained cash balances in various operating accounts in excess of federally
insured limits. NetScout limits the amount of credit exposure with any one
financial institution by evaluating the creditworthiness of the financial
institutions with which it invests.

REVENUE RECOGNITION

Product revenue consists of sales of hardware products and licensing
software products. Product revenue is recognized upon shipment, provided that
evidence of an arrangement exists, title and risk of loss have passed to the
customer, fees are fixed or determinable and collection of the related
receivable is reasonably assured. Revenue is recorded net of estimated product
returns, which is based upon our return policy, sales agreements, management
estimates of potential future product returns related to current period revenue,
current economic trends, changes in our customer composition and historical
experience. If our judgments and estimates relating to the product returns prove
to be inadequate, our financial results could be materially adversely affected
in future periods.

Service revenue consists primarily of fees from customer support agreements,
consulting and training. NetScout generally provides three months of software
support and 12 months of hardware support as part of product sales. Revenue from
software support is deferred and recognized ratably over the three-month support
period. Revenue from hardware support is deferred and recognized ratably over
the 12-month support period. In addition, customers can elect to purchase
extended support agreements, typically for 12-month periods. Revenue from these
agreements is deferred and recognized ratably over the support period. Revenue
from consulting and training is recognized as the work is performed.

For multi-element arrangements, each element of the arrangement is analyzed
and a portion of the total fee under the arrangement is allocated to the
undelivered elements, primarily support agreements and training, using vendor
objective evidence of fair value of the element and the remaining portion of the
fee is allocated to the delivered elements (i.e. generally, hardware products
and licensed software products), regardless of any separate prices stated within
the contract for each element, under the residual method. Vendor objective
evidence of fair value is based on the price customers pay when the element is
sold separately.

License and royalty revenue consists primarily of royalties paid under
license agreements by original equipment manufacturers who incorporate
components of our data collection technology into their own products or who
reproduce and sell our software products. License revenue is recognized when
delivery has occurred and when we become contractually entitled to receive
license fees, provided that such fees are fixed or determinable and collection
is probable. Royalty revenue is recognized based upon product shipment by the
license holder.

CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

Management believes its credit policies are prudent and reflect normal
industry terms and business risk. In addition, NetScout maintains reserves for
potential credit losses, and such losses historically have

F-8

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
been minimal and within management's expectations. At March 31, 2001 and 2002,
one customer accounted for approximately 15% and 8%, respectively, of NetScout's
accounts receivable. Historically, NetScout has not experienced any significant
non-performance by our customers nor do we anticipate non-performance by our
customers in the future and, accordingly, do not require collateral from our
customers.

One customer accounted for approximately 50%, 51% and 32% of NetScout's
total revenue during the fiscal years ended March 31, 2000, 2001 and 2002,
respectively.

FINANCIAL INSTRUMENTS

The carrying value of NetScout's financial instruments, which include cash
and cash equivalents, short-term marketable securities, accounts receivable,
accounts payable and accrued expenses approximate their fair values due to their
short-term maturities. Long-term marketable securities are stated at fair value
based on quoted market prices.

INVENTORIES AND CONCENTRATIONS OF SUPPLIERS

Inventories are stated at the cost. Cost is determined by using the
first-in, first-out ("FIFO") method.

NetScout purchases the majority of its product components from a limited
number of vendors. Although the supply sources are concentrated, management
believes that the nature of its business requires sourcing and marketing
products from the limited number of vendors who have expertise in manufacturing
the components for our products. A change in or loss of one or more of these
vendors could cause a delay in filling customer orders and a possible loss of
sales, which could adversely affect results of operations.

FIXED ASSETS

Fixed assets are stated at cost and depreciated using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized on a straight-line basis over the lease term. Gains and losses upon
asset disposal are recognized in the year of disposition. Expenditures for
replacements and building improvements are capitalized, while expenditures for
maintenance and repairs are charged against earnings as incurred.

