Ixia 10Q/A 2013 Q2 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q/A

Amendment No. 1

(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, 2013

[ ]	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 [ ] No [X]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ]	Accelerated filer [X]
Non-accelerated filer (Do not check if a smaller reporting company) [ ]	Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

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

Common Stock		75,927,530
(Class of Common Stock)		(Outstanding at July 30, 2013)

EXPLANATORY NOTE

As used in this Amendment No. 1 on Form 10-Q/A for the three and six months ended June 30, 2013 (the “Form 10-Q/A”), the terms “Company,” “our,” “us” or “we” refer to Ixia, a California corporation.

This Form 10-Q/A amends the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, as originally filed with the Securities and Exchange Commission (the “SEC”) on August 9, 2013 (the “Original Filing”). This Form 10-Q/A is being filed to restate our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2013 and to make related revisions to certain other disclosures in the Original Filing. The restatement of our financial statements in this Form 10-Q/A reflects the correction of certain identified errors primarily related to revenue that affected the timing of the Company’s recognition of revenue. The errors relate to (i) our inappropriate assessment of certain multiple-element arrangement sales transactions, (ii) an arrangement involving the extension of payment terms beyond our customary terms and (iii) the correction of stock-based compensation expense related to certain performance based equity awards. The restatement also includes the correction of errors related to the income tax effects of the above errors as well as the correction of certain other income tax items for the three and six months ended June 30, 2013. Further explanation regarding the restatement is set forth in Note 14 to the unaudited condensed consolidated financial statements included in this Form 10-Q/A.

The following sections in the Original Filing are revised in this Form 10-Q/A to reflect this restatement:

●	Part I - Item 1 – Financial Statements (Unaudited)
●	Part 1 - Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
●	Part I - Item 4 – Controls and Procedures
●	Part II - Item 1A – Risk Factors
●	Part II - Item 6 – Exhibits

Our principal executive officer and principal financial officer have also provided new certifications as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications are included in this Form 10-Q/A as Exhibits 31.1, 31.2 and 32.1.

For the convenience of the reader, this Form 10-Q/A sets forth the information in the Original Filing in its entirety, as such information is modified and superseded where necessary to reflect the restatement and related revisions. Except as provided above, this Amendment does not reflect events occurring after the filing of the Original Filing and does not amend or otherwise update any information in the Original Filing. Accordingly, this Form 10-Q/A should be read in conjunction with our filings with the SEC subsequent to the date on which we filed the Original Filing with the SEC (i.e., August 9, 2013).

IXIA

TABLE OF CONTENTS

			Page Number

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements (unaudited)

		Condensed Consolidated Balance Sheets as of June 30, 2013 (As Restated)and December 31, 2012	3

		Condensed Consolidated Statements of Operations for the threeand six months ended June 30, 2013 (As Restated) and 2012 (As Restated)	4

		Condensed Consolidated Statements of Comprehensive Incomefor the three and six months ended June 30, 2013 (As Restated) and 2012(As Restated)	5

		Condensed Consolidated Statements of Cash Flows for the sixmonths ended June 30, 2013 (As Restated) and 2012 (As Restated)	6

		Notes to Condensed Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of FinancialCondition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures about MarketRisk	37

	Item 4.	Controls and Procedures	38

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	43

	Item 1A.	Risk Factors	43

	Item 5.	Other Information	44

	Item 6.	Exhibits	44

SIGNATURES			45

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (unaudited)

IXIA

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

	June 30,		December 31,
	2013		2012
	(As Restated See Note 14)
Assets
Current assets:
Cash and cash equivalents	$	55,690	$	47,508
Short-term investments in marketable securities		178,042		126,851
Accounts receivable, net		91,378		103,523
Inventories		36,381		37,220
Prepaid expenses and other current assets		51,171		42,942
Total current assets		412,662		358,044

Investments in marketable securities		370		3,119
Property and equipment, net		32,741		28,763
Intangible assets, net		137,263		157,003
Goodwill		260,032		260,457
Other assets		13,952		11,863
Total assets	$	857,020	$	819,249


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	15,452	$	12,114
Accrued expenses and other		39,373		52,525
Deferred revenues		71,669		66,096
Total current liabilities		126,494		130,735

Deferred revenues		11,036		8,695
Other liabilities		37,613		32,321
Convertible senior notes		200,000		200,000
Total liabilities		375,143		371,751


Shareholders’ equity:
Common stock, without par value; 200,000 shares authorized at June 30, 2013 and December 31, 2012; 75,922 and 74,126 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively		172,293		158,933
Additional paid-in capital		181,235		168,980
Retained earnings		128,133		117,296
Accumulated other comprehensive income		216		2,289
Total shareholders’ equity		481,877		447,498

Total liabilities and shareholders’ equity	$	857,020	$	819,249

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

IXIA

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012
	(As Restated See Note 14)			(As Restated See Note 14)			(As Restated See Note 14)			(As Restated See Note 14)
Revenues:
Products	$	83,794		$	73,288		$	179,305		$	142,895
Services		28,210			17,414			54,158			34,465
Total revenues		112,004			90,702			233,463			177,360

Costs and operating expenses:⁽¹⁾
Cost of revenues – products⁽²⁾		21,088			14,220			42,475			29,002
Cost of revenues – services		3,311			2,730			6,336			4,860
Research and development		29,068			22,546			58,780			43,397
Sales and marketing		32,983			24,556			68,024			49,163
General and administrative		11,507			11,090			23,565			22,606
Amortization of intangible assets		10,055			5,358			20,193			9,403
Acquisition and other related		1,093			3,739			2,365			4,164
Restructuring		—			—			58			—
Total costs and operating expenses		109,105			84,239			221,796			162,595

Income from operations		2,899			6,463			11,667			14,765
Interest income and other, net		3,431			602			3,638			712
Interest expense		(1,943	)		(1,800	)		(3,886	)		(3,600	)
Income before income taxes		4,387			5,265			11,419			11,877
Income tax expense (benefit)		1,370			(20,431	)		582			(18,986	)
Net income	$	3,017		$	25,696		$	10,837		$	30,863

Earnings per share:
Basic	$	0.04		$	0.36		$	0.14		$	0.43
Diluted	$	0.04		$	0.32		$	0.14		$	0.40

Weighted average number of common and common equivalent shares outstanding:
Basic		75,667			71,579			75,194			71,079
Diluted		77,178			83,803			76,974			83,508


⁽¹⁾Stock-based compensation included in:
Cost of revenues - products	$	128	$	75	$	281	$	171
Cost of revenues - services		49		29		107		66
Research and development		1,578		945		4,026		2,224
Sales and marketing		1,628		911		3,643		1,934
General and administrative		1,159		1,809		3,364		3,475

⁽²⁾Cost of revenues – products excludes amortization of intangible assets, related to product lines and purchased technologies of $6.4 million and $12.9 million for the three and six months ended June 30, 2013, respectively, and $3.6 million and $6.3 million for the three and six months ended June 30, 2012, respectively, which is included in Amortization of intangible assets.

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

IXIA

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012
	(As Restated See Note 14)			(As Restated See Note 14)			(As Restated See Note 14)			(As Restated See Note 14)

Net income	$	3,017		$	25,696		$	10,837		$	30,863

Other comprehensive (loss) income, net of tax:
Net change in unrealized gains and losses on investments		(1,708	)		(625	)		(1,564	)		459
Cumulative translation adjustment		(186	)		132			(509	)		(165	)

Total other comprehensive (loss) income, net of tax		(1,894	)		(493	)		(2,073	)		294

Comprehensive income	$	1,123		$	25,203		$	8,764		$	31,157

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

IXIA

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six months ended
	June 30,
	2013			2012
	(As Restated See Note 14)			(As Restated See Note 14)
Cash flows from operating activities:
Net income	$	10,837		$	30,863
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		7,636			7,505
Amortization of intangible assets		20,193			9,403
Realized gain on sale of available-for-sale securities		(3,169	)		—
Stock-based compensation		11,421			7,870
Deferred income taxes		(786	)		(23,363	)
Tax benefit from stock option transactions		833			811
Excess tax benefits from stock-based compensation		(923	)		(798	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net		12,375			5,679
Inventories		839			(1,534	)
Prepaid expenses and other current assets		(8,685	)		1,495
Other assets		1,409			(170	)
Accounts payable		2,003			3,013
Accrued expenses and other		(14,415	)		1,125
Deferred revenues		7,914			5,097
Other liabilities		3,683			3

Net cash provided by operating activities		51,165			46,999

Cash flows from investing activities:
Purchases of property and equipment		(9,352	)		(8,322	)
Purchases of available-for-sale securities		(110,037	)		(110,552	)
Proceeds from available-for-sale securities		62,175			211,921
Purchases of other intangible assets		(453	)		(504	)
Proceeds (payments) in connection with acquisitions, net of cash acquired		401			(148,257	)

Net cash used in investing activities		(57,266	)		(55,714	)

Cash flows from financing activities:
Proceeds from exercise of stock options		13,360			10,584
Excess tax benefits from stock-based compensation		923			798

Net cash provided by financing activities		14,283			11,382

Net increase in cash and cash equivalents		8,182			2,667
Cash and cash equivalents at beginning of period		47,508			42,729
Cash and cash equivalents at end of period	$	55,690		$	45,396

Supplemental disclosure of non-cash investing activities:
Purchased and unpaid property and equipment		$	2,768			$	—

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

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business

Ixia was incorporated on May 27, 1997 as a California corporation. We are a leading provider of converged Internet Protocol (IP) network testand network visibility solutions. Equipment manufacturers, service providers, enterprises, and government agencies use our solutionsto design, verify, and monitor a broadrange of Ethernet, Wi-Fi, 3G and 4G/LTE equipment and networks. Our product solutions consist of our hardwareplatforms, such as our chassis, interface cards and appliances, software application tools, and services, including our warranty and maintenance offerings and professional services. We operated within one reportable business segment during the periods presented in the accompanying condensed consolidated financial statements.

2. Basis of Presentation and Recent Accounting Pronouncements

Basis of Presentation

The accompanying condensed consolidated financial statements as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012, 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, 2013 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 U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2012 has been derived from our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities Exchange Commission on April 4, 2013 (the “2012 Form 10-K”), but does not include all disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our 2012 Form 10-K.

Reclassifications

Certain reclassifications have been made to prior period consolidated financial statements to conform to the current presentation. Income taxes payable is now presented within Accrued expenses and other on our consolidated balance sheets and consolidated statements of cash flows.

Recent Accounting Pronouncements

In June 2011, theFASBissued disclosure guidance related to the presentation of the Statement of Comprehensive Income. This guidance eliminated the then current option to report other comprehensive income and its components in the statement of changes in equity. Under this guidance, we are required to present either a single continuous statement of comprehensive income or a consolidated statement of operations immediately followed by a statement of comprehensive income. Although this guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under the previous guidance. We adopted this guidance in the first quarter of 2012 on a retrospective basis. There was no impact to our consolidated financial results as the adoption of this guidance related only to changes in financial statement presentation. In February 2013, FASB issued finalized disclosure guidance related to the amounts reclassified from accumulated other comprehensive income. Under this guidance, we are required to show reclassifications from accumulated other comprehensive income either in a single note or parenthetically on the face of the statement of operations provided that all of the required information is presented in a single location with the effect of significant amounts reclassified by component and the statement of operations line items affected by the reclassification. The effective date for this disclosure guidance is for fiscal years beginning after December 15, 2012. We adopted this new guidance prospectively in the quarter ended March 31, 2013. The adoption of this new guidance did not have a material impact on our consolidated financial position, results of operations and cash flows.

In July 2013, the Financial Accounting Standards Board (“FASB”) issued changes to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. These changes require an entity to present an unrecognized tax benefit as a liability in the financial statements if (i) a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or (ii) the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, an unrecognized tax benefit is required to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Previously, there was diversity in practice as no explicit guidance existed. The effective date for this disclosure guidance is for fiscal years beginning after December 15, 2013 and is consistent with our current practices.

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

3. Acquisitions

Anue Systems, Inc.

