Ixia (XXIA) 10-Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

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	(I.R.S. Employer Identification No.)
incorporation or organization)

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. Yesþ Noo

     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 filero       Accelerated filerþ       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	68,675,595
(Class of Common Stock)	(Outstanding at November 1, 2007)

IXIA

TABLE OF CONTENTS

	Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006		3
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2007 and 2006		4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosures about Market Risk		21
Item 4. Controls and Procedures		21
PART II. OTHER INFORMATION
Item 1A. Risk Factors		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 5. Other Information		23
Item 6. Exhibits		23
SIGNATURES		25
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

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IXIA

Condensed Consolidated Balance Sheets

(in thousands)

	September 30,		December 31,
	2007		2006
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	178,155	$	64,644
Short-term investments in marketable securities		23,998		152,703
Accounts receivable, net of allowance for doubtful accounts of $631 and $1,174 as of September 30, 2007 and December 31, 2006, respectively		30,296		36,221
Inventories		10,950		11,604
Deferred income taxes		5,965		6,382
Prepaid expenses and other current assets		2,648		4,182
Total current assets		252,012		275,736
Investments in marketable securities		46,668		4,354
Property and equipment, net		21,665		22,044
Deferred income taxes		11,555		9,486
Intangible assets, net		15,634		20,224
Goodwill		16,728		16,728
Other assets		932		487
Total assets	$	365,194	$	349,059
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	1,400	$	2,195
Accrued expenses		18,037		15,873
Deferred revenues		17,441		17,346
Income taxes payable		301		5,154
Total current liabilities		37,179		40,568
Deferred revenues		7,234		7,202
Other liabilities		4,218		500
Total liabilities		48,631		48,270
Shareholders’ equity:
Common stock, without par value; 200,000 shares authorized, 68,271 and 67,351 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively		136,248		132,413
Additional paid-in capital		95,677		86,305
Retained earnings		84,638		82,071
Total shareholders’ equity		316,563		300,789
Total liabilities and shareholders’ equity	$	365,194	$	349,059

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

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IXIA

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

	Three months ended				Nine months ended
	September 30,				September 30,
	2007		2006		2007			2006
Revenues:
Products	$	37,247	$	49,696	$	108,826		$	114,339
Services		6,787		5,532		18,910			18,426
Total revenues		44,034		55,228		127,736			132,765
Costs and operating expenses:(1)
Cost of revenues — products		8,523		7,694		24,757			21,783
Cost of revenues — amortization of purchased technology		1,220		1,256		3,976			3,449
Cost of revenues — services		865		629		2,925			1,723
Research and development		12,767		11,097		35,377			32,720
Sales and marketing		13,944		15,317		42,253			45,163
General and administrative		6,109		5,824		18,440			16,627
Amortization of intangible assets		430		464		1,575			1,287
Impairment of purchased technology and intangible assets		—		—		3,263			—
Total costs and operating expenses		43,858		42,281		132,566			122,752
Income (loss) from operations		176		12,947		(4,830	)		10,013
Interest and other income, net		2,818		2,431		8,429			6,741
Income before income taxes		2,994		15,378		3,599			16,754
Income tax expense		1,068		7,278		1,032			7,774
Net income	$	1,926	$	8,100	$	2,567		$	8,980
Earnings per share:
Basic	$	0.03	$	0.12	$	0.04		$	0.13
Diluted	$	0.03	$	0.12	$	0.04		$	0.13
Weighted average number of common and common equivalent shares outstanding:
Basic		68,192		67,129		67,805			66,907
Diluted		69,572		68,636		69,298			68,804

⁽¹⁾ Stock-based compensation included in:

Cost of revenues — products	$	157	$	144	$	383	$	452
Cost of revenues — services		60		55		146		172
Research and development		1,590		1,695		3,850		5,130
Sales and marketing		1,130		2,126		3,496		6,154
General and administrative		861		869		1,821		2,346

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)

	Nine months ended
	September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	2,567		$	8,980
Adjustments to reconcile net income to net cash provided by operating activities, net of effect of acquisitions:
Depreciation and amortization		8,658			7,238
Amortization of intangible assets		5,551			4,737
Impairment of purchased technology and intangible assets		3,263			—
Stock-based compensation		9,696			14,254
Deferred income taxes		(1,652	)		4,447
Tax (shortfall) benefit from stock option transactions		(324	)		369
Excess tax benefits from stock-based compensation		(207	)		(253	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net		5,925			(6,412	)
Inventories		654			(718	)
Prepaid expenses and other current assets		1,534			172
Other assets		(445	)		(164	)
Accounts payable		(795	)		(99	)
Accrued expenses		474			1,537
Deferred revenues		127			(11,253	)
Income taxes payable and other liabilities		(635	)		(136	)
Net cash provided by operating activities		34,391			22,699
Cash flows from investing activities:
Purchases of property and equipment		(8,279	)		(9,919	)
Purchases of available-for-sale securities		(54,150	)		(100,400	)
Proceeds from available-for-sale securities		161,850			90,725
Purchases of held-to-maturity securities		(45,469	)		(7,978	)
Proceeds from held-to-maturity securities		24,160			25,965
Purchases of other intangible assets		(105	)		(121	)
Payments in connection with acquisitions		(2,929	)		(7,274	)
Net cash provided by (used in) investing activities		75,078			(9,002	)
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants		5,086			4,402
Repurchase of common stock		(1,251	)		—
Excess tax benefits from stock-based compensation		207			253
Net cash provided by financing activities		4,042			4,655
Net increase in cash and cash equivalents		113,511			18,352
Cash and cash equivalents at beginning of period		64,644			51,837
Cash and cash equivalents at end of period	$	178,155		$	70,189

