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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



|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
|- | ----------------------------------------------------------------------------------------

(Commission file number: 000-30931)

OPNET TECHNOLOGIES, INC.

(Exact name of registrant as specified in its
charter)



|                                                               |  |                                                          |  |                                     
|-------------------------------------------------------------- |  | -------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 7372                                                     |  | 52-1483235                          
|(State or other jurisdiction of incorporation or organization) |  | (Primary Standard Industrial Classification Code Number) |  | (I.R.S. Employer Identification No.)

7255 Woodmont Avenue

Bethesda, MD 20814

(Address of principal executive office)

(240) 497-3000

(Registrants telephone number, including area code)

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 definitions of large accelerated filer, accelerated filer, or smaller reporting company in Rule 12b-2 of the Exchange Act (check one).

Large accelerated filer   ̈    Accelerated filer  x    Non-accelerated filer   ̈    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 of the registrants common stock outstanding on November 2, 2010 was 21,589,046.









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TABLE OF CONTENTS



|     |  |                                                                                                                |  |      |    | 
|---- |  | -------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|     |  | PART I                                                                                                         |  |      |    | 
|     |  | FINANCIAL INFORMATION                                                                                          |  |      |    | 
|ITEM |  |                                                                                                                |  | Page |   
|1.   |  | Condensed Consolidated Financial Statements (unaudited)                                                        |  |      | 3  | 
|     |  |                                                                                                               
|     |  | 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 2009 |  |      | 4  | 
|     |  |                                                                                                               
|     |  | Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended September 30, 2010 and 2009 |  |      | 5  | 
|     |  |                                                                                                               
|     |  | Notes to Condensed Consolidated Financial Statements                                                           |  |      | 6  | 
|     |  |                                                                                                               
|2.   |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                          |  |      | 19 | 
|     |  |                                                                                                               
|3.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  |      | 30 | 
|     |  |                                                                                                               
|4.   |  | Controls and Procedures                                                                                        |  |      | 30 | 
|     |  |                                                                                                               
|     |  | PART II                                                                                                        |  |      |    | 
|     |  | OTHER INFORMATION                                                                                              |  |      |    | 
|     |  |                                                                                                               
|1.   |  | Legal Proceedings                                                                                              |  |      | 32 | 
|     |  |                                                                                                               
|1A.  |  | Risk Factors                                                                                                   |  |      | 32 | 
|     |  |                                                                                                               
|2.   |  | Unregistered Sales of Securities and Use of Proceeds                                                           |  |      | 33 | 
|     |  |                                                                                                               
|3.   |  | Defaults Upon Senior Securities                                                                                |  |      | 33 | 
|     |  |                                                                                                               
|4.   |  | Removed and Reserved                                                                                           |  |      | 33 | 
|     |  |                                                                                                               
|5.   |  | Other Information                                                                                              |  |      | 33 | 
|     |  |                                                                                                               
|6.   |  | Exhibits                                                                                                       |  |      | 33 | 
|     |  |                                                                                                               
|     |  | Signature                                                                                                      |  |      | 34 | 
|     |  |                                                                                                               
|     |  | Exhibit Index                                                                                                  |  |      | 35 | 



2



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PART I. FINANCIAL
INFORMATION



|ITEM 1. | Condensed Consolidated Financial Statements
|------- | -------------------------------------------

OPNET TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED
BALANCE SHEETS

(in thousands, except share data)

(unaudited)



|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                                                                                                                                                      |  | September 30,2010 |         |   | March 31,2010 |  
|ASSETS                                                                                                                                                                                                                                                |  |                   |         |   |               |   |         |  
|Current assets:                                                                                                                                                                                                                                       |  |                   |         |   |               |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                             |  | $                 | 74,733  |   |               | $ | 104,681 |  
|Marketable securities                                                                                                                                                                                                                                 |  |                   | 33,591  |   |               |   |        |  
|Accounts receivable, net of $536 and $336 in allowance for doubtful accounts at September 30 and March 31, 2010,
respectively                                                                                                                         |  |                   | 29,302  |   |               |   | 28,015  |  
|Unbilled accounts receivable                                                                                                                                                                                                                          |  |                   | 2,404   |   |               |   | 4,765   |  
|Inventory                                                                                                                                                                                                                                             |  |                   | 417     |   |               |   | 872     |  
|Deferred income taxes, prepaid expenses and other current assets                                                                                                                                                                                      |  |                   | 3,490   |   |               |   | 2,816   |  
|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  
|                                                                                                                                                                                                                                                      |  |                   | 143,937 |   |               |   | 141,149 |  
|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  
|Property and equipment, net                                                                                                                                                                                                                           |  |                   | 12,994  |   |               |   | 13,245  |  
|Intangible assets, net                                                                                                                                                                                                                                |  |                   | 5,649   |   |               |   | 5,109   |  
|Goodwill                                                                                                                                                                                                                                              |  |                   | 15,406  |   |               |   | 14,639  |  
|Deferred income taxes and other assets                                                                                                                                                                                                                |  |                   | 4,447   |   |               |   | 4,210   |  
|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  
|Total assets                                                                                                                                                                                                                                          |  | $                 | 182,433 |   |               | $ | 178,352 |  
|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                  |  |                   |         |   |               |   |         |  
|Current liabilities:                                                                                                                                                                                                                                  |  |                   |         |   |               |   |         |  
|Accounts payable                                                                                                                                                                                                                                      |  | $                 | 1,395   |   |               | $ | 1,405   |  
|Accrued liabilities                                                                                                                                                                                                                                   |  |                   | 10,946  |   |               |   | 10,932  |  
|Other income taxes                                                                                                                                                                                                                                    |  |                   | 302     |   |               |   | 498     |  
|Deferred rent                                                                                                                                                                                                                                         |  |                   | 279     |   |               |   | 432     |  
|Deferred revenue                                                                                                                                                                                                                                      |  |                   | 36,001  |   |               |   | 38,425  |  
|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  
|Total current liabilities                                                                                                                                                                                                                             |  |                   | 48,923  |   |               |   | 51,692  |  
|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  
|Accrued liabilities                                                                                                                                                                                                                                   |  |                   | 78      |   |               |   | 145     |  
|Deferred rent                                                                                                                                                                                                                                         |  |                   | 2,070   |   |               |   | 2,138   |  
|Deferred revenue                                                                                                                                                                                                                                      |  |                   | 4,222   |   |               |   | 4,946   |  
|Other income taxes                                                                                                                                                                                                                                    |  |                   | 650     |   |               |   | 755     |  
|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  
|Total liabilities                                                                                                                                                                                                                                     |  |                   | 55,943  |   |               |   | 59,676  |  
|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  
|Commitments and contingencies (Note 12)                                                                                                                                                                                                               |  |                   |         |   |               |   |         |  
|Stockholders equity:                                                                                                                                                                                                                                 |  |                   |         |   |               |   |         |  
|Common stock-par value $0.001; 100,000,000 shares authorized; 29,167,226 and 28,386,958 shares issued at September 30 and
March 31, 2010, respectively; 21,538,619 and 20,955,452 shares outstanding at September 30 and March 31, 2010, respectively |  |                   | 29      |   |               |   | 28      |  
|Additional paid-in capital                                                                                                                                                                                                                            |  |                   | 109,554 |   |               |   | 99,229  |  
|Retained earnings                                                                                                                                                                                                                                     |  |                   | 37,917  |   |               |   | 37,920  |  
|Accumulated other comprehensive loss                                                                                                                                                                                                                  |  |                   | (604    | ) |               |   | (999    | )
|Treasury stock, at cost7,628,607 and 7,431,506 shares at September 30 and March 31, 2010,
respectively                                                                                                                                               |  |                   | (20,406 | ) |               |   | (17,502 | )
|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  
|Total stockholders equity                                                                                                                                                                                                                            |  |                   | 126,490 |   |               |   | 118,676 |  
|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                                                            |  | $                 | 182,433 |   |               | $ | 178,352 |  
|                                                                                                                                                                                                                                                      |  |                   |         |   |               |   |         |  



See accompanying notes to
condensed consolidated financial statements.



3



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OPNET TECHNOLOGIES, 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                                                        |  | $                               | 17,673 |   |                               | $ | 11,672 |      |  | $ | 30,645 |   |  | $ | 20,586 | 
|Product updates, technical support and services                |  |                                 | 13,050 |   |                               |   | 11,653 |      |  |   | 25,372 |   |  |   | 22,953 | 
|Professional services                                          |  |                                 | 5,395  |   |                               |   | 7,303  |      |  |   | 11,186 |   |  |   | 14,816 | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Total revenue                                                  |  |                                 | 36,118 |   |                               |   | 30,628 |      |  |   | 67,203 |   |  |   | 58,355 | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|                                                               |  |                                 |        |  
|Cost of revenue:                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Product                                                        |  |                                 | 2,487  |   |                               |   | 1,238  |      |  |   | 3,779  |   |  |   | 2,344  | 
|Product updates, technical support and services                |  |                                 | 1,270  |   |                               |   | 1,176  |      |  |   | 2,558  |   |  |   | 2,403  | 
|Professional services                                          |  |                                 | 4,195  |   |                               |   | 4,857  |      |  |   | 8,497  |   |  |   | 9,888  | 
|Amortization of acquired technology and customer relationships |  |                                 | 499    |   |                               |   | 481    |      |  |   | 958    |   |  |   | 917    | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Total cost of revenue                                          |  |                                 | 8,451  |   |                               |   | 7,752  |      |  |   | 15,792 |   |  |   | 15,552 | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Gross profit                                                   |  |                                 | 27,667 |   |                               |   | 22,876 |      |  |   | 51,411 |   |  |   | 42,803 | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|                                                               |  |                                 |        |  
|Operating expenses:                                            |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Research and development                                       |  |                                 | 8,578  |   |                               |   | 7,681  |      |  |   | 16,641 |   |  |   | 15,567 | 
|Sales and marketing                                            |  |                                 | 11,402 |   |                               |   | 10,038 |      |  |   | 21,852 |   |  |   | 20,341 | 
|General and administrative                                     |  |                                 | 3,035  |   |                               |   | 2,954  |      |  |   | 5,958  |   |  |   | 5,316  | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Total operating expenses                                       |  |                                 | 23,015 |   |                               |   | 20,673 |      |  |   | 44,451 |   |  |   | 41,224 | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|                                                               |  |                                 |        |  
|Income from operations                                         |  |                                 | 4,652  |   |                               |   | 2,203  |      |  |   | 6,960  |   |  |   | 1,579  | 
|Interest and other (expense) income, net                       |  |                                 | (1     | ) |                               |   | (56    | )    |  |   | (31    | ) |  |   | 12     | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Income before provision for income taxes                       |  |                                 | 4,651  |   |                               |   | 2,147  |      |  |   | 6,929  |   |  |   | 1,591  | 
|Provision for income taxes                                     |  |                                 | 1,735  |   |                               |   | 614    |      |  |   | 2,675  |   |  |   | 416    | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Net income                                                     |  | $                               | 2,916  |   |                               | $ | 1,533  |      |  | $ | 4,254  |   |  | $ | 1,175  | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Basic net income per common share                              |  | $                               | 0.14   |   |                               | $ | 0.07   |      |  | $ | 0.20   |   |  | $ | 0.06   | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Diluted net income per common share                            |  | $                               | 0.13   |   |                               | $ | 0.07   |      |  | $ | 0.19   |   |  | $ | 0.05   | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Basic weighted average common shares outstanding               |  |                                 | 21,251 |   |                               |   | 20,535 |      |  |   | 21,090 |   |  |   | 20,507 | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 
|Diluted weighted average common shares outstanding             |  |                                 | 21,788 |   |                               |   | 20,733 |      |  |   | 21,675 |   |  |   | 20,684 | 
|                                                               |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        | 



See accompanying notes to
condensed consolidated financial statements.



