IXIA - FORM 10-Q - November 7, 2011

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - IXIA	ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - IXIA	ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - IXIA	ex32-1.htm
EXCEL - IDEA: XBRL DOCUMENT - IXIA	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2011

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________

Commission File Number 000-31523

IXIA

(Exact name of Registrant as specified in its charter)

California		95-4635982
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

26601 West Agoura Road, Calabasas, CA 91302

(Address of principal executive offices, including zip code)

(818) 871-1800

(Registrant’s telephone number, including area code)

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

Indicate 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” 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		69,740,015
(Class of Common Stock)		(Outstanding at October 27, 2011)

IXIA

TABLE OF CONTENTS

			Page Number
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements (unaudited)

		Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010	3

		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010	4

		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26

	Item 4.	Controls and Procedures	27


PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	28

	Item 1A.	Risk Factors	28

	Item 5.	Other Information	28

	Item 6.	Exhibits	28

SIGNATURES			29

PART I.

FINANCIAL INFORMATION

ITEM 1.

Financial Statements (unaudited)

IXIA

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

	September 30,		December 31,
	2011		2010
Assets
Current assets:
Cash and cash equivalents	$	48,416	$	76,082
Short-term investments in marketable securities		113,420		151,696
Accounts receivable, net		67,227		67,838
Inventories		30,400		28,965
Prepaid expenses and other current assets		15,119		12,647
Total current assets		274,582		337,228

Investments in marketable securities		205,382		111,440
Property and equipment, net		24,172		22,745
Intangible assets, net		50,171		52,778
Goodwill		66,429		59,384
Other assets		6,455		6,308
Total assets	$	627,191	$	589,883


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	9,276	$	9,924
Accrued expenses		30,455		33,778
Deferred revenues		40,047		37,505
Income taxes payable		—		1,648
Total current liabilities		79,778		82,855

Deferred revenues		9,163		9,170
Other liabilities		5,960		6,378
Convertible senior notes		200,000		200,000
Total liabilities		294,901		298,403


Shareholders’ equity:
Common stock, without par value; 200,000 shares authorized at September 30, 2011 and December 31, 2010; 69,703 and 67,613 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively		129,294		115,590
Additional paid-in capital		146,719		133,249
Retained earnings		54,198		40,187
Accumulated other comprehensive income		2,079		2,454
Total shareholders’ equity		332,290		291,480

Total liabilities and shareholders’ equity	$	627,191	$	589,883

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					Nine months ended
	September 30,					September 30,
	2011			2010		2011			2010
Revenues:
Products	$	62,062		$	58,540	$	181,981		$	164,134
Services		15,209			12,350		42,724			34,901
Total revenues		77,271			70,890		224,705			199,035

Costs and operating expenses:(1)
Cost of revenues – products		14,164			14,231		41,199			39,449
Cost of revenues – services		1,573			1,535		4,682			4,561
Research and development		18,932			17,802		55,996			54,323
Sales and marketing		20,397			19,665		64,525			57,986
General and administrative		9,420			8,443		25,892			25,667
Amortization of intangible assets		4,239			3,532		11,718			13,676
Acquisition and other related		377			312		851			2,991
Restructuring		—			30		—			3,587
Total costs and operating expenses		69,102			65,550		204,863			202,240

Income (loss) from operations		8,169			5,340		19,842			(3,205	)
Interest income and other, net		1,022			578		1,813			9,674
Interest expense		(1,800	)		—		(5,400	)		—
Income before income taxes		7,391			5,918		16,255			6,469
Income tax expense		943			1,044		2,244			1,087
Net income	$	6,448		$	4,874	$	14,011		$	5,382

Earnings per share:
Basic	$	0.09		$	0.07	$	0.20		$	0.08
Diluted	$	0.09		$	0.07	$	0.20		$	0.08

Weighted average number of common and common equivalent shares outstanding:
Basic		69,613			65,513		68,968			64,388
Diluted		70,892			68,018		71,595			66,341



(1) Stock-based compensation included in:
Cost of revenues - products	$	81		$	115	$	329		$	371
Cost of revenues - services		31			44		125			140
Research and development		918			1,191		3,374			3,748
Sales and marketing		679			772		2,546			2,503
General and administrative		1,172			916		3,614			2,468

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

IXIA

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine months ended
	September 30,
	2011			2010

Cash flows from operating activities:
Net income	$	14,011		$	5,382
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		9,858			8,240
Amortization of intangible assets		11,718			13,676
Stock-based compensation		9,988			9,230
Deferred income taxes		(696	)		(634	)
Tax benefit (shortfall) from stock option transactions		3,482			(350	)
Excess tax benefits from stock-based compensation		(2,852	)		(712	)
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable, net		2,271			(10,078	)
Inventories		(1,115	)		(9,118	)
Prepaid expenses and other current assets		(2,385	)		495
Other assets		694			531
Accounts payable		(814	)		5,240
Accrued expenses		(4,927	)		10,143
Deferred revenues		2,035			4,543
Income taxes payable and other liabilities		(1,817	)		(208	)

Net cash provided by operating activities		39,451			36,380

Cash flows from investing activities:
Purchases of property and equipment		(10,891	)		(11,544	)
Purchases of available-for-sale securities		(323,638	)		(63,140	)
Proceeds from available-for-sale securities		266,990			49,365
Purchases of other intangible assets		(311	)		(275	)
Payments in connection with acquisition, net of cash acquired		(15,823	)		(525	)

Net cash used in investing activities		(83,673	)		(26,119	)

Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan options		13,704			16,657
Excess tax benefits from stock-based compensation		2,852			712

Net cash provided by financing activities		16,556			17,369

Net (decrease) increase in cash and cash equivalents		(27,666	)		27,630
Cash and cash equivalents at beginning of period		76,082			15,061
Cash and cash equivalents at end of period	$	48,416		$	42,691

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

IXIA

Notes to Condensed Consolidated Financial Statements

(unaudited)

Business

We were incorporated on May 27, 1997 as a California corporation. Ixia is a leading supplier of converged network and application performance testing solutions for network equipment manufacturers, service providers, enterprises, and government agencies. We provide a comprehensive solution for testing converged IP/Ethernet services from the wireless edge to the Internet core. Our test and simulation platforms use powerful and high performance technology to help customers design and validate a broad range of wired, Wi-Fi and 3G (third generation) / LTE (Long-Term Evolution) networking equipment and networks. Our hardware platforms use a common set of software application tools that enable our customers to create, generate and automate realistic, media-rich application traffic to stress routers, switches and converged network appliances.

2.	Basis of Presentation

The accompanying condensed consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010, 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 period presented is not necessarily indicative of results to be expected for the full year ending December 31, 2011 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, 2010 has been derived from our audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2010. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Other than the adoption of authoritative guidance for the accounting of multiple-deliverable revenue arrangements and certain revenue arrangements that include software elements issued by the Financial Accounting Standards Board (“FASB”) during the first quarter of 2011 discussed below in Note 4, there have been no significant changes in our accounting policies during the three and nine months ended September 30, 2011, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2010.

