Ixia (XXIA) 10-Q/A 2006 Q1 Quarterly report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q/A

AMENDMENT NO. 1

(Mark One)

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)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yeso Noþ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filerþ     Accelerated filero      Non-accelerated filero

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock	66,990,282
(Class of Common Stock)	(Outstanding at April 28, 2006)

EXPLANATORY NOTE

     We have restated our unaudited condensed consolidated financial statements for the quarters ended March 31, 2006 and 2005 in this Amendment No. 1 on Form-Q/A (the “Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the “Form 10-Q”), which Form 10-Q was filed with the Securities and Exchange Commission (the “Commission”) on May 5, 2006. Specifically, we have restated our unaudited condensed consolidated financial statements to correct certain errors that existed in our previously issued unaudited condensed consolidated financial statements, principally related to our application of Statement of Position 97-2 “Software Revenue Recognition” (“SOP 97-2”) with respect to the accounting for implied post contract customer support (“PCS”) obligations. In connection with the restatement, we have also corrected certain errors that we had previously identified and determined not to be material with respect to our condensed consolidated financial statements for the affected periods and that relate to (i) our classification of certain customer support costs as sales and marketing expenses rather than as cost of revenues in our consolidated statements of income, and (ii) our presentation of certain deferred tax assets and deferred tax liabilities on a gross basis rather than on a net basis in our consolidated balance sheets. These additional adjustments had no impact on our previously reported revenues, income from operations, net income or the related earnings per share amounts. This restatement is more fully described in Part I herein under Item 1 in our unaudited condensed consolidated financial statements and related notes, including, without limitation, in Note 3 to such condensed consolidated financial statements, and in Part I herein under Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In this Form 10-Q/A, we have also revised the presentation of our consolidated statement of income (i) to separately disclose product and service revenues, and the associated costs, in accordance with Regulation S-X as the service revenues comprise more than the 10 percent threshold prescribed by the SEC due to the restatement of implied PCS, and (ii) to remove the gross profit computation and line item to conform to future and certain prior presentations of our consolidated statement of income in our filings with the Commission.

     All referenced amounts in this report as of March 31, 2006 and December 31, 2005, and for the three months ended March 31, 2006 and 2005, reflect balances and amounts on a restated basis. All of our future Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q will reflect the restated information included in this Form 10-Q/A, as applicable.

     This Form 10-Q/A is filed as part of the restatement (the “Restatement”) of our previously issued financial statements for (i) the year ended December 31, 2003, (ii) the year ended December 31, 2004 and each of the quarters and year-to-date periods therein, (iii) the year ended December 31, 2005 and each of the quarters and year-to-date periods therein, and (iv) the quarter ended March 31, 2006 and the quarter ended June 30, 2006 and the year-to-date period therein, as well as the Company’s selected financial data for the years 2001 through 2005 as set forth in Item 6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Accordingly, we are also filing with the Commission substantially contemporaneously herewith (i) an amendment on Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2005 and (ii) an amendment on Form 10-Q/A to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. These additional amended filings with the Commission correct the same types of errors noted above, principally with respect to our accounting for implied PCS obligations in accordance with SOP 97-2. We do not intend to file any other amended Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the Restatement, and the financial statements and related financial information contained in our other reports for those periods should therefore no longer be relied upon.

     The following items originally included in the Form 10-Q are amended by this Form 10-Q/A:

• 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

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• Part II, Item 6, Exhibits.

     The Chief Executive Officer and the Chief Financial Officer of the Company have also reissued as part of this Form 10-Q/A the certifications required by Sections 302 and 906 of the Sarbanes-Oxley of 2002. The reissued certifications are included in this Form 10-Q/A as Exhibits 31.1, 31.2 and 32.1.

     This Form 10-Q/A makes only the changes described above and, except for such changes and as otherwise required to reflect the effects of the Restatement, we have not in this Form 10-Q/A modified or updated other disclosures presented in the original filing of the Form 10-Q. Accordingly, this Form 10-Q/A generally does not reflect events occurring after the date of the original filing of the Form 10-Q or modify or update disclosures in the original filing that may have been affected by subsequent events. For information regarding events subsequent to the original filing of the Form 10-Q, this Form 10-Q/A should be read in connection with the Company’s filings with the Commission since the date of the original filing of the Form 10-Q, including without limitation the Company’s Current Reports on Form 8-K and the amendments to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, each of which is being filed with the Commission substantially contemporaneously with the filing of this Form 10-Q/A.

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IXIA

TABLE OF CONTENTS

			Page Number
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005 (as restated)		5
		Condensed Consolidated Statements of Income for the three months ended March 31, 2006 and 2005 (as restated)		6
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (as restated)		7
		Notes to Condensed Consolidated Financial Statements		8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		29
	Item 4.	Controls and Procedures		30
PART II.	OTHER INFORMATION
	Item 1A.	Risk Factors		31
	Item 5.	Other Information		32
	Item 6.	Exhibits		32
SIGNATURES				33
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

4

IXIA

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

	March 31,		December 31,
	2006		2005
	(Restated)		(Restated)
Assets
Current assets:
Cash and cash equivalents	$	50,663	$	51,837
Short-term investments in marketable securities		139,333		124,456
Accounts receivable, net of allowance for doubtful accounts of $928 and $854 as of March 31, 2006 and December 31, 2005, respectively		30,358		31,565
Inventories		10,616		9,846
Deferred income taxes		10,455		8,588
Prepaid expenses and other current assets		3,872		3,519
Total current assets		245,297		229,811
Investments in marketable securities		13,379		25,392
Property and equipment, net		21,652		19,750
Deferred income taxes		12,778		13,018
Goodwill		16,717		13,468
Intangible assets, net		21,482		20,462
Other assets		549		315
Total assets	$	331,854	$	322,216
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	2,511	$	2,872
Accrued expenses		12,840		12,399
Deferred revenues		20,551		19,233
Income taxes payable		5,089		4,131
Total current liabilities		40,991		38,635
Deferred revenues		20,643		20,101
Total liabilities		61,634		58,736
Shareholders’ 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		126,792
Additional paid-in capital		73,432		68,098
Retained earnings		68,528		68,590
Total shareholders’ equity		270,220		263,480
Total liabilities and shareholders’ equity	$	331,854	$	322,216

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

IXIA

Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)

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

The accompanying notes are an integral part of these condensed consolidated financial statements.

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IXIA

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Three months ended
	March 31,
	2006			2005
	(Restated)			(Restated)
Cash flows from operating activities:
Net income (loss)	$	(62	)	$	8,330
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,214			1,008
Amortization of intangible assets		1,456			1,284
Allowance for doubtful accounts		74			(125	)
Stock-based compensation		4,902			—
Deferred income taxes		(1,627	)		(6,426	)
Tax benefit from stock option transactions		432			7,499
Excess 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			2,380
Income taxes payable		958			278
Net cash provided by operating activities		9,413			12,871
Cash 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			22,076
Purchases of held-to-maturity securities		(7,943	)		—
Proceeds from held-to-maturity securities		12,004			7,204
Purchases 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			9,219
Excess tax benefits from stock-based compensation		173			—
Net cash provided by financing activities		1,641			9,219
Net (decrease) increase in cash and cash equivalents		(1,174	)		8,656
Cash and cash equivalents at beginning of period		51,837			16,383
Cash and cash equivalents at end of period	$	50,663		$	25,039

The accompanying notes are an integral part of these condensed consolidated financial statements.

