The following information should be read in conjunction with the unaudited consolidated financial information and the notes thereto included in this Quarterly Report on Form 10-Q. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking statements that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors referred to in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended March 31, 2012 and elsewhere in this Quarterly Report. These factors may cause our actual results to differ materially from any forward-looking statement.

Overview

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

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

On October 31, 2012, we completed the acquisition of ONPATH Technologies, Inc. (ONPATH), an established provider of scalable packet flow switching technology for high-performance networks for the aggregation and distribution of network traffic for data, voice, video testing, monitoring, performance management and cybersecurity deployments. ONPATH's packet flow switch technology is synergistic with the Company's network monitoring switch strategy. The acquisition of the packet flow switch technology further strengthens the Company's Unified Service Delivery Management strategy by enabling scalable access to all relevant network traffic across highly distributed network environments for use by any network monitoring, performance management and security system. ONPATH's test automation technology is used to monitor networks in test environments which simulate existing and planned network environments. We paid $36.8 million in cash for the acquisition of ONPATH and $4.2 million of additional compensation consideration to be paid out in the future.

On July 20, 2012, we completed the acquisition of certain assets, technology and employees from Accanto Sytems, S.r.l. (Accanto). Accanto provides service assurance for telecommunication service providers enabling carriers to monitor and manage the delivery of voice services over converged, next generation network architectures. This technology is synergistic with our packet flow strategy and brings voice service monitoring capabilities for legacy voice environments and for next generation network voice services, including voice over IP (VoIP) and voice over long-term evolution (VoLTE) for 4G wireless networks. NetScout paid $15.0 million for the acquisition of Accanto.

Results Overview

During the quarter ended December 31, 2012, net income and net income per share increased 11% and 8%, respectively compared to the same period in the prior year.

We saw continued growth during the quarter ended December 31, 2012, with product revenue growth of 15% and overall revenue growth of 10% compared to the same period in the prior year.

Total new business bookings increased by 15% during the nine months ended December 31, 2012 when compared to the same period in the prior year. Our new business bookings for the service provider sector grew 51% for the nine months ended December 31, 2012 when compared to the same period in the prior year. This is the result of the expansion of our Long-term Evolution (LTE) deployments within the major global carriers. Our new business bookings for the financial enterprise sector grew 9% for the nine months ended December 31, 2012 when compared to the same period in the prior year. New business bookings from the government enterprise sector decreased by 30% for the nine months ended December 31, 2012 as compared to the same period in the prior year due to the deferral by the federal government on long-term strategic initiatives. A new business booking is defined as new product orders and new service orders including new maintenance purchases.

We ended the quarter ended December 31, 2012 with backlog of $17.3 million.

At December 31, 2012 cash, cash equivalents and marketable securities totaled $136.7 million, down $76.8 million from $213.5 million at March 31, 2012 due primarily to the $62.0 million repayment of long-term debt, $51.3 million used for the acquisitions of ONPATH and Accanto, $20.7 million of cash used to repurchase shares of our common stock and $8.1 million of cash used for capital expenditures, offset by $67.0 million of cash provided by operating activities.

Use of Non-GAAP Financial Measures

We supplement the GAAP financial measures we report in quarterly earnings announcements, investor presentations and other investor communications by reporting the following non-GAAP measures: non-GAAP revenue, non-GAAP net income and non-GAAP net income per diluted share. Non-GAAP revenue eliminates the GAAP effects of acquisitions by adding back revenue related to deferred revenue revaluation. Non-GAAP net income includes the foregoing adjustment and also removes inventory fair value adjustments, expenses related to the amortization of acquired intangible assets, stock-based compensation, restructuring, certain expenses relating to acquisitions including compensation for post-combination services and business development charges, as well as early extinguishment of debt, net of related income tax effects. Non-GAAP diluted net income per share also excludes these expenses as well as the related impact of all these adjustments on the provision for income taxes.

