The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 ("2011 Form 10-K"), including the "Risk Factors" section and the consolidated financial statements and notes included therein.

BUSINESS OVERVIEW

We are a leading provider of converged Internet Protocol (IP) network validation and network visibility solutions. Equipment manufacturers, service providers, enterprises, and government agencies use our solutions to design, verify, and monitor a broad range of Ethernet, Wi-Fi, and 3G/LTE equipment and networks. Our test solutions emulate realistic media-rich traffic and network conditions so that customers can optimize and validate the design, performance, and security of their pre-deployment networks. Our intelligent network visibility solutions provide clarity into physical and virtual production networks for improved performance, security, resiliency, and application delivery of cloud, data center, and service provider networks. Our product solutions consist of our hardware platforms, such as our chassis, interface cards and appliances, software application tools, and services, including our warranty and maintenance offerings and professional services.

BreakingPoint Systems, Inc. On June 30, 2012, we entered into an Agreement and Plan of Merger to acquire all of the outstanding shares of common stock of BreakingPoint Systems, Inc. ("BreakingPoint") for total estimated cash consideration of approximately $160.0 million, subject to adjustment based on BreakingPoint's net working capital and cash as of the closing date. BreakingPoint is a leader in security testing, and its solutions provide global visibility into emerging threats and applications, along with advance insight into the resiliency of an organization's information technology infrastructure under operationally relevant conditions and malicious attacks. The acquisition is expected to close during the third quarter ending September 30, 2012, subject to customary closing conditions. See Note 3 to the Consolidated Financial Statements included in this Form 10-Q.

Acquisition of Anue Systems, Inc. On June 1, 2012, we completed our acquisition of all of the outstanding shares of common stock of Anue Systems, Inc. ("Anue"). The aggregate consideration totaled $151.9 million, or $148.3 million net of Anue's existing cash and investment balances at the time of the acquisition, and is subject to certain adjustments including an adjustment based on the final amount of Anue's net working capital on the closing date. The acquisition was funded from our existing cash and cash equivalents. Anue provides solutions to monitor and test complicated networks, including Anue's Net Tool Optimizer solution that efficiently aggregates and filters network traffic to help optimize network monitoring tool usage. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to leverage Anue's existing sales channels and assembled workforce, including its experienced development team. The results of operations of Anue have been included in our consolidated statements of operations and cash flows since the date of the acquisition. See Note 3 to the Consolidated Financial Statements included in this Form 10-Q.

Acquisition of VeriWave, Inc. On July 18, 2011, we completed our acquisition of all of the outstanding stock of VeriWave, Inc. ("VeriWave"). The purchase price for VeriWave totaled $15.8 million, or $15.6 million net of VeriWave's existing cash and investment balances at the time of the acquisition. The acquisition was funded from our existing cash and cash equivalents. VeriWave's test solutions validate wireless networks, devices, and applications by benchmarking and measuring speed, quality, interoperability, compliance, and other pivotal aspects of mobile performance. The results of operations of VeriWave have been included in our consolidated statements of operations and cash flows since the date of the acquisition.

Revenues. Our revenues are principally derived from the sale and support of our test systems. Product revenues primarily consist of sales of our hardware and software products. Our hardware products primarily relate to our traffic generation and analysis hardware platform consisting of a multi-slot chassis and interface cards. Our primary hardware platform is enabled by our operating system software that is essential to the functionality of the hardware platform. Our software products consist of a comprehensive suite of technology-specific test applications. Our software products are typically installed on and work with our hardware products to further enhance the core functionality of the overall test system, although some of our software products can be operated independently from our hardware products.

Our service revenues primarily consist of post contract customer support and maintenance ("PCS") related to the initial period of service provided with the purchase of our software or software-related (i.e., our operating system software) products and separately purchased extended PCS contracts. PCS on our software and software-related products includes unspecified when and if available software upgrades and customer technical support services. Service revenues also include separately purchased extended hardware warranty support, implied PCS and hardware warranty support, training and other professional services.

Sales of our Ethernet interface cards, including our 1 Gigabit Ethernet, 10 Gigabit Ethernet and 40/100 Gigabit Ethernet interface cards, continue to represent the majority of our total revenues, and we expect this trend to continue through the end of 2012. Over the longer term, while we expect the sale of our Ethernet interface cards to represent a significant amount of our revenues going forward, we expect to see some decline as a percentage of total revenues as the sales of our network visibility solutions and other appliances increase. Sales to our largest customer, Cisco Systems, accounted for approximately $15.0 million, or 16.2%, and $29.4 million, or 16.5%, of our total revenues for the three and six months ended June 30, 2012, respectively, and $10.4 million, or 15.1%, and $21.7 million, or 14.8%, of our total revenues for the three and six months ended June 30, 2011, respectively. To date, we have generated the majority of our revenues from sales to network and telecommunication equipment manufacturers. While we expect that we will continue to have some customer concentration for the foreseeable future, we continue to sell our products to a wider variety and increasing number of customers. To the extent that we develop a broader and more diverse customer base, our reliance on any one customer or customer type should diminish. From a geographic perspective, we generated revenues from shipments to international locations of $40.2 million, or 43.5%, and $82.4 million, or 46.3%, of our total revenues for the three and six months ended June 30, 2012, respectively, compared to $33.8 million, or 49.0%, and $76.5 million, or 51.9%, of our total revenues for the three and six months ended June 30, 2011, respectively. Total revenues from product shipments to Japan, were $13.0 million and $25.0 million for the three and six months ended June 30, 2012, respectively compared with $1.5 million and $13.4 million for the three and six months ended June 30, 2011, respectively. The increase in revenue from product shipments to Japan was primarily driven by NTT, our largest customer in Japan, which accounted for $9.8 million, or 10.7%, and $16.4 million, or 9.2%, of our total revenues for the three and six months ended June 30, 2012, respectively. Looking forward, we expect our international revenues to be between 50% and 55% of our total revenues on an annualized basis.

Stock-Based Compensation. For the three and six months ended June 30, 2012, stock-based compensation expense was $3.8 million and $7.9 million, respectively. Stock-based compensation for the three and six months ended June 30, 2011 was $3.2 million and $7.1 million, respectively. The increase in stock-based compensation expense in the three and six months ended June 30, 2012 as compared to the same periods in 2011 was primarily due to the partial recognition during the 2012 periods of expense for certain performance based awards which were previously not expected to be earned for the comparable periods in 2011. The aggregate amount of gross unrecognized stock-based compensation to be expensed in the years 2012 through 2016 related to unvested share-based awards as of June 30, 2012 was approximately $17.4 million. To the extent that we grant additional share-based awards, future expense may increase by the additional unearned compensation resulting from those grants. We anticipate that we will continue to grant additional share-based awards in the future as part of our long-term incentive compensation programs. The impact of future grants cannot be estimated at this time because it will depend on a number of factors, including the amount of share-based awards granted and the then current fair values of such awards for accounting purposes.

Cost of Revenues. Our cost of revenues related to the sale of our hardware and software products includes materials, payments to third-party contract manufacturers, royalties, and salaries and other expenses related to our manufacturing and supply operations, technical support and professional service personnel. We outsource the majority of our manufacturing operations, and we conduct supply chain management, quality assurance, documentation control, shipping and some final assembly and testing at our facilities in Calabasas, California, Austin, Texas and Penang, Malaysia. Accordingly, a significant portion of our cost of revenues related to our products consists of payments to our contract manufacturers. Cost of revenues related to the provision of services includes salaries and other expenses associated with technical support services, professional services and the warranty cost of hardware that is replaced or repaired during the warranty coverage period. Cost of revenues does not include the amortization of purchased technology related to our acquisitions of certain businesses, product lines and technologies of $3.6 million and $6.3 million for the three and six months ended June 30, 2012, respectively, and $2.5 million and $5.0 million for the three and six months ended June 30, 2011, respectively, which are included within our Amortization of Intangible Assets line item on our condensed consolidated statements of operations.

Our cost of revenues as a percentage of total revenues is primarily affected by the following factors:

· our pricing policies and those of our competitors;

· the pricing we are able to obtain from our component suppliers and contract manufacturers;

· the mix of customers and sales channels through which our products are sold;

· the mix of our products sold, such as the mix of software versus hardware product sales;

· new product introductions by us and by our competitors;

· demand for and quality of our products; and

· shipment volume.

In the near term, although we anticipate that our cost of revenues as a percentage of total revenues will remain relatively flat, we expect to continue to experience pricing pressure on larger transactions and from larger customers as a result of competition.

Operating Expenses. Our operating expenses are generally recognized when incurred and consist of research and development, sales and marketing, general and administrative, amortization of intangible assets, acquisition and other related costs and restructuring expenses. In dollar terms, we expect total operating expenses, excluding stock-based compensation expense discussed above and amortization of intangible assets and acquisition and other related costs discussed below, to increase for the remainder of 2012 due primarily to the recently completed acquisition of Anue.

· Research and development expenses consist primarily of salaries and other personnel costs related to the design, development, testing and enhancement of our products. We expense our research and development costs as they are incurred. We also capitalize and depreciate over a five-year period costs of our products used for internal purposes.

· Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in direct sales, sales support and marketing functions, as well as promotional and advertising expenditures. We also capitalize and depreciate over a two-year period costs of our products used for sales and marketing activities, including product demonstrations for potential customers.

· General and administrative expenses consist primarily of salaries and related expenses for certain executive, finance, legal, human resources, information technology and administrative personnel, as well as professional fees (e.g., legal and accounting), facility costs related to our corporate headquarters, insurance costs and other general corporate expenses.

