##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q/A
 AMENDMENT NO. 1
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 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
    
    66,990,282(Class of Common Stock)
    
    (Outstanding at April 28, 2006)




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##### Table of Contents



EXPLANATORY NOTE
     
    
    Part I, Item 1, Financial Statements;
    
    Part I, Item 2, Managements Discussion and Analysis of Financial Condition and
Results of Operations;
    
    Part I, Item 4, Controls and Procedures; and
 2




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
    
    Part II, Item 6, Exhibits.
   3




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##### 



TABLE OF CONTENTS
 Page NumberPART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of March 31,
2006 and December 31, 2005 (as restated)
    
    
    5Condensed Consolidated Statements of Income for the three months ended March 31, 2006 and 2005 (as
restated)
    
    
    6Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2006 and 2005 (as
restated)
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2.
    

Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    22Item 3.
    

Quantitative and Qualitative Disclosures about Market
Risk
    
    
    29Item 4.
    

Controls and Procedures
    
    
    30PART II.
    
    OTHER INFORMATIONItem 1A.
    

Risk Factors
    
    
    31Item 5.
    

Other Information
    
    
    32Item 6.
    

Exhibits
    
    
    32SIGNATURES
    
    
    33EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  4




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IXIA
 
 Condensed Consolidated Balance Sheets
 (in thousands)
  March 31,
    
    
    December 31,2006
    
    
    2005(Restated)
    
    
    (Restated)AssetsCurrent assets:Cash and cash equivalents
    
    $
    50,663
    
    
    $
    51,837Short-term investments in marketable securities
    
    
    139,333
    
    
    
    124,456Accounts receivable, net of allowance for
doubtful accounts of $928 and $854 as of March
31, 2006 and December 31, 2005, respectively
    
    
    30,358
    
    
    
    31,565Inventories
    
    
    10,616
    
    
    
    9,846Deferred income taxes
    
    
    10,455
    
    
    
    8,588Prepaid expenses and other current assets
    
    
    3,872
    
    
    
    3,519Total current assets
    
    
    245,297
    
    
    
    229,811Investments in marketable securities
    
    
    13,379
    
    
    
    25,392Property and equipment, net
    
    
    21,652
    
    
    
    19,750Deferred income taxes
    
    
    12,778
    
    
    
    13,018Goodwill
    
    
    16,717
    
    
    
    13,468Intangible assets, net
    
    
    21,482
    
    
    
    20,462Other assets
    
    
    549
    
    
    
    315Total assets
    
    $
    331,854
    
    
    $
    322,216Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    2,511
    
    
    $
    2,872Accrued expenses
    
    
    12,840
    
    
    
    12,399Deferred revenues
    
    
    20,551
    
    
    
    19,233Income taxes payable
    
    
    5,089
    
    
    
    4,131Total current liabilities
    
    
    40,991
    
    
    
    38,635Deferred revenues
    
    
    20,643
    
    
    
    20,101Total liabilities
    
    
    61,634
    
    
    
    58,736Shareholders equity:Common stock, without par value; 200,000
shares authorized, 66,785 and 66,580 shares
issued and outstanding as of March 31, 2006
and December 31, 2005, respectively
    
    
    128,260
    
    
    
    126,792Additional paid-in capital
    
    
    73,432
    
    
    
    68,098Retained earnings
    
    
    68,528
    
    
    
    68,590Total shareholders equity
    
    
    270,220
    
    
    
    263,480Total liabilities and shareholders equity
    
    $
    331,854
    
    
    $
    322,216
  5




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IXIA
 
 Condensed Consolidated Statements of Income
(in thousands, except per share data)
 Three months endedMarch 31,2006
    
    
    2005(Restated)
    
    
    (Restated)Revenues:Products
    
    $
    30,734
    
    
    $
    31,863Services
    
    
    6,333
    
    
    
    4,607Total revenues
    
    
    37,067
    
    
    
    36,470Costs and operating expenses:(1)Cost of revenues  products
    
    
    6,449
    
    
    
    5,779Cost of revenues  amortization of purchased
technology
    
    
    1,056
    
    
    