4



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OPNET TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                  |      |                               |         |      |  |   |        |  
|--------------------------------------------------------------------------------- | ---- | ----------------------------- | ------- | ---- |  | - | ------ | -
|                                                                                  |      | Six Months
EndedSeptember 30, |        
|                                                                                  | 2010 |                               |         | 2009 | 
|Cash flows from operating activities:                                             |      |                               |         |      |  |   |        |  
|Net income                                                                        |      | $                             | 4,254   |      |  | $ | 1,175  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |      |                               |         |      |  |   |        |  
|Depreciation and amortization                                                     |      |                               | 2,774   |      |  |   | 2,652  |  
|Provision for losses on accounts receivable                                       |      |                               | 276     |      |  |   | 61     |  
|Deferred income taxes                                                             |      |                               | (597    | )    |  |   | 14     |  
|Non-cash stock-based compensation expense                                         |      |                               | 791     |      |  |   | 708    |  
|Non-cash accretion of market discount on marketable securities                    |      |                               | 8       |      |  |   | (1     | )
|(Gain)/loss on disposition of fixed assets                                        |      |                               | (3      | )    |  |   | 7      |  
|Changes in assets and liabilities, net of assets acquired:                        |      |                               |         |      |  |   |        |  
|Accounts receivable                                                               |      |                               | 835     |      |  |   | (4,150 | )
|Inventory                                                                         |      |                               | 499     |      |  |   | (319   | )
|Prepaid expenses and other current assets                                         |      |                               | (25     | )    |  |   | (1,191 | )
|Other assets                                                                      |      |                               | (470    | )    |  |   | (44    | )
|Accounts payable                                                                  |      |                               | 69      |      |  |   | 264    |  
|Accrued liabilities                                                               |      |                               | 160     |      |  |   | (119   | )
|Accrued income taxes                                                              |      |                               | 1,083   |      |  |   | 1,099  |  
|Deferred revenue                                                                  |      |                               | (3,227  | )    |  |   | 1,760  |  
|Deferred rent                                                                     |      |                               | (221    | )    |  |   | (168   | )
|Excess tax benefit from exercise of stock options                                 |      |                               | (215    | )    |  |   |       |  
|                                                                                  |      |                               |         |      |  |   |        |  
|Net cash provided by operating activities                                         |      |                               | 5,991   |      |  |   | 1,748  |  
|                                                                                  |      |                               |         |      |  |   |        |  
|Cash flows from investing activities:                                             |      |                               |         |      |  |   |        |  
|Acquisition of business                                                           |      |                               | (2,225  | )    |  |   |       |  
|Acquired technology                                                               |      |                               |        |      |  |   | (381   | )
|Purchase of property and equipment                                                |      |                               | (1,838  | )    |  |   | (1,347 | )
|Purchase of investments                                                           |      |                               | (35,622 | )    |  |   |       |  
|Proceeds from sale/maturity of investments                                        |      |                               | 2,031   |      |  |   | 1,000  |  
|                                                                                  |      |                               |         |      |  |   |        |  
|Net cash used in investing activities                                             |      |                               | (37,654 | )    |  |   | (728   | )
|                                                                                  |      |                               |         |      |  |   |        |  
|Cash flows from financing activities:                                             |      |                               |         |      |  |   |        |  
|Acquisition of treasury stock                                                     |      |                               | (2,904  | )    |  |   | (155   | )
|Proceeds from exercise of common stock options                                    |      |                               | 7,579   |      |  |   | 130    |  
|Excess tax benefit from exercise of stock options                                 |      |                               | 215     |      |  |   |       |  
|Issuance of common stock under employee stock purchase plan                       |      |                               | 727     |      |  |   | 625    |  
|Payment of dividend to stockholders                                               |      |                               | (4,257  | )    |  |   | (3,729 | )
|                                                                                  |      |                               |         |      |  |   |        |  
|Net cash provided by (used in) financing activities                               |      |                               | 1,360   |      |  |   | (3,129 | )
|                                                                                  |      |                               |         |      |  |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                      |      |                               | 355     |      |  |   | 611    |  
|                                                                                  |      |                               |         |      |  |   |        |  
|Net decrease in cash and cash equivalents                                         |      |                               | (29,948 | )    |  |   | (1,498 | )
|Cash and cash equivalents, beginning of period                                    |      |                               | 104,681 |      |  |   | 90,990 |  
|                                                                                  |      |                               |         |      |  |   |        |  
|Cash and cash equivalents, end of period                                          |      | $                             | 74,733  |      |  | $ | 89,492 |  
|                                                                                  |      |                               |         |      |  |   |        |  



See accompanying notes to
condensed consolidated financial statements.



5



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OPNET TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30,
2010

(unaudited)



|1. | Organization and Significant Accounting Policies
|-- | ------------------------------------------------

Organization.OPNET Technologies, Inc. (hereafter, the Company or OPNET), is a provider of software products and related services for information technology service assurance. The
Companys software products address application performance management, network planning, engineering and operations, and network research and development. The Company sells products to corporate enterprises, government and defense agencies,
network service providers, and network equipment manufacturers. The Company markets software products and related services in North America primarily through a direct sales force and, to a lesser extent, several resellers and original equipment
manufacturers. Internationally, the Company conducts research and development through a wholly-controlled subsidiary in Ghent, Belgium and markets software products and related services through (1) wholly-owned subsidiaries with offices in
Paris, France; Frankfurt, Germany; Slough, United Kingdom; and Singapore; (2) an office in Beijing, China; (3) third-party distributors; and (4) value-added resellers. The Company is headquartered in Bethesda, Maryland and has offices
in Cary, North Carolina; Dallas, Texas; Santa Clara, California; Nashua, New Hampshire; and Colorado Springs, Colorado.

The
accompanying condensed consolidated financial statements include the Companys results and the results of the Companys wholly-owned and wholly-controlled subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation. The interim condensed consolidated financial statements included herein are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and applicable rules
and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or
omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the
Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2010 filed with the SEC on June 4, 2010. The March 31, 2010 condensed consolidated balance sheet included herein was derived from the audited financial
statements as of that date, but does not include all disclosures, including notes, required by GAAP. In the opinion of management, these interim condensed consolidated financial statements reflect all adjustments of a normal and recurring nature
necessary to present fairly the Companys results for the interim periods. The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amount of revenue and expenses during the reporting periods. Actual results could differ from those estimates. In addition, the
Companys operating results for the three and six months ended September 30, 2010 may not be indicative of the operating results for the full fiscal year or any other future period.

Supplemental Cash Flow Information



|                                                             |  |                                 |       |  |                               |   |      |      |  |   |       |  |  |   |      |  
|------------------------------------------------------------ |  | ------------------------------- | ----- |  | ----------------------------- | - | ---- | ---- |  | - | ----- |  |  | - | ---- | -
|                                                             |  | Three Months EndedSeptember 30, |       |  | Six Months EndedSeptember 30, |  
|                                                             |  | 2010                            |       |  | 2009                          |   |      | 2010 |  |   | 2009  | 
|                                                             |  | (in thousands)                  |      
|Cash paid during the period:                                 |  |                                 |       |  |                               |   |      |      |  |   |       |  |  |   |      |  
|Income tax payments (refunds)                                |  | $                               | 1,748 |  |                               | $ | (700 | )    |  | $ | 1,969 |  |  | $ | (691 | )
|Non-cash financing and investing activities:                 |  |                                 |       |  |                               |   |      |      |  |   |       |  |  |   |      |  
|Restricted stock issued                                      |  | $                               | 152   |  |                               | $ | 90   |      |  | $ | 606   |  |  | $ | 204  |  
|Accrued liability for the purchase of property and equipment |  | $                               | 34    |  |                               | $ | 16   |      |  | $ | 34    |  |  | $ | 51   |  



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|2. | Significant Accounting Policies
|-- | -------------------------------

See the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2010 filed with the SEC on June 4, 2010 for an overview of the significant accounting policies.



|3. | Recently Issued Accounting Pronouncements
|-- | -----------------------------------------

In October 2009, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU 2009-14, Certain Revenue Arrangements That Include Software Elements, (included
in Accounting Standards Codification, or ASC, 985 Software) and Accounting Standards Update, or ASU, 2009-13, Multiple Deliverable Revenue Arrangements, which amends EITF Issue No. 08-1, Revenue Arrangements With
Multiple Deliverables (as codified in ASC 605 Revenue Recognition). ASU 2009-14 amends the scoping guidance for software arrangements to exclude tangible products that contain software elements and nonsoftware elements that
function together to interdependently deliver the products essential functionality. ASU 2009-13 amends the current guidance on arrangements with multiple elements to (1) eliminate the separation criterion that requires entities to
establish objective and reliable evidence of fair value for undelivered elements, (2) establish a selling price hierarchy to help entities allocate arrangement consideration to the separate units of account, (3) require the relative
selling price allocation method for all arrangements (i.e., eliminate the residual method), and (4) significantly expand required disclosures. ASU 2009-14 and ASU 2009-13 will be effective for the first annual reporting period beginning on
or after June 15, 2010, which the Company will adopt on April 1, 2011. Early adoption is permitted. The Company has determined that ASU 2009-14 and ASU 2009-13 will not have a material impact on its results of operations or financial
condition.



|4. | Stock-Based Compensation
|-- | ------------------------

In September 2009, the Companys stockholders approved the adoption of the 2010 Stock Incentive Plan, or the 2010 Plan, in response
to the pending expiration of the Companys Amended and Restated 2000 Stock Incentive Plan, or the 2000 Plan. The 2010 Plan provides for the granting of stock options, restricted stock and other stock-based awards to employees, officers,
directors, consultants and advisors. Subject to specified adjustments, the number of shares initially set aside and reserved for issuance under the 2010 Plan is 2,150,000 shares, which approximated the number of shares available for issuance under
the 2000 Plan as of January 1, 2010, the effective date of the 2010 Plan. The Companys Board of Directors, or the Board, approved a resolution to make no further grants for options or stock awards under the 2000 Plan upon approval of the
2010 Plan.

The number of shares available for issuance under the 2010 Plan will automatically increase from time to time by a
number equal to (i) in the event any outstanding stock option granted under the 2000 Plan should for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the number of shares that are not
acquired under such stock option and (ii) in the event stock that has been issued to a participant under the 2000 Plan pursuant to restricted or unrestricted stock awards is subsequently forfeited or acquired by the Company as a result of a
failure to vest or satisfy any other contingency, the number of such shares. The maximum aggregate number of additional shares that may become available for issuance in these situations is 2,000,000 shares, subject to specified adjustments.

The number of shares available for issuance under the 2010 Plan will automatically increase on the first trading day of each
calendar year, beginning with 2011 and continuing through the term of the 2010 Plan, by an amount equal to the lesser of (i) three percent (3%) of the shares of the Companys common stock outstanding on the last trading day of the
preceding calendar year, or (ii) an amount determined by the Board; provided, however, that in no event shall any such annual increase exceed 1,000,000 shares. This provision, commonly referred to as an evergreen provision, is
similar to the provision in the 2000 Plan.

Options granted pursuant to the 2010 Plan will be exercisable at such times and
subject to such terms and conditions as the Board may specify in the applicable option agreement, but no option may be granted for a term



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in excess of 10 years. The terms and conditions of any restricted stock awards granted under the 2010 Plan, including the conditions for repurchase or forfeiture and the issue price, if any, will
be determined by the Board. The Board also has the right to grant other stock awards pursuant to the 2010 Plan having such terms and conditions as the Board may determine, including the grant of fully vested shares, the grant of securities
convertible into shares of the Companys common stock and the grant of stock appreciation rights.

ASC 718, Stock
Compensation, requires an entity to recognize an expense within its statement of operations for all share-based payment arrangements, which include employee stock option plans, restricted stock grants, and employee stock purchase plans. The
Company has elected to use straight-line amortization of stock-based compensation expense for the entire award over the service period since the awards have only service conditions and graded vesting.

Compensation cost for option grants is recognized on a straight-line basis over the requisite service period for the entire award (from
the date of grant through the period of the last separately vesting portion of the grant). Compensation cost is recognized within the statement of operations in the same expense line as the cash compensation paid to the respective employees. ASC 718
also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation. The impact on compensation cost due to changes in the expected forfeiture rate will be recognized in the period that they become known.
The Company has concluded that its historical forfeiture rate is the best measure to estimate future forfeitures of granted stock options. The impact on compensation cost due to changes in the expected forfeiture rate of 10% will be recognized in
the period that they become known. The Company does not apply a forfeiture rate to the options granted to certain key executives or directors. The Company has concluded that historically certain key executives and directors will perform the
requisite service to vest in the award.

Excess tax benefits from the exercise of stock options are presented as a cash flow
from financing activity. For the three months ended September 30, 2010 excess tax benefits from the exercise of stock options were $85,000. For the six months ended September 30, 2010, excess tax benefits from the exercise of stock options
were $215,000. There were no excess tax benefits from the exercise of stock options for the three or six months ended September 30, 2009.

A summary of the total stock-based compensation expense for the three and six months ended September 30, 2010 and 2009 is as follows:



|                                    |  |                    |     |  |                   |   |     |                   |  |   |                   |  |  |   |     | 
|----------------------------------- |  | ------------------ | --- |  | ----------------- | - | --- | ----------------- |  | - | ----------------- |  |  | - | --- | 
|                                    |  | Three Months Ended |     |  | Six Months Ended  |  
|                                    |  | September 30,2010  |     |  | September 30,2009 |   |     | September 30,2010 |  |   | September 30,2009 | 
|                                    |  | (in thousands)     |    
|Restricted stock                    |  | $                  | 231 |  |                   | $ | 178 |                   |  | $ | 477               |  |  | $ | 441 | 
|Employee Stock Purchase Plan shares |  |                    | 106 |  |                   |   | 91  |                   |  |   | 211               |  |  |   | 255 | 
|Stock options                       |  |                    | 52  |  |                   |   | 12  |                   |  |   | 103               |  |  |   | 12  | 
|                                    |  |                    |     |  |                   |   |     |                   |  |   |                   |  |  |   |     | 
|Total stock-based compensation      |  | $                  | 389 |  |                   | $ | 281 |                   |  | $ | 791               |  |  | $ | 708 | 
|                                    |  |                    |     |  |                   |   |     |                   |  |   |                   |  |  |   |     | 

A summary of the total nonvested stock-based deferred compensation at September 30, 2010 and 2009 is as
follows:



|                                         |  |                   |       |  |                   |   |       | 
|---------------------------------------- |  | ----------------- | ----- |  | ----------------- | - | ----- | 
|                                         |  | September 30,2010 |       |  | September 30,2009 |  
|                                         |  | (in thousands)    |      
|Restricted stock                         |  | $                 | 1,318 |  |                   | $ | 1,255 | 
|Employee Stock Purchase Plan shares      |  |                   | 146   |  |                   |   | 159   | 
|Stock options                            |  |                   | 813   |  |                   |   | 1,019 | 
|                                         |  |                   |       |  |                   |   |       | 
|Total nonvested stock-based compensation |  | $                 | 2,277 |  |                   | $ | 2,433 | 
|                                         |  |                   |       |  |                   |   |       | 



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The deferred
compensation related to nonvested restricted stock, stock options, and the Companys 2000 Employee Stock Purchase Plan, or ESPP, shares at September 30, 2010 is expected to be recognized over a weighted average period of one year, three
years, and four months, respectively.

Stock Options

The Companys stock option programs are accounted for as equity awards. The expense is based on the grant-date fair value of the
options granted and is recognized over the requisite service period.

