##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    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 000-31523
 IXIA
 (Exact name of Registrant as specified in its charter)
 California
    
    95-4635982(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 26601 West Agoura Road, Calabasas, CA 91302  (Address of principal executive offices, including zip code)
 (818) 871-1800  (Registrants telephone number, including area code)
 o þ
  þ o o
 o þ
  Common Stock
    
    67,350,595(Class of Common Stock)
    
    (Outstanding at February 1, 2007)




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##### 



IXIA
 TABLE OF CONTENTS
 Page NumberPART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of September
30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 2006 and
2005
    
    
    4Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures about Market
Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    31Item 5.
    
    Other Information
    
    
    31Item 6.
    
    Exhibits
    
    
    31SIGNATURES
    
    
    32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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IXIA
Condensed Consolidated Balance Sheets
(in thousands)
 September 30,
    
    
    December 31,2006
    
    
    2005(Restated)AssetsCurrent assets:Cash and cash equivalents
    
    $
    70,189
    
    
    $
    51,837Short-term investments in marketable securities
    
    
    137,184
    
    
    
    124,456Accounts receivable, net of allowance for
doubtful accounts of $1,076 and $854 as of
September 30, 2006 and December 31, 2005,
respectively
    
    
    37,978
    
    
    
    31,565Inventories
    
    
    10,564
    
    
    
    9,846Deferred income taxes
    
    
    10,352
    
    
    
    8,588Prepaid expenses and other current assets
    
    
    3,347
    
    
    
    3,519Total current assets
    
    
    269,614
    
    
    
    229,811Investments in marketable securities
    
    
    4,352
    
    
    
    25,392Property and equipment, net
    
    
    22,431
    
    
    
    19,750Deferred income taxes
    
    
    6,807
    
    
    
    13,018Goodwill
    
    
    16,728
    
    
    
    13,468Intangible assets, net
    
    
    21,894
    
    
    
    20,462Other assets
    
    
    479
    
    
    
    315Total assets
    
    $
    342,305
    
    
    $
    322,216Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    2,773
    
    
    $
    2,872Accrued expenses
    
    
    15,242
    
    
    
    12,399Deferred revenues
    
    
    18,009
    
    
    
    19,233Income taxes payable
    
    
    3,995
    
    
    
    4,131Total current liabilities
    
    
    40,019
    
    
    
    38,635Deferred revenues and other liabilities
    
    
    10,801
    
    
    
    20,101Total liabilities
    
    
    50,820
    
    
    
    58,736Shareholders equity:Common stock, without par value; 200,000
shares authorized, 67,186 and 66,580 shares
issued and outstanding as of September 30,
2006 and December 31, 2005, respectively
    
    
    131,194
    
    
    
    126,792Additional paid-in capital
    
    
    82,721
    
    
    
    68,098Retained earnings
    
    
    77,570
    
    
    
    68,590Total shareholders equity
    
    
    291,485
    
    
    
    263,480Total liabilities and shareholders equity
    
    $
    342,305
    
    
    $
    322,216
  3




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##### Table of Contents



IXIA
Condensed Consolidated Statements of Income
(in thousands, except per share data)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Revenues:Products
    
    $
    49,696
    
    
    $
    34,491
    
    
    $
    114,339
    
    
    $
    100,301Services
    
    
    5,532
    
    
    
    5,401
    
    
    
    18,426
    
    
    
    15,015Total revenues
    
    
    55,228
    
    
    
    39,892
    
    
    
    132,765
    
    
    
    115,316Costs
and operating expenses:
(1)Cost of revenues  products
    
    
    7,694
    
    
    
    6,635
    
    
    
    21,783
    
    
    
    18,683Cost of revenues  amortization of purchased
technology
    
    
    1,256
    
    
    
    991
    
    
    
    3,449
    
    
    
    2,876Cost of revenues  services
    
    
    629
    
    
    
    561
    
    
    
    1,723
    
    
    
    1,640Research and development
    
    
    11,097
    
    
    
    7,994
    
    
    
    32,720
    
    
    
    23,514Sales and marketing
    
    
    15,317
    
    
    
