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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 000-31523
 IXIA
 (Exact name of Registrant as specified in its charter)
 California
    
    95-4635982(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)
 26601 West Agoura Road, Calabasas, CA 91302  (Address of principal executive offices, including zip code)
  Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, without par value
    
    The NASDAQ Stock Market LLC
  o þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



IXIA
 FORM 10-K
 TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    17Item 1B.
    
    Unresolved Staff Comments
    
    
    31Item 2.
    
    Properties
    
    
    31Item 3.
    
    Legal Proceedings
    
    
    31Item 4.
    
    Reserved
    
    
    32PART IIItem 5.
    
    Market for Registrants Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity Securities
    
    
    33Item 6.
    
    Selected Financial Data
    
    
    34Item 7.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    37Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    52Item 8.
    
    Financial Statements and Supplementary Data
    
    
    52Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    53Item 9A.
    
    Controls and Procedures
    
    
    53Item 9B.
    
    Other Information
    
    
    54PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    55Item 11.
    
    Executive Compensation
    
    
    55Item 12.
    
    Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters
    
    
    55Item 13.
    
    Certain Relationships and Related Transactions, and
Director Independence
    
    
    55Item 14.
    
    Principal Accounting Fees and Services
    
    
    55PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    56SIGNATURES
    
    59EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1
  2




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PART I
 
 Item 1. Business
 Overview
   
    
    Leading network equipment manufacturers such as Cisco Systems, Juniper Networks and
Alcatel-Lucent;
    
    Semiconductor manufacturers such as Broadcom, HSL and LSI Corporation;
    
    Telecommunications equipment manufacturers such as Ericsson, Nokia Siemens Networks
and ZTE Corporation;
    
    Voice, broadband and/or wireless service providers such as NTT, AT&T and Verizon;
    
    Cable operators such as Comcast Cable, Time Warner and Charter Communications;
    
    Enterprises such as Wells Fargo, Morgan Stanley and Oracle; and
    
    Government contractors, departments and agencies such as General Dynamics, U.S. Navy
and Deutsche Bahn.
   3




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The Increasing Need for Network and Application Testing and Measurement
  
    
    Communications Chip Manufacturers. At the early stages of development of new
components, communications chip manufacturers use our test systems to evaluate and
analyze the conformance, interoperability, and performance of their components. This
occurs during the design and development phase  typically prior to integration by
network equipment manufacturers.
    
    Network/Telecommunications Equipment Manufacturers (NEMs/TEMs). NEMs and TEMs
provide voice, video, and data service infrastructure equipment to customer network
operators, service providers, and network users, who specify high standards of
functionality, performance and reliability. To meet these higher standards, NEMs and
TEMs must ensure the quality of their products during development and manufacturing and
prior to shipping. Failure to ensure the consistent functionality and performance of
their products may result in the loss of customers, increased research and development
costs, increased support costs and losses resulting from the return of products. NEMs
use our test systems to run large-scale subscriber and service emulations, generating
extreme traffic loads to verify the performance and capacity of their wired and
wireless devices prior to deployment in production networks. Our systems are also used
by NEMs and TEMs in the sales and acceptance process to demonstrate to their customers
(e.g., service providers and enterprises) how their products will operate under
real-world conditions. Our conformance test suites are used by NEMs and TEMs to ensure
that their devices conform to published standards  ensuring that they will be
interoperable with other equipment.
    
    Network Operators and Service Providers (Service Providers).Service Providers seek
to provide their customers with a growing variety of high quality, advanced network
services. Failure to provide satisfactory service can be costly and may result in high
subscriber churn rates and reduced Average Revenue per User (ARPU). To ensure desired
service levels and overall quality of experience are acceptable, Service Provider R&D
and network engineering groups must verify the performance and functionality of staged
networks during the equipment selection and network design process prior to deployment.
Service Providers use our test systems to emulate millions of subscribers to
realistically predict end-user quality of experience delivered by their wired and
wireless infrastructure and services.
    
    Enterprises and Government.These large Service Provider customers spend significant
amounts on networks and network services. They deploy LANs and WANs that rival some
Service Provider networks in size and complexity. These customers use Ixias solutions
in much the same way as Service Providers, verifying the performance and functionality
of network equipment and making sure that new networks, services and applications will
perform as expected. They also use our products to test the performance and scalability
of their internal applications, often based on proprietary protocols.
 4




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Characteristics Demanded of Network and Application Test and Measurement Equipment
  The Ixia Solution
   Versatile High Performance.
   Highly Scalable.
 5




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Hardware Platform.
 Highly Modular.
 Flexible.
 Ease of Automation.
 Ease of Use.
 Strategy
  Continue to Expand our Addressable Markets.
 6




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Maintain Focus on Technology Leadership.
 Expand and Further Penetrate Customer Base.
 
    
    Continuing to develop and offer new and innovative systems that meet our existing
and potential customers needs,
    
    Expanding our sales and marketing efforts to increase penetration in
under-represented vertical and geographic market segments, and
    
    Building upon and further strengthening our reputation and brand name recognition.
  License and Acquire Key Technologies.
 Expand International Market Presence
 Products
   7




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Chassis
    Interface Cards
   System Management Software
  8




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Application Specific Test Suites
  Video Testing
   Voice Testing
   Intelligent Network Testing
  Conformance Testing
  Security Testing
  9




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Application Testing
  Router Testing
   Layer 2-3 Security Testing
   Switch Testing
    Wireless Testing
   10




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Broadband Testing
   Automated Testing
     Converged Monitoring Testing
  Products in Development
  
    
    10, 40 and 100 Gigabit Ethernet
    
    Carrier, Metro and Data Center Ethernet
    
    Security
    
    MPLS and MPLS-TP
    
    IPv6
    
    Voice and Video over IP
    
    IPSec
    
    Test Automation
    
    LTE/EPC
    
    Femtocell
    
    Energy efficiency
 11




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Technology
  Complex Logic Design
 Software Technology
 Customers
   12




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Competition
   
    
    Breadth of product offerings and features on a single platform,
    
    Timeliness of new product introductions,
    
    Product quality, reliability and performance,
    
    Price and overall cost of product ownership,
    
    Ease of installation, integration and use,
    
    Customer service and technical support, and
    
    Company reputation and size.
    Sales, Marketing and Technical Support
 Sales
 13




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Marketing
 
    
    Sponsoring technical seminars and webinars that highlight our solutions,
    
    Participating in industry trade shows and technical conferences,
    
    Writing and distribution of various forms of collateral, including brochures, white
papers, and application notes,
    
    Demonstrating the performance and scalability of our products at our iSimCity
proof-of-concept labs,
    
    Communicating through our corporate website, and
    
    Writing online and print trade journals.
 Technical Support
 
    
    Offer solutions for performance validation needs,
    
    Develop custom applications,
    
    Deploy to customer sites on short notice, and
    
    Provide guidance to optimally utilize our systems.
 Manufacturing and Supply Operations
    14




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Research and Development
     Intellectual Property and Proprietary Rights
    15




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Employees
  Available Information
  16




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Item 1A. Risk Factors
  Our business may be adversely affected by unfavorable general economic and market conditions
   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 or delays in assimilating or transitioning to Ixia the acquired
operations, systems, processes, controls, technologies, products or personnel;
    
    loss of acquired customer accounts;
    
    unanticipated costs associated with the acquisition;
 17




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
    
    our failure to identify in the due diligence process significant issues with
product quality or development;
    
    multiple and overlapping product lines as a result of our acquisitions that are
offered, priced and supported differently, which could cause customer confusion and
delays;
    
    higher than anticipated costs in continuing support and development of acquired
products;
    
    diversion of managements attention from our core business and the challenges of
managing larger and more widespread operations resulting from acquisitions;
    
    adverse effects on existing business relationships of Ixia or the acquired business
with its suppliers, licensors, contract manufacturers, customers, distributors and
industry experts;
    
    significant impairment, exit and/or restructuring charges if the products or
technologies acquired in an acquisition do not meet our sales expectations or are
unsuccessful;
    
    insufficient revenue to offset increased expenses associated with acquisitions;
    
    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.
  Competition in our market could significantly harm our results of operations
     18




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If we are unable to successfully develop or 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 advancements of IP-based networks and
wireless technologies (e.g., LTE);
    
    frequent new product introductions such as higher speed and more complex routers;
    
    evolving industry standards;
    
    changing customer needs such as the increase in advanced IP services 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 and license or acquire new technologies and applications;
    
    hire and retain necessary technical personnel;
    
    successfully commercialize new technologies in a timely manner;
    
    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;
    
    provide high quality, timely technical support; and
    
    differentiate our offerings from our competitors offerings.
 19




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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
  Because we depend on a limited number of customers for a majority of our revenues, any
cancellation, reduction or delay in purchases by one of these customers could significantly harm
our revenues and results of operations
  Our large customers have substantial negotiating leverage, which may require that we agree to terms
and conditions that may have an adverse effect on our business
  20




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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
  Our quarterly and annual operating results have historically fluctuated or may fluctuate
significantly in the future as a result of new product introductions and other factors, which
fluctuations could cause our stock price to decline significantly
       21




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We expect our gross margins to vary over time and our recent level of gross margins may not be
sustainable, which may have a material adverse effect on our future profitability
  
    
    increased price competition;
    
    changes in customer, geographic or product mix (such as the mix of software versus
hardware product sales);
    
    the pricing we are able to obtain from our component suppliers and contract
manufacturers;
    
    increases in material or labor costs;
    
    new product introductions by us and by our competitors:
    
    changes in shipment volume;
    
    excess or obsolete inventory costs; and
    
    increased industry consolidation among our customers, which may lead to decreased
demand for, and downward pricing pressure on, our products.
  The loss of any of our key personnel could significantly harm our results of operations and
competitive position
   Continued growth will strain our operations and require us to incur costs to maintain and upgrade
our management and operational resources
  22




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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
  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 industry and market conditions could lead to charges related to discontinuances of
certain of our products and asset impairments
  Restructuring our workforce can be disruptive
  23




