10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

OR

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

For the transition period from             to             

Commission file number 0000-26251

NETSCOUT SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

310 Littleton Road, Westford, MA 01886

(978) 614-4000

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

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

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

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of November 2, 2005 was 31,077,148.

NETSCOUT SYSTEMS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2005

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements	3
a.) Condensed Consolidated Balance Sheets: As of September 30, 2005 and March 31, 2005	3
b.) Condensed Consolidated Statements of Operations: For the three and six months ended September 30, 2005 and September 30, 2004	4
c.) Condensed Consolidated Statements of Cash Flows: For the six months ended September 30, 2005 and September 30, 2004	5
d.) Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	42
Item 4. Controls and Procedures	43
PART II: OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 4. Submission of Matters to a Vote of Security Holders	44
Item 6. Exhibits	44
SIGNATURES	45
EXHIBIT INDEX	46

2

PART I: FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

NetScout Systems, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

	September 30, 2005			March 31, 2005
Assets
Current assets:
Cash and cash equivalents	$	32,706		$	57,070
Marketable securities		38,796			26,793
Accounts receivable, net of allowance for doubtful accounts of $35 and $34 at September 30, 2005 and March 31, 2005, respectively		12,204			11,886
Inventories		4,514			3,114
Refundable income taxes		1,419			1,399
Deferred income taxes		2,318			2,356
Prepaids and other current assets		2,098			3,003
Total current assets		94,055			105,621
Fixed assets, net		6,880			6,011
Goodwill		36,561			28,839
Other intangible assets, net		1,302			—
Capitalized software development costs, net		—			221
Deferred income taxes		6,640			7,586
Long-term marketable securities		6,007			—
Restricted cash		1,334			—
Other assets		9			9
Total assets	$	152,788		$	148,287
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,481		$	2,520
Accrued compensation		6,585			6,385
Accrued other		3,073			2,976
Deferred revenue		16,272			17,680
Total current liabilities		29,411			29,561
Accrued compensation		35			—
Deferred acquisition payment		1,334			—
Deferred revenue		1,124			1,277
Total long term liabilities		2,493			1,277
Total liabilities		31,904			30,838
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.001 par value: 5,000,000 shares authorized; no shares issued or outstanding at September 30, 2005 and March 31, 2005		—			—
Common stock, $0.001 par value: 150,000,000 shares authorized; 35,174,195 and 34,892,273 shares issued and 30,970,972 and 30,689,050 shares outstanding at September 30, 2005 and March 31, 2005, respectively		35			35
Additional paid-in capital		114,338			112,286
Accumulated other comprehensive loss		(114	)		(130	)
Deferred compensation		(739	)		—
Treasury stock at cost, 4,203,223 shares at September 30, 2005 and March 31, 2005		(26,490	)		(26,490	)
Retained earnings		33,854			31,748
Total stockholders’ equity		120,884			117,449
Total liabilities and stockholders’ equity	$	152,788		$	148,287

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

3

NetScout Systems, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,					Six Months Ended September 30,
	2005		2004			2005		2004
Revenue:
Product	$	15,069	$	12,224		$	30,115	$	23,784
Service		8,581		7,826			16,852		15,931
License and royalty		—		439			184		871
Total revenue		23,650		20,489			47,151		40,586
Cost of revenue:
Product		4,300		3,901			8,926		7,554
Service		1,177		1,077			2,434		2,142
Total cost of revenue		5,477		4,978			11,360		9,696
Gross profit		18,173		15,511			35,791		30,890
Operating expenses:
Research and development (including stock-based compensation of $83, $-, $142, and $-, respectively)		4,639		4,058			9,253		8,377
Sales and marketing (including stock-based compensation of $24, $-, $44, and $-, respectively)		9,532		8,802			19,554		17,585
General and administrative (including stock-based compensation of $8, $-, $8, and $-, respectively)		2,211		1,806			4,496		3,760
Amortization of other intangible assets		39		—			71		—
In-process research and development		—		—			143		—
Total operating expenses		16,421		14,666			33,517		29,722
Income from operations		1,752		845			2,274		1,168
Interest income and other expenses, net		569		119			1,083		298
Income before income tax expense		2,321		964			3,357		1,466
Income tax expense (benefit)		867		(93	)		1,251		112
Net income	$	1,454	$	1,057		$	2,106	$	1,354
Basic net income per share	$	0.05	$	0.03		$	0.07	$	0.04
Diluted net income per share	$	0.05	$	0.03		$	0.07	$	0.04
Shares used in computing:
Basic net income per share		30,970		30,533			30,905		30,491
Diluted net income per share		31,614		31,288			31,512		31,517

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

4

NetScout Systems, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	2,106		$	1,354
Adjustments to reconcile net income to cash provided by operating activities, net of the effects of the acquisition of Quantiva’s business:
Depreciation		1,331			1,207
Amortization of other intangible assets		71			—
Amortization of capitalized software and expense related to acquired software		413			332
In-process research and development		143			—
Loss on disposal of fixed assets		61			62
Stock-based compensation expense		194			—
Deferred income taxes		1,007			(327	)
Changes in assets and liabilities:
Accounts receivable, net		(318	)		1,198
Inventories		(1,400	)		417
Refundable income taxes		(20	)		691
Prepaids and other current assets		921			(541	)
Other assets		—			6
Accounts payable		961			(121	)
Accrued compensation and other expenses		332			854
Income taxes payable		—			(490	)
Deferred revenue		(1,561	)		(884	)
Net cash provided by operating activities		4,241			3,758
Cash flows from investing activities:
Purchase of marketable securities		(56,519	)		(31,857	)
Proceeds from maturity of marketable securities		38,523			47,854
Acquisition of Quantiva’s business		(9,470	)		—
Purchase of fixed assets		(2,235	)		(1,664	)
Net cash (used in) provided by investing activities		(29,701	)		14,333
Cash flows from financing activities:
Proceeds from issuance of common stock		1,096			768
Net cash provided by financing activities		1,096			768
Net (decrease) increase in cash and cash equivalents		(24,364	)		18,859
Cash and cash equivalents, beginning of period		57,070			19,011
Cash and cash equivalents, end of period	$	32,706		$	37,870
Supplemental disclosure of cash flow information:
Cash paid for interest	$	11		$	122
Cash paid for income taxes	$	288		$	251
Non-cash financing activities:
Tax benefits of disqualifying dispositions of incentive stock options recorded to additional paid-in capital	$	23		$	24

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

5

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements as of September 30, 2005 and for the three and six months ended September 30, 2005 and 2004, respectively, have been prepared by NetScout Systems, Inc. (“NetScout” or the “Company”) in accordance with generally accepted accounting principles for interim financial reports and the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under generally accepted accounting principles have been condensed or omitted pursuant to such regulations. In the opinion of NetScout’s management, the unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of NetScout’s financial position, results of operations and cash flows. The results of operations for the three and six months ended September 30, 2005 are not necessarily indicative of the results of operations for the year ending March 31, 2006. The balance sheet at March 31, 2005 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain prior period amounts have been reclassified to conform with the current period presentation. This reclassification had no effect on previously reported net income. NetScout reclassified $87 of amortization expense related to software acquired through the acquisition of Quantiva’s business (Note 6) from operating expenses to cost of revenue in the statement of operations as previously reported on Form 10-Q for the three months ended June 30, 2005, as filed with the Securities and Exchange Commission on August 8, 2005.

For further information, refer to the consolidated financial statements and footnotes thereto included in NetScout’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005, as filed with the Securities and Exchange Commission on June 3, 2005.

2. Stock-Based Compensation

NetScout accounts for stock-based awards to employees using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. NetScout has adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment to FAS No. 123.” All stock-based awards to non-employees are accounted for using the fair value method in accordance with SFAS No. 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

6

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except share and per share data)

(Unaudited)

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

	Three Months Ended September 30,						Six Months Ended September 30,
	2005			2004			2005			2004
Net income as reported	$	1,454		$	1,057		$	2,106			1,354
Add: stock-based compensation under APB No. 25		115			—			194			—
Deduct: stock-based employee compensation expense determined under fair value-based methods for all awards, net of tax		(623	)		(1,277	)		(1,472	)		(2,792	)
Pro forma net income (loss)	$	946		$	(220	)		828		$	(1,438	)
Basic net income (loss) per share:
As reported	$	0.05		$	0.03		$	0.07		$	0.04
Pro forma	$	0.03		$	(0.01	)	$	0.03		$	(0.05	)
Diluted net income (loss) per share:
As reported	$	0.05		$	0.03		$	0.07		$	0.04
Pro forma	$	0.03		$	(0.01	)	$	0.03		$	(0.05	)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Three Months Ended September 30,						Six Months Ended September 30,
Option Plans	2005			2004			2005			2004
Expected option term		5 years			4 years			5 years			4 years
Weighted average risk-free interest rate		4.2	%		3.6	%		4.0	%		3.6	%
Expected volatility		95	%		100	%		95	%		100	%
Dividend yield		—			—						—
Weighted average fair value	$	4.33		$	4.04		$	3.32		$	4.55
	Three Months Ended September 30,						Six Months Ended September 30,
Stock Purchase Plan	2005			2004			2005			2004
Expected option term		—			—			0.5 years			0.5 years
Weighted average risk-free interest rate		—			—			3.2	%		1.2	%
Expected volatility		—			—			59	%		100	%
Dividend yield		—			—			—			—
Weighted average fair value	$	—			—		$	1.23		$	2.28

In May 2005, NetScout approved the acceleration of vesting of all stock options issued on or before December 31, 2004 that become exercisable on or after April 1, 2006, so that all such options shall become fully exercisable on March 31, 2006. The purpose of this acceleration was to enable NetScout to avoid recognizing stock-based compensation expense associated with these options in future periods upon the adoption of SFAS No. 123(R), which becomes effective for NetScout on April 1, 2006. As a result of these accelerations, an expense of $2 and $4 was recorded for the three and six months ended September 30, 2005, respectively.

7

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except share and per share data)

(Unaudited)

3. Cash, Cash Equivalents and Marketable Securities

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

Marketable Securities

Marketable securities held by NetScout at September 30, 2005, with maturity dates of October 2005 through August 2007, are as follows:

	Amortized Costs		Unrealized Losses			Fair Value
U.S. government and municipal obligations	$	19,141	$	(114	)	$	19,027
Commercial paper		26,838		—			26,838
Less restricted investment		1,078		(16	)		1,062
Marketable securities	$	44,901	$	(98	)	$	44,803
Short-term marketable securities						$	38,796
Long-term marketable securities						$	6,007

Marketable securities held by NetScout at March 31, 2005, with maturity dates of April 2005 through March 2006, are as follows:

	Amortized Costs		Unrealised Losses			Fair Value
U.S. government and municipal obligations	$	10,031	$	(130	)	$	9,901
Commercial paper		17,878		—			17,878
Less restricted investment		1,004		(18	)		986
Marketable securities	$	26,905	$	(112	)	$	26,793
Short-term marketable securities						$	26,793
Long-term marketable securities						$	—

Restricted Investment

NetScout has a restricted investment account related to a deferred compensation plan of $1.1 million, which is currently included in prepaids and other current assets. As of September 30, 2005 and March 31, 2005, there were unrealized losses of $16 and $18, respectively, recorded as other comprehensive income (loss), net of $0 tax.

4. Income Taxes

The effective income tax rates for the three months and six months ended September 30, 2005 were 37.4% and 37.3%, respectively, compared with (9.6%) and 7.7% for the three and six months ended September 30,

8

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except share and per share data)

(Unaudited)

2004. The change in the effective income tax rates is primarily due to the resolution of a federal income tax audit for the fiscal years ended March 31, 2000, 2001, 2002 and 2003 during the three months ended September 30, 2004. As a result of completing this income tax audit, NetScout reduced previously accrued income taxes and recorded a $440 discrete net income tax benefit during the quarter ended September 30, 2004.

5. Inventories

Inventories are stated at actual cost. Cost is determined by using the first-in, first-out (“FIFO”) method. Inventories consist of the following:

	September 30, 2005		March 31, 2005
Raw materials	$	3,458	$	2,635
Work in process		394		33
Finished goods		662		446
	$	4,514	$	3,114

6. Acquisition

On April 14, 2005, NetScout completed the acquisition of substantially all of the assets of Quantiva, a provider of automated analytics solutions for application performance management. The acquisition of Quantiva’s business is intended to extend NetScout’s product offering with unique technology that automates detection and diagnosis of application performance problems before they impact business critical services. Quantiva’s patent pending technology uses real-time performance metrics to establish statistically detected behavior values using advanced modeling and analytic technologies. The Company’s financial statements include the results of operations of Quantiva subsequent to the acquisition date.

