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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K/A
 AMENDMENT NO. 2
  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(State or other jurisdiction of incorporation or organization)
    
    95-4635982(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
 o þ
 þ
  þ o o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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EXPLANATORY NOTE
    
    
    Part I, Item 1, Business
    
    Part I, Item 1A, Risk Factors
    
    Part II, Item 6, Selected Financial Data
    
    Part II, Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    Part II, Item 8, Financial Statements and Supplementary Data
    
    Part II, Item 9A, Controls and Procedures
    
    Part IV, Item 15, Exhibits and Financial Statement Schedules
    2




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3




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IXIA
 FORM 10-K
  
 TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    5Item 1A.
    
    Risk Factors
    
    
    17Item 1B.
    
    Unresolved Staff Comments
    
    
    28Item 2.
    
    Properties
    
    
    28Item 3.
    
    Legal Proceedings
    
    
    28Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28PART IIItem 5.
    
    Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Registered Securities
    
    
    29Item 6.
    
    Selected Financial Data
    
    
    30Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    33Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 8.
    
    Financial Statements and Supplementary Data
    
    
    44Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    44Item 9A.
    
    Controls and Procedures
    
    
    44Item 9B.
    
    Other Information
    
    
    49PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    50Item 11.
    
    Executive Compensation
    
    
    50Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
    
    
    50Item 13.
    
    Certain Relationships and Related Transactions
    
    
    50Item 14.
    
    Principal Accountant Fees and Services
    
    
    50PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    50SIGNATURES
    
    
    54EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
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PART I
 
 Item 1. Business
 Overview
   
    
    Leading network equipment manufacturers such as Cisco Systems, Alcatel, Nortel
Networks, and Juniper Networks;
    
    Semiconductor manufacturers such as Intel, Broadcom, Texas Instruments, and Agere;
    
    Telephony equipment manufacturers such as Ericsson, Motorola, and Samsung;
    
    Internet and network service providers such as NTT, AT&T, Verizon, Sprint, and Bell Canada;
    
    Enterprises such as Merrill Lynch, Northrop Grumman, Microsoft, and Lockheed Martin; and
    
    Government departments and agencies such as MIT Lincoln Laboratory, Defense
Information System Agency (DISA), Joint Interoperability Test Command (JITC), and U.S.
Navy.
  The Increasing Need for Network and Application Testing and Measurement
  
    
    Equipment Manufacturers. To meet the higher standards specified by network
operators and network users, equipment manufacturers who provide infrastructure
equipment and systems must ensure the quality of their products during development and
manufacturing and prior to shipping. Failure to
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ensure the consistent performance of their products may result in the loss of customers,
increased research and development costs, customer service charges and losses resulting
from the return of products. Equipment manufacturers use our test systems to run
large-scale protocol emulations, and generate extreme traffic loads to verify the
performance of their IP-based devices.
 
    
    Communications Chip Manufacturers. Communications chip manufacturers use our test
systems to evaluate and analyze the performance of their chips during the design and
development phase.
    
    Telephony Equipment Manufacturers. Telephony equipment manufacturers provide
devices and infrastructure equipment and must ensure not only the quality of their
products during development and manufacture, but also the conformance of their products
to strict industry standards. This is critical for interoperability between various
vendors equipment, as well as to ensure that traditional TDM based voice networks
operate in conjunction with IP based technologies such as Voice and Video, and Video
over IP.
    
    Internet and Network Service Providers. Internet and network service providers seek
to provide network users with the high quality network services they demand. Failure
to provide satisfactory service can be costly and may result in the loss of customers.
To ensure desired service levels are met, internet and network service providers must
verify the performance and conformance of network equipment during the product and
systems selection process prior to deployment. Internet and network service providers
use our test systems to emulate millions of subscribers to verify the performance of
their IP-based infrastructure and services.
    
    Network Users. Network users such as large businesses use our test systems to
verify that they are receiving the level of service that they have contracted to
receive from internet and network service providers. They also increasingly use our
test systems to measure the performance of their own networks before new equipment or
applications are deployed in the network.
    
    Government Departments and Agencies. Government departments and agencies depend on
test solutions to perform qualification and pre-deployment testing of network systems,
protocols, and software applications running on their networks. Government departments
and agencies use our test systems to emulate thousands of users to determine IP
infrastructure and application limits to avoid lost productivity.
 Characteristics Demanded of Network and Application Test and Measurement Equipment
  The Ixia Solution
  6




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High Performance.
    Highly Scalable.
 Highly Customizable.
 Hardware Platform.
 Highly Modular.
 7




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Flexibility.
 Open Architecture.
 Ease of Automation.
 Ease of Use.
 Strategy
  Continue to Expand Our Addressable Markets.
 Maintain Focus on Technology Leadership.
 Expand and Further Penetrate Customer Base.
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
    
    Continuing to develop and offer new and innovative systems that meet our existing
and potential customers needs;
    
    Expanding our sales and marketing efforts; and
    
    Building upon and further strengthening our reputation and brand name recognition.
  License and Acquire Key Technologies.
 Expand International Market Presence
 Products
    Chassis
   9




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Interface Cards
  System Management Software
  Application Specific Test Suites
  Video Testing
    10




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Voice Testing
    Content Aware Testing
  Layer 4-7 Security Testing
  Application Testing
  Router Testing
   Layer 2-3 Security Testing
   Switch Testing
  11




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Wireless Testing
    Broadband Testing
   Automated Testing
    Products in Development
  
    
    Gigabit Ethernet
    
    10 Gigabit Ethernet
    
    Carrier / Metro Ethernet
    
    ATM
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
    
    Layer 4  7
    
    MPLS
    
    VPLS
    
    Multicast
    
    IPv6
    
    Voice over IP
    
    Video over IP
    
    IPSec
    
    SSL
    
    Denial of Service
    
    Wi-Fi
    
    WiMAX
    
    Mobile IP
  Technology
  Complex Logic Design
 Software Technology
 Customers
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Competition
   
    
    timeliness of new product introductions;
    
    product quality, reliability and performance;
    
    ease of installation, integration and use;
    
    breadth of product offerings and features;
    
    price and overall cost of product ownership;
    
    customer service and technical support; and
    
    company reputation and size.
    14




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Sales, Marketing and Technical Support
 Sales
 Marketing
 
    
    sponsoring technical seminars that highlight our solutions;
    
    participating in industry trade shows and technical conferences;
    
    communicating through our corporate website; and
    
    advertising in trade journals.
 Technical Support
 
    
    offer solutions for performance validation needs;
    
    develop custom applications at our company headquarters;
    
    deploy to customer sites on short notice; and
    
    provide training to optimally utilize our systems.
 Manufacturing
    15




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Research and Development
     Intellectual Property and Proprietary Rights
     16




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Employees
  Available Information
  
 Item 1A. Risk Factors
  Because we depend on a limited number of customers for a majority of our revenues, any
cancellation, reduction or delay in purchases by these customers could significantly harm our
revenues and results of operations
   Our quarterly and annual operating results may fluctuate significantly as a result of new product
introductions and other factors which could cause our stock price to decline significantly
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If we are unable to successfully introduce new products to keep pace with the rapid technological
changes that characterize our market, our results of operations will be significantly harmed
  
    
    rapid technological change such as the recent development of optical fiber and
wireless technologies;
    
    frequent new product introductions such as higher speed and more complex routers;
    
    evolving industry standards such as new internet protocols;
    
    changing customer needs such as the increase in the levels of service agreed to
between network service providers and their customers; and
    
    short product life cycles as a result of rapid changes in our customers products.
   
    
    anticipate technological changes and industry trends;
    
    properly identify customer needs;
    
    innovate and develop new technologies and applications;
    
    hire and retain necessary technical personnel;
    
    successfully commercialize new technologies in a timely manner;
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
    
    timely obtain key components for the manufacture of new products;
    
    manufacture and deliver our products in sufficient volumes and on time;
    
    price our products competitively; and
    
    differentiate our offerings from our competitors offerings.
  We depend on sales of a narrow range of products and if customers do not purchase our products, our
revenues and results of operations would be significantly harmed
  Competition in our market could significantly harm our results of operations
      19




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If we do not diversify our customer base, we may not be able to grow our business or increase our
profitability
  The restatement of our consolidated financial statements and related events could have a material
adverse effect on us.
    