GOODWILL AND OTHER INTANGIBLE ASSETS

In July 2000, in connection with the acquisition of NextPoint, NetScout
recorded goodwill and other intangible assets using the purchase method. Other
intangible assets consists of customer base, assembled workforce, and completed
technology. Until March 31, 2002, all goodwill and other intangible assets were
amortized on a straight-line basis over a period of two to five years. In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," on
April 1, 2002, NetScout reclassified the remaining un-amortized assembled
workforce intangible asset of $69 to goodwill and ceased amortization of
goodwill of $28,770.

F-9

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS

NetScout regularly performs reviews on the carrying value of our long-term
assets to determine if any impairment is present. Recoverability is measured by
the carrying costs of the asset against any undiscounted future net cash flow
projections expected to be generated by the asset. If the asset is considered to
be impaired, the impairment is the excess carrying value over the fair market
value of the asset. Management considers historical product demand, current
economic trends, customer buying patterns, customer credit-worthiness and
expected revenue projections when estimating expected future cash flows. At
March 31, 2001 and 2002, long-lived assets, including goodwill and other
intangible assets, were determined not to be impaired.

RESEARCH AND DEVELOPMENT AND COMPUTER SOFTWARE DEVELOPMENT COSTS

Costs incurred in the research and development of NetScout's products are
expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to
establishment of technological feasibility (as defined by SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed") and capitalized thereafter. No software development costs were
capitalized during the fiscal years ended March 31, 2000, 2001 and 2002, since
costs incurred subsequent to establishment of technological feasibility were not
material to NetScout's financial position or results of operations.

ACCOUNTING FOR STOCK-BASED COMPENSATION

NetScout accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
NetScout has adopted the provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation," for disclosure only of pro forma net income (loss)
(Note 10). All stock-based awards to non-employees are accounted for using the
fair value method in accordance with SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."

ADVERTISING EXPENSE

NetScout recognizes advertising expense as incurred. Advertising expense was
approximately $973, $1,153 and $168 for the years ended March 31, 2000, 2001 and
2002, respectively.

OTHER COMPREHENSIVE INCOME

Other comprehensive income consists of unrealized gains and losses on
marketable securities and foreign currency translation adjustments. Other
comprehensive income does not materially affect net income (loss) for the years
ended March 31, 2000, 2001 and 2002.

INCOME TAXES

NetScout accounts for income taxes under the liability method. Under the
liability method, deferred assets and liabilities are recognized based upon
anticipated future tax consequences attributable to differences between
financial statement carrying amounts of assets and liabilities and their
respective tax

F-10

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
bases. The provision for income taxes is comprised of the current tax liability
and the change in deferred tax assets and liabilities. A valuation allowance is
established to the extent that it is more likely than not that deferred tax
assets will not be recoverable against future taxable income. NetScout does not
have a valuation allowance against its net deferred tax assets at March 31, 2001
and 2002.

NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding during the
period, excluding shares of common stock subject to repurchase. Diluted net
income per share for fiscal years ended March 31, 2000 and 2001 is computed by
dividing net income by the sum of the weighted average number of shares of
common stock outstanding during the period and the weighted average number of
potential common stock from the assumed exercise of stock options and reserved
shares of common stock subject to repurchase using the "treasury stock" method
for all periods presented and the assumed conversion of the Series A preferred
stock and the Class B convertible common stock in fiscal 2000. Diluted net loss
per share for fiscal year ended March 31, 2002 is computed by dividing net loss
by the weighted average number of shares of common stock outstanding during the
period, excluding shares of common stock subject to repurchase.