On June 1, 2012, we completed our acquisition of all of the outstanding shares of capital stock and other equity interests of Anue Systems, Inc. (“Anue”). Anue provides solutions to monitor and test complex networks, including Anue’s Net Tool Optimizer solution that efficiently aggregates and filters network traffic to help optimize network monitoring tool usage. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to continue to leverage Anue’s sales channels and assembled workforce, including its experienced development team. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Anue’s net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.

In the second quarter of 2013, we finalized our purchase price allocation. The aggregate cash consideration paid totaled $152.4 million, and was funded from our existing cash and sale of investments.

Acquisition and other related costs, including integration activities, approximated $46,000 and $269,000 for the three and six months ended June 30, 2013, respectively, and $2.6 million and $3.0 million for the three and six months ended June 30, 2012, respectively. These acquisition and other related costs have been expensed as incurred and have been included within the Acquisition and other related line item on our condensed consolidated statements of operations.

The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Cash and cash equivalents	$	3,659
Accounts receivable		12,016
Inventories		4,380
Prepaid and other assets		2,980
Fixed assets		1,600
Identifiable intangible assets		74,700
Goodwill		91,008
Total assets acquired		190,343
Accounts payable, accrued expenses and other liabilities		(7,942	)
Deferred revenues		(6,997	)
Deferred tax liability, net		(22,964	)
Net assets acquired	$	152,440

During the second quarter of 2013, we updated the allocation of our purchase price to increase the value of our accounts receivable balance by $173,000, decrease accounts payable, accrued expenses and other liabilities by $172,000, and decrease our deferred tax liability, net by $22,000, resulting in a net decrease in goodwill of $367,000. As these changes were not material, we did not recast our prior period financial statements for such changes. The above table reflects these changes.

The identifiable intangible assets of $74.7 million consist of $45.0 million of acquired technology, $21.9 million of customer relationships, $4.0 million for the trade name, $2.1 million related to non-compete agreements and $1.7 million of other identifiable intangible assets. The fair values of the identifiable intangible assets have been estimated using the income approach, which includes the discounted cash flow and relief-from-royalty methods. These intangible assets will be amortized using a straight-line method over their expected useful lives ranging from six months to six years. The goodwill recorded in connection with this transaction is not deductible for U.S. income tax purposes.

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

BreakingPoint Systems, Inc.

On August 24, 2012, we completed our acquisition of all of the outstanding shares of capital stock of BreakingPoint Systems, Inc. (“BreakingPoint”). BreakingPoint is a leader in security testing, and its solutions provide global visibility into emerging threats and applications, along with advance insight into the resiliency of an organization’s information technology infrastructure under operationally relevant conditions and malicious attacks. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to continue to leverage BreakingPoint’ssales channels and assembled workforce, including its experienced product development and sales teams. These factors, among others, contributed to a purchase price in excess of the estimated fair value of BreakingPoint’s net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.

The aggregate cash consideration paid totaled $163.7 million and was funded from our existing cash and sale of investments.

Acquisition and other related costs, including integration activities, approximated $1.0 million and $2.1 million for the three and six months ended June 30, 2013, respectively. These acquisition and other related costs have been expensed as incurred, and have been included within the Acquisition and other related line item on our condensed consolidated statements of operations.

In connection with the acquisition, we may be obligated to pay up to $3.8 million to certain pre-acquisition employees of BreakingPoint over a weighted average period of less than two years provided they remain employees of Ixia. As of June 30, 2013, we have paid $1.7 million related to this obligation, of which $474,000 and $1.1 million have been included within the Acquisition and other related line item on our condensed consolidated statements of operations for the three and six months ended June 30, 2013, respectively. The remaining accrual was included as a component of Accrued expenses and other in our consolidated balance sheets.

The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Cash and cash equivalents	$	13,417
Accounts receivable		4,610
Inventories		3,156
Prepaid and other assets		796
Fixed assets		936
Identifiable intangible assets		65,600
Goodwill		102,594
Total assets acquired		191,109
Accounts payable, accrued expenses and other liabilities		(6,889	)
Deferred revenues		(6,387	)
Deferred tax liability, net		(14,146	)
Net assets acquired	$	163,687

During 2013, we updated the preliminary allocation of our purchase price to increase the value of our accounts receivable balance by $58,000, decrease the value of our deferred tax liability balance by $264,000 and decrease goodwill by $322,000. As these changes were not material, we did not recast our prior period financial statements for such changes. The above table reflects these changes.

The preliminary purchase price allocation is pending the completion of certain items, such as the final tax attributes that will be determined upon the filing of certain pre-acquisition tax returns.

The identifiable intangible assets of $65.6 million consist of $22.7 million of acquired technology, $20.6 million of customer relationships, $16.6 million of service agreements, $2.9 million for the trade name, $2.2 million related to non-compete agreements and $600,000 of other identifiable intangible assets. The fair values of the identifiable intangible assets have been estimated using the income approach, which includes the discounted cash flow and relief-from-royalty methods. These intangible assets will be amortized using a straight-line method over their expected useful lives ranging from two weeks to six years. The goodwill recorded in connection with this transaction is not deductible for U.S. income tax purposes.

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

Pro Forma and Post-Acquisition Results (Unaudited)

The following table summarizes the unaudited pro forma total revenues and net income of the combined entities, including Ixia, had the acquisitions of Anue and BreakingPoint occurred on January 1, 2011 (in thousands):

	Three Months Ended		Six Months Ended
	June 30, 2012		June 30, 2012

Total revenues	$	116,629	$	225,458
Net income		5,586		6,839

The pro forma combined results in the table above have been prepared for comparative purposes only and include acquisition-related adjustments for, among others items, reductions in revenues related to the estimated fair value adjustment to deferred revenues, certain acquisition related costs, amortization of identifiable intangible assets, and the related income tax effects for these adjustments.Post-acquisition results for Anue’s operations have been included in our consolidated financial statements, which include combined revenues of $3.9 million and a combined loss before income taxes of approximately $0.8 million for both the three and six months ended June 30, 2012. The pro forma combined results, as well as those of Anue and BreakingPoint included in the Company’s results subsequent to the acquisition date, do not purport to be indicative of the results of operations which would have resulted had the acquisition been effective at the beginning of the applicable periods noted above, or of the future results of operations of the combined entity.

4. Restructuring

During the third quarter of 2012, our management approved, committed to and initiated a plan to restructure our operations following our August 24, 2012 acquisition of BreakingPoint (“BreakingPoint Restructuring”). The BreakingPoint Restructuring included a net reduction in force of approximately 29 positions (primarily impacting our research and development team in Melbourne, Australia). Forthe year ended December 31, 2012, we recognized restructuring costs of approximately $4.1 million, and of this amount, $2.7 million primarily related to one-time employee termination benefits consisting of severance and other related costs and $1.4 million related to facility costs associated with the closure of our office in Melbourne, Australia and other costs, which were recorded to the Restructuring line item within our consolidated statement of operations. There were no restructuring activities prior to the third quarter of 2012.

As of December 31, 2012, $1.0 million of such costs were accrued to the Accrued expenses and other line item within our consolidated balance sheets.The BreakingPoint Restructuring was substantially completed during the fourth quarter of 2012.

As of June 30, 2013, $591,000 of such costs were accrued to the Accrued expenses and other line item within our consolidated balance sheets. These costs relate primarily to lease terminationcosts which are expected to be paid by the end of the second quarter of 2015.

Activity related to our restructuring plan is as follows (in thousands):

Accrual at December 31, 2011	$	-
Charges		4,077
Payments		(2,275	)
Non-cash items		(776	)
Accrual at December 31, 2012		1,026
Charges		58
Payments		(391	)
Non-cash items		(102	)
Accrual at June 30, 2013	$	591

5. Convertible Senior Notes

On December 7, 2010, we issued $200.0 million in aggregate principal amount of 3.00% Convertible Senior Notes (the “Notes”) due December 15, 2015 unless earlier repurchased or converted. The interest is payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2011.The Notes are governed by the terms of an indenture agreement (the “Indenture”) dated December 7, 2010 between the Company and Wells Fargo Bank, National Association, as trustee.

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Notes are convertible at any time prior to the close of business on the third business day immediately preceding the maturity date at the holder’s option, into shares of our common stock at an initial conversion rate of 51.4536 shares per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $19.43 per share. The conversion rate is subject to adjustment for certain events that occur prior to maturity, such as a change in control transaction as defined in the Indenture.

The Notes bear interest at a rate of 3.00% per year, payable semiannually in arrears on June 15 and December 15 of each year, which payments began on June 15, 2011. We may in certain instances be required to pay additional interest if the Notes are not freely tradable by the holders thereof (other than our affiliates) beginning six months after the date of issuance and in connection with events of default, including events of default relating to our failure to comply with our reporting obligations to the trustee and the SEC. After a default under the Indenture, if the trustee or the holders of at least 25% in aggregate principal amount of the Notes give us notice of, and direct us to cure, the default and the default is not cured within 60 days thereafter, then unless a waiver is obtained from the holders of more than 50% in aggregate principal amount of the Notes, an event of default will occur under the Indenture. Upon any such event of default, we may elect that for the first 180 days (or such lesser amount of time during which the event of default continues), the sole remedy be the payment of additional interest at an annual rate equal to 0.50%. In the event that such additional interest becomes payable because of our failure to timely file certain reports with the SEC and the trustee, the filing of such reports will cure the event of default and the interest rate will be reduced (so long as no other events of default then exist). If we elect to pay such additional interest and the event of default is not cured within the 180-day period, or if we do not make such an election to pay additional interest when the event of default first occurs, the trustee or the holders of at least 25% in aggregate principal amount of the Notes may declare the Notes to be due and payable immediately.

As ofJune 30, 2013, the estimated fair value of our Notes was approximately $241.4 million. The fair values of the Notes were estimated using market prices of the Notes, which are based on Level 2 inputs (i.e.inputs, other than the quoted prices in active markets that are observable either directly or indirectly).

Senior Secured Revolving Credit Facility

On December 21, 2012, we entered into a credit agreement (the “Credit Facility Agreement”) establishing a senior secured revolving credit facility (the “Credit Facility”) with certain institutional lenders that provides for an aggregate loan amount of up to $150.0 million. The Credit Facility is expected to mature on December 21, 2016, but may mature on September 14, 2015 if we do not have available liquidity (domestic cash and investments, plus availability under the Credit Facility) of $25.0 million in excess of the amount required to repay our Notes of $200.0 million in full beginning on June 15, 2015. If we satisfy this requirement between June 15, 2015 and September 14, 2015, but fail to do so after September 15, 2015 and prior to December 15, 2015, the maturity date is the date on which the requirement is no longer satisfied.

The Credit Facility Agreement requires the Company to comply with certain covenants, including maintaining (i) an interest coverage ratio (as defined in the Credit Facility Agreement) of greater than 3.50 to 1.00, measured quarterly on a trailing twelve months basis and (ii) a maximum leverage ratio (as defined in the Credit Facility Agreement) of not greater than 3.50 to 1.00 through June 30, 2014 and 3.00 to 1.00 thereafter, measured quarterly on a trailing twelve months basis. The Credit Facility Agreement also requires us to timely provide certain periodic financial statements to the lenders.

The Credit Facility Agreement also provides for customary events of default (subject to grace and cure periods in certain cases) including, without limitation, (a) failure to pay (with no grace period for the nonpayment of principal); (b) defaults under other documents executed and delivered in connection with the Credit Facility agreement; (c) bankruptcy or the commencement of insolvency proceedings, including the appointment of a receiver; (d) changes of control; and (e) failure to perform or observe covenants contained in the Credit Facility Agreement or related documents, including a covenant in the Credit Facility Agreement to comply with the Indenture governing our Notes that includes our obligation to timely file with the trustee under the Indenture the periodic financial and other reports that we are required to file with the SEC.Upon the occurrence of an event of default, the principal and accrued interest under the Credit Facility then outstanding may be declared due and payable. An event of default related to certain events of bankruptcy, insolvency or reorganization with respect to the Company will automatically cause the acceleration of payment of the unpaid principal and accrued interest of all outstanding loans.