    942Cost of revenues  services
    
    
    586
    
    
    
    511Research and development
    
    
    10,560
    
    
    
    7,546Sales and marketing
    
    
    14,708
    
    
    
    9,030General and administrative
    
    
    5,654
    
    
    
    3,605Amortization of intangible assets
    
    
    399
    
    
    
    342Total costs and operating expenses
    
    
    39,412
    
    
    
    27,755Income (loss) from operations
    
    
    (2,345
    )
    
    
    8,715Interest and other income, net
    
    
    2,101
    
    
    
    896Income (loss) before income taxes
    
    
    (244
    )
    
    
    9,611Income tax expense (benefit)
    
    
    (182
    )
    
    
    1,281Net income (loss)
    
    $
    (62
    )
    
    $
    8,330Earnings (loss) per share:Basic
    
    $
    (0.00
    )
    
    $
    0.13Diluted
    
    $
    (0.00
    )
    
    $
    0.12Weighted average number of common and common
equivalent shares outstanding:Basic
    
    
    66,635
    
    
    
    63,355Diluted
    
    
    66,635
    
    
    
    68,516(1) Stock-based compensation included in:Cost of revenues  products
    
    $
    172
    
    
    
    Cost of revenues  services
    
    
    65
    
    
    
    Research and development
    
    
    1,842
    
    
    
    Sales and marketing
    
    
    2,032
    
    
    
    General and administrative
    
    
    791
    
    
    
    
  6




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IXIA
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
  Three months endedMarch 31,2006
    
    
    2005(Restated)
    
    
    (Restated)Cash flows from operating activities:Net income (loss)
    
    $
    (62
    )
    
    $
    8,330Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,214
    
    
    
    1,008Amortization of intangible assets
    
    
    1,456
    
    
    
    1,284Allowance for doubtful accounts
    
    
    74
    
    
    
    (125
    )Stock-based compensation
    
    
    4,902
    
    
    
    Deferred income taxes
    
    
    (1,627
    )
    
    
    (6,426
    )Tax benefit from stock option transactions
    
    
    432
    
    
    
    7,499Excess tax benefits from stock-based
compensation
    
    
    (173
    )
    
    
    Changes in operating assets and liabilities,
net of effect of acquisitions:Accounts receivable
    
    
    1,133
    
    
    
    (185
    )Inventories
    
    
    (770
    )
    
    
    (234
    )Prepaid expenses and other current assets
    
    
    (353
    )
    
    
    (266
    )Other assets
    
    
    (234
    )
    
    
    (13
    )Accounts payable
    
    
    (361
    )
    
    
    (346
    )Accrued expenses
    
    
    192
    
    
    
    (313
    )Deferred revenues
    
    
    1,632
    
    
    
    2,380Income taxes payable
    
    
    958
    
    
    
    278Net cash provided by operating activities
    
    
    9,413
    
    
    
    12,871Cash flows from investing activities:Purchases of property and equipment
    
    
    (4,116
    )
    
    
    (2,329
    )Purchases of available-for-sale securities
    
    
    (38,800
    )
    
    
    (36,001
    )Proceeds from available-for-sale securities
    
    
    31,875
    
    
    
    22,076Purchases of held-to-maturity securities
    
    
    (7,943
    )
    
    
    Proceeds from held-to-maturity securities
    
    
    12,004
    
    
    
    7,204Purchases of technology and other intangible assets
    
    
    (46
    )
    
    
    (28
    )Payments in connection with acquisitions
    
    
    (5,202
    )
    
    
    (4,356
    )Net cash used in investing activities
    
    
    (12,228
    )
    
    
    (13,434
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    1,468
    
    
    
    9,219Excess tax benefits from stock-based compensation
    
    
    173
    
    
    
    Net cash provided by financing activities
    
    
    1,641
    
    
    
    9,219Net (decrease) increase in cash and cash
equivalents
    
    
    (1,174
    )
    
    
    8,656Cash and cash equivalents at beginning of period
    
    
    51,837
    
    
    
