##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K/A
 AMENDMENT NO. 1
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2005
 OR
 o
    
    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)
    o þ
 o þ
 þ o
 þ
 þ o o
 o þ




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##### 



DOCUMENTS INCORPORATED BY REFERENCE
  EXPLANATORY NOTE
   2




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##### 



PART IV
 
 Item 15.
    
    Exhibits and Financial Statement Schedules
  Consolidated Financial Statements
  Financial Statement Schedule
  Exhibits
  2.1
    
    
    Stock Purchase Agreement dated as of February 20, 2004 by and among Ixia, G3 Nova Technology,
Mihai Moldovan, Dana Moldovan and Ovidiu Rancu (schedules are omitted from this agreement, and
the Registrant agrees to furnish supplementally a copy of any such schedule to the Commission
upon request)(1)3.1
    
    
    Amended and Restated Articles of Incorporation, as amended(2)3.2
    
    
    Bylaws, as amended(3)10.1*
    
    
    Amended and Restated 1997 Equity Incentive Plan (4)10.2*
    
    
    Amended and Restated Non-Employee Director Stock Option Plan(5)10.3*
    
    
    Employee Stock Purchase Plan(6)10.3.1*
    
    
    Amendment No. 1, dated May 9, 2003, to Ixia Employee Stock Purchase Plan(7)10.4*
    
    
    Officer Severance Plan(8)10.5*
    
    
    Form of Indemnity Agreement between Ixia and its directors and executive officers(9)10.6
    
    
    Office Lease Agreement dated November 5, 1999 between Malibu Canyon Office Partners, LLC and
Ixia First Amendment to Office Lease dated as of March 22, 2000 and Second Amendment to Office
Lease dated May 8, 2003(10)10.6.1
    
    
    Third Amendment to Office Lease dated September 2004 between Malibu Canyon Office Partners,
LLC and Ixia(11)10.6.2
    
    
    Fourth Amendment to Office Lease, effective October 27, 2005, between Malibu Canyon Office
Partners, LLC and Ixia(12)
 3




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##### 



10.7*
    
    
    Warrants dated August 2, 2000 to Purchase 80,000 Shares of Common Stock issued to Robert W.
Bass(13)10.8
    
    
    Registration Rights and Stock Transfer Restriction Agreement dated as of September 1, 2000
among Ixia, Technology Capital Group S.A. and Stéphane Ratel(14)10.10*
    
    
    Employment offer letter agreement dated October 27, 2001 between Ixia and David
Anderson(15)10.11*
    
    
    Employment offer letter agreement dated as of February 27, 2003 between Ixia and Robert W.
Bass(16)10.12*
    
    
    Employment Offer Letter Agreement, effective July 30, 2003, between Ixia and Alan
Amrod(17)10.13
    
    
    License, Distribution and Option Agreement, dated July 7, 2003, between NetIQ Corporation and
Ixia(18)10.13.1
    
    
    First Amendment to License, Distribution and Option Agreement dated as of January 6, 2005
between the Registrant and NetIQ Corporation(19)10.13.2
    
    
    Second Amendment to License, Distribution and Option Agreement dated as of June 16, 2005
between the Registrant and NetIQ Corporation(20)(21)10.14*
    
    
    2004 Employee Bonus Plan(22)10.15*
    
    
    2005 Employee Bonus Plan(23)10.16*
    
    
    Summary of 2005 Compensation for the Registrants Named Executive Officers(24)10.17*
    
    
    Summary of Compensation for the Registrants Non-Employee Directors(25)14.1
    
    
    Code of Ethics for Chief Executive and Senior Financial Officers(26)21.1
    
    
    Subsidiaries of the Registrant(25)23.1
    
    
    Consent of PricewaterhouseCoopers LLP31.1
    
    
    Certificate of Chief Executive Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange
Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certificate of Chief Financial Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange
Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certificate of Chief Executive Officer and Chief Financial Officer of Ixia pursuant to Rule
13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Constitutes a management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K.(1)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No.
000-31523) for the fiscal quarter ended March 31, 2004.(2)
    
    Incorporated by reference to Exhibit No. 3.1 to Amendment No. 1 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 5, 2000.(3)
    
    Incorporated by reference to Exhibit No. 3.2 to Amendment No. 2 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 19, 2000.(4)
    
    Incorporated by reference to Exhibit 4.1 to the Registrants Registration Statement on
Form S-8 (Reg. No. 333-117969) filed with the Commission on August 5, 2004.(5)
    
    Incorporated by reference to Exhibit 4.2 to the Registrants Registration Statement on
Form S-8 (Reg. No. 333-117969) filed with the Commission on August 5, 2004.(6)
    
    Incorporated by reference to Exhibit No. 10.3 to Amendment No. 1 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 5, 2000.(7)
    