    9,753
    
    
    
    45,163
    
    
    
    28,245General and administrative
    
    
    5,824
    
    
    
    4,421
    
    
    
    16,627
    
    
    
    11,940Amortization of intangible assets
    
    
    464
    
    
    
    316
    
    
    
    1,287
    
    
    
    944Total costs and operating expenses
    
    
    42,281
    
    
    
    30,671
    
    
    
    122,752
    
    
    
    87,842Income from operations
    
    
    12,947
    
    
    
    9,221
    
    
    
    10,013
    
    
    
    27,474Interest and other, net
    
    
    2,431
    
    
    
    1,361
    
    
    
    6,741
    
    
    
    3,486Income before income taxes
    
    
    15,378
    
    
    
    10,582
    
    
    
    16,754
    
    
    
    30,960Income tax expense
    
    
    7,278
    
    
    
    2,602
    
    
    
    7,774
    
    
    
    6,119Net income
    
    $
    8,100
    
    
    $
    7,980
    
    
    $
    8,980
    
    
    $
    24,841Earnings per share:Basic
    
    $
    0.12
    
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.38Diluted
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.36Weighted average number of common and common
equivalent shares outstanding:Basic
    
    
    67,129
    
    
    
    66,015
    
    
    
    66,907
    
    
    
    64,753Diluted
    
    
    68,636
    
    
    
    69,923
    
    
    
    68,804
    
    
    
    69,281
 
 (1)
    
    Stock-based compensation included in: Cost of revenues  products
    
    $
    144
    
    
    $
    
    
    
    $
    452
    
    
    $
    Cost of revenues  services
    
    
    55
    
    
    
    
    
    
    
    172
    
    
    
    Research and development
    
    
    1,695
    
    
    
    
    
    
    
    5,130
    
    
    
    Sales and marketing
    
    
    2,126
    
    
    
    
    
    
    
    6,154
    
    
    
    General and administrative
    
    
    869
    
    
    
    
    
    
    
    2,346
    
    
    
    
  4




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IXIA
Condensed Consolidated Statements of Cash Flows
(in thousands)
 Nine months endedSeptember 30,2006
    
    
    2005(Restated)Cash flows from operating activities:Net income
    
    $
    8,980
    
    
    $
    24,841Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    7,238
    
    
    
    3,976Amortization of intangible assets
    
    
    4,737
    
    
    
    3,820Allowance for doubtful accounts
    
    
    222
    
    
    
    (6
    )Stock-based compensation
    
    
    14,254
    
    
    
    Deferred income taxes
    
    
    4,447
    
    
    
    (9,683
    )Tax benefit from stock option transactions
    
    
    369
    
    
    
    15,102Excess tax benefits from stock-based
compensation
    
    
    (253
    )
    
    
    Changes in operating assets and liabilities,
net of effect of acquisitions:Accounts receivable
    
    
    (6,634
    )
    
    
    (11,468
    )Inventories
    
    
    (718
    )
    
    
    (1,188
    )Prepaid expenses and other current assets
    
    
    172
    
    
    
    1,616Other assets
    
    
    (164
    )
    
    
    322Accounts payable
    
    
    (99
    )
    
    
    1,107Accrued expenses
    
    
    1,537
    
    
    
    2,836Deferred revenues
    
    
    (11,253
    )
    
    
    7,559Income taxes payable
    
    
    (136
    )
    
    
    529Net cash provided by operating activities
    
    
    22,699
    
    
    
    39,363Cash flows from investing activities:Purchases of property and equipment
    
    
    (9,919
    )
    
    
    (9,214
    )Purchases of available-for-sale securities
    
    
    (100,400
    )
    
    
    (119,611
    )Proceeds from available-for-sale securities
    
    
    90,725
    
    
    
    92,976Purchases of held-to-maturity securities
    
    
    (7,978
    )
    
    
    (18,679
    )Proceeds from held-to-maturity securities
    
    
    25,965
    
    
    
    27,203Purchases of technology and other intangible assets
    
    
    (121
    )
    
    
    (126
    )Payments in connection with acquisitions
    
    
    (7,274
    )
    