RECLASSIFICATIONS

Certain prior years' financial statement items have been reclassified to
conform to the current year's presentation.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that all business combinations be
accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill. SFAS No. 142 requires that ratable amortization of goodwill be
replaced with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001, and will be
adopted by the Company, as required, in the first quarter of fiscal year 2003.
On April 1, 2002, NetScout reclassified the remaining un-amortized assembled
workforce intangible asset to goodwill and ceased amortization of goodwill.
NetScout does not expect that the adoption of SFAS No. 142 will have a
significant impairment impact on its consolidated financial statements.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is effective March 2003. SFAS No. 143 addresses the
financial reporting for obligations and retirement costs relating to the
retirement of tangible long-lived assets. NetScout does not expect that the
adoption of SFAS No. 143 will have a significant impact on its consolidated
financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective March 1, 2002. SFAS
No. 144 supersedes SFAS No. 121,

F-11

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." NetScout does not expect that the adoption of SFAS No. 144 will
have a significant impact on its consolidated financial statements.

3. INVENTORIES

Inventories consist of the following:

4. ACQUISITION

In July 2000, NetScout acquired all of the outstanding common and preferred
stock of NextPoint Networks, Inc. ("NextPoint") in exchange for 1,831,518 shares
of NetScout common stock and $19,600 in cash. NetScout also issued options and
warrants exercisable for 298,647 shares of NetScout common stock in exchange for
all outstanding options and warrants exercisable for NextPoint common stock. In
December 2000, the warrants were exercised in full. The value of the acquisition
was $52,551 based on the fair value of the consideration paid plus direct
acquisition costs. The acquisition was accounted for using the purchase method.
In addition, 267,602 shares of NetScout common stock have been reserved and are
being released during a two-year period subsequent to the acquisition to two
founding shareholders of NextPoint as they continue employment by NetScout.
NetScout recorded $3,981 as deferred compensation related to the reserved
shares, which will be amortized to stock-based compensation expense over the
two-year period of employment. Accordingly, the results of operations of
NextPoint subsequent to July 7, 2000 have been included in NetScout's statements
of operations for the fiscal year ended March 31, 2001 and 2002.

The summary table below, prepared on an unaudited pro forma basis, combines
NetScout's results of operations with NextPoint's results of operations as if
NextPoint had been acquired as of April 1, 1999 and April 1, 2000 for the twelve
months ended March 31, 2000 and 2001, respectively:

The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined operations.

F-12

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consist of the following:

In accordance with SFAS No. 142, NetScout reclassified the un-amortized
assembled workforce intangible asset to goodwill and ceased amortization of
goodwill effective April 1, 2002. Completed technology and customer base will
continue to be amortized over the life of the asset as detailed below:

2003................................................ $1,088
2004................................................ 272
------
Total............................................... $1,360
======

6. FIXED ASSETS

Fixed assets consist of the following:

Depreciation and amortization expense on fixed assets for the years ended
March 31, 2000, 2001 and 2002 was $2,936, $4,101, and $4,457, respectively.

7. LINE OF CREDIT

At March 31, 2002, NetScout had a revolving line of credit with a bank under
which we can borrow up to $10,000 based upon a percentage of eligible accounts
receivable. This line of credit expires on March 10, 2003. Borrowings under the
line are payable on demand and bear interest at the bank's prime rate. Under

F-13

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

7. LINE OF CREDIT (CONTINUED)
the terms of the agreement, NetScout is required to comply with certain
restrictive covenants, which require that NetScout maintain minimum amounts of
profitability and liquidity. NetScout's accounts receivable and inventory secure
the line of credit. NetScout was in compliance with all restrictive covenants at
March 31, 2002. No borrowings were outstanding under the line of credit at
March 31, 2002 (Note 13).

8. NET INCOME (LOSS) PER SHARE

Below is a summary of the shares used in computing basic and diluted net
income (loss) per share for the years indicated:

The following table sets forth common stock excluded from the calculation of
diluted net income (loss) per share since the inclusion would be antidilutive:

9. CAPITAL STOCK

PUBLIC OFFERING

On August 17, 1999, NetScout completed an initial public offering of three
million shares of common stock at $11.00 per share. NetScout received net
proceeds of approximately $29,600 after deducting $2,300 in underwriting
discounts and commissions and $1,100 in other offering expenses.