A summary of the option transactions for the three and
six months ended September 30, 2010 and 2009 is as follows:



|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |        |  |  |   |       | 
|---------------------------------- |  | ------------------------------------------------ | --------- | - | -------------------------------------------- | - | ----- | -------------------------------------------- |  |  | ----------------------- |  |  | -------------------------------------------------- | ------ |  |  | - | ----- | 
|                                   |  | Three Months Ended September 30, 2010            |          
|                                   |  | Options                                          |           |   | WeightedAverageExercise PricePer OptionShare |   |       | WeightedAverageRemainingContract Life(Years) |  |  | AggregateIntrinsicValue |  |  | WeightedAverageGrant DateFair ValuePer OptionShare |       
|                                   |  | (dollars in thousands, except per share amounts) |          
|Outstanding at beginning of period |  |                                                  | 2,052,912 |   |                                              | $ | 10.72 |                                              |  |  |                        |  |  | $                                                  | 16,812 |  |  | $ | 7.05  | 
|Granted                            |  |                                                  |          |   |                                              | $ |      |                                              |  |  |                        |  |  | $                                                  |       |  |  | $ |      | 
|Exercised                          |  |                                                  | (233,230  | ) |                                              | $ | 11.19 |                                              |  |  |                        |  |  | $                                                  | 1,420  |  |  | $ | 7.99  | 
|Forfeited or expired               |  |                                                  | (5,500    | ) |                                              | $ | 19.50 |                                              |  |  |                        |  |  | $                                                  |       |  |  | $ | 13.30 | 
|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |        |  |  |   |       | 
|Outstanding at end of period       |  |                                                  | 1,814,182 |   |                                              | $ | 10.64 |                                              |  |  | 2.81                    |  |  | $                                                  | 15,020 |  |  | $ | 6.91  | 
|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |        |  |  |   |       | 
|Exercisable at end of period       |  |                                                  | 1,539,182 |   |                                              | $ | 10.79 |                                              |  |  | 1.72                    |  |  | $                                                  | 12,520 |  |  | $ | 7.40  | 
|Nonvested at end of period         |  |                                                  | 275,000   |   |                                              | $ | 9.79  |                                              |  |  | 8.94                    |  |  | $                                                  | 2,500  |  |  | $ | 4.17  | 
|Nonvested expected to be exercised |  |                                                  | 247,500   |   |                                              | $ | 9.79  |                                              |  |  | 8.95                    |  |  | $                                                  | 1,213  |  |  | $ | 4.17  | 



|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |       |  |  |   |      | 
|---------------------------------- |  | ------------------------------------------------ | --------- | - | -------------------------------------------- | - | ----- | -------------------------------------------- |  |  | ----------------------- |  |  | -------------------------------------------------- | ----- |  |  | - | ---- | 
|                                   |  | Three Months Ended September 30, 2009            |          
|                                   |  | Options                                          |           |   | WeightedAverageExercise PricePer OptionShare |   |       | WeightedAverageRemainingContract Life(Years) |  |  | AggregateIntrinsicValue |  |  | WeightedAverageGrant DateFair ValuePer OptionShare |      
|                                   |  | (dollars in thousands, except per share amounts) |          
|Outstanding at beginning of period |  |                                                  | 2,518,604 |   |                                              | $ | 10.91 |                                              |  |  |                        |  |  | $                                                  | 3,414 |  |  | $ | 7.64 | 
|Granted                            |  |                                                  | 275,000   |   |                                              | $ | 9.79  |                                              |  |  |                        |  |  | $                                                  | 360   |  |  | $ | 4.17 | 
|Exercised                          |  |                                                  | (2,000    | ) |                                              | $ | 5.58  |                                              |  |  |                        |  |  | $                                                  | 6     |  |  | $ | 3.96 | 
|Forfeited or expired               |  |                                                  | (17,500   | ) |                                              | $ | 10.65 |                                              |  |  |                        |  |  | $                                                  | 12    |  |  | $ | 7.49 | 
|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |       |  |  |   |      | 
|Outstanding at end of period       |  |                                                  | 2,774,104 |   |                                              | $ | 10.80 |                                              |  |  | 3.18                    |  |  | $                                                  | 3,751 |  |  | $ | 7.30 | 
|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |       |  |  |   |      | 
|Exercisable at end of period       |  |                                                  | 2,499,104 |   |                                              | $ | 10.92 |                                              |  |  | 2.44                    |  |  | $                                                  | 3,391 |  |  | $ | 7.64 | 
|Nonvested at end of period         |  |                                                  | 275,000   |   |                                              | $ | 9.79  |                                              |  |  | 9.94                    |  |  | $                                                  | 360   |  |  | $ | 4.17 | 



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|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |        |  |  |   |       | 
|---------------------------------- |  | ------------------------------------------------ | --------- | - | -------------------------------------------- | - | ----- | -------------------------------------------- |  |  | ----------------------- |  |  | -------------------------------------------------- | ------ |  |  | - | ----- | 
|                                   |  | Six Months Ended September 30, 2010              |          
|                                   |  | Options                                          |           |   | WeightedAverageExercise PricePer OptionShare |   |       | WeightedAverageRemainingContract Life(Years) |  |  | AggregateIntrinsicValue |  |  | WeightedAverageGrant DateFair ValuePer OptionShare |       
|                                   |  | (dollars in thousands, except per share amounts) |          
|Outstanding at beginning of period |  |                                                  | 2,494,082 |   |                                              | $ | 10.86 |                                              |  |  |                        |  |  | $                                                  | 20,081 |  |  | $ | 7.31  | 
|Granted                            |  |                                                  |          |   |                                              | $ |      |                                              |  |  |                        |  |  | $                                                  |       |  |  | $ |      | 
|Exercised                          |  |                                                  | (670,550  | ) |                                              | $ | 11.33 |                                              |  |  |                        |  |  | $                                                  | 3,291  |  |  | $ | 8.30  | 
|Forfeited or expired               |  |                                                  | (9,350    | ) |                                              | $ | 19.50 |                                              |  |  |                        |  |  | $                                                  |       |  |  | $ | 13.30 | 
|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |        |  |  |   |       | 
|Outstanding at end of period       |  |                                                  | 1,814,182 |   |                                              | $ | 10.64 |                                              |  |  | 2.81                    |  |  | $                                                  | 15,020 |  |  | $ | 6.91  | 
|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |        |  |  |   |       | 
|Exercisable at end of period       |  |                                                  | 1,539,182 |   |                                              | $ | 10.79 |                                              |  |  | 1.72                    |  |  | $                                                  | 12,520 |  |  | $ | 7.40  | 
|Nonvested at end of period         |  |                                                  | 275,000   |   |                                              | $ | 9.79  |                                              |  |  | 8.94                    |  |  | $                                                  | 2,500  |  |  | $ | 4.17  | 



|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |       |  |  |   |      | 
|---------------------------------- |  | ------------------------------------------------ | --------- | - | -------------------------------------------- | - | ----- | -------------------------------------------- |  |  | ----------------------- |  |  | -------------------------------------------------- | ----- |  |  | - | ---- | 
|                                   |  | Six Months Ended September 30, 2009              |          
|                                   |  | Options                                          |           |   | WeightedAverageExercise PricePer OptionShare |   |       | WeightedAverageRemainingContract Life(Years) |  |  | AggregateIntrinsicValue |  |  | WeightedAverageGrant DateFair ValuePer OptionShare |      
|                                   |  | (dollars in thousands, except per share amounts) |          
|Outstanding at beginning of period |  |                                                  | 2,556,723 |   |                                              | $ | 10.89 |                                              |  |  |                        |  |  | $                                                  | 3,514 |  |  | $ | 7.62 | 
|Granted                            |  |                                                  | 275,000   |   |                                              | $ | 9.79  |                                              |  |  |                        |  |  | $                                                  | 360   |  |  | $ | 4.17 | 
|Exercised                          |  |                                                  | (20,813   | ) |                                              | $ | 6.25  |                                              |  |  |                        |  |  | $                                                  | 42    |  |  | $ | 4.39 | 
|Forfeited or expired               |  |                                                  | (36,806   | ) |                                              | $ | 11.56 |                                              |  |  |                        |  |  | $                                                  | 23    |  |  | $ | 8.07 | 
|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |       |  |  |   |      | 
|Outstanding at end of period       |  |                                                  | 2,774,104 |   |                                              | $ | 10.80 |                                              |  |  | 3.18                    |  |  | $                                                  | 3,751 |  |  | $ | 7.30 | 
|                                   |  |                                                  |           |   |                                              |   |       |                                              |  |  |                         |  |  |                                                    |       |  |  |   |      | 
|Exercisable at end of period       |  |                                                  | 2,499,104 |   |                                              | $ | 10.92 |                                              |  |  | 2.44                    |  |  | $                                                  | 3,391 |  |  | $ | 7.64 | 
|Nonvested at end of period         |  |                                                  | 275,000   |   |                                              | $ | 9.79  |                                              |  |  | 9.94                    |  |  | $                                                  | 360   |  |  | $ | 4.17 | 

During the three and
six months ended September 30, 2010, no stock options vested or were granted. During the three and six months ended September 30, 2009, no stock options vested and 275,000 stock options were granted.

To estimate the grant-date fair value of its stock options, the Company uses the Black-Scholes option-pricing model. The Black-Scholes
model estimates the per share fair value of an option on its date of grant based on the following: the options exercise price; the price of the underlying stock on the date of grant; the estimated dividend yield; a risk-free
interest rate; the estimated option term; and the expected volatility. For the risk-free interest rate, the Company uses a United States Treasury Bond due in the number of years equal to the options expected term. The estimated
option term is calculated based upon the simplified method set out in ASC 718. The Company uses the simplified method to determine the estimated option term because it lacks sufficient historical share option exercise data. To determine expected
volatility, the Company analyzes the historical volatility of its stock over the expected term of the option.

During the
three months ended September 30, 2010 and 2009, respectively, the Company received proceeds of approximately $2.6 million and $11,000 and issued 233,230 and 2,000 shares of common stock, respectively, pursuant to employee and director exercises
of stock options. During the six months ended September 30, 2010 and 2009, respectively, the Company received proceeds of approximately $7.6 million and $130,000 and issued 670,550 and 20,813 shares of common stock, respectively, pursuant to
employee and director exercises of stock options.



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Restricted Stock

The Companys restricted stock grants are accounted for as equity awards. The expense is based on the price of the
Companys common stock on the date of grant and is recognized on a straight-line basis over the requisite service period. The Companys restricted stock agreements do not contain any post-vesting restrictions.

A summary of the restricted stock grants for the three and six months ended September 30, 2010 and 2009 is as follows:



|                                 |  |                                      |         |   |                                         |   |       |                       |  |  |                                         |   |  |   |       | 
|-------------------------------- |  | ------------------------------------ | ------- | - | --------------------------------------- | - | ----- | --------------------- |  |  | --------------------------------------- | - |  | - | ----- | 
|                                 |  | Three Months EndedSeptember 30, 2010 |         |   | Six Months EndedSeptember 30, 2010      |  
|                                 |  | RestrictedStockGrants                |         |   | WeightedAverageGrant FairValue PerShare |   |       | RestrictedStockGrants |  |  | WeightedAverageGrant FairValue PerShare |  
|Nonvested at beginning of period |  |                                      | 181,496 |   |                                         | $ | 11.76 |                       |  |  | 183,797                                 |   |  | $ | 10.87 | 
|Granted                          |  |                                      | 9,000   |   |                                         | $ | 16.87 |                       |  |  | 39,829                                  |   |  | $ | 16.37 | 
|Vested                           |  |                                      | (28,493 | ) |                                         | $ | 10.92 |                       |  |  | (61,334                                 | ) |  | $ | 10.91 | 
|Forfeited                        |  |                                      |        |   |                                         | $ |      |                       |  |  | (289                                    | ) |  | $ | 13.30 | 
|                                 |  |                                      |         |   |                                         |   |       |                       |  |  |                                         |   |  |   |       | 
|Nonvested at end of period       |  |                                      | 162,003 |   |                                         | $ | 12.20 |                       |  |  | 162,003                                 |   |  | $ | 12.20 | 
|                                 |  |                                      |         |   |                                         |   |       |                       |  |  |                                         |   |  |   |       | 
|Nonvested expected to vest       |  |                                      | 148,792 |   |                                         | $ | 12.22 |                       |  |  |                                         |   |  |   |       | 
|                                 |  |                                     
|                                 |  | Three Months EndedSeptember 30, 2009 |         |   | Six Months EndedSeptember 30, 2009      |  
|                                 |  | RestrictedStockGrants                |         |   | WeightedAverageGrant FairValue PerShare |   |       | RestrictedStockGrants |  |  | WeightedAverageGrant FairValue PerShare |  
|Nonvested at beginning of period |  |                                      | 223,932 |   |                                         | $ | 10.63 |                       |  |  | 235,562                                 |   |  | $ | 10.66 | 
|Granted                          |  |                                      | 9,000   |   |                                         | $ | 9.98  |                       |  |  | 21,141                                  |   |  | $ | 9.93  | 
|Vested                           |  |                                      | (25,602 | ) |                                         | $ | 12.18 |                       |  |  | (41,743                                 | ) |  | $ | 11.79 | 
|Forfeited                        |  |                                      | (5,125  | ) |                                         | $ | 10.59 |                       |  |  | (12,755                                 | ) |  | $ | 9.69  | 
|                                 |  |                                      |         |   |                                         |   |       |                       |  |  |                                         |   |  |   |       | 
|Nonvested at end of period       |  |                                      | 202,205 |   |                                         | $ | 10.41 |                       |  |  | 202,205                                 |   |  | $ | 10.41 | 
|                                 |  |                                      |         |   |                                         |   |       |                       |  |  |                                         |   |  |   |       | 

ESPP

The ESPP provides all eligible employees the ability to collectively purchase up to a total of 3,070,000 shares of the Companys common stock. On September 14, 2009, the stockholders voted to
increase the number of shares authorized for issuance under the ESPP from 820,000 shares to 3,070,000 shares, effective February 1, 2010. An employee may authorize a payroll deduction up to a maximum of 10% of his or her compensation during the
plan period. The purchase price for each share purchased is the lesser of 85% of the closing price of the common stock on the first or last day of the plan period. The plan period for the ESPP ends on the last day of January and July of each year.

