##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





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 September 30, 2010

OR



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

For the transition period from  to

Commission file number 0000-26251





NETSCOUT SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 04-2837575                       
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (IRS Employer Identification No.)





310 Littleton
Road, Westford, MA 01886

(978) 614-4000





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 has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
    YES    ̈    NO    ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                                               |  |                           |  |  
|----------------------- |  | - |  | --------------------------------------------- |  | ------------------------- |  | -
|                        |  |   |  |                                              
|Large accelerated filer |  |  ̈ |  |                                               |  | Accelerated filer         |  | x
|                        |  |   |  |                                              
|Non-accelerated filer   |  |  ̈ |  | (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    YES   ̈     NO  x

The number of shares outstanding of the registrants common stock, par value $0.001 per share, as of November 8, 2010 was
42,121,631.









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##### Table of Contents



NETSCOUT SYSTEMS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS



|                              |  |                                                                                                                                |    |  |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ | -- |  | -- | 
|PART I: FINANCIAL INFORMATION |  |                                                                                                                                |    | 
|                              |  |                                                                                                                               
|Item 1.                       |  | Unaudited Financial Statements:                                                                                                |    |  |    | 
|                              |  |                                                                                                                               
|                              |  | Condensed Consolidated Balance Sheets: As of September 30, 2010 and March 31, 2010                                             |    |  | 3  | 
|                              |  |                                                                                                                               
|                              |  | Condensed Consolidated Statements of Operations: For the three and six months ended September 30, 2010 and September
 30, 2009 |    |  | 4  | 
|                              |  |                                                                                                                               
|                              |  | Condensed Consolidated Statements of Cash Flows: For the six months ended September 30, 2010 and September 30,
 2009           |    |  | 5  | 
|                              |  |                                                                                                                               
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                           |    |  | 6  | 
|                              |  |                                                                                                                               
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                          |    |  | 18 | 
|                              |  |                                                                                                                               
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                     |    |  | 33 | 
|                              |  |                                                                                                                               
|Item 4.                       |  | Controls and Procedures                                                                                                        |    |  | 34 | 
|                              | 
|PART II: OTHER INFORMATION    |  |                                                                                                                                |    | 
|                              |  |                                                                                                                               
|Item 1A.                      |  | Risk Factors                                                                                                                   |    |  | 35 | 
|                              |  |                                                                                                                               
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                    |    |  | 35 | 
|                              |  |                                                                                                                               
|Item 6.                       |  | Exhibits                                                                                                                       |    |  | 35 | 
|                              | 
|SIGNATURES                    |  |                                                                                                                                | 36 | 
|                              | 
|EXHIBIT INDEX                 |  |                                                                                                                                | 37 | 



2



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PART I: FINANCIAL INFORMATION



|Item 1. | Unaudited Financial Statements
|------- | ------------------------------

NetScout Systems, Inc.

Condensed Consolidated
Balance Sheets

(In thousands, except share and per share data)

(Unaudited)



|                                                                                                                                                                                                              |  |                   |         |   |               |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                                                                                                              |  | September 30,2010 |         |   | March 31,2010 |  
|Assets                                                                                                                                                                                                        |  |                   |         |   |               |   |         |  
|Current assets:                                                                                                                                                                                               |  |                   |         |   |               |   |         |  
|Cash and cash equivalents                                                                                                                                                                                     |  | $                 | 114,043 |   |               | $ | 63,322  |  
|Marketable securities                                                                                                                                                                                         |  |                   | 53,261  |   |               |   | 69,875  |  
|Accounts receivable, net of allowance for doubtful accounts of $285 and $427 at September 30, 2010 and March 31, 2010,
respectively                                                                           |  |                   | 41,448  |   |               |   | 65,556  |  
|Inventories                                                                                                                                                                                                   |  |                   | 11,412  |   |               |   | 9,181   |  
|Prepaid income taxes                                                                                                                                                                                          |  |                   | 2,386   |   |               |   | 2,730   |  
|Deferred income taxes                                                                                                                                                                                         |  |                   | 2,583   |   |               |   | 2,698   |  
|Prepaid expenses and other current assets                                                                                                                                                                     |  |                   | 4,684   |   |               |   | 5,422   |  
|                                                                                                                                                                                                              |  |                   |         |   |               |   |         |  
|Total current assets                                                                                                                                                                                          |  |                   | 229,817 |   |               |   | 218,784 |  
|Fixed assets, net                                                                                                                                                                                             |  |                   | 12,774  |   |               |   | 12,773  |  
|Goodwill                                                                                                                                                                                                      |  |                   | 128,177 |   |               |   | 128,177 |  
|Acquired intangible assets, net                                                                                                                                                                               |  |                   | 50,630  |   |               |   | 53,573  |  
|Deferred income taxes                                                                                                                                                                                         |  |                   | 27,259  |   |               |   | 30,062  |  
|Long-term marketable securities                                                                                                                                                                               |  |                   | 28,702  |   |               |   | 37,354  |  
|Other assets                                                                                                                                                                                                  |  |                   | 1,811   |   |               |   | 1,878   |  
|                                                                                                                                                                                                              |  |                   |         |   |               |   |         |  
|Total assets                                                                                                                                                                                                  |  | $                 | 479,170 |   |               | $ | 482,601 |  
|                                                                                                                                                                                                              |  |                   |         |   |               |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                                                          |  |                   |         |   |               |   |         |  
|Current liabilities:                                                                                                                                                                                          |  |                   |         |   |               |   |         |  
|Accounts payable                                                                                                                                                                                              |  | $                 | 6,415   |   |               | $ | 7,307   |  
|Accrued compensation                                                                                                                                                                                          |  |                   | 17,483  |   |               |   | 19,806  |  
|Accrued other                                                                                                                                                                                                 |  |                   | 4,218   |   |               |   | 5,051   |  
|Current portion of long-term debt                                                                                                                                                                             |  |                   | 13,750  |   |               |   | 11,250  |  
|Deferred revenue                                                                                                                                                                                              |  |                   | 71,810  |   |               |   | 84,196  |  
|                                                                                                                                                                                                              |  |                   |         |   |               |   |         |  
|Total current liabilities                                                                                                                                                                                     |  |                   | 113,676 |   |               |   | 127,610 |  
|Other long-term liabilities                                                                                                                                                                                   |  |                   | 817     |   |               |   | 551     |  
|Accrued long-term retirement benefits                                                                                                                                                                         |  |                   | 1,746   |   |               |   | 1,645   |  
|Long-term deferred revenue                                                                                                                                                                                    |  |                   | 15,219  |   |               |   | 17,846  |  
|Long-term debt, net of current portion                                                                                                                                                                        |  |                   | 60,606  |   |               |   | 68,106  |  
|                                                                                                                                                                                                              |  |                   |         |   |               |   |         |  
|Total liabilities                                                                                                                                                                                             |  |                   | 192,064 |   |               |   | 215,758 |  
|                                                                                                                                                                                                              |  |                   |         |   |               |   |         |  
|Commitments and contingencies                                                                                                                                                                                 |  |                   |         |   |               |   |         |  
|Stockholders equity:                                                                                                                                                                                         |  |                   |         |   |               |   |         |  
|Preferred stock, $0.001 par value:5,000,000 shares authorized; no shares issued or outstanding at September 30, 2010 and
March 31, 2010                                                                       |  |                   |        |   |               |   |        |  
|Common stock, $0.001 par value:150,000,000 shares authorized; 46,731,446 and 46,490,166 shares issued and 41,990,726 and
41,769,680 shares outstanding at September 30, 2010 and March 31, 2010, respectively |  |                   | 47      |   |               |   | 46      |  
|Additional paid-in capital                                                                                                                                                                                    |  |                   | 213,347 |   |               |   | 209,146 |  
|Accumulated other comprehensive loss                                                                                                                                                                          |  |                   | (859    | ) |               |   | (1,817  | )
|Treasury stock at cost, 4,740,818 and 4,720,584 shares at September 30, 2010 and March 31, 2010,
respectively                                                                                                 |  |                   | (31,981 | ) |               |   | (31,691 | )
|Retained earnings                                                                                                                                                                                             |  |                   | 106,552 |   |               |   | 91,159  |  
|                                                                                                                                                                                                              |  |                   |         |   |               |   |         |  
|Total stockholders equity                                                                                                                                                                                    |  |                   | 287,106 |   |               |   | 266,843 |  
|                                                                                                                                                                                                              |  |                   |         |   |               |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                    |  | $                 | 479,170 |   |               | $ | 482,601 |  
|                                                                                                                                                                                                              |  |                   |         |   |               |   |         |  

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



3



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NetScout Systems, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except
per share data)

(Unaudited)



|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                              |  | Three Months EndedSeptember 30, |        |   | Six Months EndedSeptember 30, |  
|                                                              |  | 2010                            |        |   | 2009                          |   |        | 2010 |  |   | 2009    |  
|Revenue:                                                      |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Product                                                       |  | $                               | 37,301 |   |                               | $ | 30,631 |      |  | $ | 71,273  |   |  | $ | 59,022  |  
|Service                                                       |  |                                 | 32,112 |   |                               |   | 29,060 |      |  |   | 64,951  |   |  |   | 58,731  |  
|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total revenue                                                 |  |                                 | 69,413 |   |                               |   | 59,691 |      |  |   | 136,224 |   |  |   | 117,753 |  
|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Cost of revenue:                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Product                                                       |  |                                 | 8,808  |   |                               |   | 8,289  |      |  |   | 17,659  |   |  |   | 15,548  |  
|Service                                                       |  |                                 | 5,499  |   |                               |   | 4,584  |      |  |   | 11,223  |   |  |   | 9,493   |  
|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total cost of revenue                                         |  |                                 | 14,307 |   |                               |   | 12,873 |      |  |   | 28,882  |   |  |   | 25,041  |  
|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                                  |  |                                 | 55,106 |   |                               |   | 46,818 |      |  |   | 107,342 |   |  |   | 92,712  |  
|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|                                                              |  |                                 |        |  
|Operating expenses:                                           |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                      |  |                                 | 9,811  |   |                               |   | 8,670  |      |  |   | 19,589  |   |  |   | 17,888  |  
|Sales and marketing                                           |  |                                 | 25,691 |   |                               |   | 21,372 |      |  |   | 50,810  |   |  |   | 43,478  |  
|General and administrative                                    |  |                                 | 5,825  |   |                               |   | 4,604  |      |  |   | 11,122  |   |  |   | 9,834   |  
|Amortization of acquired intangible assets                    |  |                                 | 477    |   |                               |   | 491    |      |  |   | 954     |   |  |   | 981     |  
|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                      |  |                                 | 41,804 |   |                               |   | 35,137 |      |  |   | 82,475  |   |  |   | 72,181  |  
|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Income from operations                                        |  |                                 | 13,302 |   |                               |   | 11,681 |      |  |   | 24,867  |   |  |   | 20,531  |  
|Interest and other income (expense), net:                     |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Interest income                                               |  |                                 | 199    |   |                               |   | 141    |      |  |   | 377     |   |  |   | 418     |  
|Interest expense                                              |  |                                 | (658   | ) |                               |   | (868   | )    |  |   | (1,280  | ) |  |   | (1,955  | )
|Other income (expense), net                                   |  |                                 | (3     | ) |                               |   | 12     |      |  |   | 1       |   |  |   | 103     |  
|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total interest and other income (expense), net                |  |                                 | (462   | ) |                               |   | (715   | )    |  |   | (902    | ) |  |   | (1,434  | )
|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Income before income tax expense                              |  |                                 | 12,840 |   |                               |   | 10,966 |      |  |   | 23,965  |   |  |   | 19,097  |  
|Income tax expense                                            |  |                                 | 4,592  |   |                               |   | 3,880  |      |  |   | 8,572   |   |  |   | 6,774   |  
|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                    |  | $                               | 8,248  |   |                               | $ | 7,086  |      |  | $ | 15,393  |   |  | $ | 12,323  |  
|                                                              |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|                                                              |  |                                 |        |  
|Basic net income per share                                    |  | $                               | 0.20   |   |                               | $ | 0.18   |      |  | $ | 0.37    |   |  | $ | 0.31    |  
|Diluted net income per share                                  |  | $                               | 0.19   |   |                               | $ | 0.17   |      |  | $ | 0.36    |   |  | $ | 0.30    |  
|Weighted average common shares outstanding used in computing: |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Net income per share - basic                                  |  |                                 | 41,922 |   |                               |   | 40,395 |      |  |   | 41,867  |   |  |   | 40,352  |  
|Net income per share - diluted                                |  |                                 | 42,778 |   |                               |   | 41,590 |      |  |   | 42,626  |   |  |   | 41,388  |  

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



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NetScout Systems, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                              |  |                               |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ----------------------------- | ------- | - | ---- | - | ------- | -
|                                                                              |  | Six Months EndedSeptember 30, |        
|                                                                              |  | 2010                          |         |   | 2009 |  
|Cash flows from operating activities:                                         |  |                               |         |   |      |   |         |  
|Net income                                                                    |  | $                             | 15,393  |   |      | $ | 12,323  |  
|Adjustments to reconcile net income to cash provided by operating activities: |  |                               |         |   |      |   |         |  
|Depreciation and amortization                                                 |  |                               | 6,875   |   |      |   | 7,179   |  
|Loss on disposal of fixed assets                                              |  |                               | 76      |   |      |   | 89      |  
|Share-based compensation expense associated with equity awards                |  |                               | 2,679   |   |      |   | 2,567   |  
|Deferred income taxes                                                         |  |                               | 2,338   |   |      |   | 2,008   |  
|Changes in assets and liabilities                                             |  |                               |         |   |      |   |         |  
|Accounts receivable                                                           |  |                               | 24,108  |   |      |   | 6,668   |  
|Inventories                                                                   |  |                               | (2,231  | ) |      |   | (247    | )
|Prepaid income taxes                                                          |  |                               | 344     |   |      |   | 1,625   |  
|Prepaid expenses and other current assets                                     |  |                               | 740     |   |      |   | 277     |  
|Other assets                                                                  |  |                               | 16      |   |      |   | (1      | )
|Accounts payable                                                              |  |                               | (892    | ) |      |   | 1,733   |  
|Accrued compensation and other expenses                                       |  |                               | (2,501  | ) |      |   | (10,972 | )
|Income taxes payable                                                          |  |                               |        |   |      |   | 3,078   |  
|Deferred revenue                                                              |  |                               | (15,013 | ) |      |   | (9,243  | )
|                                                                              |  |                               |         |   |      |   |         |  
|Net cash provided by operating activities                                     |  |                               | 31,932  |   |      |   | 17,084  |  
|                                                                              |  |                               |         |   |      |   |         |  
|                                                                              |  |                              
|Cash flows from investing activities:                                         |  |                               |         |   |      |   |         |  
|Purchase of marketable securities                                             |  |                               | (29,146 | ) |      |   | (32,930 | )
|Proceeds from maturity of marketable securities                               |  |                               | 55,660  |   |      |   | 28,342  |  
|Purchase of fixed assets                                                      |  |                               | (3,958  | ) |      |   | (3,200  | )
|Capitalized software development costs                                        |  |                               |        |   |      |   | (222    | )
|                                                                              |  |                               |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                           |  |                               | 22,556  |   |      |   | (8,010  | )
|                                                                              |  |                               |         |   |      |   |         |  
|                                                                              |  |                              
|Cash flows from financing activities:                                         |  |                               |         |   |      |   |         |  
|Proceeds from the exercise of stock options                                   |  |                               | 593     |   |      |   | 509     |  
|Repayment of long-term debt                                                   |  |                               | (5,000  | ) |      |   | (8,144  | )
|Excess tax benefit from stock options exercised                               |  |                               | 640     |   |      |   | 1,037   |  
|                                                                              |  |                               |         |   |      |   |         |  
|Net cash used in financing activities                                         |  |                               | (3,767  | ) |      |   | (6,598  | )
|                                                                              |  |                               |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                     |  |                               | 50,721  |   |      |   | 2,476   |  
|Cash and cash equivalents, beginning of period                                |  |                               | 63,322  |   |      |   | 82,222  |  
|                                                                              |  |                               |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                      |  | $                             | 114,043 |   |      | $ | 84,698  |  
|                                                                              |  |                               |         |   |      |   |         |  

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



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NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



|1. | Basis of Presentation
|-- | ---------------------

The accompanying unaudited interim consolidated financial statements as of September 30, 2010 and for the three and six months ended
September 30, 2010 and 2009 have been prepared by NetScout Systems, Inc., or NetScout or the Company, in accordance with generally accepted accounting principles, or GAAP, 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 condensed or omitted pursuant to such regulations. In
the opinion of the Companys management, the unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Companys financial position,
results of operations and cash flows. The results of operations for the three and six months ended September 30, 2010 and 2009 are not necessarily indicative of the results of operations for the year ending March 31, 2011. The balance
sheet at March 31, 2010 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 the
Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2010, as filed with the Securities Exchange Commission, or SEC, on May 28, 2010.