TREASURY STOCK

At March 31, 2001 and 2002, 3,977,254 and 4,101,254 shares of common stock
were held in treasury, respectively.

On September 17, 2001, NetScout announced an open market stock repurchase
program that enables NetScout to purchase up to one million shares of
outstanding NetScout common stock, subject to market conditions and other
factors. As of March 31, 2002, NetScout has repurchased 124,000 shares under
this program.

F-14

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

10. STOCK PLANS

1990 STOCK OPTION PLAN

In October 1990, NetScout adopted the 1990 Stock Option Plan. The 1990 Stock
Option Plan provides for the granting of incentive and non-qualified stock
options to employees, directors and consultants of NetScout. The 1990 Stock
Option Plan, as amended, allows for the issuance of options to purchase up to
4,514,666 shares of non-voting common stock. The Board of Directors determines
the term of each option, option price, and number of shares for which each
option is granted and the rate at which each option is exercisable, generally
over four years. The exercise price of incentive stock options shall not be less
than 100% of the fair market value of the common stock at the date of grant
(110% for incentive stock options granted to holders of more than 10% of the
voting stock of NetScout). The term of options granted cannot exceed ten years
(five years for incentive stock options granted to holders of more than 10% of
the voting stock of NetScout). No additional option grants will be made under
the 1990 Stock Option Plan.

1999 STOCK OPTION AND INCENTIVE PLAN

In April 1999, NetScout adopted the 1999 Stock Option and Incentive Plan
(the "1999 Stock Option Plan"). The 1999 Stock Option Plan provides for the
grant of stock-based awards to employees, officers and directors, consultants or
advisors. Under the 1999 Stock Option Plan, NetScout may grant options that are
intended to qualify as incentive stock options, options not intended to qualify
as incentive stock options, restricted stock and other stock-based awards.
Incentive stock options may be granted only to employees of NetScout. The 1999
Stock Option Plan is administered by the Compensation Committee. Subject to the
provisions of the 1999 Stock Option Plan, the Compensation Committee has the
authority to select the persons to whom awards are granted and determine the
terms of each award, including the number of shares of common stock subject to
the award. Options generally vest over four years. The exercise price of
incentive stock options shall not be less than 100% of the fair market value of
the common stock at the date of grant (110% for incentive stock options granted
to holders of more than 10% of the voting stock of NetScout). The term of
options granted cannot exceed ten years (five years for incentive stock options
granted to holders of more than 10% of the voting stock of NetScout). A total of
4,500,000 shares of common stock were originally reserved for issuance under the
1999 Stock Option Plan. In September 2001, at the annual meeting of
stockholders, an additional 5,000,000 shares were approved, for a total of
9,500,000 shares reserved for issuance under the 1999 Stock Option Plan.

F-15

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

10. STOCK PLANS (CONTINUED)
Transactions under the 1990 and 1999 Stock Option Plan during the years
ended March 31, 2000, 2001 and 2002 are summarized as follows:

NetScout has assumed the stock option plans of NextPoint in connection with
the acquisition (Note 4). No additional option grants will be made under the
assumed NextPoint stock option plans.

The following tables summarize information about employee options
outstanding and exercisable at March 31, 2002:

F-16

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

10. STOCK PLANS (CONTINUED)
As of March 31, 2000, 954,892 options were exercisable under the 1990 and
1999 Stock Option Plans. As of March 31, 2001, 1,181,682 options were
exercisable under the 1990 and 1999 Stock Option Plan. As of March 31, 2002,
there were 5,527,535 shares of common stock available for grant under the 1999
Stock Option Plan.

