NETSCOUT SYSTEMS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 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

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NETSCOUT SYSTEMS, INC.
(Exact name of registrant as specified in charter)

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

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

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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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES / / NO /X/

The number of shares outstanding of the registrant's common stock as of
February 6, 2003 was 29,982,671.

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NETSCOUT SYSTEMS, INC.

FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements........................................ 3

a.) Condensed Consolidated Balance Sheets:
As of December 31, 2002 and March 31, 2002..................... 3

b.) Condensed Consolidated Statements of Operations:
For the three and nine months ended December 31, 2002 and
December 31, 2001.................................................... 4

c.) Condensed Consolidated Statements of Cash Flows:
For the nine months ended December 31, 2002 and December 31,
2001................................................................. 5

d.) Notes to Condensed Consolidated Financial Statements......... 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13

Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 30

Item 4. Controls and Procedures..................................... 30

PART II: OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds................... 32

Item 6. Exhibits and Reports on Form 8-K............................ 32

SIGNATURES........................................................... 33

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002................................................................. 34

EXHIBIT INDEX........................................................ 36

2

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NETSCOUT SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

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

3

NETSCOUT SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

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

4

NETSCOUT SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

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

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NETSCOUT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial
statements as of December 31, 2002 and for the three and nine months ended
December 31, 2002 and 2001, respectively, have been prepared by NetScout
Systems, Inc. in accordance with generally accepted accounting principles for
interim financial reports and the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared under generally accepted
accounting principles have been considered or omitted pursuant to such
regulations. In the opinion of NetScout's management, the unaudited interim
condensed consolidated financial statements include all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of our
financial position, results of operations and cash flows. The results of
operations for the three and nine month periods ended December 31, 2002 are not
necessarily indicative of the results of operations for the year ending
March 31, 2003. The balance sheet at March 31, 2002 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.

For further information refer to the consolidated financial statements and
footnotes thereto included in NetScout's Annual Report on Form 10-K for the year
ended March 31, 2002, as filed with the Securities and Exchange Commission on
June 28, 2002.

Certain reclassifications have been made to the prior year financial
statements to conform to the current presentation.

2. 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
marketable securities are stated at amortized cost plus accrued interest, which
approximates fair value. 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 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. As of December 31, 2002 and 2001, there
were no unrealized gains or losses recorded as other comprehensive income
(Note 8).

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NETSCOUT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

3. INVENTORIES

Inventories consist of the following:

4. LONG-LIVED ASSETS

GOODWILL AND OTHER INTANGIBLE ASSETS

NetScout adopted SFAS No. 142, "Goodwill and Other Intangible Assets," in
April 2002. Prior to the adoption of SFAS No. 142, the net carrying amount of
goodwill was $28,770. In accordance with the provisions of SFAS No. 142,
NetScout reclassified its assembled workforce intangible net asset of $69 to
goodwill. NetScout concluded that it had one reporting unit and assigned the
entire balance of goodwill to this reporting unit for purposes of performing a
transitional impairment test as of April 1, 2002. The fair value of the
reporting unit was determined using NetScout's market capitalization as of
April 1, 2002. As of April 1, 2002, the fair value of NetScout exceeded the
carrying value of its net assets, including goodwill, and accordingly, NetScout
concluded no impairment existed as of that date. NetScout will perform a test of
impairment of goodwill annually or when changes in events or circumstances
indicate that an impairment test is required.

The following table summarizes other intangible assets:

Estimated amortization expense for the fiscal years 2003 and 2004 is $1,088
and $272, respectively.

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NETSCOUT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

4. LONG-LIVED ASSETS (CONTINUED)
The following table presents a reconciliation of net loss and net loss per
share adjusted for the exclusion of goodwill and assembled workforce
amortization:

NOTE RECEIVABLE

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," NetScout recorded impairment charges related to a
long-term note receivable. These impairment charges were based on management's
assessments of the collectability of this note receivable. At September 30,
2002, NetScout concluded that this asset was fully impaired. For the three and
nine months ended December 31, 2002, NetScout's impairment charges were $0 and
$1,019, respectively.

5. TREASURY STOCK

On September 17, 2001, NetScout announced an open market stock repurchase
program to purchase up to one million shares of outstanding NetScout common
stock, subject to market conditions and other factors. Any purchases under
NetScout's stock repurchase program may be made from time to time without prior
notice. As of March 31, 2002, NetScout had repurchased 124,000 shares under this
program. No shares have been repurchased by the Company during the nine months
ended December 31, 2002.

6. COMMITMENTS AND 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. In May 2002, escrow funds were released and NetScout received the
appropriate escrow balance to finalize this matter.

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NETSCOUT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 impact
on NetScout's financial position or results of operations.

7. COMPUTATION OF NET LOSS PER SHARE

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

8. OTHER COMPREHENSIVE INCOME

Other comprehensive income consists of unrealized gains and losses on
marketable securities and foreign currency translation adjustments. Other
comprehensive income did not materially impact net loss for the nine months
ended December 31, 2002 and 2001.

9. INCOME TAX BENEFIT

For the nine months ended December 31, 2002, NetScout estimated the income
tax benefit utilizing an estimated annual effective tax rate for the fiscal year
ending March 31, 2003, which represents the statutory tax rate adjusted
primarily for non-deductible stock-based compensation and amortization of other
intangible assets. NetScout's estimated annual effective tax rate increased to a
benefit rate of 40% in fiscal 2003 from a benefit rate of 8% in fiscal 2002,
which was primarily impacted by the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets," effective April 1, 2002, which causes goodwill and the
un-amortized assembled workforce intangible asset to be no longer subject to
amortization.

