Ixia (XXIA) 10-Q 2001 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2001

OR

[   ] 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.

Yes [X]    No [     ]

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

Common Stock	55,090,899
(Class of Common Stock)	(Outstanding at July 31, 2001)

TABLE OF CONTENTS

		Consolidated Balance Sheets
		Consolidated Statements of Income
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 4. Submission of Matters to a Vote of Security Holders
	ITEM 5. Other Information
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES

IXIA

TABLE OF CONTENTS

			Page Number
PART I.  FINANCIAL INFORMATION
	Item 1. Financial Statements (unaudited)
		Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000		3
		Consolidated Statements of Income for the three and six months ended June 30, 2001 and 2000		4
		Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000		5
		Notes to Consolidated Financial Statements		6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
	Item 3. Quantitative and Qualitative Disclosures about Market Risk			14
PART II.  OTHER INFORMATION
	Item 1. Legal Proceedings			14
	Item 4. Submission of Matters to a Vote of Security Holders			14
	Item 5. Other Information			15
	Item 6. Exhibits and Reports on Form 8-K			15
SIGNATURES				16

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IXIA
Consolidated Balance Sheets
(in thousands)

			June 30,			December 31,
			2001			2000
			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	106,206		$	96,066
	Accounts receivable, net of allowance for doubtful accounts of $503 and $260 as of June 30, 2001 and December 31, 2000, respectively			7,236			11,874
	Inventories			5,680			5,589
	Income taxes receivable			1,732			—
	Prepaid expenses and other current assets			3,844			4,127
		Total current assets		124,698			117,656
Property and equipment, net				6,036			3,561
Other assets, net				447			465
		Total assets	$	131,181		$	121,682
Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable		$	1,339		$	4,641
	Accrued expenses			3,289			5,492
	Deferred revenues			1,034			1,469
	Income taxes payable			—			2,029
		Total liabilities		5,662			13,631
Shareholders’ equity:
	Common stock, no par value; 200,000 shares authorized, 54,901 and 53,883 shares issued and outstanding as of June 30, 2001 and December 31, 2000, respectively			76,717			75,454
	Additional paid-in capital			45,787			44,007
	Deferred stock-based compensation			(14,576	)		(23,941	)
	Notes receivable from shareholders			—			(262	)
	Retained earnings			17,591			12,793
		Total shareholders’ equity		125,519			108,051
		Total liabilities and shareholders’ equity	$	131,181		$	121,682

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

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

				Three months ended					Six months ended
				June 30,					June 30,
				2001			2000		2001		2000
Net revenues				$	15,146		$	17,075	$	43,969	$	28,268
Cost of revenues(1)					3,371			3,485		9,281		5,626
		Gross profit			11,775			13,590		34,688		22,642
Operating expenses(1):
	Research and development				4,807			3,271		9,905		5,341
	Sales and marketing				5,004			3,955		10,872		6,143
	General and administrative				2,370			2,271		5,009		3,615
			Total operating expenses		12,181			9,497		25,786		15,099
		Income (loss) from operations			(406	)		4,093		8,902		7,543
Interest income, net					1,065			124		2,345		221
		Income before income taxes			659			4,217		11,247		7,764
Income tax expense					593			3,277		6,449		5,477
		Net income		$	66		$	940	$	4,798	$	2,287
Earnings per share:
	Basic			$	0.00		$	0.02	$	0.09	$	0.05
	Diluted			$	0.00		$	0.02	$	0.08	$	0.05
Weighted average number of common and common equivalents shares outstanding:
	Basic				54,317			45,564		53,931		45,236
	Diluted				61,537			50,903		62,098		49,892
(1) Stock-based compensation included in:
		Cost of revenues		$	152		$	255	$	414	$	386
		Research and development			1,605			1,610		3,655		2,597
		Sales and marketing			942			1,214		2,047		1,771
		General and administrative			787			1,190		1,601		1,882
				$	3,486		$	4,269	$	7,717	$	6,636

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

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IXIA
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