3.	Acquisitions

On July 18, 2011, we completed our acquisition of all of the outstanding stock of VeriWave, Inc. (“VeriWave”). VeriWave’s test solutions validate wireless networks, devices, and applications by benchmarking and measuring speed, quality, interoperability, compliance, and other pivotal aspects of mobile performance. With this acquisition, we have broadened our product portfolio, expanded our addressable market and enhanced our ability to provide our customers with a complete end-to-end network testing solution. In addition, we leveraged the existing sales channels and experienced product development resources to realize some operational and cost synergies. These factors, among others, contributed to a purchase price in excess of the estimated fair value of net identifiable assets acquired, and, as a result, we recorded goodwill in connection with this transaction.

The aggregate purchase price totaled $15.8 million, and was funded from our existing cash and cash equivalents.

For the three and nine months ended September 30, 2011, acquisition and other related costs related to the VeriWave transaction, including integration activities were, $377,000 and $851,000, respectively. These acquisition and other related costs have been expensed as incurred, and have been included within the Acquisition and other related expenses line item on our consolidated statements of operations.

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	$	235
Accounts receivable		1,660
Inventories		320
Other		268
Identifiable intangible assets		8,800
Goodwill		7,045
Total assets acquired		18,328
Accounts payable and accrued expenses		(2,020	)
Deferred revenues		(500	)
Net assets acquired	$	15,808

The preliminary purchase price allocation is based on a preliminary valuation of the assets acquired and liabilities assumed, and our estimates and assumptions are subject to change within the purchase price allocation period as valuations are finalized.

The identifiable intangible assets of $8.8 million consist of $4.3 million of acquired technology, $3.5 million of customer relationships, and $1.0 million of other identifiable intangible assets. 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 the United States in connection with this transaction is not deductible for income tax purposes. We do not consider the acquisition of VeriWave material for further disclosure.

Revenue

Recently Adopted Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance for the accounting of multiple-deliverable revenue arrangements, which establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This new authoritative guidance for arrangements with multiple deliverables requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. It also establishes a selling price hierarchy for determining the selling price of each deliverable. The new guidance also eliminates the residual method of allocation for multiple-deliverable revenue arrangements that are outside the scope of software revenue recognition guidance.

In October 2009, the FASB also issued authoritative guidance for the accounting of certain revenue arrangements that include software elements, which changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality” of the tangible products, and excludes these products from the software revenue accounting guidance.

We adopted the new guidance on revenue recognition in the first quarter of 2011 on a prospective basis for applicable revenue arrangements originating or materially modified on or after January 1, 2011. The impact of the adoption of the new revenue recognition guidance is to accelerate the timing of revenue recognition principally related to partial shipments of hardware products at the end of accounting periods, which impact may vary from period to period. In periods prior to the adoption of the new guidance, the revenue related to partial shipments of our hardware products which were sold with software deliverables was deferred under the software revenue recognition guidance until the shipment or delivery of all items of a multiple element arrangement had occurred, other than the delivery of post contract customer support and maintenance (“PCS”). PCS was deferred based on established vendor specific objective evidence (“VSOE”) of selling price. As our revenues are generated from the sale of hardware and software products, and related services, a portion of our revenues will continue to be recognized under the software revenue recognition guidance (see below for additional information). Had we recognized revenue in a manner consistent with our policies prior to January 1, 2011, our total revenues for the three and nine months ended September 30, 2011 would have been reduced by approximately 5% and 3%, respectively.

Revenue Recognition

Our revenues are principally derived from the sale and support of our test systems. Product revenues primarily consist of sales of our hardware and software products. Our hardware products primarily relate to our traffic generation and analysis hardware platform consisting of a multi-slot chassis and interface cards. Our primary hardware platform is enabled by our operating system software that is essential to the functionality of the hardware platform. Our software products consist of a comprehensive suite of technology-specific test applications. Our software products are typically installed on and work with our hardware products to further enhance the core functionality of the overall test system, although some of our software products can be operated independently from our hardware products.

Our service revenues primarily consist of post contract customer support and maintenance (“PCS”) related to the initial period of service provided with the purchase of our software or software-related (i.e., our operating system software) products and separately purchased extended PCS contracts. PCS on our software and software-related products includes unspecified when and if available software upgrades and customer technical support services. Service revenues also include separately purchased extended hardware warranty support, implied PCS and hardware warranty support, training and other professional services.

As our test systems include hardware and software products, and the related services previously discussed, we recognize our revenue in accordance with authoritative guidance on both hardware and software revenue recognition. Furthermore, in accordance with the amended revenue recognition guidance, our hardware platform and certain other products that include both tangible products and software elements that function together to deliver the tangible product’s essential functionality have been scoped out of software revenue recognition guidance, and therefore these products are accounted for as hardware products for revenue recognition purposes.

For our hardware and software products, and related services, we recognize revenue based on the following four criteria: whether (i) evidence of an arrangement exists, which is typically in the form of a customer purchase order; (ii) delivery has occurred (i.e., risks and rewards of ownership have passed to the customer); (iii) the sales price is fixed or determinable; and (iv) collection is deemed probable. Provided that the above criteria are met, revenue from hardware and software product sales is typically recognized upon shipment and service revenues are recognized as the services are provided or completed. Our service revenues from our initial and separately purchased PCS contracts and from our extended hardware warranty arrangements are recognized on a straight-line basis over the applicable contractual periods. Service revenues from our implied PCS and hardware warranty support arrangements, which account for the circumstances in which we provide PCS and hardware warranty support after the expiration of the customer’s contractual periods, are recognized ratably over the expected economic life of our products of four years.

Our test systems are generally fully functional at the time of shipment and do not require us to perform any significant production, modification, customization or installation after shipment. If our arrangements include acceptance provisions based on customer specified criteria for which we cannot reliably demonstrate that the delivered product meets all the specified criteria, revenue is deferred until the earlier of the receipt of written customer acceptance or the expiration of the acceptance period. In addition, our arrangements generally do not include any provisions for cancellation, termination or refunds.

Multiple Element Arrangements and Allocation of Value

Our arrangements with our customers to provide our test systems typically include a combination of our hardware and software products, as well as the related PCS and/or extended warranty support of these products, and therefore are commonly referred to as multiple element arrangements. When sales arrangements involve hardware and software elements, we use a two-step process to allocate value to each element in the arrangement:

(1)

The total arrangement fee is allocated to the non-software deliverables (e.g., chassis, interface cards, and PCS related to our operating system software that is essential to the functionality of our hardware platform) and the software deliverables as a group (e.g., application software and PCS) based on a relative selling price (“RSP”) method applied to all elements in the arrangement using the fair value hierarchy in the amended revenue recognition guidance as discussed below, and

(2)

The value assigned to the software group for the software deliverables is then allocated to each software element based on the relative fair values of those elements in accordance with software revenue recognition guidance. The fair value of an element must be based on vendor specific objective evidence (“VSOE”) of the selling price, which typically only exists for PCS as discussed below.