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

5

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 test systems for IP-based infrastructure and services that allow our customers to test and measure the performance, functionality, service quality and conformance of Internet Protocol (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, identifying problems, assessing performance, ensuring functionality and interoperability, and verifying conformance to industry specifications. We offer hardware platforms with interchangeable traffic generation interfaces, utilizing a common set of applications and Application Programming Interfaces (APIs) that allow our customers to create integrated, easy-to-use automated test environments. The networks that our systems analyze primarily include Ethernet networks operating at speeds of up to 10 gigabits per second, which carry data traffic over optical fiber or electrical cable. 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, internet, security and business applications.

2. Basis of Presentation

     The accompanying condensed consolidated financial statements as of September 30, 2007 and for the three and nine months ended September 30, 2007 and 2006, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) 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, 2007 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 our Annual Report on Form 10-K for the year ended December 31, 2006.

     Certain reclassifications have been made to prior period condensed consolidated financial statements to conform to the current presentation.

3. Income Taxes

     On January 1, 2007, we adopted the provisions of Financial Standards Accounting Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109” (“FIN 48”). We did not record any cumulative effect adjustment to retained earnings as a result of adopting FIN 48. At the adoption date, we had gross unrecognized tax benefits of approximately $4.9 million. Of this total, approximately $4.1 million (net of the federal benefit on state issues) would affect our effective tax rate if recognized. There were no significant changes to this liability for unrecognized tax benefits during the third quarter of 2007. The adoption of FIN 48 resulted in a reclassification of this liability from current to non-current liabilities.

     We recognize interest and penalties related to uncertain tax positions in income tax expense. At January 1, 2007, we had accrued approximately $15,000, net of tax benefit.

     We file income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. With few minor exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities in material jurisdictions for the tax years ended prior to 2002.

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     We are currently under audit by the California Franchise Tax Board for the 2003 and 2004 tax years. The examination phase of the audit will likely conclude in late 2007. At this time, we do not expect the outcome of this examination to result in an adjustment that materially exceeds the applicable recorded liability for unrecognized tax benefits as of September 30, 2007. For the nine months ended September 30, 2007, we have reduced our recorded liability for unrecognized tax benefits by approximately $53,000 due to the expiration of certain statutes of limitations. At September 30, 2007, as a result of the expirations of the statutes of limitations and settlements with specific jurisdictions, it is reasonably possible that we may reduce our recorded liability for unrecognized tax benefits for the related tax positions by approximately $1.6 million over the next 12 months.

4. Impairment of Intangible Assets

     Under Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), long-lived assets, other than indefinite life intangible assets, must be tested for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the second quarter of 2007, we recognized an impairment charge of $3.3 million consisting of $1.5 million of purchased technology and $1.8 million of certain other intangible assets. These impaired intangible assets related to the wireless LAN testing tools acquired as part of Communication Machinery Corporation in July 2005 and the acquisition of the mobile video test product line from Dilithium Networks in January 2006. The impairment charges resulted from lower than expected current and projected operating profits for the applicable products and our decision to curtail sales and development efforts related to these products. Under SFAS 144, we determined that the future expected undiscounted cash flows were less than the carrying value of the affected identifiable intangible assets, which indicated that an impairment existed at June 30, 2007. To measure the impairment, we used the discounted cash flow approach to reduce the carrying value of the affected assets to fair value, which resulted in the $3.3 million impairment of the above noted purchased technology and other identifiable intangible assets.

5. Inventories

     Inventories consist of the following (in thousands):

	September 30,		December 31,
	2007		2006
Raw materials	$	3,040	$	3,391
Work in process		4,847		6,891
Finished goods		3,063		1,322
	$	10,950	$	11,604

6. Stock-Based Compensation

     Stock-based compensation expense recognized under Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”) for the three and nine months ended September 30, 2007 was $3.8 million and $9.7 million, respectively. Stock-based compensation for the three and nine months ended September 30, 2006 was $4.9 million and $14.3 million, respectively. Under SFAS 123R, actual tax benefits recognized in excess of tax benefits previously recognized are reported as cash provided by financing activities.