    
    (8,536
    )Net cash used in investing activities
    
    
    (9,002
    )
    
    
    (35,987
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    4,402
    
    
    
    23,667Excess tax benefits from stock-based compensation
    
    
    253
    
    
    
    Net cash provided by financing activities
    
    
    4,655
    
    
    
    23,667Net increase in cash and cash equivalents
    
    
    18,352
    
    
    
    27,043Cash and cash equivalents at beginning of period
    
    
    51,837
    
    
    
    16,383Cash and cash equivalents at end of period
    
    $
    70,189
    
    
    $
    43,426
  5




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IXIA
Notes to Condensed Consolidated Financial Statements
(unaudited)
 1. Business
  2. Basis of Presentation
      6




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3. Restatement of Previously Issued Financial Statements
     7




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Revenue Recognition for Implied PCS
  Classification of Certain Customer Support Costs and Classification of Deferred Tax Assets and
Liabilities
    Summary of Restatement Adjustments
  8




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As of December 31, 2005As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Balance Sheet:AssetsCurrent assets:Cash and cash equivalents
    
    $
    51,837
    
    
    $
    
    
    
    $
    51,837Short-term investments in marketable securities
    
    
    124,456
    
    
    
    
    
    
    
    124,456Accounts receivable, net
    
    
    31,565
    
    
    
    
    
    
    
    31,565Inventories
    
    
    9,846
    
    
    
    
    
    
    
    9,846Deferred income taxes
    
    
    4,401
    
    
    
    4,187
    (1)(2)
    
    
    8,588Prepaid expenses and other current assets
    
    
    3,519
    
    
    
    
    
    
    
    3,519Total current assets
    
    
    225,624
    
    
    
    4,187
    
    
    
    229,811Investments in marketable securities
    
    
    25,392
    
    
    
    
    
    
    
    25,392Property and equipment, net
    
    
    19,750
    
    
    
    
    
    
    
    19,750Deferred income taxes
    
    
    10,004
    
    
    
    3,014
    (1)(2)
    
    
    13,018Goodwill
    
    
    13,468
    
    
    
    
    
    
    
    13,468Intangible assets, net
    
    
    20,462
    
    
    
    
    
    
    
    20,462Other assets
    
    
    315
    
    
    
    
    
    
    
    315Total assets
    
    $
    315,015
    
    
    $
    7,201
    
    
    $
    322,216Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    2,872
    
    
    $
    
    
    
    $
    2,872Accrued expenses
    
    
    12,399
    
    
    
    
    
    
    
    12,399Deferred revenues
    
    
    8,338
    
    
    
    10,895
    (3)
    
    
    19,233Income taxes payable
    
    
    4,131
    
    
    
    
    
    
    
    4,131Total current liabilities
    
    
    27,740
    
    
    
    10,895
    
    
    
    38,635Deferred revenues
    
    
    528
    
    
    
    19,573
    (3)
    
    
    20,101Deferred income taxes
    
    
    4,651
    
    
    
    (4,651
    )(2)
    
    
    Total liabilities
    
    
    32,919
    
    
    
    25,817
    
    
    
    58,736Total shareholders equity
    
    
    282,096
    
    
    
    (18,616
    )(4)
    
    
    263,480Total liabilities and shareholders equity
    
    $
    315,015
    
    
    $
    7,201
    
    
    $
    322,216
 
 (1)
    
    To reflect the income tax effects of the revenue adjustment for implied PCS detailed in Item
(3).(2)
    
    To reflect the combination of certain deferred tax assets and deferred tax liabilities that
were previously reported separately on a gross basis.(3)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above.(4)
    
    To reflect the cumulative effects on shareholders equity of the adjustments detailed in
Items (1) and (3). 9




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For the Three Months Ended September 30, 2005As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Statement of Income:Revenues:Products
    
    $
    42,134
    
    
    $
    (7,643
    )(A)
    
    $
    34,491Services
    
    
    
    
    
    
    5,401
    (A)
    
    
    5,401Total revenues
    
    
    42,134
    
    
    
    (2,242
    )
    