Recently Adopted Accounting Pronouncements

In October 2009, the
FASB amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the products essential functionality from the scope of
industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to:



| | (i) | provide updated guidance on how the deliverables in a multiple deliverable arrangement should be separated, and how the consideration should be allocated;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | require an entity to allocate revenue in an arrangement using its best estimate of selling prices, or ESP, of deliverables if a vendor does not have vendor-specific
objective evidence, or VSOE, of selling price or third-party evidence of selling price; and
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------

We elected to early adopt this accounting guidance at the beginning of our first quarter of 2011 on a prospective basis for applicable
transactions originating or materially modified after April 1, 2010. The adoption of this guidance did not have a material impact on our financial position or results of operations for the three and six months ended June 30, 2010 and
September 30, 2010. The following reflects our updated policy for revenue recognition.

Product revenue consists of sales
of hardware products (which include embedded software that works together with the hardware to deliver the products essential functionality), licensing of software products, and sale of hardware bundled with a software license. 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 probable. Because many of our solutions are
comprised of both hardware and more than incidental software components, we recognize our revenue in accordance with authoritative guidance on both hardware and software revenue recognition.



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Service revenue
consists primarily of fees from customer support agreements, consulting and training. The Company generally provides software and hardware support as part of product sales. Revenue related to the initial bundled software and hardware support is
recognized ratably over the support period. In addition, customers can elect to purchase extended support agreements for periods after the initial software warranty expiration, typically for 12-month periods. Revenue from customer support agreements
is recognized ratably over the support period. Revenue from consulting and training services is recognized as the work is performed.

Multi-element arrangements are concurrent customer purchases of a combination of product and service offerings that may be delivered at various points in time. For multi-element arrangements comprised
only of hardware products and related services, the total transaction revenue is allocated to the multiple elements based on each elements relative fair value compared to the total fair value. Each elements relative fair value is based
on managements best estimate of selling price paid by customers when the element is sold separately. Sales of all products and services are reviewed quarterly and best estimate of selling price for each element is updated, when appropriate, to
ensure that it reflects recent pricing experience.

For multi-element arrangements comprised only of software products and
related services, a portion of the total purchase price is allocated to the undelivered elements, primarily support agreements and training, using vendor-specific objective evidence of fair value of the undelivered elements. The remaining portion of
the total transaction value is allocated to the delivered software, referred to as the residual method. Vendor-specific objective evidence of fair value of the undelivered elements is based on the price customers pay when the element is sold
separately. The separate sales of the undelivered elements is reviewed on a quarterly basis and vendor-specific objective evidence of fair value for such elements updated, when appropriate, to ensure that it reflects recent pricing experience.

For multi-element arrangements comprised of a combination of hardware and software elements, the total transaction value is
bifurcated between the hardware elements and the software elements based on the relative selling prices of the hardware elements and the software elements as a group. Then, revenue for the hardware and hardware-related services is recognized
following the hardware revenue recognition methodology outlined above and revenue for the software and software-related services is recognized following the residual method.



|2. | Concentration of Credit Risk and Significant Customers
|-- | ------------------------------------------------------

Financial instruments, which include cash, cash equivalents, short-term marketable securities, accounts receivable and accounts payable, are stated at cost, plus accrued interest where applicable, which
approximates fair value. Long-term marketable securities include auction rate securities which are currently illiquid, corporate bonds and certificates of deposit. Auction rate securities are stated at fair value based on discounted cash flow
calculations. At September 30, 2010, no one direct customer or channel partner accounted for more than 10% of the accounts receivable balance. At March 31, 2010, the Company had one customer which accounted for more than 10% of the
accounts receivable balance. During the three and six months ended September 30, 2010 and 2009, respectively, no one direct customer or indirect channel partner accounted for more than 10% of total revenue. Historically, the Company has not
experienced any significant non-performance by its customers nor does the Company anticipate non-performance by its customers in the future; accordingly, the Company does not require collateral.



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|3. | Share-Based Compensation
|-- | ------------------------

The following is a summary of share-based compensation expense (in thousands):



|                                                                 |  |                                 |       |  |                               |   |       |      |  |   |       |  |  |   |       | 
|---------------------------------------------------------------- |  | ------------------------------- | ----- |  | ----------------------------- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                                 |  | Three Months EndedSeptember 30, |       |  | Six Months EndedSeptember 30, |  
|                                                                 |  | 2010                            |       |  | 2009                          |   |       | 2010 |  |   | 2009  | 
|Cost of product revenue                                          |  | $                               | 31    |  |                               | $ | 29    |      |  | $ | 51    |  |  | $ | 57    | 
|Cost of service revenue                                          |  |                                 | 70    |  |                               |   | 56    |      |  |   | 130   |  |  |   | 112   | 
|Research and development                                         |  |                                 | 368   |  |                               |   | 312   |      |  |   | 641   |  |  |   | 620   | 
|Sales and marketing                                              |  |                                 | 588   |  |                               |   | 545   |      |  |   | 1,072 |  |  |   | 1,101 | 
|General and administrative                                       |  |                                 | 444   |  |                               |   | 342   |      |  |   | 785   |  |  |   | 677   | 
|                                                                 |  |                                 |       |  |                               |   |       |      |  |   |       |  |  |   |       | 
|Total share-based compensation expense, before income tax effect |  | $                               | 1,501 |  |                               | $ | 1,284 |      |  | $ | 2,679 |  |  | $ | 2,567 | 
|                                                                 |  |                                 |       |  |                               |   |       |      |  |   |       |  |  |   |       | 



|4. | Cash, Cash Equivalents and Marketable Securities
|-- | ------------------------------------------------

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents and those investments with original maturities greater than three
months to be marketable securities. Cash equivalents, short-term marketable securities and long-term marketable securities are stated at fair value. Cash and cash equivalents consisted of money market instruments and cash maintained with various
financial institutions at September 30, 2010 and March 31, 2010, respectively.

Marketable Securities

The following is a summary of marketable securities held by NetScout at September 30, 2010 classified as short-term and long-term (in
thousands):



|                                          |  |               |        |  |                          |   |        |            |  |   |        | 
|----------------------------------------- |  | ------------- | ------ |  | ------------------------ | - | ------ | ---------- |  | - | ------ | 
|                                          |  | AmortizedCost |        |  | UnrealizedGains (Losses) |   |        | Fair Value | 
|Type of security (see Note 5):            |  |               |        |  |                          |   |        |            |  |   |        | 
|U.S. government and municipal obligations |  | $             | 28,849 |  |                          | $ | 71     |            |  | $ | 28,920 | 
|Commercial paper                          |  |               | 10,986 |  |                          |   |       |            |  |   | 10,986 | 
|Corporate bonds                           |  |               | 8,850  |  |                          |   | (6     | )          |  |   | 8,844  | 
|Certificates of deposit                   |  |               | 5,533  |  |                          |   | (18    | )          |  |   | 5,515  | 
|                                          |  |               |        |  |                          |   |        |            |  |   |        | 
|Subtotal                                  |  |               | 54,218 |  |                          |   | 47     |            |  |   | 54,265 | 
|Less: restricted investment               |  |               | 934    |  |                          |   | 70     |            |  |   | 1,004  | 
|                                          |  |               |        |  |                          |   |        |            |  |   |        | 
|Total short-term marketable securities    |  |               | 53,284 |  |                          |   | (23    | )          |  |   | 53,261 | 
|                                          |  |               |        |  |                          |   |        |            |  |   |        | 
|Auction rate securities                   |  |               | 24,088 |  |                          |   | (2,631 | )          |  |   | 21,457 | 
|Corporate bonds                           |  |               | 4,685  |  |                          |   | (2     | )          |  |   | 4,683  | 
|Certificates of deposit                   |  |               | 2,597  |  |                          |   | (35    | )          |  |   | 2,562  | 
|                                          |  |               |        |  |                          |   |        |            |  |   |        | 
|Total long-term marketable securities     |  |               | 31,370 |  |                          |   | (2,668 | )          |  |   | 28,702 | 
|                                          |  |               |        |  |                          |   |        |            |  |   |        | 
|                                          |  | $             | 84,654 |  |                          | $ | (2,691 | )          |  | $ | 81,963 | 
|                                          |  |               |        |  |                          |   |        |            |  |   |        | 

Maturity dates for short-term marketable securities held at September 30, 2010 range from October 2010
to September 2011. Maturity dates for long-term marketable securities held at September 30, 2010, which consist of auction rate securities, corporate bonds and certificate of deposits, range from October 2011 to December 2039.



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The following is a
summary of marketable securities held by NetScout at March 31, 2010, classified as short-term and long-term (in thousands):



|                                          |  |               |         |  |                          |   |        |            |  |   |         | 
|----------------------------------------- |  | ------------- | ------- |  | ------------------------ | - | ------ | ---------- |  | - | ------- | 
|                                          |  | AmortizedCost |         |  | UnrealizedGains (Losses) |   |        | Fair Value | 
|Type of security (see Note 5):            |  |               |         |  |                          |   |        |            |  |   |         | 
|U.S. government and municipal obligations |  | $             | 42,026  |  |                          | $ | 59     |            |  | $ | 42,085  | 
|Commercial paper                          |  |               | 8,993   |  |                          |   |       |            |  |   | 8,993   | 
|Corporate bonds                           |  |               | 9,039   |  |                          |   | (15    | )          |  |   | 9,024   | 
|Certificates of deposit                   |  |               | 10,761  |  |                          |   |       |            |  |   | 10,761  | 
|                                          |  |               |         |  |                          |   |        |            |  |   |         | 
|Subtotal                                  |  |               | 70,819  |  |                          |   | 44     |            |  |   | 70,863  | 
|Less: restricted investment               |  |               | 937     |  |                          |   | 51     |            |  |   | 988     | 
|                                          |  |               |         |  |                          |   |        |            |  |   |         | 
|Total short-term marketable securities    |  |               | 69,882  |  |                          |   | (7     | )          |  |   | 69,875  | 
|                                          |  |               |         |  |                          |   |        |            |  |   |         | 
|Auction rate securities                   |  |               | 32,399  |  |                          |   | (3,924 | )          |  |   | 28,475  | 
|U.S. government and municipal obligations |  |               | 2,032   |  |                          |   | (4     | )          |  |   | 2,028   | 
|Corporate bonds                           |  |               | 3,589   |  |                          |   | (2     | )          |  |   | 3,587   | 
|Certificates of deposit                   |  |               | 3,266   |  |                          |   | (2     | )          |  |   | 3,264   | 
|                                          |  |               |         |  |                          |   |        |            |  |   |         | 
|Total long-term marketable securities     |  |               | 41,286  |  |                          |   | (3,932 | )          |  |   | 37,354  | 
|                                          |  |               |         |  |                          |   |        |            |  |   |         | 
|                                          |  | $             | 111,168 |  |                          | $ | (3,939 | )          |  | $ | 107,229 | 
|                                          |  |               |         |  |                          |   |        |            |  |   |         | 

Maturity dates for short-term marketable securities held at March 31, 2010 range from April 2010 to
March 2011. Maturity dates for long-term marketable securities held at March 31, 2010, which consist of auction rate securities, corporate bonds and certificates of deposit, range from April 2011 to December 2039.

The Companys long-term marketable securities include investments in auction rate securities. Beginning in February 2008 and
continuing through September 30, 2010, auctions have failed resulting in a lack of short-term liquidity for these securities, which has caused the Company to classify them as long-term on its consolidated balance sheet. As of September 30,
2010, the Companys auction rate securities consisted of four positions issued by municipal agencies with a total par value of $24.1 million and a current estimated market value totaling $21.5 million. As of September 30, 2010, these
investments have investment grade ratings ranging from AAA to A by Standard and Poors. These investments are collateralized by student loans with underlying support by the federal government through the Federal Family Education Loan Program
and by monoline insurance companies.

During the three months ended September 30, 2010, redemptions by the issuers for
certain of the Companys auction rate securities totaling $4.0 million were settled at par. During the six months ended September 30, 2010, redemptions by the issuers for certain of the Companys auction rate securities totaling $8.3
million were settled at par.

At September 30, 2010, the Company valued its outstanding auction rate securities at fair
value using a discounted cash flow model. This model estimated future interest income using maximum rate formulas applicable to each of these securities which consider historical spreads for benchmark rates included in these formulas as well as
rates for U.S. Treasuries. The model then discounts the estimated future interest income using a risk based discount rate that considers known U.S. Treasury yields as of September 30, 2010, historical spreads in comparison to U.S. Treasuries,
and a liquidity risk premium of 350 basis points. As these securities have retained investment grade credit ratings with Standard and Poors, the Company has not applied a credit spread to its discount rate. The valuation also includes
assumptions as to when these securities will return to liquidity, of which the weighted average period is estimated at between 51 and 56 months depending on the security being valued. This valuation resulted in a cumulative temporary decline in
value of $2.6 million ($1.6 million, net of tax) as of September 30, 2010 recorded within accumulated other comprehensive income (loss) on the balance sheet. This represents a reduction in the valuation reserve of $348 thousand ($214 thousand,
net of tax) during



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the quarter ended September 30, 2010 reflecting redemptions at par during the quarter ended September 30, 2010. The valuation is also impacted by changes in market interest rates used
to value the securities. To the extent the Company determines that any impairment is other-than-temporary, the Company would record a charge to earnings.

The Company has the ability and intent to hold these securities until a recovery in the auction process or other liquidity event occurs. Based on the Companys current cash position, expected
operating cash flows and the Companys other sources of cash, the Company does not believe that it is more likely than not that it will be required to sell the securities before a recovery in the auction process or other liquidity event occurs.
Additionally, the Company believes that the present value of expected future cash flows consisting of interest payments and the return of principal is sufficient to recover the amortized cost basis of the securities and expects to collect these cash
flows. Therefore, the Company does not believe that the decline in value of its auction rate securities is other than temporary, or that any portion of the temporary decline is the result of a credit loss.

Restricted Investment

NetScout has a restricted investment account related to a deferred compensation plan of $1.0 million and $988 thousand as of
September 30, 2010 and March 31, 2010, respectively, which is included in prepaid and other current assets. As of September 30, 2010, there were unrealized gains of $70 thousand recorded as accumulated other comprehensive income
(loss) related to this investment. As of March 31, 2010, there were unrealized gains of $51 thousand recorded as accumulated other comprehensive income (loss) related to this investment. The restriction on the investment account has no impact
on the fair value as the restriction would not pass to another party in the event of the sale of the investments.



|5. | Fair Value Measurements
|-- | -----------------------

The Company follows the authoritative guidance for fair value measurements of its financial assets and financial liabilities.