    Incorporated by reference to Exhibit 4.2 to the Registrants Registration Statement on
Form S-8 (Registration No. 333-107818) filed with the Commission on August 8, 2003.(8)
    
    Incorporated by reference to Exhibit No. 10.4 to Amendment No. 1 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 5, 2000.(9)
    
    Incorporated by reference to Exhibit No. 10.5 to Amendment No. 1 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 5, 2000. 4




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##### 



(10)
    
    Incorporated by reference to Exhibit No. 10.14 to the Registrants Registration
Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on July 31, 2000.(11)
    
    Incorporated by reference to Exhibit 10.6.1 to the
Registrants Annual Report on Form 10-K (File No. 000-31523) for the fiscal year ended December 31, 2004.(12)
    
    Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on December 6, 2005.(13)
    
    Incorporated by reference to Exhibit No. 10.15 to Amendment No. 1 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 5, 2000.(14)
    
    Incorporated by reference to Exhibit No. 10.17 to Amendment No. 3 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 27, 2000.(15)
    
    Incorporated by reference to Exhibit No. 10.13 to the Registrants Annual Report on
Form 10-K (File No. 000-31523) for the fiscal year ended December 31, 2001.(16)
    
    Incorporated by reference to Exhibit No. 10.14 to the Registrants Annual Report on
Form 10-K (File No. 000-31523) for the fiscal year ended December 31, 2002.(17)
    
    Incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form
10-Q (File No. 000-31523) for the fiscal quarter ended September 30, 2003.(18)
    
    Incorporated by reference to Exhibit 10.2 to the Registrants Quarterly Report on Form
10-Q (File No. 000-31523) for the fiscal quarter ended September 30, 2003.(19)
    
    Incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form
10-Q (File No. 000-31523) for the fiscal quarter ended June 30, 2005.(20)
    
    Incorporated by reference to Exhibit 10.2 to the Registrants Quarterly Report on Form
10-Q (File No. 000-31523) for the fiscal quarter ended June 30, 2005.(21)
    
    Confidential treatment has been requested with respect to a portion of this exhibit,
which portion has been omitted and filed separately with the Commission.(22)
    
    Incorporated by reference to Exhibit 10.14 to the Registrants Annual Report on Form
10-K (File No. 000-31523) for the year ended December 31, 2004.(23)
    
    Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K (File No. 000-31523) filed with the Commission on May 19, 2005.(24)
    
    Incorporated by reference to Exhibit 10.3 to the
Registrants Quarterly Report on Form 10-Q (File No. 000-31523) for the fiscal quarter ended June 30, 2005.(25)
    
    Previously filed.(26)
    
    Incorporated by reference to Exhibit 14.1 to the
Registrants Annual Report on Form 10-K (File No. 000-31523) for the fiscal year ended December 31, 2003. Exhibits
  Financial Statement Schedules
  5




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##### 



SIGNATURES
  June 1, 2006
    
    IXIA/s/ Errol GinsbergErrol GinsbergPresident and Chief Executive Officer
 6




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##### 



IXIA
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    8Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    10Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003
    
    11Consolidated Statements of Shareholders Equity for the years ended December 31, 2005,
2004 and 2003
    
    12Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
    
    13Notes to Consolidated Financial Statements
    
    14
 7




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##### 



Report of Independent Registered Public Accounting Firm
   Consolidated financial statements
  Internal control over financial reporting
 Internal
Control  Integrated Framework
  8




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##### 



9




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##### 



IXIA
 
 Consolidated Balance Sheets
 (in thousands)
 December 31,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    51,837
    
    
    $
    16,383Short-term investments in marketable securities
    
    
    124,456
    
    
    
    81,757Accounts receivable, net
    
    
    31,565
    
    
    
    22,069Inventories
    
    
    9,846
    
    
    
    6,669Deferred income taxes
    
    
    4,401
    
    
    
    3,756Income taxes receivable
    
    
    9
    
    
    
    1,696Prepaid expenses and other current assets
    
    
    3,510
    
    
    
    2,878Total current assets
    
    
    225,624
    
    
    
    135,208Investments in marketable securities
    
    
    25,392
    
    
    
    49,015Property and equipment, net
    
    
    19,750
    
    
    
    12,268Deferred income taxes
    
    
    10,004
    
    
    
    4,798Goodwill
    
    
    13,468
    
    
    
    11,377Intangible assets, net
    
    
    20,462
    
    
    
    23,031Other assets
    
    
    315
    
    
    
    612Total assets
    
    $
    315,015
    
    
    $
    236,309Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    2,872
    
    
    $
    1,556Accrued expenses
    
    
    12,399
    
    
    
