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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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from ___ to ___
 Commission File Number 000-31523
 IXIA
 (Exact name of Registrant as specified in its charter)
 California(State or other jurisdiction of incorporation or organization)
    
    95-4635982(I.R.S. Employer Identification No.)
 26601 West Agoura Road, Calabasas, CA 91302
 (Address of principal executive offices, including zip code)
  
   o þ
 o þ
 þ o
 þ
  o þ o
 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
    
    
    16Item 1B.
    
    Unresolved Staff Comments
    
    
    27Item 2.
    
    Properties
    
    
    27Item 3.
    
    Legal Proceedings
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28PART IIItem 5.
    
    Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Registered Securities
    
    
    28Item 6.
    
    Selected Financial Data
    
    
    31Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 8.
    
    Financial Statements and Supplementary Data
    
    
    43Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    43Item 9A.
    
    Controls and Procedures
    
    
    44Item 9B.
    
    Other Information
    
    
    48PART IIIItem 10.
    

Directors,
Executive Officers and Corporate Governance
    
    
    49Item 11.
    
    Executive Compensation
    
    
    49Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
    
    
    49Item 13.
    

Certain
Relationships and Related Transactions and Director Independence
    
    
    49Item 14.
    
    Principal Accountant Fees and Services
    
    
    49PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    49SIGNATURES
    
    
    53EXHIBIT 10.16EXHIBIT 10.17EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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PART I
 
 Item 1. Business
 Overview
   
    
    Leading network equipment manufacturers such as Cisco Systems, Alcatel-Lucent,
Juniper Networks, Nortel Networks, Hewlett Packard, and Foundry Networks;
    
    Semiconductor manufacturers such as Intel, Broadcom, Agere Systems, Texas
Instruments, and Xilinx;
    
    Telephony equipment manufacturers such as Motorola, Ericsson, and Samsung;
    
    Voice and broadband service providers such as AT&T, NTT, Bell Canada, Verizon, Telus
Communications, and Qwest;
    
    Cable operators such as Comcast Cable, Time Warner, Cox Communications, and Charter
Communications;
    
    Enterprises such as Fannie Mae, Wachovia, British Broadcasting Corporation, and
Lehman Brothers Inc.; and
    
    Government contractors, departments and agencies such as Boeing, Lockheed Martin,
Joint Interoperability Test Command (JITC), General Dynamics, U.S. Air Force, and MIT
Lincoln Laboratory.
  The Increasing Need for Network and Application Testing and Measurement
 3




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
    
    Communications Chip Manufacturers. At the early stages of development of new
technologies, Communications chip manufacturers use our test systems to evaluate and
analyze the performance of their components during the design and development phase,
typically prior to integration by the Equipment Manufacturers.
    
    Equipment Manufacturers. To meet the higher standards specified by network
operators and network users, equipment manufacturers who provide voice, video, data and
application service infrastructure equipment 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, increase support costs and losses
resulting from the return of products. Equipment manufacturers use our test systems to
run large-scale subscriber and service emulations, generating extreme traffic loads to
verify the performance and capacity of their IP-based devices prior to deployment in
production networks. Our systems are also used by Equipment Manufacturers in the sales
and acceptance process to demonstrate to theircustomers (Service Providers and
Enterprises) how their products will operate under real-world conditions.
    
    Voice, video and broadband network operators and service providers (Service
Providers).Service Providers seek to provide their customers with a growing variety
of high quality 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. Internet and network service providers use
our test systems to emulate millions of subscribers to realistically predict end user
quality of experience delivered by their IP-based infrastructure and services.
Increasingly, Service Provider operations groups also use Ixias products to diagnose
issues in their production networks by executing in-service tests similar to those
conducted prior to deployment.
    
    Enterprises and Government.These large Service Provider customers spend significant
amounts on networks and network services. They deploy LANs and WANs that rival Service
Provider networks in size and complexity. These customers use Ixias solutions in much
the same way as Service Providers, verifying the capabilities of network equipment and
making sure that new networks, services and applications will perform as expected.
 Characteristics Demanded of Network and Application Test and Measurement Equipment
  The Ixia Solution
  4




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Versatile High Performance.
    Highly Scalable.
 Highly Customizable.
 5




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Hardware Platform.
 Highly Modular.
 Flexible.
 Open Architecture.
 Ease of Automation.
 Ease of Use.
 Strategy
  Continue to Expand Our Addressable Markets.
 Maintain Focus on Technology Leadership.
 6