    
    39,892Costs and operating expenses:Cost of revenues  products
    
    
    6,685
    
    
    
    (50
    )(B)
    
    
    6,635Cost of revenues  amortization of
purchased technology
    
    
    991
    
    
    
    
    
    
    
    991Cost of revenues  services
    
    
    
    
    
    
    561
    (B)
    
    
    561Research and development
    
    
    7,994
    
    
    
    
    
    
    
    7,994Sales and marketing
    
    
    10,264
    
    
    
    (511
    )(B)
    
    
    9,753General and administrative
    
    
    4,421
    
    
    
    
    
    
    
    4,421Amortization of intangible assets
    
    
    316
    
    
    
    
    
    
    
    316Total costs and operating expenses
    
    
    30,671
    
    
    
    
    
    
    
    30,671Income from operations
    
    
    11,463
    
    
    
    (2,242
    )
    
    
    9,221Interest and other income, net
    
    
    1,361
    
    
    
    
    
    
    
    1,361Income before income taxes
    
    
    12,824
    
    
    
    (2,242
    )
    
    
    10,582Income tax expense
    
    
    3,754
    
    
    
    (1,152
    )(C)
    
    
    2,602Net income
    
    $
    9,070
    
    
    $
    (1,090
    )
    
    $
    7,980Earnings per share:Basic
    
    $
    0.14
    
    
    $
    (0.02
    )(D)
    
    $
    0.12Diluted
    
    $
    0.13
    
    
    $
    (0.02
    )(D)
    
    $
    0.11Weighted average number of common and
common equivalent shares outstanding:Basic
    
    
    66,015
    
    
    
    
    
    
    
    66,015Diluted
    
    
    69,923
    
    
    
    
    
    
    
    69,923
 
 (A)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. Adjustment also includes $3.2 million of
services revenues that were previously reported within the $42.1 million revenue amount by
reducing product revenues by $3.2 million and increasing services revenues by $3.2 million.(B)
    
    To reflect the reclassification of certain direct customer support costs to cost of revenues
from sales and marketing expenses and to separately disclose the costs associated with
products and services revenues.(C)
    
    To reflect the income tax effects of the revenue adjustment for implied PCS detailed in Item
(A).(D)
    
    To reflect earnings per share effects from adjustments detailed in Items (A) and (C). 10




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For the Nine Months Ended September 30, 2005As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Statement of Income:Revenues:Products
    
    $
    121,874
    
    
    $
    (21,573
    )(A)
    
    $
    100,301Services
    
    
    
    
    
    
    15,015
    (A)
    
    
    15,015Total revenues
    
    
    121,874
    
    
    
    (6,558
    )
    
    
    115,316Costs and operating expenses:Cost of revenues  products
    
    
    18,879
    
    
    
    (196
    )(B)
    
    
    18,683Cost of revenues  amortization of
purchased technology
    
    
    2,876
    
    
    
    
    
    
    
    2,876Cost of revenues  services
    
    
    
    
    
    
    1,640
    (B)
    
    
    1,640Research and development
    
    
    23,514
    
    
    
    
    
    
    
    23,514Sales and marketing
    
    
    29,689
    
    
    
    (1,444
    )(B)
    
    
    28,245General and administrative
    
    
    11,940
    
    
    
    
    
    
    
    11,940Amortization of intangible assets
    
    
    944
    
    
    
    
    
    
    
    944Total costs and operating expenses
    
    
    87,842
    
    
    
    
    
    
    
    87,842Income from operations
    
    
    34,032
    
    
    
    (6,558
    )
    
    
    27,474Interest and other income, net
    
    
    3,486
    
    
    
    
    
    
    
    3,486Income before income taxes
    
    
    37,518
    
    
    
    (6,558
    )
    
    
    30,960Income tax expense
    
    
    9,353
    
    
    
    (3,234
    )(C)
    
    
    6,119Net income
    
    $
    28,165
    
    
    $
    (3,324
    )
    
    $
    24,841Earnings per share:Basic
    
    $
    0.43
    
    
    $
    (0.05
    )(D)
    