					Six months ended
					June 30,
					2001			2000
Cash flows from operating activities:
	Net income				$	4,798		$	2,287
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation				1,109			430
		Allowance for doubtful accounts				243			129
		Stock-based compensation				7,717			6,636
		Interest receivable from shareholders				(8	)		(13	)
		Deferred income tax benefit				—			(914	)
		Changes in operating assets and liabilities:
			Accounts receivable			4,395			(4,291	)
			Inventories			(91	)		(2,310	)
			Income taxes receivable			(1,732	)		—
			Prepaid expenses and other current assets			283			(312	)
			Other assets			18			(177	)
			Accounts payable			(3,302	)		2,145
			Accrued expenses			(2,203	)		1,026
			Deferred revenue			(435	)		90
			Income taxes payable			1,399			(3,001	)
				Net cash provided by operating activities		12,191			1,725
Cash used in investing activities:
	Purchases of property and equipment					(3,584	)		(1,633	)
				Cash used in investing activities		(3,584	)		(1,633	)
Cash flows from financing activities:
	Proceeds from exercise of stock options					1,263			127
	Proceeds from related-party notes receivable					270			—
				Net cash provided by financing activities		1,533			127
				Net increase in cash and cash equivalents		10,140			219
Cash and cash equivalents at beginning of period						96,066			8,733
Cash and cash equivalents at end of period					$	106,206		$	8,952

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

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IXIA

Notes to Consolidated Financial Statements

June 30, 2001
(unaudited)

1.  Business

     Ixia (the “Company”) was incorporated on May 27, 1997 as a California corporation. The Company designs and markets high-speed, multi-port network performance analysis systems that generate and analyze data traffic over optical and electrical networks.

2.  Basis of Presentation

     The accompanying consolidated financial statements as of June 30, 2001 and for the three and six months ended June 30, 2001 and 2000, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the Company’s 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 current year.

     These 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 consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

     Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 presentation.

3.  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 six months ended June 30, 2001 and 2000 (in thousands, except per share data):

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IXIA

Notes to Consolidated Financial Statements

			Three months ended						Six months ended
			June 30,						June 30,
			2001			2000			2001			2000
Basic presentation
Numerator:
	Net income		$	66		$	940		$	4,798		$	2,287
Denominator:
	Weighted average common shares			54,565			46,497			54,259			46,169
	Adjustment for common shares subject to repurchase			(248	)		(933	)		(328	)		(933	)
Denominator for basic calculation				54,317			45,564			53,931			45,236
Basic earnings per share			$	0.00		$	0.02		$	0.09		$	0.05
Diluted presentation
Denominator:
	Shares used above			54,317			45,564			53,931			45,236
	Weighted average effect of dilutive securities:
		Stock options and warrants		6,972			4,406			7,839			3,723
		Common shares subject to repurchase		248			933			328			933
Denominator for diluted calculation				61,537			50,903			62,098			49,892
Diluted earnings per share			$	0.00		$	0.02		$	0.08		$	0.05

4.  Inventories

     Inventories consist of the following (in thousands):

	June 30,		December 31,
	2001		2000
Raw materials	$	1,210	$	2,612
Work in process		1,889		2,039
Finished goods		2,581		938
	$	5,680	$	5,589

5.  Related Party Transactions

     The Company recorded $118,000 and $315,000 of net revenues to related parties for the three months ended June 30, 2001 and 2000, respectively, and $474,000 and $687,000 of net revenues to related parties for the six months ended June 30, 2001 and 2000, respectively. Such sales in the three and six months ended June 30, 2000 consisted of sales (i) to a company affiliated with and controlled by a director/shareholder of the Company and (ii) to the subsidiary of a company in which three directors/shareholders of the Company are also directors. Such sales in the three and six months ended June 30, 2001 consisted solely of sales to such subsidiary. Related party accounts receivable as of June 30, 2001 and December 31, 2000 were $90,000 and $66,000, respectively.