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

6. Selected Balance Sheet Data

Investments in Marketable Securities

Investments in marketable securities as of June 30, 2013 consisted of the following(in thousands):

	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-sale – short-term:
U.S. Treasury, government and agency debt securities	$	86,606	$	21	$	(46	)	$	86,581
Corporate debt securities		90,638		1,056		(233	)		91,461
		177,244		1,077		(279	)		178,042
Available-for-sale – long-term:
Auction rate securities		369		1		—			370
		369		1		—			370

Total	$	177,613	$	1,078	$	(279	)	$	178,412

Investments in marketable securities as of December 31, 2012 consisted of the following(in thousands):

	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-sale – short-term:
U.S. Treasury, government and agency debt securities	$	77,823	$	48	$	(1	)	$	77,870
Corporate debt securities		47,933		1,068		(20	)		48,981
		125,756		1,116		(21	)		126,851
Available-for-sale – long-term:
Auction rate securities		820		2,301		(2	)		3,119
		820		2,301		(2	)		3,119

Total	$	126,576	$	3,417	$	(23	)	$	129,970

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

As of June 30, 2013 and December 31, 2012, our available-for-sale securities had a weighted remaining contractual maturity of 1.56 and 1.36 years, respectively. For the three and six months ended June 30, 2013, gross realized gains and gross realized losses were $3.2 million and $0, respectively. For the three and six months ended June 30, 2012, gross realized gains and gross realized losses were not significant. As of June 30, 2013, our gross unrealized losses of $279,000 were in an unrealized loss position for less than 12 months.

The amortized cost and fair value of our investments at June 30, 2013, by contractual years-to-maturity, are as follows (in thousands):

	Amortized Cost		Fair Value
Due in less than 1 year	$	38,159	$	38,206
Due within 1-2 years		86,642		86,658
Due within 2-5 years		51,300		51,119
Due after 5 years		1,512		2,429
Total	$	177,613	$	178,412

Accounts receivable, net

Accounts receivable, net included an allowance for doubtful accounts of $1.3 million and $1.4 million as of June 30, 2013 and December 31, 2012, respectively.

Inventories

Inventories consist of the following (in thousands):

	June 30,		December 31,
	2013		2012

Raw materials	$	2,909	$	4,530
Work in process		18,143		14,144
Finished goods		15,329		18,546
	$	36,381	$	37,220

Accrued expenses and other

As of June 30, 2013 and December 31, 2012, accrued vacation totaled $8.3 million and $7.6 million, respectively.

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

7. Goodwill and Other Intangible Assets

The following table presents the 2012 and 2013 activity for our goodwill (in thousands):

Balance at January 1, 2012:	$	66,429
Acquisition of Anue		91,376
Acquisition of BreakingPoint		102,652
Balance at December 31, 2012:	$	260,457
Anue Acquisition		(367	)
BreakingPoint Acquisition		(58	)
Balance at June 30, 2013	$	260,032

We have not had any historical goodwill impairment charges.

The following table presents our purchased intangible assets (in thousands) as of June 30, 2013:

	Weighted Average
	Useful Life (in years)		Gross		Accumulated Amortization			Net

Other intangible assets:
Technology		5.4	$	141,215	$	(77,655	)	$	63,560
Customer relationships		6.0		70,376		(24,071	)		46,305
Service agreements		5.7		22,700		(7,265	)		15,435
Non-compete agreements		4.2		5,700		(2,207	)		3,493
Trademark		5.3		8,976		(3,016	)		5,960
Other		4.0		3,869		(1,359	)		2,510
			$	252,836	$	(115,573	)	$	137,263

The following table presents our purchased intangible assets (in thousands) as of December 31, 2012:

	Weighted Average
	Useful Life (in years)		Gross		Accumulated Amortization			Net

Other intangible assets:
Technology		5.4	$	141,215	$	(66,704	)	$	74,511
Customer relationships		6.0		70,376		(18,289	)		52,087
Service agreements		5.7		22,700		(5,272	)		17,428
Non-compete agreements		4.2		5,700		(1,520	)		4,180
Trademark		5.3		8,976		(2,333	)		6,643
Other		3.8		3,416		(1,262	)		2,154
			$	252,383	$	(95,380	)	$	157,003

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

The estimated future amortization expense of purchased intangible assets as of June 30, 2013 is as follows (in thousands):

2013	$	19,668
2014		33,928
2015		29,251
2016		25,898
2017		18,853
Thereafter		9,665
	$	137,263

8. Shareholders’ Equity

Accumulated Other Comprehensive Income

We sold available-for-sale securities in the three and six months ended June 30, 2013, which resulted in a gross reclassification from accumulated other comprehensive income for realized gains of $3.1 million and $3.2 million, respectively, which were included within our interest income and other,net line item on our condensed consolidated statements of operations. These realized gains, along with the related tax impact of $1.2 million, for both the three and six months ended June 30, 2013, were reclassified from accumulated other comprehensive income. Prior to the reclassification for the sale of available-for-salesecurities,we had a net unrealized gain during the periods of $286,000 and $517,000 for the three and six months ended June 30, 2013, respectively.The tax impact for these unrealized gains and losses was a benefit of $80,000 and $145,000 for the three and six months ended June 30, 2013, respectively.

Stock Award Plans

In June 2013, our shareholders approvedour Second Amended and Restated Ixia 2008 Equity Incentive Plan (the “Plan”), which resulted in amendments to the Company’s Amended and Restated Ixia 2008 Equity Incentive Plan, as amended, that include the following:

●

Increase in Share Reserve.Increased the total number of shares of our common stock available for future grants by 9.8 million shares for a total of 29.0 million shares of our common stock authorized and reserved over the term of the Plan, of which 13.3 million shares were available for future grant as of such date.

●

Types of Awards.Added cash awards to the types of awards that may be granted under the Plan, including performance-based incentives that are intended to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).

●

Award Limits. Added (i) a limit on the total number of shares (i.e., 1,000,000) subject to options and share appreciation rights granted to an eligible participant in any calendar year, (ii) with respect to performance-based awards that are intended to comply with the exception under Section 162(m) of the Code, limits on the total number of shares (i.e., 1,000,000) subject to restricted stock unit and restricted stock awards that an individual may earn over a 12-month period and on the total dollar amount (i.e., $2,000,000) subject to cash awards that an individual may earn over a 12-month period, and (iii) a limit (i.e., $500,000) on the total dollar value of equity and cash awards that may be granted to a non-employee director in any calendar year.

The Plan also provides for the following:

●

Shares Not Available for Awards. None of the following will be added to the shares available for awards under the Plan: (i) shares tendered by a participant or withheld by the Company in payment of the exercise price of an option, or to satisfy any tax withholding obligation with respect to options, and (ii) shares reacquired by the Company on the open market using cash proceeds from the exercise of options.

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

●

Acquisitions and Combinations.In connection with acquisitions and combinations by us, we may grant under the Plan awards in substitution or exchange for awards or rights to future awards previously granted by the acquired or combined company without reducing the shares available under the Plan. Any shares subject to but not issued under any such substitute awards would not become available for other awards granted under the Plan. Also, in the event that a company acquired by us or with which we combine has a pre-existing plan approved by its shareholders that was not adopted in contemplation of the acquisition or combination, available shares under that plan may be used for Plan awards without reducing the shares available under the Plan. Any such awards may only be made to persons who were not eligible to receive awards under the Plan prior to the acquisition or combination and may not be made after the date that awards could have been made under the terms of the pre-existing plan.

Share Cancellation

Certain of the Company’s performance-based equity awards include a forfeitureprovision that provides for the forfeiture of the unvested portion of such equity awards in the event that the Company concludes that it is required to restate its previously issued financial statements to reflect a less favorable financial condition and/or less favorable results of operations. On April 2, 2013, the Company concluded to restate certain previously issued unaudited condensed consolidated financial statements, and, due to such forfeiture provisions, we have for accounting purposes deemed such equity awards to have been automatically forfeited and subsequently re-granted. The Company did not reflect any such forfeiture or subsequent re-grant of these equity awards in its previously issued unaudited condensed consolidated financial statements. The correction of this error resulted in a reversal of stock-based compensation expenses for the deemed cancellation of $4.0 million for the quarter ended June 30, 2013 and additional stock-based compensation expenses for the deemed re-grant of $2.8 million for the three and six months ended June 30, 2013. See further discussion on the restatement in Note 14 of the Notes to the condensed consolidated financial statements.

Employee Stock Purchase Plan

In May 2013, the number of shares authorized and reserved for issuance under our 2010 Employee Stock Purchase Plan, as amended (the “Purchase Plan”) was increased by an additional 500,000 shares pursuant to the automatic annual increase provision of the Purchase Plan. In June 2013, our shareholders approved a 2,000,000-share increase in the number of shares of our common stock authorized and reserved for issuance under the Purchase Plan.

9. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three months and six months ended June 30, 2013 and 2012 (in thousands, except per share data):

	Three months ended				Six months ended
	June 30,				June 30,
	2013		2012		2013		2012

Basic presentation:
Numerator for basic earnings per share:
Net income	$	3,017	$	25,696	$	10,837	$	30,863
Denominator for basic earnings per share:
Weighted average common shares outstanding		75,667		71,579		75,194		71,079

Basic earnings per share	$	0.04	$	0.36	$	0.14	$	0.43

Diluted presentation:
Numerator for diluted earnings per share:
Net income	$	3,017	$	25,696	$	10,837	$	30,863
Interest expense on convertible senior notes, net of tax		—		1,100		—		2,200
Net income used for diluted earnings per share	$	3,017	$	26,796	$	10,837	$	33,063

Denominator for dilutive earnings per share:
Weighted average common shares outstanding		75,667		71,579		75,194		71,079
Effect of dilutive securities:
Stock options and other share-based awards		1,511		1,934		1,780		2,139
Convertible senior notes		—		10,290		—		10,290
Dilutive potential common shares		77,178		83,803		76,974		83,508

Diluted earnings per share	$	0.04	$	0.32	$	0.14	$	0.40

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

The diluted earnings per share computation for the three and six months ended June 30, 2013 excludes (i) the weighted average number of shares underlying our outstanding Notes of 10.3 million shares as such shares are considered anti-dilutive because the related interest expense on a per common share “if converted” basis exceeds basic earnings per share and (ii) the weighted average number of shares underlying ouremployee stock options and other share-based awards of 2.2 million shares and 1.3 million shares, respectively, which were anti-dilutive because, in general, the exercise price of these awards exceeded the average closing sales price per share of our common stock during the applicable period.

The diluted earnings per share computation for the three and six months ended June 30, 2012 excludes the weighted average number of shares underlying ouremployee stock options and other share-based awards of 1.7 million shares and 1.6 million shares, respectively, which were anti-dilutive because, in general, the exercise price of these awards exceeded the average closing sales price per share of our common stock during the applicable period.

10. Concentrations

Significant Customers

The following customers accounted for more than 10% of total revenue for the three and six months ended June 30, 2013, in the case of Customer A, and for the three and six months ended June 30, 2013 and 2012, in the case of Customer B:

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012


Customer A		15.7	%		*			17.2	%		*


Customer B		*			14.9	%		10.4	%		16.0	%

* Less than 10%

As of June 30, 2013 and December 31, 2012, the percentage of total receivables for Customers A and B above were as follows:

	June 30, 2013			December 31, 2012

Customer A		10.0	%		*


Customer B		10.6	%		*

* Less than 10%

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

International Data

For the three and six months ended June 30, 2013 and 2012, the percentage of total international revenues based on customer location consisted of the following:

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012


International revenues		33.7	%		44.5	%		35.8	%		46.7	%

Within international revenues disclosed above, the percentage of total revenues from product shipments to Japan for the three and six months ended June 30, 2013 and 2012 wereas follows:

Three months ended

Six months ended

June 30,

2013

2012

2013

2012

Japan

14.4

14.2

* Less than 10%

11. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1.	Observable inputs such as quoted prices in active markets;

Level 2.	Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3.	Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

Financial assets carried at fair value as of June 30, 2013 and December 31, 2012 are classified in the table below in one of the three categories described above (in thousands):

	June 30, 2013								December 31, 2012
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents:
Money market funds	$	251	$	251	$	—	$	—	$	185	$	185	$	—	$	—
Corporate debt securities		29,139		—		29,139		—		—		—		—		—
Short-term investments:
U.S. Treasury, governmentand agency debt securities		86,581		—		86,581		—		77,870		—		77,870		—
Corporate debt securities		91,461		—		91,461		—		48,981		—		48,981		—
Long-term investments:
Auction rate securities		370		—		—		370		3,119		—		—		3,119
Total financial assets	$	207,802	$	251	$	207,181	$	370	$	130,155	$	185	$	126,851	$	3,119

To estimate the fair value of our money market funds, U.S. treasury, government and agency debt securities, corporate debt securities and auction rate securities, we use the estimated fair value per our investment brokerage/custodial statements. To the extent deemed necessary, we may also obtain non-binding market quotes to corroborate the estimated fair values reflected in our investment brokerage/custodial statements.