The total purchase price was approximately $9.5 million and was paid in cash. Cash paid includes $1.3 million in escrow to be paid sixteen months from the date of the acquisition. The Company has recorded the cash in escrow as Restricted Cash on the balance sheet, with an offsetting long-term liability reported as deferred acquisition payment. On the sixteenth month anniversary of the acquisition, the $1.3 million escrow and any interest earned on the balance, will be paid to Quantiva, which will reduce the restricted cash and corresponding liability balances to $0. The escrow account was established to satisfy potential claims and obligations that could arise subsequent to the acquisition. At the present time, NetScout is unaware of any such claims or obligations. The purchase price includes capitalized acquisition costs of approximately $166 consisting of legal, consulting and accounting services. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. The total purchase price of $9.5 million has been allocated to the tangible and intangible assets acquired based on NetScout’s estimates of fair values at the time of acquisition as follows:

Current assets	$	7
Fixed assets		26
Intangible assets		1,708
Goodwill		7,722
Total purchase price including acquisition costs	$	9,463

9

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except share and per share data)

(Unaudited)

Goodwill was recognized for the excess purchase price over the fair value of the assets acquired. Goodwill is primarily attributable to the expected growth from new technology and synergies related to the integration of Quantiva with our High Definition Performance Monitoring and nGenius Flow Recorder, forming our three-prong technology strategy. Goodwill from the Quantiva acquisition will be included within the Company’s one reporting unit and will be included in our enterprise-level annual review for impairment. Goodwill for tax purposes is deductible over a 15-year period.

The following table reflects the estimated fair value of the acquired intangible assets and related estimates of useful lives:

Software	$	1,255	3-year useful life
Non-compete agreements		310	2-year useful life
In-process research and development		143
	$	1,708

The acquired research and development of $143 was charged to expense as a separate line item within operating expenses on the consolidated statement of operations for the six months ended September 30, 2005.

NetScout recorded compensation expense totaling $19 and $34 for the three and six months ended September 30, 2005 related to deferred payments to be paid to two individuals two years from the date of the closing. These deferred payments are in lieu of payments the individuals would have received as security holders of Quantiva. The total amount of deferred payments to be made is $150 which is anticipated to be paid by April 2007.

The following pro forma information presents a summary of the historical consolidated statements of operations of the Company and Quantiva for the three and six months ended September 30, 2005 and 2004, giving effect to the merger as if it occurred on April 1, 2005 and 2004, respectively.

	Three Months Ended September 30,				Six Months Ended September 30,
	2005		2004		2005		2004
Pro forma revenues	$	23,650	$	20,515	$	47,190	$	40,638
Pro forma net income		1,455		610		2,018		454
Pro forma earnings per share:
Basic	$	0.05	$	0.02	$	0.07	$	0.01
Diluted	$	0.05	$	0.02	$	0.06	$	0.01

The pro forma net income and earnings per share for each period presented primarily includes adjustments for amortization of intangibles, stock-based compensation and interest expense. This pro forma information does not purport to indicate the results that would have actually been obtained had the acquisition been completed on the assumed date, or which may be realized in the future.

7. Goodwill & Other Intangible Assets

Goodwill

The carrying amount of goodwill was $36.6 million and $28.8 million as of September 30, 2005 and 2004, respectively. The Company’s goodwill resulted from the acquisition of NextPoint Networks, Inc. (“NextPoint”) in July 2000 and substantially all of the assets of Quantiva on April 14, 2005 (Note 6). The Company recorded $7.7 million of goodwill at the acquisition date related to Quantiva. During the three months ended

10

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except share and per share data)

(Unaudited)

September 30, 2005, goodwill was increased by a total of $28 due to additional acquisition related costs. In accordance with SFAS No. 142, goodwill is not amortized, but instead will be reviewed for impairment at the enterprise-level at least annually or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. If the book value of our enterprise exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recorded in an amount equal to that excess.

The change in the carrying amount of goodwill for the three and six months ended September 30, 2005 is as follows:

	For the Three Months Ended September 30, 2005		For the Six Months Ended September 30, 2005
Balance as of beginning of period	$	36,533	$	28,839
Goodwill related to the acquisition of Quantiva’s business		—		7,694
Adjustment to Quantiva goodwill		28		28
Balance as of September 30, 2005	$	36,561	$	36,561

Other Intangible Assets

The carrying amount of other intangible assets was $1.3 million as of September 30, 2005. Intangible assets acquired in a business combination are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. We amortize other intangible assets over their estimated useful lives on a straight-line basis. Other Intangible Assets consist of the following as of September 30, 2005:

	September 30, 2005
	Cost		Accumulated Amortization		Net
Software	$	1,255	$	192	$	1,063
Non-Compete Agreements		310		71		239
	$	1,565	$	263	$	1,302

There were no carrying amounts of other intangible assets as of September 30, 2004. Amortization of capitalized software related to other intangible assets, included as cost of product revenue, was approximately $105 and $192 for the three and six months ended September 30, 2005. Amortization of other intangible assets, included as operating expense, was approximately $39 and $71 for the three and six months ended September 30, 2005, respectively.

The following is the future annual amortization expense for the years ended March 31

2006	$	550
2007		574
2008		424
2009		17
Total	$	1,565

The weighted average useful life of the amortized other intangible assets is 2.8 years.

11

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except share and per share data)

(Unaudited)

8. Capitalized Software Development Costs and Purchased Software

Costs incurred in the research and development of NetScout’s products are expensed as incurred, except for certain software development costs. Costs associated with the development of computer software are expensed prior to the establishment of technological feasibility (as defined by SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed”) and capitalized thereafter until the related software products are available for first customer shipment. During the six month period ended September 30, 2003, NetScout capitalized $1.3 million of software development costs. Beginning in August 2003, NetScout commenced amortization of capitalized software development costs on a straight-line basis over a two-year period. Amortization of capitalized software development costs was $221 and $332 for the six months ending September 30, 2005 and 2004. NetScout also capitalizes purchased software in accordance with SFAS No. 86. During the six months ended September 30, 2005, NetScout capitalized $1.3 million of purchased software obtained in connection with the acquisition of Quantiva’s business (Note 6). Amortization of capitalized purchased software was $192.

Capitalized software development costs are periodically assessed for recoverability in the event of changes to the anticipated future revenue for the software products or changes in product technologies. Unamortized capitalized software development costs that are determined to be in excess of the net realizable value of the software products would be expensed in the period in which such a determination is made.

9. Commitments and Contingencies

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

Guarantor’s Agreements

NetScout warrants that its software and hardware products will substantially conform to the documentation accompanying such products on their original date of shipment. For software, which also includes software embedded in the probes sold to customers, the standard warranty commences upon shipment and expires ninety (90) days thereafter. With regard to hardware, the standard warranty commences upon shipment and expires twelve (12) months thereafter. Additionally, this warranty is subject to various exclusions which include but are not limited to non-conformance resulting from modifications made to the software or hardware by a party other than NetScout or damage to hardware caused by a power surge or a force majeure event. The Company also warrants that all support services shall be performed in a good and workmanlike manner. The Company believes that its product and support services warranties are consistent with commonly accepted industry standards. No warranty cost information is presented since service revenue associated with warranty is deferred at the time of a sale and recognized over the warranty period, therefore, no warranty costs are accrued.

Contracts that NetScout enters into in the ordinary course of business may contain standard indemnification provisions. Pursuant to these agreements, the Company may agree to defend any third party claims brought against a partner or direct customer claiming infringement of such third party’s (i) U.S. patent and/or EU patents, (ii) Berne convention member country copyright, and/or (iii) U.S., EU and/or OHIM trademark or intellectual property rights. Moreover, this indemnity may require NetScout to pay any damages awarded against the partner or direct customer in such type of lawsuit as well as reimburse the partner or direct customer for any reasonable attorney’s fees incurred by them from the lawsuit.

12

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except share and per share data)

(Unaudited)

On very limited occasions, the Company may agree to provide other forms of indemnification to partners or direct customers, such as indemnification that would obligate the Company to defend and pay any damages awarded to a third party against a partner or direct customer based on a lawsuit alleging that such third party has suffered personal injury and/or tangible property damage legally caused by negligently designed or manufactured products.

The term associated with these indemnification agreements is generally perpetual. The maximum potential amount of future payments that the Company could be required to pay arising from indemnification agreements may be limited to a certain monetary value. However, the monetary exposure associated with the majority of these indemnification agreements is unlimited. Historically, the Company has incurred no costs to defend lawsuits or settle claims relating to such indemnity agreements and believes the estimated fair value of these agreements is immaterial. If the Company were to have to defend a lawsuit and settle claims, the costs could potentially have a material impact on our financial results.

10. Material Transactions Affecting Stockholders’ Equity

Restricted Stock

On April 14, 2005, NetScout granted stock-based awards to employees who were also former employees of Quantiva and to a consultant who was also a former consultant of Quantiva, a company whose assets were acquired by NetScout (Note 6). These awards consisted of grants of 154,348 restricted stock units, which vest over two years and do not have an exercise price. NetScout recorded the intrinsic and the fair value of the restricted stock units granted to former employees and consultants as deferred compensation and recognized the current period expense in accordance with the appropriate accounting pronouncements. NetScout estimated the fair value of these restricted stock units using a per share value of $4.14, which represents NetScout’s market price on the date of grant. The restricted stock units issued to the consultant of Quantiva will be marked-to-market at each reporting date until exercised with changes being charged to compensation expense. Upon the grant of the restricted stock units, deferred compensation for the fair market value of the restricted stock units on the date granted was recorded as deferred compensation within stockholders’ equity and will be subsequently amortized as compensation expense over the vesting period. The gross value of these awards at September 30, 2005 was approximately $658. Amortization expense related to these grants for the three and six months ended September 30, 2005 was $91 and $162, respectively.

On September 14, 2005, NetScout granted equity-based awards to members of NetScout’s Board of Directors who are not employees of NetScout. These awards consisted of grants of 33,210 restricted stock units, which vest over one year after grant, provided that during such year, such directors attend at least 75% of the meetings of the Board and at least 75% of the meetings of any committee of the Board of which such directors are a member. In the event that the foregoing attendance requirements are not met, the restricted stock units will not vest until the third anniversary of the date of grant. The restricted stock units do not have an exercise price. NetScout recorded the intrinsic value of the restricted stock units granted to members of the Board of Directors as deferred compensation and recognized the current period expense in accordance with the appropriate accounting pronouncements. NetScout estimated the value of these restricted stock units using a per share value of $5.42, which represented NetScout’s market price on the date of grant. Upon the grant of the restricted stock units, deferred compensation for the value of the restricted stock units on the date granted was recorded as deferred compensation within stockholders’ equity and will be subsequently amortized as compensation expense over the vesting period. The gross value of these awards at September 30, 2005 was approximately $180. Amortization expense related to these grants for the three months ended September 30, 2005 was $8. In addition

13

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except share and per share data)

(Unaudited)

to the granting of the restricted stock units, NetScout has agreed to pay each member of the Board of Directors $20 upon exercise of the stock units to defray taxes related to the stock units. NetScout will recognize the expense related to these payments over a period equal to the vesting period of the stock units. Operating expenses related to these tax defrayment payments for the three months ended September 30, 2005, was $5.

Stock Options

On April 14, 2005, NetScout granted a stock-based award to certain former consultants of Quantiva, a company acquired by NetScout (Note 6). These awards consisted of options to purchase 20,000 NetScout common shares, which vest over a four year period and have an exercise price of $4.14. Upon the grant of the options, deferred compensation for the fair market value of the options on the date granted was recorded as deferred compensation within stockholder’s equity and will be subsequently amortized as compensation expense over the vesting period. The unamortized fair value of these awards at September 30, 2005 was approximately $61. Amortization expense related to these options for the three and six months ended September 30, 2005 was $14 and $20, respectively. NetScout calculated the fair value and related compensation expense in accordance with EITF 96-18. These options will be marked-to-market at each reporting date until exercised with changes being charged to compensation expense. Fair value of the stock options was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Three Months Ended September 30, 2005		Six Months Ended September 30, 2005
Dividend yield	None		None
Expected volatility	95	%	95	%
Risk-free interest rate	4.18	%	4.18	%
Expected life (years)	4.50		4.50

Acceleration of Stock Option Vesting Period

On May 4, 2005, NetScout approved the acceleration of vesting of all stock options issued on or before December 31, 2004 that become exercisable on or after April 1, 2006, so that all such options shall become fully exercisable on March 31, 2006. Such options had been granted under NetScout’s equity compensation plans and are held by NetScout’s employees, including its executive officers. Substantially all of such options were “out-of-the-money” as of the time of the acceleration of vesting. Options to purchase 621,234 shares of common stock or 39% of NetScout’s outstanding unvested options (of which options to purchase 112,938 shares or 7% of NetScout’s outstanding unvested options are held by NetScout’s executive officers) are subject to the acceleration. The weighted average exercise price of the options subject to the acceleration is $5.62. As a result of the acceleration, NetScout recorded $14 of deferred compensation within stockholder’s equity, which will be subsequently amortized as compensation expense over the remaining vesting periods. Amortization expense related to the acceleration of options for the three and six months ended September 30, 2005 was $2 and $4, respectively.