The guidance clarifies the definition of fair value as an exit price representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or
liability. The following summarizes the three-tier value hierarchy, which prioritizes, in descending order, the inputs used in measuring fair value as follows:



|          |  |   |  |                                                                                                                           
|--------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------
|Level I   |  |  |  | Observable inputs such as quoted prices in active markets,                                                                
|          |  |  
|Level II  |  |  |  | Inputs other than the quoted prices in active markets that are observable either directly or indirectly, and              
|          |  |  
|Level III |  |  |  | Unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when
determining fair value. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including its marketable securities and derivative financial instruments. The Companys investment instruments, except
for auction rate securities, listed below are classified within Level I of the fair value hierarchy because they are valued using quoted market prices or alternative pricing sources with reasonable levels of price transparency. The
Companys derivative financial instruments consist of forward foreign exchange contracts and are classified as Level II because the fair values of these derivatives are determined using models based on market observable inputs, including spot
prices for foreign currencies and credit derivatives, as well as an interest rate factor. For further information on the Companys derivative instruments refer to Note 9. The Companys auction rate securities are classified as Level III of
the fair



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value hierarchy due to the limited market data for pricing these securities. For further information on the Companys auction rate securities refer to Note 4.

The following table summarizes the valuation of the Companys marketable securities by the above levels as of September 30,
2010 (in thousands):



|                                          |  |                 |         |   |         |   |         |          |  |   |           |  |  |   |        | 
|----------------------------------------- |  | --------------- | ------- | - | ------- | - | ------- | -------- |  | - | --------- |  |  | - | ------ | 
|                                          |  | TotalFair Value |         |   | Level I |   |         | Level II |  |   | Level III | 
|ASSETS:                                   |  |                 |         |   |         |   |         |          |  |   |           |  |  |   |        | 
|Cash and cash equivalents                 |  | $               | 114,043 |   |         | $ | 114,043 |          |  | $ |          |  |  | $ |       | 
|U.S. government and municipal obligations |  |                 | 28,919  |   |         |   | 28,919  |          |  |   |          |  |  |   |       | 
|Commercial paper                          |  |                 | 10,986  |   |         |   | 10,986  |          |  |   |          |  |  |   |       | 
|Corporate bonds                           |  |                 | 13,528  |   |         |   | 13,528  |          |  |   |          |  |  |   |       | 
|Certificate of deposits                   |  |                 | 8,077   |   |         |   | 8,077   |          |  |   |          |  |  |   |       | 
|Less: restricted investment               |  |                 | (1,004  | ) |         |   | (1,004  | )        |  |   |          |  |  |   |       | 
|Auction rate securities                   |  |                 | 21,457  |   |         |   |        |          |  |   |          |  |  |   | 21,457 | 
|Derivative asset                          |  |                 | 77      |   |         |   |        |          |  |   | 77        |  |  |   |       | 
|                                          |  |                 |         |   |         |   |         |          |  |   |           |  |  |   |        | 
|                                          |  | $               | 196,083 |   |         | $ | 174,549 |          |  | $ | 77        |  |  | $ | 21,457 | 
|                                          |  |                 |         |   |         |   |         |          |  |   |           |  |  |   |        | 
|LIABILITIES:                              |  |                 |         |   |         |   |         |          |  |   |           |  |  |   |        | 
|Derivative financial instruments          |  | $               | 42      |   |         | $ |        |          |  | $ | 42        |  |  |   |       | 
|                                          |  |                 |         |   |         |   |         |          |  |   |           |  |  |   |        | 
|                                          |  | $               | 42      |   |         | $ |        |          |  | $ | 42        |  |  |   |       | 
|                                          |  |                 |         |   |         |   |         |          |  |   |           |  |  |   |        | 

The following table presents a reconciliation of assets classified as Level III measured at fair value using
significant unobservable inputs for the three and six months ended September 30, 2010 (in thousands):



|                                                                            |  |                                      |        |   |                                    |   |        |  
|--------------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ---------------------------------- | - | ------ | -
|                                                                            |  | Three Months EndedSeptember 30, 2010 |        |   | Six Months EndedSeptember 30, 2010 |  
|Balance at beginning of period                                              |  | $                                    | 25,084 |   |                                    | $ | 28,475 |  
|Total gains or (losses) (realized or unrealized)                            |  |                                      |        |   |                                    |   |        |  
|Change in accrued interest receivable                                       |  |                                      | 25     |   |                                    |   | (11    | )
|Unrealized losses included in accumulated other comprehensive income (loss) |  |                                      |       |   |                                    |   | 151    |  
|Redemptions                                                                 |  |                                      | (4,000 | ) |                                    |   | (8,300 | )
|Reversal of temporary loss on redeemed securities                           |  |                                      | 348    |   |                                    |   | 1,142  |  
|                                                                            |  |                                      |        |   |                                    |   |        |  
|Balance at end of period                                                    |  | $                                    | 21,457 |   |                                    | $ | 21,457 |  
|                                                                            |  |                                      |        |   |                                    |   |        |  



|6. | Inventories
|-- | -----------

Inventories
are stated at the lower of actual cost or net realizable value. Cost is determined by using the first-in, first-out, or FIFO method. Inventories consist of the following (in thousands):



|                |  |                    |        |  |                |   |       | 
|--------------- |  | ------------------ | ------ |  | -------------- | - | ----- | 
|                |  | September 30, 2010 |        |  | March 31, 2010 |  
|Raw materials   |  | $                  | 7,139  |  |                | $ | 5,184 | 
|Work in process |  |                    | 268    |  |                |   | 269   | 
|Finished goods  |  |                    | 4,005  |  |                |   | 3,728 | 
|                |  |                    |        |  |                |   |       | 
|                |  | $                  | 11,412 |  |                | $ | 9,181 | 
|                |  |                    |        |  |                |   |       | 



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|7. | Goodwill & Acquired Intangible Assets
|-- | -------------------------------------

Goodwill

The carrying amount of goodwill was $128.2 million as of
September 30, 2010 and March 31, 2010. The Companys goodwill resulted from the acquisition of Network General Central Corporation, or Network General, in November 2007, the acquisition of substantially all of the assets of Quantiva,
Inc. in April 2005 and the acquisition of NextPoint Networks, Inc. in July 2000.

Acquired Intangible Assets

The net carrying amounts of acquired intangible assets were $50.6 million and $53.6 million as of September 30, 2010 and
March 31, 2010, respectively. Intangible assets acquired in a business combination are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. The Company amortizes acquired intangible assets
over their estimated useful lives on a straight-line basis, except for the acquired trade name or names, which has an indefinite life and thus is not amortized. The carrying value of the indefinite lived trade name will be evaluated for potential
impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Acquired intangible assets consist of the following as of September 30, 2010 (in thousands):



|                            |  |      |        |  |                         |   |         |     |  |   |        | 
|--------------------------- |  | ---- | ------ |  | ----------------------- | - | ------- | --- |  | - | ------ | 
|                            |  | Cost |        |  | AccumulatedAmortization |   |         | Net | 
|Acquired software           |  | $    | 19,900 |  |                         | $ | (11,608 | )   |  | $ | 8,292  | 
|Customer relationships      |  |      | 29,200 |  |                         |   | (5,495  | )   |  |   | 23,705 | 
|Indefinite lived trade name |  |      | 18,600 |  |                         |   |        |     |  |   | 18,600 | 
|Net beneficial leases       |  |      | 336    |  |                         |   | (303    | )   |  |   | 33     | 
|                            |  |      |        |  |                         |   |         |     |  |   |        | 
|                            |  | $    | 68,036 |  |                         | $ | (17,406 | )   |  | $ | 50,630 | 
|                            |  |      |        |  |                         |   |         |     |  |   |        | 

Amortization of acquired software included as cost of product revenue was $995 thousand and $2.0 million for
the three and six months ended September 30, 2010, respectively. Amortization of other acquired intangible assets included as operating expense was $477 thousand and $954 thousand for the three and six months ended September 30, 2010,
respectively.

Acquired intangible assets consist of the following as of March 31, 2010 (in thousands):



|                            |  |      |        |  |                         |   |         |     |  |   |        | 
|--------------------------- |  | ---- | ------ |  | ----------------------- | - | ------- | --- |  | - | ------ | 
|                            |  | Cost |        |  | AccumulatedAmortization |   |         | Net | 
|Acquired software           |  | $    | 19,900 |  |                         | $ | (9,618  | )   |  | $ | 10,282 | 
|Customer relationships      |  |      | 29,200 |  |                         |   | (4,553  | )   |  |   | 24,647 | 
|Indefinite lived trade name |  |      | 18,600 |  |                         |   |        |     |  |   | 18,600 | 
|Net beneficial leases       |  |      | 336    |  |                         |   | (292    | )   |  |   | 44     | 
|                            |  |      |        |  |                         |   |         |     |  |   |        | 
|                            |  | $    | 68,036 |  |                         | $ | (14,463 | )   |  | $ | 53,573 | 
|                            |  |      |        |  |                         |   |         |     |  |   |        | 

Amortization of acquired software included as cost of product revenue was $995 thousand and $2.0 million for
the three and six months ended September 30, 2009, respectively. Amortization of other acquired intangible assets included as operating expense was $491 thousand and $981 thousand for the three and six months ended September 30, 2009
respectively.



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The following is the
expected future amortization expense as of September 30, 2010 for the years ended March 31 (in thousands):



|                            |  |   |        | 
|--------------------------- |  | - | ------ | 
|2011 (remaining six months) |  | $ | 2,943  | 
|2012                        |  |   | 5,885  | 
|2013                        |  |   | 4,206  | 
|2014                        |  |   | 1,884  | 
|2015                        |  |   | 1,884  | 
|Thereafter                  |  |   | 15,228 | 
|                            |  |   |        | 
|                            |  | $ | 32,030 | 
|                            |  |   |        | 

The weighted average useful life of acquired intangible assets is 11 years.



|8. | Capitalized Software Development Costs
|-- | --------------------------------------

On June 29, 2010, the Company met technological feasibility for nGenius Service Delivery Manager. As of September 30, 2010 and March 31, 2010, respectively, capitalized software development
costs for this project totaled $408 thousand and $408 thousand. Beginning in July 2010, the Company commenced amortization of the capitalized software development for the nGenius Service Delivery Manager project costs on a straight-line basis for
two years. Amortization of capitalized software development costs included as cost of product revenue was $51 thousand for the three and six months ended September 30, 2010.



|9. | Derivative Instruments and Hedging Activities
|-- | ---------------------------------------------

NetScout operates internationally and, in the normal course of business, is exposed to fluctuations in foreign currency exchange rates. The exposures result from costs that are denominated in
currencies other than the U.S. dollar, primarily the Euro, British Pound, Canadian Dollar, and Indian Rupee. During the year ended March 31, 2010, the Company began managing its foreign currency transaction risk by hedging forecasted cash
flows for operating expenses for up to twelve months, within specified guidelines through the use of forward contracts. The Company enters into foreign currency exchange contracts to hedge cash flow exposures from costs that are denominated in
currencies other than the U.S. dollar. These hedges are designated as cash flow hedges at inception.

All of the
Companys derivative instruments are utilized for risk management purposes, and the Company does not use derivatives for speculative trading purposes. As of September 30, 2010, the Company had open contracts with notional amounts totaling
$5.9 million that mature over the next twelve months.

The location and amounts of derivative fair values on the condensed
consolidated balance sheets as of September 30, 2010 and March 31, 2010 were as follows (in thousands):



|                                               |  |                       |                      |  |                   |               |    |                        |  |                       |    |  |               |                           |  |   |    |  |  |   |     | 
|---------------------------------------------- |  | --------------------- | -------------------- |  | ----------------- | ------------- | -- | ---------------------- |  | --------------------- | -- |  | ------------- | ------------------------- |  | - | -- |  |  | - | --- | 
|                                               |  | Balance SheetLocation |                      |  | Asset Derivatives |               |    | Balance Sheet
Location |  | Liability Derivatives |   
|                                               |  |                       | September 30,2010    |  |                   | March 31,2010 |    |                        |  | September 30,2010     |    |  | March 31,2010 |                          
|Derivatives Designated as Hedging Instruments: |  |                       |                      |  |                   |               |    |                        |  |                       |    |  |               |                           |  |   |    |  |  |   |     | 
|Forward contracts                              |  |                       | Other current assets |  |                   | $             | 77 |                        |  | $                     | 94 |  |               | Accrued other liabilities |  | $ | 42 |  |  | $ | 359 | 
|                                               |  |                       |                      |  |                   |               |    |                        |  |                       |    |  |               |                           |  |   |    |  |  |   |     | 



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The following table
provides the effect foreign exchange forward contracts had on other comprehensive income (loss), or OCI, and results of operations as of September 30, 2010 (in thousands):



|                                               |  |                                                         |      |   |                                                                     |  |                         |                                                                       |  |   |                                                        |   |  |                                                                                                       |                         |  |  |   |   | 
|---------------------------------------------- |  | ------------------------------------------------------- | ---- | - | ------------------------------------------------------------------- |  | ----------------------- | --------------------------------------------------------------------- |  | - | ------------------------------------------------------ | - |  | ----------------------------------------------------------------------------------------------------- | ----------------------- |  |  | - | - | 
|                                               |  | Effective Portion                                       |      |   | Ineffective Portion                                                 | 
|Derivatives in Cash Flow
Hedging Relationships |  | Amount ofGain or (Loss)Recognized inOCI onDerivative(a) |      |   | Location of Gainor (Loss)Reclassified fromAccumulatedOCI intoIncome |  |                         | Amount ofGain or (Loss)Reclassified fromAccumulatedOCI into
Income(b) |  |   | Location of Gain(Loss)Recognized inIncome onDerivative |   |  | Amount ofGain or (Loss)Recognized inIncome
onDerivative (amountexcluded fromeffectiveness Testing)(c) |                        
|Forward contracts                              |  | $                                                       | (129 | ) |                                                                     |  | Research anddevelopment |                                                                       |  | $ | (7                                                     | ) |  |                                                                                                       | Research anddevelopment |  |  | $ | 8 | 
|                                               |  |                                                         |      |   |                                                                     |  | Sales andmarketing      |                                                                       |  |   | (426                                                   | ) |  |                                                                                                       | Sales andmarketing      |  |  |   | 1 | 
|                                               |  |                                                         |      |   |                                                                     |  |                         |                                                                       |  |   |                                                        |   |  |                                                                                                       |                         |  |  |   |   | 
|                                               |  | $                                                       | (129 | ) |                                                                     |  |                         |                                                                       |  | $ | (433                                                   | ) |  |                                                                                                       |                         |  |  | $ | 9 | 
|                                               |  |                                                         |      |   |                                                                     |  |                         |                                                                       |  |   |                                                        |   |  |                                                                                                       |                         |  |  |   |   | 



|(a) | The amount represents the change in fair value of derivative contracts due to changes in spot rates.
|--- | ----------------------------------------------------------------------------------------------------



|(b) | The amount represents reclassification from other comprehensive income to earnings that occurs when the hedged item affects earnings.
|--- | -------------------------------------------------------------------------------------------------------------------------------------



|(c) | The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from
the assessment of hedge effectiveness and therefore recognized in earnings. No amounts were recognized in income due to ineffectiveness.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. | Long-term Debt
|--- | --------------

In
December 2007, the Company entered into a credit facility with a syndicate of lenders led by KeyBank National Association, or KeyBank, providing a term loan of $100 million and a $10 million revolving credit facility, or the Credit Facility,
pursuant to a Credit Agreement, dated as of December 21, 2007, by and among the Company, KeyBank and the other parties thereto, or the Credit Agreement. The proceeds of the $100 million term loan were used to redeem all of the Companys
outstanding senior secured floating rate notes issued in connection with the acquisition of Network General on November 1, 2007. No amounts were outstanding under the revolving credit facility as of September 30, 2010.