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IXIA

Notes to Consolidated Financial Statements

6.  Concentrations

International Revenues:

     Net revenues from international product shipments were $2.3 million and $2.2 million for the three months ended June 30, 2001 and 2000, respectively, and $6.5 million and $3.8 million for the six months ended June 30, 2001 and 2000, respectively.

Credit Risk:

     Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company maintains its cash and cash equivalents with reputable financial institutions, and at times, cash balances may be in excess of the FDIC insurance limits. The Company extends differing levels of credit to customers, does not require collateral deposits and maintains reserves for potential credit losses based upon the expected collectibility of accounts receivable. Credit losses to date have been within management’s expectations and have not been significant.

     For the three and six months periods ended June 30, 2001 and 2000, only one customer comprises more than 10% of net revenues as follows (in thousands, except percentages):

	Three months ended						Six months ended
	June 30,						June 30,
	2001			2000			2001			2000
Amount of net revenues	$	2,123		$	7,429		$	10,143		$	9,612
As a percentage of total net revenues		14	%		44	%		23	%		34	%

     As of June 30, 2001 and December 31, 2000, the Company had receivable balances from the customer approximating 13.2% and 30.6%, respectively, of total accounts receivable.

7.  Recent Accounting Pronouncements

     In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.” SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements.

     In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company does not believe that the adoption of SFAS 142 will have a significant impact on its financial statements.

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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 six months ended June 30, 2001, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2001, or of any other future period. The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

OVERVIEW

     We develop, market and sell high-speed, multi-port network performance analysis systems for advanced optical communications equipment and networks, as well as electrical communications equipment and networks. Our products address a broad range of network equipment and systems that are used throughout the Internet and local, metropolitan and wide area networks. Our products allow customers to generate network and Internet protocol traffic and analyze the performance, accuracy and reliability of equipment and systems that they either manufacture for sale to others or purchase for use in their own networks. Our customers include manufacturers of network equipment, Internet and network service providers, communications chip manufacturers and network users.

     Our product offerings include a variety of interface cards, chassis that hold the interface cards and related software products. Our interface cards can generate traffic over a variety of optical and electrical interfaces such as Packet Over SONET and Gigabit Ethernet. The following table sets forth, for the periods indicated, our net revenues by principal product category in dollars and as a percentage of total net revenues:

	Three months ended								Six months ended
	June 30,								June 30,
Products	2001				2000				2001				2000
	(in thousands, except percentages)
Optical interface cards	$	9,452	62.4	%	$	11,396	66.7	%	$	27,733	63.1	%	$	17,134	60.6	%
Electrical interface cards		3,517	23.2			4,196	24.6			10,213	23.2			8,268	29.3
Chassis, software and other products		2,177	14.4			1,483	8.7			6,023	13.7			2,866	10.1
Total	$	15,146	100.0	%	$	17,075	100.0	%	$	43,969	100.0	%	$	28,268	100.0	%

     Sales to our five largest customers collectively accounted for approximately $5.1 million or 33.8% of our net revenues for the three months ended June 30, 2001 and $10.1 million or 59.1% of our net revenues for the three months ended June 30, 2000. Sales to our five largest customers collectively accounted for approximately $15.7 million or 35.8% of our net revenues for the six months ended June 30, 2001 and $15.0 million or 53.1% of our net revenues for the six months ended June 30, 2000. To date, we have sold our systems primarily to network equipment manufacturers. While we expect that we will continue to have some customer concentration for the foreseeable future, we continue to sell our systems to a wide variety of customers. Through June 30, 2001, we had shipped our systems to over 320 customers. To the extent we develop a broader and more diverse customer base, we anticipate that our reliance on any one customer will diminish.

     Net revenues. Our revenues consist primarily of product sales. The hardware and software components of our products are sold as an integrated system. The software component of our products does not require significant modification or customization, and our sales do not involve any significant future obligations or customer acceptance terms. Accordingly, product revenue from product sales is recognized upon shipment. We warrant the hardware and software components of our products for one year after sale. At the time of sale we defer that portion

9

of our revenues that relates to our post-contract support and recognize it ratably over the 12-month service period. Revenues from maintenance contracts are deferred and recognized ratably over the term of the contracts.

