##### 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 June 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
  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
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
 o þ
  Common Stock(Class of Common Stock)
    
    67,107,581(Outstanding at July 31, 2006)




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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
    
    Part II, Item 6, Exhibits.




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IXIA
 TABLE OF CONTENTS
 Page NumberPART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 (as restated)
    
    
    3Condensed Consolidated Statements of Income for the three and six months ended June 30, 2006 and 2005 (as restated)
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (as restated)
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    31PART II.
    
    OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    33Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    33Item 5.
    
    Other Information
    
    
    33Item 6.
    
    Exhibits
    
    
    33SIGNATURES
    
    
    35EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
 2




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IXIA
Condensed Consolidated Balance Sheets
(in thousands)
 June 30,
    
    
    December 31,2006
    
    
    2005(Restated)
    
    
    (Restated)AssetsCurrent assets:Cash and cash equivalents
    
    $
    37,360
    
    
    $
    51,837Short-term investments in marketable securities
    
    
    160,372
    
    
    
    124,456Accounts receivable, net of allowance for
doubtful accounts of $1,001 and $854 as of
June 30, 2006 and December 31, 2005,
respectively
    
    
    39,344
    
    
    
    31,565Inventories
    
    
    9,910
    
    
    
    9,846Deferred income taxes
    
    
    11,910
    
    
    
    8,588Prepaid expenses and other current assets
    
    
    3,569
    
    
    
    3,519Total current assets
    
    
    262,465
    
    
    
    229,811Investments in marketable securities
    
    
    4,350
    
    
    
    25,392Property and equipment, net
    
    
    22,533
    
    
    
    19,750Deferred income taxes
    
    
    11,876
    
    
    
    13,018Goodwill
    
    
    16,728
    
    
    
    13,468Intangible assets, net
    
    
    23,564
    
    
    
    20,462Other assets
    
    
    488
    
    
    
    315Total assets
    
    $
    342,004
    
    
    $
    322,216Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    3,445
    
    
    $
    2,872Accrued expenses
    
    
    14,228
    
    
    
    12,399Deferred revenues
    
    
    21,428
    
    
    
    19,233Income taxes payable
    
    
    4,240
    
    
    
    4,131Total current liabilities
    
    
    43,341
    
    
    
    38,635Deferred revenues and other liabilities
    
    
    20,586
    
    
    
    20,101Total liabilities
    
    
    63,927
    
    
    
    58,736Shareholders equity:Common stock, without par value; 200,000
shares authorized, 67,080 and 66,580 shares
issued and outstanding as of June 30, 2006 and
December 31, 2005, respectively
    
    
    130,592
    
    
    
    126,792Additional paid-in capital
    
    
    78,015
    
    
    
    68,098Retained earnings
    
    
    69,470
    
    
    
    68,590Total shareholders equity
    
    
    278,077
    
    
    
    263,480Total liabilities and shareholders equity
    
    $
    342,004
    
    
    $
    322,216
  3




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IXIA
Condensed Consolidated Statements of Income
(in thousands, except per share data)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Revenues:Products
    
    $
    33,909
    
    
    $
    33,947
    
    
    $
    64,643
    
    
    $
    65,810Services
    
    
    6,561
    
    
    
    5,007
    
    
    
    12,894
    
    
    
    9,614Total revenues
    
    
    40,470
    
    
    
    38,954
    
    
    
    77,537
    
    
    
    75,424Costs and operating expenses:(1)Cost of revenues  products
    
    
    7,640
    
    
    
    6,270
    
    
    
    14,089
    
    
    
    12,049Cost of revenues  amortization of purchased
technology
    
    
    1,137
    
    
    
    943
    
    
    
    2,193
    
    
    
    1,885Cost of revenues  services
    
    
    508
    
    
    
    568
    
    
    
    1,094
    
    
    
    1,079Research and development
    
    
    11,063
    
    
    
    7,974
    
    
    
    21,623
    
    
    
    15,520Sales and marketing
    
    
    15,138
    
    
    
    9,461
    
    
    
    29,846
    
    
    
    18,491General and administrative
    
    
    5,149
    
    
    
    3,914
    
    
    
    10,803
    
    
    
    7,519Amortization of intangible assets
    
    
    424
    
    
    
    286
    
    
    
    823
    
    
    
    628Total costs and operating expenses
    
    
    41,059
    
    
    
    29,416
    
    
    