During the second quarter of 2013, we sold an auction rate security that was classified as a Level 3 financial asset. This auction rate security had a par value of $4.0 million and the sale resulted in a realized gain of $2.9 million (included within our Interest income and other, net line item on our condensed consolidated statements of operations.)

There were no transfers of assets between levels within the fair value hierarchy for the three and six months ended June 30, 2013.

The following table summarizes the activity for the three and six months ended June 30, 2013 and 2012 for our auction rate securities where fair value measurements are estimated utilizing Level 3 inputs (in thousands):

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012

Beginning balance	$	3,167		$	2,954		$	3,119		$	2,774
Unrealized (loss) gain reclassified from/recorded in other comprehensive income		(2,346	)		(119	)		(2,298	)		61
Realized gain recorded in earnings		2,869			—			2,869			—
Sales		(3,320	)		—			(3,320	)		—
Ending balance	$	370		$	2,835		$	370		$	2,835

There were no unrealized losses recorded in earnings for Level 3 assets still held at June 30, 2013.

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

12. Commitments and Contingencies

Litigation

On June 15, 2012, Catapult, our wholly owned subsidiary, issued a demand for indemnification to Tekelec pursuant to the Asset Purchase Agreement between Tekelec and Catapult dated July 15, 2002 (the “APA”) under which Catapult had succeeded to Tekelec’s relationship with Tucana, a former distributor of Catapult. Catapult demanded indemnification for the full amount of Catapult’s costs, including attorneys’ fees and expenses, incurred in defending against and resolving Tucana’s claims.

Because Catapult’s demand for indemnification was not resolved within the 30-day period provided for by the APA, on July 16, 2012, Catapult demanded arbitration of its indemnification claim against Tekelec. The arbitration hearing took place before three arbitrators in January 2013. The arbitrators issued their final award on January 31, 2013 granting Catapult its full indemnity claim against Tekelec in the amount of approximately $1.2 million. The $1.2 million of proceeds were received in the first quarter of 2013 and were reflected in our results of operations as a component of the General and administrativeline item on our condensed consolidated statements of operations.

We are not aware of any pending legal proceedings that, individually or in the aggregate, could have a material adverse effect on our business, results of operations, cash flows or financial position. We may in the future be a party to litigation arising in the ordinary course of business, including claims that we allegedly infringe upon third party patents or other intellectual property rights. Such claims, even if without merit, could result in the expenditure of significant financial and managerial resources.

13. Income Taxes

As of June 30, 2013 and December 31, 2012, current deferred tax assets totaled $24.1 million and $24.2 million, respectively, and were included within the Prepaid expenses & other current assets line item in our condensed consolidated balance sheets.

14. Restatement

Quarterly financial statements as of and for the three and six months ended June 30, 2013

Subsequent to the initial filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, we have restated herein our unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2013 to reflect certain corrections in the manner in which we recognize revenue related to certain sales transactions. The errors identified by the Company in its revenue recognition practices are described below:

●

For certain sales transactions, the Company entered into an extended maintenance and warranty arrangement that included a fixed fee to cover products owned by the customer at the date of execution of the arrangement as well as extended maintenance and warranty coverage on any additional products purchased by the customers over the multi-year term of the applicable arrangement. The Company did not properly defer revenues on the additional product purchases to correctly account for the fixed fee, multi-year extended maintenance and warranty arrangement. As a result, the Company improperly recognized product revenues when the additional products were shipped rather than deferring a portion of the consideration and recognizing the related revenues over the remaining term of the applicable fixed fee, multi-year extended maintenance and warranty arrangement.

●

For certain other sales transactions, the Company (i) recognized product revenues prematurely in advance of delivering certain product functionality or other deliverables that were committed to be provided to the customers or (ii) recognized product revenues prematurely based on an incorrect assessment of certain multiple-element arrangement sales transactions that included professional services that were provided based on a purchase order that was separate from the product purchase order but that was negotiated concurrently with the customer.

●

The Company entered into a sales arrangement that included extended payment terms beyond the Company’s customary terms. Revenue for this transaction should have been, but was not, recognized when the payments became due, as opposed to when the products were shipped.

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

These corrections in our revenue recognition resulted in the movement of revenue between accounting periods, and do not have any impact on the total revenue to be recognized over the life of the applicable arrangements.

Certain of the Company’s performance-based equity awards include a forfeitureprovision that provides for the forfeiture of the unvested portion of such equity awards in the event that the Company concludes that it is required to restate its previously issued financial statements to reflect a less favorable financial condition and/or less favorable results of operations. On April 2, 2013, the Company concluded to restate certain previously issued unaudited condensed consolidated financial statements, and, due to such forfeiture provisions, we have for accounting purposes deemed such equity awards to have been automatically forfeited and subsequently re-granted as a result of the restatement. The Company did not reflect any such forfeiture or subsequent re-grant of these equity awards in its previously issued unaudited condensed consolidated financial statements. The correction of this error resulted in a net reduction in our stock-based compensation expenses with a pre-tax impact of $1.2 million for the three and six months ended June 30, 2013.

The previously filed interim condensed consolidated financial statements as of and for the three months and six months ended June 30, 2013 have been restated to reflect the correction of these errors, which impact revenue from products, revenue from services, research and development expenses, sales and marketing expenses, general and administrative expenses, and deferred revenue (current and non-current). All other adjustments relate to the applicable income tax effects of these errors as well as the correction of certain other income tax errors which existed as of June 30, 2013 as shown in the following table:

Restated condensed consolidated balance sheet amounts

	As of June 30, 2013
	As Previously		Restatement
	Reported		Adjustments			Restated
	(in thousands)




Prepaid expenses and other current assets	$	46,657	$	4,514		$	51,171
Total current assets		408,148		4,514			412,662

Other assets		10,221		3,731			13,952
Total assets		848,775		8,245			857,020

Deferred revenues - current		67,195		4,474			71,669
Total current liabilities		122,020		4,474			126,494

Deferred revenues - non-current		10,295		741			11,036
Other liabilities		32,353		5,260			37,613
Total liabilities		364,668		10,475			375,143

Additional paid-in capital		182,434		(1,199	)		181,235
Retained earnings		129,164		(1,031	)		128,133
Total shareholders’ equity		484,107		(2,230	)		481,877
Total liabilities and shareholders’ equity	$	848,775	$	8,245		$	857,020

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

Restated condensed consolidated statements of operations amounts

	For the Three Months Ended June 30, 2013
	As Previously		Restatement
	Reported		Adjustments			Restated
	(in thousands, except per share data)
Revenues:
Products	$	87,818	$	(4,024	)	$	83,794
Services		28,077		133			28,210
Total revenues		115,895		(3,891	)		112,004

Costs and operating expenses:
Research and development		29,539		(471	)		29,068
Sales and marketing		33,191		(208	)		32,983
General and administrative		12,027		(520	)		11,507
Total costs and operating expenses		110,304		(1,199	)		109,105

Income from operations		5,591		(2,692	)		2,899
Income before income taxes		7,079		(2,692	)		4,387
Income tax expense		3,316		(1,946	)		1,370
Net income		3,763		(746	)		3,017
Earnings per share:
Basic	$	0.05	$	(0.01	)	$	0.04
Diluted	$	0.05	$	(0.01	)	$	0.04

Stock-based compensation included in:
Research and development	$	2,049	$	(471	)	$	1,578
Sales and marketing		1,836		(208	)		1,628
General and administrative		1,679		(520	)		1,159

	For the Six Months Ended June 30, 2013
	As Previously		Restatement
	Reported		Adjustments			Restated
	(in thousands, except per share data)
Revenues:
Products	$	184,454	$	(5,149	)	$	179,305
Services		54,224		(66	)		54,158
Total revenues		238,678		(5,215	)		233,463

Costs and operating expenses:
Research and development		59,251		(471	)		58,780
Sales and marketing		68,232		(208	)		68,024
General and administrative		24,085		(520	)		23,565
Total costs and operating expenses		222,995		(1,199	)		221,796

Income from operations		15,683		(4,016	)		11,667
Income before income taxes		15,435		(4,016	)		11,419
Income tax expense		3,567		(2,985	)		582
Net income		11,868		(1,031	)		10,837
Earnings per share:
Basic	$	0.16	$	(0.02	)	$	0.14
Diluted	$	0.15	$	(0.01	)	$	0.14

Stock-based compensation included in:
Research and development	$	4,497	$	(471	)	$	4,026
Sales and marketing		3,851		(208	)		3,643
General and administrative		3,884		(520	)		3,364

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

Restated condensed consolidated statements of comprehensive income amounts

	For the Three Months Ended June 30, 2013
	As Previously		Restatement
	Reported		Adjustments			Restated
	(in thousands)

Net Income	$	3,763	$	(746	)	$	3,017
Comprehensive Income	$	1,869	$	(746	)	$	1,123

	For the Six Months Ended June 30, 2013
	As Previously		Restatement
	Reported		Adjustments			Restated
	(in thousands)

Net Income	$	11,868	$	(1,031	)	$	10,837
Comprehensive Income	$	9,795	$	(1,031	)	$	8,764

Restated condensed consolidated statements of cash flows amounts

The correction of the errors described above did not impact our total cash flows from operating activities, investing activities or financing activities within our consolidated statement of cash flows, but did result in corrections of the following line items within cash flows from operating activities:

	For the Six Months Ended June 30, 2013
	As Previously			Restatement
	Reported			Adjustments			Restated
	(in thousands)

Net Income	$	11,868		$	(1,031	)	$	10,837
Stock-based compensation		12,621			(1,200	)		11,421
Deferred Income Taxes		(1,649	)		863			(786	)
Prepaid Expenses and Other current Assets		(4,172	)		(4,513	)		(8,685	)
Other Assets		(282	)		1,691			1,409
Deferred Revenues		2,699			5,215			7,914
Other Liabilities		4,708			(1,025	)		3,683

Quarterly financial statements as of and for the three and six months ended June 30, 2012

In our 2012 Form 10-K, we restated, among other previously issued financial statements, our unaudited consolidated financial statements for the three and six months ended June 30, 2012 to reflect certain corrections in the manner in which we recognized revenue related to our warranty and software maintenance contracts, including a previous implied warranty and software maintenance arrangement with one of our customers. Specifically, we made the following two corrections to our revenue recognition practices to properly report revenue in prior periods:

●

Accounting Practice Error - We now recognize revenue related to our warranty and software maintenance contracts on the effective date of each such contract rather than in the first calendar month following the effective date of the contract as though the warranty and maintenance period commenced on the first day of such month. We also now recognize revenue related to back maintenance fees when evidence of an arrangement exists rather than commencing in the first calendar month following the effective date of the contract as though the warranty and maintenance period commenced on the first day of such month.

●

Implied Arrangement Error - We now cease to defer revenue for any implied warranty and software maintenance arrangement upon the receipt from the applicable customer of the first substantive contract for extended warranty and software maintenance services, and we will recognize the applicable previously deferred revenue related to the implied arrangement, provided all other revenue recognition criteria have been met. The Company’s historical practice was to continue to defer revenue for implied warranty and software maintenance arrangements (despite the receipt of an initial substantive extended warranty and software maintenance contract) until we could establish a pattern that we were able to enforce our warranty and software maintenance contracts as evidenced by, among other items, (i) the consistent receipt of extended renewal orders from the specific customer for warranty and software maintenance services and (ii) senior management’s assertion that warranty and software maintenance services would not be provided to the customer if existing contracts were canceled or were not renewed.