    16,383Cash and cash equivalents at end of period
    
    $
    50,663
    
    
    $
    25,039
  7




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IXIA
 
 Notes to Condensed Consolidated Financial Statements
 (unaudited)
 1. Business
  2. Basis of Presentation
    3. Restatement of Previously Issued Financial Statements
  8




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Revenue Recognition for Implied PCS
  9




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Classification of Certain Customer Support Costs and Classification of Deferred Tax Assets and
Liabilities
    Summary of Restatement Adjustments
  10




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As of March 31, 2006As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Balance Sheet:AssetsCurrent assets:Cash and cash equivalents
    
    $
    50,663
    
    
    $
    
    
    
    $
    50,663Short-term investments in marketable securities
    
    
    139,333
    
    
    
    
    
    
    
    139,333Accounts receivable, net
    
    
    30,358
    
    
    
    
    
    
    
    30,358Inventories
    
    
    10,616
    
    
    
    
    
    
    
    10,616Deferred income taxes
    
    
    5,237
    
    
    
    5,218
    (1)
    
    
    10,455Prepaid expenses and other current assets
    
    
    3,872
    
    
    
    
    
    
    
    3,872Total current assets
    
    
    240,079
    
    
    
    5,218
    
    
    
    245,297Investments in marketable securities
    
    
    13,379
    
    
    
    
    
    
    
    13,379Property and equipment, net
    
    
    21,652
    
    
    
    
    
    
    
    21,652Deferred income taxes
    
    
    4,910
    
    
    
    7,868
    (1)
    
    
    12,778Goodwill
    
    
    16,717
    
    
    
    
    
    
    
    16,717Intangible assets, net
    
    
    21,482
    
    
    
    
    
    
    
    21,482Other assets
    
    
    549
    
    
    
    
    
    
    
    549Total assets
    
    $
    318,768
    
    
    $
    13,086
    
    
    $
    331,854Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    2,511
    
    
    $
    
    
    
    $
    2,511Accrued expenses
    
    
    12,840
    
    
    
    
    
    
    
    12,840Deferred revenues
    
    
    8,524
    
    
    
    12,027
    (2)
    
    
    20,551Income taxes payable
    
    
    5,089
    
    
    
    
    
    
    
    5,089Total current liabilities
    
    
    28,964
    
    
    
    12,027
    
    
    
    40,991Deferred revenues
    
    
    417
    
    
    
    20,226
    (2)
    
    
    20,643Total liabilities
    
    
    29,381
    
    
    
    32,253
    
    
    
    61,634Total shareholders equity
    
    
    289,387
    
    
    
    (19,167
    )(3)
    
    
    270,220Total liabilities and shareholders equity
    
    $
    318,768
    
    
    $
    13,086
    
    
    $
    331,854
 
 (1)
    
    To reflect the income tax effects of the revenue adjustment for implied PCS detailed in Item
(2).(2)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above.(3)
    
    To reflect the cumulative effects on shareholders equity of the adjustments detailed in
Items (1) and (2). 11




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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). 12




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For the Three Months Ended March 31, 2006As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Statement of Income:Revenues:Products
    
    $
    38,852
    
    
    $
    (8,118
    )(A)
    
    $
    30,734Services
    
    
    
    
    
    
    6,333
    (A)
    
    
    6,333Total revenues
    
    
    38,852
    
    
    
    (1,785
    )
    
    
    37,067Costs and operating expenses:Cost of revenues  products
    
    
    6,999
    
    
    
    (550
    )(B)
    
    
    6,449Cost of revenues  amortization of
purchased technology
    
    
    1,056
    
    
    
    
    
    
    
    1,056Cost of revenues  services
    
    
    
    
    
    
    586
    (B)
    
    
    586Research and development
    
    
    10,560
    
    
    
    
    
    
    
    10,560Sales and marketing
    
    
    14,744
    
    
    
    (36
    )(B)
    
    
    14,708General and administrative
    
    
    5,654
    
    
    
    
    
    
    
    5,654Amortization of intangible assets
    
    
    399
    
    
    
    
    
    
    
    399Total costs and operating expenses
    
    
    39,412
    
    
    
    
    
    
    