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     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						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Expected lives (in years)		4.3			4.0			4.4			4.1
Risk-free interest rates		4.5	%		4.9	%		4.6	%		4.8	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Expected volatility		51.2	%		59.3	%		53.1	%		61.3	%

     The aggregate balance of gross unearned stock-based compensation related to unvested share-based awards as of September 30, 2007, was approximately $20.3 million, and this amount is expected to be expensed in the remainder of 2007 and through 2011.

     The following table summarizes stock option activity for the nine months ended September 30, 2007 (number of options and aggregate intrinsic value in thousands):

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number			Exercise Price		Contractual		Intrinsic
	of Options			Per Share		Life (in years)		Value
Outstanding as of December 31, 2006		10,120			$ 10.59
Granted		1,931			9.45
Exercised		(685	)		4.76
Forfeited/canceled		(993	)		13.18
Outstanding as of September 30, 2007		10,373			$ 10.52		4.41		$ 9,256
Exercisable as of September 30, 2007		6,769			$ 10.11		3.49		$ 9,189

     The following table summarizes restricted stock unit activity for the nine months ended September 30, 2007 (number of awards in thousands):

				Weighted
				Average Grant
	Number			Date Fair Value
	of Awards			Per Share
Outstanding as of December 31, 2006		323		$	9.64
Awarded		641			9.30
Released		(135	)		9.44
Forfeited/canceled		(64	)		9.53
Outstanding as of September 30, 2007		765		$	9.40

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7. Earnings Per Share

     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 and nine months ended September 30, 2007 and 2006 (in thousands, except per share data):

	Three months ended				Nine months ended
	September 30,				September 30,
	2007		2006		2007		2006
Numerator:
Net income	$	1,926	$	8,100	$	2,567	$	8,980
Denominator:
Basic presentation:
Weighted average common shares		68,192		67,129		67,805		66,907
Denominator for basic calculation		68,192		67,129		67,805		66,907
Diluted presentation:
Shares used above		68,192		67,129		67,805		66,907
Weighted average effect of dilutive stock options and other share-based awards		1,380		1,507		1,493		1,897
Denominator for diluted calculation		69,572		68,636		69,298		68,804
Basic earnings per share	$	0.03	$	0.12	$	0.04	$	0.13
Diluted earnings per share	$	0.03	$	0.12	$	0.04	$	0.13

     The weighted average antidilutive employee stock options and other share-based awards for the three months ended September 30, 2007 and 2006 and for the nine months ended September 30, 2007 and 2006 were 7.3 million, 7.3 million, 7.0 million and 6.3 million shares, respectively.

     In August 2007, we announced a $50 million stock buyback program. For the nine months ended September 30, 2007, we have purchased 135,385 shares for $1.25 million, or approximately $9.21 per share. These shares have been retired.

8. Concentrations

     Significant Customer

     For the three and nine months ended September 30, 2007 and 2006, only one customer comprised more than 10% of total revenues as follows (in thousands, except percentages):

	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Amount of total revenues	$	11,259		$	12,965		$	32,924		$	36,187
As a percentage of total revenues		25.6	%		23.5	%		25.8	%		27.3	%

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     As of September 30, 2007 and December 31, 2006, we had receivable balances from this customer approximating 16.2% and 22.7%, respectively, of total accounts receivable.

     International Data

     For the three and nine months ended September 30, 2007 and 2006, total revenues from international product shipments consisted of the following (in thousands, except percentages):

	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Amount of total revenues	$	13,214		$	15,047		$	40,757		$	40,616
As a percentage of total revenues		30.0	%		27.2	%		31.9	%		30.6	%

     Long-lived assets are primarily located in the United States. As of September 30, 2007, approximately $8.5 million, or 8.3%, of our total long-lived assets were located at international locations. As of December 31, 2006, approximately $7.1 million, or 11.1%, of our total long-lived assets were located at international locations. Long-lived assets located at international locations consist primarily of fixed assets.

9. Acquisition

     In February 2007, we acquired the rights to certain wireless technology from a privately-held company for an estimated purchase price of $2.4 million, which is expected to be paid over the next 12 months. As of September 30, 2007, we have paid approximately $550,000 related to this acquisition. We accounted for this acquisition under the purchase method of accounting and allocated the purchase price to the net tangible and amortizable intangible assets acquired based on their estimated fair values. The acquired assets did not constitute a business and as such, no goodwill was recorded on the asset purchase.

10. Commitments and Contingencies

     Lease Commitments

     During the third quarter of 2007, we entered into a new agreement to lease our corporate headquarters located in Calabasas, California, after our existing lease expires. The new lease has a five-year term commencing on June 1, 2008 with an option to extend the term of the lease for an additional five-year period. The following table sets forth the future minimum commitments under the new lease (in thousands):

	Year Ending
	December 31,
2008	$	1,508
2009		2,630
2010		2,708
2011		2,790
2012		2,873
Thereafter		1,212
	$	13,721

     As of December 31, 2006, we had future commitments of $3.4 million remaining under the terms of our current corporate headquarters lease.