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IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business

     We were incorporated on May 27, 1997 as a California corporation. We are a leading provider of performance test systems for Internet Protocol (IP) based infrastructure and services that allow our customers to test and measure the performance, functionality, and conformance of IP equipment and networks, and the applications that run over them. Our solutions generate, capture, characterize, and analyze high volumes of realistic network and application traffic, exposing problems, assessing performance, ensuring functionality and interoperability, and verifying conformance to industry specifications. We offer a hardware platform with interchangeable interfaces, utilizing a single set of applications and Application Programming Interfaces (APIs) that allows our customers to create an integrated, easy-to-use test bed. The networks our systems analyze include Ethernet networks operating at speeds of up to 10 gigabits per second, which carry data traffic over optical fiber or electrical cable. Other networks include Packet over SONET networks operating at speeds of up to 10 gigabits per second, which transmit information over high-speed optical links and Asynchronous Transfer Mode (ATM) networks, operating at speeds of up to 622 megabits per second. We also offer a telephony test suite that is used to test and verify traditional Time-Division Multiplexing (TDM) voice based networks, Voice over IP technology, devices, and systems, as well as the interoperability, troubleshooting, service optimization and call traffic monitoring of Video Telephony. Customers also use our performance applications to test and verify web servers, internet networks, security, and business applications.

2. Basis of Presentation

     The accompanying condensed consolidated financial statements as of March 31, 2006 and for the three months ended March 31, 2006 and 2005, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments except for restatement adjustments discussed in Note 3) which are, in the opinion of management, necessary for a fair statement of our financial position, operating results and cash flows for the interim periods presented. The results of operations for the current interim periods presented are not necessarily indicative of results to be expected for the full year ending December 31, 2006 or any other future period.

     These condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in Amendment No. 2 on Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2005.

     Certain reclassifications have been made to prior period financial statements to conform to the current presentation. We have also revised the presentation of our consolidated statement of income (i) to separately disclose product and service revenues, and the associated costs, in accordance with Regulation S-X as the service revenues comprise more than the 10 percent threshold prescribed by the SEC due to the restatement of implied PCS, and (ii) to remove the gross profit computation and line item to conform to future and certain prior presentations of our consolidated statement of income in our filings with the Commission.

3. Restatement of Previously Issued Financial Statements

     Subsequent to the issuance of our 2005 consolidated financial statements, we determined that we had not properly applied Statement of Position 97-2 “Software Revenue Recognition” (“SOP 97-2”) with respect to the accounting for implied post contract customer support (“PCS”) obligations, and as a result we determined that we had incorrectly allocated revenue between product revenue and PCS revenue. As such, the timing of when we recognized revenue in the consolidated financial statements was incorrect. Specifically, in November 2006 and as a result of the findings during an accounting review related to revenue recognition with respect to our software upgrade and support practices and the potential impact of those practices on our previously reported financial results, management recommended to the Audit Committee, and the Audit Committee concurred with the

8

recommendation, that we restate our consolidated financial statements for certain prior periods to correct our recognition of revenue related to the provision of unspecified software upgrades and support for products for which the contractual PCS period had expired, which upgrades and support had created implied PCS obligations for those products that extended beyond the contractual PCS periods. The implied PCS obligations should have resulted in an additional deferral of revenue when the products were initially shipped. SOP 97-2 requires that we re-allocate certain previously reported product revenues, which revenues have generally been recognized at the time of product shipment, to implied PCS revenues, which revenues are required to be recognized over the multi-year period during which the implied PCS obligations are in effect (such multi-year period would typically begin 12 months after the date of product shipment). Our previous practice at the time of sale of a software product was to allocate revenue to PCS only for the initial contractual 12 months of PCS.

     In connection with the restatement discussed herein, we have also corrected certain errors that we had previously identified and determined not to be material with respect to our consolidated financial statements for the affected periods and that relate to (i) our classification of certain customer support costs as sales and marketing expenses rather than as cost of revenues in our consolidated statements of income, and (ii) our presentation of certain deferred tax assets and deferred tax liabilities on a gross basis rather than on a net basis in our consolidated balance sheets. These additional adjustments had no impact on our previously reported revenues, income from operations, net income or the related earnings per share amounts.

     We have corrected the above-described errors through a restatement of the accompanying consolidated financial statements as of and for the quarters ended March 31, 2006 and 2005. We have also revised the presentation of our consolidated statement of income (i) to separately disclose product and service revenues, and the associated costs, in accordance with Regulation S-X as the service revenues comprise more than the 10 percent threshold prescribed by the SEC due to the restatement of implied PCS, and (ii) to remove the gross profit computation and line item to conform to future and certain prior presentations of our consolidated statement of income in our filings with the Commission.

     Revenue Recognition for Implied PCS

     We have determined that because of our past business practice of providing some of our customers with unspecified software upgrades for products for which the initial or extended contractual PCS periods had expired, we created implied PCS obligations for these software products that extended beyond the contractual PCS period. We further determined that the implied PCS obligations should have resulted in an additional deferral and re-allocation of a portion of the product revenues previously recognized at the time of product sale to deferred PCS revenues that should be recognized ratably into revenues over the implied PCS period, which is typically based on the expected economic life of our software products of four years. To the extent we determine that implied PCS is no longer being provided after the expiration of the customer’s contractual PCS period, the remaining deferred revenue balance related to the implied PCS obligation will be reversed and recognized as revenue in the period of cessation of the implied PCS obligation. The implied PCS obligation for our software products ceases upon (i) the license management of our software upgrades and (ii) our determination not to provide PCS after the expiration of the contractual PCS period. Our license management system locks a software license to a specific computer or Ixia hardware chassis on which our software resides. The system then manages and controls the provision of software upgrades to ensure that the upgrades are only provided to customers that are entitled to receive such upgrades during an initial or extended PCS period. For software products that are not controlled under a license management system and for certain customers where we expect to continue to provide implied PCS outside of the contractual PCS period, we will continue to allocate and defer revenue for these implied PCS obligations and to recognize this revenue ratably over the implied PCS periods as described above. As of March 31, 2006, reversals of implied PCS deferred revenue have not been significant but are expected to be significant in future periods as a result of the license management of certain products and our determination not to provide PCS after the expiration of the contractual PCS period.

9

     Classification of Certain Customer Support Costs and Classification of Deferred Tax Assets and Liabilities

     Prior to the determination to effect the Restatement, certain previously identified errors had been determined to be immaterial both individually and in the aggregate to our consolidated financial statements. We have also corrected these errors in our consolidated financial statements in connection with the Restatement. These adjustments consist of:

     (i) Adjustments to reclassify certain direct customer support costs, such as those associated with our technical support group, that had been classified as a component of sales and marketing expenses rather than cost of revenues in the consolidated statements of income. These adjustments had no impact on our previously reported revenues, income from operations, net income or the related earnings per share amounts.

     (ii) Adjustments to combine and net, as prescribed by SFAS No. 109, certain deferred tax assets and deferred tax liabilities that were previously reported separately in our consolidated balance sheets on a gross basis.

     Summary of Restatement Adjustments

     The following schedules reconcile the amounts as originally reported in our consolidated balance sheets as of March 31, 2006 and December 31, 2005 and the consolidated statements of income and cash flows for the three months ended March 31, 2006 and 2005 to the corresponding restated amounts in each of these consolidated financial statements (in thousands, except per share data):

10

	As of March 31, 2006
	As Previously		Restatement
	Reported		Adjustments			Restated
Consolidated Balance Sheet:
Assets
Current assets:
Cash and cash equivalents	$	50,663	$	—		$	50,663
Short-term investments in marketable securities		139,333		—			139,333
Accounts receivable, net		30,358		—			30,358
Inventories		10,616		—			10,616
Deferred income taxes		5,237		5,218	(1)		10,455
Prepaid expenses and other current assets		3,872		—			3,872
Total current assets		240,079		5,218			245,297
Investments in marketable securities		13,379		—			13,379
Property and equipment, net		21,652		—			21,652
Deferred income taxes		4,910		7,868	(1)		12,778
Goodwill		16,717		—			16,717
Intangible assets, net		21,482		—			21,482
Other assets		549		—			549
Total assets	$	318,768	$	13,086		$	331,854
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	2,511	$	—		$	2,511
Accrued expenses		12,840		—			12,840
Deferred revenues		8,524		12,027	(2)		20,551
Income taxes payable		5,089		—			5,089
Total current liabilities		28,964		12,027			40,991
Deferred revenues		417		20,226	(2)		20,643
Total liabilities		29,381		32,253			61,634
Total shareholders’ equity		289,387		(19,167	)(3)		270,220
Total 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).