    13,181Deferred revenues
    
    
    8,338
    
    
    
    7,032Income taxes payable
    
    
    4,131
    
    
    
    4,203Total current liabilities
    
    
    27,740
    
    
    
    25,972Deferred revenues
    
    
    528
    
    
    
    Deferred income taxes
    
    
    4,651
    
    
    
    3,411Total liabilities
    
    
    32,919
    
    
    
    29,383Commitments and contingencies (Note 7)Shareholders equity:Preferred stock, without par value; 1,000
shares authorized and none outstanding
    
    
    
    
    
    
    Common stock, without par value; 200,000
shares authorized at December 31, 2005 and
December 31, 2004, respectively, 66,580 and
62,459 shares issued and outstanding as of
December 31, 2005 and December 31, 2004,
respectively
    
    
    126,792
    
    
    
    100,144Additional paid-in capital
    
    
    68,098
    
    
    
    53,247Retained earnings
    
    
    87,206
    
    
    
    53,535Total shareholders equity
    
    
    282,096
    
    
    
    206,926Total liabilities and shareholders equity
    
    $
    315,015
    
    
    $
    236,309
 The accompanying notes are an integral part of these consolidated financial statements
 10




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##### 



IXIA
 
 Consolidated Statements of Income
 (in thousands, except per share data)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Net revenues
    
    $
    159,333
    
    
    $
    116,978
    
    
    $
    83,533Cost of revenues (1)
    
    
    24,800
    
    
    
    20,716
    
    
    
    15,761Amortization of purchased technology
    
    
    3,891
    
    
    
    3,044
    
    
    
    1,183Gross profit
    
    
    130,642
    
    
    
    93,218
    
    
    
    66,589Operating expenses:(1)Research and development
    
    
    32,404
    
    
    
    24,960
    
    
    
    21,980Sales and marketing
    
    
    41,014
    
    
    
    31,865
    
    
    
    25,050General and administrative
    
    
    16,438
    
    
    
    12,479
    
    
    
    9,179Amortization of intangible assets
    
    
    1,278
    
    
    
    1,532
    
    
    
    1,070Impairment of goodwill and other intangible assets
    
    
    
    
    
    
    
    
    
    
    410Total operating expenses
    
    
    91,134
    
    
    
    70,836
    
    
    
    57,689Income from operations
    
    
    39,508
    
    
    
    22,382
    
    
    
    8,900Interest and other income, net
    
    
    5,055
    
    
    
    2,960
    
    
    
    3,062Income before income taxes
    
    
    44,563
    
    
    
    25,342
    
    
    
    11,962Income tax expense
    
    
    10,892
    
    
    
    6,463
    
    
    
    3,258Net income
    
    $
    33,671
    
    
    $
    18,879
    
    
    $
    8,704Earnings per share:Basic
    
    $
    0.52
    
    
    $
    0.31
    
    
    $
    0.15Diluted
    
    $
    0.49
    
    
    $
    0.29
    
    
    $
    0.14Weighted average number of common and common
equivalent shares outstanding:Basic
    
    
    65,168
    
    
    
    60,687
    
    
    
    58,344Diluted
    
    
    69,227
    
    
    
    64,745
    
    
    
    62,227
 
 (1)

    Stock-based compensation included in: Cost of revenues
    
    $
    
    
    
    $
    30
    
    
    $
    157Research and development
    
    
    
    
    
    
    271
    
    
    
    1,316Sales and marketing
    
    
    
    
    
    
    80
    
    
    
    166General and administrative
    
    
    
    
    
    
    38
    
    
    
    280
 The accompanying notes are an integral part of these consolidated financial statements
 11




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##### 



IXIA
 
 Consolidated Statements of Shareholders Equity
 (in thousands)
 Additional
    
    
    DeferredCommon Stock
    
    
    Paid-In
    
    
    Stock-based
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Earnings
    
    
    TotalBalance as of December 31, 2002
    
    
    57,595
    
    
    $
    79,206
    
    
    $
    47,045
    
    
    $
    (3,036
    )
    
    $
    25,952
    
    
    $
    149,167Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,704
    
    
    
    8,704Exercise of stock options
and employee stock purchase
plan options
    
    
    2,047
    
    
    
    4,842
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,842Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,414
    
    
    
    
    
    
    
    2,414Forfeiture of stock options
    
    
    
    
    
    
    
    
    
    
    (698
    )
    
    
    203
    
    
    
    
    
    
    
    (495
    )Stock option tax benefit
    
    
    
    
    
    
    
    
    
    
    2,422
    
    
    
    
    
    
    
    
    
    
    
    2,422Balance as of December 31, 2003
    
    
    59,642
    
    
    
    84,048
    
    
    
    48,769
    
    
    
    (419
    )
    