At the Companys election, revolving loans and the term loan under the Credit Agreement bear interest at either (1) a rate per
annum equal to the greater of KeyBanks prime rate or 0.5% in excess of the federal funds effective rate, or the Alternative Base Rate, or (2) the one-, two-, three-, or six-month per annum LIBOR, as selected by the Company, multiplied by
the statutory reserve adjustment, collectively the Eurodollar Rate, in each case plus an applicable margin. The applicable margin varies depending on the Companys consolidated leverage ratio ranging from 175 basis points for Alternative Base
Rate loans and 300 basis points for Eurodollar Rate loans if the Companys consolidated leverage ratio is 2.50 to 1.00 or higher, down to 75 basis points for Alternative Base Rate loans and 200 basis points for Eurodollar Rate loans if the
Companys consolidated leverage ratio is 1.00 to 1.00 or less. The consolidated leverage ratio is the ratio of funded indebtedness to adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA. For the three months ended
September 30, 2010 and 2009 the term loan incurred interest at 2.813% and 3.375%, respectively. Effective September 30, 2010, the interest rate on the term loan was 2.750%, and the Company expects this to be the rate in effect until the
next adjustment date of March 1, 2011.



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Payments of principal
on the term loan commenced on March 31, 2008, and will be made in regular quarterly installments. As of September 30, 2010, the aggregate annual repayment amounts are as follows for the years ended March 31 (in thousands):



|                            |  |   |        | 
|--------------------------- |  | - | ------ | 
|2011 (remaining six months) |  | $ | 6,250  | 
|2012                        |  |   | 15,000 | 
|2013                        |  |   | 53,106 | 
|                            |  |   |        | 
|                            |  | $ | 74,356 | 
|                            |  |   |        | 

The Credit Agreement contains financial covenants that stipulate a maximum leverage ratio of 3.00 and a
minimum fixed-charge coverage ratio of 1.25. As of September 30, 2010, the Company was in compliance with all covenants. Substantially all of the Companys assets serve as collateral under the Credit Agreement. Subject to certain
exceptions, the Credit Agreement contains provisions for mandatory prepayments including from (a) 100% of the net proceeds from certain asset sales by the Company and its subsidiaries, (b) 100% of the net proceeds from the issuance of
debt, (c) annually, subject to the Companys leverage ratio, either 25% or 50% of the annual excess cash flow of the Company and its subsidiaries as defined in the Credit Agreement, (d) 50% of the net proceeds from the issuance of
equity by the Company and its subsidiaries and (e) 100% of the net proceeds from insurance recovery and condemnation events of the Company and its subsidiaries. The Company made a $3.1 million payment during the second quarter of fiscal year
2010 as a result of the annual excess cash flow calculation based on the year ended March 31, 2009 financial results. An excess cash flow payment was not triggered for the year ended March 31, 2010. The Company may also prepay loans under
the Credit Agreement, including the term loan, at any time, without penalty, subject to certain notice requirements.



|11. | Treasury Stock
|--- | --------------

On
September 17, 2001, the Company announced an open market stock repurchase program to purchase up to one million shares of outstanding Company common stock, subject to market conditions and other factors. Any purchases under the
Companys stock repurchase program may be made from time to time without prior notice. On July 26, 2006, the Company announced that it had expanded the existing open market stock repurchase program to enable the Company to purchase up
to an additional three million shares of the Companys outstanding common stock, bringing the total number of shares authorized for repurchase to four million shares. Through September 30, 2010, the Company had repurchased a total of
486,794 shares of common stock through the open market stock repurchase program. The Company did not repurchase any shares during the six months ended September 30, 2010, under the program.

In connection with the vesting and release of the restriction on previously vested shares of restricted stock, we repurchased
20,234 shares for $290 thousand related to minimum statutory tax withholding requirements on these restricted stock units during the six months ended September 30, 2010. These repurchase transactions do not fall under the repurchase
program described above, and therefore do not reduce the amount that is available for repurchase under that program.



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|12. | Net Income Per Share
|--- | --------------------

Calculations of the basic and diluted net income per share and potential common shares are as follows (in thousands, except per share
data):



|                                           |  |                                 |        |  |                               |   |        |      |  |   |        |  |  |   |        | 
|------------------------------------------ |  | ------------------------------- | ------ |  | ----------------------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                           |  | Three Months EndedSeptember 30, |        |  | Six Months EndedSeptember 30, |  
|                                           |  | 2010                            |        |  | 2009                          |   |        | 2010 |  |   | 2009   | 
|Basic:                                     |  |                                 |        |  |                               |   |        |      |  |   |        |  |  |   |        | 
|Net income                                 |  | $                               | 8,248  |  |                               | $ | 7,086  |      |  | $ | 15,393 |  |  | $ | 12,323 | 
|                                           |  |                                 |        |  |                               |   |        |      |  |   |        |  |  |   |        | 
|Weighted average common shares outstanding |  |                                 | 41,922 |  |                               |   | 40,395 |      |  |   | 41,867 |  |  |   | 40,352 | 
|                                           |  |                                 |        |  |                               |   |        |      |  |   |        |  |  |   |        | 
|Basic net income per share                 |  | $                               | 0.20   |  |                               | $ | 0.18   |      |  | $ | 0.37   |  |  | $ | 0.31   | 
|                                           |  |                                 |        |  |                               |   |        |      |  |   |        |  |  |   |        | 
|Diluted:                                   |  |                                 |        |  |                               |   |        |      |  |   |        |  |  |   |        | 
|Net income                                 |  | $                               | 8,248  |  |                               | $ | 7,086  |      |  | $ | 15,393 |  |  | $ | 12,323 | 
|                                           |  |                                 |        |  |                               |   |        |      |  |   |        |  |  |   |        | 
|Weighted average common shares outstanding |  |                                 | 41,922 |  |                               |   | 40,395 |      |  |   | 41,867 |  |  |   | 40,352 | 
|Weighted average stock options             |  |                                 | 315    |  |                               |   | 763    |      |  |   | 324    |  |  |   | 705    | 
|Weighted average restricted stock units    |  |                                 | 541    |  |                               |   | 432    |      |  |   | 435    |  |  |   | 330    | 
|                                           |  |                                 |        |  |                               |   |        |      |  |   |        |  |  |   |        | 
|Diluted weighted average shares            |  |                                 | 42,778 |  |                               |   | 41,590 |      |  |   | 42,626 |  |  |   | 41,387 | 
|                                           |  |                                 |        |  |                               |   |        |      |  |   |        |  |  |   |        | 
|Diluted net income per share               |  | $                               | 0.19   |  |                               | $ | 0.17   |      |  | $ | 0.36   |  |  | $ | 0.30   | 
|                                           |  |                                 |        |  |                               |   |        |      |  |   |        |  |  |   |        | 

The following table sets forth options and restricted stock units excluded from the calculation of diluted
net income per share, since their inclusion would be antidilutive (in thousands):



|                       |  |                                 |    |  |                               |  |     |      |  |  |      |  |  |  |     | 
|---------------------- |  | ------------------------------- | -- |  | ----------------------------- |  | --- | ---- |  |  | ---- |  |  |  | --- | 
|                       |  | Three Months EndedSeptember 30, |    |  | Six Months EndedSeptember 30, | 
|                       |  | 2010                            |    |  | 2009                          |  |     | 2010 |  |  | 2009 | 
|Stock options          |  |                                 | 29 |  |                               |  | 224 |      |  |  | 32   |  |  |  | 238 | 
|Restricted stock units |  |                                 | 38 |  |                               |  | 52  |      |  |  | 51   |  |  |  | 45  | 
|                       |  |                                 |    |  |                               |  |     |      |  |  |      |  |  |  |     | 
|Total                  |  |                                 | 67 |  |                               |  | 276 |      |  |  | 83   |  |  |  | 283 | 
|                       |  |                                 |    |  |                               |  |     |      |  |  |      |  |  |  |     | 



|13. | Comprehensive Income
|--- | --------------------

Other comprehensive income typically consists of unrealized gains and losses on marketable securities and restricted investments and
foreign currency translation adjustments. Comprehensive income for the three and six months ended September 30, 2010 and 2009 is as follows (in thousands):



|                                                                                                        |  |                                 |       |  |                               |   |       |      |  |   |        |  |  |   |        |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- |  | ----------------------------- | - | ----- | ---- |  | - | ------ |  |  | - | ------ | -
|                                                                                                        |  | Three Months EndedSeptember 30, |       |  | Six Months EndedSeptember 30, |  
|                                                                                                        |  | 2010                            |       |  | 2009                          |   |       | 2010 |  |   | 2009   | 
|Net income                                                                                              |  | $                               | 8,248 |  |                               | $ | 7,086 |      |  | $ | 15,393 |  |  | $ | 12,323 |  
|Unrealized gain (loss) on cash equivalents, marketable securities and restricted investment, net of tax |  |                                 | 301   |  |                               |   | 33    |      |  |   | 771    |  |  |   | (104   | )
|Unrealized gain on hedge contracts, net of tax                                                          |  |                                 | 372   |  |                               |   |      |      |  |   | 187    |  |  |   |       |  
|                                                                                                        |  |                                 |       |  |                               |   |       |      |  |   |        |  |  |   |        |  
|Comprehensive income                                                                                    |  | $                               | 8,921 |  |                               | $ | 7,119 |      |  | $ | 16,351 |  |  | $ | 12,219 |  
|                                                                                                        |  |                                 |       |  |                               |   |       |      |  |   |        |  |  |   |        |  



|14. | Income Taxes
|--- | ------------

The
estimated annual effective tax rate as of September 30, 2010 for fiscal year 2011 is 35.6%, compared to an estimated annual effective rate of 35.5% as of September 30, 2009 for fiscal year 2010. The increase in our



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effective tax rate is primarily due to the December 31, 2009 expiration of the federal research and development credit partially offset by an increase in the domestic production activities
deduction. Generally, the estimated annual effective tax rates differ from the statutory rates primarily due to the impact of federal and state tax credits, state taxes and the qualified production activities deduction.

Significant accounting judgments and estimates are made when determining whether it is more likely than not that the Companys
deferred income tax assets will be realized. Management has concluded that deferred income tax assets do not require a valuation allowance. If these judgments and estimates prove to be materially inaccurate, a valuation allowance may be required and
the Companys financial results could be materially and adversely impacted in the future. If the Company determines that it will not be able to realize some or all of its deferred income taxes in the future, an adjustment to the deferred income
tax assets will be charged to income tax expense in the period such determination is made.

The Companys policy is to
include interest and penalties related to unrecognized tax benefits as a component of interest expense on the condensed consolidated statements of operations. Accrued interest and penalties as of September 30, 2010 are $22 thousand.



|15. | Geographic Information
|--- | ----------------------

The Company reports revenues and income under one reportable industry segment. The Companys management assesses operating results on
an aggregate basis to make decisions about the allocation of resources.

The Company manages its business in the following
geographic areas: United States, Europe (including the United Kingdom, Germany, France, Spain, Italy and Norway), Asia (including China, Hong Kong, Japan, Korea, Malaysia, Singapore and Taiwan) and Rest of World (including South Africa, Australia,
Canada, India, Brazil, Mexico and the United Arab Emirates). In accordance with United States export control regulations, the Company does not sell or do business with countries subject to economic sanctions and export controls.

Total revenue by geography is as follows (in thousands):



|              |  |                                 |        |  |                               |   |        |      |  |   |         |  |  |   |         | 
|------------- |  | ------------------------------- | ------ |  | ----------------------------- | - | ------ | ---- |  | - | ------- |  |  | - | ------- | 
|              |  | Three Months EndedSeptember 30, |        |  | Six Months EndedSeptember 30, |  
|              |  | 2010                            |        |  | 2009                          |   |        | 2010 |  |   | 2009    | 
|United States |  | $                               | 49,523 |  |                               | $ | 44,465 |      |  | $ | 102,583 |  |  | $ | 90,257  | 
|Europe        |  |                                 | 10,058 |  |                               |   | 7,761  |      |  |   | 16,313  |  |  |   | 13,321  | 
|Asia          |  |                                 | 3,803  |  |                               |   | 3,226  |      |  |   | 6,626   |  |  |   | 5,415   | 
|Rest of World |  |                                 | 6,029  |  |                               |   | 4,239  |      |  |   | 10,702  |  |  |   | 8,760   | 
|              |  |                                 |        |  |                               |   |        |      |  |   |         |  |  |   |         | 
|              |  | $                               | 69,413 |  |                               | $ | 59,691 |      |  | $ | 136,224 |  |  | $ | 117,753 | 
|              |  |                                 |        |  |                               |   |        |      |  |   |         |  |  |   |         | 

The United States revenue includes sales to resellers in the United States. These resellers fulfill customer
orders and may subsequently ship the Companys products to international locations. The Company reports these shipments as United States revenue since the Company ships the products to a United States location. Revenue attributable to locations
outside of the United States is a result of export sales. Substantially all of the Companys identifiable assets are located in the United States.



|16. | Subsequent Events
|--- | -----------------

The
Company has evaluated subsequent events for potential recognition or disclosure in these financial statements. No material subsequent events have occurred since September 30, 2010 that required recognition or disclosure in these financial
statements.



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|17. | Recently Issued Accounting Pronouncements
|--- | -----------------------------------------

Fair Value Disclosures. In January 2010, the Financial Accounting Standards Board, or FASB, issued amended standards requiring additional fair value disclosures. The amended standards require
disclosures of transfers in and out of Levels I and II of the fair value hierarchy, as well as requiring gross basis disclosures for purchases, sales, issuances and settlements within the Level III reconciliation which will replace the net
presentation format. Additionally, the update clarifies the requirement to determine the level of disaggregation for fair value measurement disclosures and to disclose valuation techniques and inputs used for both recurring and nonrecurring fair
value measurements in either Level II or Level III. The Company adopted the new guidance in the fourth quarter of our fiscal year 2010, except for the gross presentation of the Level III rollforward information which is effective for fiscal years
beginning after December 15, 2010 (fiscal year 2012 for the Company). Because these new standards are related primarily to disclosures, their adoption has not had and is not expected to have a significant impact on the Companys
financial position or results of operations.



|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 consolidated financial information and the notes thereto
included in this Quarterly Report on Form 10-Q. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking statements that involve risks and uncertainties. You should not place
undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors referred to in Part I, Item 1A. Risk Factorsin our Annual Report on Form 10-K for our fiscal
year ended March 31, 2010 and elsewhere in this Quarterly Report. These factors may cause our actual results to differ materially from any forward-looking statement.

Overview

NetScout was founded in 1984 and is headquartered in
Westford, Massachusetts. We design, develop, manufacture, market, sell and support market leading unified service delivery management, service assurance and application and network performance management solutions focused on assuring service
delivery for the worlds largest, most demanding and complex internet protocol, or IP, based service delivery environments. We manufacture and market these products in integrated hardware and software solutions that are used by commercial
enterprises, large governmental agencies and telecommunication service providers worldwide. We have a single operating segment and substantially all of our identifiable assets are located in the United States.

Our operating results are influenced by a number of factors, including, but not limited to, the mix and quantity of products and services
sold, pricing, costs of materials used in our products, growth in employee related costs, including commissions, and the expansion of our operations. Factors that affect our ability to maximize our operating results include, but are not limited to,
our ability to introduce and enhance existing products, the marketplace acceptance of those new or enhanced products, continued expansion into international markets, development of strategic partnerships, competition, successful acquisition
integration efforts and current economic conditions.