Under the RSP method, the selling price to be used in the allocation of the total arrangement fee to each of the elements, or deliverables, is based on a selling price hierarchy, where the selling price for each element is based on (i) VSOE, if available; (ii) third-party evidence (“TPE”), if available and VSOE is not available; or (iii) the best estimate of selling price (“BESP”), if neither VSOE nor TPE are available.

We determine VSOE based on sales prices charged to customers when the same element is sold separately or based upon stated future renewal pricing included in the original arrangement, provided it is substantive. Many of our products are sold as part of a multiple element arrangement and not sold separately, such as our software products, which always include an initial period (generally 90-day or 12-month periods) of free PCS. Accordingly, we have not established VSOE for nearly all of our products. On a regular basis, we separately sell PCS and extended warranty support upon the expiration of the initial PCS and warranty periods included in an initial sales arrangement and have been able to establish VSOE for our PCS and extended warranty support services.

We generally are not able to determine TPE for our products or services because our products are not interchangeable with those of our competitors. Furthermore, we are unable to reliably determine competitive selling prices when the applicable competitive products are sold separately. As such, we use BESP for all of our products and services when allocating the total consideration of multiple element arrangements to each of the deliverables under step one of the allocation process described above except for our PCS and extended warranty support services where we use VSOE. We determine BESP for a product or service by considering multiple factors including, analyzing historical sales price data for standalone and bundled arrangements, published price lists, geographies and customer types. Our estimate of BESP used in our allocation of arrangement consideration requires significant judgment and we review these estimated selling prices on a quarterly basis.

The allocation of value to each deliverable in a multiple element arrangement is completed at the inception of an arrangement, which is typically the receipt of a customer purchase order. The allocated value of each non-software deliverable is then recognized as revenue when each element is delivered, provided all of the other revenue recognition criteria discussed above have been met. For software deliverables, the total software group allocation (or total arrangement consideration for customer orders that include only software products and related services) is assigned to each deliverable based on VSOE in accordance with software revenue recognition guidance as described under step two of the allocation process above. As we do not sell our software products without PCS, we are unable to establish VSOE for our software products, and therefore use the residual method under the software revenue recognition guidance to allocate the software group (or arrangement) value to each software deliverable. Under the residual method, the software group (or arrangement) value is allocated first to the undelivered elements, typically PCS based on VSOE, and the residual portion of the value is then allocated to the delivered elements (typically the software products) and recognized as revenue, provided all other revenue recognition criteria discussed above have been met. If VSOE cannot be established for an undelivered element within the software group (or arrangement), we defer the entire value allocated to the software group (or arrangement) until the earlier of (i) delivery of all elements (other than PCS, provided VSOE has been established) or (ii) establishment of VSOE of the undelivered element(s). If the only undelivered element(s) relates to a service for which VSOE has not been established, the entire allocated value of the software group (or arrangement) is recognized as revenue over the longer of the service or PCS term.

Prior to the adoption of the amended revenue recognition guidance on January 1, 2011, our multiple element arrangements did not go through the two-step allocation process described above. The total arrangement consideration was assigned to each deliverable, including hardware products, based on VSOE in accordance with software revenue recognition guidance as described above. As a result, the substantial majority of our revenue was recognized under the residual method as VSOE was only established for PCS. This resulted in the deferral of revenue at the balance sheet date for partial shipments of multiple element arrangements. Under the amended revenue recognition guidance, we are able to allocate value to our hardware products, despite not having VSOE, and as a result are now typically able to recognize revenue for our hardware products when delivered, assuming all other revenue recognition criteria noted above have been met.

Sales to Distributors

We use distributors to complement our direct sales and marketing efforts in certain international markets. Due to the broad range of features and options available with our hardware and software products, distributors generally do not stock our products and typically place orders with us after receiving an order from an end customer. These distributors receive business terms of sale similar to those received by our other customers; and payment is not contingent on the distributor’s sell-through to and receipt of payment from its end customer. As such, for sales to distributors, we recognize revenue when the risks and rewards of ownership have transferred to the distributor provided that the other revenue recognition criteria noted above have been met.

5.	Convertible Senior Notes

On December 7, 2010, we issued $200.0 million in aggregate principal amount of 3.00% convertible senior notes due December 15, 2015 unless earlier repurchased or converted (the “Notes”). The interest is payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2011. During the second quarter of 2011, we made interest payments of $3.1 million.

As of September 30, 2011, the estimated fair value of our $200.0 million principal Notes, determined based on the market price of the Notes, was approximately $176.8 million.

6.	Inventories

Inventories consist of the following (in thousands):

	September 30,		December 31,
	2011		2010

Raw materials	$	4,443	$	8,173
Work in process		8,133		7,745
Finished goods		17,824		13,047
	$	30,400	$	28,965

7.	Shareholders’ Equity

Other Comprehensive Income

For the three month periods ended September 30, 2011 and 2010, comprehensive income was $5.8 million and $5.3 million, respectively. Comprehensive income for the nine month periods ended September 30, 2011 and 2010, was $13.6 million and $5.9 million, respectively. In addition to net income in 2011 and 2010, the other components of comprehensive income, all net of tax, were changes in unrealized gain or loss on our investments and foreign currency translation adjustments.

Stock Award Plans

During the second quarter of 2011, our shareholders approved the Second Amendment to our Amended and Restated 2008 Equity Incentive Plan (“the Plan”), which resulted in the following:

Increase in Share Reserve. Increase of the total number of shares of our Common Stock available for future grants by 7.7 million shares to a total of 19.2 million shares of our Common Stock reserved as of September 30, 2011, of which 9.2 million shares were available for future grant as of September 30, 2011.

Introduction of Fungible Share Reserve. The share reserve under the Plan became a “fungible share reserve” so that, with respect to grants made after December 31, 2010, the authorized share reserve is reduced by (i) one share for every one share subject to a stock option or share appreciation right granted under the Plan and (ii) two shares for every one share subject to a restricted stock unit or restricted stock award granted under the Plan. Similarly, each share that is credited back to the Plan (e.g., upon expiration of an unexercised option or forfeiture of an unvested restricted stock unit) after December 31, 2010 increases the share reserve by one share if the share had been the subject of an option or share appreciation right and by two shares if the share had been subject to a restricted stock unit or restricted stock award (i.e., a “full value” award).

Acquisitions and Combinations. In connection with acquisitions and combinations by us, we could 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.