FAIR VALUE DISCLOSURES

As discussed in Note 2, NetScout has adopted SFAS No. 123 for disclosure
only of pro forma net income (loss). Had compensation cost for NetScout's option
plans been determined based on the fair value at the grant dates, as prescribed
in SFAS No. 123, NetScout's net income (loss) and basic and diluted net income
(loss) per share on a pro forma basis would have been as follows:

F-17

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

10. STOCK PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:

Because additional grants are expected to be made each year and options vest
over several years, the above pro forma disclosures are not representative of
pro forma effects of reported net income for future years.

In September 1997, NetScout granted 518,000 options to purchase non-voting
common stock at $2.50 per share to employees. At the grant date, NetScout
estimated the fair value of the common stock to be $3.50 per share. In
accordance with APB Opinion No. 25, NetScout recorded $518 of deferred
compensation, which will be charged to NetScout's results of operations over the
vesting period of the options, generally four years. For the year ended
March 31, 2001, $36 of deferred compensation was reversed due to termination of
employees and for the years ended March 31, 2000, 2001 and 2002, NetScout
recorded $130, $117 and $31 of compensation expense related to these options,
respectively.

In February 1999, NetScout granted 305,500 options to purchase non-voting
common stock at $6.50 per share to employees. At the grant date, NetScout
estimated the fair value of the common stock to be $9.68 per share. In
accordance with APB Opinion No. 25, NetScout recorded $968 of deferred
compensation, which is being charged to NetScout's results of operations over
the vesting period of the options, generally four years. For the years ended
March 31, 2000, 2001, and 2002, $234, $134 and $8 of

F-18

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

10. STOCK PLANS (CONTINUED)
deferred compensation was reversed due to termination of employees and NetScout
recorded $242, $123 and $103 of compensation expense related to these options,
respectively.

As part of the NextPoint acquisition in July 2000, NetScout recorded $980 of
deferred compensation, which is being charged to NetScout's results of
operations over the remainder of the vesting periods, generally from one to four
years. For the years ended March 31, 2001 and 2002, $184 and $20 of deferred
compensation was reversed due to termination of employees and NetScout recorded
$201 and $233 of compensation expense related to these options.

Also as part of the NextPoint acquisition, 267,602 shares of NetScout common
stock were reserved and are being released during a two-year period subsequent
to the acquisition to two founding shareholders of NextPoint as they continue
employment at NetScout. NetScout recorded $4.0 million as deferred compensation
related to the reserved shares, which will be amortized to stock-based
compensation expense over the two-year period of employment. For the years ended
March 31, 2001 and 2002, NetScout record $1,393 and $1,951 as compensation
expense related to these reserved shares.

EMPLOYEE STOCK PURCHASE PLAN

In April 1999, NetScout adopted the 1999 Employee Stock Purchase Plan (the
"1999 Purchase Plan"). The 1999 Purchase Plan is administered by the
Compensation Committee. All employees of NetScout whose customary employment is
for more than 20 hours per week and for more than three months in any calendar
year are eligible to participate in the 1999 Purchase Plan. Employees who would
own 5% or more of the total combined voting power or value of NetScout's stock
immediately after the grant of the option may not participate in the 1999
Purchase Plan. The 1999 Purchase Plan provides for the issuance of a maximum of
500,000 shares of common stock.

11. RETIREMENT PLAN

In 1996, NetScout established a 401(k) plan, which is intended to qualify
under Section 401(k) of the Internal Revenue Code of 1986, as amended, pursuant
to which NetScout matches 25% of the employee's contribution up to 6% of the
employee's salary. In January 2001, the plan was amended to increase the
NetScout match to 50% of the employee's contribution up to 6% of the employee's
salary. NetScout contributions vest at a rate of 25% per year of service.
NetScout made matching contributions of $187, $312 and $672 to the plan for the
years ended March 31, 2000, 2001 and 2002, respectively.