10. GEOGRAPHIC INFORMATION

Revenue was distributed geographically as follows:

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NETSCOUT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

10. GEOGRAPHIC INFORMATION (CONTINUED)
The North America revenue includes sales to domestic resellers, who 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.

11. TENDER OFFER

On November 8, 2002, NetScout offered to exchange any outstanding option
grants to purchase shares of NetScout's common stock with an exercise price of
at least $10.00 per share granted under the NetScout Systems, Inc. 1999 Stock
Option and Incentive Plan, as amended (the "1999 Plan"), or the NextPoint
Networks, Inc. 2000 Stock Incentive Plan assumed by NetScout in connection with
the acquisition of NextPoint for new options NetScout will grant under the 1999
Plan on a date no earlier than six months and one day after the date we accepted
the options in the exchange. All options granted under NetScout's other stock
option plans were not eligible for the offer to exchange because all the grants
under those plans have exercise prices below $10.00 per share.

Other than the Chief Executive Officer and the Chairman of the Board of
Directors' of NetScout, all employees of NetScout and its subsidiaries holding
Eligible Option Grants were eligible to participate in this offer to exchange.
Directors and consultants of NetScout were not eligible to participate in this
offer to exchange.

NetScout expects to grant new options on the date of its Board of Directors'
meeting to be held on or after the first day that is at least six months and one
day following December 10, 2002, the date on which NetScout terminated all
options tendered in accordance with the exchange offer. NetScout believes the
new options will be granted on or after June 12, 2003, but in no event later
than June 20, 2003. In order to qualify for the new grant, eligible participants
must be an employee of NetScout from the date they tender any eligible option
grants through the date NetScout grants the new options. The exercise price of
all new options granted under the offer will be equal to the per share market
price of NetScout's common stock as reported by the Nasdaq National Market at
the close of trading on the date of grant. A total of 2,489,666 shares were
eligible for tender, and 2,142,723 were tendered in the exchange offer.

12. 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. SFAS
No. 142 was adopted by us in the first quarter of our fiscal year ending
March 31, 2003 (Note 4). On April 1, 2002,

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NETSCOUT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
NetScout reclassified the remaining un-amortized assembled workforce intangible
asset to goodwill and ceased amortization of goodwill.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is effective in April 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 currently 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 became 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." For the three and nine months
ended December 31, 2002, NetScout applied the provisions of SFAS No. 144 to a
long-term note receivable balance (Note 4).

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which will become effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." NetScout does
not currently expect that the adoption of SFAS No. 146 will have a significant
impact on its consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation 45 ("FIN 45"),
"Guarantor's Accounting Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN
45 clarifies the requirements of FASB Statement No. 5, "Accounting for
Contingencies," relating to the guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. The provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. NetScout does not currently expect
that the adoption of FIN 45 will have a significant impact on its consolidated
financial statements. 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 December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an Amendment to FAS No. 123," to
provide alternative methods of transition to the fair value method of accounting
for stock-based employee compensation, and also amends the disclosure provision
of SFAS No. 123 to require disclosure in the summary of significant accounting
policies the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial

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NETSCOUT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
statements. The disclosure provision is required for all companies with
stock-based employee compensation, regardless of whether the company utilizes
the fair value method of accounting described in SFAS No. 123 or the intrinsic
value method described in APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS No. 148's amendment of the transition and annual disclosure
provisions of SFAS No. 123 are effective for fiscal years ending after
December 15, 2002. The disclosure requirements for interim financial statements
containing condensed consolidated financial statements are effective for interim
periods beginning after December 15, 2002. NetScout intends to adopt the
disclosure requirements of SFAS No. 148 effective April 1, 2003 for its fiscal
year ended March 31, 2004.

In December 2002, the Emerging Issues Task Force issued No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF
No. 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities.
EITF No. 00-21 established three principles: revenue arrangements with multiple
deliverables should be divided into separate units of accounting, arrangement
consideration should be allocated among the separate units of accounting based
on their relative fair values and applicable revenue recognition criteria should
be considered separately for separate units of accounting. EITF No. 00-21 is
effective for all revenue arrangements entered into in fiscal periods beginning
after June 15, 2003, with early adoption permitted. NetScout does not currently
expect that the adoption of EITF No. 00-21 will have a significant impact on its
consolidated financial statements.

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

The following information should be read in conjunction with the unaudited
condensed consolidated financial information and the notes thereto included in
this Quarterly Report on Form 10-Q.

In addition to the other information in this report, the following
Management's Discussion and Analysis should be considered carefully in
evaluating NetScout and our business. This Quarterly Report on Form 10-Q
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 computer and
telecommunication 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 our first infrastructure performance management
products. Our operations have been financed principally through cash provided by
operations.

CRITICAL ACCOUNTING POLICIES

NetScout considers accounting policies related to revenue recognition,
accounts receivable and allowance for doubtful accounts, valuation of
inventories, valuation of long-lived assets and valuation of net deferred tax
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 are based upon our return policy, sales agreements, estimates of
potential future product returns related to current period revenue, current
economic trends, changes in our customer composition and historical experience.
If these accounting judgments and estimates relating to product returns prove to
be inadequate, our financial results could be materially and adversely impacted
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

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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 reported product shipment by the license holder.