    
    We could be subject to civil litigation, including class action shareholder actions
arising out of or relating to the Restatements and/or the late filing of our 2006 Third
Quarter Form 10-Q, which litigation, if decided against us, could require us to pay
substantial judgments, settlements or other penalties;
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
    
    Negative publicity relating to the Restatements and/or our failure to timely file
our 2006 Third Quarter Form 10-Q may adversely affect our business and the market price
of our Common Stock;
    
    We have identified in this Amended Form 10-K a material weakness related to our
internal control over financial reporting with respect to the completeness and accuracy
of revenue reporting for implied PCS obligations and have concluded, because of the
effects of this material weakness, that our internal control over financial reporting
was ineffective as of December 31, 2005, which conclusion has risks which are further
discussed in the next risk factor below;
    
    Should we be unable to file (i) our 2006 Third Quarter Form 10-Q and (ii) our
amendments to our 2006 Forms 10-Q on or before March 16, 2007, which is the extended
compliance deadline provided by The Nasdaq Stock Market, The Nasdaq Stock Market could
delist Ixias Common Stock;
    
    Our failure to timely file our 2006 Third Quarter Form 10-Q with the Commission
limits our ability to access the capital markets using short-form registration;
    
    Due to any negative publicity with respect to the Restatements and/or our failure to
timely file our 2006 Third Quarter Form 10-Q and the associated uncertainty in the
equity markets, we may be unable to attract or retain the personnel necessary to
achieve our business objectives;
    
    Managements focus on achieving our business objectives has been and may continue to
be diverted to addressing (i) the Restatements and our failure to timely file our 2006
Third Quarter Form 10-Q, (ii) customers, employees, investors and regulators
questions and concerns regarding the Restatements and our failure to timely file our
2006 Third Quarter Form 10-Q , (iii) any negative impact on Ixias public image with
our customers and in the financial market caused by the Restatements and our failure to
timely file our 2006 Third Quarter Form 10-Q, and (iv) any subsequent litigation that
may result from the Restatements and/or our failure to timely file our 2006 Third
Quarter Form 10-Q;
    
    The Commission may review the Restatements and require further amendment of our
public filings; and
    
    We have incurred and may continue to incur significant expenses and costs associated
with the Restatements and our failure to timely file our 2006 Third Quarter Form 10-Q.
  We have identified a material weakness in our internal control over financial reporting and an
ineffectiveness in our disclosure controls and procedures, which, if not remediated effectively,
could have an adverse effect on the trading price of our Common Stock and otherwise seriously harm
our business.
  21




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Our business may be adversely affected by unfavorable general economic and market conditions
  The loss of any of our key personnel could significantly harm our results of operations and
competitive position
  Continued rapid growth will strain our operations and require us to incur costs to maintain and
upgrade our management and operational resources
  If we are unable to expand our sales and distribution channels or are unable to successfully manage
our expanded sales organization, our revenues and results of operations will be harmed
  International activity may increase our cost of doing business or disrupt our business
  
    
    supporting multiple languages;
    
    recruiting and training international personnel;
    
    increased complexity and costs of managing international operations;
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
    
    increased exposure to foreign currency exchange rate fluctuations;
    
    commercial laws and business practices that favor local competition;
    
    changing governmental laws and regulations, including differing labor and employment
laws and longer sales cycles;
    
    difficulties in collecting receivables;
    
    reduced or limited protections of intellectual property rights;
    
    more complicated logistical and distribution arrangements; and
    
    political and economic instability.
 Man-made problems such as computer viruses or terrorism may disrupt our operations and harm our
operating results
  To the extent that our customers consolidate, they may reduce purchases of our products and demand
more favorable terms and conditions from us, which would harm our revenues and profitability
  Acquisitions undertaken and any that we may undertake could be difficult to integrate, disrupt our
business, dilute shareholder value and significantly harm our operating results
  
    
    problems assimilating the acquired operations, technologies or products;
    
    unanticipated costs associated with the acquisition;
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
    
    diversion of managements attention from our core business;
    
    adverse effects on existing business relationships with suppliers, contract
manufacturers, customers and industry experts;
    
    risks associated with entering markets in which we have no or limited prior experience; and
    
    potential loss of the acquired organizations or our own key employees.
  If we are unable to expand our international sales and distribution channels or manage them
effectively, our results of operations would be harmed
  Changes in laws, regulations and financial accounting standards may affect our reported results of
operations
    Some key components in our products come from sole or limited sources of supply, which exposes us
to potential supply shortages that could disrupt the manufacture and sale of our products
  24




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If we fail to accurately forecast our manufacturing requirements, we could incur additional costs
and experience manufacturing delays
  Failure by our contract manufacturers to provide us with adequate supplies of high quality products
could harm our revenues, results of operations, competitive position and reputation
   25




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Because of intense competition for technical personnel, we may not be able to recruit or retain
necessary personnel on a cost-effective basis
  Our products may contain defects which may cause us to incur significant costs, divert our
attention from product development efforts and result in a loss of customers
  Our failure to protect our intellectual property may significantly harm our results of operations
and reputation
    26




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Claims that we infringe third-party intellectual property rights could result in significant
expenses or restrictions on our ability to sell our products
   
    
    be time-consuming;
    
    result in costly litigation;
    
    divert the efforts of our technical and management personnel;
    
    require us to develop alternative technology, thereby causing product shipment
delays and the loss or deferral of revenues;
    
    require us to cease selling the products containing the infringing intellectual property;
    
    require us to pay substantial damage awards;
    
    damage our reputation; or
    
    require us to enter into royalty or licensing agreements which, if required, may not
be available on terms acceptable to us, if at all.
  If we fail to maintain our relationships with industry experts, our products may lose industry and
market recognition and sales could decline
  27




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Our headquarters, many of our customers and some of our contract manufacturers and suppliers are
located in California where natural disasters have occurred and may occur in the future
  Provisions of our articles of incorporation and bylaws may make it difficult for a third party to
acquire us, despite the possible benefits to our shareholders
   
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
 28




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Registered Securities
   High
    
    Low2004First quarter
    
    $
    15.59
    
    
    $
    9.63Second quarter
    
    
    12.21
    
    
    
    8.67Third quarter
    
    
    9.72
    
    
    
    5.76Fourth quarter
    
    
    16.90
    
    
    
    8.882005First quarter
    
    $
    19.36
    
    
    $
    13.46Second quarter
    
    
    21.17
    
    
    
    13.96Third quarter
    
    
    20.00
    
    
    
    14.71Fourth quarter
    
    
    15.20
    
    
    
    10.25
       29




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Item 6. Selected Financial Data
   30




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Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Consolidated Statement of Income Data (in
thousands, except per share data):Revenues:Products
    
    $
    130,045
    
    
    $
    97,200
    
    
    $
    72,674
    
    
    $
    55,699
    
    
    $
    71,458Services
    
    
    20,808
    
    
    
    13,464
    
    
    
    7,400
    
    
    
    5,861
    
    
    
    3,616Total revenues
    
    
    150,853
    
    
    
    110,664
    
    
    
    80,074
    
    
    
    61,560
    
    
    
    75,074Costs and operating expenses:(1)Cost of revenues  products
    
    
    24,239
    
    
    
    20,592
    
    
    
    15,661
    
    
    
    13,310
    
    
    
    16,610Cost of revenues  amortization of
purchased technology
    
    
    3,891
    
    
    
    3,044
    
    
    
    1,183
    
    
    
    
    
    
    
    Cost of revenues  services
    
    
    2,216
    
    
    
    1,423
    
    
    
    1,208
    
    
    
    843
    
    
    
    744Research and development
    
    
    32,404
    
    
    
    24,960
    
    
    
    21,980
    
    
    
    20,386
    
    
    
    19,355Sales and marketing
    
    
    39,359
    
    
    
    30,566
    
    
    
    23,942
    
    
    
    19,974
    
    
    
    18,813General and administrative
    
    
    16,438
    
    
    
    12,479
    
    
    
    9,179
    
    
    
    7,852
    
    
    
    8,643Amortization of intangible assets
    
    
    1,278
    
    
    
    1,532
    
    
    
    1,070
    
    
    
    941
    
    
    
    57Impairment of goodwill and other
intangible assets
    
    
    
    
    
    
    
    
    
    
    410
    
    
    
    1,677
    
    
    
    Total costs and operating expenses
    
    
    119,825
    
    
    
    94,596
    
    
    
    74,633
    
    
    
    64,983
    
    
    
    64,222Income (loss) from operations
    
    
    31,028
    
    
    
    16,068
    
    
    
    5,441
    
    
    
    (3,423
    )
    
    
    10,852Interest and other income, net
    
    
    5,055
    
    
    
    2,960
    
    
    
    3,062
    
    
    
    2,743
    
    
    
    4,035Income (loss) before income taxes
    
    
    36,083
    
    
    
    19,028
    
    
    
    8,503
    
    
    
    (680
    )
    
    
    14,887Income tax expense (benefit)
    
    
    7,593
    
    
    
    4,007
    
    
    
    1,912
    
    
    
    (403
    )
    
    
    6,411Net income (loss)
    
    $
    28,490
    
    
    $
    15,021
    
    
    $
    6,591
    
    
    $
    (277
    )
    
    $
    8,476Earnings (loss) per share:Basic
    
    $
    0.44
    
    
    $
    0.25
    
    
    $
    0.11
    
    
    $
    (0.00
    )
    
    $
    0.16Diluted
    
    $
    0.41
    
    
    $
    0.23
    
    
    $
    0.11
    
    
    $
    (0.00
    )
    
    $
    0.14Weighted average number of common and
common equivalent shares outstanding:Basic
    
    
    65,168
    
    
    
    60,687
    
    
    
    58,344
    
    
    
    56,902
    
    
    
    54,550Diluted
    
    
    69,227
    
    
    
    64,745
    
    
    
    62,227
    
    
    
    56,902
    
    
    
    61,977(1)  Stock-based compensation
included in:Cost of revenues  products
    
    $
    
    
    
    $
    30
    
    
    $
    157
    
    
    $
    398
    
    
    $
    729Cost of revenues  services
    
    
    
    
    
    
    3
    
    
    
    7
    
    
    
    56
    
    
    
    123Research and development
    
    
    
    
    
    
    271
    
    
    
    1,316
    
    
    
    2,864
    
    
    
    6,055Sales and marketing
    
    
    
    
    
    
    77
    
    
    
    159
    
    
    
    1,329
    
    
    
    3,122General and administrative
    
    
    
    
    
    
    38
    
    
    
    280
    
    
    
    658
    
    
    
    2,159
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December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(Restated)
    
    (Restated)
    
    (Restated)
    
    (Restated)
    
    (Restated)Consolidated Balance Sheet Data (in thousands):Cash and cash equivalents
    