· Amortization of intangible assets consists of the purchase price of various intangible assets over their estimated useful lives. We evaluate our identifiable definite life intangible assets and other long-lived assets for impairment when events or changes in circumstances indicate that a potential impairment may exist. An impairment charge would be recorded to the extent that the carrying value of the intangible asset exceeds its undiscounted cash flows and its estimated fair value in the period that the impairment circumstances occurred. We also evaluate the recoverability of our goodwill on an annual basis or if events or changes in circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. Impairment losses are recorded to the extent that the carrying value of the goodwill exceeds its estimated fair value. The future amortization expense of acquired intangible assets depends on a number of factors, including the extent to which we acquire additional businesses, technologies or product lines or are required to record impairment charges related to our acquired intangible assets.

· Acquisition and other related costs are expensed as incurred and consist primarily of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting, tax, due diligence, valuation and other related services, change in control payments, consulting fees, required regulatory costs, certain employee, facility and infrastructure transition costs, and other related expenses. We expect our acquisition and other related expenses to fluctuate over time based on the timing of our acquisitions and related integration activities.

Interest Income and Other, Net represents interest on cash and a variety of securities, including money market funds, U.S. government and government agency debt securities, corporate debt securities and auction rate securities, realized gains/losses on the sale of investment securities, certain foreign currency gains and losses, and other non-operating items.

Interest Expense consists of interest due to the holders of our 3.00% convertible senior notes issued in December 2010, as well as the amortization of the associated debt issuance costs. See Note 4 to the Consolidated Financial Statements included in this Form 10-Q.

Income Tax is determined based on the amount of earnings and enacted federal, state and foreign tax rates, adjusted for allowable credits and deductions, and for other effects of equity compensation plans. Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimates based on changes in economic conditions. Such changes could have a substantial impact on the income tax provision. Our income tax provision could also be significantly impacted by estimates surrounding our uncertain tax positions and the recording of valuation allowances against certain deferred tax assets and changes to these valuation allowances in future periods. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period.

During the three months ended June 30, 2012, we released $22.6 million of our valuation allowance previously established against our U.S. deferred tax assets. The $22.6 million release was the result of a net deferred tax liability recorded as part of the Anue acquisition. While we continue to maintain a valuation allowance against our remaining U.S. deferred tax assets, the release of the remaining valuation allowance, or a portion thereof, will have a favorable impact on our effective tax rate. We will continue to monitor the need for a valuation allowance each reporting period, and we believe that we may release an additional portion of our valuation allowance in the 2012 third quarter if our pending acquisition of BreakingPoint closes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements included in our Form 10-Q which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, write-downs for obsolete inventory, income taxes, acquisition purchase price allocation, impairments of long-lived assets and marketable securities, stock-based compensation, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. None of these accounting policies and estimates have significantly changed since our Annual Report on Form 10-K for the year ended December 31, 2011. Critical accounting policies and estimates are more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2011 Form 10-K. Actual results may differ from these estimates under different assumptions or conditions.

RESULTS OF OPERATIONS

The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:

                                             Three months ended                 Six months ended
                                                  June 30,                          June 30,
                                            2012             2011             2012            2011

Revenues:
Products                                        82.2 %           79.7 %           81.5 %          81.3 %
Services                                        17.8             20.3             18.5            18.7
Total revenues                                 100.0            100.0            100.0           100.0

Costs and operating expenses:(1)
Cost of revenues - products                     15.4             18.9             16.3            18.3
Cost of revenues - services                      3.0              2.3              2.7             2.1
Research and development                        24.4             26.9             24.4            25.2
Sales and marketing                             26.6             30.8             27.6            29.9
General and administrative                      12.0             11.7             12.8            11.2
Amortization of intangible assets                5.8              5.5              5.3             5.1
Acquisition and other related                    4.0              0.7              2.3             0.3
Total costs and operating expenses              91.2             96.8             91.4            92.1

Income from operations                           8.8              3.2              8.6             7.9
Interest income and other, net                   0.7              0.4              0.4             0.5
Interest expense                                (2.0 )           (2.6 )           (2.0 )          (2.4 )
Income before income taxes                       7.5              1.0              7.0             6.0
Income tax (benefit) expense                   (21.6 )            0.3            (10.5 )           0.9
Net income                                      29.1 %            0.7 %           17.5 %           5.1 %


(1) Stock-based compensation included
in:
Cost of revenues - products                      0.1 %            0.2 %            0.1 %           0.2 %
Cost of revenues - services                      0.0              0.1              0.0             0.1
Research and development                         1.0              1.6              1.2             1.7
Sales and marketing                              1.0              1.2              1.1             1.3
General and administrative                       2.0              1.7              2.0             1.7

Comparison of Three and Six Months Ended June 30, 2012 and 2011

Revenues. In the second quarter of 2012, total revenues increased 33.9% to $92.3 million from the $69.0 million recorded in the second quarter of 2011. As a result of our acquisition of Anue Systems, Inc. ("Anue") on June 1, 2012, the second quarter of 2012 included Anue revenue of $3.9 million. Excluding the Anue revenue of $3.9 million, revenues increased to $88.5 million in the second quarter of 2012 primarily due to a $14.7 million increase in shipments of our hardware products (primarily our 40/100 Gigabit Ethernet interface cards and IxVeriwave products) and an increase in PCS and warranty revenues that are recognized ratably.