8.	Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2011 and 2010 (in thousands, except per share data):

	Three months ended				Nine months ended
	September 30,				September 30,
	2011		2010		2011		2010
Basic presentation:
Numerator for basic earnings per share:
Net income	$	6,448	$	4,874	$	14,011	$	5,382
Denominator for basic earnings per share:
Weighted average common shares outstanding		69,613		65,513		68,968		64,388

Basic earnings per share	$	0.09	$	0.07	$	0.20	$	0.08

Diluted presentation:
Numerator for diluted earnings per share:
Net income	$	6,448	$	4,874	$	14,011	$	5,382
Interest expense on convertible senior notes, net of tax		—		—		—		—
Net income used for diluted earnings per share	$	6,448	$	4,874	$	14,011	$	5,382

Denominator for dilutive earnings per share:
Weighted average common shares outstanding		69,613		65,513		68,968		64,388
Effect of dilutive securities:
Stock options and other share-based awards		1,279		2,505		2,627		1,953
Convertible senior notes		—		—		—		—
Dilutive potential common shares		70,892		68,018		71,595		66,341

Diluted earnings per share	$	0.09	$	0.07	$	0.20	$	0.08

The diluted earnings per share computation for the three and nine months ended September 30, 2011 excludes (i) the weighted average number of shares underlying our outstanding convertible senior 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 our employee stock options and other share-based awards of 3.2 million shares and 1.0 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.

The diluted earnings per share computation for the three and nine months ended September 30, 2010 excludes weighted employee stock options and other share-based awards of 1.7 million shares and 2.4 million shares, respectively, as the inclusion of these shares in the calculation would have been anti-dilutive because, in general, the exercise price of these awards exceeded the average closing price per share of our common stock.

9.	Concentrations

Significant Customer

For the three and nine months ended September 30, 2011 and 2010, only one customer accounted for more than 10% of total revenues as follows (in thousands, except percentages):

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010

Amount of total revenues	$	8,560		$	9,034		$	30,309		$	30,487
As a percentage of total revenues		11.1	%		12.7	%		13.5	%		15.3	%

As of September 30, 2011 and December 31, 2010, we had receivable balances from this customer approximating 10.1% and 6.5%, respectively, of total accounts receivable.

As of September 30, 2011 and December 31, 2010, we had a receivable balance from a second significant customer that approximated 10.4% and 14.6%, respectively, of total accounts receivable.

International Data

For the three and nine months ended September 30, 2011 and 2010, total international revenues based on customer location consisted of the following (in thousands, except percentages):

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010

Amount of total international revenues	$	37,448		$	37,234		$	113,916		$	97,075
As a percentage of total revenues		48.5	%		52.5	%		50.7	%		48.8	%

For the three and nine months ended September 30, 2011, total revenues from product shipments to Japan approximated $9.8 million, or 12.7%, of total revenues, and $21.7 million, or 9.6%, of total revenues, respectively. For the three and nine months ended September 30, 2010, total revenues from product shipments to Japan approximated $8.6 million, or 12.1%, of total revenues, and $21.2 million, or 10.7%, of total revenues, respectively.

As of September 30, 2011 and December 31, 2010, our property and equipment were geographically located as follows (in thousands):

	September 30,		December 31,
	2011		2010
United States	$	10,598	$	11,235
India		3,938		2,286
Romania		3,324		3,268
Other		6,312		5,956
	$	24,172	$	22,745

10.	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 the 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.

Financial assets carried at fair value as of September 30, 2011 and December 31, 2010 are classified in the table below in one of the three categories described above (in thousands):

	September 30, 2011								December 31, 2010
	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:(1)
Money market funds	$	8,200	$	8,200	$	—	$	—	$	6,037	$	6,037	$	—	$	—
U.S. Treasury, government and agency debt securities		—		—		—		—		30,419		—		30,419		—
Corporate debt securities		1,000		—		1,000		—		9,997		—		9,997		—
Short-term investments:(1)
U.S. Treasury, government and agency debt securities		53,933		—		53,933		—		123,619		—		123,619		—
Corporate debt securities		59,487		—		59,487		—		28,077		—		28,077		—
Long-term investments:
U.S. Treasury, government and agency debt securities (1)		89,204		—		89,204		—		55,584		—		55,584		—
Corporate debt securities (1)		112,995		—		112,995		—		50,605		—		50,605		—
Auction rate securities (2)		3,183		—		—		3,183		5,251		—		—		5,251
Total financial assets	$	328,002	$	8,200	$	316,619	$	3,183	$	309,589	$	6,037	$	298,301	$	5,251

_____________________________

(1)

To estimate the fair value of our money market funds, U.S. government and agency debt securities and corporate debt 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.

(2)

Given the disruption in the auction process, there is no longer an actively quoted market price for these securities. Accordingly, we utilized models to estimate the fair values of these auction rate securities based on, among other items: (i) the underlying structure of each security; (ii) the present value of future principal, interest and/or dividend payments discounted at the appropriate rate considering the market rate and conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) credit quality and estimates of the recovery rates in the event of default for each security. These estimated fair values could change significantly based on, among other events: (i) a further deterioration in market conditions for these securities; (ii) further declines in the credit quality of our auction rate securities or of the issuers of our auction rate securities; or (iii) a cessation of dividend payments or default on interest or principal payments by the issuer of the securities.

There were no transfers of assets between levels within the fair value hierarchy for the nine-month period ended September 30, 2011.

The following table summarizes the activity for the three and nine months ended September 30, 2011 and 2010 for our auction rate securities where fair value measurements are estimated utilizing Level 3 inputs (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010

Beginning balance	$	4,646		$	5,187		$	5,251		$	5,673
Unrealized (loss) gain recorded in other comprehensive income		(703	)		117			(631	)		25
Realized gain recorded in earnings		48			—			121			—
Settlements		(808	)		(83	)		(1,558	)		(477	)
Ending balance	$	3,183		$	5,221		$	3,183		$	5,221

There were no unrealized losses recorded in earnings for Level 3 assets still held at September 30, 2011.

11.	Commitments and Contingencies

Litigation

IneoQuest Technologies, Inc. vs. Ixia. In November 2008, IneoQuest filed a complaint against Ixia in the United States District Court for the Central District of California. The complaint alleges that Ixia makes and sells products that infringe a patent owned by IneoQuest, and that Ixia misappropriated IneoQuest’s trade secrets, in addition to numerous other related claims. The patent at issue allegedly relates to a system and method for analyzing the performance of multiple transportation streams of streaming media in packet-based networks. IneoQuest seeks a permanent injunction enjoining Ixia from infringing the patent at issue and from using IneoQuest’s trade secrets and confidential information, unspecified general and exemplary damages, and attorneys’ fees and costs.