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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
    Our reported financial results could suffer if there is an impairment of goodwill or acquired
intangible assets
  International activity may increase our cost of doing business or disrupt our business
  
    
    difficulties in recruiting, hiring, training and retaining international personnel;
    
    increased complexity and costs of managing international operations;
    
    growing demand for and cost of technical personnel;
 24




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
    
    changing governmental laws and regulations, including those related to income
taxes;
    
    increased exposure to foreign currency exchange rate fluctuations;
    
    political and economic instability, including military conflict and social unrest;
    
    commercial laws and business practices that favor local competition;
    
    differing labor and employment laws;
    
    supporting multiple languages;
    
    reduced or limited protections of intellectual property rights;
    
    more complicated logistical and distribution arrangements; and
    
    longer accounts receivable cycles and difficulties in collecting receivables.
  Adverse resolution of legal proceedings may harm our results of operations or financial condition
  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;
 25




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
    
    require us to modify the products at issue or to develop alternative technology,
thereby causing product shipment delays and the loss or deferral of revenues;
    
    require us to cease selling the products at issue;
    
    require us to pay substantial damage awards;
    
    expose us to indemnity claims from our customers;
    
    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 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
  26




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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
  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
    27




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The inability to successfully defend claims from taxing authorities or the adoption of new tax
legislation could adversely affect our operating results and financial position
  Servicing our debt will require a significant amount of cash, and we may not have sufficient cash
flow from our business to service our existing debt or debt we may incur
  When we issue shares of our common stock upon conversion of the Convertible Senior Notes, such
issuance will dilute the ownership interest of our existing shareholders, including holders who had
previously converted their Convertible Senior Notes
  The fundamental change repurchase feature of the Convertible Senior Notes may delay or prevent an
otherwise beneficial attempt to take over our company
  Our investment portfolio may become impaired by deterioration of the financial markets
   28




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Changes in laws, regulations and financial accounting standards may affect our reported results of
operations
  Our business is subject to changing regulation that has resulted in increased costs and may
continue to result in additional costs in the future
    If we fail to maintain our relationships with industry experts, our products may lose industry and
market recognition and sales could decline
  29




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Our business and operations are subject to the risks of earthquakes, floods, hurricanes and other
natural disasters
  Man-made problems such as computer viruses or terrorism may disrupt our operations and harm our
operating results
  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
  Our stock price may continue to be volatile
  30




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  IneoQuest Technologies, Inc. vs. Ixia.
  Tucana Telecom NV vs. Catapult.
 31




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Item 4. Reserved
 32




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
   High
    
    Low2010Fourth quarter
    
    $
    18.21
    
    
    $
    12.48Third quarter
    
    
    12.75
    
    
    
    8.47Second quarter
    
    
    10.81
    
    
    
    8.53First quarter
    
    
    9.59
    
    
    
    7.002009Fourth quarter
    
    $
    8.22
    
    
    $
    6.33Third quarter
    
    
    7.70
    
    
    
    6.08Second quarter
    
    
    7.03
    
    
    
    4.98First quarter
    
    
    6.00
    
    
    
    4.36
    33




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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 
 *
    
    $100 invested on 12/31/05 in stock or index, including reinvestment of dividends. 
Fiscal
year ending December 31. 12/31/05
    
    
    12/31/06
    
    
    12/31/07
    
    
    12/31/08
    
    
    12/31/09
    
    
    12/31/10Ixia
    
    
    $
    100
    
    
    
    $
    64.86
    
    
    
    $
    64.05
    
    
    
    $
    39.05
    
    
    
    $
    50.34
    
    
    
    $
    113.38Nasdaq Composite Index
    
    
    
    100
    
    
    
    
    111.74
    
    
    
    
    124.67
    
    
    
    
    73.77
    
    
    
    
    107.12
    
    
    
    
    125.93Nasdaq
Telecommunications Index
    
    
    
    100
    
    
    
    
    131.50
    
    
    
    
    146.22
    
    
    
    
    85.43
    
    
    
    
    118.25
    
    
    
    
    129.78
 *
    
    Assumes (i) $100 invested on December 31, 2005 in Ixia Common Stock, the Nasdaq Composite
Index and the Nasdaq Telecommunications Index and (ii) immediate reinvestment of all
dividends.(b)
    
    Use of ProceedsNone.(c)
    
    Issuer Repurchases of Equity SecuritiesNone. 
 Item 6. Selected Financial Data
  34




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2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Consolidated Statement of Operations Data (in
thousands, except per share data):Revenues:Products
    
    $
    227,880
    
    
    $
    142,871
    
    
    $
    146,802
    
    
    $
    148,226
    
    
    $
    155,388Services
    
    
    48,935
    
    
    
    35,123
    
    
    
    29,065
    
    
    
    25,895
    
    
    
    24,744Total revenues
    
    
    276,815
    
    
    
    177,994
    
    
    
    175,867
    
    
    
    174,121
    
    
    
    180,132Costs and operating expenses:(1)Cost of revenues  products
    
    
    54,378
    
    
    
    36,722
    
    
    
    32,411
    
    
    
    32,724
    
    
    
    29,437Cost of revenues  services
    
    
    6,327
    
    
    
    3,859
    
    
    
    4,475
    
    
    
    3,870
    
    
    
    2,681Research and development
    
    
    72,488
    
    
    
    53,977
    
    
    
    49,167
    
    
    
    47,407
    
    
    
    43,450Sales and marketing
    
    
    79,986
    
    
    
    60,374
    
    
    
    59,374
    
    
    
    57,420
    
    
    
    59,020General and administrative
    
    
    35,142
    
    
    
    28,061
    
    
    
    25,502
    
    
    
    24,927
    
    
    
    23,800Amortization of intangible assets
    
    
    17,545
    
    
    
    11,391
    
    
    
    5,664
    
    
    
    7,108
    
    
    
    6,450Acquisition and other related(5)
    
    
    2,991
    
    
    
    6,179
    
    
    
    1,479
    
    
    
    
    
    
    
    Restructuring
    
    
    3,587
    
    
    
    4,637
    
    
    
    
    
    
    
    
    
    
    
    Impairment of purchased technology and
intangible assets(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,263
    
    
    
    Total costs and operating expenses
    
    
    272,444
    
    
    
    205,200
    
    
    
    178,072
    
    
    
    176,719
    
    
    
    164,838Income (loss) from operations
    
    
    4,371
    
    
    
    (27,206
    )
    
    
    (2,205
    )
    
    
    (2,598
    )
    
    
    15,294Interest income and other, net(6)
    
    
    10,970
    
    
    
    2,160
    
    
    
    6,574
    
    
    
    11,723
    
    
    
    9,409Interest expense
    
    
    (480
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other-than-temporary impairment on
investments(2)
    
    
    
    
    
    
    (2,761
    )
    
    
    (20,243
    )
    
    
    
    
    
    
    Income (loss) before income taxes
    
    
    14,861
    
    
    
    (27,807
    )
    
    
    (15,874
    )
    
    
    9,125
    
    
    
    24,703Income tax expense(3)
    
    
    3,653
    
    
    
    16,396
    
    
    
    21
    
    
    
    2,119
    
    
    
    11,222Net income (loss)
    
    $
    11,208
    
    
    $
    (44,203
    )
    
    $
    (15,895
    )
    
    $
    7,006
    
    
    $
    13,481Earnings (loss) per share:Basic
    
    $
    0.17
    
    
    $
    (0.70
    )
    
    $
    (0.24
    )
    
    $
    0.10
    
    
    $
    0.20Diluted
    
    $
    0.17
    
    
    $
    (0.70
    )
    
    $
    (0.24
    )
    
    $
    0.10
    
    
    $
    0.20Weighted average number of common and common
equivalent shares outstanding:Basic
    
    
    65,157
    
    
    
    62,710
    
    
    
    65,087
    
    
    
    67,936
    
    
    
    67,005Diluted
    
    
    67,769
    
    
    
    62,710
    
    
    
    65,087
    
    
    
    69,386
    
    
    
    68,792(1)      Stock-based compensation
included in:Cost of revenues  products
    
    $
    524
    
    
    $
    478
    
    
    $
    513
    
    
    $
    519
    
    
    $
    590Cost of revenues  services
    
    
    198
    
    
    
    182
    
    
    
    195
    
    
    
    197
    
    
    
    224Research and development
    
    
    5,195
    
    
    
    4,491
    
    
    
    4,166
    
    
    
    5,243
    
    
    
    6,481Sales and marketing
    
    
    3,592
    
    
    
    2,989
    
    
    
    3,411
    
    
    
    4,416
    
    
    
    7,838General and administrative
    
    
    3,406
    
    
    
    2,395
    
    
    
    2,360
    
    
    
    2,659
    
    
    
    2,890
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(2)
    
    Our 2009 and 2008 results include a pre-tax other-than-temporary impairment charge of $2.8 million and $15.8 million, respectively, to
earnings related to our investments in auction rate securities. Our 2008 results also include a pre-tax other-than-temporary impairment charge of $4.4
million to earnings related to our investments in bonds issued by Lehman Brothers Holdings, Inc.(3)
    
    In 2009, our income tax expense includes a $28.1 million charge related primarily to the establishment of a valuation allowance against
our remaining net U.S. deferred tax assets. In 2008, our income tax expense includes a $7.9 million charge related primarily to the establishment of a
valuation allowance against our deferred tax assets associated with the unrealized impairment (capital) losses as discussed above.(4)
    
    Our 2007 results include a pre-tax impairment charge of $3.3 million, which consists of the impairment of purchased technology of $1.5
million and the impairment of certain intangible assets of $1.8 million related to the acquisition of Communication Machinery Corporation in July 2005
and to the acquisition of the mobile video test product line from Dilithium Networks in January 2006.(5)
    
    In 2009, we adopted new accounting guidance for business combinations. As a result, transactions costs related to our acquisitions of
Catapult and N2X were expensed as incurred rather than treated as part of the purchase price.(6)
    
    In 2010, we recorded $8.9 million and $1.0 million, respectively, relating to (i) settlement proceeds received for claims asserted by us
against our former investment manager for damages and losses relating to our previous investments in auction rate securities with an aggregate par
value of $19.0 million, and (ii) proceeds received for the sale of certain of these auction rate securities that were previously written-off. 2010
    