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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
    Chassis
 7




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Interface Cards
  System Management Software
  Application Specific Test Suites
  8




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Video Testing
    Voice Testing
    Intelligent Network Testing
  Conformance Testing
  Security Testing
  Application Testing
  9




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




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Automated Testing
  TM
   In-Service Diagnostics
  Products in Development
  
    
    Gigabit Ethernet
    
    10 Gigabit Ethernet
    
    Carrier / Metro Ethernet
    
    ATM
    
    Layer 4  7
    
    MPLS
    
    VPLS
    
    Multicast
    
    IPv6
    
    Voice over IP
    
    Video over IP
    
    IPSec
    
    SSL
    
    Denial of Service
    
    Wi-Fi
    
    WiMAX
    
    Mobile Wireless IP
    
    IMS
  11




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Technology
  Complex Logic Design
 Software Technology
 Customers
   Competition
  12




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
    
    price and overall cost of product ownership;
    
    timeliness of new product introductions;
    
    product quality, reliability and performance;
    
    ease of installation, integration and use;
    
    breadth of product offerings and features on a single platform;
    
    customer service and technical support; and
    
    company reputation and size.
    Sales, Marketing and Technical Support
 Sales
 Marketing
 
    
    sponsoring technical seminars that highlight our solutions;
    
    participating in industry trade shows and technical conferences;
    
    communicating through our corporate website; and
 13




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
    
    advertising in trade journals.
 Technical Support
 
    
    offer solutions for performance validation needs;
    
    develop custom applications at our company headquarters;
    
    deploy to customer sites on short notice; and
    
    provide training to optimally utilize our systems.
 Manufacturing
    Research and Development
    14




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Intellectual Property and Proprietary Rights
     Employees
  Available Information
  15




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Item 1A. Risk Factors
  Because we depend on a limited number of customers for a majority of our revenues, any
cancellation, reduction or delay in purchases by these customers could significantly harm our
revenues and results of operations
   Our quarterly and annual operating results may fluctuate significantly as a result of new product
introductions and other factors which could cause our stock price to decline significantly
    If we are unable to successfully introduce new products to keep pace with the rapid technological
changes that characterize our market, our results of operations will be significantly harmed
 16




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
    
    rapid technological change such as the recent development of optical fiber and
wireless technologies;
    
    frequent new product introductions such as higher speed and more complex routers;
    
    evolving industry standards such as new internet protocols;
    
    changing customer needs such as the increase in the levels of service agreed to
between network service providers and their customers; and
    
    short product life cycles as a result of rapid changes in our customers products.
   
    
    anticipate technological changes and industry trends;
    
    properly identify customer needs;
    
    innovate and develop new technologies and applications;
    
    hire and retain necessary technical personnel;
    
    successfully commercialize new technologies in a timely manner;
    
    timely obtain key components for the manufacture of new products;
    
    manufacture and deliver our products in sufficient volumes and on time;
    
    price our products competitively; and
    
    differentiate our offerings from our competitors offerings.
  17




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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
  Competition in our market could significantly harm our 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
  If we do not diversify our customer base, we may not be able to grow our business or increase our
profitability
  18




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The restatement in February 2007 of our consolidated financial statements for certain prior periods
and related events could have a material adverse effect on us
    
    
    We could be subject to civil litigation, including class action shareholder actions,
arising out of or relating to the Restatement and/or the late filing of our 2006 Third
Quarter Form 10-Q, which litigation, if decided against us, could require us to pay
substantial judgments, settlements or other penalties;
    
    Negative publicity relating to the Restatement and/or our failure to timely file our
2006 Third Quarter Form 10-Q may adversely affect our business and the market price of
our Common Stock;
    
    In connection with the Restatement, we have identified in this Form 10-K a material
weakness related to our internal control over financial reporting with respect to the
completeness and accuracy of revenue reporting for implied PCS obligations and have
concluded, because of the effects of this material weakness, that our internal control
over financial reporting was ineffective as of December 31, 2006, which conclusion has
risks which are further discussed in the next risk factor below;
    
    Our failure to timely file our 2006 Third Quarter Form 10-Q with the Commission
currently limits our ability to access the capital markets using short-form
registration;
    