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	As of December 31, 2005
	As Previously		Restatement
	Reported		Adjustments			Restated
Consolidated Balance Sheet:
Assets
Current assets:
Cash and cash equivalents	$	51,837	$	—		$	51,837
Short-term investments in marketable securities		124,456		—			124,456
Accounts receivable, net		31,565		—			31,565
Inventories		9,846		—			9,846
Deferred income taxes		4,401		4,187	(1)(2)		8,588
Prepaid expenses and other current assets		3,519		—			3,519
Total current assets		225,624		4,187			229,811
Investments in marketable securities		25,392		—			25,392
Property and equipment, net		19,750		—			19,750
Deferred income taxes		10,004		3,014	(1)(2)		13,018
Goodwill		13,468		—			13,468
Intangible assets, net		20,462		—			20,462
Other assets		315		—			315
Total assets	$	315,015	$	7,201		$	322,216
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	2,872	$	—		$	2,872
Accrued expenses		12,399		—			12,399
Deferred revenues		8,338		10,895	(3)		19,233
Income taxes payable		4,131		—			4,131
Total current liabilities		27,740		10,895			38,635
Deferred revenues		528		19,573	(3)		20,101
Deferred income taxes		4,651		(4,651	)(2)		—
Total liabilities		32,919		25,817			58,736
Total shareholders’ equity		282,096		(18,616	)(4)		263,480
Total 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).

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	For the Three Months Ended March 31, 2006
	As Previously			Restatement
	Reported			Adjustments			Restated
Consolidated Statement of Income:
Revenues:
Products	$	38,852		$	(8,118	)(A)	$	30,734
Services		—			6,333	(A)		6,333
Total revenues		38,852			(1,785	)		37,067
Costs and operating expenses:
Cost of revenues — products		6,999			(550	)(B)		6,449
Cost of revenues — amortization of purchased technology		1,056			—			1,056
Cost of revenues — services		—			586	(B)		586
Research and development		10,560			—			10,560
Sales and marketing		14,744			(36	)(B)		14,708
General and administrative		5,654			—			5,654
Amortization of intangible assets		399			—			399
Total costs and operating expenses		39,412			—			39,412
Income (loss) from operations		(560	)		(1,785	)		(2,345	)
Interest and other income, net		2,101			—			2,101
Income (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			—			66,635
Diluted		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.

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	For the Three Months Ended March 31, 2005
	As Previously		Restatement
	Reported		Adjustments			Restated
Consolidated Statement of Income:
Revenues:
Products	$	38,414	$	(6,551	)(A)	$	31,863
Services		—		4,607	(A)		4,607
Total revenues		38,414		(1,944	)		36,470
Costs and operating expenses:
Cost of revenues — products		5,845		(66	) (B)		5,779
Cost of revenues — amortization of purchased technology		942		—			942
Cost of revenues — services		—		511	(B)		511
Research and development		7,546		—			7,546
Sales and marketing		9,475		(445	)(B)		9,030
General and administrative		3,605		—			3,605
Amortization of intangible assets		342		—			342
Total costs and operating expenses		27,755		—			27,755
Income from operations		10,659		(1,944	)		8,715
Interest and other income, net		896		—			896
Income before income taxes		11,555		(1,944	)		9,611
Income tax expense		2,226		(945	)(C)		1,281
Net income	$	9,329	$	(999	)	$	8,330
Earnings per share:
Basic	$	0.15	$	(0.02	)(D)	$	0.13
Diluted	$	0.14	$	(0.02	)(D)	$	0.12
Weighted average number of common and common equivalent shares outstanding:
Basic		63,355		—			63,355
Diluted		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).

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     The restatement adjustments described above did not impact our total cash flows from operating activities, investing activities or financing activities within our consolidated statements of cash flows. For the quarter ended March 31, 2006, we have also corrected our consolidated statement of cash flows to properly reflect excess tax benefits from stock-based compensation, resulting in a decrease of $259,000 to net cash provided by financing activities and a corresponding net increase to net cash provided by operating activities.

     The effects of the restatement adjustments and the reclassification described above on the categories within the consolidated statement of cash flows for the three months ended March 31, 2006 and 2005 are as follows (in thousands):

	As Previously			Restatement
Increase (Decrease):	Reported			Adjustments			Restated
Three Months Ended March 31, 2006
Cash flows from operating activities:
Net income (loss)	$	489		$	(551	)	$	(62	)
Tax benefit from stock option transactions		—			432			432
Excess 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			1,632
Net cash provided by operating activities		9,154			259			9,413
Cash flows from financing activities:
Excess tax benefits from stock-based compensation		432			(259	)		173
Net cash provided by financing activities		1,900			(259	)		1,641
Three Months Ended March 31, 2005
Cash flows from operating activities:
Net income		9,329			(999	)		8,330
Changes in deferred income taxes		(5,481	)		(945	)		(6,426	)
Changes in deferred revenues		436			1,944			2,380
Net cash provided by operating activities		12,871			—			12,871

4. Inventories

     Inventories consist of the following (in thousands):

	March 31,		December 31,
	2006		2005
Raw materials	$	2,679	$	3,574
Work in process		4,740		3,426
Finished goods		3,197		2,846
	$	10,616	$	9,846

5. Stock-Based Compensation

     On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including stock options and employee stock purchase rights based on the estimated fair values for accounting purposes on the grant date. Prior to the adoption of SFAS 123R, we accounted for our share-based awards in accordance with the provisions of Accounting

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Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and the related interpretations of FASB Interpretation (“FIN”) No. 44, “Accounting for Certain Transactions involving Stock Compensation.” Accordingly, compensation expense related to employee stock options was recorded only if, on the date of the grant, the fair market value of the underlying stock exceeded the exercise price. We accounted for share-based awards issued to non-employees in accordance with the provisions of SFAS 123, “Accounting for Stock-Based Compensation” and Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees.”

     We adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of our fiscal year 2006. Our consolidated financial statements as of and for the three months ended March 31, 2006 reflect the impact of SFAS 123R. In accordance with the modified prospective transition method, our consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. Under SFAS 123R, actual tax benefits recognized in excess of tax benefits previously recognized, if any, are reported as a financing cash inflow. Prior to adoption, such excess tax benefits were reported as an increase to operating cash flows. Stock-based compensation expense recognized under SFAS 123R for the three months ended March 31, 2006 was $4.9 million, which consisted of stock-based compensation expense related to stock options and employee stock purchase rights of $4.2 million and $0.7 million, respectively. There was no stock-based compensation expense related to stock options and employee stock purchase rights recognized in the consolidated financial statements during the three months ended March 31, 2005. See Note 9 for additional information.

     SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. We will continue to use the Black-Scholes model to estimate the fair value for accounting purposes of share-based awards. The determination of the fair value of share-based awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life and risk-free interest rate. The expected life and expected volatility are based on historical and other data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our stock options and stock purchase rights. We will evaluate the assumptions used to value share-based awards on a periodic basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Stock-based compensation expense recognized in our consolidated statement of income for the three months ended March 31, 2006 included (a) compensation expense for share-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123, and (b) compensation expense for the share-based awards granted subsequent to January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Consistent with our past practice under SFAS 123, we attribute the value of stock-based compensation to expense based on the graded, or accelerated multiple-option, approach. Stock-based compensation expense is recorded over the requisite service periods for awards ultimately expected to vest based on estimated future forfeitures. The amount of stock-based compensation expense to be recognized in periods after the grant dates will be adjusted for the impact of actual forfeitures, or vesting, compared to the estimated forfeitures used to expense the fair value of the awards. In our pro forma information required under SFAS 123 for periods prior to fiscal 2006, we accounted for actual forfeitures in the periods in which they occurred.