    80,471
    
    
    
    57,171Income (loss) from operations
    
    
    (589
    )
    
    
    9,538
    
    
    
    (2,934
    )
    
    
    18,253Interest and other, net
    
    
    2,209
    
    
    
    1,229
    
    
    
    4,310
    
    
    
    2,125Income before income taxes
    
    
    1,620
    
    
    
    10,767
    
    
    
    1,376
    
    
    
    20,378Income tax expense
    
    
    678
    
    
    
    2,236
    
    
    
    496
    
    
    
    3,517Net income
    
    $
    942
    
    
    $
    8,531
    
    
    $
    880
    
    
    $
    16,861Earnings per share:Basic
    
    $
    0.01
    
    
    $
    0.13
    
    
    $
    0.01
    
    
    $
    0.26Diluted
    
    $
    0.01
    
    
    $
    0.12
    
    
    $
    0.01
    
    
    $
    0.24Weighted average number of common and common
equivalent shares outstanding:Basic
    
    
    66,955
    
    
    
    64,862
    
    
    
    66,796
    
    
    
    64,112Diluted
    
    
    68,802
    
    
    
    69,391
    
    
    
    68,887
    
    
    
    68,944(1) Stock-based compensation included in:Cost of revenues  products
    
    $
    136
    
    
    $
    
    
    
    $
    308
    
    
    $
    Cost of revenues  services
    
    
    52
    
    
    
    
    
    
    
    117
    
    
    
    Research and development
    
    
    1,593
    
    
    
    
    
    
    
    3,435
    
    
    
    Sales and marketing
    
    
    1,996
    
    
    
    
    
    
    
    4,028
    
    
    
    General and administrative
    
    
    686
    
    
    
    
    
    
    
    1,477
    
    
    
    
  4




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IXIA
Condensed Consolidated Statements of Cash Flows
(in thousands)
 Six months endedJune 30,2006
    
    
    2005(Restated)
    
    
    (Restated)Cash flows from operating activities:Net income
    
    $
    880
    
    
    $
    16,861Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,673
    
    
    
    2,395Amortization of intangible assets
    
    
    3,017
    
    
    
    2,513Allowance for doubtful accounts
    
    
    147
    
    
    
    (62
    )Stock-based compensation
    
    
    9,365
    
    
    
    Deferred income taxes
    
    
    (2,180
    )
    
    
    (10,982
    )Tax benefit from stock option transactions
    
    
    552
    
    
    
    13,521Excess tax benefits from stock-based
compensation
    
    
    (212
    )
    
    
    Changes in operating assets and liabilities,
net of effect of acquisitions:Accounts receivable
    
    
    (7,926
    )
    
    
    (5,194
    )Inventories
    
    
    (64
    )
    
    
    (595
    )Prepaid expenses and other current assets
    
    
    (50
    )
    
    
    672Other assets
    
    
    (173
    )
    
    
    305Accounts payable
    
    
    573
    
    
    
    214Accrued expenses
    
    
    523
    
    
    
    1,002Deferred revenues
    
    
    1,952
    
    
    
    6,227Income taxes payable
    
    
    109
    
    
    
    1,041Net cash provided by operating activities
    
    
    11,186
    
    
    
    27,918Cash flows from investing activities:Purchases of property and equipment
    
    
    (7,456
    )
    
    
    (5,512
    )Purchases of available-for-sale securities
    
    
    (62,000
    )
    
    
    (86,251
    )Proceeds from available-for-sale securities
    
    
    43,100
    
    
    
    42,376Purchases of held-to-maturity securities
    
    
    (7,978
    )
    
    
    (13,666
    )Proceeds from held-to-maturity securities
    
    
    12,004
    
    
    
    15,204Purchases of technology and other intangible assets
    
    
    (71
    )
    
    
    (62
    )Payments in connection with acquisitions
    
    
    (7,274
    )
    
    
    (4,356
    )Net cash used in investing activities
    
    
    (29,675
    )
    
    
    (52,267
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    3,800
    
    
    
    20,787Excess tax benefits from stock-based compensation
    
    
    212
    
    
    
    Net cash provided by financing activities
    
    
    4,012
    
    
    
    20,787Net decrease in cash and cash equivalents
    
    
    (14,477
    )
    
    
    (3,562
    )Cash and cash equivalents at beginning of period
    
    
    51,837
    
    
    