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11. Recent Accounting Pronouncements

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). Unrealized gains and losses on items for which the fair value option has been elected are to be recognized as earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We believe that the adoption of SFAS 159 will not have a significant impact on our consolidated financial position, results of operations or cash flows.

     In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This Statement is applied under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact on our financial statements of adopting SFAS 157.

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

     The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and nine months ended September 30, 2007, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2007, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2006 (“2006 Form 10-K”), including the “Risk Factors” section and the consolidated financial statements and notes included therein.

OVERVIEW

     We are a leading provider of test systems for IP-based infrastructure and services that allow our customers to test and measure the performance, functionality, service quality and conformance of Internet Protocol (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, identifying problems, assessing performance, ensuring functionality and interoperability, and verifying conformance to industry specifications. We offer hardware platforms with interchangeable traffic generation interfaces, utilizing a common set of applications and Application Programming Interfaces (APIs) that allow our customers to create integrated, easy-to-use automated test environments. The networks that our systems analyze primarily include Ethernet networks operating at speeds of up to 10 gigabits per second, which carry data traffic over optical fiber or electrical cable. 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, internet, 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 three years ended September 30, 2007, 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 in the core and at the edge of the internet and in enterprise applications, where demand has increased or remained stable during the three years ended September 30, 2007. Looking forward, we expect demand for our Ethernet interface cards to increase modestly and expect that the sale of our Ethernet interface cards will continue to represent the majority of our product revenue. Over the past three years, shipments of our software products have increased as a 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, Cisco Systems, accounted for approximately $11.3 million or 25.6% and $33.0 million or 25.8% of our total revenues for the three and nine months ended September 30, 2007, respectively, and $13.0 million or 23.5% and $36.2 million or 27.3% of our total revenues for the three and nine months ended September 30, 2006, respectively. 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 wider variety and increasing number of customers. To the extent that we develop a broader and more diverse customer base, our reliance on any one customer or customer type should diminish. From a geographic perspective, we generate a majority of our revenues from product shipments to customer locations within the United States. We generated revenues from product shipments to international locations of $13.2 million or 30.0% and $40.8 million or 31.9% of our total revenues for the three and nine months ended September 30, 2007, respectively, and $15.0 million or 27.2% and $40.6 million or 30.6% of our total revenues for the three and nine months ended September 30, 2006, respectively. We intend to continue increasing our sales

12

efforts internationally with specific focus on Europe and in the Asia Pacific region. Looking forward, we continue to expect the majority of our revenues to be generated within the United States for the foreseeable future.

     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 (i.e., transfer of title (as applicable) 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 post contract customer support (“PCS”). Many of our products, such as our software and chassis products, typically include 12 months of free PCS and are not sold separately. 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 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.

     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 provide implied PCS outside of the contractual PCS period, we allocate and defer revenue for these implied PCS obligations and recognize this revenue ratably over the implied PCS periods as described above. For the three months ended September 30, 2007 and 2006, services revenues related to our implied PCS obligations approximated $871,000 and $1.6 million, respectively. For the nine months ended September 30, 2007 and 2006, services revenues related to our implied PCS obligations approximated $2.4 million and $6.7 million, respectively. For the three months ended September 30, 2007 and 2006, $0 and approximately $15.5 million, respectively, of deferred revenue relating to implied PCS was reversed and recognized as product revenue as a result of the license management of certain products and our determination

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not to provide PCS after the expiration of the contractual PCS period. For the nine months ended September 30, 2007 and 2006, the reversal of implied PCS deferred revenue was $0 and approximately $18.8 million, respectively. Future reversals of implied PCS deferred revenue are not expected to be significant over the near term as a result of the future license management of additional products and our determination not to provide PCS to certain customers 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 share-based award 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 awards which meets the requirements of SFAS 123R. The determination of the fair value for accounting purposes 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 share-based awards. Stock-based compensation expense recognized in our consolidated financial statements is based on awards that are ultimately expected to vest. The amount of stock-based compensation expense is 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 estimated and actual forfeitures differ from these initial 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.

     For the three and nine months ended September 30, 2007, stock-based compensation expense was $3.8 million and $9.7 million, respectively. Stock-based compensation for the three and nine months ended September 30, 2006 was $4.9 million and $14.3 million, respectively. Our stock-based compensation expense for the three and nine months ended September 30, 2007 decreased from the comparable periods in the prior year due in part to (i) an increase in estimated and actual forfeitures and (ii) a decrease in employee stock purchase plan participation. The aggregate balance of gross unearned stock-based compensation to be expensed in the remainder of 2007 and through 2011 related to unvested share-based awards as of September 30, 2007 was approximately $20.3 million. To the extent that we grant additional share-based awards, future expense may increase by the additional unearned compensation resulting from those grants. We anticipate that we will continue to grant additional share-based awards in the future as part of our long-term incentive compensation programs. The impact of future grants cannot be estimated at this time because it will depend on a number of factors, including the amount of share-based awards granted and the then current fair values of such awards for accounting purposes.