    $
    51,837
    
    
    $
    16,383
    
    
    $
    21,133
    
    
    $
    45,265
    
    
    $
    108,168Short-term investments in marketable
securities
    
    
    124,456
    
    
    
    81,757
    
    
    
    42,718
    
    
    
    25,650
    
    
    
    8,475Working capital
    
    
    191,176
    
    
    
    104,515
    
    
    
    74,032
    
    
    
    80,210
    
    
    
    126,581Long-term investments in marketable
securities
    
    
    25,392
    
    
    
    49,015
    
    
    
    58,072
    
    
    
    51,306
    
    
    
    Total assets
    
    
    322,216
    
    
    
    241,451
    
    
    
    191,115
    
    
    
    162,413
    
    
    
    146,570Total shareholders equity
    
    
    263,480
    
    
    
    193,491
    
    
    
    157,477
    
    
    
    141,703
    
    
    
    134,044
  Year Ended December 31, 2002
    
    Year Ended December 31, 2001As
    
    
    
    
    
    
    
    
    
    AsPreviously
    
    Restatement
    
    
    
    
    
    Previously
    
    RestatementReported
    
    Adjustments
    
    Restated
    
    Reported
    
    Adjustments
    
    RestatedConsolidated Statement of
Income Data (in thousands,
except per share data):Total revenues
    
    $
    67,594
    
    
    $
    (6,034
    )
    
    $
    61,560
    
    
    $
    77,157
    
    
    $
    (2,083
    )
    
    $
    75,074Total cost of revenues
    
    
    13,310
    
    
    
    843
    
    
    
    14,153
    
    
    
    16,610
    
    
    
    744
    
    
    
    17,354Sales and marketing
    
    
    20,817
    
    
    
    (843
    )
    
    
    19,974
    
    
    
    19,557
    
    
    
    (744
    )
    
    
    18,813Income (loss) from operations
    
    
    2,611
    
    
    
    (6,034
    )
    
    
    (3,423
    )
    
    
    12,935
    
    
    
    (2,083
    )
    
    
    10,852Income tax expense (benefit)
    
    
    1,944
    
    
    
    (2,347
    )
    
    
    (403
    )
    
    
    7,221
    
    
    
    (810
    )
    
    
    6,411Net income (loss)
    
    
    3,410
    
    
    
    (3,687
    )
    
    
    (277
    )
    
    
    9,749
    
    
    
    (1,273
    )
    
    
    8,476Earnings (loss) per share:Basic
    
    $
    0.06
    
    
    $
    (0.06
    )
    
    $
    (0.00
    )
    
    $
    0.18
    
    
    $
    (0.02
    )
    
    $
    0.16Diluted
    
    $
    0.06
    
    
    $
    (0.06
    )
    
    $
    (0.00
    )
    
    $
    0.16
    
    
    $
    (0.02
    )
    
    $
    0.14
 December 31, 2003
    
    December 31, 2002As
    
    
    
    
    
    
    
    
    
    AsPreviously
    
    Restatement
    
    
    
    
    
    Previously
    
    RestatementReported
    
    Adjustments
    
    Restated
    
    Reported
    
    Adjustments
    
    RestatedConsolidated Balance Sheet
Data (in thousands):Working capital
    
    $
    77,531
    
    
    $
    (3,499
    )
    
    $
    74,032
    
    
    $
    83,125
    
    
    $
    (2,915
    )
    
    $
    80,210Total assets
    
    
    185,018
    
    
    
    6,097
    
    
    
    191,115
    
    
    
    157,661
    
    
    
    4,752
    
    
    
    162,413Total shareholders equity
    
    
    167,054
    
    
    
    (9,577
    )
    
    
    157,477
    
    
    
    149,167
    
    
    
    (7,464
    )
    
    
    141,703
 32




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##### Table of Contents



December 31, 2001AsPreviously
    
    RestatementReported
    
    Adjustments
    
    RestatedConsolidated Balance Sheet Data (in
thousands):Working capital
    
    $
    128,206
    
    
    $
    (1,625
    )
    
    $
    126,581Total assets
    
    
    144,166
    
    
    
    2,404
    
    
    
    146,570Total shareholders equity(1)
    
    
    137,821
    
    
    
    (3,777
    )
    
    
    134,044
 
 (1)
    
    The beginning balance of total shareholders equity as previously
reported, or $108.1 million, was restated to $105.5 million as a direct result of a change in
retained earnings related to the impact of the above-described restatement adjustments on prior
years. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Restatement of Previously Issued Financial Statements
  Business Overview
  33




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##### Table of Contents



Revenues.
      34




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##### Table of Contents



Cost of Revenues
  
    
    changes in 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 our products sold, such as the mix of software versus hardware product
sales, including the effects of any related deferral, reversal and recognition of
revenues for implied PCS obligations;
    
    new product introductions by us and by our competitors;
    
    demand for our products;
 35




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##### Table of Contents




    
    expenses related to acquired technologies, such as royalties and amortization of intangible assets;
    
    production volume; and
    
    the mix of sales channels through which our products are sold.
  Operating Expenses
     Interest and Other Income, Net.
 Income Tax.
 Critical Accounting Policies and Estimates
  36




---



##### Table of Contents




    
    Revenue Recognition Policy. We recognize revenue as discussed in Revenues in the
Business Overview section of Item 7.
    
    Allowance for Doubtful Accounts. Trade accounts receivable are recorded at the
invoiced amount and do not bear interest. The allowance for doubtful accounts is based
on our best estimate of the amount of probable credit losses in existing accounts
receivable. The allowance for doubtful accounts is determined based on historical
write-off experience, current customer information and other relevant data. We review
the allowance for doubtful accounts monthly. Past due balances of 60 days and over are
reviewed individually for collectibility. Account balances are charged off against the
allowance when we believe it is probable the receivable will not be recovered. We do
not have any off-balance-sheet credit exposure related to our customers.
    
    Write-Down of Obsolete Inventory.We write-down inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future demand and
market conditions. If actual future demand is less favorable than our initial
estimate, additional inventory write-downs may be required.
    
    Deferred Taxes.Deferred taxes are determined based on the differences between the
financial statement and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce net deferred tax assets to the
amounts expected to be realized. In assessing the need for a valuation allowance we
consider estimates of future taxable income and ongoing prudent and feasible tax
planning strategies.
    
    Acquisition Purchase Price Allocation.When we acquire a business, product line or
rights to a product or technology, we allocate the purchase price, including related
transaction costs, to the various tangible and intangible assets acquired and the
liabilities assumed, based on their estimated fair values. Determining the fair value
of certain assets and liabilities acquired is subjective in nature and often involves
the use of significant estimates and assumptions. To assist in this process, we may
obtain appraisals from valuation specialists for certain of these items. Most of the
assumptions used to determine fair value are made based on forecasted information. The
useful lives of amortizable intangible assets are reviewed for reasonableness
periodically by management in light of current conditions.
    
    Impairment of Long-Lived Assets.We evaluate the recoverability of our identifiable
definite life intangible assets and other long-lived assets in accordance with
Statement of Financial Accounting Standards (SFAS) 144 which generally requires that
we assess these assets for recoverability when events or circumstances indicate a
potential impairment by estimating the undiscounted cash flows to be generated from the
use and ultimate disposition of these assets. To the extent that the estimated
undiscounted cash flows fall below the carrying value of the intangible or other long
lived assets we write-down the assets to fair value. Fair value is generally
determined based on discounted cash flows. Determining the fair value based on
discounted cash flows is subjective in nature and often involves the use of significant
estimates and assumptions about future results and discount rates. We evaluate the
recoverability of our goodwill in accordance with SFAS 142 which requires us to assess
our goodwill annually for impairment. Impairment losses are recorded to the extent
that the carrying value of the goodwill exceeds the fair value.
 37




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##### Table of Contents




    
    Stock-Based Compensation Expense for 2006 and Thereafter.Effective January 1, 2006,
we adopted SFAS 123R. SFAS 123R requires all share-based payments, including grants of
stock options and employee stock purchase rights, to be recognized in the financial
statements based on their respective fair values for accounting purposes on the grant
date. Under this standard, the fair value of each employee stock option and employee
stock purchase right is estimated on the date of grant using an option pricing model
that meets certain requirements. We currently use the Black-Scholes option pricing
model to estimate the fair value of our share-based payments which meets the
requirements of SFAS 123R. The determination of the fair value of share-based payment
awards utilizing the Black-Scholes model is affected by our stock price and a number of
assumptions, including expected volatility, expected life and risk-free interest rate.
The expected life and expected volatility are based on historical and other data
trended into the future. The risk-free interest rate assumption is based on observed
interest rates appropriate for the terms of our stock options and stock purchase
rights. Stock-based compensation expense recognized in our consolidated financial
statements in 2006 and thereafter will be based on awards that are ultimately expected
to vest. The amount of stock-based compensation expense in 2006 and thereafter will be
reduced for estimated forfeitures based on historical experience as well as future
expectations. Forfeitures are required to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. We will evaluate the assumptions used to value stock awards on a periodic
basis. If factors change and we employ different assumptions, stock-based compensation
expense may differ significantly from what we have recorded in the past. If there are
any modifications or cancellations of the underlying unvested securities, we may be
required to accelerate, increase or cancel any remaining unearned stock-based
compensation expense. To the extent that we grant additional equity securities to
employees, our stock-based compensation expense may increase by the additional unearned
compensation resulting from those grants. Had we adopted SFAS 123R in prior periods,
the impact would have been similar to the current pro forma disclosures required under
SFAS 123 (see Note 1 to our Consolidated Financial Statements).
    