    Due to any negative publicity with respect to the Restatement and/or our failure to
timely file our 2006 Third Quarter Form 10-Q and the associated uncertainty in the
equity markets, we may be unable to attract or retain the personnel necessary to
achieve our business objectives;
    
    Managements focus on achieving our business objectives has been and may continue to
be diverted to addressing (i) the effects of the Restatement and our failure to timely
file our 2006 Third Quarter Form
 19




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10-Q, (ii) customers, employees, investors and regulators questions and concerns
regarding the Restatement and our failure to timely file our 2006 Third Quarter Form
10-Q, (iii) any negative impact on Ixias public image with our customers and in the
financial market caused by the Restatement and our failure to timely file our 2006 Third
Quarter Form 10-Q, and (iv) any subsequent litigation that may result from the
Restatement and/or our failure to timely file our 2006 Third Quarter Form 10-Q;
    
    The Commission may review the Restatement and require further amendment of our
public filings; and
    
    We have incurred and may continue to incur significant expenses and costs associated
with the Restatement and our failure to timely file our 2006 Third Quarter Form 10-Q.
  We have identified a material weakness in our internal control over financial reporting and an
ineffectiveness in our disclosure controls and procedures, which, if not remediated effectively,
could have an adverse effect on the trading price of our Common Stock and otherwise seriously harm
our business
  Our business may be adversely affected by unfavorable general economic and market conditions
  The loss of any of our key personnel could significantly harm our results of operations and
competitive position
  20




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Continued growth will strain our operations and require us to incur costs to maintain and upgrade
our management and operational resources
  If we are unable to expand our sales and distribution channels or are unable to successfully manage
our expanded sales organization, our revenues and results of operations will be harmed
  If we are unable to expand our international sales and distribution channels or manage them
effectively, our results of operations would be harmed
  International activity may increase our cost of doing business or disrupt our business
  
    
    supporting multiple languages;
    
    recruiting, training and retaining international personnel;
    
    increased complexity and costs of managing international operations;
    
    growing demand for and cost of technical personnel;
 21




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
    
    increased exposure to foreign currency exchange rate fluctuations;
    
    commercial laws and business practices that favor local competition;
    
    changing governmental laws and regulations, including differing labor and employment
laws and longer sales cycles;
    
    reduced or limited protections of intellectual property rights;
    
    more complicated logistical and distribution arrangements;
    
    political and economic instability; and
    
    difficulties in collecting receivables.
 Man-made problems such as computer viruses or terrorism may disrupt our operations and harm our
operating results
  To the extent that our customers consolidate, they may reduce purchases of our products and demand
more favorable terms and conditions from us, which would harm our revenues and profitability
  Acquisitions undertaken and any that we may undertake could be difficult to integrate, disrupt our
business, dilute shareholder value and significantly harm our operating results
  
    
    problems assimilating the acquired operations, technologies or products;
    
    unanticipated costs associated with the acquisition;
 22




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
    
    diversion of managements attention from our core business;
    
    adverse effects on existing business relationships with suppliers, contract
manufacturers, customers and industry experts;
    
    risks associated with entering markets in which we have no or limited prior experience; and
    
    potential loss of the acquired organizations or our own key employees.
  Changes in laws, regulations and financial accounting standards may affect our reported results of
operations
   Our business is subject to changing regulation of corporate governance and public disclosure that
has resulted in increased costs and may continue to result in additional costs in the future
   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
    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
  24




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Because of intense competition for technical personnel, we may not be able to recruit or retain
necessary personnel on a cost-effective basis
  Our products may contain defects which may cause us to incur significant costs, divert our
attention from product development efforts and result in a loss of customers
  Our failure to protect our intellectual property may significantly harm our results of operations
and reputation
   25




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Claims that we infringe third-party intellectual property rights could result in significant
expenses or restrictions on our ability to sell our products
   
    
    be time-consuming;
    
    result in costly litigation;
    
    divert the efforts of our technical and management personnel;
    
    require us to develop alternative technology, thereby causing product shipment
delays and the loss or deferral of revenues;
    
    require us to cease selling the products containing the intellectual property at issue;
    
    require us to pay substantial damage awards;
    
    damage our reputation; or
    
    require us to enter into royalty or licensing agreements which, if required, may not
be available on terms acceptable to us, if at all.
  If we fail to maintain our relationships with industry experts, our products may lose industry and
market recognition and sales could decline
  26