In January 2009, Ixia filed an answer and counterclaim to IneoQuest's complaint denying IneoQuest's claims and raising several affirmative defenses. Ixia has also asserted a counterclaim against IneoQuest seeking declaratory relief that Ixia has not infringed the IneoQuest patent and that such patent is invalid. In April 2009, Ixia filed an amended answer and counterclaim to IneoQuest's complaint in which Ixia asserted that IneoQuest has infringed four patents owned by Ixia. The parties commenced discovery in this matter in the 2009 second quarter. The parties filed a Joint Claim Construction brief on November 30, 2009. On July 27, 2010, the Court issued a claim construction ruling relating to certain terms within the claims of IneoQuest's patent and ordered the parties to further brief claim construction issues related to Ixia's four asserted patents. As part of that process, Ixia eliminated one of its four patents from its infringement case. The Court has now issued two claim construction rulings related to the Ixia patents-in-suit, and ordered the parties to attend a mediation session, which was held on November 3, 2011. The parties previously held two such sessions before the same mediator. No trial date has yet been set. The Court has indicated that further orders (which will likely address discovery cutoffs, dispositive motion briefing, and trial) would be set if the matter did not settle as a result of the November 3rd mediation session. The November 3rd mediation session did not result in settlement. Therefore, it is expected the Court will set the remainder of the case schedule in the near future. Although the Company cannot predict the outcome of this matter, Ixia believes that it has strong defenses to IneoQuest's claims and is defending the action vigorously. The Company also believes it has meritorious claims of patent infringement directed against IneoQuest and will continue to pursue those claims.

Tucana Telecom NV vs. Catapult. On May 22, 2007, the Antwerp Court of Appeals heard an appeal by Tucana Telecom NV, a Belgian company, of the previous dismissal by the Antwerp Commercial Court of an action by Tucana against Catapult. Ixia acquired Catapult Communications Corporation (“Catapult”) on June 23, 2009. Tucana had sought damages of 10.4 million Euros (approximately $14.2 million as of September 30, 2011) for the alleged improper termination in 2002 by Catapult of Tucana’s distribution agreement with Catapult. On June 19, 2007, the Antwerp Court of Appeals confirmed the Commercial Court’s dismissal of Tucana’s action and assessed the costs of the appeal against Tucana. On July 22, 2008, Catapult was notified by its Belgian counsel that Tucana had appealed the judgment of the Antwerp Court of Appeals to the Belgian Supreme Court. In a decision dated January 14, 2010, the Belgium Supreme Court set aside the decision of the Antwerp Court of Appeals and remanded the matter for trial to the Ghent Court of Appeals. On March 11, 2011, Tucana served Catapult with a writ scheduling an introductory hearing before the Ghent Court of Appeals for June 22, 2011. Catapult’s counsel was informed that Tucana now asserts that it is entitled to total damages in the amount of approximately 9.5 million Euros (approximately $12.9 million as of September 30, 2011) plus interest. At the introductory hearing on June 22, 2011, the Court set a summary hearing for October 12, 2011 to consider (i) whether the issue of the Court’s jurisdiction can be examined separately from and prior to the merits of the case; and (ii) if yes, whether the Court has jurisdiction following the remand from the Supreme Court. On October 26, 2011, the Ghent Court of Appeals issued an interim ruling that the jurisdiction issue would not be examined separately from and prior to a hearing on the merits of the case. Accordingly, it adopted a procedural calendar which, taking into account the substantial case backlog at the Court, provides for an oral hearing to be held on March 26, 2014.

Catapult believes that it properly terminated any contract it had with Tucana and that Tucana is not entitled to any damages in this matter. Catapult has defended the action vigorously to date and will continue to do so. Catapult may be able to seek indemnification from Tekelec for any damages assessed against Catapult in this matter under the terms of the Asset Purchase Agreement that Catapult entered into with Tekelec, although there is no assurance that such indemnification would be available. It is not possible to determine the amount of any loss that might be incurred in this matter.

Catapult vs. Tucana Telecom NV. In June 2010, Catapult filed a complaint against Tucana in the Superior Court of the State of California, County of Los Angeles, seeking declaratory and injunctive relief and damages for breach of the distribution agreement. Catapult filed its First Amended Complaint on September 8, 2010 to address a statute of limitations issue raised by Tucana’s initial response. Catapult seeks a declaration that the distribution agreement is a valid and enforceable agreement, and that the distribution agreement’s mandatory forum selection and choice of law provisions are enforceable and require that the litigation of any dispute involving the agreement be brought in a court located in the County of Los Angeles. Catapult also seeks an order permanently enjoining Tucana from prosecuting any claims arising out of Tucana’s distribution relationship with Catapult in any judicial forum outside the County of Los Angeles. Catapult also seeks compensatory damages of not less than $200,000 for damages suffered by Catapult arising out of Tucana’s breach of the distribution agreement. Tucana filed a demurrer to the First Amended Complaint on October 12, 2010 seeking dismissal of the action based on the statute of limitations and the doctrine of laches. Catapult filed its opposition to the demurrer on November 23, 2010. The hearing on the demurrer was held on March 24, 2011. The Superior Court overruled the demurrer in its entirety and ordered Tucana to answer the complaint in ten days. On April 4, 2011, Tucana filed an answer to the complaint generally denying Catapult’s allegations and alleging certain affirmative defenses. The parties are now actively engaged in discovery. Because of a judicial reassignment, the previously set trial date in the California action of October 4, 2011 has been vacated and no new trial date has yet been set. The parties attended a private mediation on May 18, 2011 in Los Angeles which did not resolve the case. Tucana has filed a motion for summary judgment seeking dismissal of the entire action, a motion which Catapult has vigorously opposed. The hearing on that motion is currently scheduled for December 19, 2011.

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

12.	Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued new disclosure guidance related to the presentation of the Statement of Comprehensive Income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under the new guidance, we will be 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. We expect to adopt this new guidance on January 1, 2012. There will be no impact to our consolidated financial results as the amendments relate only to changes in financial statement presentation.

In September 2011, the FASB issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more likely than not that goodwill will be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This guidance is effective for fiscal years beginning after December 15, 2011. Early application is permitted. We expect to adopt this new guidance in the fourth quarter of 2011. The adoption of this guidance will not have a material impact on our financial position, results of operations and cash flows.

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”), including the “Risk Factors” section and the consolidated financial statements and notes included therein.

OVERVIEW

Acquisition of VeriWave, Inc. On July 18, 2011, we completed our acquisition of all of the outstanding stock of VeriWave, Inc. (“VeriWave”). The purchase price for VeriWave totaled $15.8 million, or $15.6 million net of VeriWave’s existing cash and investment balances at the time of the acquisition. The acquisition was funded from our existing cash and cash equivalents. VeriWave’s test solutions validate wireless networks, devices, and applications by benchmarking and measuring speed, quality, interoperability, compliance, and other pivotal aspects of mobile performance. The results of operations of VeriWave have been included in the consolidated statements of operations and cash flows since the date of the acquisition.