     Cost of Revenues.Our cost of revenues consists of materials, payments to third party manufacturers, salaries and related expenses for manufacturing personnel and the warranty cost of hardware to be replaced during the one-year warranty period. 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. Accordingly, a significant portion of our cost of revenues consists of payments to our contract manufacturers. In addition, cost of revenues includes a non-cash component related to the amortization of deferred stock-based compensation allocated to manufacturing personnel.

     Gross Margins.Excluding the effects of stock-based compensation, the gross margins of our various interface cards have generally been consistent and have exceeded the gross margins of our chassis. In general, our gross margins are primarily affected by the following factors:

• the mix of our products sold;

• production volume;

• new product introductions by us and by our competitors;

• changes in our pricing policies and those of our competitors;

• demand for our products;

• the mix of sales channels through which our products are sold; and

• the pricing we are able to obtain from our component suppliers and contract manufacturers.

     Operating Expenses.We generally recognize our operating expenses as we incur them in three general operational categories: research and development, sales and marketing and general and administrative. Our operating expenses also include a non-cash component related to the amortization of deferred stock-based compensation allocated to research and development, sales and marketing and general and administrative personnel.

     Research and development expenses consist primarily of salaries and related personnel and consulting costs related to the design, development, testing and enhancements of our systems. We expense our research and development costs as they are incurred. We also capitalize and depreciate over a two-year period some costs of our systems used for internal purposes. We expect research and development expenses to increase as we seek to attain our strategic product development objectives and to meet changing customer requirements and technological advances.

     Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in sales and marketing and customer support functions, as well as costs associated with promotional and other marketing activities. We expect sales and marketing expenses to increase as we hire additional sales and marketing personnel, expand our marketing programs and establish new sales offices.

     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, including rent. We expect general and administrative expenses to increase as we add personnel and incur additional costs related to the growth of our business.

     In connection with the grant of stock options and warrants and the sale of restricted stock, we recorded deferred stock-based compensation of $8.9 million in the three months ended June 30, 2000 and $26.0 million in the

10

six months ended June 30, 2000. This amount represents the difference between the deemed fair value of our common stock for accounting purposes and (1) the exercise price of the options and warrants at the date of grant or (2) the purchase price of the restricted stock. Deferred stock-based compensation is presented as a reduction of shareholders’ equity, with amortization recorded over the vesting period, which is typically four years. In the three months ended June 30, 2001, deferred stock-based compensation increased from March 31, 2001 by $149,000 due to changes in the market value of the Company’s common stock that affected certain equity instruments which receive variable accounting treatment offset by the forfeiture of stock options. In the six months ended June 30, 2001, deferred stock-based compensation decreased from December 31, 2000 by $1.3 million due to the forfeiture of stock options and changes in the market value of the Company’s common stock that affected certain equity instruments which receive variable accounting treatment. We amortized $3.5 million of stock-based compensation in the three months ended June 30, 2001 and $4.3 million in the three months ended June 30, 2000. We amortized $7.7 million of stock-based compensation in the six months ended June 30, 2001 and $6.6 million in the six months ended June 30, 2000. Based on the unvested options, warrants and stock subject to repurchase as of June 30, 2001, we expect to record additional stock-based compensation expense relating to deferred stock-based compensation approximately as follows: $4.9 million in the remaining six months of 2001, $6.3 million in 2002, $2.8 million in 2003 and $535,000 in 2004. The amount of deferred stock-based compensation expense to be recorded in future periods could decrease if options, warrants and stock subject to repurchase for which unearned compensation has been recorded are forfeited or repurchased. Changes in the market value of the Company’s common stock could also affect future stock-based compensation expense related to equity instruments which receive variable accounting treatment.