    
    34,656
    
    
    
    167,054Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,879
    
    
    
    18,879Exercise of stock options
and employee stock purchase
plan options
    
    
    2,510
    
    
    
    12,333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,333Issuance of common stock in
connection with acquisition
    
    
    307
    
    
    
    3,763
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,763Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    419
    
    
    
    
    
    
    
    419Stock option tax benefit
    
    
    
    
    
    
    
    
    
    
    4,478
    
    
    
    
    
    
    
    
    
    
    
    4,478Balance as of December 31, 2004
    
    
    62,459
    
    
    
    100,144
    
    
    
    53,247
    
    
    
    
    
    
    
    53,535
    
    
    
    206,926Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,671
    
    
    
    33,671Exercise of stock options
and employee stock purchase
plan options
    
    
    4,121
    
    
    
    26,648
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,648Stock option tax benefit
    
    
    
    
    
    
    
    
    
    
    14,851
    
    
    
    
    
    
    
    
    
    
    
    14,851Balance as of December 31, 2005
    
    
    66,580
    
    
    $
    126,792
    
    
    $
    68,098
    
    
    $
    
    
    
    $
    87,206
    
    
    $
    282,096
 The accompanying notes are an integral part of these consolidated financial statements
 12




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##### 



IXIA
 
 Consolidated Statements of Cash Flows
(in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    33,671
    
    
    $
    18,879
    
    
    $
    8,704Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    5,925
    
    
    
    3,418
    
    
    
    4,388Amortization of intangible assets
    
    
    5,169
    
    
    
    4,576
    
    
    
    2,255Allowance for doubtful accounts
    
    
    12
    
    
    
    432
    
    
    
    249Stock-based compensation
    
    
    
    
    
    
    419
    
    
    
    1,919Deferred income taxes
    
    
    (4,842
    )
    
    
    719
    
    
    
    (1,438
    )Tax benefit from stock option transactions
    
    
    14,851
    
    
    
    4,478
    
    
    
    2,422Impairment of goodwill and other intangible assets
    
    
    
    
    
    
    
    
    
    
    410Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable
    
    
    (9,389
    )
    
    
    (5,130
    )
    
    
    (8,019
    )Inventories
    
    
    (3,156
    )
    
    
    (1,002
    )
    
    
    (464
    )Income taxes receivable
    
    
    1,687
    
    
    
    315
    
    
    
    (2,011
    )Prepaid expenses and other current assets
    
    
    (629
    )
    
    
    (696
    )
    
    
    (85
    )Other assets
    
    
    297
    
    
    
    6
    
    
    
    (53
    )Accounts payable
    
    
    1,312
    
    
    
    432
    
    
    
    (154
    )Accrued expenses
    
    
    3,339
    
    
    
    (89
    )
    
    
    4,776Deferred revenues
    
    
    1,819
    
    
    
    1,320
    
    
    
    3,478Income taxes payable
    
    
    (72
    )
    
    
    1,365
    
    
    
    1,311Net cash provided by operating activities
    
    
    49,994
    
    
    
    29,442
    
    
    
    17,688Cash flows from investing activities:Purchases of property and equipment
    
    
    (13,396
    )
    
    
    (8,707
    )
    
    
    (4,233
    )Purchases of available-for-sale securities
    
    
    (143,336
    )
    
    
    (82,551
    )
    
    
    (27,125
    )Proceeds from available-for-sale securities
    
    
    109,186
    
    
    
    47,750
    
    
    
    20,150Purchases of held-to-maturity securities
    
    
    (22,030
    )
    
    
    (24,181
    )
    
    
    (53,505
    )Proceeds from held-to-maturity securities
    
    
    37,104
    
    
    
    29,000
    
    
    
    36,646Purchases of technology and other intangible assets
    
    
    (180
    )
    
    
    (1,447
    )
    
    
    (457
    )Payments in connection with acquisitions
    
    
    (8,536
    )
    
    
    (6,389
    )
    
    
    (18,138
    )Net cash used in investing activities
    
    
    (41,188
    )
    
    
    (46,525
    )
    
    
    (46,662
    )Cash flows from financing activities:Exercise of stock options and employee stock
purchase plan options
    
    
    26,648
    
    
    
    12,333
    
    
    
    4,842Net cash provided by financing activities
    
    
    26,648
    
    
    
    12,333
    
    
    
    4,842Net increase (decrease) in cash and cash
equivalents
    
    
    35,454
    
    
    
    (4,750
    )
    
    
    (24,132
    )Cash and cash equivalents at beginning of year
    
    
    16,383
    
    
    
    21,133
    
    
    