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Our headquarters, many of our customers and some of our contract manufacturers and suppliers are
located in California where natural disasters have occurred and may occur in the future
  Provisions of our articles of incorporation and bylaws may make it difficult for a third party to
acquire us, despite the possible benefits to our shareholders
   
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
 27




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Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Registered Securities
   High
    
    Low2006First quarter
    
    $
    15.04
    
    
    $
    11.62Second quarter
    
    
    13.91
    
    
    
    8.68Third quarter
    
    
    10.28
    
    
    
    7.31Fourth quarter
    
    
    10.26
    
    
    
    8.702005First quarter
    
    $
    19.36
    
    
    $
    13.46Second quarter
    
    
    21.17
    
    
    
    13.96Third quarter
    
    
    20.00
    
    
    
    14.71Fourth quarter
    
    
    15.20
    
    
    
    10.25
   28




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Comparison of Five-Year Cumulative Total Return*
among Ixia, the Nasdaq Composite Index, the Nasdaq Computer
Manufacturers Index and the Nasdaq Telecommunications Index
 
 12/31/01
    
    
    12/31/02
    
    
    12/31/03
    
    
    12/31/04
    
    
    12/31/05
    
    
    12/31/06Ixia
    
    
    $
    100
    
    
    
    $
    28.40
    
    
    
    $
    91.05
    
    
    
    $
    130.82
    
    
    
    $
    115.18
    
    
    
    $
    74.71Nasdaq Composite Index
    
    
    
    100
    
    
    
    
    69.66
    
    
    
    
    99.71
    
    
    
    
    113.79
    
    
    
    
    114.47
    
    
    
    
    124.20Nasdaq Computer Mfrs. Index
    
    
    
    100
    
    
    
    
    67.48
    
    
    
    
    109.37
    
    
    
    
    115.04
    
    
    
    
    107.28
    
    
    
    
    134.84Nasdaq Telecommunications
Index
    
    
    
    100
    
    
    
    
    61.62
    
    
    
    
    110.79
    
    
    
    
    106.16
    
    
    
    
    100.63
    
    
    
    
    127.11
 
 *
    
    Assumes (i) $100 invested on December 31, 2001 in Ixia Common Stock, the Nasdaq Composite
Index, the Nasdaq Computer Manufacturers Index and the Nasdaq Telecommunications Index and
(ii) immediate reinvestment of all dividends. 29




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30




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Item 6. Selected Financial Data
  Year Ended December 31,2006(2)
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Consolidated Statement of Income Data (in
thousands, except per share data):Revenues:Products
    
    $
    155,388
    
    
    $
    130,045
    
    
    $
    97,200
    
    
    $
    72,674
    
    
    $
    55,699Services
    
    
    24,744
    
    
    
    20,808
    
    
    
    13,464
    
    
    
    7,400
    
    
    
    5,861Total revenues
    
    
    180,132
    
    
    
    150,853
    
    
    
    110,664
    
    
    
    80,074
    
    
    
    61,560Costs and operating expenses:(1)Cost of revenues  products
    
    
    29,437
    
    
    
    24,239
    
    
    
    20,592
    
    
    
    15,661
    
    
    
    13,310Cost of revenues  amortization of
purchased technology
    
    
    4,705
    
    
    
    3,891
    
    
    
    3,044
    
    
    
    1,183
    
    
    
    Cost of revenues  services
    
    
    2,681
    
    
    
    2,216
    
    
    
    1,423
    
    
    
    1,208
    
    
    
    843Research and development
    
    
    43,450
    
    
    
    32,404
    
    
    
    24,960
    
    
    
    21,980
    
    
    
    20,386Sales and marketing
    
    
    59,020
    
    
    
    39,359
    
    
    
    30,566
    
    
    
    23,942
    
    
    
    19,974General and administrative
    
    
    23,800
    
    
    
    16,438
    
    
    
    12,479
    
    
    
    9,179
    
    
    
    7,852Amortization of intangible assets
    
    
    1,745
    
    
    
    1,278
    
    
    
    1,532
    
    
    
    1,070
    
    
    
    941Impairment of goodwill and other
intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    410
    
    
    
    1,677Total costs and operating expenses
    
    
    164,838
    
    
    
    119,825
    
    
    
    94,596
    
    
    
    74,633
    
    
    
    64,983Income (loss) from operations
    
    
    15,294
    
    
    
    31,028
    
    
    