    39,412Income (loss) from operations
    
    
    (560
    )
    
    
    (1,785
    )
    
    
    (2,345
    )Interest and other income, net
    
    
    2,101
    
    
    
    
    
    
    
    2,101Income (loss) before income taxes
    
    
    1,541
    
    
    
    (1,785
    )
    
    
    (244
    )Income tax expense (benefit)
    
    
    1,052
    
    
    
    (1,234
    )(C)
    
    
    (182
    )Net income (loss)
    
    $
    489
    
    
    $
    (551
    )
    
    $
    (62
    )Earnings (loss) per share:Basic
    
    $
    0.01
    
    
    $
    (0.01
    )(D)
    
    $
    (0.00
    )Diluted
    
    $
    0.01
    
    
    $
    (0.01
    )(D)
    
    $
    (0.00
    )Weighted average number of common and
common equivalent shares outstanding:Basic
    
    
    66,635
    
    
    
    
    
    
    
    66,635Diluted
    
    
    69,035
    
    
    
    (2,400
    )(E)
    
    
    66,635
 
 (A)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. Adjustment also includes $3.8 million of
services revenues that were previously reported within the $38.9 million revenue amount by
reducing product revenues by $3.8 million and increasing services revenues by $3.8 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).(E)
    
    To adjust the diluted weighted average share number to the basic weighted average share
number due to the restated net loss position. 13




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##### Table of Contents



For the Three Months Ended March 31, 2005As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Statement of Income:Revenues:Products
    
    $
    38,414
    
    
    $
    (6,551
    )(A)
    
    $
    31,863Services
    
    
    
    
    
    
    4,607
    (A)
    
    
    4,607Total revenues
    
    
    38,414
    
    
    
    (1,944
    )
    
    
    36,470Costs and operating expenses:Cost of revenues  products
    
    
    5,845
    
    
    
    (66
    )(B)
    
    
    5,779Cost of revenues  amortization of
purchased technology
    
    
    942
    
    
    
    
    
    
    
    942Cost of revenues  services
    
    
    
    
    
    
    511
    (B)
    
    
    511Research and development
    
    
    7,546
    
    
    
    
    
    
    
    7,546Sales and marketing
    
    
    9,475
    
    
    
    (445
    )(B)
    
    
    9,030General and administrative
    
    
    3,605
    
    
    
    
    
    
    
    3,605Amortization of intangible assets
    
    
    342
    
    
    
    
    
    
    
    342Total costs and operating expenses
    
    
    27,755
    
    
    
    
    
    
    
    27,755Income from operations
    
    
    10,659
    
    
    
    (1,944
    )
    
    
    8,715Interest and other income, net
    
    
    896
    
    
    
    
    
    
    
    896Income before income taxes
    
    
    11,555
    
    
    
    (1,944
    )
    
    
    9,611Income tax expense
    
    
    2,226
    
    
    
    (945
    )(C)
    
    
    1,281Net income
    
    $
    9,329
    
    
    $
    (999
    )
    
    $
    8,330Earnings per share:Basic
    
    $
    0.15
    
    
    $
    (0.02
    )(D)
    
    $
    0.13Diluted
    
    $
    0.14
    
    
    $
    (0.02
    )(D)
    
    $
    0.12Weighted average number of common and
common equivalent shares outstanding:Basic
    
    
    63,355
    
    
    
    
    
    
    
    63,355Diluted
    
    
    68,516
    
    
    
    
    
    
    
    68,516
 
 (A)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. Adjustment also includes $2.8 million of
services revenues that were previously reported within the $38.4 million revenue amount by
reducing product revenues by $2.8 million and increasing services revenues by $2.8 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). 14




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##### Table of Contents



As Previously
    
    RestatementIncrease (Decrease):
    
    Reported
    
    Adjustments
    
    RestatedThree Months Ended March 31, 2006Cash flows from operating activities:Net income (loss)
    
    $
    489
    
    
    $
    (551
    )
    
    $
    (62
    )Tax benefit from stock option transactions
    
    
    
    
    
    
    432
    
    
    