    45,265Cash and cash equivalents at end of year
    
    $
    51,837
    
    
    $
    16,383
    
    
    $
    21,133Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes
    
    $
    853
    
    
    $
    2,109
    
    
    $
    2,991Non-cash activities:Common stock issued in connection with acquisition
    
    $
    
    
    
    $
    3,763
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements
 13




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##### 



IXIA
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Business and Summary of Significant Accounting Policies
 Business
  Use of Estimates
  Consolidation
  Cash and Cash Equivalents
  Fair Value of Financial Instruments
   14




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##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Investments in Marketable Securities
   Accounts Receivable and Allowance for Doubtful Accounts
  Inventories
  Property and Equipment
  Amortization of Intangible Assets and Goodwill Impairment
  15




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##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Litigation
  Product Warranty Costs
  Revenue Recognition
    Research and Development
  16




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##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Software Developed for Internal Use
  Advertising
  Stock-Based Compensation
   Year Ended December 31,2005
    
    2004
    
    2003Expected life (in years)
    
    
    4.0
    
    
    
    3.7
    
    
    
    4.0Risk-free interest rates
    
    
    4.2
    %
    
    
    3.1
    %
    
    
    3.0
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    62.4
    %
    
    
    92.8
    %
    
    
    108.0
    %
  17




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Stock-based compensation:As reported
    
    $
    
    
    
    $
    419
    
    
    $
    1,919Additional stock-based
compensation expense, net of
taxes, determined under the
fair value method
    
    
    8,402
    
    
    
    13,612
    
    
    
    10,506Pro forma
    
    $
    8,402
    
    
    $
    14,031
    
    
    $
    12,425Net income (loss):As reported
    
    $
    33,671
    
    
    $
    18,879
    
    
    $
    8,704Additional stock-based
compensation expense, net of
taxes, determined under the
fair value method
    
    
    8,402
    
    
    
    13,612
    
    
    
    10,506Pro forma
    
    $
    25,269
    
    
    $
    5,267
    
    
    $
    (1,802
    )Basic earnings (loss) per share:As reported
    
    $
    0.52
    
    
    $
    0.31
    
    
    $
    0.15Pro forma
    
    $
    0.39
    
    
    $
    0.09
    
    
    $
    (0.03
    )Diluted earnings (loss) per share:As reported
    
    $
    0.49
    
    
    $
    0.29
    
    
    $
    0.14Pro forma
    
    $
    0.37
    
    
    $
    0.08
    
    
    $
    (0.03
    )
   Income Taxes
  Earnings Per Share
  18




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Foreign Currency Translation
  Comprehensive Income
  Segments
  Reclassifications
  Recent Accounting Pronouncements
   19




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     2. Concentrations
 Credit Risk
  Significant Customer
  Year Ended December 31,2005
    
    2004
    
    2003Amount of net revenues
    
    $
    55,498
    
    
    $
    37,165
    
    
    $
    24,316As a percentage of total net revenues
    
    
    35
    %
    
    
    32
    %
    
    
    29
    %
 20




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  International Data
  Year Ended December 31,2005
    
    2004
    
    2003Amount of net revenues
    
    $
    43,232
    
    
    $
    30,756
    
    
    $
    25,287As a percentage of total net revenues
    
    
    27
    %
    
    
    26
    %
    
    
    30
    %
  Sources of Supply
  3. Selected Balance Sheet Data (in thousands)
 Accounts Receivable, Net
  December 31,
    
    
    December 31,2005
    
    
    2004Trade accounts receivable
    
    $
    32,419
    
    
    $
    22,911Allowance for doubtful accounts
    
    
    (854
    )
    
    
    (842
    )$
    31,565
    
    
    $
    22,069
  Balance at
    
    Charged to and
    
    Reversals to
    
    
    
    
    
    Balance atBeginning
    
    Cost and
    
    Cost and
    
    
    
    
    
    End ofYear Ended December 31,
    
    of Period
    
    Expenses
    
    Expenses
    
    Deductions
    
    Period2005
    
    $
    842
    
    
    $
    300
    
    
    $
    (150
    )
    
    $
    (138
    )
    
    $
    8542004
    
    
    410
    
    
    
    450
    
    
    
    
    
    
    
    (18
    )
    
    
    8422003
    
    
    161
    
    
    
    300
    
    
    
    
    
    
    
    (51
    )
    
    
    410
 21




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Investments in Marketable Securities
  Carrying
    
    
    FairValue
    
    
    ValueAvailable-for-sale  short-term:Auction rate securities
    
    $
    89,526
    
    
    $
    89,526Held-to-maturity  maturities of less than one year:U.S. government and federal agency debt securities
    
    
    20,917
    
    
    
    20,759Corporate debt securities
    
    
    14,013
    
    
    
    13,901124,456
    
    
    