The 2012 changes in our revenue recognition practices resulted in movements of revenue between accounting periods, and do not have any impact on the total revenue to be recognized over the life of a warranty and software maintenance contract or arrangement, although the timing of the recognition of such revenue commences earlier and ends earlier than would be the case under the Company’s previously used accounting treatment.

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

This Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2013 (this “Form 10-Q/A”) reflects the impact of the prior restatement on the applicable unaudited quarterly financial information for the three and six months ended June 30, 2012. Our previously filed Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 has not been and will not be amended.

Certain line items included in this Form 10-Q/A have been restated to reflect the corrections of the above errors, which impact revenues from products, revenues from services and deferred revenues (current and non-current). All other adjustments related to the applicable income tax effects of these errors. The following tables reconcile the amounts as originally reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 to the corresponding amountsas restated and included in Note 15, Restatement, in our 2012 Form 10-K and as reported herein.

Restated consolidated statement of operations amounts

	For the Three Months Ended June 30, 2012
	As Previously			Restatement
	Reported			Adjustments			Restated
	(in thousands, except per share data)
Revenues:
Products
Implied arrangement error	$	—		$	(2,650	)	$	—
		75,938			(2,650	)		73,288

Services
Accounting practice error		—			340			—
Implied arrangement error		—			669			—
		16,405			1,009			17,414

Total revenues		92,343			(1,641	)		90,702
Income from operations		8,104			(1,641	)		6,463
Income before income taxes		6,906			(1,641	)		5,265
Income tax benefit		(19,944	)		(487	)		(20,431	)
Net income		26,850			(1,154	)		25,696
Earnings per share:
Basic	$	0.38		$	(0.02	)	$	0.36
Diluted	$	0.33		$	(0.01	)	$	0.32

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

	For the Six Months Ended June 30, 2012
	As Previously			Restatement
	Reported			Adjustments			Restated
	(in thousands, except per share data)
Revenues:
Products
Implied arrangement error	$	—		$	(2,086	)	$	—
		144,981			(2,086	)		142,895

Services
Accounting practice error		—			1,028			—
Implied arrangement error		—			432			—
		33,005			1,460			34,465

Total revenues		177,986			(626	)		177,360
Income from operations		15,391			(626	)		14,765
Income before income taxes		12,503			(626	)		11,877
Income tax benefit		(18,729	)		(257	)		(18,986	)
Net income		31,232			(369	)		30,863
Earnings per share:
Basic	$	0.44		$	(0.01	)	$	0.43
Diluted	$	0.40		$	—		$	0.40

Restated consolidated statements of comprehensive income amounts

	For the Three Months Ended June 30, 2012
	As Previously Reported		Restatement Adjustments			Restated
	(in thousands)

Net income	$	26,850	$	(1,154	)	$	25,696
Comprehensive income	$	26,357	$	(1,154	)	$	25,203

	For the Six Months Ended June 30, 2012
	As Previously Reported		Restatement Adjustments			Restated
	(in thousands)

Net income	$	31,232	$	(369	)	$	30,863
Comprehensive income	$	31,526	$	(369	)	$	31,157

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

Restated consolidated statements of cash flows amounts

The correction of the errors described above did not impact our total cash flows from operating activities, investing activities or financing activities within our consolidated statements of cash flows but did result in corrections of the following line items within cash flow from operating activities:

	For the Six Months Ended June 30, 2012
	As Previously Reported		Restatement Adjustments			Restated
	(in thousands)

Net income	$	31,232	$	(369	)	$	30,863
Accrued expenses and other		1,382		(257	)		1,125
Deferred revenues		4,471		626			5,097

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, 2013 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013, 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 Form 10-Q/A and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”), including the “Risk Factors” section and the consolidated financial statements and notes included therein.

Restatement of Previously Issued Financial Statements. As discussed further in Note 14of the Notes to the condensed consolidated financial statements contained in this Form 10-Q/A, we are restating herein our unaudited quarterly condensed consolidated financial statements for the three and six months ended June 30, 2013 and 2012. There have been no revisions to the previously presented restated unaudited quarterly condensed consolidated financial information for the three and six months ended June 30, 2012 that were disclosed in Note 15, Restatement, in our 2012 Form 10-K and as reported herein. The following discussion has been updated to reflect the effects of the restatement.

BUSINESS OVERVIEW

We are a leading provider of converged Internet Protocol (IP) network validation and network visibility solutions. Equipment manufacturers, service providers, enterprises, and government agencies use our solutions to design, verify, and monitor a broad range of Ethernet, Wi-Fi, and 3G/LTE equipment and networks. Our product solutions consist of our hardware platforms, such as our chassis, interface cards and appliances, software application tools, and services, including our warranty and maintenance offerings and professional services.

During the 2013 second quarter, our cash, cash equivalents and investments in the aggregate increased by $25.8 million to $234.1 million from the $208.3 million reported three months earlier at March 31, 2013, and by $56.6 million from the $177.5 million reported six months earlier at December 31, 2012. Total revenues increased 23.5% to $112.0 million during the 2013 second quarter from $90.7 million during the 2012 second quarter due to the completion of two significant acquisitions in June and August of 2012. However, during the second quarter of 2013, our revenues came in below our expectations due, in part, to delays in spending at certain customers. We remain confident in our competitive position and our opportunities for long-term growth as our customers continue to transition to mobile networks, virtual data centers and hybrid cloud environments to deliver next generation applications. However, we believe that there continues to be some concerns that are creating uncertainty in the market, such as the Federal sequestration in the United States and the capital spending plans of large service providers and equipment manufacturers. This uncertainty may adversely impact our sales, results of operations and financial position over the near term.

Acquisition ofBreakingPoint Systems, Inc.On August 24, 2012, we completed our acquisition of all of the outstanding shares of capital stock of BreakingPoint Systems, Inc. (“BreakingPoint”). The aggregate cash consideration paid totaled $163.7 million, or $150.3 million net of BreakingPoint’s existing cash and cash equivalents balances at the time of the acquisition. The acquisition was funded from our existing cash and sale of investments. BreakingPoint is a leader in security testing, and its solutions provide global visibility into emerging threats and applications, along with advance insight into the resiliency of an organization’s information technology infrastructure under operationally relevant conditions and malicious attacks. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to leverage BreakingPoint’s existing sales channels and assembled workforce, including its experienced product development and sales teams. The results of operations of BreakingPoint have been included in our consolidated statements of operations and cash flows since the date of the acquisition. See Note 3 to the condensed consolidated financial statements included in this Form 10-Q/A for additional information regarding the BreakingPoint acquisition.

Acquisition of Anue Systems, Inc. On June 1, 2012, we completed our acquisition of all of the outstanding shares of capital stock and other equity interests of Anue Systems, Inc. (“Anue”). The aggregate consideration paid totaled $152.4 million, or $148.7 million net of Anue’s existing cash and cash equivalents balances at the time of the acquisition. The acquisition was funded from our existing cash and sale of investments. Anue provides solutions to monitor and test complex networks, including Anue’s Net Tool Optimizer solution that efficiently aggregates and filters network traffic to help optimize network monitoring tool usage. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we expect to leverage Anue’s existing sales channels and assembled workforce, including its experienced product development team. The results of operations of Anue have been included in our condensed consolidated statements of operations and cash flows since the date of the acquisition. See Note 3 to the condensed consolidated financial statements included in this Form 10-Q/A for additional information regarding the Anue acquisition.

Revenues.Our revenues are principally derived from the sale and support of our test and visibility solutions.

Sales of our network test hardware products primarily consist of traffic generation and analysis hardware platforms containing multi-slot chassis and interface cards. Our primary network test hardware platform is enabled by our operating system software that is essential to the functionality of the hardware platform. Sales of our network visibility hardware products typically include an integrated, purpose-built hardware appliance with essential, proprietary software. Our software products consist of a comprehensive suite of technology-specific applications for certain of our network test hardware platforms. Our software products are typically installed on and work with these hardware products to further enhance the core functionality of the overall network test system, although some of our software products can be operated independently from our network test platforms.

Our service revenues primarily consist of technical support, warranty and software maintenance services revenues related to our network test and visibility hardware and software products. Most of our products include up to one year of these services with the initial product purchase, and our customers may separately purchase extended services for annual or multi-year periods. Our technical support, warranty and software maintenance services include assistance with the set-up, configuration and operation of our products, repair or replacement of defective products, bug fixes, and unspecified when and if available software upgrades. For certain network test products, our technical support and software maintenance service revenues also include our Application and Threat Intelligence (ATI) service, which provides a comprehensive suite of application protocols, software updates and technical support. The ATI service provides full access to the latest security attacks and application updates for use in real-world test and assessment scenarios. Our customers may purchase the ATI service for annual or multi-year periods. Service revenues also include training and other professional services revenues.

Sales to AT&T were approximately $17.5 million, or 15.7%, and $40.2 million, or 17.2%, of our total revenues for the three and six months ended June 30, 2013, respectively, and $1.7 million, or 1.9%, and $2.9 million, or 1.7%, of our total revenues for the three and six months ended June 30, 2012, respectively. Sales to Cisco Systems were approximately $10.4 million, or 9.3%, and $24.4 million, or 10.4%, of our total revenues for the three and six months ended June 30, 2013, respectively, and $13.5 million, or 14.9%, and $28.4 million, or 16.0%, of our total revenues for the three and six months ended June 30, 2012, respectively. To date, we have generated the majority of our revenues from sales to network equipment manufacturers, but this percentage has been declining over the past several years. While we expect that we will continue to have some customer concentration with network equipment manufacturers for the foreseeable future, we expect to continue to see some declines in revenues from such customers as a percentage of total revenues as we continue to sell our products to a wider variety and increasing number of service provider, enterprise and government 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. We also expect that our 2012 acquisitions of Anue and BreakingPoint (the “2012 Acquisitions”) and the growth of their businesses will continue to further diversify our customer base.

From a geographic perspective, we generated revenues from shipments to international locations of $37.7 million, or 33.7%, and $83.7 million, or 35.8 %, of our total revenues for the three and six months ended June 30, 2013, respectively, and $40.3 million, or 44.5%, and $82.9 million, or 46.7%, of our total revenues for the three and six months ended June 30, 2012, respectively. The decline in the percentage of our revenue from shipments to international locations was primarily due to our 2012 Acquisitions, which have a higher concentration of revenue from customers in the United States. Over the next 12 months, we expect to leverage and expand our international sales force to sell our Anue and BreakingPoint products to a larger global customer base, and as a result, we expect to increase our percentage of revenues from shipments to international locations.

Stock-Based Compensation.For the three and six months ended June 30, 2013, stock-based compensation expense was $4.5 million and $11.4 million, respectively. For the three and six months ended June 30, 2012, stock-based compensation expense was $3.8 million and $7.9 million, respectively. The increase in stock-based compensation expense in the three and six months ended June 30, 2013 as compared to the same periods in 2012 was primarily due to (i) the incremental impact of the share-based awards granted to the Anue and BreakingPoint employees related to our 2012 Acquisitions and (ii) an increase in the number of participants in our employee stock purchase plan. The aggregate amount of gross unrecognized stock-based compensation to be expensed in the years 2013 through 2017 related to unvested share-based awards as ofJune 30, 2013 was approximately $31.8 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 and supply 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 and testing at our facilities in Calabasas, California, Austin, Texas and Penang, Malaysia. 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 technical support services, professional services and the cost of extended warranty and maintenance services. Cost of revenues does not include the amortization of purchased technology and trade names related to our acquisitions of certain businesses, product lines and purchased technologies of $6.4 million and $12.9 million for the three and six months ended June 30, 2013, respectively, and $3.6 million and $6.3 million for the three and six months ended June 30, 2012, respectively, which are included within our Amortization of intangible assets line item on our condensed consolidated statements of operations included in this Form 10-Q/A.