     Cost of Revenues. Our cost of revenues related to the sale of our hardware and software products includes materials, payments to third party contract manufacturers, royalties, and salaries and other expenses related to our manufacturing, operations, technical support and professional service personnel. We outsource the majority of our manufacturing operations, and we conduct supply chain management, quality assurance, documentation control, shipping and some final assembly 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, professional services and the warranty cost of hardware to be replaced or repaired during the warranty coverage period. Cost of revenues also includes the amortization of purchased technology in connection with our acquisitions of certain product lines and technologies.

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     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 customers and sales channels through which our products are sold;

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

• production volume.

     In the near term, we anticipate that our cost of revenues as a percentage of total revenues may increase due to lower sales prices principally 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, while we expect to continue to meet our product development objectives and our changing customer requirements, we expect total operating expenses, excluding stock-based compensation expenses discussed above, to remain relatively constant or decrease as a percentage of total revenues as we seek to leverage our existing sales force, development team and operating infrastructure.

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

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

     General and administrative expenses consist primarily of salaries and related expenses for executive, finance, legal, 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. See Note 4 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

     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.Income tax is determined based on the amount of earnings and enacted federal, state and foreign tax rates, adjusted for allowable credits and deductions and for the effects of equity compensation plans.

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RESULTS OF OPERATIONS

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues:
Products		84.6	%		90.0	%		85.2	%		86.1	%
Services		15.4			10.0			14.8			13.9
Total revenues		100.0			100.0			100.0			100.0
Costs and operating expenses:(1)
Cost of revenues — products		19.4			13.9			19.4			16.4
Cost of revenues — amortization of purchased technology		2.8			2.3			3.1			2.6
Cost of revenues — services		2.0			1.1			2.3			1.3
Research and development		28.9			20.2			27.7			24.6
Sales and marketing		31.6			27.8			33.1			34.0
General and administrative		13.9			10.5			14.4			12.5
Amortization of intangible assets		1.0			0.8			1.2			1.0
Impairment of purchased technology and intangible assets		—			—			2.6			—
Total costs and operating expenses		99.6			76.6			103.8			92.4
Income (loss) from operations		0.4			23.4			(3.8	)		7.6
Interest and other income, net		6.4			4.4			6.6			5.1
Income before income taxes		6.8			27.8			2.8			12.7
Income tax expense		2.4			13.2			0.8			5.9
Net income		4.4	%		14.6	%		2.0	%		6.8	%

⁽¹⁾ Stock-based compensation included in:

Cost of revenues — products	0.4	%	0.3	%	0.3	%	0.3	%
Cost of revenues — services	0.1		0.1		0.1		0.1
Research and development	3.6		3.1		3.0		3.9
Sales and marketing	2.6		3.8		2.7		4.6
General and administrative	2.0		1.6		1.4		1.8

Comparison of Three and Nine Months Ended September 30, 2007 and 2006

     Revenues.In the third quarter of 2007, total revenues decreased 20.3% to $44.0 million from the $55.2 million recorded in the third quarter of 2006. This overall decrease primarily relates to the $12.4 million decrease in product revenues in the third quarter of 2007 over the same period in 2006. This decrease in product revenues was primarily due to the $15.5 million reversal of deferred revenue related to the cessation of implied PCS obligations recorded in the third quarter of 2006 as compared to no reversal in the third quarter of 2007. This decrease was partially offset by a $2.5 million increase in shipments of our Ethernet interface cards and software products, such as IxNetwork, IxAutomate and IxLoad, in the third quarter of 2007 over the third quarter of 2006. In the third quarter of 2007, revenues from services increased 22.7% to $6.8 million from the $5.5 million recorded in the third quarter of 2006 due in part to an increase in the ratable recognition of revenue related to extended warranty and PCS contracts.

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     In the first nine months of 2007, total revenues decreased 3.8% to $127.7 million from $132.8 million recorded in the same period of 2006. This overall decrease primarily relates to a $5.5 million decrease in product revenues in the first nine months of 2007 over the same period in 2006. This decrease in product revenues was primarily due to the $18.8 million reversal of deferred revenue related to the cessation of implied PCS obligations recorded in the first nine months of 2006 as compared to no reversal in the first nine months of 2007. This decrease was partially offset by a $7.7 million lower revenue deferral for implied PCS in the first nine months of 2007 compared to the same period in 2006 and by a $5.4 million increase in shipments of our Ethernet interface cards and software products, such as IxNetwork, IxLoad and IxAutomate, in the first nine months of 2007 over the same period in 2006. In the first nine months of 2007, revenues from services increased 2.6% to $18.9 million from the $18.4 million recorded in the same period of 2006.