12. INCOME TAXES

Income (loss) before provision for (benefit from) consisted of the
following:

F-19

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

12. INCOME TAXES (CONTINUED)
The components of the provision for (benefit from) income taxes are as
follows:

The components of net deferred tax assets are as follows:

At March 31, 2002, NetScout had federal net operating loss carryforwards and
federal and state research and development credits of approximately $13,927 and
$621, respectively, available to offset future taxable income. These
carryforwards begin to expire in fiscal year 2011.

For federal income tax purposes, a portion of the Company's carryforwards
are subject to certain limitations on annual utilization in case of changes in
ownership, as defined by federal tax laws.

F-20

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

12. INCOME TAXES (CONTINUED)
The income tax provision computed using the federal statutory income tax
rate differs from NetScout's effective tax rate primarily due to the following:

13. COMMITMENTS AND CONTINGENCIES

LEASES

NetScout leases office space under non-cancelable operating leases. Total
rent expense under the leases was $1,712, $2,446 and $3,404 for the years ended
March 31, 2000, 2001 and 2002, respectively.

Future non-cancelable minimum lease commitments are as follows:

Under the terms of its current principal office lease, NetScout is required
to maintain a letter of credit totaling $3,200 under its $10,000 revolving line
of credit (Note 7).

F-21

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

13. COMMITMENTS AND CONTINGENCIES (CONTINUED)

CONTINGENCIES

Prior to the acquisition of NextPoint Networks, Inc. ("NextPoint"), a
reseller of NextPoint filed an action against NextPoint alleging breach of
contract. NextPoint denied the claim. An escrow balance was established at the
time of the acquisition to account for potential losses related to this suit and
this escrow balance significantly limited NetScout's exposure. NetScout recorded
an accrual to account for any additional expenses. The matter was settled in
January 2002. Subsequent to year end, escrow funds were released and NetScout
received the appropriate escrow balance to finalize this matter.

In addition to the matter noted above, from time to time, NetScout is
subject to legal proceedings and claims in the ordinary course of business. In
the opinion of management, the amount of ultimate expense with respect to any
other current legal proceedings and claims will not have a significant adverse
effect on NetScout's financial position or results of operations.

EMPLOYMENT AGREEMENT

In January 1999, NetScout amended an employment agreement with two employee
stockholders, which provides that each employee stockholder will receive a base
salary of at least $250 and a year-end, non-discretionary bonus of at least
$250. For the fiscal year ended March 31, 2002, the year-end bonus for these two
employee stockholders (with their consent) was $190. The employment agreement is
terminable at will, but provides that if either employee's employment is
terminated by NetScout without cause, or either decides to terminate his own
employment for "good reason", as defined, each is entitled to receive severance
benefits for three years as follows: (i) for the first twelve months following
termination, the greater of $175 or base salary as of the date of termination;
and (ii) for each subsequent twelve-month period, an amount equal to 120% of the
amount received in the immediately preceding twelve months. Each employment
agreement provides for a five-year term commencing June 1, 1994 with automatic
one-year renewals.

14. GEOGRAPHIC INFORMATION

Revenue was distributed geographically as follows:

The North America revenue includes sales to domestic resellers. These
domestic resellers may sell NetScout products to international locations.
NetScout reports these shipments as North America revenue since NetScout ships
the products to a domestic location. Revenue attributable to locations outside
of North America is a result of export sales. Substantially all of NetScout's
identifiable assets are located in the United States.

F-22

NETSCOUT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

15. RESULTS OF OPERATIONS--UNAUDITED

The following table sets forth certain unaudited quarterly results of
operations of NetScout for the fiscal years ended 2001 and 2002. In the opinion
of management, this information has been prepared on the same basis as the
audited consolidated financial statements and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the quarterly information when read in
conjunction with the audited consolidated financial statements and notes thereto
included elsewhere in this Annual Report on Form 10-K. The quarterly operating
results are not necessarily indicative of future results of operations.

F-23

NETSCOUT SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

- ------------------------

* Including $103,000, due to the purchase of NextPoint Networks, Inc. in
July 2000.

S-1