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

● 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;

● new product introductions by us and by our competitors;

● demand for and quality of our products; and

● shipment volume.

In the near term, although we anticipate that our cost of revenues as a percentage of total revenues will remain relatively flat, we expect to continue to experience pricing pressure on larger transactions and from larger customers as a result of competition.

Operating Expenses.Our operating expenses are generally recognized when incurred and consist of research and development, sales and marketing, general and administrative, amortization of intangible assets,acquisition and other related costs and restructuring expenses. In dollar terms, we expect total operating expenses, excluding stock-based compensation expense discussed above and amortization of intangible assets,acquisition and other related costs and restructuring expenses discussed below, to increase modestly for the remainder of 2013 due primarily the expansion of our sales force and investments in certain product initiatives.

●

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 certain executive, finance, legal, human resources, information technology and administrative personnel, as well as professional fees (e.g., legal and accounting), facility costs related to our corporate headquarters, insurance costs and other general corporate expenses.

●

Amortization of intangible assets consists of the recognition of the purchase price of various intangible assets over their estimated useful lives. We evaluate our identifiable definite-lived intangible assets and other long-lived assets for impairment when events or changes in circumstances indicate that a potential impairment may exist. An impairment charge would be recorded to the extent that the carrying value of the intangible asset exceeds its undiscounted cash flows and its estimated fair value in the period that the impairment circumstances occurred. We also evaluate the recoverability of our goodwill on an annual basis or if events or changes in circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. Impairment losses are recorded to the extent that the carrying value of the goodwill exceeds its estimated fair value. The future amortization expense of acquired intangible assets depends on a number of factors, including the extent to which we acquire additional businesses, technologies or product lines or are required to record impairment charges related to our acquired intangible assets.

●

Acquisition and other related costs are expensed as incurred and consist primarily of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting, tax, due diligence, valuation and other related services, change in control payments, amortization of deferred compensation, consulting fees, required regulatory costs, certain employee, facility and infrastructure transition costs, and other related expenses. We expect our acquisition and other related expenses to fluctuate over time based on the timing of our acquisitions and related integration activities.

●

Restructuring expenses consist primarily of employee severance costs and other related charges, as well as facility-related charges to exit certain locations. See Note 4 to the condensed consolidated financial statements included in this Form 10-Q/A.

Interest Income and Other, Netrepresents interest on cash and a variety of securities, including money market funds, U.S. government and government agency debt securities, corporate debt securities and auction rate securities, realized gains/losses on the sale of investment securities, certain foreign currency gains and losses, and other non-operating items.

Interest Expense consists of interest due to the holders of our 3.00% Notes issued in December 2010 and interest expense and fees pertaining to our credit facility established in December 2012, as well as the amortization of the associated debt issuance costs. See Note 5 to the condensed consolidated financial statements included in this Form 10-Q/A.

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 other effects of equity compensation plans. Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimates based on changes in economic conditions. Such changes could have a substantial impact on the income tax provision. Our income tax provision could also be significantly impacted by estimates surrounding our uncertain tax positions and changes to valuation allowance set against certain deferred tax assets. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period.

Our effective tax rate differs from the federal statutory rate of 35% due to benefits associated with the differential in tax rates for certain foreign operations, state taxes and significant permanent differences. Significant permanent differences arise primarily due to research and development credits and certain stock-based compensation expenses that are not expected to generate a tax deduction, such as stock-based compensation expense on grants to foreign employees, offset by tax benefits from disqualifying dispositions. Federal research credits were not available to be recorded in our 2012 financial statements. During the 2013 first quarter, the
federal research credit was retroactively renewed for 2012, and such benefits were recorded at that time.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements included in this Form 10-Q which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, write-downs for obsolete inventory, income taxes, acquisition purchase price allocation, impairments of long-lived assets, goodwill and marketable securities, stock-based compensation, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. None of these accounting policies and estimates have significantly changed since our Annual Report on Form 10-K for the year ended December 31, 2012. Critical accounting policies and estimates are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2012 Form 10-K. Actual results may differ from these estimates under different assumptions or conditions.

RESULTS OF OPERATIONS

The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated and reflects the impact of the restatement of the prior period consolidated financial statements as described in “Restatement of Previously Issued Financial Statements” above and in Note 14 of the Notes to the condensed consolidated financial statements included herein:

	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012

Revenues:
Products		74.8	%		80.8	%		76.8	%		80.6	%
Services		25.2			19.2			23.2			19.4
Total revenues		100.0			100.0			100.0			100.0

Costs and operating expenses:⁽¹⁾
Cost of revenues – products⁽²⁾		18.8			15.7			18.2			16.4
Cost of revenues - services		3.0			3.0			2.7			2.7
Research and development		26.0			24.9			25.2			24.5
Sales and marketing		29.4			27.1			29.1			27.7
General and administrative		10.3			12.2			10.1			12.8
Amortization of intangible assets		9.0			5.9			8.6			5.3
Acquisition and other related		1.0			4.1			1.0			2.3
Restructuring		—			—			—			—
Total costs and operating expenses		97.4			92.9			95.0			91.7

Income from operations		2.6			7.1			5.0			8.3
Interest income and other, net		3.1			0.7			1.6			0.4
Interest expense		(1.7	)		(2.0	)		(1.7	)		(2.0	)
Income before income taxes		3.9			5.8			4.9			6.7
Income tax (benefit) expense		1.2			(22.5	)		0.2			(10.7	)
Net income		2.7	%		28.3	%		4.6	%		17.4	%

⁽¹⁾ Stock-based compensation included in:
Cost of revenues - products		0.1	%		0.1	%		0.1	%		0.1	%
Cost of revenues - services		0.0			0.0			0.0			0.0
Research and development		1.4			1.0			1.7			1.3
Sales and marketing		1.5			1.0			1.6			1.1
General and administrative		1.0			2.0			1.4			2.0

Comparison of Three and Six Months Ended June 30, 2013 and 2012

As a result of our acquisitions of Anue on June 1, 2012 and BreakingPoint on August 24, 2012 (the “2012 Acquisitions”), our 2013 consolidated results of operations include the financial results of these acquisitions from their respective acquisition dates. To assist the readers of our financial statements in reviewing our year-over-year consolidated operating results, we have estimated the impacts of these acquisitions for the applicable periods in the related statement of operations sections below. Results for the three and six months ended June 30, 2012 do not include any results of BreakingPoint, which was not acquired until the third quarter of 2012.

Revenues.In the second quarter of 2013, total revenues increased 23.5% to $112.0 million from the $90.7 million recorded in the second quarter of 2012. The year over year increase was primarily due to the impact of our 2012 Acquisitions. The second quarters of 2013 and 2012 included revenues of $32.6 million and $3.9 million, respectively, related to the 2012 Acquisitions. Excluding the revenues from our 2012 Acquisitions, revenues decreased by $7.4 million, or 8.5%, to $79.4 million in the second quarter of 2013 as compared to the same period in 2012 primarily due to a $2.7 million decrease in shipments of our hardware products (primarily our core network test Gigabit and 10 Gigabit Ethernet interface cards), partially offset by an increase in shipments of our 40/100 Gigabit Ethernet interface cards.

In the first six months of 2013, total revenues increased 31.6% to $233.5 million from $177.4 million recorded in the same period of 2012. The year-over-year increase was primarily due to the impact of our 2012 Acquisitions. The first six months of 2013 and 2012 included revenues of $71.0 million and $3.9 million, respectively, related to the 2012 Acquisitions.Excluding the revenues from our 2012 Acquisitions, revenues decreased by $11.0 million, or 6.3%, to $162.5 million in the first six months of 2013 as compared to the same period in 2012 primarily due to a $8.6 million decrease in shipments of our hardware products (primarily our core network test Gigabit and 10 Gigabit Ethernet interface cards), partially offset by an increase in shipments of our 40/100 Gigabit Ethernet interface cards.

Cost of Revenues. As a percentage of total revenues, our total cost of revenues increased to 21.8% in the 2013 second quarter from 18.7% in the 2012 second quarter. As a percentage of total revenues, our total cost of revenues increased to 20.9% in the first six months of 2013 from 19.1% in the first six months of 2012. These increases in cost of revenues as a percentage of total revenues were primarily due to lower sales prices on certain of our Ethernet interface cards in 2013 when compared to their sales prices for the same periods in 2012, without a similar reduction in the materials costs of the interface cards.

Research and Development Expenses.In the second quarter of 2013, research and development expenses increased 28.9% to $29.1 million from $22.5 million in the second quarter of 2012. As a result of our 2012 Acquisitions, our research and development expenditures in the second quarter of 2013 and 2012 included approximately $7.5 million and $893,000, respectively, related to the research and development activities of the acquired operations. Excluding the incremental research and development costs related to the 2012 Acquisitions, research and development expenses in the second quarter of 2013 were $21.6 million compared to $21.7 million in the second quarter of 2012. This decrease was primarily due to an increase in stock-based compensation expense of $633,000 million. The net decrease in compensation and related employee costs was primarily due to lower bonus expense as we expect our 2013 performance to be below our applicable company-wide annual objectives and targets.

Research and development expenses for the first six months of 2013 increased 35.5% to $58.8 million from $43.4 million in the same period of 2012. Excluding the incremental research and development costs related to the 2012 Acquisitions, of $14.4 million and $893,000 in the first six months of 2013 and 2012, respectively, our research and development expenses were $44.4 million in the first six months of 2013 compared to $42.5 million in the same period of 2012. This increase was primarily due to an increase in stock-based compensation expense of $1.8 million and higher spending on new product initiatives of $864,000, partially offset by a decrease in compensation and other related costs of $1.2 million.

Sales and Marketing Expenses.In the second quarter of 2013, sales and marketing expenses increased 35.3% to $33.0 million from $24.6 million in the second quarter of 2012. As a result of our 2012 Acquisitions, our sales and marketing expenditures in the second quarters of 2013 and 2012 included approximately $8.5 million and $1.4 million, respectively, related to the sales and marketing activities of Anue and BreakingPoint. Excluding the incremental sales and marketing costs related to the 2012 Acquisitions, sales and marketing expenses in the second quarter of 2013 were $24.5 million compared to $23.2 million in the second quarter of 2012. This increase was primarily due to an increase in stock-based compensation expense of $717,000 and higher marketing events and activities related costs (e.g., trade shows) of $685,000.

Sales and marketing expenses for the first six months of 2013 increased 38.4% to $68.0 million from $49.2 million in the same period of 2012. Excluding the incremental sales and marketing costs related to the 2012 Acquisitions of $18.0 million and $1.4 million, in the first six months of 2013 and 2012, respectively, sales and marketing expenses in the first six months of 2013 were $50.0 million compared to $47.8 million in the same period of 2012. This increase was primarily due to an increase in stock-based compensation expense of $1.7 million and higher marketing events and activities related costs (e.g., trade shows) of $1.3 million, partially offset by a net decrease in compensation and other related costs of $849,000.

General and Administrative Expenses.In the second quarter of 2013, general and administrative expenses increased 3.8% to $11.5 million from $11.1 million in the second quarter of 2012. As a result of our 2012 Acquisitions, our general and administrative expenses in the second quarters of 2013 and 2012 included approximately $868,000 and $340,000, respectively, related to the general and administrative activities of Anue and BreakingPoint. Our general and administrative expenditures in the second quarter of 2013 also included one-time items including $156,000 of costs incurred in the second quarter of 2013 related to the restatement of certain of our previously issued financial statements (See Note 14 to the condensed consolidated financial statements included in this Form 10-Q). Excluding these one-time items and the incremental general and administrative costs related to the 2012 Acquisitions, general and administrative expenses in the second quarter of 2013 were $10.6 million compared to $10.3 million in the second quarter of 2012.