RESULTS OF OPERATIONS

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

				Three months ended						Six months ended
				June 30,						June 30,
				2001			2000			2001			2000
Net revenues					100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues(1)					22.3			20.4			21.1			19.9
		Gross profit			77.7			79.6			78.9			80.1
Operating expenses(1):
	Research and development				31.7			19.1			22.5			18.9
	Sales and marketing				33.0			23.2			24.7			21.7
	General and administrative				15.7			13.3			11.4			12.8
			Total operating expenses		80.4			55.6			58.6			53.4
		Income from operations			(2.7	)		24.0			20.3			26.7
Interest income, net					7.0			0.7			5.3			0.8
		Income before income taxes			4.3			24.7			25.6			27.5
Income tax expense					3.9			19.2			14.7			19.4
		Net income			0.4	%		5.5	%		10.9	%		8.1	%
(1) Stock-based compensation included in:
		Cost of revenues			1.0	%		1.5	%		1.0	%		1.4	%
		Research and development			10.6			9.4			8.3			9.2
		Sales and marketing			6.2			7.1			4.7			6.3
		General and administrative			5.2			7.0			3.6			6.6
					23.0	%		25.0	%		17.6	%		23.5	%

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Comparison of Three and Six Months Ended June 30, 2001 and June 30, 2000

     Net Revenues.In the second quarter of 2001, net revenues decreased 11.3% to $15.1 million from the $17.1 million recorded in the second quarter of 2000. This decrease was primarily related to a broad reduction of customer orders across all product lines due to a slowdown in the economy and telecommunications spending. For the first six months of 2001, net revenues increased 55.5% to $44.0 million from the $28.3 million recorded in the first six months of 2000. This increase was primarily related to increased unit sales across our product lines, the introduction of new product lines and sales to new customers.

     Gross Profit.In the second quarter of 2001, gross profit decreased 13.4% to $11.8 million from the $13.6 million recorded in the second quarter of 2000. For the first six months of 2001, gross profit increased 53.2% to $34.7 million from the $22.6 million recorded in the first six months of 2000. In the second quarter of 2001, gross profit as a percentage of net revenues decreased to 77.7% from 79.6% for the second quarter of 2000. For the first six months of 2001, gross profit as a percentage of net revenues decreased to 78.9% from 80.1% for the first six months of 2000. This decrease was primarily a result of lower production volumes and product mix.

     Research and Development Expenses.In the second quarter of 2001, research and development expenses increased 47.0% to $4.8 million from the $3.3 million recorded in the second quarter of 2000. For the first six months of 2001, research and development expenses increased 85.5% to $9.9 million from the $5.3 million recorded in the first six months of 2000. These increases were a result of higher compensation and related benefit costs due to the addition of engineering personnel, increased costs associated with new product development and increased amortization of stock-based compensation related to the issuance of equity instruments prior to the Company’s initial public offering in the fourth quarter of 2000. Excluding stock-based compensation related to individuals engaged in research and development activities, research and development expenses increased to $3.2 million in the three months ended June 30, 2001 from $1.7 million in the three months ended June 30, 2000 and to $6.3 million in the six months ended June 30, 2001 from $2.7 million in the six months ended June 30, 2000.

     Sales and Marketing Expenses.In the second quarter of 2001, sales and marketing expenses increased 26.5% to $5.0 million from the $4.0 million recorded in the second quarter of 2000. For the first six months of 2001, sales and marketing expenses increased 77.0% to $10.9 million from the $6.1 million recorded in the first six months of 2000. These increases were primarily due to an increase in the number of direct sales and marketing personnel and increases in commissions, advertising and trade show expenses. Excluding stock-based compensation related to individuals engaged in sales and marketing activities, sales and marketing expenses increased to $4.1 million in the three months ended June 30, 2001 from $2.7 million in the three months ended June 30, 2000 and to $8.8 million in the six months ended June 30, 2001 from $4.4 million in the six months ended June 30, 2000.

     General and Administrative Expenses.In the second quarter of 2001, general and administrative expenses increased 4.4% to $2.4 million from the $2.3 million recorded in the second quarter of 2000. For the first six months of 2001, general and administrative expenses increased 38.6% to $5.0 million from the $3.6 million recorded in the first six months of 2000. These increases were related to higher facility rental costs, higher compensation expense resulting from increased personnel and increased expenses for professional services, primarily legal and accounting. Excluding stock-based compensation related to personnel engaged in general and administrative activities, general and administrative expenses increased to $1.6 million in the three months ended June 30, 2001 from $1.1 million in the three months ended June 30, 2000 and to $3.4 million in the six months ended June 30, 2001 from $1.7 million in the six months ended June 30, 2000.