    $
    0.38Diluted
    
    $
    0.41
    
    
    $
    (0.05
    )(D)
    
    $
    0.36Weighted average number of common and
common equivalent shares outstanding:Basic
    
    
    64,753
    
    
    
    
    
    
    
    64,753Diluted
    
    
    69,281
    
    
    
    
    
    
    
    69,281
 
 (A)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. Adjustment also includes $9.1 million of
services revenues that were previously reported within the $121.9 million revenue amount by
reducing product revenues by $9.1 million and increasing services revenues by $9.1 million.(B)
    
    To reflect the reclassification of certain direct customer support costs to cost of revenues
from sales and marketing expenses and to separately disclose the costs associated with
products and services revenues.(C)
    
    To reflect the income tax effects of the revenue adjustment for implied PCS detailed in Item
(A).(D)
    
    To reflect earnings per share effects from adjustments detailed in Items (A) and (C). 11




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As Previously
    
    RestatementIncrease (Decrease):
    
    Reported
    
    Adjustments
    
    RestatedNine Months Ended September 30, 2005Cash flows from operating activities:Net income
    
    $
    28,165
    
    
    $
    (3,324
    )
    
    $
    24,841Changes in deferred income taxes
    
    
    (6,449
    )
    
    
    (3,234
    )
    
    
    (9,683
    )Changes in deferred revenues
    
    
    1,001
    
    
    
    6,558
    
    
    
    7,559Net cash provided by operating activities
    
    
    39,363
    
    
    
    
    
    
    
    39,363
 4.
    
    Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    2,145
    
    
    $
    3,574Work in process
    
    
    7,174
    
    
    
    3,426Finished goods
    
    
    1,245
    
    
    
    2,846$
    10,564
    
    
    $
    9,846
 5.
    
    Stock-Based Compensation
   12




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6.
    
    Earnings Per Share
  13




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Numerator:Net income
    
    $
    8,100
    
    
    $
    7,980
    
    
    $
    8,980
    
    
    $
    24,841Denominator:Basic presentation:Weighted average common shares
    
    
    67,129
    
    
    
    66,015
    
    
    
    66,907
    
    
    
    64,753Denominator for basic calculation
    
    
    67,129
    
    
    
    66,015
    
    
    
    66,907
    
    
    
    64,753Diluted presentation:Shares used above
    
    
    67,129
    
    
    
    66,015
    
    
    
    66,907
    
    
    
    64,753Weighted average effect of
dilutive stock options and
warrants
    
    
    1,507
    
    
    
    3,908
    
    
    
    1,897
    
    
    
    4,528Denominator for diluted calculation
    
    
    68,636
    
    
    
    69,923
    
    
    
    68,804
    
    
    
    69,281Basic earnings per share
    
    $
    0.12
    
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.38Diluted earnings per share
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.36
  7.
    
    Concentrations
 Significant Customer
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005(Restated)
    
    
    
    
    
    (Restated)Amount of total revenues
    
    $
    12,965
    
    
    $
    14,271
    
    
    $
    36,187
    
    
    $
    43,957As a percentage of total revenues
    
    
    24
    %
    
    
    36
    %
    
    
    27
    %
    
    
    38
    %
  International Data
  14




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Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005(Restated)
    
    
    
    
    
    (Restated)Amount of total revenues
    
    $
    15,047
    
    
    $
    10,069
    
    
    $
    40,616
    
    
    $
    30,988As a percentage of total revenues
    
    
    27
    %
    
    
    25
    %
    
    
    31
    %
    
    
    27
    %
  8.
    
    Acquisitions
   Intangible assets
    
    $
    2,430Goodwill
    
    
    3,260Total assets acquired
    
    
    5,690Current liabilities assumed
    
    
    (477
    )Net assets acquired
    
    $
    5,213
   9.
    