    Contingencies and Litigation. We evaluate contingent liabilities, including
threatened or pending litigation, in accordance with SFAS 5, Accounting for
Contingencies, and we record accruals when the loss is deemed probable and the
liability can reasonably be estimated. We make these assessments based on the facts
and circumstances of each situation and in some instances based in part on the advice
of outside legal counsel.
 38




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##### Table of Contents



Results of Operations
  Year Ended December 31,2005
    
    2004
    
    2003(Restated)
    
    (Restated)
    
    (Restated)Revenues:Products
    
    
    86.2
    %
    
    
    87.8
    %
    
    
    90.8
    %Services
    
    
    13.8
    
    
    
    12.2
    
    
    
    9.2Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and operating expenses:(1)Cost of revenues  products
    
    
    16.1
    
    
    
    18.6
    
    
    
    19.6Cost of revenues  amortization of purchased technology
    
    
    2.6
    
    
    
    2.8
    
    
    
    1.5Cost of revenues  services
    
    
    1.5
    
    
    
    1.3
    
    
    
    1.5Research and development
    
    
    21.4
    
    
    
    22.5
    
    
    
    27.4Sales and marketing
    
    
    26.0
    
    
    
    27.6
    
    
    
    29.9General and administrative
    
    
    10.9
    
    
    
    11.3
    
    
    
    11.5Amortization of intangible assets
    
    
    0.9
    
    
    
    1.4
    
    
    
    1.3Impairment of goodwill and other intangible assets
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.5Total costs and operating expenses
    
    
    79.4
    
    
    
    85.5
    
    
    
    93.2Income from operations
    
    
    20.6
    
    
    
    14.5
    
    
    
    6.8Interest and other income, net
    
    
    3.3
    
    
    
    2.7
    
    
    
    3.8Income before income taxes
    
    
    23.9
    
    
    
    17.2
    
    
    
    10.6Income tax expense
    
    
    5.0
    
    
    
    3.6
    
    
    
    2.4Net income
    
    
    18.9
    %
    
    
    13.6
    %
    
    
    8.2
    %(1)  Stock-based compensation included in:Cost of revenues  products
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.2
    %Cost of revenues  services
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Research and development
    
    
    0.0
    
    
    
    0.2
    
    
    
    1.6Sales and marketing
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.2General and administrative
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.3
 Comparison of the Years Ended December 31, 2005 and 2004
 Revenues.
 Cost of Revenues
 39




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##### Table of Contents



Research and Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 Amortization of Intangible Assets.
 Interest and Other Income, Net.
 Income Tax Expense.
 Comparison of the Years Ended December 31, 2004 and 2003
 Revenues
 Cost of Revenues
 40




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Research and Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 Amortization of Intangible Assets.
 Impairment of Goodwill and Other Intangible Assets
 Interest and Other Income, Net
 Income Tax Expense
 Liquidity and Capital Resources
 41




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##### Table of Contents



Financial Commitments
  Year Ending December 31,Total
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    ThereafterOperating leases
    
    $
    8,606
    
    
    $
    3,390
    
    
    $
    3,207
    
    
    $
    1,503
    
    
    $
    222
    
    
    $
    200
    
    
    $
    84
 Recent Accounting Pronouncements
 42




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43




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Sensitivity
  Exchange Rate Sensitivity
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Restatement
  44




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##### Table of Contents



Evaluation of Disclosure Controls and Procedures (Restated)
    45




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Managements Report on Internal Control over Financial Reporting (Restated)
  Internal Control  Integrated Framework
   Internal Control  Integrated Framework
  46




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##### Table of Contents



Remediation Efforts to Address Material Weakness
  
    
    License Management System (LMS)- In December 2006, we completed the
implementation of a license management system, or LMS, for all of our significant
software products. This system locks a software license to a specific computer or
Ixia hardware chassis on which our software resides and manages the provision of
software upgrades to ensure that the upgrades are only provided to customers that are
entitled to receive such upgrades during an initial or extended PCS period. The use
of the LMS to control our software upgrades is a significant improvement over the use
of our legacy password system that did not sufficiently control the circumstances
under which upgrades were provided for many of our software products. Under our
legacy password system, the software upgrade files were protected with passwords that
were readily accessible to sales and support personnel. These passwords were not
frequently changed and were not provided under any system of license management.
During the accounting review, management determined that, for a variety of reasons,
including to (i) provide bug fixes, (ii) facilitate the sale of new products that did
not function with a customers existing Ixia products, and (iii) meet competitive
pressures, our sales and support personnel used such readily accessible passwords
and/or disseminated them to customers to provide software upgrades at a time when the
customers were not contractually entitled to receive such PCS. The practices were not
documented (for example, on sales quotations or customer purchase orders) in a manner
that identified them to our management and finance personnel to enable them to review
and account for them in accordance with SOP 97-2. As a result, we did not, as
required by SOP 97-2, defer revenue for these implied PCS obligations. Our completion
during the fourth quarter of 2006 of a license management system for all of our
significant software products now provides us with an effective preventative control
in that the license management system restricts the provision of software upgrades to
only those customers that are entitled to such upgrades. This system should eliminate
the possibility of customers receiving free PCS without the knowledge of our finance personnel. For certain software products that are
not subject to license management and for certain customers for which free extended PCS
periods are to be provided, we will defer revenue for implied PCS obligations in
accordance with SOP 97-2.
    
    Enhanced Revenue Recognition Policies and Practices During 2006 and in light of
the Companys accounting review and Restatement, we thoroughly reviewed, supplemented
and clarified our written revenue recognition policies and practices in an effort to
ensure that our sales, support and other personnel are aware of and clearly understand
these policies. The Audit Committee has reviewed, and we are currently in the process
of finalizing, the enhanced documentation for our revenue recognition policies and
practices. By the end of the first quarter of 2007, members of senior management and
finance will distribute the revised and enhanced revenue recognition policies and
practices to all Company personnel. We will also post a copy of the policies and
practices on our Intranet site for easy reference.
    
    Communication and Training Regarding PCS and Revenue Recognition Policies
Subsequent to the determination that we had a practice of providing software upgrades
and support to certain customers that differed from our standard PCS policies and
contractual agreements, we have expressly and repeatedly communicated and reinforced,
both orally and in writing, to our sales, support, management and finance personnel,
our policy with respect to the provision of PCS services (i.e., no unauthorized
out-of-maintenance services should be provided). We have also begun to create
additional training materials regarding our PCS and revenue recognition policies,
which materials will be distributed to our sales, support, product management and
order management personnel (as well as to new hires in those groups) in order to
ensure that such personnel appropriately understand and consider these policies in the
course of their employment with the Company. These materials will include copies of
the policies and an explanation of the role that sales and support personnel play in
ensuring that we comply with those policies. In 2007, we plan to continue to enhance
our communication and training program regarding PCS and revenue recognition policies
by conducting a number of revenue recognition training sessions that will be presented
by persons having expertise in SOP 97-2 and in-depth knowledge regarding our business,
our PCS policies and our revenue recognition policies and practices. The training
program included training provided at our January 2007 international sales conference
for all sales personnel and will include new hire training, as well as annual,
mandatory training sessions and regular refresher sessions. To the extent
practicable, we will conduct training in person and in small group sessions to enhance
the effectiveness of the training. In 2006, we also communicated to our sales and
customer support personnel that we will take appropriate disciplinary actions, up to
and including termination of employment, if they do not comply with our PCS policies
and our policies and procedures that affect our accounting for matters relating to
revenue recognition.
    
    Communication among Functional Groups within the Company The practices and
errors that resulted in the Restatement occurred in part because of a lack of
effective communication among various Ixia departments and specifically between our
finance group, on the one hand, and our sales and customer support personnel, on the
other. The Company is in the process of implementing more formalized and regular
communications among the various functional groups within the Company, including
finance, sales, customer support, product management and order management personnel,
with respect to matters that may affect the Companys accounting and financial
reporting. The Company plans, among other things, to arrange for regular meetings
between members of these departments and finance and for discussions across
departments regarding field-level and other practices that may affect the Companys
accounting and financial statements.
 47




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##### Table of Contents




    
    Finance Group The Company has taken and is continuing to take steps to
ensure that the Companys finance group receives adequate resources and is effectively
staffed and organized. The Company is also requiring that its finance personnel regularly attend
continuing education training courses in accounting and finance to enhance their
knowledge of and expertise in the accounting principles applicable to the Companys
business and particularly SOP 97-2.
    
    Revenue Recognition Senior Manager We are further strengthening our
control environment with respect to revenue recognition by hiring a senior-level
finance employee with technical understanding and experience in this highly complex
area. This individual, who is a certified public accountant, is scheduled to begin
employment with the Company as Senior Manager, Revenue Recognition, in early March
2007. He will be responsible for monitoring and helping ensure compliance with our
revenue recognition policies, including training our internal personnel (e.g., sales,
finance, customer support, product management and order management personnel) with
regard to the policies, participating in reviewing contract provisions and sales and
other business practices, including our PCS policies and practices, that affect
revenue recognition and overseeing the implementation of and monitoring controls
designed to ensure compliance with our revenue recognition policies and GAAP.
    