Revenue generated from indirect distribution channels, including original
equipment manufacturers, distributors, resellers, system integrators and service
providers, represented 51% and 52% of total revenue for the three months ended
December 31, 2002 and 2001, respectively, and 53% and 61% of total revenue for
the nine months ended December 31, 2002 and 2001, respectively. Total revenue
generated from Cisco Systems, Inc. represented 9% and 27% of our total revenue
for the three months ended December 31, 2002 and 2001, respectively, and 11% and
39% of our total revenue for the nine months ended December 31, 2002 and 2001,
respectively. No other customer or indirect channel partner accounted for 10% or
more of our total revenue during the three or nine months ended December 31,
2002 and 2001.

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. We have completed the transition of Cisco
customers who are actively purchasing our products to either a direct or
reseller relationship with NetScout. Additionally, Cisco continues to
incorporate components of our software technology into their products. On
August 1, 2002, we amended our agreement with Cisco regarding the incorporation
of our software into Cisco's products to extend the term of the agreement until
November 1, 2003 with automatic renewals for 18 month periods, subject to
certain conditions.

Revenue from sales outside North America represented 16% of our total
revenue for each of the three months ended December 31, 2002 and 2001 and 16%
and 12% of our total revenue for the nine months ended December 31, 2002 and
2001, respectively. Sales outside North America are primarily due to indirect
channel partners, who 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 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.

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

14

arise. We believe our credit policies are prudent and reflect normal industry
terms and business risk. At December 31, 2002, one customer accounted for 10% of
our accounts receivable balance; at December 31, 2001 no customer accounted for
10% or more of our accounts receivable balance. 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, we
do not require collateral from our customers. We perform credit checks on all
potential new customers prior to acceptance of an 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
our judgments and estimates of the uncollectability of specific accounts
receivable, 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 these accounting
judgments and estimates relating to the allowance for doubtful accounts prove to
be inadequate, our financial results could be materially and adversely impacted
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 impact 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 impact our business, operating results and financial
condition.

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

VALUATION OF LONG-LIVED ASSETS

NetScout regularly performs reviews of the carrying value of our long-lived
assets, consisting of fixed assets, goodwill and other intangible assets and
other assets, to determine if any impairment is present. Items that could
trigger impairment include, but are not limited to, current economic trends,
customer buying patterns, customer credit-worthiness and expected revenue
projections, significant underperformance of product demand 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. In accordance with
SFAS No. 144, we recorded $1.0 million of impairment charges during the nine
months ended December 31, 2002 related to a long-term note receivable which was
fully impaired.

Significant management judgments and estimates must be made when
establishing criteria for future cash flows and assessing impairment. If our
judgments and estimates relating to long-lived assets prove to be inadequate, an
asset may be determined to be impaired and our financial results could be

15

materially adversely impacted. Likewise, if a future event or circumstance
indicates that an impairment assessment is required and an asset is determined
to be impaired, our financial results could be materially and adversely impacted
in future periods.

VALUATION OF NET DEFERRED TAX ASSETS

We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax basis of assets and
liabilities. Significant management judgment is required in determining our
deferred tax assets and liabilities and any valuation allowance recorded against
our net deferred tax assets. We make an assessment of the likelihood that our
deferred tax assets will be recovered from future taxable income, and to the
extent that recovery is not believed to be more likely than not, a valuation
allowance is established. We have not recorded a valuation allowance to reduce
our deferred tax assets because we believe the amount is more likely than not to
be realized. If we determine that we will not be able to realize some or all of
the deferred taxes in the future, an adjustment to the deferred tax assets will
be charged to income in the period such determination is made.

16

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 OF TOTAL REVENUE

THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001

REVENUE

Total revenues were $18.2 million and $21.5 million for the three months
ended December 31, 2002 and 2001, respectively, representing a decrease of 15%
from 2001 to 2002.

PRODUCT. Product revenues were $10.6 million and $13.9 million for the
three months ended December 31, 2002 and 2001, respectively, representing a
decrease of 23% from 2001 to 2002. This decrease was primarily due to a 42%
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, partially offset by an increase in the average selling price
of approximately 27% attributable to the increased sales of our higher speed
probes. We expect the current challenging market resulting from information
technology capital spending constraints in the U.S. and abroad and

17

the current economic downturn will have an impact on our future product revenue
results which can not be quantified at this time.

SERVICE. Service revenues were $6.4 million and $5.4 million for the three
months ended December 31, 2002 and 2001, respectively, representing an increase
of 19% 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 over the last year combined with continued renewals of customer
support agreements from our expanding installed base. We anticipate that we will
continue to increase our service revenue in future quarters as our current
installed base continues to expand but, in the fourth quarter, that increase
will be offset by lower revenue from the renegotiation of a support contract
with one of our long-term partners.

LICENSE AND ROYALTY. License and royalty revenues were $1.1 million and
$2.2 million for the three months ended December 31, 2002 and 2001,
respectively, representing a decrease of 50% from 2001 to 2002. This decrease
was primarily due to a reduction in Cisco reported unit volume of Cisco products
that incorporate our software. We anticipate a continued decrease in our license
and royalty revenues due to royalty price reductions and our decreased focus on
royalty partnerships in favor of a concentration on partnerships that more
closely complement our current product strategies.