To estimate the fair value of shares issued under the ESPP, the Company uses the Black-Scholes option-pricing model. The
Black-Scholes model estimates the per share fair value of an ESPP share at the beginning of the plan period based on the following: the price of the underlying stock on the first day of the plan period; the estimated dividend yield; a
risk-free interest rate; the term of the plan period (six months); and the expected volatility. For the risk-free interest rate, the Company uses a United States Treasury Bond due in six months. To determine expected
volatility, the Company analyzes the historical volatility of its stock over the six months prior to the first day of the plan period.

During the six months ended September 30, 2010 and 2009, employees purchased 70,178 and 87,748 shares of common stock under the ESPP, respectively, resulting in proceeds to the Company of
approximately $727,000 and $625,000, respectively.



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|5. | Acquisition of DSAuditor from Embarcadero Technologies, Inc.
|-- | ------------------------------------------------------------

On August 25, 2010, the Company acquired substantially all the assets associated with the DSAuditor product line from Embarcadero Technologies, Inc., or Embarcadero, a privately held software company
headquartered in San Francisco, CA. The Company paid approximately $2.3 million cash to Embarcadero to acquire such assets. An initial payment of $25,000 was made in September 2009, and the remaining purchase price of $2.25 million was made in
August 2010. DSAuditor is a software product that provides visibility into database activity and performance. The acquisition contributed key capabilities to the Companys product portfolio for application performance management.

The DSAuditor product line acquisition was accounted for as a business combination in accordance with the guidance outlined in ASC Topic
805. The operating results associated with the DSAuditor product line from August 25, 2010 to September 30, 2010 and the transaction-related professional services costs have been included in the Companys consolidated statements of
operations for the three and six months ended September 30, 2010. The Companys consolidated balance sheet as of September 30, 2010 reflects the acquisition of the DSAuditor product line, effective August 25, 2010, the date the
Company acquired the DSAuditor product line. The acquisition date fair value of the total consideration transferred was approximately $2.3 million.

The following table summarizes the estimated fair values of the DSAuditor product line acquired and liabilities assumed on the acquisition date:



|                                |  |                   |       |   |                    |               |             |                  
|------------------------------- |  | ----------------- | ----- | - | ------------------ | ------------- | ----------- | -----------------
|                                |  | At August 25,2010 |       |   | AmortizationMethod |               | Useful Life
|                                |  | (in thousands)    |       |   |                    |               |            
|Property and equipment, net     |  | $                 | 14    |   |                    | Straight-line |             | 1 month  3 years
|Deferred revenue                |  |                   | (79   | ) |                    |               |             |                  
|Identifiable intangible assets: |  |                   |       |   |                    |               |             |                  
|Developed technologyDS Auditor |  |                   | 1,458 |   |                    | Straight-line |             | 5 years          
|Trade names and trademark       |  |                   | 47    |   |                    | Straight-line |             | 5 years          
|Customer relationships          |  |                   | 27    |   |                    | Straight-line |             | 5 years          
|Non-compete agreements          |  |                   | 16    |   |                    | Straight-line |             | 1 year           
|                                |  |                   |       |   |                    |               |             |                  
|Total identifiable assets       |  |                   | 1,483 |   |                    |               |             |                  
|                                |  |                   |       |   |                    |               |             |                  
|Goodwill                        |  |                   | 767   |   |                    |               |             |                  
|                                |  |                   |       |   |                    |               |             |                  
|Net assets acquired             |  | $                 | 2,250 |   |                    |               |             |                  
|                                |  |                   |       |   |                    |               |             |                  

Intangible Assets

Intangible assets consist primarily of the developed technology associated with the DSAuditor product acquired. The Company determined that estimated acquisition date fair value of the DSAuditor developed
technology was approximately $1.5 million. The Company utilized an income approach known as the Relief-From-Royalty Method to value the acquired developed technology assets.

Goodwill

The excess of the consideration transferred over the fair values assigned to the assets acquired and liabilities assumed was $767,000,
which represents the goodwill resulting from the acquisition. The goodwill is expected to be deductible for income tax purposes. The Company will test goodwill for impairment on an annual basis, or sooner if deemed necessary. As of
September 30, 2010, there were no changes in the recognized amount of goodwill resulting from the acquisition of the DSAuditor product line.



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|6. | Marketable Securities
|-- | ---------------------

At
September 30, 2010, marketable securities consisted of United States Treasury bills and United States Treasury notes with original maturities greater than three months and less than one year.

The following table summarizes the Companys marketable securities at September 30, 2010:



|                                     |  |                    |        |  |                      |   |   |             |  |   |        | 
|------------------------------------ |  | ------------------ | ------ |  | -------------------- | - | - | ----------- |  | - | ------ | 
|                                     |  | September 30, 2010 |       
|                                     |  | AmortizedCost      |        |  | GrossUnrealizedGains |   |   | MarketValue | 
|                                     |  | (in thousands)     |       
|United States government obligations |  | $                  | 33,583 |  |                      | $ | 8 |             |  | $ | 33,591 | 
|                                     |  |                    |        |  |                      |   |   |             |  |   |        | 
|Total                                |  | $                  | 33,583 |  |                      | $ | 8 |             |  | $ | 33,591 | 
|                                     |  |                    |        |  |                      |   |   |             |  |   |        | 



|7. | Fair Value
|-- | ----------

The following
table details the fair value measurements within the three levels of fair value hierarchy of the Companys financial assets, consisting of cash, cash equivalents, and marketable securities at September 30 and March 31, 2010:



|                                                                       |  |                  |         |  |                                                   |   |         |         |  |   |         |  |  |   |   | 
|---------------------------------------------------------------------- |  | ---------------- | ------- |  | ------------------------------------------------- | - | ------- | ------- |  | - | ------- |  |  | - | - | 
|                                                                       |  |                  |         |  | Fair Value Measurement at September 30, 2010Using |  
|                                                                       |  | Total Fair Value |         |  | Level 1                                           |   |         | Level 2 |  |   | Level 3 | 
|                                                                       |  | (in thousands)   |        
|Cash                                                                   |  | $                | 25,180  |  |                                                   | $ | 25,180  |         |  | $ |        |  |  | $ |  | 
|Money market funds                                                     |  |                  | 48,553  |  |                                                   |   | 48,553  |         |  |   |        |  |  |   |  | 
|Unites States government obligations included in cash equivalents      |  |                  | 1,000   |  |                                                   |   | 1,000   |         |  |   |         |  |  |   |   | 
|United States government obligations included in marketable securities |  |                  | 33,591  |  |                                                   |   | 33,591  |         |  |   |        |  |  |   |  | 
|                                                                       |  |                  |         |  |                                                   |   |         |         |  |   |         |  |  |   |   | 
|Total                                                                  |  | $                | 108,324 |  |                                                   | $ | 108,324 |         |  | $ |        |  |  | $ |  | 
|                                                                       |  |                  |         |  |                                                   |   |         |         |  |   |         |  |  |   |   | 
|                                                                       |  |                 
|                                                                       |  |                  |         |  | Fair Value Measurement at March 31, 2010Using     |  
|                                                                       |  | Total Fair Value |         |  | Level 1                                           |   |         | Level 2 |  |   | Level 3 | 
|                                                                       |  | (in thousands)   |        
|Cash                                                                   |  | $                | 21,545  |  |                                                   | $ | 21,545  |         |  | $ |        |  |  | $ |  | 
|Money market funds                                                     |  |                  | 83,136  |  |                                                   |   | 83,136  |         |  |   |        |  |  |   |  | 
|                                                                       |  |                  |         |  |                                                   |   |         |         |  |   |         |  |  |   |   | 
|Total                                                                  |  | $                | 104,681 |  |                                                   | $ | 104,681 |         |  | $ |        |  |  | $ |  | 
|                                                                       |  |                  |         |  |                                                   |   |         |         |  |   |         |  |  |   |   | 

At September 30 and March 31, 2010, the Company valued money market funds and United States
government obligations using a Level 1 valuation because market prices in active markets for identical assets were readily available. The per-share net asset value of the Companys money market funds has remained at a constant amount of $1.00
per share. Also, as of September 30 and March 31, 2010, there were no withdrawal limits on redemptions for any of the money market funds that the Company holds. The Company did not value any financial assets using Level 2 or Level 3
valuations at September 30, 2010 or March 31, 2010.



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|8. | Earnings Per Share
|-- | ------------------

The
following is a reconciliation of the amounts used in calculating basic and diluted net income per common share for the three and six months ended September 30, 2010 and 2009:



|                                                                                 |  |                                                  |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------------------------------------------- |  | ------------------------------------------------ | ---------- | - | ----------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                 |  | Three Months EndedSeptember 30,                  |            |   | Six Months EndedSeptember 30, |  
|                                                                                 |  | 2010                                             |            |   | 2009                          |   |            | 2010 |  |   | 2009       |  
|                                                                                 |  | (dollars in thousands, except per share amounts) |           
|Net income (numerator):                                                          |  |                                                  |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net income attributable to common stockholders                 |  | $                                                | 2,916      |   |                               | $ | 1,533      |      |  | $ | 4,254      |   |  | $ | 1,175      |  
|Dividends paid on nonvested restricted stock                                     |  |                                                  | (15        | ) |                               |   | (18        | )    |  |   | (31        | ) |  |   | (39        | )
|Undistributed earnings attributable to nonvested restricted stock                |  |                                                  | (6         | ) |                               |   |           |      |  |   |           |   |  |   |           |  
|                                                                                 |  |                                                  |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income available to common stockholders excluding nonvested restricted stock |  | $                                                | 2,895      |   |                               | $ | 1,515      |      |  | $ | 4,223      |   |  | $ | 1,136      |  
|                                                                                 |  |                                                  |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Shares (denominator):                                                            |  |                                                  |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares outstandingbasic                                 |  |                                                  | 21,251,009 |   |                               |   | 20,535,410 |      |  |   | 21,089,537 |   |  |   | 20,507,112 |  
|Effect of other dilutive securitiesoptions                                      |  |                                                  | 536,696    |   |                               |   | 197,690    |      |  |   | 584,996    |   |  |   | 177,204    |  
|                                                                                 |  |                                                  |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Weighted average diluted shares outstanding                                      |  |                                                  | 21,787,705 |   |                               |   | 20,733,100 |      |  |   | 21,674,533 |   |  |   | 20,684,316 |  
|                                                                                 |  |                                                  |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income per common share:                                                     |  |                                                  |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                                            |  | $                                                | 0.14       |   |                               | $ | 0.07       |      |  | $ | 0.20       |   |  | $ | 0.06       |  
|Diluted                                                                          |  | $                                                | 0.13       |   |                               | $ | 0.07       |      |  | $ | 0.19       |   |  | $ | 0.05       |  

The weighted average
diluted shares outstanding during any period does not include shares issuable upon exercise of any stock option where the exercise price of the stock option is greater than the average market price because including such shares would be
anti-dilutive. Options for the purchase of 102,000 and 1,795,901 common shares were excluded from the weighted average diluted shares outstanding calculation for the three months ended September 30, 2010 and 2009, respectively, because their
effect was anti-dilutive. Options for the purchase of 102,000 and 1,763,200 common shares were excluded from the weighted average diluted shares outstanding calculation for the six months ended September 30, 2010 and 2009, respectively, because
their effect was anti-dilutive.



|9. | Stockholders Equity
|-- | --------------------

Treasury Stock

On January 31, 2005, the Company announced that the Board had authorized the repurchase of up to 1,000,000 shares of the Companys common stock from time to time on the open market or in
privately negotiated transactions. On February 4, 2008, the Company announced that the Board had authorized the repurchase of an additional 1,000,000 shares of the Companys common stock under the stock repurchase program. This stock
repurchase program does not have a specified termination date. Any repurchased shares will be available for use in connection with the Companys stock plans or other corporate purposes. The Company expended $2.4 million and $99,000 to purchase
163,974 and 10,243 shares during the three months ended September 30, 2010 and 2009, respectively, at average prices of $14.52 and $9.70 per share, respectively. The Company expended $2.9 million and $155,000 to purchase 197,101 and 16,151
shares during the six months ended September 30, 2010 and 2009, respectively, at average prices of $14.73 and $9.62 per share, respectively.

Restricted stock shares withheld from employees to satisfy the minimum statutory withholding obligations with respect to the income recognized by these employees upon the vesting of their restricted stock
share during the year are included in these totals.



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As of
September 30, 2010, the Company had repurchased 1,495,062 shares of common stock under the stock repurchase program.

Dividend

The following table summarizes the Companys quarterly cash dividend payments for the six months ended September 30, 2010:



|                 |  |                         |  |                    |  |                 
|---------------- |  | ----------------------- |  | ------------------ |  | ----------------
|Declaration Date |  | Stockholder Record Date |  | Payment Date       |  | Amount per Share
|May 5, 2010      |  | June 15, 2010           |  | June 30, 2010      |  | $0.10           
|August 4, 2010   |  | September 14, 2010      |  | September 29, 2010 |  | $0.10           

The declaration of
cash dividends in the future is subject to final determination each quarter by the Board based on a number of factors, including the Companys financial performance and available cash resources, its cash requirements and alternative uses of
cash that the Board may conclude would represent an opportunity to generate a greater return on investment for the Company. The Board may decide that future dividends will be in amounts that are different than the amount described above or may
decide to suspend or discontinue the payment of cash dividends altogether.