    432Excess tax benefits from stock-based
compensation
    
    
    
    
    
    
    (173
    )
    
    
    (173
    )Changes in deferred income taxes
    
    
    (393
    )
    
    
    (1,234
    )
    
    
    (1,627
    )Changes in deferred revenues
    
    
    (153
    )
    
    
    1,785
    
    
    
    1,632Net cash provided by operating activities
    
    
    9,154
    
    
    
    259
    
    
    
    9,413Cash flows from financing activities:Excess tax benefits from stock-based
compensation
    
    
    432
    
    
    
    (259
    )
    
    
    173Net cash provided by financing activities
    
    
    1,900
    
    
    
    (259
    )
    
    
    1,641Three Months Ended March 31, 2005Cash flows from operating activities:Net income
    
    
    9,329
    
    
    
    (999
    )
    
    
    8,330Changes in deferred income taxes
    
    
    (5,481
    )
    
    
    (945
    )
    
    
    (6,426
    )Changes in deferred revenues
    
    
    436
    
    
    
    1,944
    
    
    
    2,380Net cash provided by operating activities
    
    
    12,871
    
    
    
    
    
    
    
    12,871
 4. Inventories
  March 31,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    2,679
    
    
    $
    3,574Work in process
    
    
    4,740
    
    
    
    3,426Finished goods
    
    
    3,197
    
    
    
    2,846$
    10,616
    
    
    $
    9,846
 5. Stock-Based Compensation
  15




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Earnings Per Share (Restated)
   Three months ended March 31,2006
    
    
    2005(Restated)
    
    
    (Restated)Numerator:Net income (loss)
    
    $
    (62
    )
    
    $
    8,330Denominator:Basic presentation:Weighted average common shares
    
    
    66,635
    
    
    
    63,355Denominator for basic calculation
    
    
    66,635
    
    
    
    63,355Diluted presentation:Shares used above
    
    
    66,635
    
    
    
    63,355Weighted average effect of
dilutive stock options and
warrants
    
    
    
    
    
    
    5,161Denominator for diluted calculation
    
    
    66,635
    
    
    
    68,516Basic earnings (loss) per share
    
    $
    (0.00
    )
    
    $
    0.13Diluted earnings (loss) per share
    
    $
    (0.00
    )
    
    $
    0.12
  7. Concentrations (Restated)
 Significant Customer
  Three months ended March 31,2006
    
    2005(Restated)
    
    (Restated)Amount of total revenues
    
    $
    13,228
    
    
    $
    14,032As a percentage of total revenues
    
    
    36
    %
    
    
    39
    %
  International Data
  17




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Three months ended March 31,2006
    
    2005(Restated)
    
    (Restated)Amount of total revenues
    
    $
    12,205
    
    
    $
    11,294As a percentage of total revenues
    
    
    33
    %
    
    
    31
    %
  8. Acquisition
   Intangible assets
    
    $
    2,430Goodwill
    
    
    3,249Total assets acquired
    
    
    5,679Current liabilities assumed
    
    
    (477
    )Net assets acquired
    
    $
    5,202
  9. Share-Based Compensation
 Stock Option Plans
  18




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##### Table of Contents



Weighted AverageRemainingWeighted Average
    
    
    Contractual
    
    
    AggregateNumber
    
    
    Exercise Price
    
    
    Life (in
    
    
    Intrinsicof Options
    
    
    Per Share
    
    
    years)
    
    
    ValueOptions Outstanding as of December 31,
2005
    
    
    10,465
    
    
    $
    10.62Granted
    
    
    442
    
    
    
    12.06Exercised
    
    
    (205
    )
    
    
    7.15Forfeited/canceled
    
    
    (215
    )
    
    
    14.99Options Outstanding as of March 31, 2006
    
    
    10,487
    
    
    $
    10.66
    
    
    
    5.28
    
    
    $
    43,092Options Exercisable as of March 31, 2006
    
    
    5,512
    
    
    $
    8.54
    
    
    
    4.44
    
    
    $
    32,863
  Employee Stock Purchase Plan
    19




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Stock-Based Compensation Expense (Restated)
  Three months ended March 31,2006
    