Results Overview

We saw continued strength during the six months ending September 30, 2010, with product revenue growth of 21% and overall revenue
growth of 16% compared to the prior year period driven by strength in our financial and service provider verticals. Gross margin remained flat at 79% for the six months ending September 30, 2010 and 2009. While operating expenses increased on
higher sales and marketing expenses and incentive compensation, we improved our operating margin to 18% for the six months ended September 30, 2010, compared to 17% for the same period in the prior year. Net income and net income per share
increased 25% and 19%, respectively compared to the prior year.

We also achieved a cash, cash equivalents and marketable
securities balance of $196.0 million at September 30, 2010. This represents an increase of $5.0 million over the previous quarter end on June 30, 2010.



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Use of Non-GAAP Financial
Measures

From time to time in press releases regarding quarterly earnings, presentations and other communications, we
may provide financial information determined by methods other than in accordance with generally accepted accounting principles, or GAAP. Recent non-GAAP financial measures have included non-GAAP revenue, income from operations, net income and net
income per diluted share, each of which were adjusted from amounts determined based on GAAP to exclude the effect of purchase accounting adjustments to reduce to fair value acquired deferred revenue resulting from our acquisition of Network General
Central Corporation, or Network General, in November 2007, and to add back the revenue impact of recently adopted accounting guidance, share-based compensation expenses and the amortization of acquired intangible assets, net of related income tax
effects.

Management regularly uses supplemental non-GAAP financial measures internally to understand, manage and evaluate its
business and to make operating decisions. These non-GAAP measures are among the primary factors that management uses in planning and forecasting future periods. Management believes these non-GAAP financial measures enhance the readers overall
understanding of NetScouts current financial performance and its prospects for the future by providing a higher degree of transparency for certain financial measures and providing a level of disclosure that helps investors understand how the
Company plans and measures its business. We believe that providing these non-GAAP measures affords investors a view of our operating results that may be more easily compared to our peer companies and against prior periods by enabling investors to
consider our operating results on both a GAAP and non-GAAP basis during periods where GAAP results were affected by non-recurring events, such as our acquisition of Network General.

These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures prepared in accordance with
GAAP, and may have limitations in that they do not reflect all our results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate our results of operations in conjunction with the corresponding
GAAP measures. The presentation of non-GAAP information is not meant to be considered superior to, in isolation from or as a substitute for results prepared in accordance with GAAP.

The following table reconciles revenue, net income and net income per share on a GAAP and non-GAAP basis for the three and six months
ended September 30, 2010 and 2009 (in thousands):



|                                                      |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three Months EndedSeptember 30, |        |   | Six Months EndedSeptember 30, |  
|                                                      |  | 2010                            |        |   | 2009                          |   |        | 2010 |  |   | 2009    |  
|GAAP revenue                                          |  | $                               | 69,413 |   |                               | $ | 59,691 |      |  | $ | 136,224 |   |  | $ | 117,753 |  
|Impact of new accounting guidance                     |  |                                 | (333   | ) |                               |   |       |      |  |   | (203    | ) |  |   |        |  
|Deferred revenue fair value adjustment                |  |                                 | 39     |   |                               |   | 387    |      |  |   | 113     |   |  |   | 996     |  
|                                                      |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Non-GAAP revenue                                      |  | $                               | 69,119 |   |                               | $ | 60,078 |      |  | $ | 136,134 |   |  | $ | 118,749 |  
|                                                      |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|GAAP net income                                       |  | $                               | 8,248  |   |                               | $ | 7,086  |      |  | $ | 15,393  |   |  | $ | 12,323  |  
|Impact of new accounting guidance                     |  |                                 | (333   | ) |                               |   |       |      |  |   | (203    | ) |  |   |        |  
|Deferred revenue fair value adjustment                |  |                                 | 39     |   |                               |   | 387    |      |  |   | 113     |   |  |   | 996     |  
|Share based compensation expense                      |  |                                 | 1,501  |   |                               |   | 1,284  |      |  |   | 2,679   |   |  |   | 2,567   |  
|Amortization of acquired intangible assets            |  |                                 | 1,472  |   |                               |   | 1,486  |      |  |   | 2,944   |   |  |   | 2,971   |  
|Income tax adjustments                                |  |                                 | (1,018 | ) |                               |   | (1,200 | )    |  |   | (2,103  | ) |  |   | (2,483  | )
|                                                      |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Non-GAAP net income                                   |  | $                               | 9,909  |   |                               | $ | 9,043  |      |  | $ | 18,823  |   |  | $ | 16,374  |  
|                                                      |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|GAAP diluted net income per share                     |  | $                               | 0.19   |   |                               | $ | 0.17   |      |  | $ | 0.36    |   |  | $ | 0.30    |  
|Share impact of non-GAAP adjustments identified above |  |                                 | 0.04   |   |                               |   | 0.05   |      |  |   | 0.08    |   |  |   | 0.10    |  
|                                                      |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Non-GAAP diluted net income per share                 |  | $                               | 0.23   |   |                               | $ | 0.22   |      |  | $ | 0.44    |   |  | $ | 0.40    |  
|                                                      |  |                                 |        |   |                               |   |        |      |  |   |         |   |  |   |         |  



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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America consistently applied. The preparation of these consolidated financial statements requires us to make
significant estimates and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and
material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from our estimates.

While all of our accounting policies impact the
consolidated financial statements, certain policies are viewed to be critical. Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and that require
managements most subjective or complex judgments and estimates. We consider the following accounting policies to be critical in fully understanding and evaluating our financial results:



| |  |  | cash, cash equivalents and marketable securities;
| | - |  | -------------------------------------------------



| |  |  | revenue recognition;
| | - |  | --------------------



| |  |  | commission expense;
| | - |  | -------------------



| |  |  | uncollected deferred product revenue;
| | - |  | -------------------------------------



| |  |  | valuation of inventories;
| | - |  | -------------------------



| |  |  | valuation of goodwill and acquired intangible assets;
| | - |  | -----------------------------------------------------



| |  |  | capitalization of software development costs;
| | - |  | ---------------------------------------------



| |  |  | derivative financial instruments;
| | - |  | ---------------------------------



| |  |  | share-based compensation; and
| | - |  | -----------------------------



| |  |  | income taxes.
| | - |  | -------------

Please refer to the critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, filed with the Securities and Exchange Commission, or the SEC on
May 28, 2010, for a description of all critical accounting policies.

The critical accounting policies included in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2010 have not materially changed, other than the following:

The critical accounting policy entitled Revenue Recognition has been changed to reflect the adoption of new authoritative
guidance for revenue arrangements with multiple deliverables during the quarter ended June 30, 2010.

The adoption of
this guidance did not have a material impact on our financial position or results of operations for the three and six months ended September 30, 2010.

Revenue Recognition

Product revenue consists of sales of our
hardware products (which include embedded software that works together with the hardware to deliver the products essential functionality), licensing of our software products, and sale of hardware bundled with a software license. 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



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determinable and collection of the related receivable is probable. Because many of our solutions are comprised of both hardware and more than incidental software components, we recognize our
revenue in accordance with authoritative guidance on both hardware and software revenue recognition.

Service revenue consists
primarily of fees from customer support agreements, consulting and training. We generally provide software and hardware support as part of product sales. Revenue related to the initial bundled software and hardware support is recognized ratably over
the support period. In addition, customers can elect to purchase extended support agreements for periods after the initial software warranty expiration, typically for 12-month periods. Revenue from customer support agreements is recognized ratably
over the support period. Revenue from consulting and training services is recognized as the work is performed.

Multi-element
arrangements are concurrent customer purchases of a combination of our product and service offerings that may be delivered at various points in time. For multi-element arrangements comprised only of hardware products and related services, we
allocate the total transaction revenue to the multiple elements based on each elements relative fair value compared to the total fair value. Each elements relative fair value is based on managements best estimate of selling price
paid by customers when the element is sold separately. We review the sales of all products and services quarterly and update, when appropriate, our best estimate of selling price for each element to ensure that it reflects our recent pricing
experience.

For multi-element arrangements comprised only of software products and related services, we allocate a portion of
the total purchase price to the undelivered elements, primarily support agreements and training, using vendor-specific objective evidence of fair value of the undelivered elements. The remaining portion of the total transaction value is allocated to
the delivered software, referred to as the residual method. Vendor-specific objective evidence of fair value of the undelivered elements is based on the price customers pay when the element is sold separately. We review the separate sales of the
undelivered elements on a quarterly basis and update, when appropriate, our vendor-specific objective evidence of fair value for such elements to ensure that it reflects our recent pricing experience.

For multi-element arrangements comprised of a combination of hardware and software elements, the total transaction value is bifurcated
between the hardware elements and the software elements based on the relative selling prices of the hardware elements and the software elements as a group. Then, revenue for the hardware and hardware-related services is recognized following the
hardware revenue recognition methodology outlined above and revenue for the software and software-related services is recognized following the residual method.

Three Months Ended September 30, 2010 and 2009

Revenue

Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consists of customer
support agreements, consulting and training. No one customer or indirect channel partner accounted for more than 10% of our total revenue during the three months ended September 30, 2010 and 2009.



|              |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  
|------------- |  | ----------------------------------------------------- | ------ |  | ----------- |  | --- | - |  | - | ----------- |  |  | - | --- | - | - | - | ----- |  |  |  | -- | -
|              |  | Three Months EndedSeptember 30,(Dollars in Thousands) |        |  | Change      | 
|              |  | 2010                                                  |        |  | 2009        |  |    
|              |  |                                                       |        |  | % ofRevenue |  |     |   |  |   | % ofRevenue |  |  | $ |     |   | % |  
|Revenue:      |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  
|Product       |  | $                                                     | 37,301 |  |             |  | 54  | % |  | $ | 30,631      |  |  |   | 51  | % |   | $ | 6,670 |  |  |  | 22 | %
|Service       |  |                                                       | 32,112 |  |             |  | 46  |   |  |   | 29,060      |  |  |   | 49  |   |   |   | 3,052 |  |  |  | 11 | %
|              |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  
|Total revenue |  | $                                                     | 69,413 |  |             |  | 100 | % |  | $ | 59,691      |  |  |   | 100 | % |   | $ | 9,722 |  |  |  | 16 | %
|              |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  



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Product.The 22%, or $6.7 million, increase in product revenue was due to a $4.1 million increase in our service
provider vertical, a $1.1 million increase in our financial vertical and a $1.5 million increase in our other enterprise business vertical. Compared to the same period in the prior year, we realized an increase of approximately 27% in the average
selling price per unit of our products due to a shift in product mix towards our Infinistream product line and away from lower priced probes.

Service.The 11%, or $3.1 million, increase in service revenue was due in part to a $1.4 million increase in revenue from maintenance contracts due to increased renewals from a
growing support base, a $1.1 million increase in revenue from post-contract customer support in connection with product revenue growth and a $253 thousand increase in other service revenue. In addition, there was a decline of $339 thousand in
purchase accounting adjustments to deferred service revenue associated with our acquisition of Network General. As a result of this acquisition, acquired deferred revenue was reduced to fair value to eliminate selling profit from the contracts that
were acquired from Network General. As the fair value adjusted deferred revenue amortizes over time, it comprised a smaller proportion of total maintenance revenue during the three months ended September 30, 2010. Subsequent maintenance renewal
contracts are recorded at their full value and thus result in higher recorded revenue.

Total product and service revenue from
direct and indirect channels are as follows:



|              |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  
|------------- |  | ----------------------------------------------------- | ------ |  | ----------- |  | --- | - |  | - | ----------- |  |  | - | --- | - | - | - | ----- |  |  |  | -- | -
|              |  | Three Months EndedSeptember 30,(Dollars in Thousands) |        |  | Change      | 
|              |  | 2010                                                  |        |  | 2009        |  |    
|              |  |                                                       |        |  | % ofRevenue |  |     |   |  |   | % ofRevenue |  |  | $ |     |   | % |  
|Indirect      |  | $                                                     | 45,206 |  |             |  | 65  | % |  | $ | 39,054      |  |  |   | 65  | % |   | $ | 6,152 |  |  |  | 16 | %
|Direct        |  |                                                       | 24,207 |  |             |  | 35  |   |  |   | 20,637      |  |  |   | 35  |   |   |   | 3,570 |  |  |  | 17 | %
|              |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  
|Total revenue |  | $                                                     | 69,413 |  |             |  | 100 | % |  | $ | 59,691      |  |  |   | 100 | % |   | $ | 9,722 |  |  |  | 16 | %
|              |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  

The 16%, or $6.2 million, increase in indirect channel revenue is primarily the result of an
increase in international sales. Sales to customers outside the United States are primarily export sales through channel partners, who are generally responsible for distributing our products and providing technical support and service to customers
within their territories. Our reported international revenue does not include any revenue from sales to customers outside the United States that are shipped to our United States-based indirect channel partners. These domestic resellers fulfill
customer orders based upon joint selling efforts in conjunction with our direct sales force and may subsequently ship our products to international locations; however, we report these shipments as United States revenue since we ship the products to
a domestic location. The 17%, or $3.6 million, increase in direct channel revenue is primarily the result of higher revenue in the United States due to the increase in volume with our larger direct financial services and service provider customers.



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Total revenue by
geography is as follows:



|                       |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  
|---------------------- |  | ----------------------------------------------------- | ------ |  | ----------- |  | --- | - |  | - | ----------- |  |  | - | --- | - | - | - | ----- |  |  |  | -- | -
|                       |  | Three Months EndedSeptember 30,(Dollars in Thousands) |        |  | Change      | 
|                       |  | 2010                                                  |        |  | 2009        |  |    
|                       |  |                                                       |        |  | % ofRevenue |  |     |   |  |   | % ofRevenue |  |  | $ |     |   | % |  
|United States          |  | $                                                     | 49,523 |  |             |  | 71  | % |  | $ | 44,465      |  |  |   | 75  | % |   | $ | 5,058 |  |  |  | 11 | %
|                       |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  
|International          |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  
|Europe                 |  |                                                       | 10,058 |  |             |  | 15  |   |  |   | 7,761       |  |  |   | 13  |   |   |   | 2,297 |  |  |  | 30 | %
|Asia                   |  |                                                       | 3,803  |  |             |  | 5   |   |  |   | 3,226       |  |  |   | 5   |   |   |   | 577   |  |  |  | 18 | %
|Rest of World          |  |                                                       | 6,029  |  |             |  | 9   |   |  |   | 4,239       |  |  |   | 7   |   |   |   | 1,790 |  |  |  | 42 | %
|                       |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  
|Subtotal International |  |                                                       | 19,890 |  |             |  | 29  |   |  |   | 15,226      |  |  |   | 25  |   |   |   | 4,664 |  |  |  | 31 | %
|                       |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  
|Total revenue          |  | $                                                     | 69,413 |  |             |  | 100 | % |  | $ | 59,691      |  |  |   | 100 | % |   | $ | 9,722 |  |  |  | 16 | %
|                       |  |                                                       |        |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |       |  |  |  |    |  

United States revenues increased 11%, or $5.1 million, primarily as a result of strong growth in
our financial services and service provider verticals. The 31%, or $4.7 million, increase in international revenue is due to growth in our service provider vertical. We expect revenue from sales to customers outside the United States to continue to
account for a significant portion of our total revenue in the future. In accordance with United States export control regulations we do not sell or do business with countries subject to economic sanctions and export controls.