    16,068
    
    
    
    5,441
    
    
    
    (3,423
    )Interest and other income, net
    
    
    9,409
    
    
    
    5,055
    
    
    
    2,960
    
    
    
    3,062
    
    
    
    2,743Income (loss) before income taxes
    
    
    24,703
    
    
    
    36,083
    
    
    
    19,028
    
    
    
    8,503
    
    
    
    (680
    )Income tax expense (benefit)
    
    
    11,222
    
    
    
    7,593
    
    
    
    4,007
    
    
    
    1,912
    
    
    
    (403
    )Net income (loss)
    
    $
    13,481
    
    
    $
    28,490
    
    
    $
    15,021
    
    
    $
    6,591
    
    
    $
    (277
    )Earnings (loss) per share:Basic
    
    $
    0.20
    
    
    $
    0.44
    
    
    $
    0.25
    
    
    $
    0.11
    
    
    $
    (0.00
    )Diluted
    
    $
    0.20
    
    
    $
    0.41
    
    
    $
    0.23
    
    
    $
    0.11
    
    
    $
    (0.00
    )Weighted average number of common and
common equivalent shares outstanding:Basic
    
    
    67,005
    
    
    
    65,168
    
    
    
    60,687
    
    
    
    58,344
    
    
    
    56,902Diluted
    
    
    68,792
    
    
    
    69,227
    
    
    
    64,745
    
    
    
    62,227
    
    
    
    56,902
 31




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Year Ended December 31,2006(2)
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(1) Stock-based compensation
included in:Cost of revenues  products
    
    $
    590
    
    
    $
    
    
    
    $
    30
    
    
    $
    157
    
    
    $
    398Cost of revenues  services
    
    
    224
    
    
    
    
    
    
    
    3
    
    
    
    7
    
    
    
    56Research and development
    
    
    6,481
    
    
    
    
    
    
    
    271
    
    
    
    1,316
    
    
    
    2,864Sales and marketing
    
    
    7,838
    
    
    
    
    
    
    
    77
    
    
    
    159
    
    
    
    1,329General and administrative
    
    
    2,890
    
    
    
    
    
    
    
    38
    
    
    
    280
    
    
    
    658
 
 (2)
    
    Due to the adoption of SFAS 123R effective January 1, 2006, our results of operations for 2006 include
$18.0 million of pre-tax stock-based compensation expense (approximately $13.9 million on an after tax basis). December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Consolidated Balance Sheet Data (in thousands):Cash and cash equivalents
    
    $
    64,644
    
    
    $
    51,837
    
    
    $
    16,383
    
    
    $
    21,133
    
    
    $
    45,265Short-term investments in marketable
securities
    
    
    152,703
    
    
    
    124,456
    
    
    
    81,757
    
    
    
    42,718
    
    
    
    25,650Working capital
    
    
    235,168
    
    
    
    191,176
    
    
    
    104,515
    
    
    
    74,032
    
    
    
    80,210Long-term investments in marketable
securities
    
    
    4,354
    
    
    
    25,392
    
    
    
    49,015
    
    
    
    58,072
    
    
    
    51,306Total assets
    
    
    349,059
    
    
    
    322,216
    
    
    
    241,451
    
    
    
    191,115
    
    
    
    162,413Total shareholders equity
    
    
    300,789
    
    
    
    263,480
    
    
    
    193,491
    
    
    
    157,477
    
    
    
    141,703
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Restatement of Previously Issued Financial Statements
  32




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Business Overview
  Revenues.
    33




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Cost of Revenues
 34




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
    
    changes in our pricing policies and those of our competitors;
    
    the pricing we are able to obtain from our component suppliers and contract manufacturers;
    
    the mix of our products sold, such as the mix of software versus hardware product
sales, including the effects of any related deferral, reversal and recognition of
revenues for implied PCS obligations;
    
    new product introductions by us and by our competitors;
    
    demand for our products;
    
    expenses related to acquired technologies, such as royalties and amortization of intangible assets;
    
    production volume; and
    
    the mix of sales channels through which our products are sold.
  Operating Expenses
     35




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##### Table of Contents



Interest and Other Income, Net.
 Income Tax.
 Critical Accounting Policies and Estimates
   
    
    Revenue Recognition Policy. We recognize revenue as discussed in Revenues in the
Business Overview section of Item 7.
    