    124,186Held-to-maturity  maturities of one to five years:U.S. government and federal agency debt securities
    
    
    24,392
    
    
    
    24,010Corporate debt securities
    
    
    1,000
    
    
    
    97525,392
    
    
    
    24,985$
    149,848
    
    
    $
    149,171
  Carrying
    
    
    FairValue
    
    
    ValueAvailable-for-sale  short-term:Auction rate securities
    
    $
    55,376
    
    
    $
    55,376Held-to-maturity  maturities of less than one year:U.S. government and federal agency debt securities
    
    
    2,000
    
    
    
    2,005Corporate debt securities
    
    
    24,381
    
    
    
    24,40081,757
    
    
    
    81,781Held-to-maturity  maturities of one to five years:U.S. government and federal agency debt securities
    
    
    28,928
    
    
    
    28,729Corporate debt securities
    
    
    20,087
    
    
    
    19,87849,015
    
    
    
    48,607$
    130,772
    
    
    $
    130,388
 Inventories
  December 31,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    3,574
    
    
    $
    1,665Work in process
    
    
    3,426
    
    
    
    2,808Finished goods
    
    
    2,846
    
    
    
    2,196$
    9,846
    
    
    $
    6,669
 22




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Property and Equipment, Net
  December 31,
    
    
    December 31,Useful Life
    
    2005
    
    
    2004(in years)Computer equipment
    
    3
    
    $
    5,168
    
    
    $
    3,343Computer software
    
    3
    
    
    5,236
    
    
    
    2,669Demonstration equipment
    
    2
    
    
    9,538
    
    
    
    8,318Development equipment
    
    5
    
    
    8,416
    
    
    
    6,270Furniture and other equipment
    
    5
    
    
    10,160
    
    
    
    7,447Leasehold improvements
    
    7
    
    
    2,024
    
    
    
    1,07440,542
    
    
    
    29,121Accumulated depreciation
    
    
    
    
    (20,792
    )
    
    
    (16,853
    )$
    19,750
    
    
    $
    12,268
 Accrued Expenses
  December 31,
    
    
    December 31,2005
    
    
    2004Accrued payroll
    
    $
    2,719
    
    
    $
    1,430Accrued vacation
    
    
    1,639
    
    
    
    1,169Accrued bonuses
    
    
    1,533
    
    
    
    1,756Accrued commissions
    
    
    1,275
    
    
    
    966Accrued legal and professional fees
    
    
    910
    
    
    
    719Accrued property taxes
    
    
    887
    
    
    
    121Employee stock purchase plan payroll deductions
    
    
    644
    
    
    
    451Accrued sales tax
    
    
    530
    
    
    
    332Accrued royalties
    
    
    28
    
    
    
    542Accrued G3 Nova earnout (Note 4)
    
    
    
    
    
    
    1,856NetIQ purchase option accrual
    
    
    
    
    
    
    2,500Other
    
    
    2,234
    
    
    
    1,339$
    12,399
    
    
    $
    13,181
 4. Acquisitions
 Communication Machinery Corporation
  23




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Current assets
    
    $
    144Property and equipment
    
    
    11Deferred taxes
    
    
    727Intangible assets
    
    
    2,420Goodwill
    
    
    2,091Total assets acquired
    
    
    5,393Current liabilities assumed
    
    
    (254
    )Deferred taxes
    
    
    (958
    )Net assets acquired
    
    $
    4,181
   Year ended December 31,2005
    
    2004Net revenues
    
    $
    159,700
    
    
    $
    117,807Net income
    
    
    33,549
    
    
    
    18,764Earnings per share:Basic
    
    
    0.51
    
    
    
    0.31Diluted
    
    
    0.48
    
    
    
    0.29
  G3 Nova Technology, Inc.
   24




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Current assets
    
    $
    355Property and equipment
    
    
    131Intangible assets
    
    
    3,700Goodwill
    
    
    7,285Total assets acquired
    
    
    11,471Current liabilities assumed
    
    
    (722
    )Deferred taxes
    
    
    (1,279
    )Net assets acquired
    
    $
    9,470
   5. Goodwill and Other Intangible Assets
  AccumulatedDescription
    
    Gross
    
    
    Amortization
    
    
    NetGoodwill
    
    $
    13,468
    
    
    $
    
    
    
    $
    13,468Other intangible assets:Technology
    
    $
    27,653
    
    
    $
    (10,106
    )
    
    $
    17,547Non-compete
    
    
    862
    
    
    
    (699
    )
    
    
    163Trademark
    
    
    676
    
    
    
    (227
    )
    
    
    449Workforce
    
    
    395
    
    
    
    (247
    )
    
    
    148Customer relationships
    
    
    2,026
    
    
    
    (604
    )
    