11. Treasury Stock

On September 17, 2001, NetScout announced an open market stock repurchase program to purchase up to one million shares of outstanding NetScout common stock, subject to market conditions and other factors. Any purchases under NetScout’s stock repurchase program may be made from time to time without prior notice. During the six months ended September 30, 2005 and 2004, NetScout did not repurchase any shares of common stock. As of September 30, 2005, NetScout has repurchased 158,000 shares of common stock under this program.

14

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except share and per share data)

(Unaudited)

12. Net Income Per Share

Calculations of the basic and diluted net income per share and potential common shares are as follows:

	Three Months Ended September 30,				Six Months Ended September 30,
	2005		2004		2005		2004
Basic:
Net income applicable to common stockholders	$	1,454	$	1,057	$	2,106	$	1,354
Weighted average common shares outstanding		30,969,545		30,532,876		30,905,000		30,490,893
Basic net income per share	$	0.05	$	0.03	$	0.07	$	0.04
Diluted:
Net income applicable to common stockholders	$	1,454	$	1,057	$	2,106	$	1,354
Weighted average common shares outstanding		30,969,545		30,532,876		30,905,000		30,490,893
Stock options		545,802		755,382		517,782		1,026,146
Restricted stock units		98,684		—		89,637		—
Diluted weighted average shares		31,614,031		31,288,258		31,512,419		31,517,039
Diluted net income per share	$	0.05	$	0.03	$	0.07	$	0.04

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

	Three Months Ended September 30,		Six Months Ended September 30,
	2005	2004	2005	2004
Stock options	1,568,981	1,570,757	1,638,163	1,457,529

13. Other Comprehensive Income (Loss)

Other comprehensive income (loss) adjustments primarily consist of unrealized gains and losses on marketable securities and restricted investment. Other comprehensive income (loss) for the three and six months ended September 30, 2005 and 2004 is as follows:

	Three Months Ended September 30,					Six Months Ended September 30,
	2005			2004		2005		2004
Net income	$	1,454		$	1,057	$	2,106	$	1,354
Unrealized gains (loss) on marketable securities and restricted investment, net of $0 tax		(22	)		46		16		(84	)
Other comprehensive income (loss)	$	1,432		$	1,103	$	2,122	$	1,270

15

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except share and per share data)

(Unaudited)

14. Geographic Information

Total revenue was distributed geographically as follows:

	Three Months Ended September 30,				Six Months Ended September 30,
	2005		2004		2005		2004
North America	$	19,368	$	16,730	$	37,824	$	33,999
Europe—Middle East—Africa		2,877		2,328		6,645		4,044
Asia—Pacific		1,405		1,431		2,682		2,543
	$	23,650	$	20,489	$	47,151	$	40,586

The North America revenue includes sales to North American resellers. These North American resellers fulfill customer orders based upon joint selling efforts in conjunction with our direct sales force and may subsequently ship NetScout products to international locations. NetScout reports these shipments as North America revenue since NetScout ships the products to a North American location. Revenue attributable to locations outside of North America is a result of export sales. Substantially all of NetScout’s identifiable assets are located in the United States.

15. Recently Issued Accounting Pronouncements

In December 2004, the FASB issued SFAS No.123(R), “Share-Based Payment”. This statement will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This statement covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans, and replaces FASB SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Statement 123, as originally issued in 1995, established a fair-value-based method of accounting for share-based payment transactions with employees as the preferred methodology. However, that statement permitted entities the option of continuing to apply the guidance in APB No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply SFAS No. 123(R) as of the annual reporting period that begins after June 15, 2005. In May 2005, NetScout approved the acceleration of vesting of all stock options issued on or before December 31, 2004 that become exercisable on or after April 1, 2006, so that all such options shall become fully exercisable on March 31, 2006. The purpose of this acceleration was to enable NetScout to avoid recognizing stock-based compensation expense associated with these options in future periods upon the adoption of SFAS No. 123(R), which becomes effective for NetScout on April 1, 2006. Irrespective of these accelerations, SFAS No. 123(R) will impact NetScout’s financial statements upon adoption. NetScout is continuing to evaluate this financial statement impact.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—Amendment of ARB No. 43, Chapter 4.” SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory

16

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(In thousands, except share and per share data)

(Unaudited)

costs incurred during fiscal years beginning after June 15, 2005. NetScout does not expect the adoption of SFAS No. 151 will have a material effect on our financial position or operating results.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets—Amendment of ABP Opinion No. 29.” SFAS No. 153 is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged and it eliminates the narrow exceptions for non-monetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of non-monetary assets that do not have “commercial substance.” The provisions in SFAS No. 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. NetScout does not expect the adoption of SFAS No. 153 will have a material effect on our financial position or operating results.

The FASB has issued two FASB Staff Positions (“FSP”) that provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 (the “AJCA”) that was signed into law on October 22, 2004. The AJCA provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. The AJCA also provides for temporary dividend deductions equal to 85% of cash dividends received during the tax year from controlled foreign corporations and invested in the United States. The result of this legislation could affect how companies report their deferred income tax balances. The first FSP, FSP SFAS 109-1, concludes that the tax relief from the qualified domestic production activities should be accounted for as a “special deduction” as described in FASB Statement No. 109, “Accounting for Income Taxes.” The second FSP, FSP SFAS 109-2, gives a company additional time to evaluate the effects of the AJCA on any plan for reinvestment or repatriation of foreign earning for purposes of applying FASB Statement No. 109. NetScout has not yet completed its evaluation of the provisions of the AJCA. The repatriation of foreign earnings would not have a material effect on NetScout’s consolidated financial statements. NetScout does not anticipate the repatriation of foreign earnings to the United States in the future.

In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 replaces APB No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that the adoption of SFAS No. 154 will have a material effect on our financial position or operating results.

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

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

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

Overview

NetScout Systems, Inc. (“NetScout” or the “Company”) designs, develops, manufactures, markets, sells and supports a family of integrated products that enable performance management and optimization of complex, high-speed networks, including the ability to efficiently deliver critical business applications and content to end-users. We manufacture and market these products in an integrated hardware and software solution that has been used by enterprises, large governmental agencies and service providers worldwide. We manage our business as a single operating segment and substantially all of our identifiable assets are located in the United States.

NetScout was incorporated in 1984 as a consulting services company. In 1992, we began to develop, manufacture and market our first infrastructure performance management products. Our operations have been financed principally through cash provided by operations.

Our operating results are influenced by a number of factors, including the mix of products, services and license and royalties sold, pricing, costs of materials used in our products and the expansion of our operations during the fiscal year. Factors that affect our ability to maximize our operating results include: our ability to introduce and enhance existing products, the marketplace acceptance of those new or enhanced products, continued expansion into international markets and current economic conditions.

For the six months ended September 30, 2005, our total revenue increased $6.6 million to $47.2 million compared to the $40.6 million of total revenue for the six months ended September 30, 2004. In addition, our cost of revenue increased by $1.7 million to $11.4 million for the six months ended September 30, 2005 compared to $9.7 million in the six months ended September 30, 2004. Gross profit at $35.8 million, or 75.9% of revenue, in the six months ended September 30, 2005 increased from $30.9 million, or 76.1% of revenue, in the six months ended September 30, 2004. Our gross margin is primarily impacted by the mix and volume of product, service, license and royalty revenue. We realize significantly higher gross margins on license and royalty revenue relative to product and service revenue and higher gross margins on service revenue relative to product revenue.

For the six months ended September 30, 2005, our total operating expenses were $33.5 million, which include research and development, sales and marketing, general and administrative expenses, amortization of intangibles and in-process research and development expenses, increasing by $3.8 million compared to the $29.7 million of total operating expenses in the six months ended September 30, 2004. Primary contributors to this increase in overall expenses were a $1.5 million increase in personnel costs due to increased headcount, employee compensation, including incentive compensation, a $892,000 increase in commissions which was

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mainly due to increased revenue attainment and higher attainment of sales incentive programs, a $412,000 increase in marketing spending, a $194,000 increase in stock-based compensation expenses mainly due to the acquisition of Quantiva’s business, a $257,000 increase in sales travel, and $71,000 in amortization of intangibles and $143,000 of in-process research and development expenses, both resulting from the acquisition of Quantiva’s business.

Net income for the six months ended September 30, 2005 increased by $752,000 to $2.1 million compared to a net income of $1.4 million for the six months ended September 30, 2004. This increase is primarily due to the increase in gross profit of $4.9 million that resulted from higher revenue attainment and an increase of $785,000 in interest income due to higher interest rates, partially offset by the increase in operating expenses of $3.8 million and an increase of $1.1 million in income tax expense due to higher income before tax.

We are beginning to see significant operating leverage and remain focused on increasing our operating margin. This is largely driven by strong year-over-year revenue growth, a positive indicator of the adoption of our nGenius solution within our customer base. We released the new Workgroup version of our flagship nGenius Performance Manager software in the second quarter of fiscal year 2006, providing the same fully integrated application and network performance management capabilities scaled down to a smaller number of managed elements and at a lower price. The Workgroup version incorporates our High Definition Performance Management technology. This technology, combined with our nGenius Flow Recorder and our acquisition of substantially all of the assets of Quantiva, furthers our strategy to deliver automated analytical products to our customers.

Critical Accounting Policies

NetScout considers accounting policies related to revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of inventories, valuation of goodwill, valuation of other intangible assets, capitalization of software development costs, purchased software and internal use software, and income taxes to be critical in fully understanding and evaluating our financial results.

Revenue Recognition

Product revenue consists of sales of our hardware products and licensing of our software products. Product revenue is recognized upon shipment, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable and collection of the related receivable is probable.

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

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

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Multi-element arrangements are customer purchases of a combination of NetScout product and service offerings which may be delivered at various points in time. For multi-element arrangements, each item of the purchase is analyzed and a portion of the total purchase price is allocated to the undelivered items, primarily support agreements and training, using vendor-specific objective evidence of fair value of that undelivered item. Under the residual method, the remaining portion of the purchase price is allocated to the delivered items, generally hardware products and licensed software products, regardless of any separate prices stated within the contract for each item. Vendor-specific objective evidence of fair value of the undelivered items is based on the price customers pay when the item is sold separately.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable is reduced by an allowance for doubtful accounts. Our standard payment terms are net 30 days. We monitor all accounts receivable balances of our customers and assess any collection issues as they arise. We believe our credit policies are prudent and reflect normal industry terms and business risk. At September 30, 2005, no one customer accounted for more than 10% of our accounts receivable balance. At September 30 2004, one customer accounted for more than 10% of our accounts receivable balance. Historically, we have not experienced any significant non-performance by our customers nor do we anticipate non-performance by our customers in the future and, accordingly, typically we do not require collateral from our customers. On rare occasions we will require select international customers to provide a letter of credit. We perform credit checks on all potential new customers prior to acceptance of an order. We maintain allowances for doubtful accounts for possible losses resulting from the failure of our customers to make their required payments and any losses are recorded as general and administrative expenses. As of September 30, 2005, our allowance for doubtful accounts was $35,000. The allowance for doubtful accounts is based upon our judgments and estimates of the uncollectability of specific accounts receivable, historical bad debts, customer credit-worthiness, current economic trends and customer concentrations. Significant judgments and estimates are made when establishing the allowance for doubtful accounts. If these accounting judgments and estimates prove to be materially inaccurate, our financial results could be materially and adversely impacted in future periods.

Valuation of Inventories

Inventories are stated at the lower of actual cost or their net realizable value. Cost is determined by using the first-in, first-out (“FIFO”) method. Inventories consist primarily of raw materials and finished goods. Inventory carrying values are reduced to our estimate of net realizable value by a reserve for obsolete and excess inventory. As of September 30, 2005, our reserve for obsolete and excess inventory was $556,000. We regularly monitor our inventories for potential obsolete and excess inventory. Our reserve for obsolete and excess inventory is based upon our estimates of forecasts of unit sales, expected timing and impact of new product introductions, historical product demand, current economic trends, expected market acceptance of our products and expected customer buying patterns. We adjust the cost basis of inventory that has been written down to reflect the net realizable value. Significant judgments and estimates are made when establishing the reserve for obsolete and excess inventory. If these accounting judgments and estimates prove to be materially inaccurate, our financial results could be materially and adversely impacted in future periods.