    Share-Based Compensation
 Stock Option Plans
  15




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##### Table of Contents



Weighted AverageWeighted Average
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Exercise Price
    
    
    Contractual
    
    
    Intrinsicof Options
    
    
    Per Share
    
    
    Life (in years)
    
    
    ValueOutstanding as of December 31, 2005
    
    
    10,465
    
    
    $
    10.62Granted
    
    
    1,082
    
    
    
    11.21Exercised
    
    
    (412
    )
    
    
    6.40Forfeited/canceled
    
    
    (841
    )
    
    
    13.37Outstanding as of September 30,
2006
    
    
    10,294
    
    
    $
    10.62
    
    
    
    4.88
    
    
    $
    13,066Exercisable as of September 30,
2006
    
    
    6,214
    
    
    $
    9.11
    
    
    
    4.02
    
    
    $
    12,341
   Weighted AverageGrant Date FairNumber
    
    
    Valueof Awards
    
    
    Per ShareOutstanding as of December 31, 2005
    
    
    
    
    
    $
    Awarded
    
    
    338
    
    
    
    9.64Released
    
    
    (1
    )
    
    
    10.72Forfeited/canceled
    
    
    
    
    
    
    Outstanding as of September 30,
2006
    
    
    337
    
    
    $
    9.64
 16




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##### Table of Contents



Employee Stock Purchase Plan
     Stock-Based Compensation Expense
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Expected lives (in years)
    
    
    4.0
    
    
    
    3.7
    
    
    
    4.1
    
    
    
    3.8Risk-free interest rates
    
    
    4.9
    %
    
    
    4.2
    %
    
    
    4.8
    %
    
    
    4.0
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    59.3
    %
    
    
    58.3
    %
    
    
    61.3
    %
    
    
    60.6
    %
 17




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Net income  as reported for prior period (1)
    
    
    N/A
    
    
    $
    7,980
    
    
    
    N/A
    
    
    $
    24,841Stock-based compensation expense related to share-based
awards, net of tax (2)
    
    $
    (3,817
    )
    
    
    (2,548
    )
    
    $
    (11,139
    )
    
    
    (5,259
    )Net income  including the effects of stock-based
compensation (3)
    
    $
    8,100
    
    
    $
    5,432
    
    
    $
    8,980
    
    
    $
    19,582Earnings per share:Basic  as reported for prior period (1)
    
    
    N/A
    
    
    $
    0.12
    
    
    
    N/A
    
    
    $
    0.38Basic  including the effects of stock-based
compensation (3)
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.30Diluted  as reported for prior period (1)
    
    
    N/A
    
    
    $
    0.11
    
    
    
    N/A
    
    
    $
    0.36Diluted  including the effects of stock-based
compensation (3)
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.28
 
 (1)
    
    Net income and earnings per share for the three and nine months ended September 30, 2005 did not include
stock-based compensation expense for share-based awards under SFAS 123 because we did not adopt the
recognition provisions of SFAS 123.(2)
    
    Stock-based compensation expense prior to fiscal 2006 is calculated based on the pro forma application
of SFAS 123. Stock-based compensation expense, excluding tax effects, under SFAS 123R and SFAS 123 for the
three months ended September 30, 2006 and 2005 was $4.9 million and $3.3 million, respectively. Stock-based
compensation expense, excluding tax effects, under SFAS 123R and SFAS 123 for the nine months ended September
30, 2006 and 2005 was $14.3 million and $10.9 million, respectively.(3)
    
    Net income and earnings per share prior to fiscal 2006 represent pro forma information based on SFAS 123. 10. Recent Accounting Pronouncements
   18




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   OVERVIEW
  Revenues.
 20




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21




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Stock-Based Compensation.
 22




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Cost of Revenues
  
    
    changes in 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 our products sold, such as the mix of software versus hardware product
sales, including the effects of any related deferral, reversal and recognition of
revenues for implied PCS obligations;
    
    new product introductions by us and by our competitors;
    
    demand for our products;
    
    expenses related to acquired technologies, such as royalties and amortization of intangible assets;
    
    production volume; and
    
    the mix of sales channels through which our products are sold.
  Operating Expenses
 23




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Interest and Other, Net.
 Income Tax Expense.
 24




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RESULTS OF OPERATIONS
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Revenues:Products
    
    
    90.0
    %
    
    
    86.5
    %
    
    
    86.1
    %
    
    
    87.0
    %Services
    
    
    10.0
    
    
    