Revenues. Our revenues are principally derived from the sale and support of our test systems. Product revenues primarily consist of sales of our hardware and software products. Our hardware products primarily relate to our traffic generation and analysis hardware platform consisting of a multi-slot chassis and interface cards. Our primary hardware platform is enabled by our operating system software that is essential to the functionality of the hardware platform. Our software products consist of a comprehensive suite of technology-specific test applications. Our software products are typically installed on and work with our hardware products to further enhance the core functionality of the overall test system, although some of our software products can be operated independently from our hardware products.

Sales of our Ethernet interface cards, including our 1 Gigabit Ethernet, 10 Gigabit Ethernet and 40/100 Gigabit Ethernet interface cards, continue to represent the majority of our total revenues, and we expect this trend to continue over the next twelve months. Sales to our largest customer accounted for approximately $8.6 million, or 11.1%, and $30.3 million, or 13.5%, of our total revenues for the three and nine months ended September 30, 2011, respectively, and $9.0 million, or 12.7%, and $30.5 million, or 15.3%, of our total revenues for the three and nine months ended September 30, 2010, respectively. To date, we have generated the majority of our revenues from network equipment manufacturers. While we expect that we will continue to have some customer concentration for the foreseeable future, we continue to sell our products to a wider variety and increasing number of customers. To the extent that we develop a broader and more diverse customer base, our reliance on any one customer or customer type should diminish. From a geographic perspective, our revenues from sales to customer locations outside of the United States continued to grow, increasing by 17.3% in the nine months ended September 30, 2011 over the same period in 2010. We generated revenues from shipments to international locations of $37.4 million, or 48.5%, and $113.9 million, or 50.7%, of our total revenues for the three and nine months ended September 30, 2011, respectively, compared to $37.2 million, or 52.5%, and $97.1 million, or 48.8%, of our total revenues for the three and nine months ended September 30, 2010, respectively. During the nine months ended September 30, 2011, our total revenues generated from international locations increased both in dollars and as a percentage of revenues when compared to the same period in 2010 primarily due to sales growth in Europe and Asia Pacific as we continued to invest in and develop our sales teams and sales channels in these regions. We intend to continue increasing our sales efforts internationally in Europe and the Asia Pacific region. Looking forward, we expect our international revenues to be approximately 50% of our total revenues on an annualized basis.

Despite a 12.9% increase in our total revenues in the first nine months of 2011 compared to the same period in 2010, our total revenues in the second quarter of 2011 were lower than expected primarily due to delays and/or reductions in spending at certain customers, as well as our inability to fulfill certain orders received late in the 2011 second quarter. While our total revenues rebounded in the third quarter of 2011 and grew 12.0% compared to the immediately preceding second quarter of 2011, the reduction in customer spending in the 2011 second quarter and the general uncertainty we continue to see in the global business environment limit our ability to accurately forecast the future demand and revenue trends for our products and services.

We adopted new revenue recognition guidance in the first quarter of 2011 on a prospective basis for applicable arrangements originating or materially modified on or after January 1, 2011. Had we recognized revenue in a manner consistent with our policies prior to January 1, 2011, our total revenues for the three and nine months ended September 30, 2011 would have been reduced by approximately 5% and 3%, respectively. For additional information with respect to revenue recognition, see Note 4 to the Consolidated Financial Statements included in this Form 10-Q.

Stock-Based Compensation. For the three and nine months ended September 30, 2011, stock-based compensation expense was $2.9 million and $10.0 million, respectively. Stock-based compensation for the three and nine months ended September 30, 2010 was $3.0 million and $9.2 million, respectively. The aggregate amount of gross unrecognized stock-based compensation to be expensed in the years 2011 through 2015 related to unvested share-based awards as of September 30, 2011 is approximately $12.6 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 facility in Calabasas, California and/or in 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 warranty cost of hardware that is replaced or repaired during the warranty coverage period. Cost of revenues does not include the amortization of purchased technology related to our acquisitions of certain businesses, product lines and technologies of $2.9 million and $7.9 million for the three and nine months ended September 30, 2011, respectively, and $2.4 million and $10.1 million for the three and nine months ended September 30, 2010, 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.

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

production 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 primarily 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 expenses discussed above in this Item 2 and amortization of intangible assets, acquisition and other related costs and restructuring expenses discussed below, to increase for the remainder of 2011 due primarily to 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 amortization of the purchase price of the various intangible assets over their estimated useful lives. We evaluate our identifiable definite life 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 exceeds its undiscounted cash flows and its estimated fair value in the period that the impairment circumstances occurred. We 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, 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 related charges, as well as facility-related charges to exit certain locations.

Interest Income and Other, Net represents 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 such as legal settlement proceeds.

Interest Expense consists of interest due to the holders of our 3.00% convertible senior notes issued in December 2010, as well as the amortization of the associated debt issuance costs. See Note 5 to the Consolidated Financial Statements included in this Form 10-Q.

Income Tax is determined based on the amount of our 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 the recording of valuation allowances against certain deferred tax assets and changes to these valuation allowances in future periods. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements included in our 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 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 with the exception of the revenue recognition policy discussed above in “Revenues” in the “Overview” section of this Item 2 and as more fully discussed in Note 4 to the Consolidated Financial Statements included in this Form 10-Q, have significantly changed since our Annual Report on Form 10-K for the year ended December 31, 2010. Critical accounting policies and estimates are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2010 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:

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010

Revenues:
Products		80.3	%		82.6	%		81.0	%		82.5	%
Services		19.7			17.4			19.0			17.5
Total revenues		100.0			100.0			100.0			100.0

Costs and operating expenses:(1)
Cost of revenues - products		18.3			20.1			18.3			19.8
Cost of revenues - services		2.0			2.2			2.1			2.3
Research and development		24.5			25.2			24.9			27.3
Sales and marketing		26.4			27.7			28.8			29.1
General and administrative		12.2			11.9			11.5			12.9
Amortization of intangible assets		5.5			5.0			5.2			6.9
Acquisition and other related		0.5			0.4			0.4			1.5
Restructuring		—			0.0			—			1.8
Total costs and operating expenses		89.4			92.5			91.2			101.6

Income (loss) from operations		10.6			7.5			8.8			(1.6	)
Interest income and other, net		1.2			0.8			0.8			4.9
Interest expense		(2.3	)		—			(2.4	)		—
Income before income taxes		9.5			8.3			7.2			3.3
Income tax expense		1.2			1.4			1.0			0.6
Net income		8.3	%		6.9	%		6.2	%		2.7	%

________________________

(1) Stock-based compensation included in:
Cost of revenues - products		0.1	%		0.2	%		0.1	%		0.2	%
Cost of revenues - services		0.0			0.1			0.1			0.1
Research and development		1.2			1.3			1.5			1.9
Sales and marketing		0.9			0.6			1.1			1.3
General and administrative		1.5			1.3			1.6			1.2

Comparison of Three and Nine Months Ended September 30, 2011 and 2010

Revenues. In the third quarter of 2011, total revenues increased 9.0% to $77.3 million from the $70.9 million recorded in the third quarter of 2010. This increase was primarily due to a net increase in the ratable recognition of revenues from initial PCS and extended PCS and warranty contracts as well as the incremental product revenue recognized related to our July 2011 acquisition of VeriWave.

In the first nine months of 2011, total revenues increased 12.9% to $224.7 million from $199.0 million recorded in the same period of 2010. This increase was primarily due to a $9.6 million increase in shipments of our hardware products (primarily our 10 Gigabit and 40/100 Gigabit Ethernet interface cards) and an increase in the ratable recognition of our revenues from initial PCS and extended PCS and warranty contracts.

Cost of Revenues. As a percentage of total revenues, our total cost of revenues decreased to 20.3% in the third quarter of 2011 from 22.3% in the third quarter of 2010. As a percentage of total revenues, our total cost of revenues decreased to 20.4% in the first nine months of 2011 from 22.1% in the first nine months of 2010. The decrease in our total cost of revenues as a percentage of total revenues for the three and nine months ended September 30, 2011 as compared to the same period in 2010 was principally due to i) the increase in our services revenue and the leverage gained as the increase in services revenue was greater than the increase in cost, ii) a shift in customer mix away from lower gross margin accounts, and iii) due to the lower royalty payments, as we were no longer obligated to pay royalties on certain terminated contracts.

Research and Development Expenses. In the third quarter of 2011, research and development expenses increased 6.3% to $18.9 million from $17.8 million in the third quarter of 2010. This increase was primarily due to a net increase in compensation and related employee costs of $1.4 million. The net increase in compensation and related employee costs was primarily due to an increase in the number of our research and development personnel (particularly at our international development centers).

Research and development expenses for the first nine months of 2011 and 2010 increased 3.1% to $56.0 million from $54.3 million in the same period of 2010. This increase was primarily due to an increase in compensation and related employee costs, excluding employee bonus expenses, of $2.1 million, and a one-time charge of $900,000 incurred in the first quarter of 2011 to terminate and settle a product development contract, partially offset by a decrease in employee bonus expenses of $1.0 million and a decrease in consulting costs of $812,000. The net increase in compensation and related employee costs was primarily due to an increase in the number of our research and development personnel (particularly at our international development centers).

Sales and Marketing Expenses. In the third quarter of 2011, sales and marketing expenses increased 3.7% to $20.4 million from $19.7 million in the third quarter of 2010. This increase was primarily due to an increase in depreciation expense of nearly $600,000 primarily related to an increase in the number of our demonstration units in the field.

Sales and marketing expenses for the first nine months of 2011 and 2010 increased 11.3% to $64.5 million from $58.0 million in the same period of 2010. This increase was primarily due to an increase in compensation and related employee costs, including travel, of $3.4 million, and higher depreciation expense of $1.6 million primarily related to an increase in the number of our demonstration units in the field. The increase in compensation and related employee costs was primarily due to the increase in the number of our sales personnel.

General and Administrative Expenses. In the third quarter of 2011, general and administrative expenses increased 11.6% to $9.4 million from $8.4 million in the third quarter of 2010. This increase was primarily due to an increase in litigation expenses and other legal fees of nearly $500,000.

For the first nine months of 2011, general and administrative expenses increased 0.9% to $25.9 million from $25.7 million in the same period of 2010. This increase included an increase in stock-based compensation expense of $1.1 million, partially offset by a decrease in outside services costs of $874,000 primarily related to transition services during the 2010 period associated with the acquisition of the N2X Data Network Testing Product line (“N2X”) of Agilent Technologies, Inc.

Amortization of Intangible Assets. In the third quarter of 2011, amortization of intangible assets increased 20.0% to $4.2 million from $3.5 million in the third quarter of 2010 primarily due to the incremental amortization of intangibles related to our July 2011 acquisition of VeriWave. In the first nine months of 2011, amortization of intangible assets decreased 14.3% to $11.7 million from the $13.7 million recorded in the first nine months of 2010. The decrease in the first nine months of 2011 compared to the same period in 2010 is primarily related to the completion of amortization periods for certain intangible assets, partially offset by the incremental amortization of intangibles related to the acquisition of VeriWave.

Acquisition and Other Related Expenses. Acquisition and other related expenses for the three and nine months ended September 30, 2011 were $377,000 and $851,000, respectively, and were due to our acquisition of VeriWave and consist primarily of transaction costs such as professional fees for legal, due diligence and valuation services, certain employee transition costs and other related costs. Acquisition and other related expenses for the third quarter of 2010 were $312,000 and $3.0 million for the first nine months of 2010, and primarily consistedof employee, facility and infrastructure transition costs, as well as professional fees relating to our integration activities following our acquisitions of Catapult Communications Corporation (“Catapult”) on June 23, 2009 and of N2X on October 30, 2009.

Restructuring. There have been no restructuring expenses incurred in 2011. Restructuring expenses for the third quarter of 2010 were $30,000 and for the first nine months of 2010 were $3.6 million. The restructuring expenses for the first nine months of 2010 consisted primarily of employee severance costs related to the restructuring of our operations in connection with our acquisition of N2X (the “N2X Restructuring”). The N2X Restructuring was initiated and completed during the first quarter of 2010 and included a net reduction in force of approximately 80 positions, which represented approximately 7% of our worldwide work force, including contractors, at the beginning of the first quarter of 2010.

Interest Income and Other, Net. Interest income and other, net increased to $1.0 million in the third quarter of 2011 from the $578,000 recorded in the third quarter of 2010. This increase is primarily attributable to a higher average cash balance in the third quarter of 2011 compared to the same period in 2010 and the receipt of $329,000 in the third quarter of 2011 in connection with the settlement of certain litigation.

Interest income and other, net decreased to $1.8 million in the first nine months of 2011 from the $9.7 million recorded in the first nine months of 2010. This significant decrease was primarily due to the inclusion of an $8.9 million favorable settlement with a former investment manager in the first quarter of 2010 related to our purchase in prior periods of certain investments in auction rate securities with an aggregate par value of $19.0 million that had previously been substantially written down.

Interest Expense. Interest expense was $1.8 million and $5.4 million for the third quarter of 2011 and for the first nine months of 2011, respectively, and included the amortization of debt issuance costs related to our convertible senior notes issued in December 2010. There was no interest expense incurred in 2010.