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 $3.4 million and
$4.6 million for the three months ended December 31, 2002 and 2001,
respectively, representing a decrease of 27% from 2001 to 2002. This decrease
corresponds with the 42% decrease in unit sales attributable to the overall
current slowdown in information technology capital spending in many large
enterprises as a result of the economic downturn and a decrease in our fixed
manufacturing costs. Product gross margins were 68% and 67% for the three months
ended December 31, 2002 and 2001, respectively. This increase in product gross
margin percentage was primarily due to an increase of approximately 27% in
average selling price per unit, a decrease in our fixed manufacturing costs and
an increase in direct sales from 2001 to 2002, which traditionally have higher
margins, partially offset by a 24% increase in average cost per unit.

SERVICE. Cost of service revenue consists primarily of personnel costs,
material and consulting costs. Cost of service revenues were $1.2 million and
$881,000 for the three months ended December 31, 2002 and 2001, respectively,
representing an increase of 39% from 2001 to 2002. Service gross margins were
81% and 84% for the three months ended December 31, 2002 and 2001, respectively.
This increase in costs and decrease in gross margin percentage were primarily
due to increases in our personnel and related travel costs. While service
revenue increased by 19%, cost of service revenue increased by 39%, resulting in
the decrease in service gross margin percentage.

Gross margins were $13.6 million and $16.0 million for the three months
ended December 31, 2002 and 2001, respectively, representing a decrease of 15%
from 2001 to 2002. Gross margin percentage was 75% and 74% for the three months
ended December 31, 2002 and 2001, respectively. Gross margin is primarily
impacted 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 sales through indirect distribution
channels. The increase in gross margin percentage was primarily due to an
increase in product margin percentage which resulted from an increase of
approximately 27% in average selling price per unit, a decrease in our fixed
manufacturing costs and an increase in direct sales which traditionally have
higher margins, partially offset by a 24% increase in average cost per unit. The
total gross margin was impacted by a decrease in license and royalty revenue,
which have no related costs.

18

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 $4.1 million and $4.9 million
for the three months ended December 31, 2002 and 2001, respectively,
representing a decrease of 17% from 2001 to 2002. This decrease was primarily
due to a 92% decrease in stock-based compensation charges related to the
NextPoint acquisition from 2001 to 2002 and a 15% decrease in personnel costs
and other incentive compensation from 2001 to 2002. We anticipate that
sequentially we will increase research and development expenses in absolute
dollars due to an increase in health insurance and payroll taxes anticipated for
the fourth quarter of fiscal year 2003.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel costs and other costs associated with marketing programs such as trade
shows, seminars, advertising and new product launch activities. Sales and
marketing expenses were $8.5 million and $9.4 million for the three months ended
December 31, 2002 and 2001, respectively, representing a decrease of 9% from
2001 to 2002. This decrease was primarily due to a 13% decrease in personnel
costs related to a decrease in commission expense due to lower sales volume and
a 52% decrease in spending on marketing programs from 2001 to 2002. We
anticipate that sequentially we will increase sales and marketing expenses in
absolute dollars due to an increase in health insurance and payroll taxes
anticipated for the fourth quarter of fiscal year 2003.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel costs for executive, financial and human resource
employees. General and administrative expenses were $1.7 million and
$2.1 million for the three months ended December 31, 2002 and 2001,
respectively, representing a decrease of 19% from 2001 to 2002. This decrease
was primarily due to an imputed interest charge of $128,000 associated with the
reclassification of a long-term note receivable balance in 2001 and by decreases
in various general and administrative expenses including personnel, other
incentive compensation, accounting services and investor relations expenses. We
anticipate that we will increase general and administrative expenses in absolute
dollars sequentially due to an anticipated increase in health insurance and
payroll taxes in the fourth quarter of fiscal year 2003.

AMORTIZATION OF OTHER INTANGIBLE ASSETS. Amortization of other intangible
assets was $272,000 and $359,000 for the three months ended December 31, 2002
and 2001, respectively, due to the acquisition of NextPoint. We anticipate that
we will continue to amortize other intangible assets at the current rate of
$272,000 per quarter for each of the fourth quarter of fiscal year 2003 and the
first quarter of fiscal year 2004, at which time it will be fully amortized.

AMORTIZATION OF GOODWILL. With the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets," effective April 1, 2002, goodwill and the un-amortized
assembled workforce intangible asset are no longer subject to amortization.
Amortization of goodwill was $2.3 million for the three months ended December
31, 2001, due to the acquisition of NextPoint.

INTEREST INCOME AND OTHER EXPENSES, NET. Interest income, net of interest
and other expenses, was $258,000 and $373,000 for the three months ended
December 31, 2002 and 2001, respectively, representing a decrease of 31% from
2001 to 2002. This decrease was primarily due to lower market interest rates on
cash, cash equivalents and marketable securities.

INCOME TAX BENEFIT. The income tax benefit was $382,000 and $65,000 for the
three months ended December 31, 2002 and 2001, respectively. NetScout's
estimated annual effective tax rate increased to a benefit rate of 40% in fiscal
year 2003 from a benefit rate of 8% in fiscal year 2002, which was primarily
impacted by the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets," effective

19

April 1, 2002, which causes goodwill and the un-amortized assembled workforce
intangible asset to be no longer subject to amortization.