    
    1,422Other
    
    
    1,260
    
    
    
    (527
    )
    
    
    733$
    32,872
    
    
    $
    (12,410
    )
    
    $
    20,462
  AccumulatedDescription
    
    Gross
    
    
    Amortization
    
    
    NetGoodwill
    
    $
    11,377
    
    
    $
    
    
    
    $
    11,377Other intangible assets:Technology
    
    $
    26,352
    
    
    $
    (5,711
    )
    
    $
    20,641Non-compete
    
    
    792
    
    
    
    (609
    )
    
    
    183Trademark
    
    
    676
    
    
    
    (127
    )
    
    
    549Workforce
    
    
    395
    
    
    
    (148
    )
    
    
    247Customer relationships
    
    
    976
    
    
    
    (285
    )
    
    
    691Other
    
    
    1,081
    
    
    
    (361
    )
    
    
    720$
    30,272
    
    
    $
    (7,241
    )
    
    $
    23,031
 25




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  2006
    
    $
    5,4412007
    
    
    5,0782008
    
    
    4,3902009
    
    
    3,5202010
    
    
    1,697Thereafter
    
    
    336$
    20,462
 6. Income Taxes
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    13,086
    
    
    $
    4,335
    
    
    $
    3,643State
    
    
    2,635
    
    
    
    1,571
    
    
    
    1,381Foreign
    
    
    14
    
    
    
    79
    
    
    
    195Deferred:Federal
    
    
    (2,319
    )
    
    
    2,233
    
    
    
    (668
    )State
    
    
    (2,540
    )
    
    
    (1,700
    )
    
    
    (1,338
    )Foreign
    
    
    16
    
    
    
    (55
    )
    
    
    45Income tax expense
    
    $
    10,892
    
    
    $
    6,463
    
    
    $
    3,258
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Federal statutory expense
    
    $
    15,597
    
    
    $
    8,867
    
    
    $
    4,215State taxes, net of federal benefit
    
    
    87
    
    
    
    113
    
    
    
    328Research and development credits
    
    
    (1,937
    )
    
    
    (1,475
    )
    
    
    (901
    )Stock-based compensation
    
    
    (1,924
    )
    
    
    (968
    )
    
    
    (407
    )Other
    
    
    (931
    )
    
    
    (74
    )
    
    
    23Income tax expense
    
    $
    10,892
    
    
    $
    6,463
    
    
    $
    3,258Net effective income tax rate
    
    
    24.4
    %
    
    
    25.5
    %
    
    
    27.2
    %
 26




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  December 31,
    
    
    December 31,2005
    
    
    2004Deferred tax assets:Allowance for doubtful accounts
    
    $
    353
    
    
    $
    359Research and development credit carryforward
    
    
    9,298
    
    
    
    4,696Deferred revenue
    
    
    430
    
    
    
    531Stock-based compensation
    
    
    1,220
    
    
    
    1,357Inventory adjustments
    
    
    1,149
    
    
    
    833Net operating loss carryforward
    
    
    706
    
    
    
    55Accrued liabilities and other
    
    
    1,249
    
    
    
    723Total deferred tax assets
    
    
    14,405
    
    
    
    8,554Deferred tax liabilities:Depreciation and amortization
    
    
    (4,651
    )
    
    
    (3,411
    )Net deferred taxes
    
    $
    9,754
    
    
    $
    5,143
     27




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 7. Commitments and Contingencies
 Leases
  Year EndingDecember 31,2006
    
    $
    3,3902007
    
    
    3,2072008
    
    
    1,5032009
    
    
    2222010
    
    
    200Thereafter
    
    
    84$
    8,606
  Litigation
  Indemnifications
  8. Shareholders Equity
 Stock Options
   28




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Weighted AverageNumber
    
    
    Exercise Priceof Options
    
    
    Per ShareOptions Outstanding as of December 31,
2002
    
    
    11,689
    
    
    $
    6.02Granted
    
    
    1,858
    
    
    
    7.31Exercised
    
    
    (1,603
    )
    
    
    2.13Canceled
    
    
    (932
    )
    
    
    8.18Options Outstanding as of December 31,
2003
    
    
    11,012
    
    
    
    6.62Granted
    
    
    3,456
    
    
    
    11.21Exercised
    
    
    (1,859
    )
    
    
    5.33Canceled
    
    
    (663
    )
    
    
    8.49Options Outstanding as of December 31,
2004
    
    
    11,946
    
    
    
    8.04Granted
    
    
    3,166
    
    
    
    15.64Exercised
    
    
    (3,807
    )
    
    
    6.22Canceled
    
    
    (840
    )
    
    
    12.89Options Outstanding as of December 31,
2005
    
    
    10,465
    
    
    $
    10.62
   Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    WeightedRange of
    