Valuation of Goodwill

The carrying amount of goodwill was $36.6 million and $28.8 million as of September 30, 2005 and 2004, respectively. The balance as of September 30, 2005 includes an addition of $7.7 million representing the excess purchase price paid by NetScout over the fair value of tangible and intangible assets acquired from Quantiva as of April 14, 2005, the closing date of the acquisition. In accordance with SFAS No. 142, goodwill is not amortized, but instead will be reviewed for impairment at the enterprise-level at least annually or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. If the book value of our enterprise exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recorded in an amount equal to that excess.

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We consider the market capitalization of our outstanding common stock versus our stockholders’ equity as one indicator that may potentially trigger an impairment of goodwill analysis. At times, the market capitalization of our common stock may decline temporarily below our stockholders’ equity; however, we do not believe that any temporary decline below our stockholders’ equity would necessarily indicate impairment. If adverse economic or industry trends or decrease in customer demand result in a significant decline in our stock price for a sustained period in the future, we would need to assess an impairment loss. Significant judgments and estimates are made when assessing impairment. If these accounting judgments and estimates prove to be materially inaccurate, an asset may be determined to be impaired and our financial results could be materially and adversely impacted in future periods. Likewise, if a future event or circumstance indicates that an impairment assessment is required and an asset is determined to be impaired, our financial results could be materially and adversely impacted in future periods. As of September 30, 2005, there was no impairment of goodwill.

Valuation of Other Intangible Assets

The carrying amount of other intangible assets was $1.3 million and $0 as of September 30, 2005 and 2004, respectively. We account for our other intangible assets at historical cost. Other intangible assets acquired in a business combination are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. We amortize other intangible assets over their estimated useful lives on a straight-line basis. The Company’s other intangible assets resulted from the acquisition of Quantiva’s business on April 14, 2005 (see Note 6).

Capitalization of Software Development Costs, Purchased Software and Internal Use Software

Costs incurred in the research and development of NetScout’s products, including the various small point releases and small product enhancements which are released throughout each fiscal year, are expensed as incurred. Costs associated with the development of computer software are expensed prior to establishment of technological feasibility (as defined by SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed”) and capitalized thereafter, until the related software products are available for first customer shipment. Judgment is required in determining the point at which technological feasibility has been met. Future major product enhancements, such as those included in our Performance Manager 2.0 release in fiscal year 2004, would be capitalized under the guidance of SFAS No. 86. Amortization of capitalized software development costs are charged to cost of revenue on a straight-line basis over two years. NetScout also capitalizes purchased software in accordance with SFAS No. 86.

As of September 30, 2005, capitalized software development costs were $1.3 million and accumulated amortization of such costs was $1.3 million, resulting in net capitalized software costs of $0. Capitalized software development costs are subject to an ongoing assessment of recoverability based upon anticipated future revenue for the software products and changes in product technologies. Unamortized capitalized software development costs that are determined to be in excess of the net realizable value of the software product will be expensed in the period in which such a determination is made. Significant judgments and estimates are made when assessing the net realizable value of the unamortized software development costs. If our accounting judgments and estimates prove to be materially inaccurate, we may expense such software development costs immediately and our financial results could be materially and adversely impacted in future periods. As of September 30, 2005 purchased software was $1.3 million and accumulated amortization of such purchased software was $192,000.

NetScout is implementing a new Enterprise Resource Planning (“ERP”) system in order to better manage the growth and increasing complexity of our business and to enhance the effectiveness and efficiency of our internal control over financial reporting. Certain costs that are incurred in the procurement and development of this ERP system are capitalized in accordance with SOP 98-1 (“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”). Preliminary project planning costs associated with the project were expensed as incurred. Once we executed contracts with third parties and committed to develop the software

21

system, capitalization of eligible costs began. Capitalized costs to date include fees paid for the purchase of software, fees paid to third parties to develop the software during the application development stage, and payroll and payroll related costs for employees who are directly associated with and devote time to the software project and who are working on software development tasks such as design requirements, development, infrastructure, testing and project management, which qualify for capitalization. General and administrative costs and overhead costs are not capitalized. As of September 30, 2005, capitalized software for the ERP system totaled $796,000. Amortization of internal use software will be recorded on a straight-line basis over five years once the project is substantially complete and ready for its intended use, which is expected to be in the first half of fiscal year 2007.

Income Taxes

NetScout estimates the quarterly income tax expense based on our projected annual effective tax rate. Significant judgments and estimates are made when assessing NetScout’s projected annual effective tax rate. In addition, we may record certain tax reserves to address potential exposures involving our tax positions. Our estimate of the value of our tax reserves contains assumptions based on past experiences and judgments about the interpretation of statutes, rules and regulations by taxing jurisdictions. If these judgments and estimates prove to be materially inaccurate, our tax rate could fluctuate significantly and our financial results could be materially and adversely impacted in the future.

NetScout recognizes deferred income tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We make an assessment of the likelihood that our deferred income tax assets will be recovered from future taxable income, and, to the extent that recovery is not believed to be more likely than not, a valuation allowance is established. All available evidence, both positive and negative, is considered in the determination of recording a valuation allowance. We consider future taxable income and ongoing tax planning strategies when assessing the need for a valuation allowance. We believe future taxable income will be sufficient to realize the deferred tax benefit of the net deferred tax assets.

As of September 30, 2005, deferred income tax assets were $9.0 million, consisting primarily of $2.6 million of federal net operating loss carryforwards and $532,000 of federal research and development tax credits, which begin to expire in fiscal year 2012, and $5.0 million of other temporary differences. Significant accounting judgments and estimates are made when determining whether it is more likely than not that our deferred income tax assets will not be realized and, accordingly, require a valuation allowance. If these judgments and estimates prove to be materially inaccurate, a valuation allowance may be required and our financial results could be materially and adversely impacted in the future. If we determine that we will not be able to realize some or all of the deferred income taxes in the future, an adjustment to the deferred income tax assets will be charged to income tax expense in the period such determination is made.

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Results of Operations

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

NetScout Systems, Inc.

Statements of Operations

Percentages of Total Revenue

	Three Months Ended September 30,				Six Months Ended September 30,
	2005		2004		2005		2004
Revenue:
Product	63.7	%	59.7	%	63.9	%	58.6	%
Service	36.3		38.2		35.7		39.3
License and royalty	—		2.1		0.4		2.1
Total revenue	100.0		100.0		100.0		100.0
Cost of revenue:
Product	18.2		19.0		18.9		18.6
Service	5.0		5.3		5.2		5.3
Total cost of revenue	23.2		24.3		24.1		23.9
Gross margin	76.8		75.7		75.9		76.1
Operating expenses:
Research and development	19.6		19.8		19.6		20.6
Sales and marketing	40.3		43.0		41.5		43.3
General and administrative	9.3		8.8		9.5		9.3
Amortization of other intangible assets	0.2		—		0.2		—
In-process research and development	—		—		0.3		—
Total operating expenses	69.4		71.6		71.1		73.2
Income from operations	7.4		4.1		4.8		2.9
Interest income and other expenses, net	2.4		0.6		2.3		0.7
Income before income tax expense	9.8		4.7		7.1		3.6
Income tax expense (benefit)	3.7		(0.5	)	2.7		0.3
Net income	6.1	%	5.2	%	4.4	%	3.3	%

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Three Months Ended September 30, 2005 and 2004

Revenue

Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consists of customer support agreements, consulting and training. License and royalty revenue consists of royalties under license agreements by original equipment manufacturers who incorporate components of our data collection technology into their own products or reproduce and sell our software products. No one customer or indirect channel partner accounted for more than 10% of our total revenue during the three months ended September 30, 2005. One customer accounted for more than 10% of our total revenue during the three months ended September 30, 2004.

	Three Months Ended September 30, (Dollars in Thousands)
	2005		2004		Percentage Change
Revenue:
Product	$	15,069	$	12,224	23	%
Service		8,581		7,826	10	%
License and royalty		—		439	(100	%)
Total revenue	$	23,650	$	20,489	15	%

Product.    The 23% or $2.8 million increase in product revenue was primarily due to an increase of approximately 11% in average selling price per unit for the three month period due to the sale of our high end probes and an increase of approximately 6% in unit sales. Also contributing to the increase in product revenue were increases in unit sales of our nGenius^® appliance products. We expect to continue to generate increasing sales sequentially from the second quarter to the third quarter of fiscal year 2006.

Service.    The 10% or $755,000 increase in service revenue was primarily due to an increase in the number of customer support agreements attributable to new product sales generated during the last 12 months, combined with continued renewals of customer support agreements from our expanding installed base. Certain older probe products are being removed from service eligibility during fiscal years 2006 and 2007; this will impact our service revenue. We expect service revenue in absolute dollars to be relatively flat sequentially from the second quarter to the third quarter of fiscal year 2006.

License and royalty.    The 100% or $439,000 decrease in license and royalty revenue was due to Cisco’s discontinuation of reselling Real Time Monitor as of February 8, 2005. There will be no future royalty revenue from Cisco related to this reseller agreement. We do not expect a material impact from the non-renewal of the reseller agreement with Cisco.

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

	Three Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
Indirect	$	15,369	65	%	$	13,187	64	%	17	%
Direct		8,281	35			7,302	36		13	%
Total Revenue	$	23,650	100	%	$	20,489	100	%	15	%

Sales to customers outside North America are primarily export sales through indirect channel partners, who are generally responsible for selling products and providing technical support and service to customers within their territory. All sales arrangements are transacted in United States dollars. Our reported international revenue

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does not include any revenue from sales to customers outside North America that are shipped to our North American-based indirect channel partners. These domestic resellers fulfill customer orders based upon joint selling efforts in conjunction with our direct sales force and may subsequently ship our products to international locations; however, we report these shipments as North America revenue since we ship the products to a domestic location.

Total revenue was distributed geographically as follows:

	Three Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
Geographic mix:
North America	$	19,368	82	%	$	16,730	82	%	16	%
International:
Europe—Middle East—Africa		2,877	12			2,328	11		24	%
Asia—Pacific		1,405	6			1,431	7		(2	%)
Subtotal International:		4,282	18			3,759	18		14	%
Total Revenue	$	23,650	100	%	$	20,489	100	%	15	%

We expect revenue from sales to customers outside North America to continue to account for a significant portion of our total revenue in the future.

Cost of Revenue and Gross Profit

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

	Three Months Ended September 30, (Dollars in Thousands)						Percentage Change
	2005			2004
Cost of revenue:
Product	$	4,300		$	3,901		10	%
Service		1,177			1,077		9	%
Total cost revenue	$	5,477		$	4,978		10	%
Gross profit:
Product $	$	10,769		$	8,323		29	%
Product %		72	%		68	%
Service $		7,404			6,749		10	%
Service %		86	%		86	%
License and royalty $		—			439		(100	%)
License and royalty %		—	%		100	%
Total gross profit $	$	18,173		$	15,511		17	%
Total gross margin %		77	%		76	%

Product.    The 10% or $399,000 increase in cost of product revenue is impacted by the 23% or $2.8 million increase in product revenue as well as an approximate 10% increase in average cost per unit due to the sale of our high end probes. In addition, we recorded $105,000 in amortization of capitalized software in the three months ended September 30, 2005 related to the acquisition of Quantiva’s business. The product gross margin percentage

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increased by 4 points to 72% from 68% due to volume efficiencies obtained by revenue increases and due to the mix of higher margin products in the three months ended September 30, 2005. We expect to generate increasing sales sequentially from the second quarter to the third quarter of fiscal year 2006; therefore, we expect the cost of product revenue to increase in absolute dollars and product gross margin percentage to remain relatively constant from the second quarter to the third quarter of fiscal year 2006.

Service.    The 9% or $100,000 increase in cost of service revenue was primarily due to a $115,000 increase in personnel costs due to increased employee compensation, including incentive compensation, offset by a $32,000 decrease in support expenses attributable to reduced repairs activity and the timing of software maintenance updates. The 10% or $655,000 increase in service gross profit corresponds with the 10% or $755,000 increase in service revenue, offset by the 9% or $100,000 increase in cost of services. We anticipate cost of service revenue to decrease in absolute dollars sequentially from the second quarter to the third quarter of fiscal year 2006 due to expected decreases in personnel related expenses including incentive compensation and benefit expenses.

Gross profits.    Our gross profit in absolute dollars increased 17% or $2.7 million. This increase was partially due to the $2.8 million increase in product revenue, offset by the associated $399,000 increase in product costs and the $755,000 increase in service revenue, offset by the associated $100,000 increase in service costs. Offsetting the increase in product gross margin was the $439,000 decrease in royalty revenue. The net effect of the combined increases in revenue and cost and decrease in royalty revenue was a 1 point increase in gross margin percentage. We anticipate that our gross margin percentage will remain essentially constant sequentially from the second quarter to the third quarter of fiscal year 2006.