    2009
    
    2008
    
    2007
    
    2006Consolidated Balance Sheet Data (in thousands):Cash and cash equivalents
    
    $
    76,082
    
    
    $
    15,061
    
    
    $
    192,791
    
    
    $
    188,892
    
    
    $
    64,644Short-term investments in marketable
securities
    
    
    151,696
    
    
    
    10,337
    
    
    
    9,850
    
    
    
    4,999
    
    
    
    152,703Working capital
    
    
    254,373
    
    
    
    46,937
    
    
    
    217,882
    
    
    
    206,059
    
    
    
    235,168Long-term investments in marketable securities
    
    
    111,440
    
    
    
    53,582
    
    
    
    3,657
    
    
    
    54,609
    
    
    
    4,354Total assets
    
    
    589,883
    
    
    
    309,088
    
    
    
    328,426
    
    
    
    369,440
    
    
    
    349,059Convertible senior notes
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    298,403
    
    
    
    72,423
    
    
    
    55,230
    
    
    
    52,940
    
    
    
    48,270Total shareholders equity
    
    
    291,480
    
    
    
    236,665
    
    
    
    273,196
    
    
    
    316,500
    
    
    
    300,789
 36




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Business Overview
  Issuance
of Convertible Senior Notes.
 Acquisition of Agilent Technologies N2X Data Network Testing Product Line.
 Acquisition of Catapult Communications Corporation.
 37




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Revenues.
     38




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Stock-Based Compensation.
  39




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Cost of Revenues
  
    
    our pricing policies and those of our competitors;
    
    the pricing we are able to obtain from our component suppliers and contract
manufacturers;
    
    the mix of customers and sales channels through which our products are sold;
    
    the mix of our products sold, such as the mix of software versus hardware product
sales;
    
    new product introductions by us and by our competitors;
    
    demand for and quality of our products; and
    
    production volume.
  40




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##### Table of Contents



Operating Expenses
 
    
    Research and development expensesconsist primarily of salaries and other personnel
costs related to the design, development, testing and enhancement of our products. We
expense our research and development costs as they are incurred. We also capitalize
and depreciate over a five-year period costs of our products used for internal
purposes.
 
    
    Sales and marketing expensesconsist primarily of compensation and related costs for
personnel engaged in direct sales, sales support and marketing functions, as well as
promotional and advertising expenditures. We also capitalize and depreciate over a
two-year period costs of our products used for sales and marketing activities,
including product demonstrations for potential customers.
 
    
    General and administrative expensesconsist primarily of salaries and related
expenses for certain executive, finance, legal, human resources, information technology
and administrative personnel, as well as professional fees (e.g., legal and
accounting), facility costs related to our corporate headquarters, insurance costs and
other general corporate expenses.
 
    
    Amortization of intangible assetsconsists of the amortization of the purchase price
of the various intangible assets over their estimated useful lives. Periodically we
review goodwill and other intangible assets for impairment. An impairment charge would
be recorded to the extent that the carrying value exceeds its estimated fair value in
the period that the impairment circumstances occurred. The future amortization of
acquired intangible assets depends on a number of factors, including the extent to
which we acquire additional businesses, technologies or product lines, or if we are
required to record impairment charges related to our acquired intangible assets. See
Note 8 to the Consolidated Financial Statements included in this Form 10-K.
 
    
    Acquisition and other relatedcosts are expensed as incurred and consist primarily
of transaction and integration related costs such as success-based banking fees,
professional fees for legal, accounting, tax, due diligence, valuation and other
related services, change in control payments, consulting fees, required regulatory
costs, certain employee, facility and infrastructure transition costs, and other
related expenses. We expect our acquisition and other related expenses to fluctuate
over time based on the timing of our acquisitions and related integration activities.
 
    
    Restructuring expensesconsist primarily of employee severance costs and related
charges, as well as facility-related charges to exit certain locations.
 Interest income and other, net
 Interest expense
 Income Tax
 41




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##### Table of Contents



Critical Accounting Policies and Estimates
   
    
    Revenue Recognition Policy. We recognize revenue as discussed in Revenues in the
Business Overview section of Item 7.
 
    
    Acquisition Purchase Price Allocation.When we acquire a business, product line or
rights to a product or technology, we allocate the purchase price 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, some of which may be based in part on historical experience and
information obtained from the management of the acquired business, and are inherently
uncertain. Many of the estimates and assumptions used to determine fair values, such
as those for purchased technologies and customer relationships, are made based on
forecasted information and discount rates. To assist in the purchase price allocation
process, as well as the determination of estimated useful lives of acquired intangible
assets, we may obtain appraisals from valuation specialists. Unanticipated events and
circumstances may occur which may affect the accuracy or validity of such estimates and
assumptions.
 
    
    Write-Down of Obsolete Inventory. We write down inventory for estimated
obsolescence, excessive quantities 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. Once
written down, the reserves are not reversed until inventory is sold or disposed of.
 
    
    Income Taxes.We operate in numerous states and countries through our various
subsidiaries, and must allocate our income, expenses, and earnings under the various
laws and regulations of each of these taxing jurisdictions. Accordingly, our provision
for income taxes represents our total estimate of the liability that we have incurred
in doing business each year in all of our locations. Deferred income tax balances
reflect the effects of temporary differences between the carrying amounts of assets and
liabilities and their tax bases and are stated at enacted tax rates expected to be in
effect when taxes are actually paid or recovered. In determining whether we need to
record a valuation allowance against our deferred tax assets, management must make a
number of estimates, assumptions and judgments, including estimates of future earnings
and taxable income. We establish a valuation allowance to reduce deferred tax assets to
the amount we believe is more likely than not to be realized. The determination to
record or release valuation allowance requires significant judgment. During 2010 and
2009, we concluded that a full valuation allowance against our net U.S. deferred tax
assets was
 42




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##### Table of Contents



warranted due to, among other reasons, (i) the recently realized cumulative accounting
losses sustained in the U.S., (ii) the taxable losses incurred in the U.S. in 2010 and
2009 and (iii) our uncertainty with respect to generating future U.S. taxable income in
the near term given our recently completed U.S. projections and a number of inherent
uncertainties such as the future level of U.S. tax deductions from our share-based
awards. To the extent these circumstances change we may need to release the valuation
allowance.
 Annually, we file tax returns that represent our filing positions with each jurisdiction
and settle our return liabilities. Each jurisdiction has the right to audit those
returns and may take different positions with respect to income and expense allocations
and taxable earnings determinations. We may provide for estimated liabilities in our
consolidated financial statements associated with uncertain tax return filing positions
that are subject to audit by various tax authorities. Because the determinations of our
annual provisions are subject to assumptions, judgments and estimates, it is likely that
actual results may vary from those recognized in our consolidated financial statements.
As a result, additions to, or reductions of, income tax expense will occur each year for
prior reporting periods as our estimates or judgments change, or as actual tax returns
and tax audits are settled. We recognize any such prior year adjustment in the discrete
quarterly period in which it is determined.
 
    
    Impairment of Long-Lived Assets.We evaluate our identifiable definite life
intangible assets and other long-lived assets for impairment, when events or changes in
circumstances indicate that a potential impairment may exist. We first estimate the
undiscounted cash flows to be generated from the use and ultimate disposition of the
applicable asset. To the extent that the estimated undiscounted cash flows fall below
the carrying value of the related intangible or other long lived asset, we write-down
the asset to its estimated 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 on an annual basis or if events or changes in circumstances indicate that
an impairment in the value of goodwill recorded on our balance sheet may exist.
Impairment losses are recorded to the extent that the carrying value of the goodwill
exceeds its estimated fair value. We completed our annual goodwill impairment test of
our single reporting unit in the fourth quarter of 2010 and determined that there was
no impairment.
 
    
    Stock-Based Compensation.We record stock-based compensation as discussed in
Stock-based Compensation in the Business Overview section of Item 7.
 
    
    Impairment of Marketable Securities.We periodically review our marketable
securities for impairment. If we conclude that any of our investments are impaired, we
determine whether such impairment is other-than-temporary. Factors we consider to
make such a determination include, among others, the severity of the impairment, the
reason for the decline in value and the potential recovery period. If any impairment is
considered other-than-temporary, we write down the asset to its fair value and take a
charge to earnings for the portion of the write-down related to credit losses with the
balance, if any, recorded to other comprehensive income.
 
    
    Contingencies and Litigation. We evaluate contingent liabilities, including
threatened or pending litigation, and 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.
 43




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Results of Operations
  2010
    
    2009
    
    2008Revenues:Products
    
    
    82.3
    %
    
    
    80.3
    %
    
    
    83.5
    %Services
    
    
    17.7
    
    
    
    19.7
    
    
    
    16.5Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and operating expenses:(1)Cost of revenues  products
    
    
    19.6
    
    
    
    20.6
    
    
    
    18.4Cost of revenues  services
    
    
    2.3
    
    
    
    2.2
    
    
    
    2.5Research and development
    
    
    26.2
    
    
    
    30.3
    
    
    
    28.0Sales and marketing
    
    
    28.9
    
    
    
    33.9
    
    
    
    33.8General and administrative
    
    
    12.7
    
    
    
    15.7
    
    
    
    14.6Amortization of intangible assets
    
    
    6.3
    
    
    
    6.4
    
    
    
    3.2Acquisition and other related
    
    
    1.1
    
    
    
    3.5
    
    
    
    0.8Restructuring
    
    
    1.3
    
    
    
    2.6
    
    
    
    Total costs and operating expenses
    
    
    98.4
    
    
    
    115.2
    
    
    
    101.3Income (loss) from operations
    
    
    1.6
    
    
    
    (15.2
    )
    
    
    (1.3
    )Interest income and other, net
    
    
    3.9
    
    
    
    1.2
    
    
    
    3.7Interest expense
    
    
    (0.2
    )
    
    
    
    
    
    
    Other-than-temporary impairment on investments
    
    
    
    
    
    
    (1.6
    )
    
    
    (11.4
    )Income (loss) before income taxes
    
    
    5.3
    
    
    
    (15.6
    )
    
    
    (9.0
    )Income tax expense
    
    
    1.3
    
    
    
    9.2
    
    
    
    Net income (loss)
    