     Interest Income, Net.Net interest income increased to $1.1 million for the three months ended June 30, 2001 from $124,000 for the three months ended June 30, 2000. Net interest income increased to $2.3 million for the six months ended June 30, 2001 from $221,000 for the six months ended June 30, 2000. These increases were the result of an increase in cash and cash equivalents. We have incurred minimal interest expense.

     Income Tax Expense.Income tax expense decreased to $593,000, or an effective rate of 90.0%, for the three months ended June 30, 2001 from $3.3 million, or an effective tax rate of 77.7%, for the three months ended

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June 30, 2000. Income tax expense increased to $6.4 million, or an effective rate of 57.3%, for the six months ended June 30, 2001 from $5.5 million, or an effective tax rate of 70.5%, for the six months ended June 30, 2000. The differences between the effective rates and the statutory rates were primarily due to the impact of non-deductible stock-based compensation charges, offset by research and development credits. Excluding the impact of stock-based compensation, the effective rates would have been 38.1% for the three months ended June 30, 2001 and 37.4% for the three months ended June 30, 2000. Excluding the impact of stock-based compensation, the effective rates would have been 39.1% for the six months ended June 30, 2001 and 36.8% for the six months ended June 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating activities was $12.2 million in the six months ended June 30, 2001 and $1.7 million in the six months ended June 30, 2000. Net cash generated from operations in the six months ended June 30, 2001 and 2000, was primarily provided by net income adjusted for non-cash expenses and offset by an increase in working capital requirements. Net cash used in operating activities in the six months ended June 30, 2000, was affected by a $4.6 million estimated income tax payment related to 1999 that was made in March 2000.

     Cash used in investing activities was $3.6 million in the six months ended June 30, 2001 and $1.6 million in the six months ended June 30, 2000. Cash used in investing activities consisted exclusively of capital expenditures related to the acquisition of property and equipment.

     Financing activities provided net cash of $1.5 million in the six months ended June 30, 2001 and consisted of proceeds from related party receivables and the exercise of stock options. For the six months ended June 30, 2001, financing activities provided net cash of $127,000 and consisted exclusively of proceeds from the exercise of stock options.

     We believe that our existing balances of cash and cash equivalents and cash flows expected to be generated from our operations will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time. Our capital requirements will depend on many factors, including the growth rate of our net revenues, our profitability, our capital expenditures, working capital requirements, the timing and extent of spending to support product development efforts and the expansion of our sales, marketing and technical support efforts.

     During the three months ended June 30, 2001, the Company received a $3.2 million income tax benefit related to employee incentive stock options. The Company received an income tax deduction to the extend that ordinary income was recognized by the optionee on incentive stock options disposed of within the earlier of (i) two years after the option grant date or (ii) one year after the exercise of the option. As a result of this income tax benefit, no estimated income tax payments were made in June of 2001.

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

     The 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 are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 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: the current economic slowdown in general and decreasing capital availability and investment in the telecommunications and data communications industries in particular, consistency of orders from significant customers, the timing of new product releases, our

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success in developing and producing new products, market acceptance of our products and competitive pressures including competition for limited source components. 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 Annual Report on Form 10-K for the year ended December 31, 2000.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

     The Company’s exposure to market risk for changes in interest rates relates primarily to our investment portfolio, which consists entirely of cash equivalents as of June 30, 2001. The primary objective of our investment activities is to maintain the safety of principal and preserve liquidity while maximizing yields without significantly increasing risk. This is accomplished by investing in marketable investment grade securities, and by limiting exposure to any one issue or issuer. We do not use derivative financial instruments in our investment portfolio and, due to the nature of our investments, we do not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio. As of June 30, 2001, all investments mature within 90 days and are carried at cost, which approximates fair market value.