Operating Expenses

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

	Three Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
			% of Revenue				% of Revenue
Research and development	$	4,639	20	%	$	4,058	20	%	14	%

The 14% or $581,000 increase in research and development expenses was primarily due to a $568,000 increase in personnel costs due to increased employee compensation, including incentive compensation and the increase in headcount associated with the four persons hired in connection with the purchase of Quantiva’s business. Average headcount in research and development was 110 and 102 for the three months ended September 30, 2005 and 2004, respectively. We anticipate research and development expenses will decrease in absolute dollars sequentially from the second quarter to the third quarter of fiscal year 2006 due to expected decreases in personnel related expenses including incentive compensation and benefit expenses, partially offset by increases in engineering costs associated with new hardware product development.

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

	Three Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
			% of Revenue				% of Revenue
Sales and marketing	$	9,532	40	%	$	8,802	43	%	8	%

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The 8% or $730,000 increase in total sales and marketing expenses was primarily due to a $284,000 increase in commission expense that was mainly due to increased revenue attainment and higher attainment of sales incentive programs, a $126,000 increase in marketing spending, a $108,000 increase in sales travel, and a $97,000 increase in personnel costs due to increased employee compensation, including incentive compensation. Average headcount in sales and marketing was 145 for the three months ended September 30, 2005 and 2004. We anticipate that sales and marketing expenses will increase in absolute dollars sequentially from the second quarter to the third quarter of fiscal year 2006 due to increases in personnel expenses related to the addition of employees, commissions expenses, and marketing spending.

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

	Three Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
			% of Revenue				% of Revenue
General and administrative	$	2,211	9	%	$	1,806	9	%	22	%

The 22% or $405,000 increase in general and administrative expense was primarily due to a $247,000 increase in personnel costs due to increased employee compensation costs, including incentive compensation and increased headcount to support compliance with requirements of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and a $84,000 increase in Sarbanes-Oxley professional services associated with our compliance with Sarbanes-Oxley. Average headcount in general and administrative was 55 and 53 for the three months ended September 30, 2005 and 2004, respectively. We anticipate general and administrative expenses will decrease in absolute dollars sequentially from the second quarter to the third quarter of fiscal year 2006 due to expected decreases in personnel related expenses, including incentive compensation and benefit expenses.

Amortization of other intangible assets.    Amortization of other intangible assets was $39,000 and $0 for the three months ended September 30, 2005 and 2004, respectively due to the acquisition of Quantiva’s business.

Interest income and other expenses, net.    Interest income includes interest earned on our cash, cash equivalents and marketable securities and restricted investments. Other expenses, net includes gain (loss) on disposal of equipment, gifts to charity, various interest and late statutory filing fees, and other miscellaneous expenses and income.

	Three Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
			% of Revenue				% of Revenue
Interest income and other expenses, net	$	569	2	%	$	119	1	%	378	%

The 378% or $450,000 increase in interest income and other expenses, net was primarily due to higher market interest rates on cash, cash equivalents and marketable securities.

Income tax expense (benefit).    We estimate our income tax expense (benefit) based on our estimated annual effective tax rate. The estimated annual effective tax rate as of September 30, 2005 is 37.4%, compared to an estimated annual effective tax rate of 24.0% as of September 30, 2004. Generally, the estimated annual effective tax rates differ from the federal statutory and state tax rates primarily due to the impact of federal and state tax credits. In addition, we recorded a discrete net income tax benefit of $440,000 during the three months ended September 30, 2004 as a result of the resolution of a federal income tax audit. The estimated annual effective tax rates for the three months ended September 30, 2005 and 2004 would have been comparable if not for the

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resolution of the federal income tax audit during the three months ended September 30, 2004. The adjusted estimated annual effective tax rates as of September 30, 2005 and 2004 would have been 37.4% and 36.7%, respectively, if this adjustment was not recorded.

	Three Months Ended September 30, (Dollars in Thousands)
	2005				2004
			% of Revenue					% of Revenue
Income tax expense (benefit)	$	867	4	%	$	(93	)	(1	)%

Net income.    Net income for the three months ended September 30, 2005 and 2004 is as follows:

	Three Months Ended September 30, (Dollars in Thousands)
	2005				2004
			% of Revenue				% of Revenue
Net income	$	1,454	6	%	$	1,057	5	%

The $397,000 increase in net income was mainly attributable to the increase in gross profit of $2.7 million and an increase of $450,000 in interest income and other expense, net, partially offset by increases in personnel costs of $912,000, sales commissions of $284,000, marketing spending of $126,000, Sarbanes-Oxley related professional services of $84,000, sales related travel costs of $108,000, stock-based compensation of $115,000, amortization of other intangibles of $39,000 and income tax expense of $960,000.

Six Months Ended September 30, 2005 and 2004

Revenue

Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consists of customer support agreements, consulting and training. License and royalty revenue consists of royalties under license agreements by original equipment manufacturers who incorporate components of our data collection technology into their own products or reproduce and sell our software products. No one customer or indirect channel partner accounted for more than 10% of our total revenue during the six months ended September 30, 2005 and 2004.

	Six Months Ended September 30, (Dollars in Thousands)				Percentage Change
	2005		2004
Revenue:
Product	$	30,115	$	23,784	27	%
Service		16,852		15,931	6	%
License and royalty		184		871	(79	%)
Total revenue	$	47,151	$	40,586	16	%

Product.    The 27% or $6.3 million increase in product revenue was primarily due to an increase of approximately 17% in average selling price per unit for the six month period due to the sale of our high end probes and an increase of approximately 5% in unit sales. Also contributing to the increase in product revenue were increases in unit sales of our nGenius^® appliance products. We expect to continue to generate increasing sales sequentially from the second quarter to the third quarter of fiscal year 2006.

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Service.    The 6% or $921,000 increase in service revenue was primarily due to an increase in the number of customer support agreements attributable to new product sales generated during the last 12 months, combined with continued renewals of customer support agreements from our expanding installed base. Certain older probe products are being removed from service eligibility during fiscal years 2006 and 2007; this will impact the growth rate of our service revenue. We expect service revenue in absolute dollars to be relatively flat sequentially from the second quarter to the third quarter of fiscal year 2006.

License and royalty.    The 79% or $687,000 decrease in license and royalty revenue was primarily due to Cisco’s discontinuation of reselling Real Time Monitor as of February 8, 2005. There will be no future royalty revenue from Cisco related to this reseller agreement. We do not expect a material impact from the non-renewal of the reseller agreement with Cisco.

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

	Six Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
Indirect	$	29,705	63	%	$	23,209	57	%	28	%
Direct		17,446	37			17,377	43		—	%
Total Revenue	$	47,151	100	%	$	40,586	100	%	16	%

Sales to customers outside North America are primarily export sales through indirect channel partners, who are generally responsible for selling products and providing technical support and service to customers within their territory. All sales arrangements are transacted in United States dollars. Our reported international revenue does not include any revenue from sales to customers outside North America that are shipped to our North American-based indirect channel partners. These domestic resellers fulfill customer orders based upon joint selling efforts in conjunction with our direct sales force and may subsequently ship our products to international locations; however, we report these shipments as North America revenue since we ship the products to a domestic location.

Total revenue was distributed geographically as follows:

	Six Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
Geographic mix:
North America	$	37,824	80	%	$	33,999	84	%	11	%
International:
Europe—Middle East—Africa		6,645	14			4,044	10		64	%
Asia—Pacific		2,682	6			2,543	6		5	%
Subtotal International:		9,327	20			6,587	16		42	%
Total Revenue	$	47,151	100	%	$	40,586	100	%	16	%

Revenue from sales to customers outside North America increased 42% as a result of continued sales and marketing focus in international regions. We expect revenue from sales to customers outside North America to continue to account for a significant portion of our total revenue in the future.

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Cost of Revenue and Gross Profit

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

	Six Months Ended September 30, (Dollars in Thousands)						Percentage Change
	2005			2004
Cost of revenue:
Product	$	8,926		$	7,554		18	%
Service		2,434			2,142		14	%
Total cost revenue	$	11,360		$	9,696		17	%
Gross profit:
Product $	$	21,189		$	16,230		31	%
Product %		70	%		68	%
Service $		14,418			13,789		5	%
Service %		86	%		87	%
License and royalty $		184			871		(79	%)
License and royalty %		100	%		100	%
Total gross profit $	$	35,791		$	30,890		16	%
Total gross margin %		76	%		76	%

Product.    The 18% or $1.4 million increase in cost of product revenue corresponds with the 27% or $6.3 million increase in product revenue as well as an approximate 13% increase in average cost per unit due to the sale of our high end probes. In addition, we recorded $192,000 in amortization of capitalized software in the six months ended September 30, 2005 related to the acquisition of Quantiva’s business. The product gross margin percentage increased by 2 points to 70% from 68% due to volume efficiencies obtained by revenue increases and due to the mix of higher margin products in the six months ended September 30, 2005. We expect to generate increasing sales sequentially from the second quarter to the third quarter of fiscal year 2006; therefore, we expect the cost of product revenue to increase in absolute dollars and product gross margin percentage to remain relatively constant from the second quarter to the third quarter of fiscal year 2006.

Service.    The 14% or $292,000 increase in cost of service revenue was primarily due to a $201,000 increase in personnel costs due to increased employee compensation, including incentive compensation and a $29,000 increase in support expenses attributable to repairs and software maintenance updates. The 5% or $629,000 increase in service gross profit corresponds with the 6% or $921,000 increase in service revenue, offset by the 14% or $292,000 increase in cost of services. We anticipate cost of service revenue to decrease in absolute dollars sequentially from the second quarter to the third quarter of fiscal year 2006 due to expected decreases in personnel related expenses including incentive compensation and benefit expenses.

Gross profits.    Our gross profit in absolute dollars increased 16% or $4.9 million. This increase was partially due to the $6.3 million increase in product revenue, offset by the associated $1.4 million increase in product costs and the $921,000 increase in service revenue, offset by the associated $292,000 in service costs. Offsetting the increase in product gross margin was the $687,000 decrease in royalty revenue. We anticipate that our gross margin percentage will remain essentially constant sequentially from the second quarter to the third quarter of fiscal year 2006.

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Operating Expenses

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

	Six Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
			% of Revenue				% of Revenue
Research and development	$	9,253	20	%	$	8,377	21	%	10	%

The 10% or $876,000 increase in research and development expenses was primarily due to an $839,000 increase in personnel costs due to increased employee compensation, including incentive compensation and the increase in headcount associated with the four persons hired in connection with the purchase of Quantiva’s business. Average headcount in research and development was 109 and 102 for the six months ended September 30, 2005 and 2004, respectively. We anticipate research and development expenses will decrease in absolute dollars sequentially from the second quarter to the third quarter of fiscal year 2006 due to expected decreases in personnel related expenses including incentive compensation and benefit expenses, partially offset by increases in engineering costs associated with new hardware product development.

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

	Six Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
			% of Revenue				% of Revenue
Sales and marketing	$	19,554	42	%	$	17,585	43	%	11	%

The 11% or $2.0 million increase in total sales and marketing expenses was primarily due to an $892,000 increase in commission expense that was mainly due to increased revenue attainment and higher attainment of sales incentive programs, a $412,000 increase in marketing spending, a $248,000 increase in personnel costs due to increased employee compensation, including incentive compensation, and a $257,000 increase in sales travel. Average headcount in sales and marketing was 144 and 145 for the six months ended September 30, 2005 and 2004, respectively. We anticipate that sales and marketing expenses will increase in absolute dollars sequentially from the second quarter to the third quarter of fiscal year 2006 due to increases in personnel expenses related to the addition of employees, commissions expenses, and marketing spending.

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

	Six Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
			% of Revenue				% of Revenue
General and administrative	$	4,496	10	%	$	3,760	9	%	20	%

The 20% or $736,000 increase in general and administrative expense was primarily due to a $399,000 increase in personnel costs due to increased employee compensation costs, including incentive compensation and

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increased headcount to support compliance with requirements of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and a $248,000 increase in professional services associated with our compliance with Sarbanes-Oxley. Average headcount in general and administrative was 56 and 53 for the six months ended September 30, 2005 and 2004, respectively. We anticipate general and administrative expenses will decrease in absolute dollars sequentially from the second quarter to the third quarter of fiscal year 2006 due to expected decreases in personnel related expenses, including incentive compensation and benefit expenses.

Amortization of other intangible assets.    Amortization of other intangible assets was $71,000 and $0 for the six months ended September 30, 2005 and 2004, respectively due to the acquisition of Quantiva’s business.

In-process research and development.    In-process research and development was $143,000 for the six months ended September 30, 2005 due to the acquisition of Quantiva’s business. In-process research and development was identified and valued through interview and analysis of data provided by management with the assistance of an independent valuation specialist regarding products under development. The amount assigned to in-process research and development was determined by identifying the specific projects that would be continued and for which technology feasibility had not been established as of the acquisition date and which had no alternative future use. The cost approach, as represented by time invested by Quantiva programmers, was used in valuing the in-process research and development. We recognize that the income approach is the preferable valuation methodology, however, due to the lack of a historical market for the technology, a meaningful cash flow projection could not be developed and therefore the cost approach was determined to be most appropriate.