     Revenues from Cisco Systems, our largest account, were $11.3 million, representing 25.6% of our total revenues for the third quarter of 2007, compared to $13.0 million or 23.5% of our total revenues for the third quarter of 2006. Revenues from Cisco Systems were $33.0 million, representing 25.8% of our total revenues for the first nine months of 2007, compared to $36.2 million or 27.3% of our total revenues for the same period in 2006.

     Cost of Revenues. As a percentage of total revenues, our total cost of revenues increased to 24.1% in the third quarter of 2007 from 17.3% in the third quarter of 2006. Excluding the reversals of implied PCS deferred revenue of $0 and $15.5 million from total revenues in the third quarters of 2007 and 2006, respectively, total cost of revenues as a percentage of total revenues remained flat at 24.1%. Our cost of product revenues increased 10.8% to $8.5 million in the third quarter of 2007 from $7.7 million in the same period of 2006 primarily due to increases in product shipments and manufacturing and operations cost. Amortization of purchased technology decreased to $1.2 million in the third quarter of 2007 from $1.3 million in the same period of 2006. For the three months ended September 30, 2007, our cost of services revenues increased to $865,000 from $629,000 in the same period of 2006 primarily due to costs associated with our professional services business and higher technical support costs.

     As a percentage of total revenues, our total cost of revenues, including the $1.5 million impairment charge related to purchased technology discussed below, increased to 26.0% in the first nine months of 2007 from 20.3% in the first nine months of 2006. Excluding the reversals of implied PCS deferred revenue of $0 and $18.8 million from total revenues in the first nine months of 2007 and 2006, respectively, total cost of revenues as a percentage of total revenues was 26.0% and 23.7%, respectively, in the two periods. This increase was primarily due to the impairment charge of $1.5 million related to purchased technology. Our cost of product revenues increased 13.7% to $24.8 million in the first nine months of 2007 from $21.8 million in the same period of 2006 primarily due to increases in product shipments and manufacturing and operations costs. Amortization of purchased technology increased to $4.0 million in the first nine months of 2007 from $3.4 million in the same period of 2006. This increase related to the higher amortization of intangible asset charges associated with the acquisitions of certain technologies in 2006 and in 2007. For the nine months ended September 30, 2007, our cost of services revenues increased to $2.9 million from $1.7 million in the same period of 2006 primarily due to costs associated with certain initiatives related to our professional services business and higher warranty costs.

     Research and Development Expenses.Research and development expenses for the third quarter of 2007 and 2006 were $12.8 million and $11.1 million, respectively. The increase in research and development expense in the third quarter of 2007 compared to the third quarter of 2006 was primarily due to higher compensation and related employee costs of approximately $1.0 million and an increase in depreciation expense of $274,000, and these increases were primarily due to the growth of our international product development operations in India and Romania.

     For the first nine months of 2007, research and development expenses increased 8.1% to $35.4 million from $32.7 million in the same period of 2006. This increase was primarily due to higher compensation and related employee costs of approximately $2.7 million and an increase in depreciation expense of $801,000 in the first nine months of 2007 as compared to the same period in 2006. These increases were primarily due to the growth of our international product development operations in India and Romania and were partially offset by a reduction in stock-based compensation expense of approximately $1.3 million in the first nine months of 2007 as compared to the same period in 2006.

     Sales and Marketing Expenses.In the third quarter of 2007, sales and marketing expenses decreased 9.0% to $13.9 million from the $15.3 million incurred in the same period of 2006. This decrease was primarily due to

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lower stock-based compensation expense of approximately $1.0 million and lower commission costs of $245,000 in the third quarter of 2007 as compared to the same period in 2006.

     For the first nine months of 2007, sales and marketing expenses decreased 6.4% to $42.3 million from $45.2 million in the same period of 2006. This decrease was primarily due to lower stock-based compensation expense of approximately $2.7 million in the first nine months of 2007 as compared to the same period in 2006.

     General and Administrative Expenses.In the third quarter of 2007, general and administrative expenses increased 4.9% to $6.1 million from the $5.8 million incurred in the third quarter of 2006. This increase was due in part to higher compensation and related employee costs of $434,000 and higher depreciation and facilities costs at our corporate headquarters location of $138,000 in the third quarter of 2007 as compared to the same period in 2006. These increases were partially offset by $361,000 in lower legal and accounting fees. The increases in compensation and related employee costs for the third quarter of 2007 as compared to the same period during 2006 were primarily due to the addition of personnel in our accounting and legal departments.