Exchange Rate Sensitivity

     Currently all of our sales and the majority of our expenses are denominated in U.S. dollars and, as a result, we have not experienced significant foreign exchange gains and losses to date. While we have conducted some transactions in foreign currencies during the six months ended June 30, 2001 and expect to continue to do so, we do not anticipate that foreign exchange gains or losses will be significant. We have not engaged in foreign currency hedging to date, but we may do so in the future.

PART II.   OTHER INFORMATION

ITEM 1. Legal Proceedings

     On June 21, 2000, one of our competitors, Netcom Systems, a subsidiary of Spirent Communications, filed an action in the Los Angeles County Superior Court against Eran Karoly, our Vice President, Marketing and a former employee of Netcom Systems. In the action, Netcom Systems alleged principally that Mr. Karoly misappropriated trade secrets and wrongfully solicited employees of Netcom Systems. Netcom Systems sought, among other things, recovery of damages and an injunction preventing Mr. Karoly and any persons acting in concert with him from disclosing or using its alleged trade secrets, soliciting its employees and performing business development or marketing work for Ixia for a period of 24 months. We were not named as a defendant in the action but were mentioned in the pleadings as the current employer of Mr. Karoly and as the competitor for whose benefit the alleged wrongful conduct has occurred. In an effort to resolve their differences without further litigation, Mr. Karoly and Netcom Systems participated in a mediation on March 16, 2001 and agreed to enter into a settlement agreement. Netcom Systems and Mr. Karoly subsequently entered into a settlement agreement which did not require that either party make any payments to the other and placed no restrictions on Karoly’s ability to continue his employment as Ixia’s Vice President, Marketing. The lawsuit was dismissed with prejudice in June 2001.

ITEM 4. Submission of Matters to a Vote of Security Holders

(a) On May 17, 2001, the Company held its 2001 Annual Meeting of Shareholders (the “Annual Meeting”).

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(b) At the Annual Meeting, the following persons were elected as directors of the Company. The numbers of votes cast for each director, as well as the number of votes withheld, are listed opposite each director’s name.

Name of Director	Votes Cast for Director		Votes Withheld
Jean-Claude Asscher		44,034,612		18,557
Robert W. Bass		44,034,612		18,557
Errol Ginsberg		44,034,612		18,557
Howard Oringer		44,034,612		18,557
Jon F. Rager		44,034,612		18,557

(c)	At the Annual Meeting, the shareholders approved, with 42,095,221 votes cast in favor and 1,941,251 votes cast against, an amendment to the Company’s 1997 Stock Option Plan increasing the aggregate number of shares of Common Stock authorized for issuance thereunder by 2,000,000. There were 16,697 abstentions and no broker nonvotes with respect to this matter.
(d)	At the Annual Meeting, with 44,025,662 votes cast in favor, the shareholders ratified the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the year ending December 31, 2001. 11,385 votes were cast against such ratification, and there were 16,122 abstentions with respect to this matter.

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. Each of our President and Chief Executive Officer, Errol Ginsberg, and our Vice President, Worldwide Sales, Paul Mallinder, has informed us that he (or in the case of Mr. Ginsberg, his affiliated family trust) has adopted a Rule 10b5-1 stock trading plan and has made or will make periodic sales of our Common Stock under such plan. 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 and Reports on Form 8-K

(a) Exhibits

10.1 Amendment No. 5 dated March 22, 2001 to Ixia 1997 Stock Option Plan (1)

(b) Reports on Form 8-K.

     No reports on Form 8-K were filed by the registrant during the three months ended June 30, 2001.

(1) Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (Registration No.333-666382) filed with the Commission on July 31, 2001.

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SIGNATURES

     Pursuant to the requirements of the Securities and 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:	August 3, 2001	By:	/s/    Errol Ginsberg
			Errol Ginsberg President and Chief Executive Officer
Date:	August 3, 2001	By:	/s/    Thomas B. Miller
			Thomas B. Miller Chief Financial Officer and Assistant Secretary

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