     The balance of gross unearned stock-based compensation to be expensed in the periods 2006 through 2010 related to unvested share-based awards as of March 31, 2006 was approximately $25.1 million. To the extent that we grant additional share-based awards to employees, future expense may increase by the additional unearned compensation resulting from those grants. We anticipate that we will grant additional share-based awards in fiscal 2006 as part of our long-term incentive compensation programs. The impact of these grants cannot be estimated at this time because it will depend on a number of factors, including the amount of share-based awards granted and the-then current fair values for accounting purposes.

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6.Earnings Per Share (Restated)

     Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the weighted average number of common shares and dilutive potential common shares outstanding during the period.

     The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2006 and 2005 (in thousands, except per share data):

	Three months ended March 31,
	2006			2005
	(Restated)			(Restated)
Numerator:
Net income (loss)	$	(62	)	$	8,330
Denominator:
Basic presentation:
Weighted average common shares		66,635			63,355
Denominator for basic calculation		66,635			63,355
Diluted presentation:
Shares used above		66,635			63,355
Weighted average effect of dilutive stock options and warrants		—			5,161
Denominator for diluted calculation		66,635			68,516
Basic earnings (loss) per share	$	(0.00	)	$	0.13
Diluted earnings (loss) per share	$	(0.00	)	$	0.12

     The diluted per share computation for the three months ended March 31, 2005 excludes weighted average outstanding stock options to purchase 0.3 million shares, which were antidilutive.

7. Concentrations (Restated)

     Significant Customer

     For the three months ended March 31, 2006 and 2005, only one customer comprised more than 10% of total revenues as follows (in thousands, except percentages):

	Three months ended March 31,
	2006			2005
	(Restated)			(Restated)
Amount of total revenues	$	13,228		$	14,032
As a percentage of total revenues		36	%		39	%

     As of March 31, 2006 and December 31, 2005, we had receivable balances from the customer approximating 35% and 27%, respectively, of total accounts receivable.

     International Data

     For the three months ended March 31, 2006 and 2005, total revenues from international product shipments consisted of the following (in thousands, except percentages):

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	Three months ended March 31,
	2006			2005
	(Restated)			(Restated)
Amount of total revenues	$	12,205		$	11,294
As a percentage of total revenues		33	%		31	%

     Long-lived assets are primarily located in the United States. As of March 31, 2006, approximately $6.0 million, or 8.2%, of our total long-lived assets were located at international locations. As of December 31, 2005, approximately $4.9 million, or 5.5%, of our total long-lived assets were located at international locations.

8. Acquisition

     In January 2006, we completed the acquisition of the mobile video and multimedia test business (“Test Business”) of privately-held Dilithium Networks. This acquisition marks our entry into the third generation wireless, or 3G, cellular market and opens new growth opportunities by allowing us to offer a broader portfolio of products to our existing customers, as well as gain access to new customers. The results of the acquired Test Business have been included in the consolidated financial statements since the acquisition date. The estimated pro forma operating results had the acquisition occurred on January 1, 2006 and 2005 would not have been significantly different from the reported consolidated operating results for the three months ended March 31, 2006 and 2005.

     The Test Business purchase price of $5.2 million included $4.9 million in cash and approximately $300,000 in legal and other acquisition costs. The following table summarizes the preliminary allocation of the purchase price based on the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Intangible assets	$	2,430
Goodwill		3,249
Total assets acquired		5,679
Current liabilities assumed		(477	)
Net assets acquired	$	5,202

     Of the $2.4 million of acquired intangible assets, $1.0 million was assigned to acquired technology, $1.2 million was assigned to customer contracts and relationships, and approximately $200,000 was assigned to other intangible assets, including a covenant not to compete. These intangible assets were generally valued using the “income” valuation approach and will be amortized using a straight-line method over their expected useful lives ranging from two to seven years. The $3.2 million of goodwill is expected to be deductible for income tax purposes.

9. Share-Based Compensation

     Stock Option Plans

     Our 1997 Stock Option Plan, as amended (the “1997 Plan”), provides for the issuance of share-based awards to our qualified employees and consultants. The share-based awards may include incentive stock options or nonqualified stock options. Options become exercisable over a vesting period as determined by the Board of Directors and expire over terms not exceeding 10 years from the date of grant. The exercise price for options granted under the 1997 Plan may not be granted at less than 100% of the fair market value of our common stock on the date of grant (110% if granted to an employee who owns more than 10% of the voting shares of the outstanding stock). Options generally vest over a four-year period. In the event the holder ceases to be employed by us, all unvested options are forfeited and all vested options may be exercised within a period of up to 30 days after optionee’s termination for cause, up to three months after termination other than for cause or as a result of death or disability, or up to six months after termination as a result of disability or death. As of March 31, 2006, we have reserved 28.5 million shares of our common stock for issuance under the 1997 Plan, 4.6 million shares of which were available for future grant as of such date.

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     Our Amended and Restated Non-Employee Director Stock Option Plan (the “Director Plan”), provides for the issuance of share-based awards to our non-employee directors. We have reserved a total of 400,000 shares of common stock for issuance under the plan. The option grants under the plan are automatic and non-discretionary, and the exercise price of the options is 100% of the fair market value of our common stock on the grant date. The plan provides for an initial grant to a non-employee director of an option to purchase at least 25,000 and up to 35,000 shares of common stock upon the director’s appointment to the board, which options vest and become exercisable in eight equal quarterly installments. The plan also provides for each non-employee director to be granted an option to purchase 10,000 shares of common stock upon the director’s re-election to the board at an annual meeting of shareholders. These subsequent grants vest and become exercisable in four equal quarterly installments commencing on the last day of the calendar quarter in which the option is granted. The plan will terminate in September 2010, unless terminated sooner by the Board of Directors. As of March 31, 2006, the Director Plan had approximately 227,000 shares available for future grant.

     The following table summarizes information relating to stock option activity under the above plans for the three months ended March 31, 2006 (in thousands, except per share data and years):

						Weighted Average
						Remaining
				Weighted Average		Contractual		Aggregate
	Number			Exercise Price		Life (in		Intrinsic
	of Options			Per Share		years)		Value
Options Outstanding as of December 31, 2005		10,465		$	10.62
Granted		442			12.06
Exercised		(205	)		7.15
Forfeited/canceled		(215	)		14.99
Options Outstanding as of March 31, 2006		10,487		$	10.66		5.28	$	43,092
Options Exercisable as of March 31, 2006		5,512		$	8.54		4.44	$	32,863

     The weighted-average grant-date fair value of options granted during the three months ended March 31, 2006 and 2005 was $6.34 and $7.59 per share, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005 was $1.2 million and $23.2 million, respectively. As of March 31, 2006, the remaining unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of 1.48 years.

     Employee Stock Purchase Plan

     The employee stock purchase plan (the “Plan”) was adopted and approved in September 2000. The Plan became effective upon the closing of our initial public offering in October 2000. We have reserved a total of 2.0 million shares of common stock for issuance under the Plan, together with the potential for an annual increase in the number of shares reserved under the Plan on May 1 of each year. As of March 31, 2006, 329,000 shares were available for future issuance. For the three months ended March 31, 2006 and 2005, no shares were issued under the Plan.

     The Plan permits eligible employees to purchase common stock, subject to limitations as set forth in the Plan, through payroll deductions which may not exceed the lesser of 15% of an employee’s compensation or $21,250 per annum.

     The Plan is designed to provide our employees with an opportunity to purchase, on a periodic basis and at a discount, shares of our common stock through payroll deductions. The Plan was adopted and approved by the Board of Directors and the shareholders of the Company in 2000 and was amended in May 2003 and in April 2006. The Plan is implemented in a series of consecutive, overlapping 24-month offering periods, with each offering period consisting of four six-month purchase periods. Offering periods begin on the first trading day on or after May 1 and November 1 of each year. During each 24-month offering period under the Plan, participants accumulate payroll deductions which on the last trading day of each six-month purchase period within the offering period are applied toward the purchase of shares of our common stock at a purchase price equal to 85% of the lower

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of (i) the fair market value of a share of our common stock as of the first trading day of the 24-month offering period and (ii) the fair market value of a share of common stock on the last trading day of the six-month purchase period.