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

Management believes these non-GAAP financial measures enhance the reader's overall understanding of NetScout's current financial performance and its prospects for the future by providing a higher degree of transparency for certain financial measures and providing a level of disclosure that helps investors understand how NetScout plans and measures its business. We believe that providing these non-GAAP measures affords investors a view of our operating results that may be more easily compared to our peer companies and also enables investors to consider our operating results on both a GAAP and non-GAAP basis during and following the integration period of our acquisitions. Presenting the GAAP measures on their own may not be indicative of our core operating results. Furthermore, management believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures provide useful information to management and investors regarding present and future business trends relating to our financial condition and results of operations.

The following table reconciles revenue, net income and net income per share on a GAAP and non-GAAP basis for the three and nine months ended December 31, 2012 and 2011 (in thousands):

                                                 Three Months Ended              Nine months ended
                                                    December 31,                   December 31,
                                                2012            2011           2012            2011
GAAP revenue                                  $  91,567       $ 83,297       $ 252,473       $ 219,217
Deferred revenue fair value adjustment              400            118             671             158

Non-GAAP revenue                              $  91,967       $ 83,415       $ 253,144       $ 219,375

GAAP net income                               $  11,138       $ 10,031       $  26,056       $  19,481
Deferred revenue fair value adjustment              400            118             671             158
Inventory fair value adjustment                     249              0             249               0
Share based compensation expense                  2,464          2,170           7,243           6,117
Amortization of acquired intangible assets        1,805          1,780           5,938           4,953
Business development and integration
expense                                             543          1,780           1,374           4,253
Compensation for post combination services        1,005            168           1,819             168
Restructuring charges                                (1 )          372           1,065             372
Loss on extinguishment of debt                        0            690               0             690
Income tax adjustments                           (2,257 )       (2,299 )        (6,498 )        (5,598 )

Non-GAAP net income                           $  15,346       $ 14,810       $  37,917       $  30,594

GAAP diluted net income per share             $    0.26       $   0.24       $    0.62       $    0.46
Share impact of non-GAAP adjustments
identified above                                   0.10           0.11            0.28            0.25

Non-GAAP diluted net income per share         $    0.36       $   0.35       $    0.90       $    0.71

Critical Accounting Policies

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

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

• revenue recognition;

• valuation of goodwill and acquired intangible assets; and

• share-based compensation.

Please refer to the critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012, filed with the Securities and Exchange Commission (SEC) on May 25, 2012, for a description of all critical accounting policies.

Three Months Ended December 31, 2012 and 2011

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. During the three months ended December 31, 2012 and
2011, no one customer accounted for more than 10% of total revenue.



                                      Three Months Ended
                                         December 31,
                                    (Dollars in Thousands)
                               2012                        2011                    Change
                                     % of                        % of
                                    Revenue                     Revenue          $         %
      Revenue:
      Product         $ 52,676            58 %    $ 46,005            55 %    $ 6,671       15 %
      Service           38,891            42        37,292            45        1,599        4 %

      Total revenue   $ 91,567           100 %    $ 83,297           100 %    $ 8,270       10 %

Product. The 15%, or $6.7 million, increase in product revenue was due to a $7.3 million increase in our general enterprise sector and a $4.3 million increase in revenue from our service provider sector. These increases were offset by a $3.9 million decrease in our government enterprise sector and a $1.0 million decrease in our financial enterprise sector. Compared to the same period in the prior year, we realized a 6% decrease in units shipped, while the average selling price per unit of our products increased approximately 14%. The increase in average selling price is due to product mix.

We expect our service provider sector to continue to be a significant driver of future growth.

Service. The 4%, or $1.6 million, increase in service revenue was due to a $1.7 million increase in revenue from maintenance contracts due to increased new maintenance and renewals from a growing support base and a $427 thousand increase in premium support contracts. These were offset by a $459 thousand decrease in consulting revenue and a $63 thousand decrease in training revenue.