    16,383Cash and cash equivalents at end of period
    
    $
    37,360
    
    
    $
    12,821
  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
    Revenue Recognition for Implied PCS
  7




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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 June 30, 2006As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Balance Sheet:AssetsCurrent assets:Cash and cash equivalents
    
    $
    37,360
    
    
    $
    
    
    
    $
    37,360Short-term investments in marketable securities
    
    
    160,372
    
    
    
    
    
    
    
    160,372Accounts receivable, net
    
    
    39,344
    
    
    
    
    
    
    
    39,344Inventories
    
    
    9,910
    
    
    
    
    
    
    
    9,910Deferred income taxes
    
    
    6,322
    
    
    
    5,588
    (1)
    
    
    11,910Prepaid expenses and other current assets
    
    
    3,569
    
    
    
    
    
    
    
    3,569Total current assets
    
    
    256,877
    
    
    
    5,588
    
    
    
    262,465Investments in marketable securities
    
    
    4,350
    
    
    
    
    
    
    
    4,350Property and equipment, net
    
    
    22,533
    
    
    
    
    
    
    
    22,533Deferred income taxes
    
    
    4,302
    
    
    
    7,574
    (1)
    
    
    11,876Goodwill
    
    
    16,728
    
    
    
    
    
    
    
    16,728Intangible assets, net
    
    
    23,564
    
    
    
    
    
    
    
    23,564Other assets
    
    
    488
    
    
    
    
    
    
    
    488Total assets
    
    $
    328,842
    
    
    $
    13,162
    
    
    $
    342,004Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    3,445
    
    
    $
    
    
    
    $
    3,445Accrued expenses
    
    
    14,228
    
    
    
    
    
    
    
    14,228Deferred revenues
    
    
    9,216
    
    
    
    12,212
    (2)
    
    
    21,428Income taxes payable
    
    
    4,240
    
    
    
    
    
    
    
    4,240Total current liabilities
    
    
    31,129
    
    
    
    12,212
    
    
    
    43,341Deferred revenues and other liabilities
    
    
    1,115
    
    
    
    19,471
    (2)
    
    
    20,586Total liabilities
    
    
    32,244
    
    
    
    31,683
    
    
    
    63,927Total shareholders equity
    
    
    296,598
    
    
    
    (18,521
    )(3)
    
    
    278,077Total liabilities and shareholders equity
    
    $
    328,842
    
    
    $
    13,162
    
    
    $
    342,004
 (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).
 9




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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).
 10




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For the Three Months Ended June 30, 2006As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Statement of Income:Revenues:Products
    
    $
    39,900
    
    
    $
    (5,991
    )(A)
    
    $
    33,909Services
    
    
    
    
    
    
    6,561
    (A)
    
    
    6,561Total revenues
    
    
    39,900
    
    
    
    570
    
    
    
    40,470Costs and operating expenses:Cost of revenues  products
    
    
    8,112
    
    
    
    (472
    )(B)
    
    
    7,640Cost of revenues  amortization of
purchased technology
    
    
    1,137
    
    
    
    
    
    
    
    1,137Cost of revenues  services
    
    
    
    
    
    
    508
    (B)
    
    
    508Research and development
    
    
    11,063
    
    
    
    
    
    
    
    11,063Sales and marketing
    
    
    15,174
    
    
    
    (36
    )(B)
    
    
    15,138General and administrative
    
    
    5,149
    
    
    
    
    
    
    
    5,149Amortization of intangible assets
    
    
    424
    
    
    
    
    
    
    
    424Total costs and operating expenses
    
    
    41,059
    
    
    
    
    
    
    
    41,059Income (loss) from operations
    
    
    (1,159
    )
    
    
    570
    
    
    
    (589
    )Interest and other income, net
    
    
    2,209
    
    
    
    
    
    
    
    2,209Income before income taxes
    
    
    1,050
    
    
    
    570
    
    
    
    1,620Income tax expense
    
    
    754
    
    
    
    (76
    )(C)
    
    
    678Net income
    
    $
    296
    
    
    $
    646
    
    
    $
    942Earnings per share:Basic
    
    $
    0.00
    
    
    $
    0.01
    (D)
    
    $
    0.01Diluted
    
    $
    0.00
    
    
    $
    0.01
    (D)
    
    $
    0.01Weighted average number of common and
common equivalent shares outstanding:Basic
    
    
    66,955
    
    
    
    
    
    
    