     For the first nine months of 2007, general and administrative expenses increased 10.9% to $18.4 million from $16.6 million in the same period of 2006. This increase was primarily related to higher compensation and related employee costs of $968,000 due to the addition of personnel in our accounting and legal departments and higher depreciation and facilities costs at our corporate headquarters location of $614,000 in the first nine months of 2007 as compared to the same period in 2006. We also completed during the first nine months of 2007 the restatement of certain of our previously filed financial statements as more fully described in our 2006 Form 10-K. The incremental costs across all functional areas resulting from the restatement were approximately $1.4 million and $0 during the first nine months of 2007 and 2006, respectively, and consisted primarily of accounting, legal and temporary assistance costs. The overall increase in general and administrative expenses in the first nine months of 2007 compared to the first nine months of 2006 was partially offset by a decrease in stock-based compensation expense of $525,000 and lower recruiting fees of $279,000.

     Amortization of Intangible Assets.In the third quarter of 2007, amortization of intangible assets was $430,000 as compared to $464,000 in the third quarter of 2006. In the first nine months of 2007, amortization of intangible assets increased to $1.6 million from the $1.3 million recorded in the first nine months of 2006. This increase in the first nine months of 2007 as compared to the same periods in 2006 was primarily the result of increases in intangible assets resulting from the acquisitions of certain technologies in June of 2006 and in 2007.

     Impairment of Purchased Technology and Intangible Assets.In the second quarter of 2007, we recognized impairment charges of $1.5 million attributable to purchased technology and $1.8 million attributable to certain intangible assets related to wireless LAN testing tools acquired as part of Communication Machinery Corporation in July 2005 and the acquisition of the mobile video test product line from Dilithium Networks in January 2006. Under SFAS 144, we determined that the future expected undiscounted cash flows were less than the carrying value of the affected identifiable intangible assets, which indicated that an impairment existed at June 30, 2007. To measure the impairment, we used the discounted cash flow approach to reduce the carrying value of the affected assets to fair value, which resulted in the $3.3 million impairment of the above noted purchased technology and other identifiable intangible assets. See Note 4 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

     Interest and Other Income, Net.Interest and other income, net increased to $2.8 million in the third quarter of 2007 from the $2.4 million recorded in the third quarter of 2006. Interest and other income, net increased to $8.4 million in the first nine months of 2007 from the $6.7 million recorded in the first nine months of 2006. These increases were primarily due to a larger cash and investment balance during the third quarter and first nine months of 2007 as compared to the same periods in 2006.

     Income Tax.Income tax expense decreased to $1.1 million, or an effective rate of 35.7%, for the third quarter of 2007 from $7.3 million, or an effective rate of 47.3%, for the third quarter of 2006. Income tax expense decreased to $1.0 million, or an effective rate of 28.7%, for the first nine months of 2007 from $7.8 million, or an effective rate of 46.4%, for the first nine months of 2006. The effective tax rates for the third quarter and first nine months of 2007 and 2006 were impacted by stock-based compensation 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 rates for the third quarter and first nine months of 2007 were lower than the applicable effective tax rates for the comparable periods in 2006 due in part to an increase in research and development tax

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credits in 2007 when compared to 2006. In addition, the lower overall effective tax rates for the third quarter and first nine months of 2007 as compared to the effective tax rates for the comparable periods in 2006 were due to increases in the 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 $34.4 million in the first nine months of 2007 and $22.7 million in the same period of 2006. Net cash generated from operations in the first nine months of 2007 and 2006 was provided primarily by net income of $2.6 million and $9.0 million, respectively, adjusted for non-cash items and changes in working capital. In the first nine months of 2007 and 2006, non-cash items included $14.2 million and $12.0 million, respectively, for depreciation and amortization of fixed and intangible assets, and non-cash stock-based compensation charges of $9.7 million and $14.3 million, respectively. The first nine months of 2007 also included the $3.3 million non-cash impairment charge related to the impairment of purchased technology and certain intangible assets discussed above. In the first nine months of 2007, working capital changes included a $5.9 million decrease in accounts receivable primarily due to the timing of shipments and improved collection efforts. In the first nine months of 2006, working capital changes included a $6.4 million increase in accounts receivable due to the timing of shipments to customers. The first nine months of 2006 also included a decrease in working capital of $11.3 million primarily due to the reversal of deferred revenue related to the cessation of implied PCS obligations during that period.

     Cash provided by investing activities was $75.1 million in the first nine months of 2007 as compared to a cash outflow of $9.0 million in the same period of 2006. In the first nine months of 2007, cash provided by investing activities principally consisted of $86.4 million related to the net proceeds from the maturities of marketable securities, partially offset by $8.3 million related to the purchase of property and equipment and $2.9 million related to payments made in connection with acquisitions of certain technologies. In the first nine months of 2006, cash used in investing activities consisted of $9.9 million for the purchase of property and equipment and $7.3 million related to the January 2006 acquisition of the mobile video and multimedia test business of Dilithium Networks and the June 2006 acquisition of certain technology from Bell Canada. These decreases in the first nine months of 2006 were partially offset by $8.3 million in net proceeds related to the maturities of marketable securities.