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

                                     Three Months Ended
                                        December 31,
                                   (Dollars in Thousands)
                              2012                        2011                    Change
                                    % of                        % of
                                   Revenue                     Revenue          $          %
     Indirect        $ 47,907            52 %    $ 48,652            58 %    $  (745 )      (2 %)
     Direct            43,660            48        34,645            42        9,015        26 %

     Total revenue   $ 91,567           100 %    $ 83,297           100 %    $ 8,270        10 %

The 2%, or $745 thousand, decrease in indirect channel revenue is the result of the decrease in sales to our government sector, which generally come through resellers. Sales to customers outside the United States are export sales typically through channel partners, who are generally responsible for distributing our products and providing technical support and service to customers within their territories. Our reported international revenue does not include any revenue from sales to customers outside the United States that are shipped to our United States-based indirect channel partners. These domestic resellers fulfill customer orders based upon joint selling efforts in conjunction with our direct sales force and may subsequently ship our products to international locations; however, we report these shipments as United States revenue since we ship the products to a domestic

location. The 26%, or $9.0 million, increase in direct channel revenue is largely the result of orders placed by domestic service provider customers and general enterprise customers for the three months ended December 31, 2012.

Total revenue by geography is as follows:

                                                     Three Months Ended
                                                        December 31,
                                                   (Dollars in Thousands)
                                              2012                        2011                     Change
                                                    % of                        % of
                                                   Revenue                     Revenue          $            %
United States                        $ 66,990            73 %    $ 60,737            73 %    $  6,253         10 %

International:
Europe                                 12,940            14         9,278            11         3,662         39 %
Asia                                    4,201             5         4,839             6          (638 )      (13 %)
Rest of the world                       7,436             8         8,443            10        (1,007 )      (12 %)

Subtotal international                 24,577            27        22,560            27         2,017          9 %

Total revenue                        $ 91,567           100 %    $ 83,297           100 %    $  8,270         10 %

United States revenues increased 10%, or $6.3 million, as a result of an increase in our service provider and general enterprise sectors. The 9%, or $2.0 million, increase in international revenue is primarily due to an increase in our service provider sector in Europe. We expect revenue from sales to customers outside the United States to continue to account for a significant portion of our total revenue in the future. In accordance with United States export control regulations we do not sell to, or do business with, countries subject to economic sanctions and export controls.

Cost of Revenue and Gross Profit

Cost of product revenue consists of material components, manufacturing personnel
expenses, including stock-based compensation costs, manuals, packaging
materials, overhead and amortization of capitalized software, acquired software
and core technology. Cost of service revenue consists of personnel, including
stock-based compensation costs, material, overhead and support costs.



                                           Three Months Ended
                                              December 31,
                                         (Dollars in Thousands)
                                   2012                         2011                     Change
                                          % of                         % of
                                         Revenue                      Revenue          $         %
 Cost of revenue
 Product                  $ 12,182             13 %    $ 10,731             13 %    $ 1,451       14 %
 Service                     6,982              8         6,508              8          474        7 %

 Total cost of revenue    $ 19,164             21 %    $ 17,239             21 %    $ 1,925       11 %

 Gross profit:
 Product $                $ 40,494             44 %    $ 35,274             42 %    $ 5,220       15 %
 Product gross profit %         77 %                         77 %
 Service $                $ 31,909             35 %    $ 30,784             37 %    $ 1,125        4 %
 Service gross profit %         82 %                         83 %
 Total gross profit $     $ 72,403                     $ 66,058                     $ 6,345       10 %
 Total gross profit %           79 %                         79 %

Product. The 14%, or $1.5 million, increase in cost of product revenue was primarily due to the 15% increase in product revenue during the three months ended December 31, 2012. In addition, there was a $249 thousand increase due to an inventory fair value adjustment related to the acquisition of ONPATH. Amortization of software and core technology included as cost of product revenue decreased by $256 thousand for the three months ended December 31, 2012. The product gross profit percentage remained flat at 77% during the three months ended December 31, 2012 as compared to the three months ended December 31, 2011. Average headcount in manufacturing was 30 and 26 for the three months ended December 31, 2012 and 2011, respectively.

Service. The 7%, or $474 thousand, increase in cost of service revenue was due to a $415 thousand increase in employee related expenses resulting from increased salaries and incentive compensation as well as a $93 thousand increase in allocated overhead costs. The service gross profit percentage decreased by one percentage point to 82% for the quarter ended December 31, 2012 as compared to the three months ended December 31, 2011. The 4%, or $1.1 million, increase in service gross profit corresponds with the 4%, or $1.6 million, increase in service revenue, offset by the 7%, or $474 thousand, increase in cost of services. Average service headcount was 135 and 125 for the three months ended December 31, 2012 and 2011, respectively.