     Prior to the April 2006 amendment to the Plan, Plan participants could increase or decrease the rate of their payroll deductions (subject to the limitations set forth in the Plan) during the course of a 24-month offering period for future six-month purchase periods within the offering period. The April 2006 amendment amends the Plan to provide that, for all offering periods beginning on or after May 1, 2006, Plan participants may decrease, but not increase, the rate of their payroll deductions for future six-month purchase periods within a 24-month offering period. In addition, prior to the April 2006 amendment, if the fair market value of our common stock on the last trading day of a six-month purchase period within a 24-month offering period was lower than the fair market value of our common stock on the first trading day of the 24-month offering period, then all participants in the 24-month offering period would automatically be withdrawn from the offering period and automatically re-enrolled in the next 24-month offering period on the first day thereof. The April 2006 amendment amends the Plan to eliminate this automatic re-enrollment feature of the Plan for all offering periods beginning on or after May 1, 2006. The April 2006 amendment will allow us to better estimate, on the grant dates under the Plan, the amount of stock-based compensation expense to be recognized in our consolidated statements of income related to awards granted under the Plan. We do not expect the April 2006 amendment to have a material adverse impact on our consolidated financial position, operating results or cash flows.

     Stock-Based Compensation Expense (Restated)

     We calculated the estimated fair value for accounting purposes of each share-based award on the respective dates of grant using the Black-Scholes option pricing model using the following weighted average assumptions:

	Three months ended March 31,
	2006			2005
Expected life (in years)		4.1			3.8
Risk-free interest rate		4.6	%		3.8	%
Dividend yield		0.0	%		0.0	%
Expected volatility		64.0	%		62.2	%

     The following table reflects net income and earnings per share for the three months ended March 31, 2006 compared with the pro forma information for the three months ended March 31, 2005 as follows (in thousands, except per share data):

	Three Months Ended March 31,
	2006			2005
	(Restated)			(Restated)
Net income – as reported for prior period(1)		N/A		$	8,330
Stock-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	)	$	6,379
Earnings (loss) per share:
Basic – as reported for prior period(1)		N/A		$	0.13
Basic – including the effects of stock-based compensation(3)	$	(0.00	)	$	0.10
Diluted – as reported for prior period(1)		N/A		$	0.12
Diluted – including the effects of stock-based compensation(3)	$	(0.00	)	$	0.09

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(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

     In December 2004, the FASB issued SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees and directors, including grants of stock options, restricted stock units and employee stock purchase rights, to be recognized in the financial statements based on the estimated fair values for accounting purposes on the grant date. The pro forma disclosures previously permitted under SFAS 123, no longer will be an alternative to financial statement recognition. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. Given that we have historically granted a significant amount of stock options to employees, the adoption of SFAS 123R will have a material adverse impact on our consolidated results of operations and earnings per share. We adopted SFAS 123R effective January 1, 2006.

     In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. The statement provides guidance for determining whether retrospective application of a change in accounting principle is impracticable. The statement also addresses the reporting of a correction of an error by restating previously issued financial statements. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will apply the requirements of SFAS 154 on any changes in principle made on or after January 1, 2006.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     As discussed further in Note 3 of the “Notes to Condensed Consolidated Financial Statements” contained in Item 1 of this Form 10-Q/A, we have restated our unaudited condensed consolidated financial statements for the quarters ended March 31, 2006 and 2005. Specifically, we have restated our unaudited condensed consolidated financial statements as the result of certain errors that existed in our previously issued financial statements, principally related to our application of Statement of Position 97-2 “Software Revenue Recognition” (“SOP 97-2”) with respect to the accounting for implied post contract customer support (“PCS”) obligations. In connection with the Restatement, we have also corrected certain errors that we had previously identified and determined not to be material with respect to our condensed consolidated financial statements for the affected periods and that relate to (i) our classification of certain customer support costs as sales and marketing expenses rather than as cost of revenues in our consolidated statements of income, and (ii) our presentation of certain deferred tax assets and deferred tax liabilities on a gross basis rather than on a net basis in our consolidated balance sheets. These additional adjustments had no impact on our previously reported revenues, income from operations, net income or the related earnings per share amounts. All referenced amounts in this Form 10-Q/A for the quarters ended March 31, 2006 and 2005 and prior period comparisons reflect the balances and amounts on a restated basis. In this Form 10-Q/A, we have also revised the presentation of our consolidated statement of income (i) to separately disclose product and service revenues, and the associated costs, in accordance with Regulation S-X as the service revenues comprise more than the 10 percent threshold prescribed by the SEC due to the restatement of implied PCS, and (ii) to remove the gross profit computation and line item to conform to future and certain prior presentations of our consolidated statement of income in our filings with the Commission.

     This Form 10-Q/A makes only the changes described above and, except for such changes and as otherwise required to reflect the effects of the Restatement, we have not in this Form 10-Q/A modified or updated other disclosures presented in the original filing of the Form 10-Q. Accordingly, this Form 10-Q/A generally does not reflect events occurring after the date of the original filing of the Form 10-Q or modify or update disclosures therein that may have been affected by subsequent events. For information regarding events subsequent to the original filing of the Form 10-Q, this Form 10-Q/A should be read in connection with the Company’s filings with the Commission since the date of the original filing of the Form 10-Q, including without limitation the Company’s Current Reports on Form 8-K and the amendments to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, each of which is being filed with the Commission substantially contemporaneously with the filing of this Form 10-Q/A.

     The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three months ended March 31, 2006, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2006, or for any other future period. The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with our amended Annual Report on Form 10-K for the year ended December 31, 2005, including the “Risk Factors” section and the restated consolidated financial statements and notes included therein.

OVERVIEW

     We are a leading provider of performance test systems for Internet Protocol (IP) based infrastructure and services that allow our customers to test and measure the performance, functionality, and conformance of IP equipment and networks, and the applications that run over them. Our solutions generate, capture, characterize, and analyze high volumes of realistic network and application traffic, exposing problems, assessing performance, ensuring functionality and interoperability, and verifying conformance to industry specifications. We offer a hardware platform with interchangeable interfaces, utilizing a single set of applications and Application Programming Interfaces (APIs) that allows our customers to create an integrated, easy-to-use test bed. The networks our systems analyze include Ethernet networks operating at speeds of up to 10 gigabits per second, which carry data traffic over optical fiber or electrical cable. Other networks include Packet over SONET networks operating at speeds of up to 10 gigabits per second, which transmit information over high-speed optical links and Asynchronous Transfer Mode (ATM) networks, operating at speeds of up to 622 megabits per second. We also

22

offer a telephony test suite that is used to test and verify traditional Time-Division Multiplexing (TDM) voice based networks, Voice over IP technology, devices, and systems, as well as the interoperability, troubleshooting, service optimization and call traffic monitoring of Video Telephony. Customers also use our performance applications to test and verify web servers, internet networks, security, and business applications.

     Revenues.Our revenues are principally derived from the sale and support of our test systems. Product revenues primarily consist of sales of our hardware and software products. Our service revenues primarily consist of the provision of post contract customer support and maintenance (“PCS”) related to the initial free 12-month and separately purchased extended PCS contracts and to our implied PCS obligations. Service revenues also include separately purchased extended hardware warranty support (generally offered for 12-month periods). PCS on our software products includes unspecified software upgrades and customer technical support services. Our hardware products primarily consist of chassis and interface cards, and during the past three years, our Ethernet interface cards have represented the majority of our product shipments. In general, our Ethernet interface cards are used to test equipment and advanced IP services at the edge of the internet and in enterprise applications, where demand has been consistently increasing. Over the same time period, product shipments for our SONET interface cards have not been significant. Looking forward, we expect demand for our Ethernet interface cards to remain strong and we expect demand for our SONET interface cards to decline or to remain consistent with our historical experience. Our growth over the past three years has also been driven by increasing shipments of our software products, including our IxChariot, IxVoice and IxLoad products. The increase in software shipments is the result of our strategy to use specialized software applications to drive demand for our proprietary hardware platform. Looking forward, we expect demand for our software products to remain strong.