    Quarterly Certification Letters We have also revised, supplemented and clarified
the certification letters that certain sales personnel are required to execute on a
quarterly basis regarding the absence of side letter agreements and concessions and
regarding other matters that affect our accounting for sales transactions. We have
revised these certifications to ensure that the persons signing them clearly
understand the meaning of the representations that they are making in the
certifications, including representations that would require them to identify any
circumstances that might give rise to implied PCS obligations, and that they clearly
understand the PCS practices that are prohibited, as well as the consequences to the
individual and to the Company of violating those prohibitions. We first presented the
revised certification form to certain sales employees with respect to the quarter
ended September 30, 2006. We have also created a similar certification letter that
certain support personnel will be required to execute on a quarterly basis. We first
presented this new certification form to those employees with respect to the quarter
ended December 31, 2006. In order to promote substantive understanding of and
communication about the certifications generally and about any transactions that are
potentially exceptions to the certifications, we also plan to modify, beginning with
the quarter ending March 31, 2007, the processes by which personnel complete and
return their certification letters. These revised processes will impress upon Company
personnel the need for accurate representations, the Companys reliance on these
representations, and the potentially severe consequences of inaccurate or improper
certifications.
  Changes in Internal Control over Financial Reporting
  Inherent Limitations on Effectiveness of Controls
  48




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Item 9B. Other Information
  49




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##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers of the Registrant
   
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management
  
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
  Consolidated Financial Statements
  Financial Statement Schedule
 50




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##### Table of Contents



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)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)14.1
    
    Code of Ethics for Chief Executive and Senior Financial Officers(25)21.1
    
    Subsidiaries of the Registrant(26)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. 51




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##### Table of Contents



(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.(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. 52




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##### Table of Contents



(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)
    
    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.(26)
    
    Previously filed. Exhibits
  Financial Statement Schedules
  53




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##### Table of Contents



SIGNATURES
  Dated: February 23, 2007
    IXIA/s/ Errol GinsbergErrol GinsbergPresident and Chief Executive Officer  Name
    
    Title
    
    Date/s/ Errol Ginsberg

Errol Ginsberg
    
    President, Chief Executive Officer and Director (Principal
Executive Officer)
    
    February 23, 2007/s/ Thomas B. Miller

Thomas B. Miller
    
    Chief Financial Officer (Principal
Financial and Accounting Officer)
    
    February 23, 2007/s/ Jean-Claude Asscher

Jean-Claude Asscher
    
    Chairman of the Board
    
    February 23, 2007/s/ Jon F. Rager

Jon F. Rager
    
    Director
    
    February 23, 2007/s/ Massoud Entekhabi

Massoud Entekhabi
    
    Director
    
    February 23, 2007/s/ Gail Hamilton

Gail Hamilton
    
    Director
    
    February 23, 2007/s/ Jonathan Fram

Jonathan Fram
    
    Director
    
    February 23, 2007
 54




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##### Table of Contents



IXIA
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    
    56Consolidated Balance Sheets as of December 31, 2005 and 2004 (as restated)
    
    
    
    59Consolidated Statements of Income for the years ended December 31, 2005,
2004 and 2003 (as restated)
    
    
    
    60Consolidated Statements of Shareholders Equity for the years ended
December 31, 2005, 2004 and 2003 (as restated)
    
    
    
    61Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004 and 2003 (as restated)
    
    
    
    62Notes to Consolidated Financial Statements
    
    
    
    63
 55




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Report of Independent Registered Public Accounting Firm
   Consolidated financial statements
   Internal control over financial reporting
 Internal Control
 Integrated Framework
   56




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##### Table of Contents



Internal Control  Integrated Framework Internal Control  Integrated Framework
  
 57




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58




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##### Table of Contents



IXIA
Consolidated Balance Sheets
(in thousands)
 December 31,
    
    
    December 31,2005
    
    
    2004(Restated)
    
    
    (Restated)AssetsCurrent 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
    
    
    8,588
    
    
    
    6,761Income taxes receivable
    
    
    9
    
    
    
    1,696Prepaid expenses and other current assets
    
    
    3,510
    
    
    
    2,878Total current assets
    
    
    229,811
    
    
    
    138,213Investments in marketable securities
    
    
    25,392
    
    
    
    49,015Property and equipment, net
    
    
    19,750
    
    
    
    12,268Deferred income taxes
    
    
    13,018
    
    
    
    6,935Goodwill
    
    
    13,468
    
    
    
    11,377Intangible assets, net
    
    
    20,462
    
    
    
    23,031Other assets
    
    
    315
    
    
    
    612Total assets
    
    $
    322,216
    
    
    $
    241,451Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    2,872
    
    
    $
    1,556Accrued expenses
    
    
    12,399
    
    
    
    13,181Deferred revenues
    
    
    19,233
    
    
    
    14,758Income taxes payable
    
    
    4,131
    
    
    
    4,203Total current liabilities
    
    
    38,635
    
    
    
    33,698Deferred revenues
    
    
    20,101
    
    
    
    14,262Total liabilities
    
    
    58,736
    
    
    
    47,960Commitments and contingencies (Note 8)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
    
    
    68,590
    
    
    
    40,100Total shareholders equity
    
    
    263,480
    
    
    
    193,491Total liabilities and shareholders equity
    
    $
    322,216
    
    
    $
    241,451
 The accompanying notes are an integral part of these consolidated financial statements
 59




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IXIA
Consolidated Statements of Income
(in thousands, except per share data)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)Revenues:Products
    
    $
    130,045
    
    
    $
    97,200
    
    
    $
    72,674Services
    
    
    20,808
    
    
    
    13,464
    
    
    
    7,400Total revenues
    
    
    150,853
    
    
    
    110,664
    
    
    
    80,074Costs and operating expenses:(1)Cost of revenues  products
    
    
    24,239
    
    
    
    20,592
    
    
    
    15,661Cost of revenues  amortization of purchased
technology
    
    
    3,891
    
    
    
    3,044
    
    
    
    1,183Cost of revenues  services
    
    
    2,216
    
    
    
    1,423
    
    
    
    1,208Research and development
    
    
    32,404
    
    
    
    24,960
    
    
    
    21,980Sales and marketing
    
    
    39,359
    
    
    
    30,566
    
    
    
    23,942General and administrative
    
    
    16,438
    
    
    
    12,479
    
    
    
    9,179Amortization of intangible assets
    
    
    1,278
    
    
    
    1,532
    
    
    
    1,070Impairment of goodwill and other intangible assets
    
    
    
    
    
    
    
    
    
    
    410Total costs and operating expenses
    
    
    119,825
    
    
    
    94,596
    
    
    
    74,633Income from operations
    
    
    31,028
    
    
    
    16,068
    
    
    
    5,441Interest and other income, net
    
    
    5,055
    
    
    
    2,960
    
    
    
    3,062Income before income taxes
    
    
    36,083
    
    
    
    19,028
    
    
    
    8,503Income tax expense
    
    
    7,593
    
    
    
    4,007
    
    
    
    1,912Net income
    
    $
    28,490
    
    
    $
    15,021
    
    
    $
    6,591Earnings per share:Basic
    
    $
    0.44
    
    
    $
    0.25
    
    
    $
    0.11Diluted
    
    $
    0.41
    
    
    $
    0.23
    
    
    $
    0.11Weighted 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  products
    
    $
    
    
    
    $
    30
    
    
    $
    157Cost of revenues  services
    
    
    
    
    
    
    3
    
    
    
    7Research and development
    
    
    
    
    
    
    271
    
    
    
    1,316Sales and marketing
    
    
    
    
    
    
    77
    
    
    
    159General and administrative
    
    
    
    
    
    
    38
    
    
    
    280
 The accompanying notes are an integral part of these consolidated financial statements
 60




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IXIA
Consolidated Statements of Shareholders Equity
(in thousands)
 Additional
    
    
    DeferredCommon Stock
    
    
    Paid-In
    
    
    Stock-based
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Earnings
    
    
    Total(Restated)
    
    
    (Restated)Balance as of December 31,
2002 (as previously reported)
    
    
    57,595
    
    
    $
    79,206
    
    
    $
    47,045
    
    
    $
    (3,036
    )
    
    $
    25,952
    
    
    $
    149,167Restatement adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,464
    )
    
    
    (7,464
    )Balance as of December 31, 2002
    
    
    57,595
    
    
    
    79,206
    
    
    
    47,045
    
    
    
    (3,036
    )
    
    
    18,488
    
    
    
    141,703Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,591
    
    
    
    6,591Exercise 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
    )
    
    
    25,079
    
    
    
    157,477Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,021
    
    
    
    15,021Exercise 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
    
    
    
    
    
    
    
    40,100
    
    
    
    193,491Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,490
    
    
    
    28,490Exercise 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
    
    
    $
    
    
    
    $
    68,590
    
    
    $
    263,480
 The accompanying notes are an integral part of these consolidated financial statements
 61




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IXIA
Consolidated Statements of Cash Flows
(in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)Cash flows from operating activities:Net income
    
    $
    28,490
    
    
    $
    15,021
    
    
    $
    6,591Adjustments 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
    
    
    (8,141
    )
    
    
    (1,737
    )
    
    
    (2,784
    )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
    
    
    10,299
    
    
    
    7,634
    
    
    
    6,937Income 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
 62




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##### Table of Contents



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
   63




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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
  64




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Litigation
  Product Warranty Costs
  Revenue Recognition (Restated)
    65




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
       Cost of Revenues (Restated)
  66




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Research and Development
  Software Developed for Internal Use
  Advertising
  Stock-Based Compensation (Restated)
   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
    %
 67




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Year Ended December 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    (Restated)
    
    (Restated)Stock-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
    
    $
    28,490
    
    
    $
    15,021
    
    
    $
    6,591Additional stock-based
compensation expense, net of
taxes, determined under the
fair value method
    