Cost of Revenue and Gross Profit

Cost of product revenue consists primarily of material components, manufacturing personnel expenses, media duplication, manuals, packaging materials, overhead and amortization of capitalized software and
developed product technology. Cost of service revenue consists primarily of personnel, material, overhead and support costs.



|                       |  |                                                       |        |   |             |  |    |   |  |   |             |   |  |   |    |   |   |   |       |  |  |  |    |  
|---------------------- |  | ----------------------------------------------------- | ------ | - | ----------- |  | -- | - |  | - | ----------- | - |  | - | -- | - | - | - | ----- |  |  |  | -- | -
|                       |  | Three Months EndedSeptember 30,(Dollars in Thousands) |        |   | Change      | 
|                       |  | 2010                                                  |        |   | 2009        |  |   
|                       |  |                                                       |        |   | % ofRevenue |  |    |   |  |   | % ofRevenue |   |  | $ |    |   | % |  
|Cost of revenue        |  |                                                       |        |   |             |  |    |   |  |   |             |   |  |   |    |   |   |   |       |  |  |  |    |  
|Product                |  | $                                                     | 8,808  |   |             |  | 13 | % |  | $ | 8,289       |   |  |   | 14 | % |   | $ | 519   |  |  |  | 6  | %
|Service                |  |                                                       | 5,499  |   |             |  | 8  |   |  |   | 4,584       |   |  |   | 8  |   |   |   | 915   |  |  |  | 20 | %
|                       |  |                                                       |        |   |             |  |    |   |  |   |             |   |  |   |    |   |   |   |       |  |  |  |    |  
|Total cost of revenue  |  | $                                                     | 14,307 |   |             |  | 21 | % |  | $ | 12,873      |   |  |   | 22 | % |   | $ | 1,434 |  |  |  | 11 | %
|                       |  |                                                       |        |   |             |  |    |   |  |   |             |   |  |   |    |   |   |   |       |  |  |  |    |  
|Gross profit:          |  |                                                       |        |   |             |  |    |   |  |   |             |   |  |   |    |   |   |   |       |  |  |  |    |  
|Product $              |  | $                                                     | 28,493 |   |             |  | 41 | % |  | $ | 22,342      |   |  |   | 37 | % |   | $ | 6,151 |  |  |  | 28 | %
|Product gross profit % |  |                                                       | 76     | % |             |  |    |   |  |   | 73          | % |  |   |    |   |   |   |       |  |  |  |    |  
|Service $              |  | $                                                     | 26,613 |   |             |  | 38 | % |  | $ | 24,476      |   |  |   | 41 | % |   | $ | 2,137 |  |  |  | 9  | %
|Service gross profit % |  |                                                       | 83     | % |             |  |    |   |  |   | 84          | % |  |   |    |   |   |   |       |  |  |  |    |  
|Total gross profit $   |  | $                                                     | 55,106 |   |             |  |    |   |  | $ | 46,818      |   |  |   |    |   |   | $ | 8,288 |  |  |  | 18 | %
|Total gross profit %   |  |                                                       | 79     | % |             |  |    |   |  |   | 78          | % |  |   |    |   |   |   |       |  |  |  |    |  

Product. The 6%, or $519 thousand, increase in cost of product revenue was
primarily due to the 22% increase in product revenue during the three months ended September 30, 2010 compared to the three months ended September 30, 2009 as well as gross profit improvement. The product gross profit percentage increased
three points from 73% to 76% for the three months ended September 30, 2009 and 2010, respectively. This



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increase was primarily due to favorable product mix and the realization of cost savings within our manufacturing organization. Average headcount was 29 and 26 for the three months ended
September 30, 2010 and 2009, respectively.

Service. The 20%, or $915 thousand, increase in cost of
service revenue was primarily due to a $638 thousand increase in employee related expenses, a $185 thousand increase in inventory used to support customers under service contracts and a $52 thousand increase in travel in our support and consulting
groups. The 9%, or $2.1 million, increase in service gross profit corresponds with the 11%, or $3.1 million, increase in service revenue, offset by the 20%, or $915 thousand, increase in cost of services. The service gross profit percentage
decreased one point from 84% to 83% for the three months ended September 30, 2009 and 2010, respectively. Average headcount was 113 and 103 for the three months ended September 30, 2010 and 2009, respectively.

Gross profit. Our gross profit increased 18%, or $8.3 million. This increase is attributable to our increase in
revenue of 16%, or $9.7 million. The net effect of the combined increases in revenue and cost of revenue was a one point increase in gross profit percentage from the three months ended September 30, 2009 to the three months ended
September 30, 2010.

Operating Expenses



|                                           |  |                                                       |        |  |             |  |    |   |  |   |             |  |  |   |    |   |   |   |       |   |  |  |    |   
|------------------------------------------ |  | ----------------------------------------------------- | ------ |  | ----------- |  | -- | - |  | - | ----------- |  |  | - | -- | - | - | - | ----- | - |  |  | -- | --
|                                           |  | Three Months
EndedSeptember 30,(Dollars in Thousands) |        |  | Change      | 
|                                           |  | 2010                                                  |        |  | 2009        |  |   
|                                           |  |                                                       |        |  | % ofRevenue |  |    |   |  |   | % ofRevenue |  |  | $ |    |   | % |  
|Research and development                   |  | $                                                     | 9,811  |  |             |  | 14 | % |  | $ | 8,670       |  |  |   | 15 | % |   | $ | 1,141 |   |  |  | 13 | % 
|Sales and marketing                        |  |                                                       | 25,691 |  |             |  | 37 |   |  |   | 21,372      |  |  |   | 36 |   |   |   | 4,319 |   |  |  | 20 | % 
|General and administrative                 |  |                                                       | 5,825  |  |             |  | 8  |   |  |   | 4,604       |  |  |   | 7  |   |   |   | 1,221 |   |  |  | 27 | % 
|Amortization of acquired intangible assets |  |                                                       | 477    |  |             |  | 1  |   |  |   | 491         |  |  |   | 1  |   |   |   | (14   | ) |  |  | (3 | %)
|                                           |  |                                                       |        |  |             |  |    |   |  |   |             |  |  |   |    |   |   |   |       |   |  |  |    |   
|Total Operating Expenses                   |  | $                                                     | 41,804 |  |             |  | 60 | % |  | $ | 35,137      |  |  |   | 59 | % |   | $ | 6,667 |   |  |  | 19 | % 
|                                           |  |                                                       |        |  |             |  |    |   |  |   |             |  |  |   |    |   |   |   |       |   |  |  |    |   

Research and development. Research and development expenses consist primarily of
personnel expenses, fees for outside consultants, overhead and related expenses associated with the development of new products and the enhancement of existing products.

The 13%, or $1.1 million, increase in research and development expenses is primarily due to increases in incentive compensation and other employee related expenses. Average headcount in research and
development was 256 and 234 for the three months ended September 30, 2010 and 2009, respectively.

Sales and
marketing. Sales and marketing expenses consist primarily of personnel expenses, including commissions, overhead and other expenses associated with selling activities and marketing programs such as trade shows, seminars, advertising, and new
product launch activities.

The 20%, or $4.3 million, increase in total sales and marketing expenses was primarily due to $1.8
million in increased sales commissions commensurate with the higher sales revenue, a $1.4 million increase in other employee related expenses resulting from increased headcount, a $553 thousand increase in recruiting fees, a $332 thousand increase
in sales travel expenses due to increased headcount and international travel and a $175 thousand increase in depreciation expense associated with demo units. Average headcount in sales and marketing was 316 and 297 for the three months ended
September 30, 2010 and 2009, respectively.

General and administrative. General and administrative expenses
consist primarily of personnel expenses for executive, financial, legal and human resource employees, overhead and other corporate expenditures.



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The 27%, or $1.2
million, increase in general and administrative expenses was primarily due to a $728 thousand increase in incentive compensation and other employee related expenses and a $496 thousand increase in business development costs. Average headcount in
general and administrative was 111 and 109 for the three months ended September 30, 2010 and 2009, respectively.

Amortization of acquired intangible assets.Amortization of acquired intangible assets consists primarily of
amortization of customer relationships related to the acquisition of Network General.

Interest and Other Income (Expense),
Net.Interest and other income (expense), net includes interest earned on our cash, cash equivalents, marketable securities and restricted investments, interest expense and other non-operating gains or losses.



|                                         |  |                                                       |      |   |             |  |    |    |  |   |             |   |  |   |    |    |   |   |     |  |  |  |    |  
|---------------------------------------- |  | ----------------------------------------------------- | ---- | - | ----------- |  | -- | -- |  | - | ----------- | - |  | - | -- | -- | - | - | --- |  |  |  | -- | -
|                                         |  | Three Months EndedSeptember 30,(Dollars in Thousands) |      |   | Change      | 
|                                         |  | 2010                                                  |      |   | 2009        |  |   
|                                         |  |                                                       |      |   | % ofRevenue |  |    |    |  |   | % ofRevenue |   |  | $ |    |    | % |  
|Interest and other income (expense), net |  | $                                                     | (462 | ) |             |  | (1 | )% |  | $ | (715        | ) |  |   | (1 | )% |   | $ | 253 |  |  |  | 35 | %

The 35%, or $253 thousand,
increase in interest and other income (expense), net was primarily due to a $210 thousand decrease in interest expense due to a reduction in the interest rate as well as a reduction of approximately $10 million on the outstanding principal of our
debt due to debt repayments. During the quarters ended September 30, 2010 and 2009, the average interest rates on our outstanding debt were 2.813% and 3.375%, respectively. Additionally, the increase was affected by a $58 thousand increase in
interest income due to an increase in market interest rates received on investments. These increases to interest and other income (expense) were partially offset by a $15 thousand decrease from a $13 thousand realized gain on securities during the
three months ended September 30, 2009.

Income Tax Expense.We estimate our income tax expense based on our
estimated annual effective tax rate. The estimated annual effective tax rate as of September 30, 2010 for fiscal year 2011 is 35.6%, compared to an estimated annual effective tax rate of 35.5% as of September 30, 2009 for fiscal year 2010.
The increase in our effective tax rate is primarily due to the expiration of the federal research and development credit partially offset by an increase in the domestic production activities deduction. Generally, the estimated annual effective tax
rates differ from the statutory rates primarily due to the impact of federal and state tax credits, state taxes, and the qualified production activities deduction.



|                   |  |                                                       |       |  |             |  |   |   |  |   |             |  |  |   |   |   |   |   |     |  |  |  |    |  
|------------------ |  | ----------------------------------------------------- | ----- |  | ----------- |  | - | - |  | - | ----------- |  |  | - | - | - | - | - | --- |  |  |  | -- | -
|                   |  | Three Months EndedSeptember 30,(Dollars in Thousands) |       |  | Change      | 
|                   |  | 2010                                                  |       |  | 2009        |  |  
|                   |  |                                                       |       |  | % ofRevenue |  |   |   |  |   | % ofRevenue |  |  | $ |   |   | % |  
|Income tax expense |  | $                                                     | 4,592 |  |             |  | 7 | % |  | $ | 3,880       |  |  |   | 7 | % |   | $ | 712 |  |  |  | 18 | %

Net
Income. Net income for the three months ended September 30, 2010 and 2009 is as follows:



|           |  |                                                       |       |  |             |  |    |   |  |   |             |  |  |   |    |   |   |   |       |  |  |  |    |  
|---------- |  | ----------------------------------------------------- | ----- |  | ----------- |  | -- | - |  | - | ----------- |  |  | - | -- | - | - | - | ----- |  |  |  | -- | -
|           |  | Three Months EndedSeptember 30,(Dollars in Thousands) |       |  | Change      | 
|           |  | 2010                                                  |       |  | 2009        |  |   
|           |  |                                                       |       |  | % ofRevenue |  |    |   |  |   | % ofRevenue |  |  | $ |    |   | % |  
|Net income |  | $                                                     | 8,248 |  |             |  | 12 | % |  | $ | 7,086       |  |  |   | 12 | % |   | $ | 1,162 |  |  |  | 16 | %



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The $1.2 million
increase in net income for the three months ended September 30, 2010 was largely attributable to the $8.3 million increase in total gross profit and a $253 thousand decrease in interest and other income (expense) offset by a $6.7 million
increase in operating expenses mainly due to increased employee related expenses and incentive compensation.

Six Months Ended
September 30, 2010 and 2009

Revenue

Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consists of customer support agreements, consulting and training. No one direct customer
or indirect channel partner accounted for more than 10% of our total revenue during the six months ended September 30, 2010 and 2009.



|              |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  
|------------- |  | --------------------------------------------------- | ------- |  | ----------- |  | --- | - |  | - | ----------- |  |  | - | --- | - | - | - | ------ |  |  |  | -- | -
|              |  | Six Months EndedSeptember 30,(Dollars in Thousands) |         |  | Change      | 
|              |  | 2010                                                |         |  | 2009        |  |    
|              |  |                                                     |         |  | % ofRevenue |  |     |   |  |   | % ofRevenue |  |  | $ |     |   | % |  
|Revenue:      |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  
|Product       |  | $                                                   | 71,273  |  |             |  | 52  | % |  | $ | 59,022      |  |  |   | 50  | % |   | $ | 12,251 |  |  |  | 21 | %
|Service       |  |                                                     | 64,951  |  |             |  | 48  |   |  |   | 58,731      |  |  |   | 50  |   |   |   | 6,220  |  |  |  | 11 | %
|              |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  
|Total revenue |  | $                                                   | 136,224 |  |             |  | 100 | % |  | $ | 117,753     |  |  |   | 100 | % |   | $ | 18,471 |  |  |  | 16 | %
|              |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  

Product. The 21%, or $12.3 million, increase in product revenue was due to a
$7.9 million increase in our financial vertical, a $7.2 million increase in our service provider vertical, offset by a $2.8 million decrease in our other enterprise business vertical. Compared to the same period in the prior year, we realized an
increase of approximately 27% in the average selling price per unit of our products due to a shift in product mix towards our Infinistream product line and away from lower priced probes.

Service. The 11%, or $6.2 million, increase in service revenue was due in part to a $2.4 million increase in revenue
from post-contract customer support in connection with product revenue growth, a $654 thousand increase in revenue from maintenance contracts due to increased renewals from a growing support base, and a $612 thousand increase in other service
revenue. In addition, there was a decline of $865 thousand in purchase accounting adjustments to deferred service revenue associated with our acquisition of Network General. As a result of this acquisition, acquired deferred revenue was reduced to
fair value to eliminate selling profit from the contracts that were acquired from Network General. As the fair value adjusted deferred revenue amortizes over time, it comprised a smaller proportion of total maintenance revenue during the six months
ended September 30, 2010. Subsequent maintenance renewal contracts are recorded at their full value and thus result in higher recorded revenue. We also recognized $1.4 million in training and consulting revenue during the quarter ended
June 30, 2010 from non-refundable expired contracts. Prior to this quarter, the Company had not been able to demonstrate that it had fulfilled its obligations. However, during the quarter, the Company was able to demonstrate that its
obligations had been fulfilled related to the non-refundable expired contracts. While the Company will continue to recognize revenue from non-refundable contracts, it does not expect the revenue in future quarters to be significant.