     Sales to our largest customer accounted for approximately $13.2 million or 35.7% of our total revenues for the three months ended March 31, 2006 and $14.0 million or 38.5% of our total revenues for the three months ended March 31, 2005. In addition, to date, we have sold our products primarily to network equipment manufacturers. While we expect that we will continue to have customer concentration for the foreseeable future, we continue to sell our products to a wide variety of customers and, to the extent we develop a broader and more diverse customer base, our reliance on any one customer or customer type may diminish.

     In some instances our software products may be installed and operated independently from our hardware products. At other times, our software products are installed on and work with our hardware products to enhance the functionality of the overall test system. In addition, our chassis is generally shipped with our core operating system software installed, which is an integral part of the chassis’ functionality. As our software is generally more than incidental to the sale of our test systems, we recognize revenue by applying the provisions of the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” as amended by SOP 98-9, “Software Revenue Recognition with Respect to Certain Arrangements” (collectively, “SOP 97-2”).

     Our test systems are generally fully functional at the time of shipment and do not require us to perform any significant production, modification, customization or installation after shipment. As such, revenue from hardware and software product sales is recognized upon shipment provided that (i) an arrangement exists, which is typically in the form of a customer purchase order; (ii) delivery has occurred, including the transfer of title and risk of loss to the customer; (iii) the sales price is fixed or determinable; and (iv) collectibility is deemed probable.

     When a sale involves multiple elements, or multiple products, and we have vendor-specific objective evidence (“VSOE”) of fair value for each element in the arrangement, we recognize revenue based on the relative fair value of all elements within the arrangement. We determine VSOE based on sales prices charged to customers when the same element is sold separately or based upon renewal pricing for PCS. Many of our products, such as our software and chassis products, are not sold separately as these products include 12 months of free PCS, and accordingly we are unable to establish VSOE for these products.

     In cases where VSOE only exists for the undelivered elements such as PCS, we apply the residual method to recognize revenue. Under the residual method, the total arrangement fee is allocated first to the undelivered elements, typically the initial or extended PCS, based on their VSOE, and the residual portion of the fee is allocated to the delivered elements, typically our hardware and software products, and is recognized as revenue assuming all other revenue recognition criteria as described above have been met.

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     If VSOE cannot be determined for all undelivered elements of an arrangement, we defer revenue until the earlier of (i) the delivery of all elements or (ii) the establishment of VSOE for all undelivered elements, provided that if the only undelivered element is PCS or a service, the total fee of the arrangement is recognized as revenue over the PCS or service term.

     Services revenues from our initial and separately purchased extended contractual PCS arrangements (generally offered for 12-month periods) are recognized ratably over the contractual coverage period. In addition, for implied PCS obligations we defer revenues from product sales and allocate these amounts to PCS revenues to account for the circumstances in which we provide PCS after the expiration of the customer’s contractual PCS period. Deferred revenues for these implied PCS obligations are recognized ratably over the implied PCS period, which is typically based on the expected economic life of our software products of four years. To the extent we determine that implied PCS is no longer being provided after the expiration of the customer’s contractual PCS period, the remaining deferred revenue balance related to the implied PCS obligation is reversed and recognized as revenue in the period of cessation of the implied PCS obligation. The implied PCS obligation for our software products ceases upon (i) the license management of our software upgrades and (ii) our determination not to provide PCS after the expiration of the contractual PCS period. Our license management system locks a software license to a specific computer or Ixia hardware chassis on which our software resides. The system then manages and controls the provision of software upgrades to ensure that the upgrades are only provided to customers that are entitled to receive such upgrades during an initial or extended PCS period. For software products that are not controlled under a license management system and for certain customers where we expect to continue to provide implied PCS outside of the contractual PCS period, we will continue to allocate and defer revenue for these implied PCS obligations and to recognize this revenue ratably over the implied PCS periods as described above. For the three months ended March 31, 2006 and 2005, services revenues related to our implied PCS obligations were approximately $2.5 million and $1.8 million, respectively. As of March 31, 2006, reversals of implied PCS deferred revenue have not been significant but are expected to be significant in subsequent periods as a result of the license management of certain products and our determination not to provide PCS after the expiration of the contractual PCS period.

     Revenues from our separately purchased extended hardware warranty arrangements are recognized ratably over the contractual coverage period.

     We use distributors to complement our direct sales and marketing efforts in certain international markets. Due to the broad range of features and options available with our hardware and software products, distributors generally do not stock our products and typically place orders with us after receiving an order from an end customer. These distributors receive business terms of sale generally similar to those received by our other customers.

     Stock-Based Compensation.Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123R. SFAS 123R requires all share-based payments, including grants of stock options and employee stock purchase rights, to be recognized in the financial statements based on the estimated fair values for accounting purposes on the grant date. Under this standard, the estimated fair value for accounting purposes of each stock option and employee stock purchase right is estimated on the date of grant using an option pricing model that meets certain requirements. We use the Black-Scholes option pricing model to estimate the fair value for accounting purposes of our share-based payments which meets the requirements of SFAS 123R. The determination of the fair value for accounting purposes of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life and risk-free interest rate. The expected life and expected volatility are based on historical and other data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our stock options and stock purchase rights. Stock-based compensation expense recognized in our consolidated financial statements in fiscal 2006 and thereafter will be based on awards that are ultimately expected to vest. The amount of stock-based compensation expense in fiscal 2006 and thereafter will be reduced for estimated forfeitures based on historical experience as well as future expectations. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We will evaluate the assumptions used to value share-based awards on a periodic basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

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     We adopted SFAS 123R using the modified prospective method which requires the application of the accounting standard as of January 1, 2006. Our condensed consolidated financial statements as of and for the three months ended March 31, 2006 reflect the impact of SFAS 123R. In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. Prior to the adoption of SFAS 123R, we accounted for our stock-based compensation using the intrinsic value method which resulted in no compensation expense being recognized for the three months ended March 31, 2005. The balance of gross unearned stock-based compensation to be expensed in the periods 2006 through 2010 related to unvested share-based awards as of March 31, 2006 was approximately $25.1 million. To the extent that we grant additional share-based awards to employees, future expense may increase by the additional unearned compensation resulting from those grants. We anticipate that we will grant additional share-based awards in fiscal 2006 as part of our long-term incentive compensation programs. The impact of these grants cannot be estimated at this time because it will depend on a number of factors, including the amount of share-based awards granted and the-then current fair values for accounting purposes.

     Cost of Revenues. Our cost of revenues related to the sale of our hardware and software products includes materials, payments to third party contract manufacturers, royalties, and salaries and other expenses related to our manufacturing and operations personnel. We outsource the majority of our manufacturing operations, and we conduct final assembly, supply chain management, quality assurance, documentation control and shipping at our facility in Calabasas, California. Accordingly, a significant portion of our cost of revenues related to our products consists of payments to our contract manufacturers. Cost of revenues related to the provision of services includes salaries and other expenses associated with customer and technical support services and the warranty cost of hardware to be replaced during the warranty coverage period. Cost of revenues also includes the amortization of purchased intangible assets in connection with our acquisitions of certain product lines and technologies.

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

• 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.

     In the near term, we anticipate that our cost of revenues as a percentage of total revenues will increase, excluding the effects of the reversal of certain implied PCS obligations, due to the January 1, 2006 adoption of SFAS 123R and potentially due to lower sales prices on larger transactions as a result of increased competition.