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    Average ExerciseExercise Price
    
    
    Outstanding
    
    
    Life (in years)
    
    
    Price
    
    
    Outstanding
    
    
    Price$
    0.01
    
    
    to
    
    $
    4.10
    
    
    
    1,638
    
    
    
    3.80
    
    
    $
    2.13
    
    
    
    1,423
    
    
    $
    1.854.22
    
    
    to
    
    
    8.50
    
    
    
    1,699
    
    
    
    5.06
    
    
    
    7.10
    
    
    
    1,066
    
    
    
    7.308.58
    
    
    to
    
    
    11.31
    
    
    
    1,515
    
    
    
    4.92
    
    
    
    9.94
    
    
    
    1,105
    
    
    
    9.8411.50
    
    
    to
    
    
    11.94
    
    
    
    1,495
    
    
    
    5.46
    
    
    
    11.89
    
    
    
    553
    
    
    
    11.8912.00
    
    
    to
    
    
    13.98
    
    
    
    2,119
    
    
    
    6.50
    
    
    
    13.47
    
    
    
    769
    
    
    
    13.1514.00
    
    
    to
    
    
    19.05
    
    
    
    1,697
    
    
    
    6.49
    
    
    
    16.47
    
    
    
    149
    
    
    
    16.9519.55
    
    
    to
    
    
    21.50
    
    
    
    302
    
    
    
    5.92
    
    
    
    20.64
    
    
    
    143
    
    
    
    20.65$
    0.01
    
    
    to
    
    $
    21.50
    
    
    
    10,465
    
    
    
    5.45
    
    
    $
    10.62
    
    
    
    5,208
    
    
    $
    8.34
 29




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Employee Stock Purchase Plan
    Warrants
  9. Retirement Plan
  30




---



##### 



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 10. Earnings Per Share
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Basic PresentationNumerator:Net income
    
    $
    33,671
    
    
    $
    18,879
    
    
    $
    8,704Denominator:Weighted average common shares
    
    
    65,168
    
    
    
    60,687
    
    
    
    58,363Adjustment for common shares subject to repurchase
    
    
    
    
    
    
    
    
    
    
    (19
    )Adjusted weighted average common shares
    
    
    65,168
    
    
    
    60,687
    
    
    
    58,344Basic net income per share
    
    $
    0.52
    
    
    $
    0.31
    
    
    $
    0.15Diluted presentationDenominator:Shares used above
    
    
    65,168
    
    
    
    60,687
    
    
    
    58,344Weighted average effect of dilutive securities:Stock options
    
    
    4,059
    
    
    
    4,058
    
    
    
    3,864Common shares subject to repurchase
    
    
    
    
    
    
    
    
    
    
    19Denominator for diluted calculation
    
    
    69,227
    
    
    
    64,745
    
    
    
    62,227Diluted net income per share
    
    $
    0.49
    
    
    $
    0.29
    
    
    $
    0.14
  11. Quarterly Financial Summary (Unaudited)
 Three Months EndedDec. 31
    
    Sep. 30
    
    Jun. 30
    
    Mar. 31
    
    Dec. 31
    
    Sep. 30
    
    Jun. 30
    
    Mar. 312005
    
    2005
    
    2005
    
    2005
    
    2004
    
    2004
    
    2004
    
    2004(in thousands, except per share data)Statement of Income Data:Net revenues
    
    $
    37,459
    
    
    $
    42,134
    
    
    $
    41,326
    
    
    $
    38,414
    
    
    $
    35,162
    
    
    $
    30,092
    
    
    $
    26,811
    
    
    $
    24,913Gross profit
    
    
    30,523
    
    
    
    34,458
    
    
    
    34,034
    
    
    
    31,627
    
    
    
    28,253
    
    
    
    23,874
    
    
    
    21,228
    
    
    
    19,863Income before income
taxes
    
    
    7,045
    
    
    
    12,824
    
    
    
    13,139
    
    
    
    11,555
    
    
    
    9,330
    
    
    
    6,610
    
    
    
    5,142
    
    
    
    4,260Net income
    
    
    5,506
    
    
    
    9,070
    
    
    
    9,766
    
    
    
    9,329
    
    
    
    7,572
    
    
    
    4,739
    
    
    
    3,546
    
    
    
    3,022Earnings per share:Basic
    
    $
    0.08
    
    
    $
    0.14
    
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    0.06
    
    
    $
    0.05Diluted
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.14
    
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.05
 12. Subsequent Event
  31




---



##### 



EXHIBIT INDEX
 Exhibit Number
    
    Description23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certificate of Chief Executive Officer of Ixia pursuant to Rule
13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of Chief Financial Officer of Ixia pursuant to Rule
13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certificate 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