On October 27, 2010, the Board approved a
one-time special dividend in the amount of $0.75 per share, which will be paid on November 30, 2010 to stockholders of record as of the close of business on November 14, 2010. On October 27, 2010, the Board also approved a quarterly
dividend in the amount of $0.10 per share, which will be paid on December 21, 2010 to stockholders of record as of the close of business on December 7, 2010.



|10. | Business Segment and Geographic Information
|--- | -------------------------------------------

The Company operates in one industry segment, the development and sale of computer software programs and related services. The chief operating decision maker evaluates the performance of the Company using
one industry segment. Revenue from transactions with United States government agencies was approximately 40.2% and 44.3% of total revenue for the three months ended September 30, 2010 and 2009, respectively. Revenue from transactions with
United States government agencies was approximately 39.4% and 43.5% of total revenue for the six months ended September 30, 2010 and 2009, respectively. No single customer accounted for 10% or more of revenue for the three or six months ended
September 30, 2010 or 2009. In addition, there was no country, with the exception of the United States, where aggregate sales accounted for 10% or more of total revenue in either the three or six months ended September 30, 2010 or 2009.
Substantially all assets were held in the United States at September 30 and March 31, 2010. Revenue by geographic area and as a percentage of total revenue follows:



|                 |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|---------------- |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                 |  | Three Months EndedSeptember 30, |        |   | Six Months EndedSeptember 30, |  
|                 |  | 2010                            |        |   | 2009                          |   |        | 2010 |  |   | 2009   |  
|                 |  | (dollars in thousands)          |       
|Geographic Area: |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|United States    |  | $                               | 28,066 |   |                               | $ | 24,734 |      |  | $ | 51,619 |   |  | $ | 46,499 |  
|International    |  |                                 | 8,052  |   |                               |   | 5,894  |      |  |   | 15,584 |   |  |   | 11,856 |  
|                 |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total revenue    |  | $                               | 36,118 |   |                               | $ | 30,628 |      |  | $ | 67,203 |   |  | $ | 58,355 |  
|                 |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Geographic Area: |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|United States    |  |                                 | 77.7   | % |                               |   | 80.8   | %    |  |   | 76.8   | % |  |   | 79.7   | %
|International    |  |                                 | 22.3   | % |                               |   | 19.2   | %    |  |   | 23.2   | % |  |   | 20.3   | %
|                 |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total revenue    |  |                                 | 100.0  | % |                               |   | 100.0  | %    |  |   | 100.0  | % |  |   | 100.0  | %
|                 |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  



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|11. | Comprehensive Income
|--- | --------------------

Comprehensive income includes net income, foreign currency translation adjustments, and unrealized gain or loss on cash equivalents and
marketable securities. The components of comprehensive income, net of tax, are as follows:



|                                                                   |  |                                 |       |  |                               |   |       |      |  |   |       |  |  |   |       | 
|------------------------------------------------------------------ |  | ------------------------------- | ----- |  | ----------------------------- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                                   |  | Three Months EndedSeptember 30, |       |  | Six Months EndedSeptember 30, |  
|                                                                   |  | 2010                            |       |  | 2009                          |   |       | 2010 |  |   | 2009  | 
|                                                                   |  | (in thousands)                  |      
|Net income                                                         |  | $                               | 2,916 |  |                               | $ | 1,533 |      |  | $ | 4,254 |  |  | $ | 1,175 | 
|Foreign currency translation adjustments                           |  |                                 | 585   |  |                               |   | 47    |      |  |   | 387   |  |  |   | 611   | 
|Net unrealized gains on cash equivalents and marketable securities |  |                                 | 9     |  |                               |   |      |      |  |   | 8     |  |  |   |      | 
|                                                                   |  |                                 |       |  |                               |   |       |      |  |   |       |  |  |   |       | 
|Total comprehensive income                                         |  | $                               | 3,510 |  |                               | $ | 1,580 |      |  | $ | 4,649 |  |  | $ | 1,786 | 
|                                                                   |  |                                 |       |  |                               |   |       |      |  |   |       |  |  |   |       | 

Accumulated other comprehensive loss of $604,000 at September 30, 2010 was comprised of $612,000 of
foreign currency translation adjustments and $8,000 of net unrealized gains on marketable securities. Accumulated other comprehensive loss of $1.0 million at March 31, 2010 was comprised of foreign currency translation adjustments.



|12. | Commitments and Contingencies
|--- | -----------------------------

The Company is currently under an income tax audit in Germany for fiscal years 2005 through 2007. The Company does not expect this matter to have a material effect on the Companys financial
condition, results of operations, or cash flows.

The Company accounts for guarantees in accordance with FASB Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (as codified in ASC 460 Guarantees). Interpretation No. 45 elaborates on the
disclosures required in financial statements concerning obligations under certain guarantees. It also clarifies the requirements related to the recognition of liabilities by a guarantor at the inception of certain guarantees. The provisions related
to recognizing a liability at inception of the guarantee do not apply to product warranties or indemnification provisions in the Companys software license agreements.

Under the terms of substantially all of the Companys license agreements, it has agreed to defend and pay any final judgment against its customers arising from claims against such customers that the
Companys software products infringe the intellectual property rights of a third party. To date: i) the Company has not received any notice that any customer is subject to an infringement claim arising from the use of its software products, ii)
the Company has not received any request to defend any customers from infringement claims arising from the use of its software products, and iii) the Company has not paid any final judgment on behalf of any customer related to an infringement claim
arising from the use of its software products. Because the outcome of infringement disputes are related to the specific facts in each case, and given the lack of previous or current indemnification claims, the Company cannot estimate the maximum
amount of potential future payments, if any, related to its indemnification provisions. However, the Company believes these indemnification provisions will not have a material adverse effect on its operating performance or financial condition. As of
September 30, 2010, the Company has not recorded any liabilities related to these indemnifications.

The Companys
standard license agreement includes a warranty provision for software products. The Company generally warrants for the first ninety days after delivery that the software shall operate substantially as stated in the then current documentation
provided that the software is used in a supported computer system. The Company provides for the estimated cost of product warranties based on specific warranty claims, provided that it is probable that a liability exists and provided the amount can
be reasonably estimated. To date, the Company has not had any material costs associated with these warranties.



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The Company is
involved in other claims and legal proceedings arising from normal operations. The Company does not expect these matters, individually or in the aggregate, to have a material effect on the Companys financial condition, results of operations,
or cash flows.



|13. | Income Taxes
|--- | ------------

The
Companys effective tax rate was 37.3% and 28.6% for the three months ended September 30, 2010 and 2009, respectively. The Companys effective tax rate was 38.6% and 26.1% for the six months ended September 30, 2010 and
2009, respectively. For the three and six months ended September 30, 2010, the effective tax rate differed from the statutory tax rate principally due to state income taxes, the difference in the U.S. and foreign tax rates, compensation under
the Companys ESPP, the domestic production activities deduction, and settlement with the Internal Revenue Service, or IRS, on completion of the fiscal 2007 audit. The increase in the Companys effective tax rate for the three and six
months ended September 30, 2010, as compared to the same period in the prior fiscal year, was largely due to the expiration of the research and development tax credit under IRC section 41 on December 31, 2009, which made it unavailable for
the Company to include in its tax provision calculation during the three and six months ended September 30, 2010.

The
following table summarizes the tax years that are either currently under audit or remain open under the statute of limitations and are subject to examination by the tax authorities in the most significant jurisdictions in which the Company operates:



|               |  |            
|-------------- |  | -----------
|Australia      |  | FY07  FY09
|Belgium        |  | FY08  FY09
|France         |  | FY07  FY10
|Germany        |  | FY05  FY09
|United Kingdom |  | FY09       
|Singapore      |  | FY08  FY09
|United States  |  | FY07  FY09
|Maryland       |  | FY05  FY09

The Company is
currently under an income tax audit in Germany for fiscal years 2005 through 2007. During the six months ended September 30, 2010, the IRS completed its examination of the Companys fiscal 2007 federal tax return. As a result of the IRS
settlement, the Company recorded a decrease in the unrecognized tax benefits related to uncertain tax positions of $106,000.



|14. | Subsequent Events
|--- | -----------------

On
October 27, 2010, the Board approved a one-time special dividend in the amount of $0.75 per share, which will be paid on November 30, 2010 to stockholders of record as of the close of business on November 14, 2010. On October 27,
2010, the Board also approved a quarterly cash dividend in the amount of $0.10 per share, which will be paid on December 21, 2010 to stockholders of record as of the close of business on December 7, 2010. The declaration of cash dividends
in the future is subject to final determination each quarter by the Board based on a number of factors, including the Companys financial performance and available cash resources, its cash requirements and alternative uses of cash that the
Board may conclude would represent an opportunity to generate a greater return on investment for the Company. The Board may decide that future dividends will be in amounts that are different than the amount described above or may decide to suspend
or discontinue the payment of cash dividends altogether.

On October 28, 2010, the compensation committee, or Committee,
of the Board adopted the fiscal 2011 Executive Incentive Bonus Program, or Program, for the fiscal year ending March 31, 2011. Each of the Companys Chief Executive Officer, President, and Chief Financial Officer is eligible to receive
cash bonuses



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under the Program based on the achievement by the Company of Committee-designated threshold levels of two specified objectives (total revenue and operating income) during each of the first half
of fiscal 2011 and full-year fiscal 2011. The cash bonus has two components, the first of which may be earned upon achievement of both objectives for the first half of fiscal 2011 and the second of which may be earned upon achievement of both
objectives for the full fiscal year, in each case calculated in accordance with formulas set forth in the Program. No payout or expense accrual was made for the first half or the full-year cash bonus during the three or six months ended
September 30, 2010.



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|ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis related to our financial condition and results of operations for the three and six months ended
September 30, 2010 and 2009 should be read in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this report. You should also read the following discussion and analysis in conjunction
with the consolidated financial statements and the related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the fiscal year ended
March 31, 2010, filed with the Securities and Exchange Commission, or SEC, on June 4, 2010. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions and our actual results may
differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under the Risk Factors section of our Form 10-K for the fiscal year ended
March 31, 2010. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995, as amended, and, as such, speak only as of the date made. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Form 10-Q.

Overview

OPNET Technologies, Inc. is a provider of software products and
related services for information technology service assurance. Our software products address application performance management, network operations, capacity management, and network research and development. Our customers include corporate
enterprises, government and defense agencies, network service providers, and network equipment manufacturers. Our software products and related services are designed to help our customers make better use of resources, reduce operational problems and
improve competitiveness.

We operate in one reportable industry segment, the development and sale of computer software
programs and related services. Our operations are principally in the United States. We also have subsidiaries with offices in Belgium, France, Germany, the United Kingdom, Singapore, and China. We primarily depend upon our direct sales force to
generate revenue in the United States. In addition, in the United States we operate a sales program to extend our market reach by establishing sales alliances with third parties called the Synergy Program. The Synergy Programs focus is on
selling our application performance management software products, including ACE Live that provides end-user experience monitoring and real-time application performance analytics, as we believe these software products are particularly well-suited for
channel distribution. Sales outside the United States are made through our international sales team as well as third-party distributors and value-added resellers, who generally are responsible for providing technical support and service to customers
within their territory.

Our revenue is derived from three primary sources: (1) products, (2) product updates,
technical support and services, and (3) professional services, which include consulting and training services for customers without current maintenance agreements. Product revenue represents all fees earned from granting customers licenses to
use our software and fees associated with hardware platforms used to deliver some software products and excludes revenue derived from product updates, which are included in product updates, technical support, and services revenue. Our software
master license agreement provides our customers with the right to use our software either perpetually, which we refer to as perpetual licenses, or during a defined term, generally for one to four years, which we refer to as term licenses. For the
six months ended September 30, 2010 and 2009, perpetual licenses represented approximately 90% and 92%, respectively, of product revenue. Substantially all of our product arrangements include both product and product updates, technical support,
and services. Product updates, technical support, and services revenue represents fees associated with the sale of unspecified product updates, technical support and when-and-if available training under our maintenance agreements. We offer
professional services, under both time-and-material and fixed-price agreements, primarily to facilitate the adoption of our software products.



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We consider our
consulting services to be an integral part of our business model as they are centered on our software product offerings. Because our consulting services facilitate the adoption of our software product offerings, we believe that they ultimately
generate additional sales of product licenses.

The key strategies of our business plan include increasing sales to existing
customers, increasing deal size by selling modules and introducing new software products, improving our sales and marketing execution, establishing alliances to extend our market reach, increasing our international presence, and increasing
profitability.We have focused our sales, marketing, and other efforts on corporate enterprise and United States government opportunities and, to a much lesser extent, service provider and network equipment manufacturer opportunities. Our
focus and strategies are designed to increase revenue and profitability. Because of the uncertainty surrounding the amount and timing of revenue growth, especially during the current economic conditions, we expect to need to closely control the
increases in our total expenses as we implement these strategies.

Summary of Our Quarter-Over-Quarter Financial Performance and Trends
That May Affect Business and Future Results

During the three months ended September 30, 2010, or Q2 fiscal 2011, as
compared to the three months ended June 30, 2010, or Q1 fiscal 2011, we generated an increase in total revenue, gross profit, income from operations, and net income. The increase in our total revenue and profitability was primarily the result
of an increase in product revenue of $4.7 million. The increase in product revenue was due to an increase in sales to United States government and corporate enterprise customers, which was largely driven by their purchases of our APM products. The
sequential increase in sales to United States government customers is a seasonal trend we typically experience due to their fiscal year end of September 30.