26



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Total product and
service revenue from direct and indirect channels are as follows:



|              |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  
|------------- |  | --------------------------------------------------- | ------- |  | ----------- |  | --- | - |  | - | ----------- |  |  | - | --- | - | - | - | ------ |  |  |  | -- | -
|              |  | Six Months EndedSeptember 30,(Dollars in Thousands) |         |  | Change      | 
|              |  | 2010                                                |         |  | 2009        |  |    
|              |  |                                                     |         |  | % ofRevenue |  |     |   |  |   | % ofRevenue |  |  | $ |     |   | % |  
|Indirect      |  | $                                                   | 80,940  |  |             |  | 59  | % |  | $ | 75,976      |  |  |   | 65  | % |   | $ | 4,964  |  |  |  | 7  | %
|Direct        |  |                                                     | 55,284  |  |             |  | 41  |   |  |   | 41,777      |  |  |   | 35  |   |   |   | 13,507 |  |  |  | 32 | %
|              |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  
|Total revenue |  | $                                                   | 136,224 |  |             |  | 100 | % |  | $ | 117,753     |  |  |   | 100 | % |   | $ | 18,471 |  |  |  | 16 | %
|              |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  

The 7%, or $5.0 million, increase in indirect channel revenue is the result of an increase in
international sales. Sales to customers outside the United States are primarily export sales through channel partners, who are generally responsible for distributing our products and providing technical support and service to customers within their
territories. Our reported international revenue does not include any revenue from sales to customers outside the United States that are shipped to our United States-based indirect channel partners. These domestic resellers fulfill customer orders
based upon joint selling efforts in conjunction with our direct sales force and may subsequently ship our products to international locations; however, we report these shipments as United States revenue since we ship the products to a domestic
location. The 32%, or $13.5 million, increase in direct channel revenue and change in sales mix between direct and indirect is primarily the result of increased domestic revenue from our telecommunications and financial verticals, as well as the
$865 thousand reduction in purchase accounting adjustments related to the Network General acquisition which had the effect of increasing revenue.

Total revenue by geography is as follows:



|                       |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  
|---------------------- |  | --------------------------------------------------- | ------- |  | ----------- |  | --- | - |  | - | ----------- |  |  | - | --- | - | - | - | ------ |  |  |  | -- | -
|                       |  | Six Months EndedSeptember 30,(Dollars in Thousands) |         |  | Change      | 
|                       |  | 2010                                                |         |  | 2009        |  |    
|                       |  |                                                     |         |  | % ofRevenue |  |     |   |  |   | % ofRevenue |  |  | $ |     |   | % |  
|United States          |  | $                                                   | 102,583 |  |             |  | 75  | % |  | $ | 90,257      |  |  |   | 77  | % |   | $ | 12,326 |  |  |  | 14 | %
|                       |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  
|International          |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  
|Europe                 |  |                                                     | 16,313  |  |             |  | 12  |   |  |   | 13,321      |  |  |   | 11  |   |   |   | 2,992  |  |  |  | 22 | %
|Asia                   |  |                                                     | 6,626   |  |             |  | 5   |   |  |   | 5,415       |  |  |   | 5   |   |   |   | 1,211  |  |  |  | 22 | %
|Rest of World          |  |                                                     | 10,702  |  |             |  | 8   |   |  |   | 8,760       |  |  |   | 7   |   |   |   | 1,942  |  |  |  | 22 | %
|                       |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  
|Subtotal International |  |                                                     | 33,641  |  |             |  | 25  |   |  |   | 27,496      |  |  |   | 23  |   |   |   | 6,145  |  |  |  | 22 | %
|                       |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  
|Total revenue          |  | $                                                   | 136,224 |  |             |  | 100 | % |  | $ | 117,753     |  |  |   | 100 | % |   | $ | 18,471 |  |  |  | 16 | %
|                       |  |                                                     |         |  |             |  |     |   |  |   |             |  |  |   |     |   |   |   |        |  |  |  |    |  

United States revenues increased 14%, or $12.3 million, primarily as a result of strong growth in
our financial services and service provider verticals. The 22%, or $6.1 million, increase in international revenue is due to growth in our service provider verticals. We expect revenue from sales to customers outside the United States to continue to
account for a significant portion of our total revenue in the future. In accordance with United States export control regulations we do not sell or do business with countries subject to economic sanctions and export controls.



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Cost of Revenue and Gross Profit

Cost of product revenue consists primarily of material components, personnel expenses, media duplication, manuals,
packaging materials, overhead and amortization of capitalized software and developed product technology. Cost of service revenue consists primarily of personnel, material, overhead and support costs.



|                       |  |                                                     |         |   |             |  |    |   |  |   |             |   |  |   |    |   |   |   |        |  |  |  |    |  
|---------------------- |  | --------------------------------------------------- | ------- | - | ----------- |  | -- | - |  | - | ----------- | - |  | - | -- | - | - | - | ------ |  |  |  | -- | -
|                       |  | Six Months EndedSeptember 30,(Dollars in Thousands) |         |   | Change      | 
|                       |  | 2010                                                |         |   | 2009        |  |   
|                       |  |                                                     |         |   | % ofRevenue |  |    |   |  |   | % ofRevenue |   |  | $ |    |   | % |  
|Cost of revenue        |  |                                                     |         |   |             |  |    |   |  |   |             |   |  |   |    |   |   |   |        |  |  |  |    |  
|Product                |  | $                                                   | 17,659  |   |             |  | 13 | % |  | $ | 15,548      |   |  |   | 13 | % |   | $ | 2,111  |  |  |  | 14 | %
|Service                |  |                                                     | 11,223  |   |             |  | 8  |   |  |   | 9,493       |   |  |   | 8  |   |   |   | 1,730  |  |  |  | 18 | %
|                       |  |                                                     |         |   |             |  |    |   |  |   |             |   |  |   |    |   |   |   |        |  |  |  |    |  
|Total cost of revenue  |  | $                                                   | 28,882  |   |             |  | 21 | % |  | $ | 25,041      |   |  |   | 21 | % |   | $ | 3,841  |  |  |  | 15 | %
|                       |  |                                                     |         |   |             |  |    |   |  |   |             |   |  |   |    |   |   |   |        |  |  |  |    |  
|Gross profit:          |  |                                                     |         |   |             |  |    |   |  |   |             |   |  |   |    |   |   |   |        |  |  |  |    |  
|Product $              |  | $                                                   | 53,614  |   |             |  | 39 | % |  | $ | 43,474      |   |  |   | 37 | % |   | $ | 10,140 |  |  |  | 23 | %
|Product gross profit % |  |                                                     | 75      | % |             |  |    |   |  |   | 74          | % |  |   |    |   |   |   |        |  |  |  |    |  
|Service $              |  | $                                                   | 53,728  |   |             |  | 39 | % |  | $ | 49,238      |   |  |   | 42 | % |   | $ | 4,490  |  |  |  | 9  | %
|Service gross profit % |  |                                                     | 83      | % |             |  |    |   |  |   | 84          | % |  |   |    |   |   |   |        |  |  |  |    |  
|Total gross profit $   |  | $                                                   | 107,342 |   |             |  |    |   |  | $ | 92,712      |   |  |   |    |   |   | $ | 14,630 |  |  |  | 16 | %
|Total gross profit %   |  |                                                     | 79      | % |             |  |    |   |  |   | 79          | % |  |   |    |   |   |   |        |  |  |  |    |  

Product. The 14%, or $2.1 million, increase in cost of product revenue was
primarily due to the 21%, or $12.3 million increase in product revenue for the six months ended September 30, 2010 when compared to September 30, 2009 as well as gross profit improvement. The product gross profit percentage increased by
one point from 74% to 75% for the six months ended September 30, 2009 compared to the six months ended September 30, 2010. This increase was primarily due to favorable product mix and the realization of cost savings within our
manufacturing organization. Average headcount in cost of product revenue was 29 and 27 for the six months ended September 30, 2010 and 2009, respectively.

Service. The 18%, or $1.7 million, increase in cost of service revenue was primarily due to a $1.2 million increase in employee related expenses, a $254 thousand increase in cost of
materials used to support customers under service contracts and a $213 thousand increase in travel in our support and consulting groups. The 9%, or $4.5 million, increase in service gross profit corresponds with the 11%, or $6.2 million, increase in
service revenue, offset by the 18%, or $1.7 million, increase in cost of services. The service gross profit percentage decreased one point from 84% to 83% for the six months ended September 30, 2010. Average headcount in cost of service revenue
was 114 and 104 for the six months ended September 30, 2010 and 2009, respectively.

Gross profit. Our
gross profit increased 16%, or $14.6 million. This increase is attributable to our increase in revenue of 16%, or $18.5 million, offset by a 15%, or $3.8 million, increase in cost of revenue. The net effect of the combined increases in revenue and
cost of revenue on gross margin remained flat at 79% for both the six months ended September 30, 2009 to the six months ended September 30, 2010.



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Operating Expenses



|                                           |  |                                                     |        |  |             |  |    |   |  |   |             |  |  |   |    |   |   |   |        |   |  |  |    |   
|------------------------------------------ |  | --------------------------------------------------- | ------ |  | ----------- |  | -- | - |  | - | ----------- |  |  | - | -- | - | - | - | ------ | - |  |  | -- | --
|                                           |  | Six Months EndedSeptember 30,(Dollars in Thousands) |        |  | Change      | 
|                                           |  | 2010                                                |        |  | 2009        |  |   
|                                           |  |                                                     |        |  | % ofRevenue |  |    |   |  |   | % ofRevenue |  |  | $ |    |   | % |  
|Research and development                   |  | $                                                   | 19,589 |  |             |  | 15 | % |  | $ | 17,888      |  |  |   | 15 | % |   | $ | 1,701  |   |  |  | 10 | % 
|Sales and marketing                        |  |                                                     | 50,810 |  |             |  | 37 |   |  |   | 43,478      |  |  |   | 37 |   |   |   | 7,332  |   |  |  | 17 | % 
|General and administrative                 |  |                                                     | 11,122 |  |             |  | 8  |   |  |   | 9,834       |  |  |   | 8  |   |   |   | 1,288  |   |  |  | 13 | % 
|Amortization of acquired intangible assets |  |                                                     | 954    |  |             |  | 1  |   |  |   | 981         |  |  |   | 1  |   |   |   | (27    | ) |  |  | (3 | %)
|                                           |  |                                                     |        |  |             |  |    |   |  |   |             |  |  |   |    |   |   |   |        |   |  |  |    |   
|Total Operating Expenses                   |  | $                                                   | 82,475 |  |             |  | 61 | % |  | $ | 72,181      |  |  |   | 61 | % |   | $ | 10,294 |   |  |  | 14 | % 
|                                           |  |                                                     |        |  |             |  |    |   |  |   |             |  |  |   |    |   |   |   |        |   |  |  |    |   

Research and development. Research and development
expenses consist primarily of personnel expenses, including incentive compensation, fees for outside consultants, overhead and other expenses associated with the development of new products and the enhancement of existing products.

The 10%, or $1.7 million, increase in research and development expenses is primarily due to increases in incentive compensation and other
employee related expenses. Average headcount in research and development was 253 and 237 for the six months ended September 30, 2010 and 2009, respectively.

Sales and marketing. Sales and marketing expenses consist primarily of personnel expenses, including commissions, overhead and other expenses associated with
selling activities and marketing programs such as trade shows, seminars, advertising, and new product launch activities.

The
17%, or $7.3 million, increase in total sales and marketing expenses was primarily due to $2.7 million in increased sales commissions commensurate with the higher sales revenue, a $2.2 million increase in other employee related expenses resulting
from increased headcount, a $771 thousand increase in recruiting fees, a $713 thousand increase in travel expenses, a $398 thousand increase in depreciation expense associated with demo units and a $354 thousand increase in sales meeting expenses.
Average headcount in sales and marketing was 312 and 301 for the six months ended September 30, 2010 and 2009, respectively.

General and administrative. General and administrative expenses consist primarily of personnel expenses for executive, financial, legal and human resource
employees, overhead and other corporate expenditures.

The 13%, or $1.3 million, increase in general and administrative
expenses was primarily due to an $880 thousand increase in incentive compensation and other employee related expenses and a $496 thousand increase in business development costs. Average headcount in general and administrative was 111 for both the
six months ended September 30, 2010 and 2009, respectively.

Amortization of acquired intangible assets.Amortization of acquired intangible assets consists primarily of amortization of customer relationships related to the acquisition of Network General.

Interest and Other Income (Expense), Net.Interest and other income (expense), net includes interest earned on our cash, cash equivalents, marketable securities and restricted
investments and interest expense.



|                                         |  |                                                     |      |   |             |  |    |    |  |   |             |   |  |   |    |    |   |   |     |  |  |  |    |  
|---------------------------------------- |  | --------------------------------------------------- | ---- | - | ----------- |  | -- | -- |  | - | ----------- | - |  | - | -- | -- | - | - | --- |  |  |  | -- | -
|                                         |  | Six Months EndedSeptember 30,(Dollars in Thousands) |      |   | Change      | 
|                                         |  | 2010                                                |      |   | 2009        |  |   
|                                         |  |                                                     |      |   | % ofRevenue |  |    |    |  |   | % ofRevenue |   |  | $ |    |    | % |  
|Interest and other income (expense), net |  | $                                                   | (902 | ) |             |  | (1 | )% |  | $ | (1,434      | ) |  |   | (1 | )% |   | $ | 532 |  |  |  | 37 | %



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The 37%, or $532
thousand, increase in interest and other income (expense), net was primarily due to the $675 thousand decrease in interest expense due to a reduction in the interest rate and principal amounts outstanding associated with the debt entered into as a
result of the acquisition of Network General. During the six months ended September 30, 2010 and 2009, the average interest rate on the term loan was 2.750% and 3.375%, respectively. This increase to interest and other income (expense) was
partially offset by an $86 thousand decrease in foreign currency transaction expense due to reductions in translation adjustment losses on foreign currency denominated assets and liabilities, a $41 thousand decrease in interest income due to a
decrease in market interest rates received on investments as well as an $11 thousand increase in losses on the disposal of assets.

Income
Tax Expense.We estimate our income tax expense based on our estimated annual effective tax rate. The estimated annual effective tax rate as of September 30, 2010 for fiscal year 2011 is 35.6%, compared to an estimated
annual effective tax rate of 35.5% as of September 30, 2009 for fiscal year 2010. The increase in our effective tax rate is primarily due to the expiration of the federal research and development credit and a decrease in tax exempt interest.
Generally, the estimated annual effective tax rates differ from the statutory rates primarily due to the impact of federal and state tax credits, tax-exempt interest income, state taxes, and qualified production activities deductions.



|                   |  |                                                     |       |  |             |  |   |   |  |   |             |  |  |   |   |   |   |   |       |  |  |  |    |  
|------------------ |  | --------------------------------------------------- | ----- |  | ----------- |  | - | - |  | - | ----------- |  |  | - | - | - | - | - | ----- |  |  |  | -- | -
|                   |  | Six Months EndedSeptember 30,(Dollars in Thousands) |       |  | Change      | 
|                   |  | 2010                                                |       |  | 2009        |  |  
|                   |  |                                                     |       |  | % ofRevenue |  |   |   |  |   | % ofRevenue |  |  | $ |   |   | % |  
|Income tax expense |  | $                                                   | 8,572 |  |             |  | 6 | % |  | $ | 6,774       |  |  |   | 6 | % |   | $ | 1,798 |  |  |  | 27 | %

Net income. Net income
for the six months ended September 30, 2010 and 2009 is as follows:



|           |  |                                                     |        |  |             |  |    |   |  |   |             |  |  |   |    |   |   |   |       |  |  |  |    |  
|---------- |  | --------------------------------------------------- | ------ |  | ----------- |  | -- | - |  | - | ----------- |  |  | - | -- | - | - | - | ----- |  |  |  | -- | -
|           |  | Six Months EndedSeptember 30,(Dollars in Thousands) |        |  | Change      | 
|           |  | 2010                                                |        |  | 2009        |  |   
|           |  |                                                     |        |  | % ofRevenue |  |    |   |  |   | % ofRevenue |  |  | $ |    |   | % |  
|Net income |  | $                                                   | 15,393 |  |             |  | 11 | % |  | $ | 12,323      |  |  |   | 11 | % |   | $ | 3,070 |  |  |  | 25 | %

The $3.1 million increase
in net income for the six months ended September 30, 2010 compared to the six months ended September 30, 2009 was largely attributable to the $14.6 million increase in total gross profit and a $532 thousand decrease in interest and other
income (expense) offset by a $10.3 million increase in operating expenses mainly due to increased employee related expenses and incentive compensation.

