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NETSCOUT Systems Reports Strong Growth For Third Quarter Fiscal 2002

January 16, 2002
Delivers 9% Sequential Revenue Growth and 13% Product Sales Increase; Adds More than 50 New Customers

WESTFORD, Mass., Jan. 16 -- NetScout Systems, Inc. (Nasdaq: NTCT), a leading provider of network performance management solutions, today announced financial results for its third quarter of fiscal 2002 ended December 31, 2001.

Revenue for the third quarter of fiscal 2002 was $21.5 million, a 9% increase over revenue of $19.7 million in the previous quarter. Pro forma net income was $627,000 or $0.02 per pro forma diluted share, versus pro forma net income of $271,000, or $0.01 per pro forma diluted share, in the previous quarter. Pro forma net income excludes non-cash amortization of goodwill and other intangible assets and stock-based compensation. Weighted average pro forma diluted shares for the three-month period ended December 31, 2001 were 30.0 million, compared to weighted average pro forma diluted shares of 29.8 million in the September quarter.

On a GAAP basis, the net loss for the quarter was $2.6 million, or ($0.09) per basic and diluted share, versus a net loss of $2.9 million, or ($0.10) per basis and diluted share for the previous quarter. A reconciliation of pro forma income to GAAP loss for the third quarter is included in the attached financial statements.

"This quarter's results reflect the strong performance of our sales force and the increasing recognition among global enterprises of the value of NetScout's network management solutions," said Anil Singhal, president and CEO of NetScout Systems. "Despite the general economic weakness and technology spending constraints in our market, NetScout has grown by showing customers a strong ROI from investing in all or part of our suite of nGenius products. Our growth continues to be driven by our many large customers with mission- critical networks. Even in today's difficult budgetary environment, many of them are investing in our products to build reliability, flexibility and efficiency into those networks. They have concluded that NetScout provides the most robust solution available today for managing the performance of high value networks."

    HIGHLIGHTS FOR THE QUARTER:
  • Total revenue grew 9% sequentially. Product revenue rose 13%; service revenue grew 7%. Gross margins remained at 74%.
  • Transition of Cisco customers to direct or reseller relationships is complete. Direct sales increased to 48% of total revenue from 35% in the previous quarter. Cisco-channeled revenue accounted for 27% of total revenue, down from 40% last quarter, as expected.
  • Cash and marketable securities increased $2.9 million from last quarter to $62.7 million.
  • NetScout shipped the new Packet-over-SONET probe. Cisco shipped NetScout's nGenius Real Time Monitor(TM) Release 1.3 in their CiscoWorks2000 LAN Management Solution and Routed WAN Management Solution products.
  • Competitive wins totaled over $4 million, involving large deals against other leading network management vendors.
  • Over 40 large deals valued over $100,000, comparable to the previous quarter.
  • More than 50 new accounts signed. Repeat orders comprised approximately 85% of total revenue.
  • Expanded partnership with OPNET Technologies, providing greater value for our joint customers.

OUTLOOK

Commenting on the company's business outlook, Singhal said, "Our products provide the most robust, highest function network management solutions available today. We are adding to the value of our solution by managing new traffic types, such as Voice-over-IP, and by delivering integrated system-wide views of network behavior. NetScout remains committed to maintaining its leadership position in integrated network performance management solutions for global, mission-critical networks and to expanding those solutions to meet our customers' broader network management requirements."

GUIDANCE

NetScout's near-term expectations are based on external economic forecasts and the economic uncertainty caused by recent world events. The Company is cautious about these effects on its customers' business performance and their IT spending. Nevertheless, the Company is confident that the demonstrated customer acceptance of the value and importance of nGenius solutions will produce short term quarterly revenue growth in the range of 5 to 10 percent and modest quarterly earnings per share increases.

Long term, NetScout expects its prospects will be driven by the continued growth of global, high-speed network usage and the expanding applicability of its network management solutions to those networks. Accordingly, NetScout continues to expect that quarterly sequential growth in the long term will be in the range of 7 to 10 percent, and that profitability will increase to its target business model range, discussed below.

NetScout's target business model remains: gross margins between 72 and 75 percent, operating expenses between 50 and 55 percent of revenue, and operating margins of 18 to 20 percent.