During Q2 fiscal 2011 as compared to Q1 fiscal 2011, we experienced a decrease in deferred revenue and cash flow from operations. The decrease in deferred revenue was due largely to no significant product
orders being deferred as a result of undelivered software elements or required software customizations. The decrease in operating cash flow was largely due to an increase in billed accounts receivable of $6.4 million associated with the increase in
product updates, technical support and services bookings in Q2 fiscal 2011. We believe the increase in billed accounts receivable is largely the result of strong sales of maintenance renewals in September of Q2 fiscal 2011 as compared to June of Q1
fiscal 2011.



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The following table
summarizes information derived from our unaudited condensed consolidated financial statements and other key metrics:



|                                                                                                       |  |                                               |         |   |              |   |         |              |  |   |                  |   |  |  |       |   
|------------------------------------------------------------------------------------------------------ |  | --------------------------------------------- | ------- | - | ------------ | - | ------- | ------------ |  | - | ---------------- | - |  |  | ----- | --
|                                                                                                       |  | Three Months Ended                            |         |   |              |   |         |              | 
|                                                                                                       |  | September 30,2010                             |         |   | June 30,2010 |   |         | AmountChange |  |   | PercentageChange |  
|                                                                                                       |  | (dollars in thousands, except per share data) |        
|Financial Data:                                                                                        |  |                                               |         |   |              |   |         |              |  |   |                  |   |  |  |       |   
|Total revenue                                                                                          |  | $                                             | 36,118  |   |              | $ | 31,085  |              |  | $ | 5,033            |   |  |  | 16.2  | % 
|Total cost of revenue                                                                                  |  | $                                             | 8,451   |   |              | $ | 7,341   |              |  | $ | 1,110            |   |  |  | 15.1  | % 
|Gross profit                                                                                           |  | $                                             | 27,667  |   |              | $ | 23,744  |              |  | $ | 3,923            |   |  |  | 16.5  | % 
|Gross profit as a percentage of total revenue (gross margin)                                           |  |                                               | 76.6    | % |              |   | 76.4    | %            |  |   |                  |   |  |  |       |   
|Total operating expenses                                                                               |  | $                                             | 23,015  |   |              | $ | 21,436  |              |  | $ | 1,579            |   |  |  | 7.4   | % 
|Income from operations                                                                                 |  | $                                             | 4,652   |   |              | $ | 2,308   |              |  | $ | 2,344            |   |  |  | 101.6 | % 
|Income from operations as a percentage of total revenue (operating margin)                             |  |                                               | 12.9    | % |              |   | 7.4     | %            |  |   |                  |   |  |  |       |   
|Net income                                                                                             |  | $                                             | 2,916   |   |              | $ | 1,339   |              |  | $ | 1,577            |   |  |  | 117.8 | % 
|Diluted net income per common share                                                                    |  | $                                             | 0.13    |   |              | $ | 0.06    |              |  | $ | 0.07             |   |  |  | 116.7 | % 
|                                                                                                       |  |                                               |         |  
|Other Operations Data:                                                                                 |  |                                               |         |   |              |   |         |              |  |   |                  |   |  |  |       |   
|Total employees (period end)                                                                           |  |                                               | 564     |   |              |   | 579     |              |  |   | (15              | ) |  |  | (2.6  | )%
|Total average employees                                                                                |  |                                               | 566     |   |              |   | 581     |              |  |   | (15              | ) |  |  | (2.6  | )%
|Total consultants (period end)                                                                         |  |                                               | 91      |   |              |   | 92      |              |  |   | (1               | ) |  |  | (1.1  | )%
|Total quota-carrying sales persons (excluding directors and inside sales representatives) (period end) |  |                                               | 64      |   |              |   | 71      |              |  |   | (7               | ) |  |  | (9.9  | )%
|                                                                                                       |  |                                               |         |  
|Financial Condition and Liquidity Data:                                                                |  |                                               |         |   |              |   |         |              |  |   |                  |   |  |  |       |   
|Cash, cash equivalents, and marketable securities (period end)                                         |  | $                                             | 108,324 |   |              | $ | 111,559 |              |  | $ | (3,235           | ) |  |  | (2.9  | )%
|Cash flows provided by operating activities                                                            |  | $                                             | 495     |   |              | $ | 5,496   |              |  | $ | (5,001           | ) |  |  | (91.0 | )%
|Total deferred revenue (period end)                                                                    |  | $                                             | 40,223  |   |              | $ | 40,440  |              |  | $ | (217             | ) |  |  | (0.5  | )%

Our increase in total
revenue in Q2 fiscal 2011 from Q1 fiscal 2011 was primarily due to an increase in product revenue of $4.7 million. The sequential increase in product revenue was primarily the result of an increase in sales to United States government and corporate
enterprise customers, which we believe was largely the result of the seasonal buying patterns from United States government customers as a result of their September 30 fiscal year end and demand for our APM products by both United States
government and corporate enterprise customers. Total revenue generated from sales to United States government customers increased by $2.5 million during Q2 fiscal 2011 as compared to Q1 fiscal 2011. The percentage of total revenue from United States
government customers increased to 40.2% in Q2 fiscal 2011 from 38.5% in Q1 fiscal 2011.

Our international revenue was $8.1
million and $7.5 million for Q2 fiscal 2011 and Q1 fiscal 2011, respectively. The increase in international revenue was primarily the result of an increase in revenue from corporate enterprise customers, partially offset by a decrease in revenue
from international government customers. As a percentage of total revenue, international revenue decreased from 24.2% to 22.3% during Q2 fiscal 2011. We expect international revenue to continue to account for a significant portion of our total
revenue in the future. Sales to corporate enterprises accounted for the largest portion of our international revenue during Q2 fiscal 2011. We believe that continued growth and profitability will require further expansion of our sales, marketing and
customer service functions in international markets.

Our gross profit increased $3.9 million, or 16.5%, to $27.7 million for
Q2 fiscal 2011 from $23.7 million for Q1 fiscal 2011. The increase in gross profit was primarily the result of a $4.7 million increase in product revenue, partially offset by a $1.1 million increase in the cost of revenue that was largely due to an
increase in costs



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related to hardware platforms used to deliver our ACE Live software products. Our gross margin increased slightly to 76.6% in Q2 fiscal 2011 from 76.4% in Q1 fiscal 2011. Gross margin on product
revenue, product updates, technical support and services revenue and professional services revenue for Q2 fiscal 2011 was 85.9%, 90.3%, and 22.2%, respectively. Changes in revenue from product and product updates, technical support and services have
more impact on gross profit than changes in revenue from professional services due to their higher gross margins.

We
anticipate the following trends and patterns over the next several quarters:

Total Revenue.We believe the current
economic environment is showing signs of improvement, but our ability to generate increased revenue domestically and internationally will depend largely upon continued improvement in economic conditions. We expect future growth opportunities in
product revenue and product updates, technical support and services revenue to come from sales to corporate enterprise customers and the United States government, as we believe our products offer competitive advantages in these markets. We expect
product revenue and product updates, technical support and services revenue from sales to service providers and network equipment manufacturers to fluctuate from quarter to quarter with the potential for periods of declining revenue. Our ability to
increase professional services revenue will depend upon our ability to maintain several large consulting contracts with the United States government and to attract and retain additional qualified consultants, including those with security
clearances. We believe that continued increases in the proportion of sales of our application performance management products, as compared to our other products, would cause the percentage of our total revenue attributable to professional services
revenue to decline and might also cause an absolute decline in professional services revenue because our application performance management products generally require less consulting time to implement. As a result of these factors, we believe that
we may experience fluctuations in quarterly revenue.

Gross Profit Margin.Our overall gross profit margin will
continue to be affected by the percentage of total revenue generated from products and product updates, technical support and services, as revenue from these sources has substantially higher gross margins than the gross margin on revenue from
professional services. Our overall gross profit margin will also be affected by the amount of fees paid to indirect channel partners and the profitability of individual consulting engagements. Amortization of technology associated with acquisitions
of technology that we may make in future periods may also affect our gross profit margin.

Research and Development
Expenses.We believe that continued investment in research and development will be required to maintain our competitive position and broaden our software product lines, as well as enhance the features and functionality of our current software
products, especially our application performance management products. We believe there is more competition in the markets served by our application performance management products as compared to the markets for our other products. We made personnel
investments in research and development during fiscal 2010, and we plan to continue making investments in additional personnel during the next several quarters. We expect that the absolute dollar amount of these expenses will continue to grow but
generally decrease as a percentage of total revenue in future periods. Our ability to decrease these expenses as a percentage of revenue will depend upon increases in our revenue, among other factors.

Sales and Marketing Expenses.We depend upon our direct sales model to generate revenue and believe that increasing the size of
our quota-carrying sales team is essential for long-term growth. During fiscal 2010, we focused on improving the productivity of our sales force and only made modest investments in additional direct sales personnel. We plan to continue this approach
during the next several quarters. We also plan to increase expenditures in areas we believe will enhance the visibility of our products in the marketplace, especially our application performance management products. While we expect that the absolute
dollar amount of sales and marketing expenses will increase in fiscal 2011 as compared to fiscal 2010, our ability to lower these expenses as a percentage of revenue will depend upon increases in our revenue.



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General and
Administrative Expense.We expect the dollar amount of general and administrative expenses to increase as we continue to expand our operations but generally decrease as a percentage of total revenue in future periods. Our ability to decrease
these expenses as a percentage of revenue will depend upon increases in our revenue, among other factors.

Operating
Margin. Since a significant portion of our product arrangements close in the latter part of each quarter, we may not be able to adjust our cost structure in the short-term to respond to lower than expected revenue, which would adversely impact
our operating margin and earnings. Our operating margin increased to 12.9% during Q2 fiscal 2011 from 7.4% during Q1 fiscal 2011. The increase was primarily the result of a $4.7 million increase in product revenue, partially offset by a $1.1 million
increase in cost of revenue. We remain committed to increasing profitability and generating long-term growth. As the economy improves, we plan to strategically increase research and development and marketing expenditures in order to maintain our
products competitive advantages and increase market share. While we intend to strategically increase expenditures in certain areas, we intend to closely monitor and control overall operating expenses in order to maximize our operating margin.

Critical Accounting Policies and Use of Estimates

The accompanying discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from the
estimates we make with respect to these and other items that require our estimates.

We have identified the accounting
policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving managements judgments and estimates. These critical accounting
policies relate to revenue recognition and deferred revenue, stock based compensation, fair value measurement of cash equivalents and marketable securities, allowance for doubtful accounts, valuation of long-lived assets, including intangible assets
and impairment review of goodwill, software development costs, and income taxes. These policies, and our procedures related to these policies, are described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 filed
with the SEC on June 4, 2010.



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Results of Operations

The following table sets forth items from the condensed consolidated statements of operations data expressed as a
percentage of total revenue for the periods indicated:



|                                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|-------------------------------------------------------------- |  | ------------------------------- | ----- | - | ----------------------------- |  | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                                               |  | Three Months EndedSeptember 30, |       |   | Six Months EndedSeptember 30, | 
|                                                               |  | 2010                            |       |   | 2009                          |  |       | 2010 |  |  | 2009  |  
|Revenue:                                                       |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Product                                                        |  |                                 | 49.0  | % |                               |  | 38.1  | %    |  |  | 45.6  | % |  |  | 35.3  | %
|Product updates, technical support and services                |  |                                 | 36.1  |   |                               |  | 38.0  |      |  |  | 37.8  |   |  |  | 39.3  |  
|Professional services                                          |  |                                 | 14.9  |   |                               |  | 23.9  |      |  |  | 16.6  |   |  |  | 25.4  |  
|                                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Total revenue                                                  |  |                                 | 100.0 |   |                               |  | 100.0 |      |  |  | 100.0 |   |  |  | 100.0 |  
|                                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Cost of revenue:                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Product                                                        |  |                                 | 6.9   |   |                               |  | 4.0   |      |  |  | 5.6   |   |  |  | 4.0   |  
|Product updates, technical support and services                |  |                                 | 3.5   |   |                               |  | 3.8   |      |  |  | 3.8   |   |  |  | 4.1   |  
|Professional services                                          |  |                                 | 11.6  |   |                               |  | 15.9  |      |  |  | 12.7  |   |  |  | 17.0  |  
|Amortization of acquired technology and customer relationships |  |                                 | 1.4   |   |                               |  | 1.6   |      |  |  | 1.4   |   |  |  | 1.6   |  
|                                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Total cost of revenue                                          |  |                                 | 23.4  |   |                               |  | 25.3  |      |  |  | 23.5  |   |  |  | 26.7  |  
|                                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Gross profit                                                   |  |                                 | 76.6  |   |                               |  | 74.7  |      |  |  | 76.5  |   |  |  | 73.3  |  
|                                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Operating expenses:                                            |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Research and development                                       |  |                                 | 23.7  |   |                               |  | 25.1  |      |  |  | 24.8  |   |  |  | 26.6  |  
|Sales and marketing                                            |  |                                 | 31.6  |   |                               |  | 32.8  |      |  |  | 32.5  |   |  |  | 34.9  |  
|General and administrative                                     |  |                                 | 8.4   |   |                               |  | 9.6   |      |  |  | 8.8   |   |  |  | 9.1   |  
|                                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Total operating expenses                                       |  |                                 | 63.7  |   |                               |  | 67.5  |      |  |  | 66.1  |   |  |  | 70.6  |  
|                                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Income from operations                                         |  |                                 | 12.9  |   |                               |  | 7.2   |      |  |  | 10.4  |   |  |  | 2.7   |  
|Interest and other (expense) income, net                       |  |                                 | 0.0   |   |                               |  | (0.2  | )    |  |  | (0.1  | ) |  |  | 0.0   |  
|                                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Income before provision for income taxes                       |  |                                 | 12.9  |   |                               |  | 7.0   |      |  |  | 10.3  |   |  |  | 2.7   |  
|Provision for income taxes                                     |  |                                 | 4.8   |   |                               |  | 2.0   |      |  |  | 4.0   |   |  |  | 0.7   |  
|                                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  
|Net income                                                     |  |                                 | 8.1   | % |                               |  | 5.0   | %    |  |  | 6.3   | % |  |  | 2.0   | %
|                                                               |  |                                 |       |   |                               |  |       |      |  |  |       |   |  |  |       |  

Revenue

Product Revenue.Product revenue was $17.7 million and $11.7 million for the three months ended September 30, 2010 and 2009, respectively, representing an increase of 51.4%. The increase was
largely due to an increase in sales to corporate enterprise customers and, to a lesser extent, United States government customers. Product revenue was $30.6 million and $20.6 million for the six months ended September 30, 2010 and 2009,
respectively, representing an increase of 48.9%. The increase was largely due to an increase in sales to corporate enterprise customers and, to a lesser extent, United States government customers and service providers. The increase in revenue to
corporate enterprise and United States government customers for the three and six month periods was primarily due to sales of our application performance management solutions.