    66,955Diluted
    
    
    68,802
    
    
    
    
    
    
    
    68,802
 (A)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. Adjustment also includes $4.0 million of
services revenues that were previously reported within the $39.9 million revenue amount by
reducing product revenues by $4.0 million and increasing services revenues by $4.0 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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For the Three Months Ended June 30, 2005As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Statement of Income:Revenues:Products
    
    $
    41,326
    
    
    $
    (7,379
    )(A)
    
    $
    33,947Services
    
    
    
    
    
    
    5,007
    (A)
    
    
    5,007Total revenues
    
    
    41,326
    
    
    
    (2,372
    )
    
    
    38,954Costs and operating expenses:Cost of revenues  products
    
    
    6,349
    
    
    
    (79
    )(B)
    
    
    6,270Cost of revenues  amortization of
purchased technology
    
    
    943
    
    
    
    
    
    
    
    943Cost of revenues  services
    
    
    
    
    
    
    568
    (B)
    
    
    568Research and development
    
    
    7,974
    
    
    
    
    
    
    
    7,974Sales and marketing
    
    
    9,950
    
    
    
    (489
    )(B)
    
    
    9,461General and administrative
    
    
    3,914
    
    
    
    
    
    
    
    3,914Amortization of intangible assets
    
    
    286
    
    
    
    
    
    
    
    286Total costs and operating expenses
    
    
    29,416
    
    
    
    
    
    
    
    29,416Income from operations
    
    
    11,910
    
    
    
    (2,372
    )
    
    
    9,538Interest and other income, net
    
    
    1,229
    
    
    
    
    
    
    
    1,229Income before income taxes
    
    
    13,139
    
    
    
    (2,372
    )
    
    
    10,767Income tax expense
    
    
    3,373
    
    
    
    (1,137
    )(C)
    
    
    2,236Net income
    
    $
    9,766
    
    
    $
    (1,235
    )
    
    $
    8,531Earnings 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
    
    
    64,862
    
    
    
    
    
    
    
    64,862Diluted
    
    
    69,391
    
    
    
    
    
    
    
    69,391
 (A)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. Adjustment also includes $3.0 million of
services revenues that were previously reported within the $41.3 million revenue amount by
reducing product revenues by $3.0 million and increasing services revenues by $3.0 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).
 12




---



##### Table of Contents



For the Six Months Ended June 30, 2006As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Statement of Income:Revenues:Products
    
    $
    78,752
    
    
    $
    (14,109
    )(A)
    
    $
    64,643Services
    
    
    
    
    
    
    12,894
    (A)
    
    
    12,894Total revenues
    
    
    78,752
    
    
    
    (1,215
    )
    
    
    77,537Costs and operating expenses:Cost of revenues  products
    
    
    15,111
    
    
    
    (1,022
    )(B)
    
    
    14,089Cost of revenues  amortization of
purchased technology
    
    
    2,193
    
    
    
    
    
    
    
    2,193Cost of revenues  services
    
    
    
    
    
    
    1,094
    (B)
    
    
    1,094Research and development
    
    
    21,623
    
    
    
    
    
    
    
    21,623Sales and marketing
    
    
    29,918
    
    
    
    (72
    )(B)
    
    
    29,846General and administrative
    
    
    10,803
    
    
    
    
    
    
    
    10,803Amortization of intangible assets
    
    
    823
    
    
    
    
    
    
    
    823Total costs and operating expenses
    
    
    80,471
    
    
    
    
    
    
    
    80,471Income (loss) from operations
    
    
    (1,719
    )
    
    
    (1,215
    )
    
    
    (2,934
    )Interest and other income, net
    
    
    4,310
    
    
    
    
    
    
    
    4,310Income before income taxes
    
    
    2,591
    
    
    
    (1,215
    )
    
    
    1,376Income tax expense
    
    
    1,806
    
    
    
    (1,310
    )(C)
    
    
    496Net income
    
    $
    785
    
    
    $
    95
    
    
    $
    880Earnings per share:Basic
    
    $
    0.01
    
    
    $
    0.00
    (D)
    
    $
    0.01Diluted
    
    $
    0.01
    
    
    $
    0.00
    (D)
    
    $
    0.01Weighted average number of common and
common equivalent shares outstanding:Basic
    
    
    66,796
    
    
    
    
    
    
    
    66,796Diluted
    
    
    68,887
    
    
    
    
    
    
    