    
    4.0
    %
    
    
    (24.8
    )%
    
    
    (9.0
    )%(1)      Stock-based compensation included in:Cost of revenues  products
    
    
    0.2
    %
    
    
    0.3
    %
    
    
    0.3
    %Cost of revenues  services
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Research and development
    
    
    1.9
    
    
    
    2.5
    
    
    
    2.4Sales and marketing
    
    
    1.3
    
    
    
    1.7
    
    
    
    1.9General and administrative
    
    
    1.2
    
    
    
    1.3
    
    
    
    1.3
 Comparison of the Years Ended December 31, 2010 and 2009
  44




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Revenues.
 Cost of Revenues
 Research and Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 Amortization of Intangible Assets.
 Acquisition and Other Related Expenses.
 Restructuring
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Interest Income and Other, Net.
 Interest expense.
 Other-than-temporary Impairment on Investments.
 Income Tax Expense.
   Comparison of the Years Ended December 31, 2009 and 2008
  Revenues.
 Cost of Revenues
 46




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Research and Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 Amortization of Intangible Assets.
 Acquisition and Other Related Expenses.
 Restructuring
 47




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Interest Income and Other, Net.
 Other-than-temporary Impairment on Investments.
 Income Tax Expense.
    48




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Liquidity and Capital Resources
  As of December 31,2010
    
    
    2009
    
    
    2008Cash and cash equivalents
    
    $
    76,082
    
    
    $
    15,061
    
    
    $
    192,791Short-term marketable securities
    
    
    151,696
    
    
    
    10,337
    
    
    
    9,850Long-term marketable securities
    
    
    111,440
    
    
    
    53,582
    
    
    
    3,657$
    339,218
    
    
    $
    78,980
    
    
    $
    206,298
    Year Ended December 31,2010
    
    2009
    
    2008Cash provided by (used in) operating activities
    
    $
    50,429
    
    
    $
    (4,725
    )
    
    $
    24,335Cash (used in) provided by investing activities
    
    
    (213,789
    )
    
    
    (168,005
    )
    
    
    19,082Cash provided by (used in) financing activities
    
    
    224,381
    
    
    
    (5,000
    )
    
    
    (39,518
    )
 Cash Flows from Operating Activities
   49




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Cash Flows from Investing Activities
    Cash Flows from Financing Activities
   50




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##### Table of Contents



Financial Commitments
  Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1  3 years
    
    
    3  5 years
    
    
    5 yearsOperating leases (1)
    
    $
    16,727
    
    
    $
    6,919
    
    
    $
    9,160
    
    
    $
    648
    
    
    $
    Purchase obligations (2)
    
    
    9,833
    
    
    
    9,833
    
    
    
    
    
    
    
    
    
    
    
    Convertible senior notes
(Principal and Interest)
(3)
    
    
    230,000
    
    
    
    6,000
    
    
    
    12,000
    
    
    
    212,000
    
    
    
    $
    256,560
    
    
    $
    22,752
    
    
    $
    21,160
    
    
    $
    212,648
    
    
    $
    
 
 (1)
    
    See Note 10 Commitments and Contingencies as disclosed in the Notes to the Financial Statements.(2)
    
    Purchase obligations in the table above consist of purchase orders issued to certain of our
contract manufacturers in the normal course of business to purchase specified quantities of certain
interface cards and chassis. It is not our intent, nor is it reasonably likely, that we would
cancel these executed purchase orders.(3)
    
    In December 2010, we issued $200.0 million in aggregate principal amount of 3.00% convertible
senior notes that mature on December 15, 2015, if not converted. The interest is payable
semi-annually on June 15 and December 15 of each year, beginning on June 15, 2011.  Recent Accounting Pronouncements
  51




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Sensitivity
 Investment Activities
  Convertible Senior Notes
  Exchange Rate Sensitivity
  
 Item 8. Financial Statements and Supplementary Data
  52




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
  Internal ControlIntegrated Framework Internal Control Integrated Framework
  Changes in Internal Control over Financial Reporting
  Inherent Limitations on Effectiveness of Controls
  53




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Item 9B. Other Information
  54




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
   
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  55




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##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules
 (a)
    
    The following documents are filed as part of this Report:
 (1)
    
    Consolidated Financial Statements
  (2)
    
    Financial Statement Schedule
  (3)
    
    Exhibits
 2.1
    
    Agreement and Plan of Merger dated as of May 11, 2009 among the Company, Catapult
Communications Corporation and Josie Acquisition Company(1)2.2
    
    Asset Purchase Agreement, dated October 21, 2009, by and between the Company and
Agilent Technologies, Inc. (2)3.1
    
    Amended and Restated Articles of Incorporation, as amended(3)3.2
    
    Bylaws, as amended(4)4.1
    
    Indenture dated as of December 7, 2010 between the Company and Wells Fargo Bank,
National Association, as trustee, including the form of 3.00% Convertible Senior
Notes due 2015 (included as Exhibit A to the Indenture)(5)10.1*
    
    Amended and Restated 1997 Equity Incentive Plan(6)10.2*
    
    Amended and Restated Non-Employee Director Stock Option Plan(7)10.3*
    
    2010 Employee Stock Purchase Plan(8)10.4*
    
    Officer Severance Plan(9), together with Amendment to the Officer Severance Plan(10)10.5*
    
    Ixia Officer Severance Plan (as Amended and Restated effective January 1, 2009)(11)10.6*
    
    Form of Indemnity Agreement between Ixia and its directors and executive officers(12)10.7
    
    Office Lease Agreement dated September 14, 2007 between MS LPC Malibu Property
Holdings, LLC and Ixia(13)10.7.1
    
    First Amendment to Office Lease dated February 11, 2010, between MS LPC Malibu
Property Holdings, LLC and Ixia10.7.2
    
    Second Amendment to Office Lease dated November 15, 2010, between MS LPC Malibu
Property Holdings, LLC and Ixia10.8
    
    License, Distribution and Option Agreement, dated July 7, 2003, between NetIQ
Corporation and Ixia(14)10.9
    
    First Amendment to License, Distribution and Option Agreement dated as of January 6,
2005 between the Company and NetIQ Corporation(15)10.10
    
    Second Amendment to License, Distribution and Option Agreement dated as of June 16,
2005 between the Company and NetIQ Corporation(16)(17)10.12*
    
    Compensation of Named Executive Officers and Chief Executive Officer effective April
1, 201010.13*
    
    Summary of Compensation for the Companys Non-Employee Directors(18)10.14*
    
    Ixia 2010 Executive Officer Bonus Plan(19)10.15*
    
    Employment Offer Letter Agreement dated as of August 8, 2007 between the Company and
Atul Bhatnagar(20)10.16*
    
    Amended and Restated Ixia 2008 Equity Incentive Plan (21)10.17
    
    Master Services Agreement dated as of January 26, 2009 between the Company and
Plexus Services Corp and its affiliates and subsidiaries(22)14.1
    
    Code of Ethics for Chief Executive and Senior Financial Officers(23)
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##### Table of Contents



21.1
    
    Subsidiaries of the Company23.1
    
    Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm31.1
    
    Certificate of Chief Executive Officer of Ixia pursuant to Rule 13a-14(a) under the
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of Chief Financial Officer of Ixia pursuant to Rule 13a-14(a) under the
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certificate of Chief Executive Officer and Chief Financial Officer of Ixia pursuant
to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act
of 2002
 
 *
    
    Constitutes a management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Annual Report on Form 10-K.(1)
    
    Incorporated by reference to Exhibit 2.1 to Ixias Current Report on Form 8-K (File No.
000-31523), as filed with the Commission on May 12, 2009.(2)
    
    Incorporated by reference to Exhibit 2.1 to Ixias Current Report on Form 8-K (File No.
000-31523), as filed with the Commission on October 27, 2009.(3)
    
    Incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Companys Registration
Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000.(4)
    
    Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K (File
No. 000-31523) filed with the Commission on November 16, 2007.(5)
    
    Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K (File
No. 000-31523) filed with the Commission on December 8, 2010.(6)
    
    Incorporated by reference to Exhibit 4.1 to the Companys Registration Statement on Form S-8
(Reg. No. 333-117969) filed with the Commission on August 5, 2004.(7)
    
    Incorporated by reference to Exhibit 4.2 to the Companys Registration Statement on Form S-8
(Reg. No. 333-117969) filed with the Commission on August 5, 2004.(8)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File
No. 000-31523) filed with the Commission on June 3, 2010.(9)
    
    Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Company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 10.2 to the Companys Current Report on Form 8-K (File
No. 000-31523) filed with the Commission on January 7, 2009.(11)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File
No. 000-31523) filed with the Commission on January 7, 2009.(12)
    
    Incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Companys Registration
Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000.(13)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File
No. 000-31523) filed with the Commission on September 25, 2007.(14)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File
No. 000-31523) filed with the Commission on August 19, 2003.(15)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q
(File No. 000-31523) for the fiscal quarter ended June 30, 2005.(16)
    
    Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q
(File No. 000-31523) for the fiscal quarter ended June 30, 2005. 57




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##### Table of Contents



(17)
    
    Confidential treatment has been requested with respect to a portion of this exhibit, which
portion has been omitted and filed separately with the Commission.(18)
    
    Incorporated by reference to Exhibit 10.17 to the Companys Annual Report on Form 10-K (File
No. 000-31523) for the fiscal year ended December 31, 2006.(19)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File
No. 000-31523) filed with the Commission on April 27, 2010.(20)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File
No. 000-31523) filed with the Commission on September 4, 2007.(21)
    
    Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (File
No. 000-31523) filed with the Commission on June 3, 2010.(22)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10 Q
(File No. 000 31523) for the fiscal quarter ended March 31, 2009.(23)
    
    Incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-K (File No.
000-31523) for the fiscal year ended December 31, 2003. (b)
    
    ExhibitsSee the list of Exhibits under Item 15(a)(3) of this Annual Report on Form 10-K.(c)
    
    Financial Statement SchedulesSee the Schedule under Item 15(a)(2) of this Annual Report on Form 10-K.
 58




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##### Table of Contents



SIGNATURES
  Dated: March 4, 2011
    IXIA/s/ Atul BhatnagarAtul BhatnagarChief Executive Officer  Name
    