Interest income and other expenses, net.    Interest income includes interest earned on our cash, cash equivalents and marketable securities and restricted investments. Other expenses, net includes gain (loss) on disposal of equipment, gifts to charity, various interest and late statutory filing fees, and other miscellaneous expenses and income.

	Six Months Ended September 30, (Dollars in Thousands)								Percentage Change
	2005				2004
			% of Revenue				% of Revenue
Interest income and other expenses, net	$	1,083	2	%	$	298	1	%	263	%

The 263% or $785,000 increase in interest income and other expenses, net was primarily due to higher market interest rates on cash, cash equivalents and marketable securities.

Income tax expense.    We estimate our income tax expense based on our estimated annual effective tax rate. The estimated annual effective tax rate as of September 30, 2005 is 37.4%, compared to an estimated annual effective tax rate of 24% as of September 30, 2004. Generally, the estimated annual effective tax rates differ from the federal statutory and state tax rates primarily due to the impact of federal and state tax credits. In addition, we recorded a net discrete income tax benefit of $440,000 during the three months ended September 30, 2004 as a result of the resolution of a federal income tax audit. The adjusted estimated annual effective tax rates for the six months ended September 30, 2005 and 2004 would have been comparable if not for the resolution of the federal income tax audit during the three months ended September 30, 2004. The estimated annual effective tax rates as of September 30, 2005 and 2004 would have been 37.4% and 36.7%, respectively, if this adjustment was not recorded.

	Six Months Ended September 30, (Dollars in Thousands)
	2005				2004
			% of Revenue				% of Revenue
Income tax expense	$	1,251	3	%	$	112	—	%

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Net income.    Net income for the six months ended September 30, 2005 and 2004 is as follows:

	Six Months Ended September 30, (Dollars in Thousands)
	2005				2004
			% of Revenue				% of Revenue
Net income	$	2,106	4	%	$	1,354	3	%

The $752,000 increase in net income was mainly attributable to the increase in product gross profit of $4.9 million and a $785,000 increase in interest income and other expenses, net, partially offset by increases in personnel costs of $1.5 million, sales commissions of $892,000, marketing spending of $412,000, Sarbanes-Oxley related professional services of $248,000, sales related travel costs of $257,000, stock-based compensation of $194,000, amortization of other intangibles and in-process research and development of $192,000 and $143,000, respectively, and income tax expense of $1.1 million.

Off-Balance Sheet Arrangements

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

Commitment and Contingencies

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

The only changes in our commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005, were reductions in such commitments for payments, the restricted cash for the deferred acquisition payment of $1.3 million and deferred payments of $150,000 due to two individuals in lieu of payments those individuals would have received as security holders of Quantiva related to the acquisition of substantially all of the assets of Quantiva (Note 6).

Liquidity and Capital Resources

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

	Six Months Ended September 30, (In Thousands)
	2005		2004
Cash and cash equivalents	$	32,706	$	37,870
Short-term marketable securities		38,796		34,416
Long-term marketable securities		6,007		5,962
Cash, cash equivalents, and marketable securities	$	77,509	$	78,248

We have a line of credit with a bank, which allows us to borrow up to $10.0 million for working capital purposes and to obtain letters of credit. Amounts available under the line of credit are a function of eligible accounts receivable, bear interest at the bank’s prime rate and are collateralized by our inventory and accounts

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receivable. As of September 30, 2005, we had a letter of credit secured under the line aggregating $3.2 million relating to our current principal operating lease for our corporate headquarters. No other amounts were outstanding under the line of credit. Under the agreement, we are required to comply with certain financial covenants, which require that NetScout maintain minimum amounts of liquidity, the most restrictive of which is a minimum tangible net worth of no less than $70 million. As of September 30, 2005, we were in compliance with such covenants.

Cash, cash equivalents and marketable securities decreased by $739,000 from September 30, 2004 to September 30, 2005. While cash and cash equivalents decreased by $5.1 million, short- and long-term marketable securities increased in total by $4.4 million.

Cash and cash equivalents were impacted by the following:

	Six Months Ended September 30, (In Thousands)
	2005			2004
Net cash provided by operating activities	$	4,241		$	3,758
Net cash provided by (used in) investing activities	$	(29,701	)	$	14,333
Net cash provided by financing activities	$	1,096		$	768

Net cash provided by operating activities

Net cash provided by operating activities amounted to $4.2 million and $3.8 million during the six months ended September 30, 2005 and 2004, respectively. The primary sources of operating cash flow in the six months ended September 30, 2005 included net income of $2.1 million, adjusted to exclude the effects of non-cash charges of $3.2 million, an increase in accounts payable of $961,000 due to the timing of payments, and an increase in prepaids and other current assets of $921,000 also due to the timing of payments, and an increase in accrued compensation and other expenses of $332,000 mainly as a result of the timing of payroll cycles and commissions and the timing of payment of incentive compensation, offset by an increase of $318,000 in accounts receivable as a result of the timing of sales within the six month period ending September 30, 2005, an increase in inventory of $1.4 million due to purchases to support anticipated quarter end order flow, and a decrease in deferred revenue of $1.6 million mainly due to the timing of our maintenance contract renewals. The primary sources of operating cash flow in the six months ended September 30, 2004 included net income of $1.4 million, adjusted to exclude the effects of non-cash charges of $1.3 million, a decrease of $1.2 million in accounts receivable as a result of the timing of sales within the six month period ending September 30, 2004, a decrease in inventory of $417,000 due to inventory management initiatives, and an increase of $854,000 in accrued compensation and other expenses primarily as a result of the timing of payroll cycles and commissions and the timing of payment of incentive compensation, offset by a $121,000 decrease in accounts payable due to the timing of payments and a decrease of $884,000 in deferred revenue, mainly due to the timing of our maintenance contract renewals.

Net cash provided by (used in) investing activities

Cash provided by (used in) investing activities was ($29.7) million and $14.3 million for the six months ended September 30, 2005 and 2004, respectively. For the six months ended September 30, 2005 and 2004, cash provided by (used in) investing activities reflects the purchase of marketable securities of $56.6 million and $31.9 million, respectively, offset by the proceeds from the maturity of marketable securities due to cash management activities of $38.5 million and $47.9 million, respectively, and the purchase of fixed assets to support our infrastructure of $2.2 million and $1.7 million, respectively. The increase of purchases of fixed assets

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year over year is mainly due to the investment in our infrastructure as our company prepares for future growth. We anticipate that our investment in our infrastructure will continue in future quarters. For the six months ended September 30, 2005 net cash provided by (used in) investing activities also reflects the acquisition of Quantiva’s business for $9.5 million.

Net cash provided by financing activities

Cash provided by financing activities was $1.1 million and $768,000 for the six months ended September 30, 2005 and 2004, respectively. For the six months ended September 30, 2005 and 2004, cash provided by financing activities was due to proceeds from the issuance of common stock in connection with the exercise of stock options and the employee stock purchase plan.

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

Additionally, a portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we evaluate potential acquisitions of such businesses, products or technologies. If our existing sources of liquidity are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or convertible debt securities. The sale of additional equity or debt securities could result in additional dilution to our stockholders.

Recently Issued Accounting Pronouncements

In December 2004, the FASB issued SFAS No.123(R), “Share-Based Payment”. This statement will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This statement covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans, and replaces FASB SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Statement 123, as originally issued in 1995, established a fair-value-based method of accounting for share-based payment transactions with employees as the preferred methodology. However, that statement permitted entities the option of continuing to apply the guidance in APB No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply SFAS No. 123(R) as of the annual reporting period that begins after June 15, 2005. In May 2005, NetScout approved the acceleration of vesting of all stock options issued on or before December 31, 2004 that become exercisable on or after April 1, 2006, so that all such options shall become fully exercisable on March 31, 2006. The purpose of this acceleration was to enable NetScout to avoid recognizing stock-based compensation expense associated with these options in future periods upon the adoption of SFAS No. 123(R), which becomes effective for NetScout on April 1, 2006. Irrespective of these accelerations, SFAS No. 123(R) will impact NetScout’s financial statements upon adoption. NetScout is continuing to evaluate this financial statement impact.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—Amendment of ARB No. 43, Chapter 4.” SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based

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on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. NetScout does not expect the adoption of SFAS No. 151 will have a material effect on our financial position or operating results.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets—Amendment of ABP Opinion No. 29.” SFAS No. 153 is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged and it eliminates the narrow exceptions for non-monetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of non-monetary assets that do not have “commercial substance.” The provisions in SFAS No. 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. NetScout does not expect the adoption of SFAS No. 153 will have a material effect on our financial position or operating results.

The FASB has issued two FASB Staff Positions (“FSP”) that provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 (the “AJCA”) that was signed into law on October 22, 2004. The AJCA provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. The AJCA also provides for temporary dividend deductions equal to 85% of cash dividends received during the tax year from controlled foreign corporations and invested in the United States. The result of this legislation could affect how companies report their deferred income tax balances. The first FSP, FSP SFAS 109-1, concludes that the tax relief from the qualified domestic production activities should be accounted for as a “special deduction” as described in FASB Statement No. 109, “Accounting for Income Taxes.” The second FSP, FSP SFAS 109-2, gives a company additional time to evaluate the effects of the AJCA on any plan for reinvestment or repatriation of foreign earning for purposes of applying FASB Statement No. 109. NetScout has not yet completed its evaluation of the provisions of the AJCA. The repatriation of foreign earnings would not have a material effect on NetScout’s consolidated financial statements. NetScout does not anticipate the repatriation of foreign earnings to the United States in the future.

In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 replaces APB No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that the adoption of SFAS No. 154 will have a material effect on our financial position or operating results.

Certain Factors Which May Impact Future Results

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

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

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

• technology spending by current and potential customers;

• uneven demand for network management solutions;

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

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

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

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

• our inability to anticipate or adapt effectively to developing markets and rapidly changing technologies;

• changes in our prices or the prices of our competitors’ products; and

• economic slowdowns or the occurrence of unforeseeable events, such as international terrorist attacks, which contribute to such slowdowns.

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

If we fail to introduce new products and enhance our existing products to keep up with rapid technological change, demand for our products may decline.    The market for network management solutions is characterized by rapid changes in technology, evolving industry standards, changes in customer requirements and frequent product introductions and enhancements. Our success is dependent upon our ability to meet our customers’ needs, which are driven by changes in computer networking technologies and the emergence of new industry standards. In addition, new technologies may shorten the life cycle for our products or could render our existing or planned products obsolete. If we are unable to develop and introduce new network and application infrastructure performance management products or enhancements to existing products in a timely and successful manner, it could have a material and adverse impact on our business, operating results and financial condition.

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

If our products contain errors, they may be costly to correct, revenue may be delayed, we could be sued and our reputation could be harmed.    Despite testing by our customers and us, errors may be found in our products after commencement of commercial shipments. If errors are discovered, we may not be able to successfully correct them in a timely manner or at all. In addition, we may need to make significant expenditures of capital resources in order to eliminate errors and failures. Errors and failures in our products could result in loss of or delay in market acceptance of our products and could damage our reputation. If one or more of our products fail, a customer may assert warranty and other claims for substantial damages against us. The occurrence or discovery of these types of errors or failures could have a material and adverse impact on our business, operating results and financial condition.

We face significant competition from other technology companies.    The market for network management solutions is intensely competitive. We believe customers make network management system purchasing decisions based primarily upon the following factors:

• product performance, functionality and price;

• name and reputation of vendor;

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• distribution strength; and/or

• alliances with industry partners.

We compete with providers of network performance management solutions, such as Concord Communications (which, following the June 7, 2005 acquisition by Computer Associates is part of Computer Associates’ Enterprise Systems Management business unit), and providers of portable network traffic analyzers and probes, such as Network General (formerly a division of Network Associates, Inc.). In addition, leading network equipment providers, including Cisco, could offer their own or competitors’ solutions in the future. Many of our current and potential competitors have longer operating histories, greater name recognition and substantially greater financial, management, marketing, service, support, technical, distribution and other resources than we do. Therefore, they may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements.

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

The success of our business depends on the continued growth in the market for and the commercial acceptance of network management solutions.    We derive all of our revenue from the sale of products and services that are designed to allow our customers to manage the performance of computer networks. Therefore, we must be able to predict the appropriate features and prices for future products to address the market, the optimal distribution strategy and the future changes to the competitive environment. In order for us to be successful, our potential customers must recognize the value of more sophisticated network management solutions, decide to invest in the management of their networks and, in particular, adopt our management solutions. Any failure of this market to continue to be viable would materially and adversely impact our business, operating results and financial condition. Additionally, businesses may choose to outsource the management of their networks to service providers. Our business may depend on our ability to continue to develop relationships with these service providers and successfully market our products to them.