For the first six months of 2013, general and administrative expenses increased 4.25% to $23.6 million from $22.6 million in the same period of 2012. Our general and administrative expenditures in the first six months of 2013 included $1.7 million of costs related to the general and administrative activities of Anue and BreakingPoint and $1.0 million of costs incurred related to the restatement of certain of our previously filed financial statements, partially offset by $1.2 million of proceeds from the settlement of a previous legal matter in the first quarter of 2013. Our general and administrative expenditures in the first six months of 2012 included one-time charges of $1.7 million in connection with the departure of our former CEO, and $401,000 incurred in the second quarter of 2012 to settle a legal matter. Excluding these one-time items, and the incremental general and administrative costs related to the 2012 Acquisitions, general and administrative expenses in the first six months of 2013 were $22.1 million compared to $20.2 million in the first six months of 2012. This increase was primarily due to an increase in professional services fees of $674,000.

Amortization of Intangible Assets.In the second quarter of 2013, amortization of intangible assets increased to $10.1 million from $5.4 million in the second quarter of 2012. In the first six months of 2013, amortization of intangible assets increased to $20.2 million from the $9.4 million recorded in the first six months of 2012. These increases were primarily due to the full year and incremental amortization of intangibles related to our acquisitions of Anue in June 2012 and BreakingPoint in August 2012.

Acquisition and Other Related Expenses.Acquisition and other related expenses for the three and six months ended June 30, 2013 were $1.1 million and $2.4 million, respectively, and related to our acquisitions of Anue and BreakingPoint. Acquisition and other related expenses for the three and six months ended June 30, 2012 were $3.7 million and $4.2 million, respectively, and related to our acquisition of Anue. Acquisition and other related costs primarily consisted of transaction and integration related costs such as professional fees for legal, accounting and tax services, integration related consulting fees, amortization of deferred compensation payable to certain pre-acquisition employees of BreakingPoint, certain employee, facility and infrastructure costs, and other acquisition-related costs.

Restructuring.There were no restructuring expenses incurred in the first six months of 2012. There were no restructuring expenses incurred in the second quarter of 2013. Restructuring expenses for the first six months of 2013 were $58,000.See Note 4 to the condensed consolidated financial statements included in this Form 10-Q.

Interest Income and Other, Net.Interest income and other, net increased to $3.4 million in the second quarter of 2013 from the $602,000 recorded in the second quarter of 2012. Interest income and other, net increased to $3.6 million in the first six months of 2013 from the $712,000 recorded in the first six months of 2012. These increases were primarily due to a $2.9 million realized gain recorded during the second quarter of 2013 for the sale of certain of our auction rate securities that were previously written-down.

Interest Expense.Interest expense, including the amortization of debt issuance costs,was $1.9 million for thesecond quarter of 2013 and $1.8 million for the second quarter of 2012. Interest expense, including the amortization of debt issuance costs, was $3.9 million for the first six months of 2013 and $3.6 million for the first six months of 2012. Interest expense relates to our Notes, which were issued in December 2010, as well as the amortization of deferred issuance costs and commitment fees related to our credit facility which we established in December 2012.

Income Tax. Income tax expense was $1.4 million, or an effective rate of 31.2% for the second quarter of 2013 as compared to an income tax benefit of $20.4 million for the second quarter of 2012. Income tax expense was $583,000, or an effective rate of 5.1%, for the first six months of 2013 as compared to an income tax benefit of $19.0 million for the first six months of 2012. The lower effective tax rate for the three and six months ended June 30, 2012 when compared to the same periods in 2013, was primarily due to the tax benefit realized in the 2012 second quarter from the $22.6 million partial reversal of our valuation allowance resulting from the net deferred tax liabilities recorded as part of the Anue Acquisition.

Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance we consider our historical, as well as future, projected taxable income along with other objectively verifiable evidence. Management has concluded it is more likely than not that all of its U.S. deferred tax assets, with the exception of its deferred tax assets for capital loss carryforwards, will be realized. Any reversal of our valuation allowance will favorably impact our results of operations in the period of the reversal.

LIQUIDITY AND CAPITAL RESOURCES

Our cash, cash equivalents and short- and long-term investments, when viewed as a whole, increased to $234.1 million as of June 30, 2013 from $177.5 million as of December 31, 2012, primarily due to $51.2 million in net cash provided by our operating activities, and $13.4 million of cash generated from exercises of share-based awards, partially offset by capital expenditures of $9.4 million.

Of our total cash, cash equivalents and short- and long-term investments, $19.9 million and $22.5 million were held outside of the United States in various foreign subsidiaries as of June 30, 2013 and December 31, 2012, respectively. Under current tax laws and regulations, if our cash, cash equivalents or investments associated with the subsidiaries’ undistributed earnings were to be repatriated in the form of dividends or deemed distributions, we would be subject to additional U.S. income taxes and foreign withholding taxes. We consider these funds to be indefinitely reinvested in our foreign operations and do not intend to repatriate them. We had no exposure to European sovereign debt as of June 30, 2013.

The following table sets forth our summary cash flows for the six months ended June 30, 2013 and 2012 (in thousands):

	Six Months Ended June 30,
	2013			2012

Net cash provided by operating activities	$	51,165		$	46,999
Net cash used in investing activities		(57,266	)		(55,714	)
Net cash provided by financing activities		14,283			11,382

Cash Flows from Operating Activities

Net cash provided by operating activities was $51.2 million in the first six months of 2013 and $47.0 million in the same period of 2012. The increase in cash flow from operating activities for the six months ended June 30, 2013, was primarily due to an increase in certain non-cash items, including amortization of intangibles, stock-based compensation and deferred taxes compared to the same period in 2012. The increase in cash flow generated from operations was offset by a decrease in net income in the first six months of 2013 compared to the same period in 2012. The working capital changes were primarily due to the timing of payments of accounts payable and accrued liabilities.

Cash Flows from Investing Activities

Net cash used in investing activities was $57.3 million and $55.7 million for the first six months of 2013 and 2012, respectively. Excluding marketable securities purchases and proceeds, net cash used in investing activities was $9.4 million and $157.1 million for the first six months of 2013 and 2012, respectively. The net cash used in the first six months of 2013 primarily related to capital expenditures. The decrease in net cash used in the first six months of 2013 was primarily due to payments for the acquisition of Anue in the amount of $148.3 million during the second quarter of 2012.

Cash Flows from Financing Activities

Net cash provided by financing activities was $14.3 million and $11.4 million for the first six months of 2013 and 2012, respectively. This increase in cash provided by financing activities was primarily due to a $2.8 million increase in proceeds from the exercises of share-based awards for the first six months of 2013 as compared to the same period in 2012.

We believe that our existing balances of cash and cash equivalents, investments and cash flows expected to be generated from our operations, andborrowings available under our $150 million credit facility established in December 2012,will be sufficient to satisfy our operating requirements for at least the next 12 months. Our credit facility is expected to mature on December 21, 2016, but may mature on September 14, 2015 if we do not have available liquidity (domestic cash and investments, plus availability under the credit facility) of $25.0 million in excess of the amount required to repay our Convertible Senior Notes (the “Notes”) of $200.0 million in full beginning on June 15, 2015. If we satisfy this requirement between June 15, 2015 and September 14, 2015, but fail to do so after September 15, 2015 and prior to December 15, 2015, the maturity date is the date on which the requirement is no longer satisfied. 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 conditions in the U.S. capital markets and the timely filing of our periodic reports with the Commission. Our failure to timely file our 2012 Form 10-K with the Securities and Exchange Commission may currently limit our ability to access the capital markets using short form registration.

In addition, our $200 million Notes have various default provisions, which, under certain circumstances, could accelerate our repayment obligations of the Notes or could lead to an increase in the overall interest rate charged on outstanding borrowings and adversely impact our liquidity.Upon the occurrence of certain events, such as any delisting of our common stock, we could be required to offer to repurchase the Notes, which could also adversely impact our liquidity.Our credit facility also has certain default provisions, which, under certain circumstances, could affect our ability to utilize the credit facility and accelerate repayment of any amounts outstanding thereunder.

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/A 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 are subject to risks and uncertainties. These risks, uncertainties and other factors may cause our future results, performances or achievements to be materially different from those expressed or implied by our forward-looking statements and include, among other things: anticipated benefits and synergies of our 2012 acquisitions of Anue and BreakingPoint will not be realized, changes in the global economy, competition, consistency of orders from significant customers, our success in developing and producing new products, market acceptance of our products, risks relating to the restatement of certain of our previously issued financial statements, war, terrorism, political unrest, natural disasters and other circumstances that could, among other consequences, reduce the demand for our products, disrupt our supply chain and/or impact the delivery of our products. The factors that may cause future results to differ materially from our current expectations also include, without limitation, the risks identified in our Annual Report on Form 10-K for the year ended December 31, 2012, and in our other filings with the Securities and Exchange Commission.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” included in our 2012 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2012. See also Note 11 to the condensed consolidated financial statements included in this Form 10-Q/A.

ITEM 4.

CONTROLS AND PROCEDURES

Background

As reported in the Current Report on Form 8-K filed by the Company with the SEC on March 5, 2014, on February 26, 2014, the Audit Committee (the “Audit Committee”) of the Company’s Board of Directors completed and made its findings with respect to an internal investigation (the “Audit Committee Investigation”) initiated as a result of the resignation on October 24, 2013 of the Company’s former President and Chief Executive Officer, Vic Alston (the “Former CEO”). The Audit Committee Investigation included performing procedures to assess the Company’s recording of financial transactions and the corresponding impact on the Company’s financial reporting. As a result of the investigation and the Company’s own internal accounting review, certain errors in the Company’s revenue recognition practices that affect the timing of the Company’s recognition of revenue were identified, as are described in more detail below under “Material Weaknesses.” The identified errors also resulted in the restatement of our condensed consolidated financial statements as described in Note 14 to the Notes to condensed consolidated financial statements included in this Form 10-Q/A.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, at the time of the filing of the Original Filing, we 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 June 30, 2013), 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, at the time of the Original Filing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as of June 30, 2013, 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.

Subsequent to the aforementioned evaluation and in connection with the preparation of this Form 10-Q/A, in view of the Company’s determination to restate its unaudited condensed consolidated financial statements for the quarter ended June 30, 2013 and based on the related identified material weaknesses described below under “Material Weaknesses,” our management, with the participation of our Acting Chief Executive Officer and Acting Chief Financial Officer, has re-evaluated the effectiveness 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, as of the end of the period covered by this Report and has concluded that our disclosure controls and procedures were not effective as of that date.

Notwithstanding the ineffectiveness of our disclosure controls and procedures as of June 30, 2013 and the material weaknesses in our internal control over financial reporting as of that date as described below, management believes that (i) this Form 10-Q/A does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this Report and (ii) the condensed consolidated financial statements, and other financial information, included in this Report fairly present in all material respects in accordance with generally accepted accounting principles (“GAAP”) our financial condition, results of operations and cash flows as of, and for, the dates and periods presented.

Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Management concluded that we did not maintain effective internal control over financial reporting as of June 30, 2013 because of certain material weaknesses in our internal control over financial reporting as of June 30, 2013 as follows:

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Control Environment – The control environment, which includes the Company’s Code of Conduct and its Ethics Policy, is the responsibility of senior management, sets the tone of our organization, influences the control consciousness of employees, and is the foundation for the other components of internal control over financial reporting. Given the Audit Committee’s determination that the Former CEO had misstated his academic credentials, age and early employment history, we determined that the Company did not have sufficient background check policies to validate the age, education and employment history of existing employees that were subsequently promoted to senior management positions or of acquired employees placed in senior management positions. Further, the results of the Audit Committee Investigation concluded that the aggressive tone at the top set by the Former CEO, and the Company’s former Chief Financial Officer’s lack of leadership in terms of counterbalancing that aggressive tone at the top, contributed to an ineffective control environment. We believe that the Former CEO and the former Chief Financial Officer provided insufficient attention to key controls. We also believe that controls over whistleblower allegation investigations were improperly designed to perform timely investigations into all whistleblower matters with appropriate scope, procedures and conclusions reached. In addition, the Company also does not have controls that are operating effectively to appropriately segregate duties within certain areas of the organization. Finally, in light of the Company’s recent growth and the relative complexity of its transactions, together with the results of the Audit Committee Investigation, we believe the Company lacks certain monitoring controls necessary to detect circumstances in which management may override controls or deviate from expected standards of conduct. Such monitoring controls are often addressed through the use of an internal audit function. This ineffective control environment contributed significantly to the material weaknesses described below.