    Title
    
    Date/s/ Atul Bhatnagar

Atul Bhatnagar
    
    President, Chief Executive Officer
and Director 
(Principal Executive Officer)
    
    March 4, 2011/s/ Thomas B. Miller

Thomas B. Miller
    
    Chief Financial Officer 
(Principal Financial and Accounting Officer)
    
    March 4, 2011/s/ Errol Ginsberg
    
    Chief Innovation Officer and Chairman of the Board
    
    March 4, 2011Errol Ginsberg/s/ Jon F. Rager
    
    Director
    
    March 4, 2011Jon F. Rager/s/ Gail Hamilton
    
    Director
    
    March 4, 2011Gail Hamilton/s/ Jonathan Fram
    
    Director
    
    March 4, 2011Jonathan Fram/s/ Laurent Asscher
    
    Director
    
    March 4, 2011Laurent Asscher
 59




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##### Table of Contents



IXIA
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    61Consolidated Balance Sheets as of December 31, 2010 and 2009
    
    
    62Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
    
    
    63Consolidated Statements of Shareholders Equity for the years ended December 31, 2010,
2009 and 2008
    
    
    64Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
    
    
    66Notes to Consolidated Financial Statements
    
    
    67
 60




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
  Internal Control  Integrated Framework
    
 61




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##### Table of Contents



IXIA
 
 Consolidated Balance Sheets
 (in thousands)
 December 31,
    
    
    December 31,2010
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    76,082
    
    
    $
    15,061Short-term investments in marketable securities
    
    
    151,696
    
    
    
    10,337Accounts receivable, net
    
    
    67,838
    
    
    
    55,765Inventories
    
    
    28,965
    
    
    
    14,541Prepaid expenses and other current assets
    
    
    12,647
    
    
    
    9,727Total current assets
    
    
    337,228
    
    
    
    105,431Investments in marketable securities
    
    
    111,440
    
    
    
    53,582Property and equipment, net
    
    
    22,745
    
    
    
    18,693Intangible assets, net
    
    
    52,778
    
    
    
    69,132Goodwill
    
    
    59,384
    
    
    
    60,121Other assets
    
    
    6,308
    
    
    
    2,129Total assets
    
    $
    589,883
    
    
    $
    309,088Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    9,924
    
    
    $
    6,136Accrued expenses
    
    
    33,778
    
    
    
    21,253Deferred revenues
    
    
    37,505
    
    
    
    29,842Income taxes payable
    
    
    1,648
    
    
    
    1,263Total current liabilities
    
    
    82,855
    
    
    
    58,494Deferred revenues
    
    
    9,170
    
    
    
    7,309Other liabilities
    
    
    6,378
    
    
    
    6,620Convertible senior notes
    
    
    200,000
    
    
    
    Total liabilities
    
    
    298,403
    
    
    
    72,423Commitments and contingencies (Note 10)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, 2010 and
2009; 67,613 and 63,062 shares issued and
outstanding as of December 31, 2010 and 2009,
respectively
    
    
    115,590
    
    
    
    87,283Additional paid-in capital
    
    
    133,249
    
    
    
    118,754Retained earnings
    
    
    40,187
    
    
    
    28,979Accumulated other comprehensive income
    
    
    2,454
    
    
    
    1,649Total shareholders equity
    
    
    291,480
    
    
    
    236,665Total liabilities and shareholders equity
    
    $
    589,883
    
    
    $
    309,088
 The accompanying notes are an integral part of these consolidated financial statements
 62




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##### Table of Contents



IXIA
 
 Consolidated Statements of Operations
 (in thousands, except per share data)
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Revenues:Products
    
    $
    227,880
    
    
    $
    142,871
    
    
    $
    146,802Services
    
    
    48,935
    
    
    
    35,123
    
    
    
    29,065Total revenues
    
    
    276,815
    
    
    
    177,994
    
    
    
    175,867Costs and operating expenses:(1)Cost of revenues  products
    
    
    54,378
    
    
    
    36,722
    
    
    
    32,411Cost of revenues  services
    
    
    6,327
    
    
    
    3,859
    
    
    
    4,475Research and development
    
    
    72,488
    
    
    
    53,977
    
    
    
    49,167Sales and marketing
    
    
    79,986
    
    
    
    60,374
    
    
    
    59,374General and administrative
    
    
    35,142
    
    
    
    28,061
    
    
    
    25,502Amortization of intangible assets
    
    
    17,545
    
    
    
    11,391
    
    
    
    5,664Acquisition and other related
    
    
    2,991
    
    
    
    6,179
    
    
    
    1,479Restructuring
    
    
    3,587
    
    
    
    4,637
    
    
    
    Total costs and operating expenses
    
    
    272,444
    
    
    
    205,200
    
    
    
    178,072Income (loss) from operations
    
    
    4,371
    
    
    
    (27,206
    )
    
    
    (2,205
    )Interest income and other, net
    
    
    10,970
    
    
    
    2,160
    
    
    
    6,574Interest expense
    
    
    (480
    )
    
    
    
    
    
    
    Other-than-temporary impairment on investments
    
    
    
    
    
    
    (2,761
    )
    
    
    (20,243
    )Income (loss) before income taxes
    
    
    14,861
    
    
    
    (27,807
    )
    
    
    (15,874
    )Income tax expense
    
    
    3,653
    
    
    
    16,396
    
    
    
    21Net income (loss)
    
    $
    11,208
    
    
    $
    (44,203
    )
    
    $
    (15,895
    )Earnings (loss) per share:Basic
    
    $
    0.17
    
    
    $
    (0.70
    )
    
    $
    (0.24
    )Diluted
    
    $
    0.17
    
    
    $
    (0.70
    )
    
    $
    (0.24
    )Weighted average number of common and common
equivalent shares outstanding:Basic
    
    
    65,157
    
    
    
    62,710
    
    
    
    65,087Diluted
    
    
    67,769
    
    
    
    62,710
    
    
    
    65,087(1)      Stock-based compensation included in:Cost of revenues  products
    
    $
    524
    
    
    $
    478
    
    
    $
    513Cost of revenues  services
    
    
    198
    
    
    
    182
    
    
    
    195Research and development
    
    
    5,195
    
    
    
    4,491
    
    
    
    4,166Sales and marketing
    
    
    3,592
    
    
    
    2,989
    
    
    
    3,411General and administrative
    
    
    3,406
    
    
    
    2,395
    
    
    
    2,360
 The accompanying notes are an integral part of these consolidated financial statements
 63




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IXIA
 
 Consolidated Statements of Shareholders Equity
 (in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (loss)
    
    
    TotalBalance as of December 31,
2007
    
    
    68,171
    
    
    $
    132,092
    
    
    $
    98,157
    
    
    $
    89,077
    
    
    $
    (2,826
    )
    
    $
    316,500Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,895
    )
    
    
    
    
    
    
    (15,895
    )Change in unrealized
gains and losses on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,680
    )
    
    
    (1,680
    )Reclassification
adjustment for
investment losses
recognized in net loss,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,191
    
    
    
    4,191Cumulative translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    61Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,323
    )Shares issued pursuant
to stock incentive plans
and employee stock
purchase plan options
    
    
    1,029
    
    
    
    3,897
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,897Repurchase of shares
pursuant to stock
buyback programs
    
    
    (5,809
    )
    
    
    (43,603
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,603
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    10,645
    
    
    
    
    
    
    
    
    
    
    
    10,645Stock award tax shortfall
    
    
    
    
    
    
    
    
    
    
    (920
    )
    
    
    
    
    
    
    
    
    
    
    (920
    )Balance as of December 31,
2008
    
    
    63,391
    
    
    
    92,386
    
    
    
    107,882
    
    
    
    73,182
    
    
    
    (254
    )
    
    
    273,196Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,203
    )
    
    
    
    
    
    
    (44,203
    )Change in unrealized
gains and losses on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,959
    
    
    
    1,959Cumulative translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    (56
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,300
    )Shares issued pursuant
to stock incentive plans
and employee stock
purchase plan options
    
    
    1,294
    
    
    
    3,321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,321Repurchase of shares
pursuant to stock
buyback programs
    
    
    (1,623
    )
    
    
    (8,424
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,424
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    10,535
    
    
    
    
    
    
    
    
    
    
    
    10,535Stock award tax benefit
    
    
    
    
    
    
    
    
    
    
    337
    
    
    
    
    
    
    
    
    
    
    
    337Balance as of December 31,
2009
    
    
    63,062
    
    
    
    87,283
    
    
    
    118,754
    
    
    
    28,979
    
    
    
    1,649
    
    
    
    236,665Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,208
    
    
    
    
    
    
    
    11,208Change in unrealized
gains and losses on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314
    
    
    
    314Cumulative translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    491
    
    
    
    491Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,013
 The accompanying notes are an integral part of these consolidated financial statements
 64




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##### Table of Contents



AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (loss)
    
    
    TotalShares issued pursuant
to stock incentive plans
and employee stock
purchase plan options
    
    
    4,551
    
    
    
    28,307
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,307Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    12,915
    
    
    
    
    
    
    
    
    
    
    
    12,915Stock award tax benefit
    
    
    
    
    
    
    
    
    
    
    1,580
    
    
    
    
    
    
    
    
    
    
    
    1,580Balance as of December 31,
2010
    
    
    67,613
    
    
    $
    115,590
    
    
    $
    133,249
    
    
    $
    40,187
    
    
    $
    2,454
    
    
    $
    291,480
 The accompanying notes are an integral part of these consolidated financial statements
 65




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IXIA
 
 Consolidated Statements of Cash Flows
 (in thousands)
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    11,208
    
    
    $
    (44,203
    )
    
    $
    (15,895
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation
    
    
    11,295
    
    
    
    10,195
    
    
    
    11,527Amortization of intangible assets
    
    
    17,545
    
    
    
    11,391
    
    
    
    5,664Impairment on investments
    
    
    
    
    
    
    2,761
    
    
    
    20,243Stock-based compensation
    
    
    12,915
    
    
    
    10,535
    
    
    
    10,645Deferred income taxes
    
    
    (65
    )
    
    
    22,955
    
    
    
    (2,455
    )Tax benefit (shortfall) from stock award transactions
    
    
    1,580
    
    
    