NET LOSS. Net loss was $328,000 and $2.6 million for the three months ended
December 31, 2002 and 2001, respectively, representing an 87% improvement from
2001 to 2002. The decrease in net loss year over year was mainly attributable to
the decrease in the amortization of goodwill and other intangible assets from an
aggregate of $2.6 million to an aggregate of $272,000 for the three months ended
December 31, 2001 and 2002, respectively. With the adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets," effective April 1, 2002, goodwill and
the un-amortized assembled workforce intangible asset are no longer subject to
amortization. When excluding the non-cash amortization of goodwill and other
intangible assets of $272,000 and $2.6 million and stock-based compensation of
$66,000 and $580,000 for the three months ended December 31, 2002 and 2001,
respectively, the pro forma net income would have been $10,000 and $626,000 for
the three months ended December 31, 2002 and 2001, respectively. This decrease
in pro forma net income is primarily attributable to the reduction in gross
margin dollars due to decreased revenue attributable to the current economic
downturn, offset by reductions in other operating expenses due to spending
controls and an increased tax benefit due to lower estimated taxable income for
the year ending March 31, 2003.

NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001

REVENUE

Total revenues were $53.9 million and $59.4 million for the nine months
ended December 31, 2002 and 2001, respectively, representing a decrease of 9%
from 2001 to 2002.

PRODUCT. Product revenues were $31.5 million and $36.6 million for the nine
months ended December 31, 2002 and 2001, respectively, representing a decrease
of 14% from 2001 to 2002. This decrease was primarily due a 37% 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 approximately 34%
attributable to the increased sale of our higher-end probes. We expect the
current challenging market resulting from information technology capital
spending constraints in the U.S. and abroad and the current economic downturn
will have an impact on our future product revenue results which can not be
quantified at this time.

SERVICE. Service revenues were $18.1 million and $15.1 million for the nine
months ended December 31, 2002 and 2001, respectively, representing an increase
of 20% 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 over the last year combined with continued renewals of customer
support agreements from our expanding installed base. We anticipate that we will
continue to increase our service revenue in future quarters as our current
installed base continues to expand but, in the fourth quarter, that increase
will be offset by lower revenue from the renegotiation of a support contract
with one of our long-term partners.

LICENSE AND ROYALTY. License and royalty revenues were $4.4 million and
$7.7 million for the nine months ended December 31, 2002 and 2001, respectively,
representing a decrease of 43% from 2001 to 2002. This decrease was primarily
due to a reduction in Cisco reported unit volume of Cisco products that
incorporate our software. We anticipate a continued decrease in our license and
royalty revenues due to royalty price reductions and our decreased focus on
royalty partnerships in favor of a concentration on partnerships that more
closely complement our current product strategies.

20

COST OF REVENUE AND GROSS MARGIN

PRODUCT. Cost of product revenue was $10.2 million and $13.4 million for
the nine months ended December 31, 2002 and 2001, respectively, representing a
decrease of 24% from 2001 to 2002. This decrease corresponds with the 37%
decrease in unit sales attributable to the overall current slowdown in
information technology capital spending in many large enterprises as a result of
the economic downturn, as well as decreases in fixed manufacturing costs.
Product gross margins were 68% and 63% for the nine months ended December 31,
2002 and 2001, respectively. The increase in gross margin percentage was
primarily due to an increase of approximately 34% in average selling price per
unit and an increase in direct sales from 2001 to 2002, which traditionally have
higher margins, partially offset by a 24% increase in average cost per unit
relating to the sale of higher speed probes.

SERVICE. Cost of service revenues were $3.4 million and $2.7 million for
the nine months ended December 31, 2002 and 2001, respectively, representing an
increase of 26% from 2001 to 2002. Service gross margins were 81% and 82% for
the nine months ended December 31, 2002 and 2001, respectively. The increase in
cost of service revenue was primarily due to an increase in our personnel costs
and related travel costs. While service revenue increased by 20%, cost of
service revenue increased by 26%, resulting in a decrease in service gross
margin percentage.

Gross margins were $40.4 million and $43.3 million for the nine months ended
December 31, 2002 and 2001, respectively, representing a decrease of 7% from
2001 to 2002. Gross margin percentage was 75% and 73% for the nine months ended
December 31, 2002 and 2001, respectively. Gross margin is primarily impacted 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 sales through indirect distribution channels. The increase in
gross margin percentage was primarily due to the increased product margin
percentage which mainly resulted from an increase of approximately 34% in the
average selling price per unit and an increase in direct sales, which
traditionally have higher margins, partially offset by a 24% increase in average
cost per unit. The gross margin percentage change was impacted by a decrease in
license and royalty revenue, which have no related costs.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses were
$12.8 million and $14.5 million for the nine months ended December 31, 2002 and
2001, respectively, representing a decrease of 11% from 2001 to 2002. This
decrease was primarily due to a 53% decrease in stock-based compensation charges
related to the NextPoint acquisition from 2001 to 2002, an 8% decrease in
personnel costs and other incentive compensation from 2001 to 2002, and an 80%
decrease in non-recurring engineering charges. We anticipate that we will
increase research and development expenses in absolute dollars sequentially due
to an increase in health insurance and payroll taxes anticipated for the fourth
quarter of fiscal year 2003.

SALES AND MARKETING. Sales and marketing expenses were $25.3 million and
$26.9 million for the nine months ended December 31, 2002 and 2001,
respectively, representing a decrease of 6% from 2001 to 2002. This decrease was
primarily due to a 65% decrease in marketing programs spending and a 1% decrease
in personnel costs. We anticipate that sequentially we will increase sales and
marketing expenses in absolute dollars due to an increase in health insurance
and payroll taxes anticipated for the fourth quarter of fiscal year 2003.