    
    8,402
    
    
    
    13,612
    
    
    
    10,506Pro forma
    
    $
    20,088
    
    
    $
    1,409
    
    
    $
    (3,915
    )Basic earnings (loss) per share:As reported
    
    $
    0.44
    
    
    $
    0.25
    
    
    $
    0.11Pro forma
    
    $
    0.31
    
    
    $
    0.02
    
    
    $
    (0.07
    )Diluted earnings (loss) per share:As reported
    
    $
    0.41
    
    
    $
    0.23
    
    
    $
    0.11Pro forma
    
    $
    0.29
    
    
    $
    0.02
    
    
    $
    (0.07
    )
   Income Taxes
  Earnings per share
 68




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Foreign Currency Translation
  Comprehensive Income
  Segments
  Reclassifications and Presentation
  Recent Accounting Pronouncements
  69




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IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
      2. Restatement of Previously Issued Financial Statements
  70




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
    Revenue Recognition for Implied PCS
  71




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Classification of Certain Customer Support Costs and Classification of Deferred Tax Assets and
Liabilities
    Summary of Restatement Adjustments
  72




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IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 As of December 31, 2005As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Balance Sheet:AssetsCurrent assets:Cash and cash equivalents
    
    $
    51,837
    
    
    $
    
    
    
    $
    51,837Short-term investments in marketable securities
    
    
    124,456
    
    
    
    
    
    
    
    124,456Accounts receivable, net
    
    
    31,565
    
    
    
    
    
    
    
    31,565Inventories
    
    
    9,846
    
    
    
    
    
    
    
    9,846Deferred income taxes
    
    
    4,401
    
    
    
    4,187
    (1)(2)
    
    
    8,588Income taxes receivable
    
    
    9
    
    
    
    
    
    
    
    9Prepaid expenses and other current assets
    
    
    3,510
    
    
    
    
    
    
    
    3,510Total current assets
    
    
    225,624
    
    
    
    4,187
    
    
    
    229,811Investments in marketable securities
    
    
    25,392
    
    
    
    
    
    
    
    25,392Property and equipment, net
    
    
    19,750
    
    
    
    
    
    
    
    19,750Deferred income taxes
    
    
    10,004
    
    
    
    3,014
    (1)(2)
    
    
    13,018Goodwill
    
    
    13,468
    
    
    
    
    
    
    
    13,468Intangible assets, net
    
    
    20,462
    
    
    
    
    
    
    
    20,462Other assets
    
    
    315
    
    
    
    
    
    
    
    315Total assets
    
    $
    315,015
    
    
    $
    7,201
    
    
    $
    322,216Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    2,872
    
    
    $
    
    
    
    $
    2,872Accrued expenses
    
    
    12,399
    
    
    
    
    
    
    
    12,399Deferred revenues
    
    
    8,338
    
    
    
    10,895
    (3)
    
    
    19,233Income taxes payable
    
    
    4,131
    
    
    
    
    
    
    
    4,131Total current liabilities
    
    
    27,740
    
    
    
    10,895
    
    
    
    38,635Deferred revenues
    
    
    528
    
    
    
    19,573
    (3)
    
    
    20,101Deferred income taxes
    
    
    4,651
    
    
    
    (4,651
    )(2)
    
    
    Total liabilities
    
    
    32,919
    
    
    
    25,817
    
    
    
    58,736Total shareholders equity
    
    
    282,096
    
    
    
    (18,616
    )(4)
    
    
    263,480Total liabilities and shareholders equity
    
    $
    315,015
    
    
    $
    7,201
    
    
    $
    322,216
 
 (1)
    
    To reflect the income tax effects of the revenue adjustment for implied PCS detailed in Item
(3).(2)
    
    To reflect the combination of certain deferred tax assets and deferred tax liabilities that
were previously reported separately on a gross basis.(3)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. 73




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IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (4)
    
    To reflect the cumulative effects on shareholders equity of the adjustments detailed in
Items (1) and (3).
 As of December 31, 2004As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Balance Sheet:AssetsCurrent assets:Cash and cash equivalents
    
    $
    16,383
    
    
    $
    
    
    
    $
    16,383Short-term investments in marketable securities
    
    
    81,757
    
    
    
    
    
    
    
    81,757Accounts receivable, net
    
    
    22,069
    
    
    
    
    
    
    
    22,069Inventories
    
    
    6,669
    
    
    
    
    
    
    
    6,669Deferred income taxes
    
    
    3,756
    
    
    
    3,005
    (1)
    
    
    6,761Income taxes receivable
    
    
    1,696
    
    
    
    
    
    
    
    1,696Prepaid expenses and other current assets
    
    
    2,878
    
    
    
    
    
    
    
    2,878Total current assets
    
    
    135,208
    
    
    
    3,005
    
    
    
    138,213Investments in marketable securities
    
    
    49,015
    
    
    
    
    
    
    
    49,015Property and equipment, net
    
    
    12,268
    
    
    
    
    
    
    
    12,268Deferred income taxes
    
    
    4,798
    
    
    
    2,137
    (1)(2)
    
    
    6,935Goodwill
    
    
    11,377
    
    
    
    
    
    
    
    11,377Intangible assets, net
    
    
    23,031
    
    
    
    
    
    
    
    23,031Other assets
    
    
    612
    
    
    
    
    
    
    
    612Total assets
    
    $
    236,309
    
    
    $
    5,142
    
    
    $
    241,451Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    1,556
    
    
    $
    
    
    
    $
    1,556Accrued expenses
    
    
    13,181
    
    
    
    
    
    
    
    13,181Deferred revenues
    
    
    7,032
    
    
    
    7,726
    (3)
    
    
    14,758Income taxes payable
    
    
    4,203
    
    
    
    
    
    
    
    4,203Total current liabilities
    
    
    25,972
    
    
    
    7,726
    
    
    
    33,698Deferred revenues
    
    
    
    
    
    
    14,262
    (3)
    
    
    14,262Deferred income taxes
    
    
    3,411
    
    
    
    (3,411
    )(2)
    
    
    Total liabilities
    
    
    29,383
    
    
    
    18,577
    
    
    
    47,960Total shareholders equity
    
    
    206,926
    (5)
    
    
    (13,435
    )(4)
    
    
    193,491Total liabilities and shareholders equity
    
    $
    236,309
    
    
    $
    5,142
    
    
    $
    241,451
 
 (1)
    
    To reflect the income tax effects of the revenue adjustment for implied PCS detailed in Item
(3).(2)
    
    To reflect the combination of certain deferred tax assets and deferred tax liabilities that
were previously reported separately on a gross basis.(3)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. 74




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IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (4)
    
    To reflect the cumulative effects on shareholders equity of the adjustments detailed in
Items (1) and (3).(5)
    
    The beginning balance of total shareholders equity as previously reported, or $167.1
million, was restated to $157.5 million as a direct result of a change in retained earnings
related to the impact of the above-described restatement adjustments on prior years.
 For the Year Ended December 31, 2005As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Statement of Income:Revenues:Products
    
    $
    159,333
    
    
    $
    (29,288
    )(A)
    
    $
    130,045Services
    
    
    
    
    
    
    20,808
    (A)
    
    
    20,808Total revenues
    
    
    159,333
    
    
    
    (8,480
    )
    
    
    150,853Costs and operating expenses:Cost of revenues  products
    
    
    24,800
    
    
    
    (561
    )(B)
    
    
    24,239Cost of revenues  amortization of
purchased technology
    
    
    3,891
    
    
    
    
    
    
    
    3,891Cost of revenues  services
    
    
    
    
    
    
    2,216
    (B)
    
    
    2,216Research and development
    
    
    32,404
    
    
    
    
    
    
    
    32,404Sales and marketing
    
    
    41,014
    
    
    
    (1,655
    )(B)
    
    
    39,359General and administrative
    
    
    16,438
    
    
    
    
    
    
    
    16,438Amortization of intangible assets
    
    
    1,278
    
    
    
    
    
    
    
    1,278Total costs and operating expenses
    
    
    119,825
    
    
    
    
    
    
    
    119,825Income from operations
    
    
    39,508
    
    
    
    (8,480
    )
    
    
    31,028Interest and other income, net
    
    
    5,055
    
    
    
    
    
    
    
    5,055Income before income taxes
    
    
    44,563
    
    
    
    (8,480
    )
    
    
    36,083Income tax expense
    
    
    10,892
    
    
    
    (3,299
    )(C)
    
    
    7,593Net income
    
    $
    33,671
    
    
    $
    (5,181
    )
    
    $
    28,490Earnings per share:Basic
    
    $
    0.52
    
    
    $
    (0.08
    )(D)
    
    $
    0.44Diluted
    
    $
    0.49
    
    
    $
    (0.08
    )(D)
    
    $
    0.41Weighted average number of common and
common equivalent shares outstanding:Basic
    
    
    65,168
    
    
    
    
    
    
    
    65,168Diluted
    
    
    69,227
    
    
    
    
    
    
    
    69,227
 
 (A)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. Adjustment also includes $12.5 million of
services revenues that were previously reported within the $159.3 million revenue amount by
reducing product revenues by $12.5 million and increasing services revenues by $12.5 million.(B)
    
    To reflect the reclassification of certain direct customer support costs to cost of revenues
from sales and marketing expenses and to separately disclose the costs associated with
products and services revenues. 75




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IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (C)
    
    To reflect the income tax effects of the revenue adjustment for implied PCS detailed in Item
(A).(D)
    