    337
    
    
    
    (920
    )Excess tax benefits from stock-based compensation
    
    
    (2,074
    )
    
    
    (103
    )
    
    
    (188
    )Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable, net
    
    
    (12,073
    )
    
    
    (11,819
    )
    
    
    (1,596
    )Inventories
    
    
    (14,424
    )
    
    
    5,606
    
    
    
    (2,235
    )Prepaid expenses and other current assets
    
    
    (1,640
    )
    
    
    (2,589
    )
    
    
    (1,596
    )Other assets
    
    
    541
    
    
    
    1,560
    
    
    
    (1,599
    )Accounts payable
    
    
    3,388
    
    
    
    (240
    )
    
    
    2,255Accrued expenses
    
    
    12,700
    
    
    
    (6,494
    )
    
    
    (167
    )Deferred revenues
    
    
    9,524
    
    
    
    361
    
    
    
    (248
    )Income taxes payable and other liabilities
    
    
    9
    
    
    
    (4,978
    )
    
    
    900Net cash provided by (used in) operating activities
    
    
    50,429
    
    
    
    (4,725
    )
    
    
    24,335Cash flows from investing activities:Purchases of property and equipment
    
    
    (14,857
    )
    
    
    (8,025
    )
    
    
    (8,540
    )Purchases of available-for-sale securities
    
    
    (267,919
    )
    
    
    (262,704
    )
    
    
    Proceeds from available-for-sale securities
    
    
    69,216
    
    
    
    225,529
    
    
    
    2,001Purchases of held-to-maturity securities
    
    
    
    
    
    
    
    
    
    
    (8,924
    )Proceeds from held-to-maturity securities
    
    
    
    
    
    
    
    
    
    
    37,104Purchases of other intangible assets
    
    
    (441
    )
    
    
    (362
    )
    
    
    (314
    )Proceeds (payments) in connection with acquisitions, net
of cash acquired
    
    
    212
    
    
    
    (122,443
    )
    
    
    (2,245
    )Net cash (used in) provided by investing activities
    
    
    (213,789
    )
    
    
    (168,005
    )
    
    
    19,082Cash flows from financing activities:Proceeds from issuance of convertible senior notes
    
    
    200,000
    
    
    
    
    
    
    
    Debt issuance costs
    
    
    (6,000
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options and employee
stock purchase plan options
    
    
    28,307
    
    
    
    3,321
    
    
    
    3,897Repurchase of common stock
    
    
    
    
    
    
    (8,424
    )
    
    
    (43,603
    )Excess tax benefits from stock-based compensation
    
    
    2,074
    
    
    
    103
    
    
    
    188Net cash provided by (used) in financing activities
    
    
    224,381
    
    
    
    (5,000
    )
    
    
    (39,518
    )Net increase (decrease) in cash and cash equivalents
    
    
    61,021
    
    
    
    (177,730
    )
    
    
    3,899Cash and cash equivalents at beginning of year
    
    
    15,061
    
    
    
    192,791
    
    
    
    188,892Cash and cash equivalents at end of year
    
    $
    76,082
    
    
    $
    15,061
    
    
    $
    192,791Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes
    
    $
    2,076
    
    
    $
    1,326
    
    
    $
    5,443
 The accompanying notes are an integral part of these consolidated financial statements
 66




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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
   67




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##### Table of Contents



Investments in Marketable Securities
      Accounts Receivable and Allowance for Doubtful Accounts
  Inventories
  68




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##### Table of Contents



Property and Equipment
  Goodwill, Purchased Intangible and Other Long-Lived Assets
   Litigation
  Product Warranty
  69




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##### Table of Contents



December 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008Balance at beginning of year
    
    $
    501
    
    
    $
    933
    
    
    $
    577Current year provision
    
    
    841
    
    
    
    533
    
    
    
    619Expenditures
    
    
    (645
    )
    
    
    (544
    )
    
    
    (263
    )Adjustments relating to pre-existing warranties
    
    
    
    
    
    
    (421
    )
    
    
    Balance at end of year
    
    $
    697
    
    
    $
    501
    
    
    $
    933
 Revenue Recognition
       70




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##### Table of Contents



Cost of Revenues
  Research and Development
  Software Developed for Internal Use
  Advertising
  Stock-Based Compensation
  71




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##### Table of Contents



Income Taxes
   Earnings (Loss) Per Share
  Foreign Currency Translation and Transactions
  72




---



##### Table of Contents



Comprehensive Income
  Segments
  Recent Accounting Pronouncements
     73




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##### Table of Contents



2. Convertible Senior Notes
        74




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##### Table of Contents



3. Acquisitions
   Catapult Communications Corporation
   Cash and cash equivalents
    
    $
    28,190Short-term investments in marketable securities
    
    
    8,638Accounts receivable
    
    
    3,815Inventories
    
    
    3,950Other current assets
    
    
    3,331Long-term investments in marketable securities
    
    
    4,366Deferred income taxes (non-current)
    
    
    2,490Other non-current assets
    
    
    2,108Identifiable intangible assets
    
    
    48,790Goodwill
    
    
    22,466Total assets acquired
    
    
    128,144Accounts payable and accrued expenses
    
    
    (9,116
    )Deferred revenues
    
    
    (5,900
    )Other liabilities (non-current)
    
    
    (6,570
    )Net assets acquired
    
    $
    106,558
  75




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##### Table of Contents



Agilent Technologies N2X Data Networks Product Line
   Accounts receivable
    
    $
    6,130Inventories
    
    
    1,231Property and equipment
    
    
    1,439Identifiable intangible assets
    
    
    21,800Goodwill
    
    
    20,190Total assets acquired
    
    
    50,790Accounts payable and accrued expenses
    
    
    (2,757
    )Deferred revenues
    
    
    (5,223
    )Net assets acquired
    
    $
    42,810
   Pro Forma Results
  Year EndedDecember 31, 2009(Proforma)Total revenues
    
    $
    229,978Net loss
    
    
    (67,625
    )
  76




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##### Table of Contents



4. Restructuring Costs
     N2X
    
    
    Catapult
    
    
    IxiaTotal
    
    
    Restructuring
    
    
    Restructuring
    
    
    RestructuringAccrual at January 1, 2009
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Charges
    
    
    4,637
    
    
    
    
    
    
    
    3,517
    
    
    
    1,120Payments
    
    
    (3,662
    )
    
    
    
    
    
    
    (2,584
    )
    
    
    (1,078
    )Non-cash items
    
    
    (96
    )
    
    
    
    
    
    
    (96
    )
    
    
    Accrual at December 31,
2009
    
    $
    879
    
    
    $
    
    
    
    $
    837
    
    
    $
    42Charges
    
    
    3,587
    
    
    
    3,538
    
    
    
    49
    
    
    
    Payments
    
    
    (4,466
    )
    
    
    (3,538
    )
    
    
    (886
    )
    
    
    (42
    )Accrual at December 31,
2010
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 5. Concentrations
 Credit Risk
  Significant Customer
  Year Ended December 31,2010
    
    2009
    
    2008Amount of total revenues
    
    $
    37,508
    
    
    $
    27,792
    
    
    $
    36,857As a percentage of total revenues
    
    
    13.5
    %
    
    
    15.6
    %
    
    
    21.0
    %
 77




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##### Table of Contents



International Data
  Year Ended December 31,2010
    
    2009
    
    2008Amount of total revenues
    
    $
    136,032
    
    
    $
    76,325
    
    
    $
    63,045As a percentage of total revenues
    
    
    49.1
    %
    
    
    42.9
    %
    
    
    35.8
    %
  As of December 31,2010
    
    
    2009United States
    
    $
    11,235
    
    
    $
    10,874Romania
    
    
    2,286
    
    
    
    2,647India
    
    
    3,268
    
    
    
    2,506Other
    
    
    5,956
    
    
    
    2,666$
    22,745
    
    
    $
    18,693
 Sources of Supply
  6. Selected Balance Sheet Data
 Accounts Receivable, Net
  December 31,
    
    
    December 31,2010
    
    
    2009Trade accounts receivable
    
    $
    68,911
    
    
    $
    56,419Allowance for doubtful accounts
    
    
    (1,073
    )
    
    
    (654
    )$
    67,838
    
    
    $
    55,765
 78




---



##### Table of Contents



December 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008Balance at beginning of year
    
    $
    654
    
    
    $
    764
    
    
    $
    614Charged to cost and expenses
    
    
    519
    
    
    
    372
    
    
    
    300Reversal of cost and expenses
    
    
    
    
    
    
    
    
    
    
    Deductions
    
    
    (100
    )
    
    
    (482
    )
    
    
    (150
    )Balance at end of year
    
    $
    1,073
    
    
    $
    654
    
    
    $
    764
 Investments in Marketable Securities
  Amortized
    
    
    FairCost
    
    
    ValueAvailable-for-sale  short-term:U.S. government and agency debt securities
    
    $
    123,495
    
    
    $
    123,619Corporate debt securities
    
    
    28,057
    
    
    
    28,077151,552
    
    
    
    151,696Available-for-sale  long-term:U.S. government and agency debt securities
    
    
    55,572
    
    
    
    55,584Corporate debt securities
    
    
    49,861
    
    
    
    50,605Auction rate securities
    
    
    2,975
    
    
    
    5,251108,408
    
    
    
    111,440$
    259,960
    
    
    $
    263,136
  Amortized
    
    
    FairCost
    
    
    ValueAvailable-for-sale  short-term:U.S. government and agency debt securities
    
    $
    5,711
    
    
    $
    5,713Corporate debt securities
    
    
    4,584
    
    
    
    4,62410,295
    
    
    
    10,337Available-for-sale  long-term:U.S. government and agency debt securities
    
    
    34,534
    
    
    
    34,673Corporate debt securities
    
    
    12,605
    
    
    
    13,236Auction rate securities
    
    
    3,823
    
    
    
    5,67350,962
    
    
    
    53,582$
    61,257
    
    
    $
    63,919
   79




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##### Table of Contents



Inventories
  December 31,
    
    
    December 31,2010
    
    
    2009Raw materials
    
    $
    8,173
    
    
    $
    3,674Work in process
    
    
    7,745
    
    
    