     Operating Expenses. Our operating expenses are generally recognized when incurred and consist of research and development, sales and marketing, general and administrative, and amortization of intangible assets. In the near term, we expect total operating expenses to increase in dollar terms and as a percentage of total revenues as we seek to attain our strategic product development objectives, meet changing customer requirements and technological advances, enlarge our direct sales force and expand our administrative infrastructure, and due to an increase in stock-based compensation expense as a result of the adoption of SFAS 123R.

     Research and development expenses consist primarily of salaries and other personnel costs related to the design, development, testing and enhancements of our products. We expense our research and development costs as

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they are incurred. We also capitalize and depreciate over a five-year period costs of our products used for research and development purposes.

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

     General and administrative expenses consist primarily of salaries and related expenses for executive, finance, human resources, information technology and administrative personnel, as well as recruiting and professional fees, insurance costs and other general corporate expenses.

     Amortization of intangible assets consists of the amortization of the purchase price of the various intangible assets over their useful lives. Periodically we review goodwill and other intangible assets for impairment. An impairment charge would be recorded to the extent that the carrying value exceeds the fair value in the period that the impairment circumstances occurred.

     Interest and Other Income, Net.Interest and other income, net represents interest on cash and a variety of securities, including commercial paper, money market funds, and government, federal agency and corporate debt securities, and certain foreign currency gains and losses.

     Income Tax Expense.Income tax expense is determined based on the amount of earnings and enacted federal, state and foreign tax rates, adjusted for allowable credits and the effects of equity compensation plans. As a result of the adoption of SFAS 123R, our fiscal 2006 effective tax rate may be significantly higher than our fiscal 2005 effective tax rate.

RESULTS OF OPERATIONS

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

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

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(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.In the first quarter of 2006, total revenues increased 1.6% to $37.1 million from the $36.5 million recorded in the first quarter of 2005. This overall growth relates to the $1.7 million increase in services revenues in the first quarter of 2006 over the same period in 2005 primarily due to the ratable recognition of revenues related to our contractual and implied PCS obligations which directly relates to the sequential increases in shipments of our software products during the preceding periods. In the first quarter of 2006, total revenues from Cisco Systems, our largest account, decreased by $804,000, or 5.7%, to $13.2 million.

     Cost of Revenues. Our total cost of revenues increased 11.9% to $8.1 million in the first quarter of 2006 from $7.2 million during the same period in 2005. As a percentage of total revenues, our total cost of revenues increased to 21.8% in the first quarter of 2006 from 19.8% in the first quarter of 2005 due in part to the adoption of SFAS 123R as of January 1, 2006 which resulted in the recording of stock-based compensation expense of $237,000 in the first quarter of 2006 and due to competitive pressures on certain larger deals. Excluding stock-based compensation expense of $172,000, our cost of product revenues increased 8.6% to $6.3 million in the first quarter of 2006 from $5.8 million in the same period of 2005 primarily due to the increase in inventory and product shipment costs. Amortization of purchased technology increased to $1.1 million in the first quarter of 2006 from $942,000 in the same period of 2005. The increase related to the amortization of intangible assets associated with the July 2005 purchase of Communication Machinery Corporation and the January 2006 purchase of certain product lines from Dilithium Networks. Excluding stock-based compensation expense of $65,000, our cost of services revenues were relatively flat during the first quarter of 2006 when compared to the first quarter of 2005.

     Research and Development Expenses.In the first quarter of 2006, research and development expenses increased 39.9% to $10.6 million from the $7.5 million recorded in the first quarter of 2005. This increase was primarily due to the adoption of SFAS 123R effective January 1, 2006 which resulted in stock-based compensation expense of $1.8 million recorded during the first quarter of 2006. The increase in research and development expenses in the first quarter of 2006 compared to the first quarter of 2005 was also due to higher compensation and related benefit costs of nearly $850,000, an increase in facilities costs of approximately $310,000 and higher depreciation expense of approximately $250,000. These increases were due in part to the expansion of our international development operations in India and Romania. The above increases were partially offset by an approximately $390,000 reduction in consulting fees due to the commencement of direct operations in India in the first quarter of 2005.

     Sales and Marketing Expenses.In the first quarter of 2006, sales and marketing expenses increased 62.9% to $14.7 million from the $9.0 million recorded in the first quarter of 2005. This increase was due in part to the adoption of SFAS 123R effective January 1, 2006 which resulted in stock-based compensation expense of $2.0 million recorded during the first quarter of 2006. The increase in sales and marketing expenses in the first quarter of 2006 compared to the first quarter of 2005 was also due to a higher number of direct sales and marketing personnel and their associated benefit costs and travel expenses, which resulted in an increase of approximately $2.4 million. Additionally, depreciation expense increased by approximately $320,000 and facility expenses increased by $270,000 in the first quarter of 2006 as compared to the first quarter of 2005.

     General and Administrative Expenses.In the first quarter of 2006, general and administrative expenses increased 56.8% to $5.7 million from the $3.6 million recorded in the first quarter of 2005. This increase was due in part to the adoption of SFAS 123R effective January 1, 2006 which resulted in stock-based compensation expense of $791,000 recorded during the first quarter of 2006. The increase in general and administrative expenses in the first quarter of 2006 compared to the first quarter of 2005 was also due to the continued expansion of our administrative infrastructure to support our growth. Administrative expansion efforts resulted in an increase in

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salary and benefit costs of over $250,000, higher recruiting costs of approximately $340,000 and an increase facility expenses, including certain internal system support costs, of $416,000 in the first quarter of 2006 as compared to the first quarter of 2005.

     Amortization of Intangible Assets.In the first quarter of 2006, amortization of intangible assets increased to $399,000 from the $342,000 recorded in the first quarter of 2005. This increase was primarily the result of an increase in intangible assets from acquisitions in 2005 and 2006, partially offset by the completion of the amortization of certain intangible assets.

     Interest and Other Income, Net.Interest and other income, net increased to $2.1 million in the first quarter of 2006 from the $896,000 recorded in the first quarter of 2005. This increase was largely attributable to higher interest rates and larger cash and investment balances in the aggregate during the first quarter of 2006 as compared to the first quarter of 2005.

     Income Tax Expense.Income tax expense decreased to a benefit of $182,000, or an effective rate of 74.6%, for the three months ended March 31, 2006 from $1.3 million, or an effective rate of 13.3%, for the three months ended March 31, 2005. The effective tax rate in the first quarter of 2006 differs from the effective tax rate in the first quarter of 2005 primarily due to the impact of stock-based compensation as recognized pursuant to SFAS 123R, as certain stock-based compensation charges, such as those associated with incentive stock options, may not be tax deductible. The effective tax rate for the first quarter of 2006 was also adversely impacted by lower research and development tax credits, due in part to the expiration of the applicable federal law, and due to a decreased amount of tax benefits related to the disqualifying disposition of incentive stock options to the extent that stock-based compensation expense had previously been reflected in our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating activities was $9.4 million in the first quarter of 2006 and $12.9 million in the first quarter of 2005. Net cash generated from operations in the first quarter of 2006 and 2005 was provided primarily by net income (loss) of $(62,000) and $8.3 million, respectively, adjusted for certain non-cash items. In the first quarter of 2006 and 2005, non-cash items included $3.7 million and $2.3 million, respectively, for depreciation and amortization of fixed and intangible assets. The first quarter of 2006 also included a non-cash stock-based compensation charge of $4.9 million related to the adoption of SFAS 123R effective January 1, 2006. The first quarter of 2005 included a $7.5 million tax benefit relating to certain stock option transactions, which was partially offset by the $6.4 million increase in net deferred tax assets.

     Cash used in investing activities was $12.2 million in the first quarter of 2006 and $13.4 million in the first quarter of 2005. In the first quarter of 2006, cash used in investing activities principally consisted of $2.9 million related to the net purchases of marketable securities, $4.1 million for the purchase of property and equipment and $5.2 million related to the January 2006 acquisition of the mobile video and multimedia test business of Dilithium Networks. For the first quarter of 2005, cash used in investing activities consisted of $6.7 million related to the net purchases of marketable securities, a $1.9 million payment related to the G3 Nova contingent earnout, a $2.5 million payment related to the purchase of the remaining assets of the NetIQ Chariot business, and $2.3 million for the purchase of property and equipment.