Product Updates, Technical Support and Services Revenue.Product updates, technical support and services revenue was $13.1 million and $11.7 million for the three months ended September 30,
2010 and 2009, respectively, representing an increase of 12.0%. Product updates, technical support and services revenue was $25.4 million and $23.0 million for the six months ended September 30, 2010 and 2009, respectively, representing an
increase of 10.5%. Product updates, technical support and services revenue growth rates are affected by the overall product revenue growth rates, as well as the annual renewal of maintenance contracts by



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existing customers. The increase in product updates, technical support and services revenue for both periods reflect increases in the overall customer installed base. Increases in the overall
customer installed base increase the demand for annual renewals of maintenance contracts.

The dollar amount of our deferred
revenue under our maintenance contracts at the end of each quarter is a key factor in determining the near-term growth of our product updates, technical support and services revenue. The balance of deferred revenue under our maintenance contracts
generally increases when we sell product licenses and when we sell renewals of annual maintenance contracts. The amount of deferred revenue under our maintenance contracts was $34.0 million and $28.9 million at September 30, 2010 and 2009,
respectively. The amount of deferred revenue under our maintenance contracts will generally be recognized as product updates, technical support and services revenue over the life of each individually purchased maintenance contract, which is
typically a twelve-month period.

Professional Services Revenue.The components of professional services revenue for
the three and six months ended September 30, 2010 and 2009 are as follows:



|                              |  |                                 |       |  |                               |   |       |      |  |   |        |  |  |   |        | 
|----------------------------- |  | ------------------------------- | ----- |  | ----------------------------- | - | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                              |  | Three Months Ended,September 30 |       |  | Six Months Ended,September 30 |  
|                              |  | 2010                            |       |  | 2009                          |   |       | 2010 |  |   | 2009   | 
|                              |  | (in thousands)                  |      
|Consulting services revenue   |  | $                               | 5,222 |  |                               | $ | 7,220 |      |  | $ | 10,954 |  |  | $ | 14,602 | 
|Training revenue              |  |                                 | 173   |  |                               |   | 83    |      |  |   | 232    |  |  |   | 214    | 
|                              |  |                                 |       |  |                               |   |       |      |  |   |        |  |  |   |        | 
|Professional services revenue |  | $                               | 5,395 |  |                               | $ | 7,303 |      |  | $ | 11,186 |  |  | $ | 14,816 | 
|                              |  |                                 |       |  |                               |   |       |      |  |   |        |  |  |   |        | 

Professional services revenue was $5.4 million and $7.3 million for the three months ended
September 30, 2010 and 2009, respectively, representing a decrease of 26.1%. Consulting services revenue accounted for 96.8% and 98.9% of professional services revenue for the three months ended September 30, 2010 and 2009, respectively.
The decrease in professional services revenue was largely the result of completing two large consulting engagements associated with non-APM software products during fiscal 2010, as these engagements did not contribute revenue during the three months
ended September 30, 2010. The percentage of total consulting revenue from United States government customers for the three months ended September 30, 2010 and 2009 was 71.8% and 70.1%, respectively. Professional services revenue was $11.2
million and $14.8 million for the six months ended September 30, 2010 and 2009, respectively, representing a decrease of 24.5%. Consulting services revenue accounted for 97.9% and 98.6% of professional services revenue for the six months ended
September 30, 2010 and 2009, respectively. The decrease in professional services revenue was largely the result of completing two large consulting engagements associated with non-APM software products during fiscal 2010, as these engagements
did not contribute revenue during the six months ended September 30, 2010. The percentage of total consulting revenue from United States government customers for the six months ended September 30, 2010 and 2009 was 71.8% and 69.2%,
respectively.

International Revenue.

Our international revenue was $8.1 million and $5.9 million for the three months ended September 30, 2010 and 2009, respectively, representing an increase of 36.6%. Our international revenue as a
percentage of total revenue was 22.3% and 19.2% for the three months ended September 30, 2010 and 2009, respectively. Our international revenue was $15.6 million and $11.9 million for the six months ended September 30, 2010 and 2009,
respectively, representing an increase of 31.4%. Our international revenue as a percentage of total revenue was 23.2% and 20.3% for the six months ended September 30, 2010 and 2009, respectively. The absolute dollar increases in international
revenue were largely the result of an increase in sales of our application performance management products to corporate enterprise customers. Revenue from corporate enterprise customers accounted for the largest percentage of international revenue
for the three and six month periods ended September 30, 2010 and 2009. Our international revenue is primarily generated in Europe and Asia.



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Cost of Revenue.

The following table sets forth, for each component of revenue, the cost of such component of revenue as a percentage of the related
revenue for the periods indicated:



|                                                |  |                                 |      |   |                               |  |      |      |  |  |      |   |  |  |      |  
|----------------------------------------------- |  | ------------------------------- | ---- | - | ----------------------------- |  | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                                |  | Three Months Ended,September 30 |      |   | Six Months Ended,September 30 | 
|                                                |  | 2010                            |      |   | 2009                          |  |      | 2010 |  |  | 2009 |  
|Cost of Revenue:                                |  |                                 |      |   |                               |  |      |      |  |  |      |   |  |  |      |  
|Product                                         |  |                                 | 14.1 | % |                               |  | 10.6 | %    |  |  | 12.3 | % |  |  | 11.4 | %
|Product updates, technical support and services |  |                                 | 9.7  | % |                               |  | 10.1 | %    |  |  | 10.1 | % |  |  | 10.5 | %
|Professional services                           |  |                                 | 77.8 | % |                               |  | 66.5 | %    |  |  | 76.0 | % |  |  | 66.7 | %

Cost of product revenue
consists primarily of the cost of hardware platforms associated with the delivery of some software products, royalties, fees paid to indirect channel partners and, to a lesser extent, media, manuals, and distribution costs. Cost of product updates,
technical support and services revenue consists of personnel-related costs necessary to provide technical support and training to customers with active maintenance contracts on a when-and-if-available basis, royalties, media, and distribution costs.
Cost of professional services revenue consists primarily of personnel-related costs necessary to provide consulting and training to customers without active maintenance contracts. Gross margins on product revenue and product updates, technical
support and services revenue are substantially higher than gross margins on professional services revenue, due to the low cost of delivering product revenue and providing technical support and maintenance compared with the relatively high personnel
costs associated with providing consulting services and customer training.

Cost of Product Revenue.Cost of product
revenue was $2.5 million and $1.2 million for the three months ended September 30, 2010 and 2009, respectively. Total hardware platform costs associated with the delivery of our ACE Live software products for the three months ended
September 30, 2010 and 2009 was $2.0 million and $840,000, respectively. Gross margin on product revenue decreased to 85.9% for the three months ended September 30, 2010, compared to 89.4% for the same period in fiscal 2010. Cost of
product revenue was $3.8 million and $2.3 million for the six months ended September 30, 2010 and 2009, respectively. Total hardware platform costs associated with the delivery of our ACE Live software products for the six months ended
September 30, 2010 and 2009 was $3.1 million and $1.7 million, respectively. Gross margin on product revenue decreased to 87.7% for the six months ended September 30, 2010, compared to 88.6% for the same period in fiscal 2010. The increase
in the cost of product revenue for the three and six months ended September 30, 2010 was primarily the result of an increase in costs associated with hardware platforms used to deliver our ACE Live software products. The decrease in gross
margin on product revenue for the three and six-month periods ended September 30 2010, as compared to the same period in fiscal 2010, was primarily due to an increase in the proportion of ACE Live software products sold.

Cost of Product Updates, Technical Support and Services Revenue.Cost of product updates, technical support and services revenue
was $1.3 million and $1.2 million for the three months ended September 30, 2010 and 2009, respectively. The increase in cost was primarily the result of compensation expense related to an increase in staffing necessary to provide customer
support. Gross margin on product updates, technical support and services revenue increased to 90.3% for the three months ended September 30, 2010, from 89.9% for the same period in fiscal 2010. Stock-based compensation expense allocated to cost
of product updates, technical support and services was $4,000 for the three months ended September 30, 2010 and 2009. Cost of product updates, technical support and services revenue was $2.6 million and $2.4 million for the six months ended
September 30, 2010 and 2009, respectively. The increase in cost was primarily the result of compensation expense related to an increase in staffing necessary to provide customer support. Gross margin on product updates, technical support and
services revenue increased to 89.9% for the six months ended September 30, 2010, from 89.5% for the same period in fiscal 2010. Stock-based compensation expense allocated to cost of product updates, technical support and services was $8,000 and
$10,000 for the six months ended September 30, 2010 and 2009, respectively.



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Cost of
Professional Services Revenue.Cost of professional services revenue was $4.2 million and $4.9 million for the three months ended September 30, 2010 and 2009, respectively. The decrease of 13.6% was primarily the result of a $525,000
decrease in compensation expense due to a reduction in staffing levels in response to weaker demand for our consulting services. Gross margin on professional services revenue decreased to 22.2% for the three months ended September 30, 2010 from
33.5% for the same period in fiscal 2010. Stock-based compensation expense allocated to cost of professional services was $19,000 and $22,000 for the three months ended September 30, 2010 and 2009, respectively. Cost of professional services
revenue was $8.5 million and $9.9 million for the six months ended September 30, 2010 and 2009, respectively. The decrease of 14.1% was primarily the result of a $1.0 million decrease in compensation expense and a $124,000 decrease in travel
expenses due to the reduction in staffing levels in response to weaker demand for our consulting services. Gross margin on professional services revenue decreased to 24.0% for the six months ended September 30, 2010 from 33.3% for the same
period in fiscal 2010. Stock-based compensation expense allocated to cost of professional services was $37,000 and $56,000 for the six months ended September 30, 2010 and 2009, respectively. We believe the weaker demand for our consulting
services during the three and six months ended September 30, 2010, as compared to the same period in fiscal 2010, was due to the increase in the proportion of sales of our application performance management products, as our application
performance management products generally require less time to implement as compared to our other products.

Operating Expenses

Research and Development.Research and development expenses were $8.6 million and $7.7 million for the three months
ended September 30, 2010 and 2009, respectively, representing an increase of 11.7%. The increase in research and development expenses for the three months ended September 30, 2010, as compared to the same period in fiscal 2010, was largely
due to a $994,000 increase in compensation expense due to increased staffing levels necessary to develop new products and enhance and maintain existing products, which was partially offset by decreases in professional services and common area
maintenance costs related to facilities. Stock-based compensation expense allocated to research and development was $167,000 and $81,000 for the three months ended September 30, 2010 and 2009, respectively. Research and development expenses
were $16.6 million and $15.6 million for the six months ended September 30, 2010 and 2009, respectively, representing an increase of 6.9%. The increase in research and development expenses for the six months ended September 30, 2010, as
compared to the same period in fiscal 2010, was largely due to a $1.3 million increase in compensation expense due to increased staffing levels necessary to develop new products and enhance and maintain existing products, which was partially offset
by an $183,000 decrease in common area maintenance costs related to facilities and an $87,000 decrease in professional services. Stock-based compensation expense allocated to research and development was $338,000 and $253,000 for the six months
ended September 30, 2010 and 2009, respectively.

Sales and Marketing. Sales and marketing expenses were $11.4
million and $10.0 million for the three months ended September 30, 2010 and 2009, respectively. The increase of 13.6% was largely due to a $755,000 increase in compensation expense primarily due to variable compensation related to an increase
in sales bookings, a $495,000 increase in trade show expenses, and an $116,000 increase in marketing services and advertising. Stock-based compensation expense allocated to sales and marketing was $96,000 and $93,000 for the three months ended
September 30, 2010 and 2009, respectively. Sales and marketing expenses were $21.9 million and $20.3 million for the six months ended September 30, 2010 and 2009, respectively. The increase of 7.4% was largely due to a $1.0 million
increase in trade show expenses, a $323,000 increase in compensation expense, and a $162,000 increase in marketing services. Stock-based compensation expense allocated to sales and marketing was $192,000 and $198,000 for the six months ended
September 30, 2010 and 2009, respectively. During the three and six months ended September 30, 2009, in response to the weak economy the company reduced certain trade show activities and eliminated others.