21

GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$6.0 million and $5.7 million for the nine months ended December 31, 2002 and
2001, respectively, representing an increase of 4% from 2001 to 2002. This
increase was primarily due to an impairment of $1.0 million on a long-term note
receivable in the first half of fiscal year 2003 partially offset by decreases
in various general and administrative expenses including personnel, other
incentive compensation, legal, investor relations, bad debt expense and
accounting services. We anticipate that we will increase general and
administrative expenses in absolute dollars sequentially due to anticipated
increases in health insurance and payroll taxes in the fourth quarter of fiscal
year 2003.

AMORTIZATION OF OTHER INTANGIBLE ASSETS. Amortization of other intangible
assets was $816,000 and $1.1 million for the nine months ended December 31, 2002
and 2001, respectively, due to the acquisition of NextPoint. We anticipate that
we will continue to amortize other intangible assets at the current rate of
$272,000 per quarter for each of the fourth quarter of fiscal year 2003 and the
first quarter of fiscal year 2004, at which time it will be fully amortized.

AMORTIZATION OF GOODWILL. Amortization of goodwill was $6.8 million for the
nine months ended December 31, 2001. With the adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets," effective April 1, 2002, goodwill and
the un-amortized assembled workforce intangible asset are no longer subject to
amortization.

INTEREST INCOME AND OTHER EXPENSES, NET. Interest income, net of interest
and other expenses, was $897,000 and $1.6 million for the nine months ended
December 31, 2002 and 2001, respectively, representing a decrease of 42% from
2001 to 2002. This decrease was primarily due to lower market interest rates on
cash and cash equivalents and marketable securities.

INCOME TAX BENEFIT. The income tax benefit was $1.4 million and $530,000
for the nine months ended December 31, 2002 and 2001, respectively. NetScout's
estimated annual effective tax rate increased to a benefit rate of 40% in fiscal
year 2003 from a benefit rate of 8% in fiscal year 2002, which was primarily
impacted by the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets," effective April 1, 2002, which causes goodwill and the un-amortized
assembled workforce intangible asset to be no longer subject to amortization.

NET LOSS. Net loss was $2.2 million and $9.7 million for the nine months
ended December 31, 2002 and 2001, respectively, representing a 77% improvement.
The decrease in net loss year over year was mainly attributable to the decrease
in the amortization of goodwill and other intangible assets from $7.9 million to
$816,000 for the nine months ended December 31, 2001 and 2002, respectively.
With the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective April 1, 2002, goodwill and the un-amortized assembled workforce
intangible asset are no longer subject to amortization. When excluding the
non-cash amortization of goodwill and other intangible assets of $816,000 and
$7.9 million and stock-based compensation of $843,000 and $1.7 million for the
nine months ended December 31, 2002 and 2001, respectively, the pro forma net
loss would have been $526,000 and $32,000 for the nine months ended
December 31, 2002 and 2001, respectively. This increase in the pro forma net
loss is primarily attributable to the reduction in gross margin dollars due to
the decreased revenue attributable to the current economic downturn and the
impairment charge of a long-term note receivable, offset by reductions in
operating expenses due to spending controls and an increased tax benefit due to
lower estimated taxable income for the year ending March 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2002, we had $30.4 million in cash and cash equivalents,
$24.9 million in short-term marketable securities and $15.0 million in long-term
marketable securities, totaling $70.3 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 and

22

we intend to renew it upon its expiration. 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 December 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 $1.7 million and $6.2 million for
the nine months ended December 31, 2002 and 2001, respectively. In the nine
months ended December 31, 2002, cash provided by operating activities and
amortization of other intangible assets, was primarily derived from decreases in
accounts receivable and inventories, and increases in depreciation and
amortization, compensation expense associated with equity awards, impairment of
a long-term note receivable and deferred revenue. This was partially offset by a
net loss, decreases in accounts payable and accrued compensation and other
expenses and an increase in deferred income taxes. In the nine months ended
December 31, 2001, cash provided by operating activities was primarily derived
from a decrease in inventories and accounts receivable, an increase in
depreciation and amortization and amortization of goodwill and other intangible
assets, compensation expense associated with equity awards and deferred revenue.
This was partially offset by a net loss, decreases in accounts payable and an
increase in prepaid and other current assets.

Cash provided by (used in) investing activities was $8.3 million and ($38.1)
million for the nine months ended December 31, 2002 and 2001, respectively. For
the nine months ended December 31, 2002, cash provided by investing activities
reflects the proceeds from the maturity of marketable securities offset by the
purchase of marketable securities and the purchase of fixed assets. For the nine
months ended December 31, 2001, net cash used was primarily due to the purchase
of marketable securities and fixed assets offset by the proceeds from the
maturity of marketable securities.

Cash provided by financing activities was $976,000 and $280,000 for the nine
months ended December 31, 2002 and 2001, respectively. For the nine months ended
December 31, 2002, cash provided by financing activities was due to proceeds
from the issuance of common stock in connection with the exercise of stock
options and the employee stock purchase plan. For the nine months ended
December 31, 2001, cash provided by financing activities was primarily due to
proceeds from the issuance of common stock in connection with the exercise of
stock options slightly offset by the stock repurchase program, On September 17,
2001, NetScout announced an open market stock repurchase program that enables
NetScout to purchase up to 1 million shares of its outstanding common stock,
subject to market conditions and other factors. NetScout had purchased 124,000
shares as of December 31, 2002. Cash to be used under this program is
undeterminable at this point in time.

