UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission File Number 000-31523

IXIA

26601 West Agoura Road, Calabasas, CA 91302
(Address of principal executive offices, including zip code)

(818) 871-1800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ]

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

IXIA

TABLE OF CONTENTS

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IXIA

Condensed Consolidated Balance Sheets
(in thousands)

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

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IXIA

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

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IXIA

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

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IXIA

Notes to Condensed Consolidated Financial Statements

September 30, 2004
(unaudited)

1.

Business

     Ixia (the “Company”) was incorporated on May 27, 1997 as a California corporation. The Company develops, markets and sells high performance IP network testing solutions. These solutions are highly scalable and generate, capture, characterize, and emulate network and application traffic, establishing definitive performance and conformance metrics of network devices or systems under test. The Company’s testing solutions are used by network and telephony equipment manufacturers, semiconductor manufacturers, service providers, and large enterprises to validate the functionality and reliability of complex IP networks, devices, and applications. The Company’s IxVoice products address the growing need for IP telephony test solutions for developing Voice over IP networks. The Company’s Real World Traffic Suite addresses the growing need to test applications and networks prior to deployment under realistic load conditions. The Company’s analysis solutions utilize a wide range of industry-standard interfaces, including Ethernet, SONET and ATM.

2.

Basis of Presentation

     The accompanying condensed consolidated financial statements as of September 30, 2004 and for the three and nine months ended September 30, 2004 and 2003, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, operating results and cash flows for the interim periods presented. The results of operations for the current interim periods presented are not necessarily indicative of results to be expected for the full year ending December 31, 2004 or any other future period.

     These condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

3.

Inventories

     Inventories consist of the following (in thousands):

4.

Stock-Based Compensation

     The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations of FASB Interpretation (“FIN”) No. 44, “Accounting for Certain Transactions involving Stock

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IXIA

Notes to Condensed Consolidated Financial Statements

Compensation.” Accordingly, compensation expense related to employee stock options is recorded only if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price.

     As prescribed by SFAS 123, the Company calculated the fair value of each option grant on the respective dates of grant. The Company used the Black-Scholes option pricing model using the following assumptions:

     Expected volatility is based on the Company’s past experience, adjusted, if necessary, to reflect ways in which current information indicates that the future is reasonably expected to differ from the past. During the third quarter of 2004 and in connection with a third party assessment, the Company refined its calculation of expected volatility, as permitted by SFAS 123, to better estimate future fluctuations over the expected lives of granted options.

     The following table illustrates the effect on stock-based compensation, net income and earnings per share on a pro forma basis as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data):

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IXIA

Notes to Condensed Consolidated Financial Statements

5.

Earnings Per Share

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

     The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2004 and 2003 (in thousands, except per share data):

6.

Concentrations

International Revenues:

     Net revenues from international product shipments were $7.3 million and $6.2 million for the three months ended September 30, 2004 and 2003, respectively, and $21.6 million and $17.7 million for the nine months ended September 30, 2004 and 2003, respectively.

Significant Customer:

     For the three and nine months ended September 30, 2004 and 2003, only one customer comprised more than 10% of net revenues as follows (in thousands, except percentages):

     As of September 30, 2004 and December 31, 2003, the Company had receivable balances from the customer approximating 29% and 20%, respectively, of total accounts receivable.

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IXIA

Notes to Condensed Consolidated Financial Statements

7.

Acquisition of G3 Nova

     On February 20, 2004, the Company completed the acquisition of all of the outstanding capital stock of G3 Nova Technology, Inc. (“G3 Nova”). G3 Nova develops and sells Voice over IP test tools for enterprise call centers, communication networks and network devices. This acquisition opens new growth opportunities for the Company by allowing the Company to offer a broader portfolio of products to customers, as well as gain access to new customer segments. The results of G3 Nova’s operations have been included in the consolidated financial statements since the acquisition date.

     The purchase price of $9.8 million included $5.5 million in cash, 307,020 shares of the Company’s common stock valued at $3.8 million and legal and other acquisition costs of $196,000. In addition, a contingent payment of up to $2.5 million may be paid based upon sales of G3 Nova products from July 2004 until June 2005. For the three months ended September 30, 2004, $384,000 of the contingent payment had been earned. Contingent payments earned are reflected as additional goodwill when or if payments become due. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

     Of the $3.7 million of acquired intangible assets, $2.5 million was assigned to acquired technology, $1.0 million was assigned to customer contracts, relationships and backlog and $200,000 was assigned to a covenant not to compete. These intangible assets will be amortized using a straight-line method over their expected useful lives ranging from three to four and one half years. No goodwill is deductible for income tax purposes.

     The following table summarizes the pro forma revenue, net income and earnings per share had the G3 Nova acquisition occurred on January 1, 2004 and 2003, respectively (in thousands, except per share data):

     The pro forma results have been prepared for comparative purposes only and include adjustments for amortization of identifiable intangible assets resulting from the acquisition. These results do not purport to be indicative of the results of operations which would have resulted had the acquisition been in effect as of January 1, 2003 or the future results of operations of the combined organization.

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IXIA

Notes to Condensed Consolidated Financial Statements

8.

Recent Accounting Pronouncements

     In March 2004, the EITF reached a consensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” EITF No. 03-1 requires disclosures about investments accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” in an unrealized loss position and are designed to help financial statement users analyze a company’s unrealized losses and better understand the basis for any management conclusion that the impairment is temporary. All new disclosures are effective for the annual reporting period ending December 31, 2004. The Company anticipates that the adoption of EITF No. 03-1 will not have a material impact on our financial position, results of operations or cash flows.

     In February 2004, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-1 “Reporting Variable Interests in Specified Assets of Variable Interest Entities under Paragraph 13 of FASB Interpretation No. 46 (Revised December 2003) (“FIN 46(R)”), Consolidation of Variable Interest Entities” to replace FIN 46-2 as a result of the release of FIN 46R in December 2003. The FSP states that a specified asset of a variable interest entity and the liability secured by the asset should not be deemed a separate variable interest entity. The effective date for the FSP follows the effective date and transition guidance specified in FIN 46R. The Company anticipates that the adoption of FIN 46(R)-1 will not have a material impact on our financial position, results of operations or cash flows.

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

     The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and nine months ended September 30, 2004, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2004, or for any other future period. The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, including the “Risk Factors” section and the consolidated financial statements and notes included therein.

OVERVIEW

     We develop, market and sell high performance IP network testing solutions. These solutions are highly scalable and generate, capture, characterize, and emulate network and application traffic, establishing definitive performance and conformance metrics of network devices or systems under test. Our testing solutions are used to validate the functionality and reliability of complex IP networks, devices, and applications. Our IxVoice products address the growing need for IP telephony test solutions for developing Voice over IP networks. Our Real World Traffic Suite addresses the growing need to test applications and networks prior to deployment under realistic load conditions. Our analysis solutions utilize a wide range of industry-standard interfaces, including Ethernet, SONET and ATM.

     The following table sets forth, for the periods indicated, our net revenues by principal product category in dollars and as a percentage of total net revenues: