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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002

OR

		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to____________

Commission File Number 000-31523

IXIA

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

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

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IXIA

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IXIA
Consolidated Balance Sheets
(in thousands)

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

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

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

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

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

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IXIA

Notes to Consolidated Financial Statements

June 30, 2002
(unaudited)

1.

Business

         Ixia (the “Company”) was incorporated on May 27, 1997 as a California corporation. The Company develops, markets and sells high-speed, distributed, multiport traffic generators and performance analyzers for wire-speed verification of optical networking equipment, LAN, MAN, and WAN multi-layer switches and routers. Our customers include manufacturers of network equipment, Internet and network service providers, communications chip manufacturers and network users.

2.

Basis of Presentation

         The accompanying consolidated financial statements as of June 30, 2002 and for the three and six months ended June 30, 2002 and 2001, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, operating results and cash flows for the interim periods presented. The results of operations for the current interim periods presented are not necessarily indicative of results to be expected for the full year end December 31, 2002 or any other future period.

         These consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

3.

Investments

         The Company’s investments at June 30, 2002 consisted of held-to-maturity U.S. government debt and corporate debt securities. Held-to-maturity securities are carried at amortized cost. Amortization of the purchase discounts and premiums is included in interest income. Realized gains and losses and declines in value judged to be other than temporary are included in results of operations. Realized gains and losses are calculated using the specific identification method and were not material to the Company’s results of operations in any period presented.

         Investments at June 30, 2002 consisted of the following (in thousands):

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IXIA

Notes to Consolidated Financial Statements

4.

Inventories

         Inventories consist of the following (in thousands):

5.

Earnings per Share

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

         The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2002 and 2001 (in thousands, except per share data):

6.

Related Party Transactions

         Revenues from a subsidiary of a company in which a director/shareholder of the Company is a director and significant shareholder, and in which two director/shareholders of the Company are directors, totaled $392,000 and $118,000 for the three months ended June 30, 2002 and 2001, respectively and $1.3 million and $474,000 for the six months ended June 30, 2002 and 2001, respectively. Related party accounts receivable as of June 30, 2002 and December 31, 2001 were $300,000 and $168,000, respectively.

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IXIA

Notes to Consolidated Financial Statements

7.

Concentrations

International Revenues:

         Net revenues from international product shipments were $3.6 million and $2.3 million for the three months ended June 30, 2002 and 2001, respectively, and $7.9 million and $6.5 million for the six months ended June 30, 2002 and 2001, respectively.

Credit Risk:

         Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short and long term investments and trade accounts receivable. The Company maintains its cash and cash equivalents with reputable financial institutions, and at times, cash balances may be in excess of the FDIC insurance limits. The Company maintains a portfolio of investments in a variety of investment-grade securities, including corporate and U.S. debt securities, and with a variety of issuers. The Company extends differing levels of credit to customers, does not require collateral deposits and maintains reserves for potential credit losses based upon the expected collectibility of accounts receivable. Credit losses to date have been within management’s expectations and have not been significant.

         For the three and six months periods ended June 30, 2002 and 2001, only one customer comprised more than 10% of net revenues as follows (in thousands, except percentages):

         As of June 30, 2002 and December 31, 2001, the Company had receivable balances from the customer approximating 28% and 18%, respectively, of total accounts receivable.

8.

Recent Accounting Pronouncements

         In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations.” SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company has accounted for the purchase of the assets of the ANVL product line from Empirix, Inc. in accordance with the provisions of SFAS 141.

         In June 2001, the FASB issued SFAS 142, “Goodwill and Other Intangible Assets,” which was effective January 1, 2002. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment only approach. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company has accounted for the purchase of the assets of the ANVL product line in accordance with the provisions of SFAS 142.

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

         The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and six months ended June 30, 2002, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2002, or of any other future period. The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, including the “Risk Factors” section and the consolidated financial statements and notes included therein.

OVERVIEW

         We develop, market and sell high-speed, distributed, multiport traffic generators and performance analyzers for wire-speed verification of optical networking equipment, LAN, MAN, and WAN multi-layer switches and routers. Our products allow customers to generate network and Internet protocol traffic and analyze the performance, accuracy and reliability of equipment and systems that they either manufacture for sale to others or purchase for use in their own networks. Our customers include manufacturers of network equipment, Internet and network service providers, communications chip manufacturers and network users.

         Our product offerings include a variety of interface cards, chassis that hold the interface cards and related software products. Our interface cards utilize a variety of interfaces – Packet Over SONET, BERT, Ethernet and USB. The following table sets forth, for the periods indicated, our net revenues by principal product category in dollars and as a percentage of total net revenues:

         Sales to our five largest customers collectively accounted for approximately $9.8 million or 56.7% of our net revenues for the three months ended June 30, 2002 and $5.1 million or 33.8% of our net revenues for the three months ended June 30, 2001. Sales to our five largest customers collectively accounted for approximately $16.9 million or 51.8% of our net revenues for the six months ended June 30, 2002 and $15.7 million or 35.8% of our net revenues for the six months ended June 30, 2001. To date, we have sold our systems primarily to network equipment manufacturers. While we expect that we will continue to have some customer concentration for the foreseeable future, we continue to sell our systems to a wide variety of customers and to the extent we develop a broader and more diverse customer base, we anticipate that our reliance on any one customer will diminish.

         Net revenues. Our revenues consist primarily of product sales. The hardware and software components of our products are sold as an integrated system. The software component of our products does not require significant modification or customization, and our sales do not involve any significant future obligations or customer acceptance terms. Accordingly, product revenue from product sales is recognized upon shipment. We warrant the hardware and software components of our products for up to one year after sale. At the time of sale we defer that portion of our revenues that relates to our post-contract support and recognize it ratably over the service period. Revenues from maintenance contracts are deferred and recognized ratably over the term of the contracts.

         Cost of Revenues. Our cost of revenues consists of materials, payments to third party manufacturers, salaries and related expenses for manufacturing personnel and the warranty cost of hardware to be replaced during

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the warranty period. We outsource the majority of our manufacturing operations, and we conduct final assembly, supply chain management, quality assurance, documentation control and shipping at our facility. Accordingly, a significant portion of our cost of revenues consists of payments to our contract manufacturers. In addition, cost of revenues includes a non-cash component related to the amortization of deferred stock-based compensation related to manufacturing personnel.

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

	•		the pricing we are able to obtain from our component suppliers and contract manufacturers;
	•		the mix of our products sold;
	•		new product introductions by us and by our competitors;
	•		production volume;
	•		changes in our pricing policies and those of our competitors;
	•		demand for our products; and
	•		the mix of sales channels through which our products are sold.

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

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

         Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in sales and marketing and customer support functions, as well as costs associated with promotional and other marketing activities.

         General and administrative expenses consist primarily of salaries and related expenses for executive, finance, human resources, information technology and administrative personnel, as well as recruiting and professional fees, insurance costs and other general corporate expenses, including rent.

         Deferred stock-based compensation represents the difference between the deemed fair value of our common stock for accounting purposes and (1) the exercise price of the options and warrants at the date of grant or (2) the purchase price of the restricted stock. At the date of grant deferred stock-based compensation is presented as a reduction of shareholders’ equity, with amortization recorded over the vesting period, which is typically four years. Deferred stock-based compensation at June 30, 2002 decreased from deferred stock-based compensation at March 31, 2002 by $146,000 and from December 31, 2001 by $369,000 as a result of the forfeiture of stock options and changes in the market value of the Company’s common stock that affected certain equity instruments which receive variable accounting treatment. Deferred stock-based compensation at June 30, 2001 increased from deferred stock-based compensation at March 31, 2001 by $149,000 and decreased from December 31, 2000 by $1.3 million as a result of the forfeiture of stock options and changes in the market value of the Company’s common stock that affected certain equity instruments which receive variable accounting treatment. We amortized to the respective expense categories $1.4 million of deferred stock-based compensation in the three months ended June 30, 2002 and $3.5 million in the three months ended June 30, 2001. We amortized to the respective expense categories $3.2 million of deferred stock-based compensation in the six months ended June 30, 2002 and $7.7 million in the six

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months ended June 30, 2001. Based on the unvested options, warrants and stock subject to repurchase as of June 30, 2002, we expect to record additional stock-based compensation expense relating to deferred stock-based compensation approximately as follows: $2.4 million during the remaining six months of 2002, $2.7 million during 2003 and $505,000 during 2004. The amount of deferred stock-based compensation expense to be recorded in future periods could decrease if options and stock subject to repurchase for which unearned compensation has been recorded are forfeited or repurchased. Changes in the market value of the Company’s common stock could also affect future stock-based compensation expense related to equity instruments which receive variable accounting treatment.

RESULTS OF OPERATIONS

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