CONFERENCE CALL INSTRUCTIONS:

The Company invites shareholders to listen to its conference call today at 4:45 p.m. EDT, which will be webcast live through the Company's website at http://www.netscout.com. Please log onto the website 15 minutes prior to the broadcast. Alternatively, people can listen to the call by dialing 800-289-0544 for U.S./Canada and 913-981-5533 for international callers. A replay of the call will be available after 8:00 p.m. EDT this evening for approximately one week. The number for the replay is 888-203-1112 for U.S./Canada, and 719-457-0820 for international callers. The access code is 640340.

About NetScout Systems

NetScout Systems, Inc. (Nasdaq: NTCT) is a market leader and pioneer of integrated infrastructure performance management solutions for leading companies and service providers worldwide. NetScout serves a major portion of the Fortune 500 and counts among its customers AmericanGreetings.com, ArvinMeritor, Blue Cross and Blue Shield of Massachusetts, Cable and Wireless, Cisco Systems, China Telecom, Fidelity Investments, Getronics, Goodyear Tire & Rubber, Hold Brothers, MBNA, Nextel Communications, Northwest Airlines, Optimus Telecommunications, Samsung SDS, Siemens Health Services Corporation, Travelocity.com, and Wachovia Bank. NetScout's solutions are offered through its nGenius(TM) Performance Management System, an integrated solutions-based suite of advanced monitoring and reporting applications that draw on the rich performance data generated by NetScout's real-time, application-aware probe suite, advanced intelligent software agents, and network devices. The nGenius System helps organizations increase their return on infrastructure investments by optimizing the performance of their network, applications and content. NetScout is headquartered in Westford, Massachusetts and has approximately 360 employees, with offices in North America, Europe and Asia. Further information on the company is available on the World Wide Web at http://www.netscout.com.

Forward-looking statements in this release are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. Investors are cautioned that statements in this press release which are not strictly historical statements, including the plans, objectives and future financial performance of NetScout, constitute forward-looking statements which involve risks and uncertainties. Actual results could differ materially from the forward-looking statements. Risks and uncertainties which could cause actual results to differ include, without limitation, risks and uncertainties associated with the company's strategic relationships with Cisco Systems and other partners, dependence upon broad-based acceptance of the company's infrastructure performance management solutions, the company's ability to achieve and maintain a high rate of growth, introduction and market acceptance of new products and product enhancements such as the delivery of nGenius product platform probes and software solutions, the ability of NetScout to take advantage of service provider opportunities, competitive pricing pressures, reliance on sole source suppliers, successful expansion and management of direct and indirect distribution channels, and dependence on proprietary technology, as well as risks of slowdowns or downturns in economic conditions generally and in the market for infrastructure performance management solutions specifically. For a more detailed description of the risk factors associated with the company, please refer to the company's Annual Report on Form 10-K for the fiscal year ended March 31, 2001, and its quarterly report on Form 10-Q for the quarter ended September 30, 2001, on file with the Securities and Exchange Commission.

NetScout is a registered trademark, and the NetScout logo, nGenius, nGenius Application Service Level Manager, nGenius Real-Time Monitor and nGenius Capacity Planner are trademarks of NetScout Systems, Inc.

The Company's condensed consolidated statements of operations and balance sheets are attached.

                            NetScout Systems, Inc.
                                  Condensed
                                Balance Sheets
                                (In thousands)
                                 (Unaudited)

                                                  December 31,      March 31,
                                                         2001           2001

    Assets
    Current assets:
       Cash, cash equivalents and
        marketable securities                          $62,718        $61,382
       Accounts receivable, net                         10,714         11,753
       Inventories                                       5,747          8,653
       Refundable income taxes                           2,753          2,412
       Deferred income taxes                             1,069          1,374
       Prepaids and other current assets                 3,830          3,126

          Total current assets                          86,831         88,700

    Fixed assets, net                                    8,723          6,937
    Goodwill and other intangible assets,
     net                                                33,648         41,549
    Deferred income taxes                                5,814          4,894

           Total assets                               $135,016       $142,080


    Liabilities and Stockholders' Equity
    Current liabilities:
       Accounts payable                                 $2,609         $4,220
       Accrued compensation                              5,139          5,013
       Accrued other                                     2,252          1,749
       Deferred revenue                                 11,453         10,053

        Total current liabilities                       21,453         21,035

    Stockholders' equity:
       Common stock                                         34             33
       Additional paid-in capital                      107,225        106,354
       Deferred compensation                            (1,644)        (3,409)
       Treasury stock                                  (25,755)       (25,306)
       Retained earnings                                33,703         43,373