We believe that our current cash balances, marketable securities classified
as available-for-sale and any future 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 impact 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

23

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. SFAS No. 142 was adopted by NetScout in the first
quarter of our fiscal year ending March 31, 2003. On April 1, 2002, NetScout
reclassified the remaining un-amortized assembled workforce intangible asset to
goodwill and ceased amortization of goodwill.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is effective in April 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 currently 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 became 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." For the three and nine months
ended December 31, 2002, NetScout applied the provisions of SFAS No. 144 to a
long-term note receivable balance.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which will become effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." NetScout does
not currently expect that the adoption of SFAS No. 146 will have a significant
impact on its consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation 45 ("FIN 45"),
"Guarantor's Accounting Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN
45 clarifies the requirements of FASB Statement No. 5, "Accounting for
Contingencies," relating to the guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. The provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. NetScout does not currently expect
that the adoption of FIN 45 will have a significant impact on its consolidated
financial statements. 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 December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an Amendment to FAS No. 123," to
provide alternative methods of transition to the fair value method of accounting
for stock-based employee compensation, and also amends the disclosure provision
of SFAS No. 123 to require disclosure in the summary of significant accounting
policies the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. The disclosure provision is required
for all companies with stock-based employee compensation, regardless of whether
the company utilizes the fair value method of accounting described in SFAS
No. 123 or the intrinsic value method described in APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 148's amendment of the
transition and annual

24

disclosure provisions of SFAS No. 123 are effective for fiscal years ending
after December 15, 2002. The disclosure requirements for interim financial
statements containing condensed consolidated financial statements are effective
for interim periods beginning after December 15, 2002. NetScout intends to adopt
the disclosure requirements of SFAS No. 148 effective April 1, 2003 for its
fiscal year ended March 31, 2004.

In December 2002, the Emerging Issues Task Force issued No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF
No. 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities.
EITF No. 00-21 established three principles: revenue arrangements with multiple
deliverables should be divided into separate units of accounting, arrangement
consideration should be allocated among the separate units of accounting based
on their relative fair values and applicable revenue recognition criteria should
be considered separately for separate units of accounting. EITF No. 00-21 is
effective for all revenue arrangements entered into in fiscal periods beginning
after June 15, 2003, with early adoption permitted. NetScout does not currently
expect that the adoption of EITF No. 00-21 will have a significant impact on its
consolidated financial statements.

CERTAIN FACTORS WHICH MAY IMPACT 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 impact our business operations. Such factors, among
others, may have a material adverse impact upon our business, results of
operations and financial condition.

A REDUCTION IN ORDERS FROM CUSTOMERS OF CISCO SYSTEMS, INC. COULD MATERIALLY
ADVERSELY IMPACT 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 and no further
orders were placed after that date. By selling our probes under their private
label, Cisco accounted for 12% of our total revenue for the three months ended
December 31, 2001 and 21% of our total revenue for the nine months ended
December 31, 2001. We now sell to those Cisco customers who are actively
purchasing our product, 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 impacted.

A TERMINATION OF OUR STRATEGIC RELATIONSHIP WITH CISCO MAY MATERIALLY
ADVERSELY IMPACT OUR BUSINESS. Cisco incorporates some of our software in their
products and provides license and royalty revenue to NetScout. License and
royalty revenue and service revenue from Cisco accounted for 9% and 15% of our
total revenue for the three months ended December 31, 2002 and 2001,
respectively and 11% and 18% of our total revenue for the nine months ended
December 31, 2002 and 2001, 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 for any reason, our business, operating results and financial
condition could be materially adversely impacted.

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

25

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
impact 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

- continuation or worsening of the current economic slowdown and the
occurrence of unforeseeable events, such as acts of war and 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.

OUR CONTINUED GROWTH DEPENDS ON OUR ABILITY TO MAINTAIN AND PERIODICALLY
EXPAND OUR SALES FORCE. We must maintain and periodically 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
maintain and periodically expand our sales capability, our business, operating
results and financial condition could be materially adversely impacted.

OUR SUCCESS DEPENDS ON OUR ABILITY TO MANAGE INDIRECT DISTRIBUTION
CHANNELS. Sales to our indirect distribution channels accounted for 51% and 52%
of our total revenue for the three months ended December 31, 2002 and 2001,
respectively and 53% and 61% of our total revenue for the nine months ended
December 31, 2002 and 2001, 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 and they continue to incorporate some of our software
in their products. Cisco accounted for 9% and 27% of our total revenue for the
three months ended December 31, 2002 and 2001, respectively and 11% and 39% of
our total revenue for the nine months ended December 31, 2002 and 2001,
respectively. During the past 18 months we have worked to transition a large
portion of our sales efforts from support of the Cisco distribution channel to
the development of more of our own direct sales and other indirect distribution
channels. To increase our sales going forward we need to continue to enhance our
direct sales efforts and to continue to 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

26

products from us. In addition, they could internally develop products that
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 impact 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
impact on our business, operating results and financial condition.

In the future, we intend to introduce new products related to our previously
announced CDM strategy. If the introduction of these products is significantly
delayed or if we are not successful in selling these products to our current and
potential customers, our business, operating results and financial condition
could be materially adversely impacted.

OUR RELIANCE ON SOLE SOURCE SUPPLIERS COULD ADVERSELY IMPACT 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. 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 impact 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
impact our business, operating results and financial condition.