Contractual Obligations

As of September 30, 2010, we had the
following contractual obligations:

Payment due by period (Dollars in thousands)



|                                         |  |       |         |  |                 |   |        |           |  |   |           |  |  |                  |       |  |  |   |        | 
|---------------------------------------- |  | ----- | ------- |  | --------------- | - | ------ | --------- |  | - | --------- |  |  | ---------------- | ----- |  |  | - | ------ | 
|Contractual Obligations                  |  | Total |         |  | Less than1 year |   |        | 1-3 years |  |   | 3-5 years |  |  | More than5 years |      
|Short and long-term debt obligations (1) |  | $     | 78,156  |  |                 | $ | 15,692 |           |  | $ | 62,464    |  |  | $                |      |  |  | $ |       | 
|Unconditional purchase obligations       |  |       | 7,200   |  |                 |   | 7,200  |           |  |   |          |  |  |                  |      |  |  |   |       | 
|Operating lease obligations (2)          |  |       | 38,634  |  |                 |   | 3,627  |           |  |   | 6,929     |  |  |                  | 6,688 |  |  |   | 21,390 | 
|Retirement obligations                   |  |       | 3,907   |  |                 |   | 254    |           |  |   | 2,150     |  |  |                  | 657   |  |  |   | 846    | 
|                                         |  |       |         |  |                 |   |        |           |  |   |           |  |  |                  |       |  |  |   |        | 
|Total contractual obligations            |  | $     | 127,897 |  |                 | $ | 26,773 |           |  | $ | 71,543    |  |  | $                | 7,345 |  |  | $ | 22,236 | 
|                                         |  |       |         |  |                 |   |        |           |  |   |           |  |  |                  |       |  |  |   |        | 



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|(1) | Includes accrued interest at an interest rate of 2.750% for our outstanding term loan at September 30, 2010.
|--- | ------------------------------------------------------------------------------------------------------------



|(2) | We lease facilities and certain equipment under operating lease agreements extending through September 2023 for a total of $38.6 million. Additionally, the payments due
by the periods above were computed based on the terms of the renegotiated lease agreements for the Westford office, which was entered in August 2010 and the San Jose office, which was entered in September 2010.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Commitment and Contingencies

From time to time we are subject to legal proceedings and claims in the ordinary course of business. In our opinion, the amount of ultimate expense with respect to any current legal proceedings and
claims, if determined adversely, will not have a significant adverse effect on our financial position or results of operations.

Liquidity
and Capital Resources

Cash, cash equivalents and marketable securities consist of the following (in thousands):



|                                                 |  |                   |         |  |               |   |         | 
|------------------------------------------------ |  | ----------------- | ------- |  | ------------- | - | ------- | 
|                                                 |  | September 30,2010 |         |  | March 31,2010 |  
|Cash and cash equivalents                        |  | $                 | 114,043 |  |               | $ | 63,322  | 
|Short-term marketable securities                 |  |                   | 53,261  |  |               |   | 69,875  | 
|Long-term marketable securities                  |  |                   | 28,702  |  |               |   | 37,354  | 
|                                                 |  |                   |         |  |               |   |         | 
|Cash, cash equivalents and marketable securities |  | $                 | 196,006 |  |               | $ | 170,551 | 
|                                                 |  |                   |         |  |               |   |         | 

At September 30, 2010, we had a revolving credit facility with a syndicate of lenders led by KeyBank
National Association, or KeyBank, which allows us to borrow up to $10 million for working capital purposes and to obtain letters of credit subject to a sublimit. Amounts outstanding under the facility bear interest at a floating interest rate
dependent upon, at our election, LIBOR or KeyBanks prime rate, in each case plus a margin, and are collateralized by substantially all of our assets. Under the agreement, we are required to comply with certain financial covenants which require
that we maintain minimum certain amounts of liquidity, the most restrictive of which are a minimum fixed charge coverage ratio of no less than 1.25 to 1.00 and a maximum leverage ratio of less than 3.00 to 1.00. As of September 30, 2010, we
were in compliance with such covenants. As of September 30, 2010, no amounts were outstanding under the revolving credit facility.

Cash, cash equivalents, and marketable securities increased by $25.5 million from March 31, 2010 to September 30, 2010. While cash and cash equivalents increased by $50.7 million, short and
long-term marketable securities decreased in total by $25.2 million.

Our long-term marketable securities include investments
in auction rate securities. Beginning in February 2008 and continuing through September 30, 2010, auctions have failed resulting in a lack of short-term liquidity for these securities, which has caused us to classify them as long term on our
consolidated balance sheet. As of September 30, 2010, our auction rate securities consisted of four positions issued by municipal agencies with a total par value of $24.1 million and a current estimated market value totaling $21.5 million. The
auction rate securities held by NetScout at September 30, 2010 have maturity dates ranging from December 2032 through



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December 2039. As of September 30, 2010, these investments have investment grade ratings ranging from AAA to A. These investments are collateralized by student loans with underlying support
by the federal government through the Federal Family Education Loan Program and by monoline insurance companies. We have the ability and intent to hold these securities until a recovery in the auction process or other liquidity event occurs. The
fair value of these securities has been estimated by management based on the assumptions disclosed in Note 4 to our consolidated financial statements. We will continue to analyze our auction rate securities each reporting period for impairment, and
we may be required to record an impairment charge in the consolidated statement of operations if the decline in fair value is determined to be other-than-temporary. The estimated fair value of our auction rate securities could change significantly
based on market and economic conditions, including changes in market rates, the estimated timing until a liquidity event, the discount factor associated with illiquidity and the credit ratings of our securities. There is no assurance as to when
liquidity will return to this investment class, and therefore, we continue to monitor and evaluate these securities. Based on our expected operating cash flows, and our other sources of cash, we do not expect the lack of liquidity in these
investments to affect our ability to execute our current business plan.



|                                                    |  |                                                     |        |   |      |   |        |  
|--------------------------------------------------- |  | --------------------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                    |  | Six Months EndedSeptember 30,(Dollars in Thousands) |       
|                                                    |  | 2010                                                |        |   | 2009 |  
|Net cash provided by operating activities           |  | $                                                   | 31,932 |   |      | $ | 17,084 |  
|Net cash provided by (used in) investing activities |  | $                                                   | 22,556 |   |      | $ | (8,010 | )
|Net cash used in financing activities               |  | $                                                   | (3,767 | ) |      | $ | (6,598 | )

Net cash provided by operating
activities

Net cash provided by operating activities amounted to $31.9 million and $17.1 million during the six months
ended September 30, 2010 and 2009, respectively. The primary sources of operating cash flow in the six months ended September 30, 2010 included net income of $15.4 million, adjusted to exclude the effects of non-cash items of $12.0
million, including depreciation and amortization, share-based compensation expense, deferred income taxes and loss on disposal of fixed assets, a $24.1 million decrease in accounts receivable resulting from increased cash collections and decreased
billings, offset by a $2.5 million decrease in accrued compensation resulting from the timing of payments for payroll, commissions, and the fiscal 2010 incentive compensation payout, and a $15.0 million decrease in deferred revenue. We entered our
fiscal year 2011 with record receivables on strong service billings during the quarter ended March 31, 2010, which included significant early and multi-year maintenance renewals. The overall increase in cash provided by operating activities is
attributable to entering the period with a record accounts receivable balance on March 31, 2010. Accounts receivable at March 31, 2010 was $65.6 million, compared to $41.4 million at September 30, 2010.

Net cash provided by investing activities

Net cash provided by investing activities was $22.6 million for the six months ended September 30, 2010. This includes the proceeds from the maturity of marketable securities due to cash management
activities of $55.7 million offset by the purchase of marketable securities of $29.1 million and the purchase of fixed assets to support our infrastructure of $4.0 million.

Net cash used in financing activities

Net cash used in financing
activities was $3.8 million for the six months ended September 30, 2010. The primary outflow was due to the repayment of $5.0 million of our long-term debt with KeyBank, offset by a tax benefit from stock options exercised of $640 thousand and
proceeds from the exercise of stock options in the amount of $593 thousand.



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Liquidity

We believe that our cash balances, short-term marketable securities classified as available-for-sale and future cash flows generated by
operations will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and scheduled principal and interest payments on our debt for at least the next 12 months. If demand for our product were to decrease
substantially, our ability to generate cash flow sufficient for our short-term working capital and expenditure needs could be materially impacted.

Additionally, 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 such as our acquisition of Network General. If our existing sources of liquidity are insufficient to satisfy our liquidity requirements, we may seek
to sell additional equity or debt securities. The sale of additional equity or debt securities could result in additional dilution to our stockholders.

At September 30, 2010, we had foreign currency forward contracts with notional amounts totaling $5.9 million. The valuation of outstanding foreign currency forward contracts at September 30,
2010 resulted in a liability balance of $42 thousand, reflecting unfavorable contract rates in comparison to current market rates at this date, and an asset balance of $77 thousand, reflecting favorable contract rates in comparison to current market
rates. The counterparty to these forward contracts is a large multinational commercial bank, and we believe the risk of nonperformance is not material. However, we cannot be assured that the financial institution will not be impacted by changes in
the economic environment.

Recently Issued Accounting Pronouncements

Fair Value Disclosures. In January 2010, the Financial Accounting Standards Board, or FASB, issued amended standards requiring
additional fair value disclosures. The amended standards require disclosures of transfers in and out of Levels I and II of the fair value hierarchy, as well as requiring gross basis disclosures for purchases, sales, issuances and settlements within
the Level III reconciliation which will replace the net presentation format. Additionally, the update clarifies the requirement to determine the level of disaggregation for fair value measurement disclosures and to disclose valuation techniques and
inputs used for both recurring and nonrecurring fair value measurements in either Level II or Level III. We adopted the new guidance in the fourth quarter of our fiscal year 2010, except for the gross presentation of the Level III rollforward
information which is effective for fiscal years beginning after December 15, 2010 (fiscal year 2012 for NetScout). Because these new standards are related primarily to disclosures, their adoption has not had and is not expected to have a
significant impact on our financial position or results of operations.



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

Market Risk. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our primary market risk exposures are in the
areas of illiquidity of auction rate securities, 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 and marketable securities. Our long-term marketable securities, which consist primarily of auction rate securities, are stated at fair value based on risk adjusted discounted cash flow calculations. Prior to
February 2008, these securities typically were stated at par value. While we continue to earn interest on auction rate securities at the maximum contractual rate, these securities are not currently trading and therefore do not currently have a
readily determinable market value. Accordingly, par value no longer approximates the estimated fair value of auction rate securities. As a result of their illiquidity, we have recorded a temporary impairment at September 30, 2010 against the
carrying value of our auction rate securities.

Credit Risk. Our cash equivalents and marketable securities consist
primarily of money market instruments, U.S. Treasury bills, certificates of deposit, commercial paper, corporate bonds, municipal obligations and student loan backed auction rate securities.



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Additional information
regarding auction rate securities held by NetScout at September 30, 2010 is detailed in Note 4 to the consolidated financial statements.

At September 30, 2010 and periodically throughout the year, we have maintained cash balances in various operating accounts in excess of federally insured limits. We limit the amount of credit
exposure with any one financial institution by evaluating the creditworthiness of the financial institutions with which we invest.

Interest Rate Risk. We are exposed to market risks related to fluctuations in interest rates related to our term loan with KeyBank. As of September 30, 2010, we owed $74.4 million on this loan
with an interest rate of 2.75% effective September 30, 2010 through March 31, 2011, the next LIBOR reset date. A sensitivity analysis was performed on the outstanding portion of our debt obligation as of September 30, 2010 and 2009.
Should the current weighted average interest rate increase or decrease by 10%, the resulting annual increase or decrease to interest expense would be approximately $192 thousand and $272 thousand as of September 30, 2010 and 2009, respectively.

Foreign Currency Exchange Risk. As a result of our foreign operations, we face exposure to movements in foreign
currency exchange rates, primarily the Euro, British Pound, Canadian Dollar and Indian Rupee. The current exposures arise primarily from expenses denominated in foreign currencies. NetScout currently engages in foreign currency hedging activities in
order to limit these exposures.

As of September 30, 2010, we had foreign currency forward contracts with notional
amounts totaling $5.9 million. The valuation of outstanding foreign currency forward contracts at September 30, 2010 resulted in a liability balance of $42 thousand, reflecting unfavorable contract rates in comparison to current market rates at
this date and an asset balance of $77 thousand reflecting favorable rates in comparison to current market rates. At September 30, 2009, we did not have any foreign currency forward contracts.

We do not use derivative financial instruments for speculative trading purposes. The counterparty to these forward contracts is a
multinational commercial bank. We believe the risk of counterparty nonperformance is not material. However, we cannot be assured that the financial institution will not be further impacted by the negative economic environment.



|Item 4. | Controls and Procedures
|------- | -----------------------

As of September 30, 2010, NetScout, under the supervision and with the participation of our management, including the Companys principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based upon that evaluation, our
principal executive officer and principal financial officer concluded that, as of September 30, 2010, our disclosure controls and procedures were effective in ensuring that material information relating to NetScout, including its consolidated
subsidiaries, required to be disclosed by NetScout 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 SECs rules and forms, including ensuring
that such material information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal controls that occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.



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PART II:
OTHER INFORMATION



|Item 1A. | Risk Factors
|-------- | ------------

In
addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended March 31,
2010. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. There have been no material changes to those risk factors since we filed our Annual Report on Form
10-K. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our
business, financial condition or operating results.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

During the second quarter of fiscal year 2010, the Company did not repurchase any shares of its outstanding common stock pursuant to its open market stock repurchase program further described above in
Note 11 to the condensed consolidated financial statements attached hereto.



|Item 6. | Exhibits
|------- | --------



|(a) | Exhibits
|--- | --------



|     |  |                                                                                                                                                                                                                                                                                                                          
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Third Amendment Agreement, dated August 12, 2010, to that certain Lease, dated August 17, 2000, as amended, between the Company and Westford West I Limited Partnership, as
successor to Arturo J. Gutierrez and John A. Cataldo, Trustees of Nashoba Westford Realty Trust, u/d/t dated April 27, 2000 (filed herewith).
|     | 
|31.1 |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                
|     | 
|31.2 |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                
|     | 
|32.1 |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).                                                                                                                                                                                                                            
|     | 
|32.2 |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).                                                                                                                                                                                                                            



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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: November 9, 2010 |  |  |  | /s/ Anil K. Singhal                                                                                
|                       |  |  |  | Anil K. Singhal                                                                                    
|                       |  |  |  | President, Chief Executive Officer and Chairman
(Principal Executive Officer)                      
|                       |  | 
|Date: November 9, 2010 |  |  |  | /s/ David P. Sommers                                                                               
|                       |  |  |  | David P. Sommers                                                                                   
|                       |  |  |  | Senior Vice President, General Operations and
Chief Financial Officer
(Principal Financial Officer)
|                       |  | 
|Date: November 9, 2010 |  |  |  | /s/ Jean Bua                                                                                       
|                       |  |  |  | Jean Bua                                                                                           
|                       |  |  |  | Vice President, Finance and Chief Accounting Officer
(Principal Accounting Officer)                



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                              
|10.1        |  | Third Amendment Agreement, dated August 12, 2010, to that certain Lease, dated August 17, 2000, as amended, between the Company and Westford West I Limited Partnership, as
successor to Arturo J. Gutierrez and John A. Cataldo, Trustees of Nashoba Westford Realty Trust, u/d/t dated April 27, 2000 (filed herewith).
|            | 
|31.1        |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                
|            | 
|31.2        |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                
|            | 
|32.1        |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).                                                                                                                                                                                                                            
|            | 
|32.2        |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).                                                                                                                                                                                                                            



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