    68,887
 (A)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. Adjustment also includes $7.8 million of
services revenues that were previously reported within the $78.8 million revenue amount by
reducing product revenues by $7.8 million and increasing services revenues by $7.8 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).
 13




---



##### Table of Contents



For the Six Months Ended June 30, 2005As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Statement of Income:Revenues:Products
    
    $
    79,740
    
    
    $
    (13,930
    )(A)
    
    $
    65,810Services
    
    
    
    
    
    
    9,614
    (A)
    
    
    9,614Total revenues
    
    
    79,740
    
    
    
    (4,316
    )
    
    
    75,424Costs and operating expenses:Cost of revenues  products
    
    
    12,194
    
    
    
    (145
    )(B)
    
    
    12,049Cost of revenues  amortization of
purchased technology
    
    
    1,885
    
    
    
    
    
    
    
    1,885Cost of revenues  services
    
    
    
    
    
    
    1,079
    (B)
    
    
    1,079Research and development
    
    
    15,520
    
    
    
    
    
    
    
    15,520Sales and marketing
    
    
    19,425
    
    
    
    (934
    )(B)
    
    
    18,491General and administrative
    
    
    7,519
    
    
    
    
    
    
    
    7,519Amortization of intangible assets
    
    
    628
    
    
    
    
    
    
    
    628Total costs and operating expenses
    
    
    57,171
    
    
    
    
    
    
    
    57,171Income from operations
    
    
    22,569
    
    
    
    (4,316
    )
    
    
    18,253Interest and other income, net
    
    
    2,125
    
    
    
    
    
    
    
    2,125Income before income taxes
    
    
    24,694
    
    
    
    (4,316
    )
    
    
    20,378Income tax expense
    
    
    5,599
    
    
    
    (2,082
    )(C)
    
    
    3,517Net income
    
    $
    19,095
    
    
    $
    (2,234
    )
    
    $
    16,861Earnings per share:Basic
    
    $
    0.30
    
    
    $
    (0.04
    )(D)
    
    $
    0.26Diluted
    
    $
    0.28
    
    
    $
    (0.04
    )(D)
    
    $
    0.24Weighted average number of common and
common equivalent shares outstanding:Basic
    
    
    64,112
    
    
    
    
    
    
    
    64,112Diluted
    
    
    68,944
    
    
    
    
    
    
    
    68,944
 (A)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. Adjustment also includes $5.8 million of
services revenues that were previously reported within the $79.7 million revenue amount by
reducing product revenues by $5.8 million and increasing services revenues by $5.8 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
    
    
    RestatedSix Months Ended June 30, 2006Cash flows from operating activities:Net income
    
    $
    785
    
    
    $
    95
    
    
    $
    880Tax benefit from stock option transactions
    
    
    
    
    
    
    552
    
    
    
    552Excess tax benefits from stock-based
compensation
    
    
    
    
    
    
    (212
    )
    
    
    (212
    )Changes in deferred income taxes
    
    
    (870
    )
    
    
    (1,310
    )
    
    
    (2,180
    )Changes in deferred revenues
    
    
    737
    
    
    
    1,215
    
    
    
    1,952Net cash provided by operating activities
    
    
    10,846
    
    
    
    340
    
    
    
    11,186Cash flows from financing activities:Excess tax benefits from stock-based
compensation
    
    
    552
    
    
    
    (340
    )
    
    
    212Net cash provided by financing activities
    
    
    4,352
    
    
    
    (340
    )
    
    
    4,012Six Months Ended June 30, 2005Cash flows from operating activities:Net income
    
    
    19,095
    
    
    
    (2,234
    )
    
    
    16,861Changes in deferred income taxes
    
    
    (8,900
    )
    
    
    (2,082
    )
    
    
    (10,982
    )Changes in deferred revenues
    
    
    1,911
    
    
    
    4,316
    
    
    
    6,227Net cash provided by operating activities
    
    
    27,918
    
    
    
    
    
    
    
    27,918
 4.
    
    Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    2,500
    
    
    $
    3,574Work in process
    
    
    5,880
    
    
    
    3,426Finished goods
    
    
    1,530
    
    
    
    2,846$
    9,910
    
    
    $
    9,846
 5.
    
    Stock-Based Compensation
  15




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6.
    