     Financing activities provided $1.6 million in the first quarter of 2006 and $9.2 million in the first quarter of 2005. In the first quarter of 2006, financing activities primarily consisted of $1.5 million from the proceeds related to the exercise of stock options. Financing activities consisted exclusively of proceeds from the exercise of stock options in the first quarter of 2005.

     As of March 31, 2006, we had no material commitments for capital expenditures. We believe that our existing balances of cash and cash equivalents, investments and cash flows expected to be generated from our operations will be sufficient to satisfy our operating requirements for at least the next twelve months. Nonetheless, we may seek additional sources of capital as necessary or appropriate to fund acquisitions or to otherwise finance our growth or operations; however, there can be no assurance that such funds, if needed, will be available on favorable terms, if at all. Our access to the capital markets to raise funds, through the sale of equity or debt securities, is subject to various factors, including the timely filing of our periodic reports with the Commission, and

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our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 with the Commission currently limits our ability to access the capital markets using short-form registration.

SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

     Statements that are not historical facts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are subject to the safe harbor created by that Section. Words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. These risks, uncertainties and other factors may cause our actual results, performances or achievements to be materially different from those expressed or implied by our forward-looking statements and include, among other things: consistency of orders from significant customers, our success in developing and producing new products and market acceptance of our products. Many of these risks and uncertainties are outside of our control and are difficult for us to forecast or mitigate. Factors that may cause our actual results to differ materially from our forward-looking statements include the risks and other factors set forth in the “Risk Factors” and other sections of the Company’s Amendment No. 2 on Form 10-K/A to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and in our other filings with the Securities and Exchange Commission (the “Commission”).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

     The primary objective of our investment activities is to maintain the safety of principal and preserve liquidity while maximizing yields without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, government and federal agency debt securities, corporate debt securities, auction rate securities and money market funds. We do not use any derivatives or similar instruments to manage our interest rate risk. We intend and have the ability to hold these securities to maturity and, therefore, we would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates. Currently, the carrying amount of these securities approximates fair market value. However, the fair market value of these securities is subject to interest rate risk and would decline in value if market interest rates increased. If market interest rates were to increase immediately and uniformly by ten percent from the levels as of March 31, 2006, the decline in the fair market value of the portfolio would not be material to our financial position, results of operations or cash flows.

Exchange Rate Sensitivity

     The majority of our revenue and expenses are denominated in U.S. dollars. However, since we have sales and service operations outside of the United States, we do have some transactions that are denominated in foreign currencies, primarily the Japanese Yen, Romanian Lei, Indian Rupee and British Pound. We utilize foreign currency forward contracts to hedge certain accounts receivable amounts that are denominated primarily in Japanese Yen. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to offset exchange losses and gains on underlying exposures. Changes in the fair value of these forward contracts are recorded immediately in earnings. We do not enter into foreign exchange forward contracts for speculative or trading purposes and we do not expect net gains or losses on these derivative instruments to have a material impact on our results of operations or cash flows.

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ITEM 4. CONTROLS AND PROCEDURES

     As discussed in Note 3 of the “Notes to Condensed Consolidated Financial Statements,” contained in Part I, Item 1 of this Form 10-Q/A, we have restated in this Form 10-Q/A our unaudited condensed consolidated financial statements for the quarters ended March 31, 2006 and 2005 (the “First Quarter Restatement”). This Item 4 has been updated to reflect the First Quarter Restatement as well as for certain other events and developments subsequent to March 31, 2006, including the Restatement described in the Explanatory Note included in this filing. The Restatement is principally related to the correction of errors in our recognition of revenue for implied post contract customer support (“PCS”) obligations in accordance with Statement of Position 97-2 “Software Revenue Recognition” (“SOP 97-2”).

Evaluation of Disclosure Controls and Procedures (Restated)

     As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), in connection with the original filing of the Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness, as of the end of the quarter covered by this report, of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) promulgated by the Commission under the Exchange Act. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosures.

     In our Form 10-Q as originally filed with the Commission, our CEO and our CFO concluded that our disclosure controls and procedures were effective as of March 31, 2006 to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Subsequently, our CEO and CFO have reevaluated our disclosure controls and procedures as of March 31, 2006 and have determined that, in light of the material weakness discussed below, our disclosure controls and procedures were not effective as of March 31, 2006 to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

     Notwithstanding the ineffectiveness of our disclosure controls and procedures as of March 31, 2006 and the material weakness in our internal control over financial reporting that existed as of that date as described below, management believes that (i) this Form 10-Q/A does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the periods covered by this Report and (ii) the condensed consolidated financial statements, and other financial information, included in this Report fairly present in all material respects in accordance with generally accepted accounting principles (“GAAP”) our financial condition, results of operations and cash flows as of, and for, the dates and periods presented.

Restatement and Impact on Internal Control over Financial Reporting

     In connection with the Restatement, management has concluded, as disclosed in Part II, Item 9A of our Amended 2005 Form 10-K, that the Company did not maintain effective internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and that the Restatement was the result of a material weakness in our internal control over financial reporting that existed as of December 31, 2005. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a

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remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

     In our Amended 2005 Form 10-K, management concluded that as of December 31, 2005, we did not maintain effective controls over the completeness and accuracy of revenue reporting for implied PCS obligations. Specifically, management concluded that we did not maintain effective controls to ensure that (i) we did not provide software upgrades and support to customers after the expiration of the contractual PCS periods and (ii) the circumstances under which our sales and support personnel provided software upgrades and support beyond the contractual periods were adequately identified, communicated to, and reviewed by our finance personnel to ensure the proper recognition of revenue for implied PCS obligations in accordance with generally accepted accounting principles. Management further concluded that this control deficiency resulted in the restatement of our 2005, 2004 and 2003 annual consolidated financial statements, all of our interim condensed consolidated financial statements for 2005 and 2004 as well as the first two interim periods of 2006. Additionally, this control deficiency could result in a misstatement of revenue and deferred revenue that would result in a material misstatement of our annual and interim consolidated financial statements that would not be prevented or detected. Accordingly, as disclosed in Part II, Item 9A of our Amended 2005 Form 10-K, we determined that this control deficiency constituted a material weakness in our internal control over financial reporting as of December 31, 2005. We believe that this material weakness continued to exist at March 31, 2006.

Changes in Internal Control over Financial Reporting

     There were no changes in our internal control over financial reporting during our quarter ended March 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As such, the material weakness in our internal control over financial reporting that existed as of December 31, 2005, as described above and as disclosed in Part II, Item 9A of our Amended 2005 Form 10-K, continued to exist as of March 31, 2006.

Inherent Limitations on Effectiveness of Controls

     Our management, including our CEO and our CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and all fraud. Any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II. OTHER INFORMATION

ITEM 1A. Risk Factors

     Information regarding risk factors appears in Part I, “Item 1A. Risk Factors,” in Amendment No. 2 on Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2005 (the “Amended 2005 Form 10-K”) and in certain of our other filings with the Securities and Exchange Commission. There have been no material changes in our risk factors previously disclosed in the Amended 2005 Form 10-K.

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ITEM 5. Other Information

     Our policy governing transactions in our securities by our directors, officers and employees permits such persons to adopt stock trading plans pursuant to Rule 10b5-1 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. We anticipate that from time to time in the future, other directors, officers and employees may establish such stock trading plans. We do not undertake any obligation to update or revise our disclosure regarding such plans and specifically do not undertake to disclose the amendment, termination or expiration of any such plans.

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 2002
31.2	Certification of Chief Financial Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	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.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		IXIA
Date: February 23, 2007	By:	/s/ Errol Ginsberg
		Errol Ginsberg
		President and Chief Executive Officer
Date: February 23, 2007	By:	/s/ Thomas B. Miller
		Thomas B. Miller
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
31.1	Certification of Chief Executive Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	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

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