    To reflect earnings per share effects from adjustments detailed in Items (A) and (C).
 For the Year Ended December 31, 2004As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Statement of Income:Revenues:Products
    
    $
    116,978
    
    
    $
    (19,778
    )(A)
    
    $
    97,200Services
    
    
    
    
    
    
    13,464
    (A)
    
    
    13,464Total revenues
    
    
    116,978
    
    
    
    (6,314
    )
    
    
    110,664Costs and operating expenses:(1)Cost of revenues  products
    
    
    20,716
    
    
    
    (124
    )(B)
    
    
    20,592Cost of revenues  amortization of purchased
technology
    
    
    3,044
    
    
    
    
    
    
    
    3,044Cost of revenues  services
    
    
    
    
    
    
    1,423
    (B)
    
    
    1,423Research and development
    
    
    24,960
    
    
    
    
    
    
    
    24,960Sales and marketing
    
    
    31,865
    
    
    
    (1,299
    )(B)
    
    
    30,566General and administrative
    
    
    12,479
    
    
    
    
    
    
    
    12,479Amortization of intangible assets
    
    
    1,532
    
    
    
    
    
    
    
    1,532Total costs and operating expenses
    
    
    94,596
    
    
    
    
    
    
    
    94,596Income from operations
    
    
    22,382
    
    
    
    (6,314
    )
    
    
    16,068Interest and other income, net
    
    
    2,960
    
    
    
    
    
    
    
    2,960Income before income taxes
    
    
    25,342
    
    
    
    (6,314
    )
    
    
    19,028Income tax expense
    
    
    6,463
    
    
    
    (2,456
    )(C)
    
    
    4,007Net income
    
    $
    18,879
    
    
    $
    (3,858
    )
    
    $
    15,021Earnings per share:Basic
    
    $
    0.31
    
    
    $
    (0.06
    )(D)
    
    $
    0.25Diluted
    
    $
    0.29
    
    
    $
    (0.06
    )(D)
    
    $
    0.23Weighted average number of common and common
equivalent shares outstanding:Basic
    
    
    60,687
    
    
    
    
    
    
    
    60,687Diluted
    
    
    64,745
    
    
    
    
    
    
    
    64,745(1)Stock-based compensation included in:Cost of revenues  products
    
    $
    30
    
    
    $
    
    
    
    $
    30Cost of revenues  services
    
    
    
    
    
    
    3
    (B)
    
    
    3Research and development
    
    
    271
    
    
    
    
    
    
    
    271Sales and marketing
    
    
    80
    
    
    
    (3
    )(B)
    
    
    77General and administrative
    
    
    38
    
    
    
    
    
    
    
    38
 
 (A)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. Adjustment also includes $7.2 million of
services revenues that were previously reported within the $117.0 million revenue amount by
reducing product revenues by $7.2 million and increasing services revenues by $7.2 million. 76




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IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (B)
    
    To reflect the reclassification of certain direct customer support costs to cost of revenues
from sales and marketing expenses and to separately disclose the costs associated with
products and services revenues.(C)
    
    To reflect the income tax effects of the revenue adjustment for implied PCS detailed in Item
(A).(D)
    
    To reflect earnings per share effects from adjustments detailed in Items (A) and (C).
 For the Year Ended December 31, 2003As Previously
    
    
    RestatementReported
    
    
    Adjustments
    
    
    RestatedConsolidated Statement of Income:Revenues:Products
    
    $
    83,533
    
    
    $
    (10,859
    )(A)
    
    $
    72,674Services
    
    
    
    
    
    
    7,400
    (A)
    
    
    7,400Total revenues
    
    
    83,533
    
    
    
    (3,459
    )
    
    
    80,074Costs and operating expenses:(1)Cost of revenues  products
    
    
    15,761
    
    
    
    (100
    )(B)
    
    
    15,661Cost of revenues  amortization of purchased
technology
    
    
    1,183
    
    
    
    
    
    
    
    1,183Cost of revenues  services
    
    
    
    
    
    
    1,208
    (B)
    
    
    1,208Research and development
    
    
    21,980
    
    
    
    
    
    
    
    21,980Sales and marketing
    
    
    25,050
    
    
    
    (1,108
    )(B)
    
    
    23,942General and administrative
    
    
    9,179
    
    
    
    
    
    
    
    9,179Amortization of intangible assets
    
    
    1,070
    
    
    
    
    
    
    
    1,070Impairment of goodwill and other intangible assets
    
    
    410
    
    
    
    
    
    
    
    410Total costs and operating expenses
    
    
    74,633
    
    
    
    
    
    
    
    74,633Income from operations
    
    
    8,900
    
    
    
    (3,459
    )
    
    
    5,441Interest and other income, net
    
    
    3,062
    
    
    
    
    
    
    
    3,062Income before income taxes
    
    
    11,962
    
    
    
    (3,459
    )
    
    
    8,503Income tax expense
    
    
    3,258
    
    
    
    (1,346
    )(C)
    
    
    1,912Net income
    
    $
    8,704
    
    
    $
    (2,113
    )
    
    $
    6,591Earnings per share:Basic
    
    $
    0.15
    
    
    $
    (0.04
    )(D)
    
    $
    0.11Diluted
    
    $
    0.14
    
    
    $
    (0.03
    )(D)
    
    $
    0.11Weighted average number of common and common
equivalent shares outstanding:Basic
    
    
    58,344
    
    
    
    
    
    
    
    58,344Diluted
    
    
    62,227
    
    
    
    
    
    
    
    62,227(1)  Stock-based compensation included in:Cost of revenues  products
    
    $
    157
    
    
    $
    
    
    
    $
    157Cost of revenues  services
    
    
    
    
    
    
    7
    (B)
    
    
    7Research and development
    
    
    1,316
    
    
    
    
    
    
    
    1,316Sales and marketing
    
    
    166
    
    
    
    (7
    )(B)
    
    
    159General and administrative
    
    
    280
    
    
    
    
    
    
    
    280
 77




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (A)
    
    To reflect the revenue adjustment for implied PCS as described in the section entitled
Revenue Recognition for Implied PCS above. Adjustment also includes $1.6 million of
services revenues that were previously reported within the $83.5 million revenue amount by
reducing product revenues by $1.6 million and increasing services revenues by $1.6 million.(B)
    
    To reflect the reclassification of certain direct customer support costs to cost of revenues
from sales and marketing expenses and to separately disclose the costs associated with
products and services revenues.(C)
    
    To reflect the income tax effects of the revenue adjustment for implied PCS detailed in Item
(A).(D)
    
    To reflect earnings per share effects from adjustments detailed in Items (A) and (C).
  As Previously
    
    RestatementReported
    
    Adjustments
    
    RestatedIncrease (Decrease):Year ended December 31, 2005Net income
    
    $
    33,671
    
    
    $
    (5,181
    )
    
    $
    28,490Changes in deferred income taxes
    
    
    (4,842
    )
    
    
    (3,299
    )
    
    
    (8,141
    )Changes in deferred revenues
    
    
    1,819
    
    
    
    8,480
    
    
    
    10,299Year ended December 31, 2004Net income
    
    
    18,879
    
    
    
    (3,858
    )
    
    
    15,021Changes in deferred income taxes
    
    
    719
    
    
    
    (2,456
    )
    
    
    (1,737
    )Changes in deferred revenues
    
    
    1,320
    
    
    
    6,314
    
    
    
    7,634Year ended December 31, 2003Net income
    
    
    8,704
    
    
    
    (2,113
    )
    
    
    6,591Changes in deferred income taxes
    
    
    (1,438
    )
    
    
    (1,346
    )
    
    
    (2,784
    )Changes in deferred revenues
    
    
    3,478
    
    
    
    3,459
    
    
    
    6,937
 3. Concentrations (Restated)
 Credit Risk
  Significant Customer
  78




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Year Ended December 31,2005
    
    2004
    
    2003(Restated)
    
    (Restated)
    
    (Restated)Amount of total revenues
    
    $
    53,045
    
    
    $
    34,950
    
    
    $
    23,847As a percentage of total revenues
    
    
    35
    %
    
    
    32
    %
    
    
    30
    %
  International Data
  Year Ended December 31,2005
    
    2004
    
    2003(Restated)
    
    (Restated)
    
    (Restated)Amount of total revenues
    
    $
    40,917
    
    
    $
    29,128
    
    
    $
    24,219As a percentage of total revenues
    
    
    27
    %
    
    
    26
    %
    
    
    30
    %
  Sources of Supply
  4. 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
    
    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 79




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##### Table of Contents



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
 80




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##### Table of Contents



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 5)
    
    
    
    
    
    
    1,856NetIQ purchase option accrual
    
    
    
    
    
    
    2,500Other
    
    
    2,234
    
    
    
    1,339$
    12,399
    
    
    $
    13,181
 81




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 5. Acquisitions (Restated)
 Communication Machinery Corporation
   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
    
    2004(Restated)
    
    (Restated)Total revenues
    
    $
    151,220
    
    
    $
    111,493Net income
    
    
    28,368
    
    
    
    14,906Earnings per share:Basic
    
    
    0.44
    
    
    
    0.25Diluted
    
    
    0.41
    
    
    
    0.23
  G3 Nova Technology, Inc.
  82




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##### Table of Contents



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
   6. 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
 83




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  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
  2006
    
    $
    5,4412007
    
    
    5,0782008
    
    
    4,3902009
    
    
    3,5202010
    
    
    1,697Thereafter
    
    
    336$
    20,462
 7. Income Taxes (Restated)
  Year Ended December 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)Current:Federal
    