General and Administrative. General and administrative expenses were $3.0 million for the three months ended September 30,
2010 and 2009, respectively. Stock-based compensation expense allocated to general and administrative expense was $103,000 and $81,000 for the three months ended September 30, 2010 and 2009,



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respectively. General and administrative expenses were $6.0 million and $5.3 million for the six months ended September 30, 2010 and 2009, respectively. The increase of 12.1% was primarily
the result of a $450,000 increase in professional service fees and a $215,000 increase in bad debt expense. The increase in professional service fees largely related to costs associated with outside tax advisors working to address the audit of our
fiscal 2007 federal tax returns, which was completed by the Internal Revenue Service, or IRS, in July 2010. Stock-based compensation expense allocated to general and administrative expense was $211,000 and $191,000 for the six months ended
September 30, 2010 and 2009, respectively.

Interest and Other (Expense) Income, net.Interest and other (expense)
income, net, was an expense of $1,000 and an expense of $56,000 for the three months ended September 30, 2010 and 2009, respectively. Interest and other (expense) income, net, was an expense of $31,000 and income of $12,000 for the six months
ended September 30, 2010 and 2009, respectively. The net change for the three and six months ended September 30, 2010, as compared to the same periods in fiscal 2010, was primarily the result of realized foreign currency gains/losses.

Provision for Income Taxes.Our effective tax rate was 37.3% and 28.6% for the three months ended September 30,
2010 and 2009, respectively. Our effective tax rate was 38.6% and 26.1% for the six months ended September 30, 2010 and 2009, respectively. For the three and six months ended September 30, 2010, the effective tax rate differed from
the statutory tax rate principally due to state income taxes, the difference in the U.S. and foreign tax rates, compensation under our ESPP, the domestic production activities deduction, and settlement with the IRS on completion of the fiscal 2007
audit. The increase in our effective tax rate for the three and six months ended September 30, 2010, as compared to the same period in the prior fiscal year, was largely due to the expiration of the research and development tax credit under IRC
section 41 on December 31, 2009, which made it unavailable for us to include in our tax provision calculation during the three and six months ended September 30, 2010.

We are currently under an income tax audit in Germany for fiscal years 2005 through 2007. During the quarter ended September 30,
2010, the IRS completed its examination of our fiscal 2007 federal tax return. As a result of the IRS settlement, we recorded a decrease in the unrecognized tax benefits related to uncertain tax positions of $106,000.

Liquidity and Capital Resources

Since inception, we have funded our operations primarily through cash provided by operating activities and through the sale of equity securities. As of September 30, 2010, we had cash, cash
equivalents and marketable securities totaling $108.3 million.

Net cash provided by operating activities was $6.0 million and
$1.7 million for the six months ended September 30, 2010 and 2009, respectively. Net cash provided by operating activities is primarily derived from net income, as adjusted for non-cash items such as depreciation and amortization expense, and
changes in operating assets and liabilities. The increase in net cash provided by operating activities was primarily attributable to a decrease in accounts receivable due to strong accounts receivable collection activities and an increase in net
income, which was partially offset by a decrease in cash provided by changes in deferred revenue.

Net cash used in investing
activities was $37.7 million and $728,000 for the six months ended September 30, 2010 and 2009, respectively. For the six months ended September 30, 2010, we used funds of $35.6 million to purchase marketable securities, funds of $2.2
million to acquire DS Auditor and funds of $1.8 million to purchase property and equipment. We received proceeds of $2.0 million from the sale/maturity of investments. For the six months ended September 30, 2009, we used funds of $1.3 million
to purchase property and equipment and funds of $381,000 to acquire technology. We also received proceeds of $1.0 million from the maturity of investments.



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Net cash provided by
financing activities was $1.4 million for the six months ended September 30, 2010. Net cash used in financing activities was $3.1 million for the six months ended September 30, 2009. During the six months ended September 30, 2010, we
used funds of $4.3 million to pay a quarterly cash dividend of $0.10 per share to stockholders of record on June 15, 2010 and September 14, 2010. During the six months ended September 30, 2009, we used funds of $3.7 million to pay a
quarterly cash dividend of $0.09 per share to stockholders of record on June 15, 2009 and September 15, 2009. We used $2.9 million and $155,000 to acquire 197,101 and 16,151 shares of treasury stock during the six months ended
September 30, 2010 and 2009, respectively. During the six months ended September 30, 2010 and 2009, respectively, 13,191 and 10,251 of the shares that were acquired were shares withheld from employees to satisfy the minimum statutory tax
withholding obligations with respect to the income recognized by these employees upon the vesting of their restricted stock shares during the applicable period. Cash provided by financing activities generally reflects the proceeds received from the
exercise of stock options and the sale of common stock under our employee stock purchase plan, or ESPP. During the six months ended September 30, 2010 and 2009, respectively, we received proceeds of approximately $7.6 million and $130,000 and
issued 670,550 and 20,813 shares of common stock, respectively, pursuant to employee and director exercises of stock options. During the six months ended September 30, 2010 and 2009, respectively, we received proceeds of approximately $727,000
and $625,000 and issued 70,178 and 87,748 shares of common stock, respectively, pursuant to the issuance of common stock under our ESPP. Excess tax benefits from the exercise of stock options are presented as a cash flow from financing activities.
For the six months ended September 30, 2010, excess tax benefits from the exercise of stock options were $215,000. For the six months ended September 30, 2009, there were no excess tax benefits from the exercise of stock options.

Contractual Obligations

We have commitments under contractual arrangements to make future payments for goods and services. These contractual arrangements secure the rights to various assets and services to be used in the future
in the normal course of business. For example, we are contractually committed to make minimum lease payments for the use of property under operating lease agreements. In accordance with current accounting rules, the future rights and related
obligations pertaining to such contractual arrangements are not reported as assets or liabilities on our consolidated balance sheets. Our liability for unrecognized tax benefits under Financial Accounting Standards Board Accounting Standards
Codification 740 is reported in current and long-term other income taxes on our consolidated balance sheets. We expect to fund these contractual arrangements with our cash, cash equivalents and marketable securities as well as cash generated
from operations in the normal course of business.

As of September 30, 2010, we did not have any capital lease
obligations. For more information regarding our office space, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 filed with the SEC on June 4, 2010.

We expect working capital needs to increase in the foreseeable future in order for us to execute our business plan and growth strategies.
We anticipate that operating activities, as well as expected capital expenditures incurred in the normal course of business, will constitute a material use of our cash resources. In addition, we may utilize cash resources to fund acquisitions or
investments in complementary businesses, technologies or products as well as repurchase our common stock in accordance with our stock repurchase program authorized by our Board of Directors in January 2005, and the payment of dividends to our
stockholders.

We believe that our current cash and cash equivalents and cash generated from operations will be sufficient to
meet our anticipated cash requirements for working capital, capital expenditures and dividends for at least the next 12 months.

Off-Balance Sheet Arrangements

As of September 30, 2010, we did not have any off-balance sheet arrangements with unconsolidated entities or related parties, and, accordingly, there are no off-balance sheet risks to our liquidity
and capital resources from unconsolidated entities.



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Contingencies

We are currently under an income tax audit in Germany for fiscal years 2005 through 2007. We do not expect this matter to
have a material effect on our financial condition, results of operations, or cash flows.

We are involved in other claims and
legal proceedings arising from our normal operations. We do not expect these matters, individually or in the aggregate, to have a material effect on our financial condition, results of operations, or cash flows.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents, and those with maturities greater than three months are considered to be marketable
securities. Cash equivalents and short-term marketable securities consist primarily of investment grade securities with high credit ratings of relatively short duration that trade in highly liquid markets. Accordingly, we have no quantitative
information concerning the market risks and believe that the risk is minimal. We currently do not hedge interest rate exposure, but do not believe that an increase in interest rates would have a material effect on the value of our cash equivalents
or marketable securities.

At September 30, 2010, we had $74.7 million in cash and cash equivalents and $33.6 million in
short-term marketable securities. Based on our cash, cash equivalents, and marketable securities as of September 30, 2010, a one percentage point increase or decrease in the interest rates would increase or decrease our annual interest income
and cash flows by approximately $1.1 million.

At September 30, 2010, $49.6 million of our $74.7 million in cash and cash
equivalents was held in money market funds and United States government obligations. The money market funds are predominately backed by United States government securities. The net asset value of our money market funds has remained at a constant
amount of $1.00 per share. Also, as of September 30, 2010 there were no withdrawal limits on redemptions for any of the money market funds that we hold.

Our consolidated financial statements are denominated in United States dollars, and, accordingly, changes in the exchange rate between foreign currencies and the United States dollar will affect the
translation of our subsidiaries financial results into United States dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded as a separate component of stockholders
equity, was a loss of $612,000 and a loss of $560,000 at September 30, 2010 and 2009, respectively. A majority of our revenue transactions outside the United States are denominated in local currencies and the majority of operating expenses
associated with our foreign subsidiaries are denominated in local currencies; therefore, our results of operations and financial condition are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the
British pound and the European Union euro. We currently do not hedge foreign exchange rate risk. Approximately 23.2% and 20.3% of our total revenue for the six months ended September 30, 2010 and 2009, respectively, was generated from outside
of the United States. Due to the limited nature of our foreign operations, we do not believe that a 10% change in exchange rates would have a material effect on our business, financial condition, or results of operations. Based on our revenue and
operating expenses denominated in foreign currencies during the six months ended September 30, 2010 and 2009, a 10% increase or decrease in exchange rates would increase or decrease our consolidated net income by approximately $41,000 and
$24,000, respectively.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
disclosure controls and procedures as of September 30, 2010. The disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, mean
controls and other procedures of a company that are designed to



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ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2010, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting
occurred during the fiscal quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER
INFORMATION



|ITEM 1. | Legal Proceedings
|------- | -----------------

Neither we, nor any of our subsidiaries, are currently subject to any material legal proceedings, nor to our knowledge, is any material
legal proceeding threatened against us or any of our subsidiaries.



|ITEM 1A. | Risk Factors
|-------- | ------------

We operate
in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this
quarterly report on Form 10-Q, you should carefully consider the factors discussed in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, as filed with the Securities and
Exchange Commission on June 4, 2010, or the Annual Report, which could materially affect our business, financial condition or future results. There are no material changes to the risk factors described in our Annual Report.



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|ITEM 2. | Unregistered Sales of Securities and Use of Proceeds
|------- | ----------------------------------------------------

Issuer Purchases of Equity Securities



|                       |  |                                 |         |  |                             |   |       |                                                                                 |  |  |                                                                            |  |  |  |         | 
|---------------------- |  | ------------------------------- | ------- |  | --------------------------- | - | ----- | ------------------------------------------------------------------------------- |  |  | -------------------------------------------------------------------------- |  |  |  | ------- | 
|Period                 |  | Total Number ofShares Purchased |         |  | Average Price Paidper Share |   |       | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans
orPrograms(1) |  |  | Maximum Number ofShares That May YetBe Purchased Underthe Plans
orPrograms | 
|July 1  31, 2010      |  |                                 | 2,544   |  |                             | $ | 15.15 |                                                                                 |  |  | 2,544                                                                      |  |  |  | 666,368 | 
|August 1  31, 2010    |  |                                 | 151,430 |  |                             | $ | 14.38 |                                                                                 |  |  | 151,430                                                                    |  |  |  | 514,938 | 
|September 1  30, 2010 |  |                                 | 10,000  |  |                             | $ | 16.51 |                                                                                 |  |  | 10,000                                                                     |  |  |  | 504,938 | 
|                       |  |                                 |         |  |                             |   |       |                                                                                 |  |  |                                                                            |  |  |  |         | 
|Total                  |  |                                 | 163,974 |  |                             | $ | 14.52 |                                                                                 |  |  | 163,974                                                                    |  |  |  | 504,938 | 
|                       |  |                                 |         |  |                             |   |       |                                                                                 |  |  |                                                                            |  |  |  |         | 



|(1) | On January 31, 2005, we announced a stock repurchase program pursuant to which we are authorized to purchase up to 1,000,000 shares of common stock from time to
time on the open market or in privately negotiated transactions. This program does not have a specified termination date. On February 4, 2008, we announced that our Board of Directors approved an increase of an additional 1,000,000 shares under
our stock repurchase program. Any repurchased shares will be available for issuance in connection with our stock plans or other corporate purposes. As of September 30, 2010, we had repurchased an aggregate of 1,495,062 shares of common stock
under this program.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|ITEM 4. | (Removed and Reserved)
|------- | ----------------------



|ITEM 5. | Other Information
|------- | -----------------

None.



|ITEM 6. | Exhibits
|------- | --------

See exhibit
index.



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SIGNATURE

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



|                       |  |                                       |  |                                           
|---------------------- |  | ------------------------------------- |  | ------------------------------------------
|                       |  | OPNET TECHNOLOGIES, INC. (Registrant)
|                       |  |                                      
|                       |  | By:                                   |  | /S/    MEL F.
WESLEY                      
|Date: November 5, 2010 |  | Name:                                 |  | Mel F. Wesley                             
|                       |  | Title:                                |  | Vice President and Chief Financial Officer



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OPNET TECHNOLOGIES, INC.

EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                              
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                  
|               | 
|3.1            |  | Third Amended and Restated Certificate of Incorporation of the Registrant, incorporated by reference from exhibit 3.2 to the Registrants Registration Statement on Form
S-1(File No. 333-2588).                             
|               | 
|3.2            |  | Second Amended and Restated By-Laws of the Registrant, incorporated by reference from exhibit 3.2 to the Registrants Annual Report on Form 10-K for the period ended
March 31, 2007, as filed with the SEC on June 11, 2007.
|               | 
|31.1           |  | Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                  
|               | 
|31.2           |  | Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                  
|               | 
|32.1           |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                           
|               | 
|32.2           |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                           



35