    Earnings Per Share (Restated)
  16




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Three months ended
    
    
    Six months endedJune 30,
    
    
    
    
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Numerator:Net income
    
    $
    942
    
    
    $
    8,531
    
    
    $
    880
    
    
    $
    16,861Denominator:Basic presentation:Weighted average common shares
    
    
    66,955
    
    
    
    64,862
    
    
    
    66,796
    
    
    
    64,112Denominator for basic calculation
    
    
    66,955
    
    
    
    64,862
    
    
    
    66,796
    
    
    
    64,112Diluted presentation:Shares used above
    
    
    66,955
    
    
    
    64,862
    
    
    
    66,796
    
    
    
    64,112Weighted average effect of
dilutive stock options and
warrants
    
    
    1,847
    
    
    
    4,529
    
    
    
    2,091
    
    
    
    4,832Denominator for diluted calculation
    
    
    68,802
    
    
    
    69,391
    
    
    
    68,887
    
    
    
    68,944Basic earnings per share
    
    $
    0.01
    
    
    $
    0.13
    
    
    $
    0.01
    
    
    $
    0.26Diluted earnings per share
    
    $
    0.01
    
    
    $
    0.12
    
    
    $
    0.01
    
    
    $
    0.24
  7. Concentrations (Restated)
 Significant Customer
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Amount of total revenues
    
    $
    9,994
    
    
    $
    15,654
    
    
    $
    23,222
    
    
    $
    29,686As a percentage of total revenues
    
    
    25
    %
    
    
    40
    %
    
    
    30
    %
    
    
    39
    %
  International Data
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Amount of total revenues
    
    $
    13,364
    
    
    $
    9,625
    
    
    $
    25,570
    
    
    $
    20,919As a percentage of total revenues
    
    
    33
    %
    
    
    25
    %
    
    
    33
    %
    
    
    28
    %
 17




---



##### Table of Contents



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
  18




---



##### 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
    
    
    759
    
    
    
    11.85Exercised
    
    
    (302
    )
    
    
    6.73Forfeited/canceled
    
    
    (595
    )
    
    
    13.51Outstanding as of June 30, 2006
    
    
    10,327
    
    
    $
    10.65
    
    
    
    5.06
    
    
    $
    13,467Exercisable as of June 30, 2006
    
    
    5,905
    
    
    $
    8.82
    
    
    
    4.22
    
    
    $
    12,265
  Employee Stock Purchase Plan
    19




---



##### Table of Contents



Stock-Based Compensation Expense (Restated)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Expected lives (in years)
    
    
    4.1
    
    
    
    3.8
    
    
    
    4.1
    
    
    
    3.8Risk-free interest rates
    
    
    5.0
    %
    
    
    3.9
    %
    
    
    4.8
    %
    
    
    3.9
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    60.5
    %
    
    
    61.6
    %
    
    
    62.3
    %
    
    
    61.9
    %
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Net income  as reported for prior period (1)
    
    
    N/A
    
    
    $
    8,531
    
    
    
    N/A
    
    
    $
    16,861Stock-based compensation expense related to share-based
awards, net of tax (2)
    
    $
    (3,407
    )
    
    
    (760
    )
    
    $
    (7,322
    )
    
    
    (2,711
    )Net income  including the effects of stock-based
compensation (3)
    
    $
    942
    
    
    $
    7,771
    
    
    $
    880
    
    
    $
    14,150Earnings per share:Basic  as reported for prior period (1)
    
    
    N/A
    
    
    $
    0.13
    
    
    
    N/A
    
    
    $
    0.26Basic  including the effects of stock-based
compensation (3)
    
    $
    0.01
    
    
    $
    0.12
    
    
    $
    0.01
    
    
    $
    0.22
 20




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Diluted  as reported for prior period (1)
    
    
    N/A
    
    
    $
    0.12
    
    
    
    N/A
    
    
    $
    0.24Diluted  including the effects of stock-based
compensation (3)
    
    $
    0.01
    
    
    $
    0.11
    
    
    $
    0.01
    
    
    $
    0.21
 
 (1)
    
    Net income and earnings per share for the three and six months ended June 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 June 30, 2006 and 2005 was $4.5 million and $3.4 million, respectively. Stock-based
compensation expense, excluding tax effects, under SFAS 123R and SFAS 123 for the six months ended June 30,
2006 and 2005 was $9.4 million and $7.6 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
 Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 21