     Financing activities provided $4.0 million in the first nine months of 2007 and $4.7 million in the same period of 2006. The net cash provided by financing activities during the first nine months of 2007 was primarily due to the proceeds received of $5.1 million as a result of stock option and warrant exercises, offset by the repurchase of common stock for an aggregate price of $1.3 million. The net cash provided by financing activities during the first nine months of 2006 was primarily due to the proceeds received as a result of stock option exercises.

     During the third quarter of 2007, we entered into a new agreement to lease our corporate headquarters located in Calabasas, California, after our existing lease expires. The new lease has a five-year term commencing on June 1, 2008 with an option to extend the term of the lease for an additional five-year period. The following table sets forth the future minimum commitments under the new renewal (in thousands):

			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
Operating lease	$	13,721	$	862	$	5,299	$	5,621	$	1,939

     As of December 31, 2006, we had future commitments of $3.4 million remaining under the terms of our current corporate headquarters lease.

     As of September 30, 2007, we had net unrecognized tax benefits of approximately $4.2 million, which may be payable by us in the future. 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

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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.

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 2006 Form 10-K and in our other filings with the Commission.

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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 September 30, 2007, 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, development and service operations outside of the United States, we do have transactions that are denominated in foreign currencies, primarily the Japanese Yen, Romanian Lei, Indian Rupee, Chinese Yuan 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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     As required by Rule 13a-15(b) under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness, as of the end of the period covered by this report (i.e., as of September 30, 2007), 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. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of such period, were adequate and effective 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 Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

     To address the material weakness in our internal control over financial reporting that existed as of December 31, 2006 as more fully described in Part II, Item 9A of our 2006 Form 10-K and in light of the Company’s 2007 restatement of certain previously filed financial statements as described in the 2006 Form 10-K, during the quarter ended September 30, 2007, we took the following step that has materially affected, or is reasonably likely to materially affect, our internal control over financing reporting, as described below:

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•  Communication among Functional Groups within the Company –During the third quarter of 2007, we created a cross functional group within the Company to formalize and facilitate regular communications among the various functional departments within the Company, including finance, sales, customer support, product management and order management. This cross functional group meets regularly to discuss field-level and other practices that may affect the Company’s accounting and financial reporting, including issues that may impact revenue recognition.

Inherent Limitations on Effectiveness of Controls

     Our management, including our Chief Executive Officer and our Chief Financial Officer, 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.

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PART II. OTHER INFORMATION

ITEM 1A. Risk Factors

     Information regarding risk factors appears in Part I, “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2006 and in certain of our other filings with the Securities and Exchange Commission. There have been no material changes to our risk factors previously disclosed in the 2006 Form 10-K.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

     On August 15, 2007, we announced a stock buyback program (the “Program”) to repurchase up to $50.0 million of our common stock. During the three months ended September 30, 2007, we repurchased 135,385 shares under the stock buyback program. As of September 30, 2007, approximately $48.8 million remains available for future repurchase. The Program expires on August 13, 2008, provided that we may earlier terminate the Program at any time.

     The following table summarizes our stock repurchase activity under the Program for the three months ended September 30, 2007:

					Total Number of		Approximate Dollar
					Shares Purchased		Value of Shares
					as Part of Publicly		that may
			Average Price		Announced		yet be Purchased
	Total Number of		Paid		Plans or		under the Plans or
Period	Shares Purchased		Per Share		Programs		Programs
July 1 – July 31		—	$	—		—	$	—
August 1 – August 31		—		—		—		50,000,000
September 1 – September 30		135,385		9.21		135,385		48,753,424
		135,385	$	9.21		135,385	$	48,753,424

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 Exchange Act. Our directors, officers and employees may from time to time establish such stock trading plans. We do not undertake any obligation to disclose, or to update or revise any disclosure regarding, any such plans and specifically do not undertake to disclose the adoption, amendment, termination or expiration of any such plans.

ITEM 6. Exhibits

10.1	2007 Executive Officer Bonus Plan(1)
10.2	Employment offer letter agreement dated as of August 8, 2007 between Ixia and Atul Bhatnagar(2)
10.3	Office Lease dated as of September 14, 2007 between MS LPC Malibu Property Holdings, LLC and Ixia(3)

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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 Registrant’s Current Report on Form 8-K (File No. 000-31523) filed with the Commission on July 26, 2007.
(2)	Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-31523) filed with the Commission on September 4, 2007.
(3)	Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-31523) filed with the Commission on September 25, 2007.

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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:November 7, 2007	By:	/s/ Errol Ginsberg
		Errol Ginsberg
		Chief Executive Officer
Date:November 7, 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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