In the first six months of 2012, total revenues increased 20.7% to $178.0 million from $147.4 million recorded in the same period of 2011. Excluding the Anue revenue of $3.9 million, revenues increased to $174.1 million in the first six months of 2012 due to a $22.5 million increase in shipments of our hardware products (primarily our 40/100 Gigabit Ethernet interface cards and IxVeriwave products) and an increase in PCS and warranty revenues that are recognized ratably.

Cost of Revenues. As a percentage of total revenues, our total costs of revenues decreased to 18.4% in the second quarter of 2012 from 21.2% in the second quarter of 2011. As a percentage of total revenues, our total cost of revenues decreased to 19.0% in the first six months of 2012 from 20.4% in the first six months of 2011. The decreases in our total cost of revenues as a percentage of total revenues in the second quarter of 2012 and the first six months of 2012 were principally due to lower hardware costs.

Research and Development Expenses. In the second quarter of 2012, research and development expenses increased 21.6% to $22.5 million from $18.5 million in the second quarter of 2011. As a result of our Anue acquisition, our research and development expenditures in the second quarter of 2012 included $893,000 related to the research and development activities of the acquired operations. Excluding the incremental research and development costs related to the Anue acquisition, research and development expenses in the second quarter of 2012 were $21.7 million compared to $18.5 million in the second quarter of 2011. This increase was primarily due to an increase in compensation and related employee costs of $2.8 million that was primarily due to (i.) additional investment in our product development teams, including the Wi-Fi development team added as part of our acquisition of VeriWave in July 2011 (with no comparable costs in the second quarter of 2011) and our teams in the United States, Romania and India, and
(ii.) higher bonus expense as we expect our 2012 performance to exceed that of 2011 when compared to the applicable annual company-wide objectives.

Research and development expenses for the first six months of 2012 increased 17.1% to $43.4 million from $37.1 million in the same period of 2011. Excluding the incremental research and development costs of $893,000 related to the Anue acquisition, research and development expenses in the first six months of 2012 were $42.5 million compared to $37.1 million in the same period of 2011. This increase was primarily due to an increase in compensation and related employee costs of $5.8 million that was primarily due to (i.) additional investment in our product development teams, including the Wi-Fi development team added as part of our acquisition of VeriWave in July 2011 (with no comparable costs in the second quarter of 2011) and our teams in the United States, Romania and India, and (ii.) higher bonus expense as we expect our 2012 performance to exceed that of 2011 when compared to the applicable annual company-wide objectives. This increase was partially offset by a one-time charge of $900,000 incurred in the first quarter of 2011 to terminate and settle a product development contract.

Sales and Marketing Expenses. In the second quarter of 2012, sales and marketing expenses increased 15.8% to $24.6 million from $21.2 million in the second quarter of 2011. As a result of our Anue acquisition, our sales and marketing costs in the second quarter of 2012 included approximately $1.4 million related to this acquisition. Excluding the incremental sales and marketing costs related to the Anue acquisition, sales and marketing expenses in the second quarter of 2012 were $23.2 million compared to $21.2 million in the second quarter of 2011. This increase was primarily due to an increase in compensation and related employee costs, including travel, of $1.5 million. The net increase in compensation and related employee costs was primarily due to higher sales commissions as revenue levels increased in the second quarter of 2012 over the same period in the prior year and higher salaries due, in part, to annual merit increases in 2012.

Sales and marketing expenses for the first six months of 2012 increased 11.4% to $49.2 million from $44.1 million in the same period of 2011. Excluding the incremental sales and marketing costs related to the Anue acquisition of $1.4 million, sales and marketing expenses in the first six months of 2012 were $47.8 million compared to $44.1 million in the same period of 2011. This increase was primarily due to an increase in compensation and related employee costs, including travel, of $3.2 million, and higher depreciation expense of $683,000 primarily related to an increase in the number of our demonstration units in the field. The increase in compensation and related employee costs was primarily due to higher sales commissions as revenue levels increased in the first six months of 2012 over the same period in the prior year and higher salaries due, in part, to annual merit increases in 2012.

General and Administrative Expenses. In the second quarter of 2012, general and administrative expenses increased 37.4% to $11.1 million from $8.1 million in . . .