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




---



##### Table of Contents



Revenues.
      23




---



##### Table of Contents



Stock-Based Compensation.
 24




---



##### 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




---



##### Table of Contents



Interest and Other, Net.
 Income Tax Expense.
 26




---



##### Table of Contents



RESULTS OF OPERATIONS
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Revenues:Products
    
    
    83.8
    %
    
    
    87.1
    %
    
    
    83.4
    %
    
    
    87.3
    %Services
    
    
    16.2
    
    
    
    12.9
    
    
    
    16.6
    
    
    
    12.7Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and operating expenses:(1)Cost of revenues  products
    
    
    18.9
    
    
    
    16.1
    
    
    
    18.2
    
    
    
    16.0Cost of revenues  amortization of purchased
technology
    
    
    2.8
    
    
    
    2.4
    
    
    
    2.8
    
    
    
    2.5Cost of revenues  services
    
    
    1.3
    
    
    
    1.5
    
    
    
    1.4
    
    
    
    1.4Research and development
    
    
    27.3
    
    
    
    20.5
    
    
    
    27.9
    
    
    
    20.6Sales and marketing
    
    
    37.4
    
    
    
    24.3
    
    
    
    38.5
    
    
    
    24.5General and administrative
    
    
    12.7
    
    
    
    10.0
    
    
    
    13.9
    
    
    
    10.0Amortization of intangible assets
    
    
    1.1
    
    
    
    0.7
    
    
    
    1.1
    
    
    
    0.8Total costs and operating expenses
    
    
    101.5
    
    
    
    75.5
    
    
    
    103.8
    
    
    
    75.8Income (loss) from operations
    
    
    (1.5
    )
    
    
    24.5
    
    
    
    (3.8
    )
    
    
    24.2Interest and other, net
    
    
    5.5
    
    
    
    3.1
    
    
    
    5.5
    
    
    
    2.8Income before income taxes
    
    
    4.0
    
    
    
    27.6
    
    
    
    1.7
    
    
    
    27.0Income tax expense
    
    
    1.7
    
    
    
    5.7
    
    
    
    0.6
    
    
    
    4.7Net income
    
    
    2.3
    %
    
    
    21.9
    %
    
    
    1.1
    %
    
    
    22.3
    %(1) Stock-based compensation included in:Cost of revenues  products
    
    
    0.3
    %
    
    
    
    
    
    
    0.4
    %
    
    
    Cost of revenues  services
    
    
    0.1
    
    
    
    
    
    
    
    0.2
    
    
    
    Research and development
    
    
    3.9
    
    
    
    
    
    
    
    4.4
    
    
    
    Sales and marketing
    
    
    4.9
    
    
    
    
    
    
    
    5.2
    
    
    
    General and administrative
    
    
    1.7
    
    
    
    
    
    
    
    1.9
    
    
    
    
 Comparison of Three and Six Months Ended June 30, 2006 and 2005
 Revenues.
 27




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##### Table of Contents



Cost of Revenues
 Research and Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 28




---



##### Table of Contents



Amortization of Intangible Assets.
 Interest and Other, Net.
 Income Tax Expense.
 LIQUIDITY AND CAPITAL RESOURCES
  29




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##### Table of Contents



SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Sensitivity
  30




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##### Table of Contents



Exchange Rate Sensitivity
  
 ITEM 4. CONTROLS AND PROCEDURES
  Evaluation of Disclosure Controls and Procedures (Restated)
   31




---



##### Table of Contents



Restatement and Impact on Internal Control over Financial Reporting
 Internal Control 
Integrated Framework
  Changes in Internal Control over Financial Reporting
  Inherent Limitations on Effectiveness of Controls
  32




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1A. Risk Factors
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
 
 Name of Director
    
    Votes Cast for Director
    
    
    Votes WithheldJean-Claude Asscher
    
    
    47,360,339
    
    
    
    15,924,231Massoud Entekhabi
    
    
    61,133,701
    
    
    
    2,150,869Jonathan Fram
    
    
    63,064,859
    
    
    
    219,711Errol Ginsberg
    
    
    63,230,337
    
    
    
    54,233Gail Hamilton
    
    
    62,916,379
    
    
    
    368,191Jon F. Rager
    
    
    61,162,610
    
    
    
    2,121,960
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 10.1
    
    Supplemental Provisions, effective April 14, 2006, to Employee Stock Purchase Plan(1)
 33




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##### Table of Contents



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 34




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##### Table of Contents



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
 35




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##### Table of Contents



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
 36