Gross profit. Our gross profit increased 10%, or $6.3 million. This increase is attributable to our increase in revenue of 10%, or $8.3 million, offset by an 11%, or $1.9 million, increase in cost of revenue. The gross margin percentage remained flat at 79% for the three months ended December 31, 2012 and 2011.

Operating Expenses



                                                     Three Months Ended
                                                        December 31,
                                                   (Dollars in Thousands)
                                              2012                         2011                     Change
                                                     % of                        % of
                                                    Revenue                     Revenue          $           %
Research and development             $ 15,352             17 %    $ 13,593            16 %    $ 1,759          13 %
Sales and marketing                    30,105             33        27,518            33        2,587           9 %
General and administrative              8,539              9         6,564             8        1,975          30 %
Amortization of acquired
intangible assets                         846              1           565             1          281          50 %
Restructuring charges                      (1 )            0           372             0         (373 )      (100 %)

Total operating expenses             $ 54,841             60 %    $ 48,612            58 %    $ 6,229          13 %

Research and development. Research and development expenses consist primarily of personnel expenses, including stock-based compensation costs, fees for outside consultants, overhead and related expenses associated with the development of new products and the enhancement of existing products.

The 13%, or $1.8 million, increase in research and development expenses is due to a $2.2 million increase in employee related expenses due to increased headcount and incentive compensation, a $222 thousand increase in compensation for post combination services related to the acquisitions of Simena and ONPATH, a $212 thousand increase in travel expenses and a $206 thousand increase in consulting. These were offset by a $1.3 million decrease in business development expenses. Average headcount in research and development was 359 and 293 for the three months ended December 31, 2012 and 2011, respectively.

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

The 9%, or $2.6 million, increase in total sales and marketing expenses was due to a $722 thousand increase in employee related expenses, a $642 thousand increase in marketing related expenses, sales meeting expenses increased by $456 thousand, a $380 thousand increase in recruiting costs, a $385 thousand increase in depreciation for demonstration and spare part units and a $162 thousand increase in depreciation. These increases were offset by a $546 thousand decrease in commission expense. Average headcount in sales and marketing was 349 and 318 for the three months ended December 31, 2012 and 2011, respectively.

General and administrative. General and administrative expenses consist primarily of personnel expenses for executive, financial, legal and human resource employees, including stock-based compensation costs, overhead and other corporate expenditures.

The 30%, or $2.0 million, increase in general and administrative expenses was due to a $584 thousand increase in deal related compensation related to the acquisitions of ONPATH and Accanto, a $551 thousand increase in bad debt expense, a $372 thousand increase in software license expense, a $284 thousand increase in business development expense, a $180 thousand increase in employee related expenses. Average headcount in general and administrative was 118 and 116 for the three months ended December 31, 2012 and 2011, respectively.

Amortization of acquired intangible assets. Amortization of acquired intangible assets consists primarily of amortization of customer relationships related to the acquisitions of ONPATH, Accanto, Simena, Replay, Psytechnics and Network General Central Corporation.

The 50%, or $281 thousand, increase in amortization of acquired intangible assets is due to the increase of expense recorded related to the acquisitions of ONPATH and Accanto. The amortization related to these acquisitions was not recorded during the three months ended December 31, 2011 as the acquisitions have occurred within the past twelve months. In addition, there was an increase related to the acquisition of Simena during the three months ended December 31, 2012 since Simena was acquired on November 21, 2011.

Restructuring charges. Restructuring charges decreased by $373 thousand due to a plan during the quarter ended December 31, 2011 to restructure parts of our general and administrative organization to centralize operations as well as our international sales organization to better align our resources with forecasted sales opportunities. As a result of the restructuring program, we eliminated or moved 2 positions and recorded $372 thousand of restructuring charges related to severance costs paid to employees.

Interest and Other Expense, Net. Interest and other income (expense), net . . .