The current economic and geopolitical environment may impact some specific sectors into which we sell.    Many of our customers are concentrated in a small number of sectors, including financial services, government, health and medical, and telecommunications. Certain sectors may be more acutely affected by economic, geopolitical and other factors than other sectors. To the extent that one or more of the sectors in which our customer base operates are adversely impacted, whether as a result of general conditions affecting all sectors or as a result of conditions affecting only those particular sectors, our business, financial condition and results of operations could be materially and adversely impacted.

Our success depends on our ability to expand and manage our international operations.    Sales to customers outside North America accounted for 18% of our total revenue for the three months ended September 30, 2005 and 2004, respectively, and 20% and 16% for the six months ended September 30, 2005 and 2004, respectively. We currently expect international revenue to continue to account for a significant percentage of total revenue in the future. We believe that we must continue to expand our international sales activities in order to be successful. Our international sales growth will be limited if we are unable to:

• expand international indirect distribution channels;

• hire additional sales personnel;

• adapt products for local markets and to comply with foreign regulations. For example, in July 2006, the European Union will implement its new Directive on the Restriction of the use of certain Hazardous Substances (“RoHS”), that is designed to restrict the use of cadmium, hexavalent chromium, lead, mercury and certain halogenated flame retardants (PBBs and PBDEs) in electronic products; and

• manage geographically dispersed operations.

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

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

• protectionist laws and business practices that favor local competitors;

• dependence on local indirect channel partners;

• multiple conflicting and changing governmental laws and regulations;

• longer sales cycles;

• greater difficulty in collecting accounts receivable; and

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

Our success depends on our ability to manage indirect distribution channels.    Sales to our indirect distribution channels accounted for 65% and 64% of our total revenue for the three months ended September 30, 2005 and 2004, respectively, and 63% and 57% for the six months ended September 30, 2005 and 2004, respectively. To increase our sales going forward we need to continue to enhance our direct sales efforts and to continue to develop new and further expand and manage existing indirect distribution channels, including original equipment manufacturers, distributors, resellers, systems integrators and service providers. Our indirect channel partners have no obligation to purchase any products from us. In addition, they could internally develop products that compete with our solutions or partner with our competitors or bundle or resell competitors’ solutions, possibly at lower prices. The potential inability to develop new relationships and to expand and manage our existing relationships with partners, the potential inability or unwillingness of our partners to effectively market and sell our products or the loss of existing partnerships could have a material and adverse impact on our business, operating results and financial condition.

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

We must hire and retain skilled personnel.    Our success depends in large part upon our ability to attract, train, motivate and retain highly skilled employees, particularly sales and marketing personnel, software engineers, and technical support personnel. If we are unable to attract and retain the highly skilled technical personnel that are integral to our sales, marketing, product development and technical support teams, the rate at which we can generate sales and develop new products or product enhancements may be limited. This inability could have a material and adverse impact on our business, operating results and financial condition.

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

Our reliance on sole source suppliers could adversely impact our business.    Many components that are necessary for the assembly of our probes are obtained from separate sole source suppliers or a limited group of suppliers. These components include some of our network interface cards. Our reliance on sole or limited

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suppliers involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing, quality and timely delivery of components. We do not generally maintain long-term agreements with any of our suppliers or large volumes of inventory. Our inability to obtain adequate deliveries or the occurrence of any other circumstance that would require us to seek alternative sources of these components would impact our ability to ship our products on a timely basis. This could damage relationships with our current and prospective customers, cause shortfalls in expected revenue, and could materially and adversely impact our business, operating results and financial condition.

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

Others may claim that we infringe on their intellectual property rights.    We may be subject to claims by others that our products infringe on their intellectual property rights, patents, copyrights or trademarks. These claims, whether or not valid, could require us to spend significant sums in litigation, pay damages, delay product shipments, reengineer our products, rename our products and rebuild name recognition or acquire licenses to such third-party intellectual property. We may not be able to secure any required licenses on commercially reasonable terms or secure them at all. We expect that these claims could become more frequent as more companies enter the market for network and application infrastructure performance management solutions. Any of these claims or resulting events could have a material and adverse impact on our business, operating results and financial condition.

We may fail to secure necessary additional financing.    We may require significant capital resources to expand our business and remain competitive in the rapidly changing network performance management industry. We may invest in our operations as well as acquire complementary businesses, products or technologies. Our future success may depend in part on our ability to obtain additional financing to support our continued growth and operations. If our existing sources of liquidity are insufficient to satisfy our liquidity requirements, we may seek to raise capital by:

• issuing additional common stock or other equity instruments;

• issuing debt securities;

• obtaining additional lease financings; or

• increasing our lines of credit.

However, we may not be able to obtain additional capital when we want or need it, and capital may not be available on satisfactory terms. Furthermore, any additional capital may have terms and conditions that adversely affect our business, such as financial or operating covenants, or that may result in additional dilution to our stockholders.

We may not successfully complete acquisitions or integrate acquisitions we do make, which could impair our ability to compete and could harm our operating results.    We may need to acquire complementary businesses, products or technologies to remain competitive or expand our business. We actively investigate and evaluate potential acquisitions of complementary businesses, products and technologies in the

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ordinary course of business. We may compete for acquisition opportunities with entities having significantly greater resources than us. As a result, we may not succeed in acquiring some or all businesses, products or technologies that we seek to acquire. In April 2005, we acquired substantially all assets and operations of Quantiva, a provider of automated analytics solutions for application performance management. The total purchase price for the acquisition was $9.5 million, including acquisition costs. Our inability to effectively consummate acquisitions on favorable terms could significantly impact our ability to effectively compete in our targeted markets and could negatively affect our results of operations.

Further acquisitions that we do complete could adversely impact our business. The potential adverse consequences from acquisitions, such as Quantiva, include:

• the potentially dilutive issuance of common stock or other equity instruments;

• the incurrence of debt and amortization expenses related to goodwill and other intangible assets;

• the incurrence of significant costs and expenses; or

• the potentially dilutive impact on our earnings per share.

Acquisition transactions also involve numerous business risks. These risks from acquisitions, such as Quantiva, include:

• difficulties in assimilating the acquired operations, technologies, personnel and products;

• difficulties in managing geographically dispersed and international operations;

• difficulties in assimilating diverse financial reporting and management information systems;

• the diversion of management’s attention from other business concerns;

• the potential disruption of our business; and

• the potential loss of key employees, customers, distributors or suppliers.

Our estimates and judgments related to critical accounting policies could be inaccurate.    We consider accounting policies related to revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of inventories, valuation of other intangible assets, valuation of goodwill, capitalized software development costs, purchased software and internal use software, and income taxes to be critical in fully understanding and evaluating our financial results. Management makes certain significant accounting judgments and estimates related to these policies. Our business, operating results and financial condition could be materially and adversely impacted in future periods if our accounting judgments and estimates related to these critical accounting policies prove to be inaccurate.

Failure to properly manage growth and to implement enhanced automated systems could adversely impact our business.    The growth in size and complexity of our business and our customer base has been and will continue to be a challenge to our management and operations. To manage further growth effectively, we must integrate new personnel and manage expanded operations. We must also implement a new Enterprise Resource Planning (“ERP”) system in order to manage the growth and increasing complexity of our business operations and to continue to enhance our internal controls over financial reporting in accordance with Sarbanes-Oxley. Our ERP selection process is complete and we began implementation efforts in the first quarter of our fiscal year ending March 31, 2006, with the new ERP system anticipated to be operational during the first half of our fiscal year 2007. If we are unable to effectively manage our growth, our costs, the quality of our products, the effectiveness of our sales organization, our retention of key personnel and the implementation of our new ERP system, our business, operating results and financial condition could be materially and adversely impacted.

The effectiveness of our disclosure and internal controls may be limited.    Our disclosure controls and procedures and internal controls over financial reporting may not prevent all errors and intentional misrepresentations. Any system of internal control can only provide reasonable assurance that all control

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objectives are met. Some of the potential risks involved could include but are not limited to management judgments, simple errors or mistakes, willful misconduct regarding controls or misinterpretation. There is no guarantee that existing controls will prevent or detect all material issues or that existing controls will be effective in future conditions, which could materially and adversely impact our financial results. Under Section 404 of Sarbanes-Oxley, we are required to evaluate and determine the effectiveness of our internal controls over financial reporting. Compliance with this legislation requires management’s attention and resources and will continue to cause us to incur significant expense. Management’s assessment of our internal controls over financial reporting may identify weaknesses that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Should we determine that we have material weaknesses in our internal controls over financial reporting, our results of operations or financial condition may be materially adversely affected or the price of our common stock may decline.

Although we have received a favorable assessment of our internal controls from our auditors for the fiscal year ended March 31, 2005, in future years we may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal controls over financial reporting or we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. If in future annual reports we cannot favorably assess the effectiveness of our internal controls over financial reporting, or if our independent auditors are unable to provide an unqualified attestation report on our assessment, the price of our common stock may decline.

In order to continue the enhancement of our internal control over financial reporting and to manage the growth and increasing complexity of our business, we are in the process of implementing a new ERP system which is expected to be operational in the first half of fiscal year 2007. If we are unable to successfully implement this system, improvements to our internal controls over financial reporting could be adversely impacted and this could have a material and adverse impact on our financial results in the future.

The price of our common stock may decrease due to market volatility.    The market price of our common stock has been highly volatile and has fluctuated significantly since the initial public offering of our common stock on August 12, 1999. The market price of our common stock may continue to fluctuate significantly in response to a number of factors, some of which are beyond our control. Trading activity of our stock tends to be minimal, in part as a result of officers and directors and their affiliates holding a significant percentage of our stock. In addition, the market prices of securities of technology companies have been extremely volatile and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. Also, broad market fluctuations could adversely impact the market price of our common stock, which in turn could cause impairment of goodwill that could materially and adversely impact our financial condition and results of operations.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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rates based on outstanding debt has been and is expected to continue to be modest due to the fact that although we currently have a $10.0 million line of credit with $3.2 million of letters of credit secured against it, we have no amounts outstanding under the line and no other outstanding interest-bearing debt.

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

Item 4. Controls and Procedures

As of September 30, 2005, NetScout, under the supervision and with the participation of our management, including the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2005, our disclosure controls and procedures were effective in ensuring that material information relating to NetScout, including its consolidated subsidiaries, required to be disclosed by NetScout in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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

43

PART II: OTHER INFORMATION

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

During the second quarter of fiscal year 2006, the Company did not repurchase any shares of its outstanding common stock pursuant to its open market stock repurchase program further described above in Note 11 to the Condensed Consolidated Financial Statements attached hereto.

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

At NetScout’s annual meeting of stockholders held on September 14, 2005, NetScout’s stockholders took the following actions:

(1) NetScout stockholders elected each of Narendra V. Popat and Joseph G. Hadzima, Jr., both Class III directors, to a three-year term expiring at NetScout’s annual meeting of stockholders in 2008 or until each’s respective successor has been duly elected and qualified or until each’s early resignation or removal. Election of the directors was determined by a plurality of the votes cast at the 2005 annual meeting. With respect to Mr. Popat, the votes were cast as follows: 29,901,583 shares of common stock voted for the election of Mr. Popat; and 520,934 shares of common stock were withheld as to the election of Mr. Popat. With respect to the election of Mr. Hadzima, the votes were cast as follows: 29,861,506 shares of common stock voted for the election of Mr. Hadzima; and 561,011 shares of common stock were withheld as to the election of Mr. Hadzima. No other persons were nominated, nor received votes, for election as a director of NetScout at the 2005 annual meeting. The other directors of NetScout whose terms continued after the 2005 annual meeting were Anil K. Singhal, Victor A. DeMarines, John R. Egan, Vincent J. Mullarkey, Kenneth T. Schiciano and Stuart M. McGuigan.

(2) NetScout’s stockholders ratified the selection of the firm of PricewaterhouseCoopers LLP, independent registered public accounting firm, as auditors for the fiscal year ending March 31, 2006. With respect to such matter, the votes were cast as follows: 29,902,736 shares of common stock voted for the proposal; 519,781 shares of common stock voted against the proposal; and no abstentions.