    2005Expected life (in years)
    
    
    4.1
    
    
    
    3.8Risk-free interest rate
    
    
    4.6
    %
    
    
    3.8
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    64.0
    %
    
    
    62.2
    %
  Three Months Ended March 31,2006
    
    
    2005(Restated)
    
    
    (Restated)Net income  as reported for prior period (1)
    
    
    N/A
    
    
    $
    8,330Stock-based compensation expense related to share-based awards, net of tax
(2)
    
    $
    (3,661
    )
    
    
    (1,951
    )Net income (loss)  including the effects of stock-based compensation
(3)
    
    $
    (62
    )
    
    $
    6,379Earnings (loss) per share:Basic  as reported for prior period (1)
    
    
    N/A
    
    
    $
    0.13Basic  including the effects of stock-based compensation (3)
    
    $
    (0.00
    )
    
    $
    0.10Diluted  as reported for prior period (1)
    
    
    N/A
    
    
    $
    0.12Diluted  including the effects of stock-based compensation (3)
    
    $
    (0.00
    )
    
    $
    0.09
 20




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##### Table of Contents



(1)
    
    Net income and earnings per share for the three months ended March 31, 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 March 31, 2006 and 2005 was $4.9 million and $4.2 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
   21




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    OVERVIEW
  22




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Revenues.
      23




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Stock-Based Compensation.
 24




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##### Table of Contents



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
  25




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##### Table of Contents



Interest and Other Income, Net.
 Income Tax Expense.
 RESULTS OF OPERATIONS
  Three months endedMarch 31,2006
    
    
    2005(Restated)
    
    
    (Restated)Revenues:Products
    
    
    82.9
    %
    
    
    87.4
    %Services
    
    
    17.1
    
    
    
    12.6Total revenues
    
    
    100.0
    
    
    
    100.0Costs and operating expenses:(1)Cost of revenues  products
    
    
    17.4
    
    
    
    15.8Cost of revenues  amortization of purchased technology
    
    
    2.9
    
    
    
    2.6Cost of revenues  services
    
    
    1.6
    
    
    
    1.4Research and development
    
    
    28.4
    
    
    
    20.7Sales and marketing
    
    
    39.6
    
    
    
    24.7General and administrative
    
    
    15.3
    
    
    
    9.9Amortization of intangible assets
    
    
    1.1
    
    
    
    1.0Total costs and operating expenses
    
    
    106.3
    
    
    
    76.1Income (loss) from operations
    
    
    (6.3
    )
    
    
    23.9Interest and other income, net
    
    
    5.6
    
    
    
    2.4Income (loss) before income taxes
    
    
    (0.7
    )
    
    
    26.3Income tax expense (benefit)
    
    
    (0.5
    )
    
    
    3.5Net income (loss)
    
    
    (0.2
    )%
    
    
    22.8
    %
 26




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##### Table of Contents



(1) Stock-based compensation included in:Cost of revenues  products
    
    
    0.5
    %
    
    
    Cost of revenues  services
    
    
    0.2
    
    
    
    Research and development
    
    
    5.0
    
    
    
    Sales and marketing
    
    
    5.5
    
    
    
    General and administrative
    
    
    2.1
    
    
    
    
 Comparison of Three Months Ended March 31, 2006 and 2005
 Revenues.
 Cost of Revenues
 Research and Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 27




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Amortization of Intangible Assets.
 Interest and Other Income, Net.
 Income Tax Expense.
 LIQUIDITY AND CAPITAL RESOURCES
     28




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SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Sensitivity
  Exchange Rate Sensitivity
  29




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ITEM 4. CONTROLS AND PROCEDURES
  Evaluation of Disclosure Controls and Procedures (Restated)
    Restatement and Impact on Internal Control over Financial Reporting
 Internal Control 
Integrated Framework
 30




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Changes in Internal Control over Financial Reporting
  Inherent Limitations on Effectiveness of Controls
  
 PART II. OTHER INFORMATION
 
 ITEM 1A. Risk Factors
  31




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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. 32




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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
 33




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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
 34