    13.5
    
    
    
    13.9
    
    
    
    13.0Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and operating expenses:(1)Cost of revenues  products
    
    
    13.9
    
    
    
    16.6
    
    
    
    16.4
    
    
    
    16.2Cost of revenues  amortization of purchased
technology
    
    
    2.3
    
    
    
    2.5
    
    
    
    2.6
    
    
    
    2.5Cost of revenues  services
    
    
    1.1
    
    
    
    1.4
    
    
    
    1.3
    
    
    
    1.4Research and development
    
    
    20.2
    
    
    
    20.0
    
    
    
    24.6
    
    
    
    20.4Sales and marketing
    
    
    27.8
    
    
    
    24.5
    
    
    
    34.0
    
    
    
    24.5General and administrative
    
    
    10.5
    
    
    
    11.1
    
    
    
    12.5
    
    
    
    10.4Amortization of intangible assets
    
    
    0.8
    
    
    
    0.8
    
    
    
    1.0
    
    
    
    0.8Total costs and operating expenses
    
    
    76.6
    
    
    
    76.9
    
    
    
    92.4
    
    
    
    76.2Income from operations
    
    
    23.4
    
    
    
    23.1
    
    
    
    7.6
    
    
    
    23.8Interest and other, net
    
    
    4.4
    
    
    
    3.4
    
    
    
    5.1
    
    
    
    3.0Income before income taxes
    
    
    27.8
    
    
    
    26.5
    
    
    
    12.7
    
    
    
    26.8Income tax expense
    
    
    13.2
    
    
    
    6.5
    
    
    
    5.9
    
    
    
    5.3Net income
    
    
    14.6
    %
    
    
    20.0
    %
    
    
    6.8
    %
    
    
    21.5
    %
 
 (1)
    
    Stock-based compensation included in: Cost of revenues  products
    
    
    0.3
    %
    
    
    
    
    
    
    0.3
    %
    
    
    Cost of revenues  services
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    Research and development
    
    
    3.1
    
    
    
    
    
    
    
    3.9
    
    
    
    Sales and marketing
    
    
    3.8
    
    
    
    
    
    
    
    4.6
    
    
    
    General and administrative
    
    
    1.6
    
    
    
    
    
    
    
    1.8
    
    
    
    
 Comparison of Three and Nine Months Ended September 30, 2006 and 2005
 Revenues.
 25




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Cost of Revenues
 Research and Development Expenses.
 Sales and Marketing Expenses.
 26




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General and Administrative Expenses.
 Amortization of Intangible Assets.
 Interest and Other, Net.
 Income Tax Expense.
 LIQUIDITY AND CAPITAL RESOURCES
 27




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SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
  28




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ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Sensitivity
  Exchange Rate Sensitivity
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  29




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Restatement and Impact on Internal Control over Financial Reporting
 Internal Control 
Integrated Framework
  Changes in Internal Control over Financial Reporting
  30




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Inherent Limitations on Effectiveness of Controls
  
 PART II. OTHER INFORMATION
 
 ITEM 1A.
    
    Risk Factors
  
 ITEM 5.
    
    Other Information
  
 ITEM 6.
    
    Exhibits
 10.1
    
    Supplemental Provisions, effective April 14, 2006, to Employee Stock Purchase Plan(1)31.1
    
    Certification of Chief Executive Officer of Ixia pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer of Ixia pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certifications of Chief Executive Officer and Chief Financial
Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 
 (1)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K (File No. 000-31523) filed with the Commission on April 20, 2006 31




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SIGNATURES
  IXIADate:  February 23, 2007
    By:
    /s/ Errol GinsbergErrol GinsbergPresident and Chief Executive OfficerDate:  February 23, 2007
    By:
    /s/ Thomas B. MillerThomas B. MillerChief Financial Officer 32




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EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    
    Certification of Chief Executive Officer of Ixia pursuant
to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer of Ixia pursuant
to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certifications of Chief Executive Officer and Chief
Financial Officer of Ixia pursuant to Rule 13a-14(b)
under the Exchange Act and 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
 33