        Total stockholders' equity                     113,563        121,045

       Total liabilities and
        stockholders' equity                          $135,016       $142,080


                            NetScout Systems, Inc.
               Condensed Consolidated Statements of Operations
                   (In thousands, except per share amounts)
                                 (Unaudited)

                                        Three Months Ended  Nine Months Ended
                                             December 31,      December 31,
                                            2001     2000     2001     2000
    Revenue:
       Product                            $13,879  $24,064  $36,567  $62,615
       Service                              5,372    4,994   15,102   13,398
       License and royalty                  2,232    3,415    7,712   10,448
          Total revenue                    21,483   32,473   59,381   86,461

    Cost of revenue:
         Product (including stock-based
          compensation
         of $0, $0, $1 and $1,
          respectively)                     4,636    7,647   13,422   21,004
         Service (including stock-based
          compensation
         of $2, $6, $6 and $7,
          respectively)                       881      964    2,668    2,416
           Total cost of revenue            5,517    8,611   16,090   23,420

    Gross margin                           15,966   23,862   43,291   63,041

    Operating expenses:
       Research and development
        (including stock-based
       compensation of $551, $513, $1,642
        and $1,044, respectively)           4,884    4,125   14,480   11,036
       Sales and marketing (including
        stock-based compensation
       of $26, $67, $83 and $180,
        respectively)                       9,361   10,798   26,938   29,775
       General and administrative
        (including stock-based
       compensation of $1, $5, $5 and $8,
        respectively)                       2,112    2,558    5,730    6,500
       Amortization of goodwill and other
        intangible assets                   2,634    2,617    7,902    5,283
       In-process research and
        development                           -        -        -        268
           Total operating expenses        18,991   20,098   55,050   52,862

    Income (loss) from operations          (3,025)   3,764  (11,759)  10,179
    Interest income and other expenses,
     net                                      373      930    1,559    3,072
    Income (loss) before provision for
     (benefit
        from) income taxes                 (2,652)   4,694  (10,200)  13,251
    Provision for (benefit from) income
     taxes                                    (65)   2,024     (530)   7,038
    Net income (loss)                     $(2,587)  $2,670  $(9,670)  $6,213

    Basic net income (loss) per share      $(0.09)   $0.09   $(0.33)   $0.22
    Diluted net income (loss) per share    $(0.09)   $0.09   $(0.33)   $0.21
    Shares used in computing:
         Basic net income (loss) per
          share                            29,478   29,107   29,476   28,196
         Diluted net income (loss) per
          share                            29,478   30,594   29,476   29,621

    Supplemental information:
    Net income (loss)                     $(2,587)  $2,670  $(9,670)  $6,213
    Tax adjustment (1)                        -       (681)     -         23
    Stock based compensation (as detailed
     in expense categories above)             580      591    1,737    1,240
    Amortization of goodwill and other
     intangible assets                      2,634    2,617    7,902    5,283
    In-process research and development       -        -        -        268
    Pro forma net income (loss) excluding
     acquisition and stock-based
       compensation costs                    $627   $5,197     $(31) $13,027

    Pro forma diluted net income (loss)
     per share excluding acquisition        $0.02    $0.17    $0.00    $0.44
        and stock-based compensation
         costs

    Shares used in computing pro forma
     diluted net income (loss) per
        share excluding acquisition and
         stock-based compensation costs    30,026   30,594   29,476   29,621

Note(1): Tax adjustment for the fiscal year ended March 31, 2001, which was the year of the NextPoint acquisition, assumes an effective tax rate of 35% which represents the effective tax rate before factoring in timing issues due to non-deductible costs related to the acquisition of NextPoint and stock- based compensation.

     Contacts:

     Peggy Flynn
     Director of Corporate Relations
     NetScout Systems, Inc.
     978-614-4162
     flynnp@netscout.com

     Bill Zima Associate Director
     Thomson Financial/Carson
     212-510-9261
     bill.zima@tfn.com

SOURCE NetScout Systems, Inc.

Web site: http://www.netscout.com
CONTACT: Peggy Flynn, Director of Corporate Relations of NetScout
Systems, Inc., +1-978-614-4162, flynnp@netscout.com; or Bill
Zima, Associate Director of Thomson Financial/Carson,
+1-212-510-9261, bill.zima@tfn.com

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