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Sufficiency of Accounting Department Resources –The Company has insufficient competent and diligent accounting department resources to develop and operate effective internal controls over financial reporting. The lack of certain appropriate resources in the Company’s accounting department led to widespread control deficiencies in the Company’s financial reporting process and contributed significantly to the Company’s inability to properly identify and assess revenue recognition as described below.

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Revenue Recognition – The Company’s internal controls were not designed to: (i) appropriately identify and assess the accounting impact of certain multiple-element arrangements that were executed as separate sales transactions, (ii) identify and account for all deliverables in certain multiple-element arrangements for which certain future deliverables existed and were not considered and (iii) properly identify and account for arrangements that included payment terms that extended beyond the Company’s customary terms. The Company has also insufficiently trained its accounting department, sales force and other personnel involved in the sales process with respect to the Company’s revenue recognition policies and procedures. In addition, the Company has not adequately designed controls to ensure the proper assessment of sales arrangements documented in foreign languages. As a result of these design defects, our policies and controls related to the Company’s revenue recognition practices were not effective in ensuring that revenue was recorded in the correct period and that the accounting department was informed of all elements and deliverables of certain arrangements. In addition, the Company lacked appropriate controls to ensure the completeness and accuracy of data within certain data warehouse reports used to support the revenue recognition process. The Company also did not have effective general information technology controls around the data warehouse and licensing systems.

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Manual Journal Entries – The Company’s internal controls over manual journal entries were not designed to prevent inappropriate manual journal entries from being recorded in its books and records. Further, management’s review process over recorded manual journal entries did not include the appropriate level of approval or evidence of such approval and, at times, lacked the appropriate journal entry supporting documentation.

The control deficiencies described above resulted in errors to our product and services revenues and deferred revenues (current and non-current) and necessitated the restatement of our unaudited condensed consolidated financial statements for the quarter ended June 30, 2013. Additionally, these control deficiencies could result in a material misstatement of our annual and interim consolidated financial statements that would not be prevented or detected. Accordingly, we have determined that these control deficiencies constitute material weaknesses.

Remediation Efforts to Address Newly Identified Material Weaknesses

Our management has worked, and continues to work, to strengthen our internal control over financial reporting. We are committed to ensuring that such controls are designed and operating effectively. Since identifying the material weaknesses in our internal control over financial reporting, we have corrected the identified errors in the financial statements. We have developed and are continuing to develop remediation plans to fully address these control deficiencies. If not remediated, these control deficiencies could result in further material misstatements to our financial statements. Our Board of Directors and management take internal controls over and the integrity of the Company’s financial statements seriously and believe that the remediation steps described below, including with respect to personnel changes, are essential to maintaining a strong and effective internal controls over financial reporting and a strong internal control environment. The following steps are among the measures that have been implemented or will be implemented as soon as practicable after the date of this filing:

Control Environment

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Our Former CEO is no longer employed by the Company, and we are engaged in a search both within and outside of Ixia for a new Chief Executive Officer who will provide strong leadership to the Company. The Company’s Chief Innovation Officer and Chairman of the Board, who also served as the Company’s President from May 1997 until September 2007 and as its Chief Executive Officer from September 2000 until March 2008, is currently also serving as our Acting CEO.

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Our Former CFO is no longer employed by the Company, and we are engaged in a search both within and outside of Ixia, for a new CFO who will provide strong leadership to the Company and, in particular, to our finance and accounting function. The Company’s Vice President, Finance, who joined the Company as Senior Director, Finance in 2004 and served in that position until he became Vice President, Finance in 2006, is now also serving as our Acting CFO.

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We are developing and preparing to implement a training program, to be led by our Acting CEO and Acting CFO (and reinforced by senior accounting personnel with the appropriate level of expertise), for executives, finance and accounting personnel, operations personnel, sales personnel and other personnel involved in the sales process to enhance awareness and understanding of the Company’s revenue recognition policies and procedures, as well as the importance of financial reporting integrity and the Company’s Code of Conduct and Ethics Policy.

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We are developing a program to enhance the visibility of the Company’s whistleblower hotline, as well as the process, policies and procedures to assess, evaluate and communicate matters arising from whistleblower communications, including the Audit Committee’s direct oversight and monitoring of senior management’s actions undertaken to assess, evaluate and resolve whistleblower matters. We are in the process of implementing an independent internal audit function reporting directly to the Audit Committee.

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We will develop a roles and responsibilities matrix for the key accounting and operations personnel to incorporate segregation of duties considerations.

Sufficiency of Accounting Department Resources

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We have enhanced and plan to continue to enhance the Company’s finance and accounting department staff, in terms of both number and competency of personnel and particularly in the area of revenue recognition. Specifically:

We have hired two full-time revenue recognition accountants reporting to our Worldwide Revenue Manager. The Company also plans on hiring three additional revenue recognition accountants in 2014.

We have hired an Assistant Corporate Controller to assist with the development of more effective accounting policies and procedures globally.

We have hired a Director of Financial Reporting to lead and oversee our SEC reporting function.

We also plan to hire a new North American Controller to lead the accounting functions for the United States and Canada.

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We will develop, implement and deliver to all existing and new accounting department personnel a technical revenue recognition training course led by our Acting CFO and Corporate Controller, supplemented by outside experts as deemed appropriate.

Revenue Recognition

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The Company has reassessed the responsibilities of and, based on that reassessment, has realigned reporting relationships for, those having responsibilities impacting revenue recognition. For example, the revenue team (i.e., the team responsible for reviewing sales transactions and recording revenue) now reports directly to the Corporate Controller, who was hired in September 2013 and has extensive revenue recognition experience in the technology field.

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We have recently purchased a revenue recognition system to help streamline the Company’s revenue recognition processes. The Company plans to fully implement the system over the next twelve months.

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In December 2013, the Company began the process of establishing a deal desk. The deal desk is led by the Corporate Controller and is staffed by the Company’s revenue recognition personnel, all of whom are knowledgeable about revenue recognition accounting principles. The deal desk has been and will continue to implement and utilize systems and processes designed to detect and then direct non-standard sales transactions, proposed or executed, to a central location where revenue recognition personnel will assess and then account for the related revenues accordingly. The deal desk personnel will regularly communicate with sales, technical support, order management, legal and operations personnel regarding sales transactions, proposed or executed, to proactively identify non-standard sales transactions. The Company will continue to enhance the deal desk function.

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We have enhanced and will continue to enhance the documentation, oversight and monitoring of accounting policies and procedures relating to revenue recognition.

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We will develop, implement and deliver revenue recognition training to executives, finance and accounting personnel, our sales force and other personnel involved in the sales process (as also noted above under “Sufficiency of Accounting Department Resources”). The first revenue recognition training will be implemented by the end of the third quarter of fiscal year 2014. Other revenue training will include new hire mandatory training (also required for personnel that transfer into one of the foregoing job categories), at least one annual “refresher” training and ongoing training on specific topics pertaining to revenue recognition.

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We will implement revised quarterly representations by our sales department personnel and other personnel involved in the sales process to assist in evaluating compliance with the Company’s revenue recognition policies and procedures.

Manual Journal Entries

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We will establish and document a more detailed accounting policy and procedures regarding (i) the documentation required to support manual journal entries and (ii) the storage of the supporting documentation for manual journal entries.

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We will implement a process to require accounting supervisors and/or managers to review and approve all manual journal entries and to ensure proper supporting evidence is maintained.

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A manual journal entry log will be maintained and used to facilitate the controller level review of manual journal entries.

The Audit Committee has directed management to develop a detailed plan and timetable for the completion of the implementation of the foregoing remedial measures and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of our internal control environment, as well as to our policies and procedures in order to improve the overall effectiveness of internal control over financial reporting.

We are committed to maintaining a strong internal control environment, and believe that these remediation actions will represent significant improvements in our controls when they are fully implemented. Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Acting Chief Executive Officer and our Acting 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, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control will be met. The design of controls 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 controls, 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 or will be 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 controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Discussion of legal matters is incorporated by reference from Part I, Item 1, Note 12 to the condensed consolidated financial statementsincluded in this Form 10-Q/A, and should be considered an integral part of this Part II, Item 1, “Legal Proceedings.”

ITEM 1A. Risk Factors

Information regarding risk factors appears in Part I, “Item 1A. Risk Factors,” in our 2012 Form 10-K and in certain of our other filings with the SEC. A material change to the risk factors that appear in Part I, “Item 1A. Risk Factors,” in our 2012 Form 10-K is set forth below:

We cannot assure investors that we will be able to fully address the material weaknesses in our internal controls as of June 30, 2013 or that remediation efforts will prevent future material weaknesses

We have identified control deficiencies in our financial reporting process as of June 30, 2013 that constitute material weaknesses, which contributed to the restatement of the condensed consolidated financial statements in our previously filed Forms 10-Q for the quarters ended March 31, 2013 and June 30, 2013. See Part I, Item 4 in this Form 10-Q/A. We have initiated certain measures, including the implementation of a new revenue recognition system and increasing the number of employees on, and the expertise of, our accounting team, to remediate these weaknesses, and plan to implement additional appropriate measures as part of this effort. There can be no assurance that we will be able to fully remediate our existing material weaknesses. Further, there can be no assurance that we will not suffer from other material weaknesses in the future. If we fail to remediate these material weaknesses or failing to otherwise maintain effective internal controls over financial reporting in the future, such failure could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors and other users to lose confidence in our financial statements, limit our ability to raise capital and have a negative effect on the trading price of our common stock. Additionally, failure to remediate the material weaknesses or otherwise fail to maintain effective internal controls over financial reporting may also negatively impact our operating results and financial condition, impair our ability to timely file our periodic reports with the SEC, subject us to additional litigation and regulatory actions and cause us to incur substantial additional costs in future periods relating to the implementation of remedial measures.

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

See the Exhibit Index following the signature page to this Form 10-Q/A for a list of exhibits filed or furnished with or incorporated by reference as part of this report, which Exhibit Index is incorporated herein by reference.

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:	June 20, 2014	By:	/s/ Errol Ginsberg
			Errol Ginsberg Acting Chief Executive Officer

Date:

June 20, 2014

By:

/s/ Brent Novak

Brent Novak

Acting Chief Financial Officer

EXHIBIT INDEX

Exhibit No.	Description

10.1*	Sixth Amendment to Office Lease entered into as of June 18, 2013 between MS LPC Malibu Property Holdings, LLC and the Company⁽⁵⁾

10.2	Amendment No. 2 to Ixia 2010 Employee Stock Purchase Plan, as amended⁽¹⁾

10.3	Amendment No. 3 to Ixia 2010 Employee Stock Purchase Plan, as amended⁽²⁾

10.4	Ixia 2013 Senior Officer Bonus Plan⁽³⁾

10.5	Second Amended and Restated Ixia 2008 Equity Incentive Plan⁽⁴⁾

31.1*	Certification of Acting Chief Executive Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*	Certification of Acting Chief Financial Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*	Certifications of Acting Chief Executive Officer and Acting 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

101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Document
101.LAB**	XBRL Taxonomy Label Linkbase Document
101.PRE**	XBRL Taxonomy Presentation Linkbase Document

Filed herewith.

**		The following financial information in the Registrant’s Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2013, is formatted in Extensible Business Reporting Language (XBRL) and electronically submitted herewith: (i) unaudited condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012, (ii) unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2013 and 2012, (iii) unaudited condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2013 and 2012, (iv) unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2013 and 2012, and (v) notes to unaudited condensed consolidated financial statements. In accordance with Rule 406T of Regulation S-T, such electronically submitted information shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

(1)		Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (Reg. No. 333-188689) filed with the Commission on May 17, 2013.

(2)		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on June 25, 2013.

(3)		Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on June 25, 2013.

(4)		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on June 25, 2013.

(5)		Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q (File No. 03-31523) filed with the Commission on August 9, 2013.

Ixia (XXIA) Inactive 10-Q/A2013 Q2 Quarterly report (amended)