Income Tax. Income tax expense was $943,000, or an effective rate of 12.8%, for the third quarter of 2011 as compared to income tax expense of $1.0 million, or an effective rate of 17.6%, for the third quarter of 2010. The overall decrease in the effective rate for the third quarter of 2011, as compared to the same period in 2010, was due to the benefits associated with the differential in tax rates in certain foreign jurisdictions and the increase in discretely recorded items, such as the release of previously recorded tax liabilities.

Income tax expense was $2.2 million, or an effective rate of 13.8%, for the first nine months of 2011 as compared to income tax expense of $1.1 million, or an effective rate of 16.8%, for the first nine months of 2010. The overall decrease in the effective rate for the first nine months of 2011 as compared to the same period in 2010 was primarily due to the increase in the tax benefit associated with the release of certain tax liabilities.

Our effective tax rate differs from the federal statutory rate due to state taxes and significant permanent differences. Significant permanent differences arise due to research and development credits, foreign tax rate benefits and stock-based compensation expense 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.

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.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations with our cash balances generated primarily from operations and proceeds from our initial public offering, our convertible debt offering and stock option exercises. Our cash, cash equivalents and short- and long-term investments, when viewed as a whole, increased to $367.2 million as of September 30, 2011 from $339.2 million as of December 31, 2010 primarily due to the $39.5 million in net cash provided by our operating activities and $13.7 million of cash generated from the exercises of share-based awards, partially offset by the cash used to acquire VeriWave in the third quarter of 2011 of $15.6 million and capital expenditures of $10.9 million.

Of our total cash, cash equivalents and short- and long-term investments, $27.9 million and $19.9 million was held outside of the United States in various foreign subsidiaries as of September 30, 2011 and December 31, 2010, 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. However, barring unforeseen circumstances, we consider these funds permanently invested in our foreign operations and do not intend to repatriate them.

The following table sets forth our summary cash flows for the nine months ended September 30, 2011 and 2010 (in thousands):

	Nine Months Ended September 30,
	2011			2010

Net cash provided by operating activities	$	39,451		$	36,380
Net cash used in investing activities		(83,673	)		(26,119	)
Net cash provided by financing activities		16,556			17,369

Cash Flows from Operating Activities

Net cash provided by operating activities was $39.5 million in the first nine months of 2011 and $36.4 million in the same period of 2010. This increase in cash flow generated from operations was primarily due to better overall operating results in the first nine months of 2011 as compared to the first nine months of 2010 driven by a $25.7 million increase in sales, which increased our net income during the same period by $8.6 million. Our operating cash flow also benefited from a $1.7 million net increase in tax benefits from the exercises of share-based awards in the first nine months of 2011 when compared to the first nine months of 2010. These increases were partially offset by a $7.6 million decrease related to net working capital changes in the first nine months of 2011 over the first nine months of 2010 principally due to the timing of payments of accounts payable and accrued liabilities, such as the 2010 year-end bonuses of approximately $9.3 million paid in 2011 compared to the 2009 year-end bonuses of approximately $0.5 million paid in 2010. These decreases in working capital were partially offset by the increase in the change of our accounts receivable balance, primarily due to the improvement in collections of accounts receivable in the first nine months of 2011 compared to the same period in 2010.

Cash Flows from Investing Activities

Net cash used in investing activities was $83.7 million and $26.1 million for the first nine months of 2011 and 2010, respectively. Excluding marketable security purchases and proceeds, net cash used in investing activities was $27.0 million and $12.3 million for the first nine months of 2011 and 2010, respectively. The increase in net cash used in the first nine months of 2011 was primarily due to the acquisition of VeriWave in the third quarter of 2011 which resulted in cash paid, net of cash acquired, of $15.6 million.

Cash Flows from Financing Activities

Net cash provided by financing activities was $16.6 million and $17.4 million for the first nine months of 2011 and 2010, respectively. This decrease in cash provided by financing activities was primarily due to a $3.0 million decrease in proceeds from the exercises of share-based awards for the first nine months of 2011 when compared to the first nine months of 2010.

We believe that our existing balances of cash and cash equivalents, investments and cash flows expected to be generated from our operations will be sufficient to satisfy our operating requirements for at least the next twelve months. Nonetheless, we may seek additional sources of capital as necessary or appropriate to fund acquisitions or to otherwise finance our growth or operations; however, there can be no assurance that such funds, if needed, will be available on favorable terms, if at all. Our access to the capital markets to raise funds, through the sale of equity or debt securities, is subject to various factors, including the conditions in the U.S. capital markets and the timely filing of our periodic reports with the Securities and Exchange Commission. In addition, our $200 million convertible senior notes have various default provisions, which if triggered could accelerate repayment and adversely impact our liquidity.

SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Statements that are not historical facts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor created by that Section. Words such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "potential," and variations of these words and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and 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: 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, war, terrorism, political unrest, natural disasters and other circumstances that could, among other consequences, reduce the demand for our products, disrupt our supply chain or impact the delivery of our products, and the risk that the anticipated benefits of our acquisition of VeriWave or other recent acquisitions will not be realized. 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, 2010, 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 2010 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2010 other than as discussed in Note 10 “Fair Value Measurements” included in this Form 10-Q.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness, as of the end of the period covered by this report (i.e., as of September 30, 2011), of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) promulgated by the Commission under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of such period, were adequate and effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

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 September 30, 2011 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 Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and all fraud. Any controls, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls 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 11, “Commitments and Contingencies,” included in this Form 10-Q , and should be considered an integral part of Part II, Item 1, “Legal Proceedings.”

ITEM 1A.

Risk Factors

Information regarding risk factors appears in Part I, “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2010 and in certain of our other filings with the Securities and Exchange Commission. There have been no material changes to our risk factors previously disclosed in the 2010 Form 10-K.

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

31.1	Certification of Chief Executive Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

32.1	Certifications of Chief Executive Officer and Chief Financial Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.1	The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (filed with the Securities and Exchange Commission on November 7, 2011), is formatted in Extensible Business Reporting Language (XBRL) and electronically submitted herewith: (i) unaudited condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010, (ii) unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010, (iii) unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010, and (v) notes to unaudited condensed consolidated financial statements (1)
______________________________________

(1)

The XBRL information in Exhibit 101.1 shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

SIGNATURES

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

	IXIA


Date: November 7, 2011	By:	/s/ Atul Bhatnagar
		Atul Bhatnagar
		President and Chief Executive Officer


Date: November 7, 2011	By:	/s/ Thomas B. Miller
		Thomas B. Miller
		Chief Financial Officer

EXHIBIT INDEX

Exhibit No.	Description

31.1	Certification of Chief Executive Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer and Chief Financial Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1	The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (filed with the Securities and Exchange Commission on November 7, 2011), is formatted in Extensible Business Reporting Language (XBRL) and electronically submitted herewith: (i) unaudited condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010, (ii) unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010, (iii) unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010, and (v) notes to unaudited condensed consolidated financial statements (1)
______________________________________

(1)

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