    4,731Finished goods
    
    
    13,047
    
    
    
    6,136$
    28,965
    
    
    $
    14,541
 Property and Equipment, Net
  December 31,
    
    
    December 31,Useful Life
    
    2010
    
    
    2009(in years)Computer equipment
    
    3
    
    $
    11,356
    
    
    $
    10,178Computer software
    
    3-5
    
    
    11,944
    
    
    
    9,725Demonstration equipment
    
    2
    
    
    17,437
    
    
    
    13,382Development equipment
    
    5
    
    
    19,756
    
    
    
    16,872Furniture and other equipment
    
    5
    
    
    17,196
    
    
    
    16,751Leasehold improvements
    
    1-5
    
    
    8,799
    
    
    
    6,64586,488
    
    
    
    73,553Accumulated depreciation
    
    
    
    
    (63,743
    )
    
    
    (54,860
    )$
    22,745
    
    
    $
    18,693
 Accrued Expenses
  December 31,
    
    
    December 31,2010
    
    
    2009Accrued bonuses
    
    $
    9,928
    
    
    $
    915Accrued vacation
    
    
    5,395
    
    
    
    4,990Accrued payroll
    
    
    4,814
    
    
    
    3,457Accrued commissions
    
    
    2,633
    
    
    
    1,203Accrued legal and professional fees
    
    
    2,377
    
    
    
    2,395Accrued property and sales tax payable
    
    
    1,174
    
    
    
    734Employee stock purchase plan payroll deductions
    
    
    1,057
    
    
    
    689Deferred rent
    
    
    985
    
    
    
    412Accrued royalties
    
    
    794
    
    
    
    727Accrued warranty
    
    
    697
    
    
    
    501Accrued travel
    
    
    363
    
    
    
    349Due to third parties for technology and certain assets
    
    
    150
    
    
    
    949Other
    
    
    3,411
    
    
    
    3,932$
    33,778
    
    
    $
    21,253
 80




---



##### Table of Contents



7. Fair Value Measurements
  Level 1.
    
    Observable inputs such as quoted prices in active markets;Level 2.
    
    Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; andLevel 3.
    
    Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own
assumptions.
  December 31, 2010
    
    
    December 31, 2009QuotedQuoted Prices
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prices inin Active
    
    
    Significant
    
    
    
    
    
    
    
    
    
    
    Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    Significant
    
    
    
    
    
    
    Markets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    Unobservable
    
    
    
    
    
    
    Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs
    
    
    
    
    
    
    Assets
    
    
    Inputs
    
    
    InputsFair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Fair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents:(1)Money market funds
    
    $
    6,037
    
    
    $
    6,037
    
    
    $
    
    
    
    $
    
    
    
    $
    241
    
    
    $
    241
    
    
    $
    
    
    
    $
    U.S. Treasury, government
and agency debt securities
    
    
    30,419
    
    
    
    
    
    
    
    30,419
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate debt securities
    
    
    9,997
    
    
    
    
    
    
    
    9,997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term investments:(1)U.S. Treasury, government
and agency debt securities
    
    
    123,619
    
    
    
    
    
    
    
    123,619
    
    
    
    
    
    
    
    5,713
    
    
    
    
    
    
    
    5,713
    
    
    
    Corporate debt securities
    
    
    28,077
    
    
    
    
    
    
    
    28,077
    
    
    
    
    
    
    
    4,624
    
    
    
    
    
    
    
    4,624
    
    
    
    Long-term investments:U.S. Treasury, government
and agency debt securities
    
    
    55,584
    
    
    
    
    
    
    
    55,584
    
    
    
    
    
    
    
    34,673
    
    
    
    
    
    
    
    34,673
    
    
    
    Corporate debt securities
    
    
    50,605
    
    
    
    
    
    
    
    50,605
    
    
    
    
    
    
    
    13,236
    
    
    
    
    
    
    
    13,236
    
    
    
    Auction rate securities (2)
    
    
    5,251
    
    
    
    
    
    
    
    
    
    
    
    5,251
    
    
    
    5,673
    
    
    
    
    
    
    
    
    
    
    
    5,673Total financial assets
    
    $
    309,589
    
    
    $
    6,037
    
    
    $
    298,301
    
    
    $
    5,251
    
    
    $
    64,160
    
    
    $
    241
    
    
    $
    58,246
    
    
    $
    5,673
 81




---



##### Table of Contents



(1)
    
    To estimate the fair value of our money market funds, U.S. government and agency debt
securities, and corporate debt securities, we use the estimated fair value per our
investment brokerage/custodial statements. To the extent deemed necessary, we may also
obtain non-binding market quotes to corroborate the estimated fair values reflected in our
investment brokerage/custodial statements.(2)
    
    Given the disruption in the auction process, there is no longer an actively quoted
market price for these securities. Accordingly, we utilized models to estimate the fair
values of these auction rate securities based on, among other items: (i) the underlying
structure of each security; (ii) the present value of future principal, interest and/or
dividend payments discounted at the appropriate rate considering the market rate and
conditions; (iii) consideration of the probabilities of default, auction failure, or
repurchase at par for each period; and (iv) credit quality and estimates of the recovery
rates in the event of default for each security. These estimated fair values could change
significantly based on, among other events: (i) a further deterioration in market
conditions for these securities; (ii) further declines in the credit quality of our auction
rate securities or of the issuers of our auction rate securities; or (iii) a cessation of
dividend payments or default on interest or principal payments by the issuer of the
securities.  Year Ended December 31,2010
    
    
    2009Beginning balance
    
    $
    5,673
    
    
    $
    3,211Unrealized gain recorded in other comprehensive income
    
    
    421
    
    
    
    1,849Unrealized loss recorded in earnings (See Note 6)
    
    
    
    
    
    
    (2,761
    )Settlements
    
    
    (843
    )
    
    
    (992
    )Additions from Catapult acquisition (See Note 3)
    
    
    
    
    
    
    4,366Ending balance
    
    $
    5,251
    
    
    $
    5,673Unrealized losses recorded in earnings for Level 3 assets
still held at December 31
    
    $
    
    
    
    $
    (2,761
    )
 8. Goodwill and Other Intangible Assets
  WeightedAverage
    
    
    
    
    
    
    AccumulatedUseful Life
    
    
    Gross
    
    
    Amortization
    
    
    Net(in years)Goodwill
    
    
    
    
    
    $
    59,384
    
    
    $
    
    
    
    $
    59,384Other intangible assets:Technology
    
    
    5.4
    
    
    $
    71,492
    
    
    $
    (43,883
    )
    
    $
    27,609Customer relationships
    
    
    5.9
    
    
    
    24,910
    
    
    
    (6,843
    )
    
    
    18,067Service agreements
    
    
    4.7
    
    
    
    6,770
    
    
    
    (2,456
    )
    
    
    4,314Non-compete
    
    
    3.8
    
    
    
    2,338
    
    
    
    (1,359
    )
    
    
    979Trademark
    
    
    4.7
    
    
    
    1,576
    
    
    
    (1,133
    )
    
    
    443Workforce
    
    
    4.0
    
    
    
    395
    
    
    
    (395
    )
    
    
    Other
    
    
    0.7
    
    
    
    4,424
    
    
    
    (3,058
    )
    
    
    1,366$
    111,905
    
    
    $
    (59,127
    )
    
    $
    52,778
  82




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##### Table of Contents



WeightedAverage
    
    
    
    
    
    
    AccumulatedUseful Life
    
    
    Gross
    
    
    Amortization
    
    
    Net(in years)Goodwill
    
    
    
    
    
    $
    60,121
    
    
    $
    
    
    
    $
    60,121Other intangible assets:Technology
    
    
    5.4
    
    
    $
    70,742
    
    
    $
    (33,031
    )
    
    $
    37,711Customer relationships
    
    
    5.9
    
    
    
    24,910
    
    
    
    (2,943
    )
    
    
    21,967Service agreements
    
    
    4.7
    
    
    
    6,770
    
    
    
    (1,144
    )
    
    
    5,626Non-compete
    
    
    3.8
    
    
    
    2,338
    
    
    
    (1,059
    )
    
    
    1,279Trademark
    
    
    4.7
    
    
    
    1,576
    
    
    
    (783
    )
    
    
    793Workforce
    
    
    4.0
    
    
    
    395
    
    
    
    (395
    )
    
    
    Other
    
    
    0.8
    
    
    
    4,038
    
    
    
    (2,282
    )
    
    
    1,756$
    110,769
    
    
    $
    (41,637
    )
    
    $
    69,132
  2011
    
    $
    14,7312012
    
    
    14,2422013
    
    
    13,6202014
    
    
    7,7832015
    
    
    2,171Thereafter
    
    
    231$
    52,778
 9. Income Taxes
  Year Ended December 31,2010
    
    
    2009
    
    
    2008U.S.
    