Item 6. Exhibits

(a) Exhibits

10.1 Summary of Director Compensation

10.2 Form of Restricted Stock Unit Agreement

31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

44

SIGNATURES

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

	NETSCOUT SYSTEMS, INC.
Date: November 4, 2005	/S/    ANIL K. SINGHAL
	Anil K. Singhal President, Chief Executive Officer, Treasurer and Director (Principal Executive Officer)
Date: November 4, 2005	/S/    DAVID P. SOMMERS
	David P. Sommers Senior Vice President, General Operations and Chief Financial Officer (Principal Financial Officer)
Date: November 4, 2005	/S/    LISA A. FIORENTINO
	Lisa A. Fiorentino Vice President, Finance and Administration and Chief Accounting Officer (Principal Accounting Officer)

45

EXHIBIT INDEX

Exhibit No.	Description
10.1	Summary of Director Compensation
10.2	Form of Restricted Stock Unit Agreement
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

46

EX-10.1

Exhibit 10.1

Summary of Director Compensation

The following is a summary of the compensation of non-employee directors of the Board of Directors (the “Board”) of NetScout Systems, Inc. (the “Company”):

Non-employee directors receive an annual retainer of $12,500 for their service on the Board of Directors and receive an annual retainer of $4,000 for service on each committee of the Board of Directors on which they serve. In addition, the chairman of the Audit Committee receives an annual payment of $8,000 and each chairman of the Compensation Committee and the Nominating and Corporate Governance Committee receives an annual payment of $4,000. Finally, each non-employee director receives $1,500 for each regular meeting of the Board of Directors attended and are reimbursed for their reasonable out-of-pocket expenses incurred in attending meetings of the Board or of any committee thereof.

Immediately after each Annual Meeting of Stockholders, each director receives an award of restricted stock units (“RSUs”) equal in value to $30,000 (based on the then fair market value of the Company’s common stock). The annual RSUs vest one year after grant and are paid out in shares of Company common stock shortly after vesting, provided that during such year, such director attends at least 75% of the meetings of the Board and at least 75% of the meetings of any committee of the Board of which such director is a member. In the event that the foregoing attendance requirements are not met, the RSUs will not vest until the third anniversary of the date of grant. In addition, upon payout of the shares of Company common stock underlying the RSUs, the Company will pay each non-employee director $20,000 in cash to defray all or a portion of the director’s tax liability with respect to such shares.

Each new non-employee director is granted an award of RSUs upon their election or appointment to the Board. The value of the initial award of RSUs is equal to a maximum of $30,000, subject to pro rata reduction based on the number of months remaining between the date of such director’s election and the next Annual Meeting of Stockholders. Such initial award of RSUs vest at the next Annual Meeting of Stockholders and are paid out in shares of Company common stock shortly after vesting, provided that during the period between the date of grant and the date of such Annual Meeting of Stockholders, such director attends at least 75% of the meetings of the Board and at least 75% of the meetings of any committee of the Board of which such director is a member. In the event that the foregoing attendance requirements are not met, the initial RSUs will not vest until the third anniversary of the date of grant. In addition, upon the payout of the shares of Company common stock underlying the initial RSUs, the non-employee director will also receive up to a maximum of $20,000 in cash to defray all or a portion of the director’s tax liability with respect to such shares, subject to pro rata reduction based on the number of months remaining between the date of such director’s election or appointment and the next Annual Meeting of Stockholders.

No director who is an employee of the Corporation will receive separate compensation for services rendered as a director.

EX-10.2

Exhibit 10.2

NETSCOUT SYSTEMS, INC.

FORM OF RESTRICTED STOCK UNIT AGREEMENT

NetScout Systems, Inc. (the “Company”) hereby enters into this Restricted Stock Unit Agreement, dated as of the date set forth below, with the Recipient named herein (the “Agreement”) and grants to the Recipient the RSUs specified herein pursuant to its 1999 Stock Option and Incentive Plan, as amended and in effect from time to time. The Terms and Conditions attached hereto are also a part hereof.

Name of recipient (the “Recipient”):	[Name]
Date of this RSU grant:	[Date]
Number of shares of the Company’s Common Stock (the “Underlying Shares”) underlying the equivalent number of restricted stock units (the “RSUs”) granted pursuant to this Agreement:	[Dollar value of grant divided by closing share price on date of grant]
Vesting Start Date:	[Date]
Number of RSUs that are vested on the Vesting Start Date:
Number of RSUs that are unvested the Vesting Start Date:

Vesting Schedule:

One year from the Vesting Start Date:	units
Two years from the Vesting Start Date:	units
Three years from the Vesting Start Date:	units
Four years from the Vesting Start Date:	units

	NETSCOUT SYSTEMS, INC.
Signature of Recipient
[Name]	By:
[Street Address]		Name of Officer:
[City, State, Zipcode]		Title:

NETSCOUT SYSTEMS, INC.

FORM OF RESTRICTED STOCK UNIT AGREEMENT – TERMS AND CONDITIONS

NetScout Systems, Inc. (the “Company”) agrees to award to the recipient specified on the cover page hereof (the “Recipient”), and the Recipient agrees to accept from the Company, the number of restricted stock units (the “RSUs”) specified on the cover page hereof representing an equivalent number of shares of the Company’s Common Stock (the “Underlying Shares”), on the following terms:

1. Grant Under Plan. This Restricted Stock Agreement (the “Agreement”) is made pursuant to and is governed by the Company’s 1999 Stock Option and Incentive Plan, as amended and in effect from time to time (the “Plan”), and, unless the context otherwise requires, capitalized terms used herein shall have the same meanings as in the Plan.

2. Vesting if Business Relationship Continues.

(a) Vesting Schedule. If the Recipient has maintained continuously Business Relationship with the Company through each date specified on the cover page hereof, a portion of the RSUs shall vest on such date in such amounts as are set forth opposite the such date on the cover page hereof. If the Recipient’s Business Relationship with the Company is terminated by the Company or by the Recipient for any reason, whether voluntarily or involuntarily, no additional RSUs shall become vested RSUs under any circumstances with respect to the Recipient. Any determination under this Agreement as to Business Relationship status or other matters referred to above shall be made in good faith by the Board, whose decision shall be final and binding on all parties.

“Business Relationship” means service to the Company or its successor in the capacity of an employee, officer, director, consultant, or advisor.

(b) Termination of Business Relationship. For purposes hereof, a Business Relationship shall not be considered as having terminated during any military leave, sick leave, or other leave of absence if approved in writing by the Company and if such written approval, or applicable law, contractually obligates the Company to continue the Business Relationship of the Recipient after the approved period of absence (an “Approved Leave of Absence”). In the event of an Approved Leave of Absence, vesting of RSUs shall be suspended (and all subsequent vesting dates shall be postponed by the length of the period of the Approved Leave of Absence) unless otherwise provided in the Company’s written approval of the leave of absence that specifically refers to this Agreement. For purposes hereof, a Business Relationship shall include a consulting arrangement between the Recipient and the Company that immediately follows termination of employment, but only if so stated in a written consulting agreement executed by the Company that specifically refers to this Agreement.

(c) Acceleration Upon Acquisition. If the Recipient has maintained continuously a Business Relationship with the Company through the date an Acquisition of the Company is consummated, twenty-five percent (25%) of the RSUs awarded pursuant to this Agreement that have not vested as of immediately prior to such date shall vest as of the date such Acquisition is consummated and the amount of Underlying Shares corresponding to such vested RSUs shall be issued to the Recipient in accordance with Section 3.

3. Issuance of Underlying Shares. With respect to any RSUs that become vested RSUs pursuant to Section 2, subject to Section 5, the Company shall issue to the Recipient, as soon as practicable following the applicable vesting date specified on the cover page hereof, the number of Underlying Shares equal to the number of RSUs vesting on such vesting date, provided that, if the vesting date of any portion of the RSUs shall occur during either a regularly scheduled or special “blackout period” of the Company wherein Recipient is precluded from selling shares of the Company’s Common Stock, the receipt of the corresponding Underlying Shares issuable with respect to such vesting date pursuant to this Agreement shall be deferred until after the expiration of such blackout period. The Underlying Shares the receipt of which was deferred as provided above shall be issued to Recipient as soon as practicable after the expiration of the blackout period.

4. Restrictions on Transfer. The Recipient shall not sell, assign, transfer, pledge, encumber or dispose of all or any of his or her RSUs.

5. Withholding Taxes. All grants made pursuant to this Agreement shall be subject to withholding of all applicable income and employment taxes resulting from the issuance or vesting of the RSUs or the delivery of the Underlying Shares (the “Tax Obligations”). The Company may, and the Recipient hereby agrees that and authorizes the Company on its behalf to, withhold, sell, and/or arrange for the sale of such number of Underlying Shares otherwise issuable to the Recipient pursuant to this Agreement as deemed necessary by the Company, in its sole discretion, to ensure that the Tax Obligations can be satisfied, including the right to sell shares having a fair market value greater than the Tax Obligations; provided, however, that for this purpose the Tax Obligations shall be computed based on the minimum statutory withholding rates for federal, state, local, and foreign income and employment tax purposes; provided, further, however, that if the Company decides to satisfy the Tax Obligations by withholding shares otherwise issuable hereunder (rather than by selling or arranging for the sale of shares on behalf of the Recipient), the Company shall not withhold shares having a fair market value greater than the Tax Obligations. The Recipient further agrees that, if the Company elects not to withhold, sell, or arrange for the sale of the amount of Underlying Shares sufficient to satisfy the full amount of the Tax Obligations, the Company may withhold such shortfall in cash from wages or other remuneration or the Recipient will deliver to the Company, in cash, the amount of such shortfall. The Recipient further agrees that the Recipient shall not sell any of the Underlying Shares during the period of time that the Company is acting on the Recipient’s behalf to withhold, sell, and/or arrange for the sale of the number of Underlying Shares necessary to satisfy the Recipient’s Tax Obligations. Notwithstanding the preceding three sentences, the Recipient may, by written notice to the Company at least ten business days before the applicable vesting date specified on the cover page hereof, elect to pay in cash the applicable Tax Obligations, or make other appropriate provisions acceptable to the Company for the payment of the applicable Tax Obligations, including the withholding from any payroll or other amounts due to the Recipient.

Recipient further agrees to take any further actions and execute any additional documents as may be necessary to effectuate the provisions of this Section 5 and the Recipient hereby grants the Company a irrevocable power of attorney to sign such additional documents on the Recipient’s behalf if the Company is unable after reasonable efforts to obtain Recipient’s signature on such additional documents. This power of attorney is coupled with an interest and is irrevocable by the Recipient.

6. Arbitration. Any dispute, controversy, or claim arising out of, in connection with, or relating to the performance of this Agreement or its termination shall be settled by arbitration in The Commonwealth of Massachusetts, pursuant to the rules then obtaining of the American Arbitration Association. Any award shall be final, binding and conclusive upon the parties and a judgment rendered thereon may be entered in any court having jurisdiction thereof.

7. Provision of Documentation to Recipient. By signing the cover page of this Agreement, the Recipient acknowledges receipt of a copy of this entire Agreement, a copy of the Plan, and a copy of the Plan’s related prospectus.

8. Section 409A of the Internal Revenue Code. The RSUs granted hereunder are intended to avoid the potential adverse tax consequences to the Recipient of Section 409A of the Internal Revenue Code of 1986, as amended, and the Board may make such modifications to this Agreement as it deems necessary or advisable to avoid such adverse tax consequences.

9. Rights as Stockholder. The Recipient shall have no rights as a stockholder of the Company with respect to any RSUs covered by this Agreement until the issuance of the Underlying Shares.

10. Miscellaneous.

(a) Notices. All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail, postage prepaid, return receipt requested, if to the Recipient, to the address set forth on the cover page hereof or at the address shown on the records of the Company, and if to the Company, to the Company’s principal executive offices, attention of the Corporate Secretary.

2

(b) Entire Agreement; Modification. This Agreement constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties signatories to this Agreement. In the event of a conflict between the terms of this Agreement and the Plan, the terms of the Plan shall control.

(c) Fractional RSUs or Underlying Shares. All fractional RSUs or Underlying Shares resulting from the adjustment provisions contained in the Plan shall be rounded down to the nearest whole unit or share.

(d) Severability. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision.

(e) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the limitations set forth herein.

(f) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of Delaware without giving effect to the principles of the conflicts of laws thereof.

(g) No Obligation to Continue Business Relationship. Neither the Plan, nor this Agreement, nor any provision hereof imposes any obligation on the Company to continue a Business Relationship with the Recipient.

(h) For purposes of Sections 2, 5 and 10(g), the “Company” shall mean the Company as defined in Section 8(a) of the Plan.

3

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Anil K. Singhal, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 4, 2005

/S/    ANIL K. SINGHAL        

Anil K. Singhal

President, Chief Executive Officer,

Treasurer and Director

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, David P. Sommers, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 4, 2005

/S/    DAVID P. SOMMERS        

David P. Sommers

Senior Vice President, General Operations and

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of NetScout Systems, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anil K. Singhal, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/S/    ANIL K. SINGHAL        

Anil K. Singhal

Chief Executive Officer

November 4, 2005

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of NetScout Systems, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David P. Sommers, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/S/    DAVID P. SOMMERS        

David P. Sommers

Chief Financial Officer

November 4, 2005