OUR ESTIMATES AND JUDGMENTS RELATED TO CRITICAL ACCOUNTING POLICIES COULD BE
INACCURATE. We consider accounting policies related to revenue recognition,
accounts receivable and allowance for doubtful accounts, valuation of
inventories, valuation of long-lived assets and valuation of net deferred tax
assets to be critical in fully understanding and evaluating our financial
results. Management makes certain significant accounting judgments and estimates
related to these policies. Our business, operating results and financial
condition could be materially and adversely impacted in future periods if our
accounting judgments and estimates related to these critical accounting policies
prove to be inadequate.

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;

- name and reputation of vendor;

- distribution strength; and/or

- alliances with industry partners.

27

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 impact 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 impact 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 continue to develop
relationships with these service providers and successfully market our products
to them.

FAILURE TO PROPERLY MANAGE GROWTH COULD ADVERSELY IMPACT 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 impacted.

LOSS OF KEY PERSONNEL COULD ADVERSELY IMPACT 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 impact 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 technical 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 impact on our business, operating
results and financial condition.

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,

28

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, patents, copyrights or trademarks. These claims,
whether or not valid, could require us to spend significant sums in litigation,
pay damages, delay product shipments, reengineer our products, rename our
products and rebuild name recognition 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 impact 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 impact 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 16% of our total revenue
for each of the three months ended December 31, 2002 and 2001, and 16% and 12%
of our total revenue for the nine months ended December 31, 2002 and 2001,
respectively. 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;

- protectionist laws and business practices that favor local competitors;

- dependence on local indirect channel partners;

29

- 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. Trading activity of our stock tends to be minimal as a result of
officers and directors and their affiliates holding a significant percentage of
our stock. 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 impact the market
price of our common stock, which in turn could cause impairment of goodwill that
could materially and adversely impact our financial condition and results of
operations.

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 3. 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. NetScout's primary market risk exposures are in the areas of
interest rate risk and foreign currency exchange rate risk. We currently do not
hedge interest rate exposure, but do not believe that a fluctuation in interest
rates would have a material impact on the value of our cash equivalents.
NetScout'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 we currently
have a $10.0 million line of credit with $3.2 million of letters of credit
secured against it, we have no amounts outstanding under the line and no other
outstanding interest-bearing debt.

NetScout's exposure to currency exchange rate fluctuations has been limited.
All revenue transactions are completed in U.S. dollars. NetScout does pay for
certain operating expenses such as foreign payroll, rent and office expense in
foreign currency and, therefore currency exchange rate fluctuations could have a
material adverse impact on our operating results and financial condition.
Currently, NetScout does not engage in foreign currency hedging activities. The
impact of currency exchange rate fluctuations is recorded in the period
incurred.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

As of a date (the "Evaluation Date") within ninety days prior to the filing
date of this quarterly report, the Company, under the supervision and with the
participation of the Company's management, including the Company's principal
executive officer and principal financial officer, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Rules 13a-15 promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange

30

Act"). Based upon that evaluation, the Company's principal executive officer and
principal financial officer concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in ensuring that
material information relating to the Company including its consolidated
subsidiaries required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, including ensuring that such material information
is accumulated and communicated to the Company's management, including the
Company's principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal controls.

There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

31

PART II: OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On August 17, 1999, we completed our initial public offering of 3,000,000
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 11, 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.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

The following exhibits are filed as part of this report.

10 Loan Modification Agreement entered into November 7, 2002
between NetScout and Silicon Valley Bank
99.1 Certification Pursuant to Section 906 of the SARBANES-OXLEY
ACT of 2002
99.2 Certification Pursuant to Section 906 of the SARBANES-OXLEY
ACT of 2002

(b) Reports on Form 8-K. A report on Form 8-K was filed with the Securities and
Exchange Commission on October 30, 2002 with respect to:

Item 5. Other Events and Required FD Disclosure

To file Amendment No. 7 effective as of August 1, 2002 to Private Label
Agreement and Project Development and License Agreement between Cisco
Systems, Inc. and NetScout.

32

SIGNATURES

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

NETSCOUT SYSTEMS, INC.

Date: February 7, 2003 By: /s/ ANIL K. SINGHAL
------------------------------------------------
Anil K. Singhal
PRESIDENT, CHIEF EXECUTIVE OFFICER, TREASURER AND
DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)

Date: February 7, 2003 By: /s/ DAVID P. SOMMERS
------------------------------------------------
David P. Sommers
SENIOR VICE PRESIDENT, GENERAL OPERATIONS AND
CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL
OFFICER)

Date: February 7, 2003 By: /s/ LISA A. FIORENTINO
------------------------------------------------
Lisa A. Fiorentino
VICE PRESIDENT, FINANCE AND ADMINISTRATION AND
CHIEF ACCOUNTING OFFICER (PRINCIPAL ACCOUNTING
OFFICER)

33

I, Anil K. Singhal, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NetScout
Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: February 7, 2003 By: /s/ ANIL K. SINGHAL
------------------------------------------------
Anil K. Singhal
PRESIDENT, CHIEF EXECUTIVE OFFICER, TREASURER AND
DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)

34

I, David P. Sommers, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NetScout
Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: February 7, 2003 By: /s/ DAVID P. SOMMERS
------------------------------------------------
David P. Sommers
SENIOR VICE PRESIDENT, GENERAL OPERATIONS AND
CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL
OFFICER)

35

EXHIBIT INDEX