    $
    2,518
    
    
    $
    (33,246
    )
    
    $
    (19,992
    )Foreign
    
    
    12,343
    
    
    
    5,439
    
    
    
    4,118$
    14,861
    
    
    $
    (27,807
    )
    
    $
    (15,874
    )
  Year Ended December 31,2010
    
    
    2009
    
    
    2008Current:Federal
    
    $
    697
    
    
    $
    (3,549
    )
    
    $
    856State
    
    
    409
    
    
    
    670
    
    
    
    594Foreign
    
    
    2,613
    
    
    
    1,692
    
    
    
    1,025Deferred:Federal
    
    
    211
    
    
    
    17,112
    
    
    
    (1,171
    )State
    
    
    38
    
    
    
    558
    
    
    
    (1,418
    )Foreign
    
    
    (315
    )
    
    
    (87
    )
    
    
    135Income tax expense
    
    $
    3,653
    
    
    $
    16,396
    
    
    $
    21
 83




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##### Table of Contents



Year Ended December 31,2010
    
    
    2009
    
    
    2008Federal statutory expense
    
    $
    5,203
    
    
    $
    (9,733
    )
    
    $
    (5,556
    )State taxes, net of federal benefit
    
    
    291
    
    
    
    (2,017
    )
    
    
    (1,393
    )Research and development credits
    
    
    (1,356
    )
    
    
    (1,292
    )
    
    
    (813
    )Stock-based compensation
    
    
    936
    
    
    
    633
    
    
    
    543Foreign tax rate differential
    
    
    (2,022
    )
    
    
    (298
    )
    
    
    (282
    )Acquisition related costs
    
    
    
    
    
    
    702
    
    
    
    Valuation allowance
    
    
    328
    
    
    
    28,078
    
    
    
    7,942Other
    
    
    273
    
    
    
    323
    
    
    
    (420
    )Income tax expense
    
    $
    3,653
    
    
    $
    16,396
    
    
    $
    21Net effective income tax rate
    
    
    24.6
    %
    
    
    (59.0
    )%
    
    
    (0.1
    )%
  December 31,
    
    
    December 31,2010
    
    
    2009Deferred tax assets:Allowance for doubtful accounts
    
    $
    274
    
    
    $
    307Research and development credit carryforward
    
    
    13,679
    
    
    
    10,732Foreign tax credit carryforward
    
    
    1,418
    
    
    
    1,418Deferred revenue
    
    
    2,895
    
    
    
    3,078Stock-based compensation
    
    
    6,949
    
    
    
    8,635Inventory adjustments
    
    
    3,679
    
    
    
    2,796Net operating loss carryforward
    
    
    5,557
    
    
    
    6,035Unrealized loss on investments
    
    
    4,054
    
    
    
    7,913Accrued liabilities and other
    
    
    3,314
    
    
    
    2,98641,819
    
    
    
    43,900Valuation allowance
    
    
    (37,694
    )
    
    
    (36,150
    )4,125
    
    
    
    7,750Deferred tax liabilities:Depreciation and amortization
    
    
    (4,330
    )
    
    
    (8,020
    )Net deferred tax liabilities
    
    $
    (205
    )
    
    $
    (270
    )
  84




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2010
    
    
    2009
    
    
    2008Unrecognized Tax Benefits  beginning balance
    
    $
    10,629
    
    
    $
    4,320
    
    
    $
    4,367Acquired unrecognized tax benefits
    
    
    
    
    
    
    5,655
    
    
    
    Gross increases  Tax positions taken in prior period
    
    
    243
    
    
    
    6
    
    
    
    18
 85




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##### Table of Contents



2010
    
    
    2009
    
    
    2008Gross decreases  Tax positions taken in prior period
    
    
    (70
    )
    
    
    
    
    
    
    (13
    )Gross increases  Tax positions taken in current period
    
    
    1,868
    
    
    
    878
    
    
    
    617Lapse of statute of limitations
    
    
    (367
    )
    
    
    (230
    )
    
    
    (669
    )Unrecognized Tax Benefits  ending balance
    
    $
    12,303
    
    
    $
    10,629
    
    
    $
    4,320
  10. Commitments and Contingencies
  Year EndingDecember 31,2011
    
    $
    6,9192012
    
    
    6,2102013
    
    
    2,9502014
    
    
    4582015
    
    
    190Thereafter
    
    
    $
    16,727
  Litigation
 IneoQuest Technologies, Inc. vs. Ixia.
  Tucana Telecom NV vs. Catapult.
 86




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##### Table of Contents



Indemnifications
  87




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##### Table of Contents



11. Shareholders Equity
 Stock Award Plans
     WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber
    
    Exercise Price
    
    Contractual
    
    Intrinsicof Options
    
    Per Share
    
    Life (in years)
    
    ValueOutstanding as of December 31, 2009
    
    
    9,227
    
    
    $
    7.98
    
    
    
    3.74
    
    
    $
    5,534Granted
    
    
    2,299
    
    
    $
    9.01Exercised
    
    
    (3,243
    )
    
    $
    7.61Forfeited/canceled
    
    
    (1,011
    )
    
    $
    9.24Outstanding as of December 31, 2010
    
    
    7,272
    
    
    $
    8.29
    
    
    
    4.18
    
    
    $
    61,772Vested and expected to vest as of December 31, 2010
    
    
    6,946
    
    
    $
    8.30
    
    
    
    4.08
    
    
    $
    58,949Exercisable as of December 31, 2010
    
    
    3,532
    
    
    $
    8.59
    
    
    
    2.66
    
    
    $
    28,973
 88




---



##### Table of Contents



WeightedAverage GrantNumber
    
    Date Fair Valueof Awards
    
    Per ShareOutstanding as of December 31, 2009
    
    
    2,084
    
    
    $
    6.53Awarded
    
    
    605
    
    
    $
    11.81Released
    
    
    (741
    )
    
    $
    6.99Forfeited/canceled
    
    
    (173
    )
    
    $
    6.91Outstanding as of December 31, 2010
    
    
    1,775
    
    
    $
    8.10
  Employee Stock Purchase Plan
   89




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##### Table of Contents



Stock-Based Compensation Expense
  Year Ended December 31,2010
    
    2009
    
    2008Expected lives (in years)
    
    
    3.6
    
    
    
    3.6
    
    
    
    4.0Risk-free interest rates
    
    
    1.6
    %
    
    
    1.7
    %
    
    
    2.4
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    46.1
    %
    
    
    46.5
    %
    
    
    48.2
    %
  Option Exchange Program
  Stock Buyback Programs
  Accumulated Other Comprehensive Income
  December 31,2010
    
    
    2009Unrealized gains on marketable securities
    
    $
    1,941
    
    
    $
    1,627Foreign currency translation gains
    
    
    513
    
    
    
    22Total accumulated other comprehensive income
    
    $
    2,454
    
    
    $
    1,649
 90




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##### Table of Contents



12. Retirement Plan
  13. Earnings Per Share
  Year Ended December 31,2010
    
    
    2009
    
    
    2008Basic PresentationNumerator for basic earnings (loss) per share:Net income (loss)
    
    $
    11,208
    
    
    $
    (44,203
    )
    
    $
    (15,895
    )Denominator for basic earnings (loss) per share:Weighted average common shares outstanding
    
    
    65,157
    
    
    
    62,710
    
    
    
    65,087Basic (loss) earnings per share
    
    $
    0.17
    
    
    $
    (0.70
    )
    
    $
    (0.24
    )Diluted PresentationNumerator for diluted earnings (loss) per share:Net income (loss)
    
    $
    11,208
    
    
    $
    (44,203
    )
    
    $
    (15,895
    )Interest expense on convertible senior notes, net of tax
    
    
    
    
    
    
    
    
    
    
    Net income (loss) used for diluted earnings (loss) per
share
    
    $
    11,208
    
    
    $
    (44,203
    )
    
    $
    (15,895
    )Denominator for dilutive earnings (loss) per share:Weighted average common shares outstanding
    
    
    65,157
    
    
    
    62,710
    
    
    
    65,087Effect of dilutive securities:Stock options and other share-based awards
    
    
    2,612
    
    
    
    
    
    
    
    Convertible senior notes
    
    
    
    
    
    
    
    
    
    
    Dilutive potential common shares
    
    
    67,769
    
    
    
    62,710
    
    
    
    65,087Diluted
earnings (loss) per share
    
    $
    0.17
    
    
    $
    (0.70
    )
    
    $
    (0.24
    )
  91




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14. Quarterly Financial Summary (Unaudited)
 Three Months EndedDec. 31
    
    Sep. 30
    
    Jun. 30
    
    Mar. 31
    
    Dec. 31
    
    Sep. 30
    
    Jun. 30
    
    Mar. 312010(1)
    
    2010
    
    2010
    
    2010(1)
    
    2009
    
    2009
    
    2009
    
    2009(in thousands, except per share data)Statement of Operations Data:Total revenues
    
    $
    77,780
    
    
    $
    70,890
    
    
    $
    66,104
    
    
    $
    62,041
    
    
    $
    56,091
    
    
    $
    46,374
    
    
    $
    38,405
    
    
    $
    37,124Total cost of revenues(2)
    
    
    19,420
    
    
    
    18,126
    
    
    
    19,184
    
    
    
    16,798
    
    
    
    15,820
    
    
    
    14,324
    
    
    
    9,983
    
    
    
    9,674Gross profit
    
    
    58,360
    
    
    
    52,764
    
    
    
    46,920
    
    
    
    45,243
    
    
    
    40,271
    
    
    
    32,050
    
    
    
    28,422
    
    
    
    27,450Income (loss) before income taxes
    
    
    8,392
    
    
    
    5,918
    
    
    
    (986
    )
    
    
    1,537
    
    
    
    (6,470
    )
    
    
    (9,388
    )
    
    
    (5,906
    )
    
    
    (6,043
    )Net income (loss)(3)
    
    
    5,826
    
    
    
    4,874
    
    
    
    (361
    )
    
    
    869
    
    
    
    (31,335
    )
    
    
    (6,223
    )
    
    
    (2,654
    )
    
    
    (3,991
    )Earnings (loss) per share:Basic
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.50
    )
    
    $
    (0.10
    )
    
    $
    (0.04
    )
    
    $
    (0.06
    )Diluted
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.50
    )
    
    $
    (0.10
    )
    
    $
    (0.04
    )
    
    $
    (0.06
    )
 
 (1)
    
    In the first and fourth quarters of 2010, we recorded $8.9 million and $1.0 million, respectively, to interest income and other, net related to (i) settlement
proceeds received during the 2010 first quarter for claims asserted by us against our former investment manager for damages and losses relating to our previous investments in
auction rate securities with an aggregate par value of $19.0 million, and (ii) proceeds received during the 2010 fourth quarter for the sale of certain of our auction rate
securities that were previously written-off.(2)
    
    For the quarters ended December 31, 2010, September 30, 2010, June 30, 2010, March 31, 2010, December 31, 2009, September 30, 2009, June 30, 2009, March 31,
2009, total cost of revenues include charges related to amortization of intangible assets of $2.7 million, $2.4 million, $3.9 million, $3.8 million, $3.8 million, $3.0
million, $1.2 million and $1.2 million, respectively.(3)
    
    In the fourth quarter of 2009, our income tax expense includes a $27.6 million charge related primarily to the establishment of a valuation allowance against
our net U.S. deferred tax assets. 92




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EXHIBIT INDEX
 Exhibit No.
    
    Description21.1
    
    Subsidiaries of the Registrant23.1
    
    Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm31.1
    
    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
 93