    $
    13,086
    
    
    $
    4,335
    
    
    $
    3,643State
    
    
    2,635
    
    
    
    1,571
    
    
    
    1,381Foreign
    
    
    14
    
    
    
    79
    
    
    
    195Deferred:Federal
    
    
    (5,109
    )
    
    
    156
    
    
    
    (1,806
    )State
    
    
    (3,049
    )
    
    
    (2,079
    )
    
    
    (1,546
    )Foreign
    
    
    16
    
    
    
    (55
    )
    
    
    45Income tax expense
    
    $
    7,593
    
    
    $
    4,007
    
    
    $
    1,912
 84




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Year Ended December 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)Federal statutory expense
    
    $
    12,629
    
    
    $
    6,657
    
    
    $
    3,004State taxes, net of federal benefit
    
    
    (244
    )
    
    
    (133
    )
    
    
    193Research and development credits
    
    
    (1,937
    )
    
    
    (1,475
    )
    
    
    (901
    )Stock-based compensation
    
    
    (1,924
    )
    
    
    (968
    )
    
    
    (407
    )Other
    
    
    (931
    )
    
    
    (74
    )
    
    
    23Income tax expense
    
    $
    7,593
    
    
    $
    4,007
    
    
    $
    1,912Net effective income tax rate
    
    
    21.0
    %
    
    
    21.1
    %
    
    
    22.5
    %
  December 31,
    
    
    December 31,2005
    
    
    2004(Restated)
    
    
    (Restated)Deferred tax assets:Allowance for doubtful accounts
    
    $
    353
    
    
    $
    359Research and development credit carryforward
    
    
    9,298
    
    
    
    4,696Deferred revenue
    
    
    12,282
    
    
    
    9,084Stock-based compensation
    
    
    1,220
    
    
    
    1,357Inventory adjustments
    
    
    1,149
    
    
    
    833Net operating loss carryforward
    
    
    706
    
    
    
    55Accrued liabilities and other
    
    
    1,249
    
    
    
    723Total deferred tax assets
    
    
    26,257
    
    
    
    17,107Deferred tax liabilities:Depreciation and amortization
    
    
    (4,651
    )
    
    
    (3,411
    )Net deferred taxes
    
    $
    21,606
    
    
    $
    13,696
     85




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 8. Commitments and Contingencies
 Leases
  Year Ending
December 31,2006
    
    $
    3,3902007
    
    
    3,2072008
    
    
    1,5032009
    
    
    2222010
    
    
    200Thereafter
    
    
    84$
    8,606
  Litigation
  Indemnifications
  9. Shareholders Equity
 Stock Options
   86




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##### Table of Contents



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 ExercisableWeighted AverageRemaining
    
    Weighted Average
    
    
    
    
    
    Weighted AverageRange of
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    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
  87




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Employee Stock Purchase Plan
    Warrants
  10. Retirement Plan
  88




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 11. Earnings Per Share (Restated)
  Year Ended December 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)Basic PresentationNumerator:Net income
    
    $
    28,490
    
    
    $
    15,021
    
    
    $
    6,591Denominator: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
    
    $
    0.44
    
    
    $
    0.25
    
    
    $
    0.11Diluted 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
    
    $
    0.41
    
    
    $
    0.23
    
    
    $
    0.11
  89




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 12. Quarterly Financial Summary (Unaudited) (in thousands, except per share data) (Restated)
   Three Months Ended March 31, 2005
    
    Three Months Ended June 30, 2005As Previously
    
    Restatement
    
    
    
    
    
    As Previously
    
    RestatementReported
    
    Adjustments
    
    Restated
    
    Reported
    
    Adjustments
    
    RestatedStatement of Income Data:Total revenues
    
    $
    38,414
    
    
    $
    (1,944
    )
    
    $
    36,470
    
    
    $
    41,326
    
    
    $
    (2,372
    )
    
    $
    38,954Total cost of revenues
    
    
    6,787
    
    
    
    445
    
    
    
    7,232
    
    
    
    7,292
    
    
    
    489
    
    
    
    7,781Gross profit
    
    
    31,627
    
    
    
    (2,389
    )
    
    
    29,238
    
    
    
    34,034
    
    
    
    (2,861
    )
    
    
    31,173Income before income taxes
    
    
    11,555
    
    
    
    (1,944
    )
    
    
    9,611
    
    
    
    13,139
    
    
    
    (2,372
    )
    
    
    10,767Net income
    
    
    9,329
    
    
    
    (999
    )
    
    
    8,330
    
    
    
    9,766
    
    
    
    (1,235
    )
    
    
    8,531Earnings per share:Basic
    
    $
    0.15
    
    
    $
    (0.02
    )
    
    $
    0.13
    
    
    $
    0.15
    
    
    $
    (0.02
    )
    
    $
    0.13Diluted
    
    $
    0.14
    
    
    $
    (0.02
    )
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    (0.02
    )
    
    $
    0.12
 Three Months Ended September 30, 2005
    
    Three Months Ended December 31, 2005As Previously
    
    Restatement
    
    
    
    
    
    As Previously
    
    RestatementReported
    
    Adjustments
    
    Restated
    
    Reported
    
    Adjustments
    
    RestatedStatement of Income Data:Total revenues
    
    $
    42,134
    
    
    $
    (2,242
    )
    
    $
    39,892
    
    
    $
    37,459
    
    
    $
    (1,922
    )
    
    $
    35,537Total cost of revenues
    
    
    7,676
    
    
    
    511
    
    
    
    8,187
    
    
    
    6,936
    
    
    
    210
    
    
    
    7,146Gross profit
    
    
    34,458
    
    
    
    (2,753
    )
    
    
    31,705
    
    
    
    30,523
    
    
    
    (2,132
    )
    
    
    28,391Income before income taxes
    
    
    12,824
    
    
    
    (2,242
    )
    
    
    10,582
    
    
    
    7,045
    
    
    
    (1,922
    )
    
    
    5,123Net income
    
    
    9,070
    
    
    
    (1,090
    )
    
    
    7,980
    
    
    
    5,506
    
    
    
    (1,857
    )
    
    
    3,649Earnings per share:Basic
    
    $
    0.14
    
    
    $
    (0.02
    )
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    (0.03
    )
    
    $
    0.05Diluted
    
    $
    0.13
    
    
    $
    (0.02
    )
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    (0.03
    )
    
    $
    0.05
 Three Months Ended March 31, 2004
    
    Three Months Ended June 30, 2004As Previously
    
    Restatement
    
    
    
    
    
    As Previously
    
    RestatementReported
    
    Adjustments
    
    Restated
    
    Reported
    
    Adjustments
    
    RestatedStatement of Income Data:Total revenues
    
    $
    24,913
    
    
    $
    (1,430
    )
    
    $
    23,483
    
    
    $
    26,811
    
    
    $
    (1,780
    )
    
    $
    25,031Total cost of revenues
    
    
    5,050
    
    
    
    260
    
    
    
    5,310
    
    
    
    5,583
    
    
    
    328
    
    
    
    5,911Gross profit
    
    
    19,863
    
    
    
    (1,690
    )
    
    
    18,173
    
    
    
    21,228
    
    
    
    (2,108
    )
    
    
    19,120Income before income taxes
    
    
    4,260
    
    
    
    (1,430
    )
    
    
    2,830
    
    
    
    5,142
    
    
    
    (1,780
    )
    
    
    3,362Net income
    
    
    3,022
    
    
    
    (874
    )
    
    
    2,148
    
    
    
    3,546
    
    
    
    (1,088
    )
    
    
    2,458Earnings per share:Basic
    
    $
    0.05
    
    
    $
    (0.01
    )
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    (0.02
    )
    
    $
    0.04Diluted
    
    $
    0.05
    
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    (0.02
    )
    
    $
    0.04
 90




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Three Months Ended September 30, 2004
    
    Three Months Ended December 31, 2004As Previously
    
    Restatement
    
    
    
    
    
    As Previously
    
    RestatementReported
    
    Adjustments
    
    Restated
    
    Reported
    
    Adjustments
    
    RestatedStatement of Income Data:Total revenues
    
    $
    30,092
    
    
    $
    (1,107
    )
    
    $
    28,985
    
    
    $
    35,162
    
    
    $
    (1,997
    )
    
    $
    33,165Total cost of revenues
    
    
    6,218
    
    
    
    346
    
    
    
    6,564
    
    
    
    6,909
    
    
    
    365
    
    
    
    7,274Gross profit
    
    
    23,874
    
    
    
    (1,453
    )
    
    
    22,421
    
    
    
    28,253
    
    
    
    (2,362
    )
    
    
    25,891Income before income taxes
    
    
    6,610
    
    
    
    (1,107
    )
    
    
    5,503
    
    
    
    9,330
    
    
    
    (1,997
    )
    
    
    7,333Net income
    
    
    4,739
    
    
    
    (676
    )
    
    
    4,063
    
    
    
    7,572
    
    
    
    (1,220
    )
    
    
    6,352Earnings per share:Basic
    
    $
    0.08
    
    
    $
    (0.01
    )
    
    $
    0.07
    
    
    $
    0.12
    
    
    $
    (0.02
    )
    
    $
    0.10Diluted
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    0.06
    
    
    $
    0.11
    
    
    $
    (0.01
    )
    
    $
    0.10
 13. Subsequent Event
  91




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description23.1
    
    Consent of PricewaterhouseCoopers LLP31.1
    
    Certification of Chief Executive Officer of Ixia pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer of Ixia pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    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