    Allowance for Doubtful Accounts. Trade accounts receivable are recorded at the
invoiced amount and do not bear interest. The allowance for doubtful accounts is based
on our best estimate of the amount of probable credit losses in existing accounts
receivable. The allowance for doubtful accounts is determined based on historical
write-off experience, current customer information and other relevant data. We review
the allowance for doubtful accounts monthly. Past due balances of 60 days and over are
reviewed individually for collectibility. Account balances are charged off against the
allowance when we believe it is probable the receivable will not be recovered. We do
not have any off-balance-sheet credit exposure related to our customers.
    
    Write-Down of Obsolete Inventory.We write-down inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future demand and
market conditions. If actual future demand is less favorable than our initial
estimate, additional inventory write-downs may be required.
    
    Income Taxes.We determine deferred taxes based on the differences between the
financial statement and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce net deferred tax assets to the
amounts expected to be realized. In assessing the need for a valuation allowance we
consider estimates of future taxable income and ongoing prudent and feasible tax
planning strategies. We also assess the likelihood of the ultimate determination of
various income tax positions that may arise in different tax jurisdictions. These tax
matters can be complex in nature and uncertain as to the ultimate outcome. We
establish reserves for these tax positions, or contingencies, when we believe an
unfavorable outcome is likely to occur and the liability can be reasonably estimated.
Although we believe these positions are fully supportable, we consider the likelihood
of potential challenges and sustainability of such challenges upon examination.
Changes in our tax contingency reserves have occurred and are likely to continue to
occur as our assessments change based on current facts and circumstances such as
further developments and progress of tax examinations. A revision in our estimates of
our reserves for tax contingencies, which would include the resolution of an applicable
contingency, will be reflected as an adjustment to our income tax
 36




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expense at the time of the change in our estimates. Such revisions could materially
impact our effective tax rate, income tax expense and net income.
    
    Acquisition Purchase Price Allocation.When we acquire a business, product line or
rights to a product or technology, we allocate the purchase price, including related
transaction costs, to the various tangible and intangible assets acquired and the
liabilities assumed, based on their estimated fair values. Determining the fair value
of certain assets and liabilities acquired is subjective in nature and often involves
the use of significant estimates and assumptions. To assist in this process, we may
obtain appraisals from valuation specialists for certain of these items. Most of the
assumptions used to determine fair value are made based on forecasted information. The
useful lives of amortizable intangible assets are reviewed for reasonableness
periodically by management in light of current conditions.
    
    Impairment of Long-Lived Assets.We evaluate the recoverability of our identifiable
definite life intangible assets and other long-lived assets in accordance with
Statement of Financial Accounting Standards (SFAS) 144 which generally requires that
we assess these assets for recoverability when events or circumstances indicate a
potential impairment by estimating the undiscounted cash flows to be generated from the
use and ultimate disposition of these assets. To the extent that the estimated
undiscounted cash flows fall below the carrying value of the intangible or other long
lived assets we write-down the assets to fair value. Fair value is generally
determined based on discounted cash flows. Determining the fair value based on
discounted cash flows is subjective in nature and often involves the use of significant
estimates and assumptions about future results and discount rates. We evaluate the
recoverability of our goodwill in accordance with SFAS 142 which requires us to assess
our goodwill annually for impairment. Impairment losses are recorded to the extent
that the carrying value of the goodwill exceeds the fair value.
    
    Stock-Based Compensation Expense.Effective January 1, 2006, we adopted SFAS 123R.
SFAS 123R requires all share-based payments, including grants of stock options,
restricted stock units and employee stock purchase rights, to be recognized in the
financial statements based on their respective fair values for accounting purposes on
the grant date. Under this standard, the fair value of each share-based award is
estimated on the date of grant using an option-pricing model that meets certain
requirements. We currently use the Black-Scholes model to estimate the fair value of
our share-based awards which meets the requirements of SFAS 123R. The determination of
the fair value of share-based awards utilizing the Black-Scholes model is affected by
our stock price and a number of assumptions, including expected volatility, expected
life and risk-free interest rate. The expected life and expected volatility are based
on historical and other data trended into the future. The risk-free interest rate
assumption is based on observed interest rates appropriate for the terms of our stock
options and stock purchase rights. Stock-based compensation expense recognized in our
consolidated financial statements in 2006 and thereafter will be based on awards that
are ultimately expected to vest. The amount of stock-based compensation expense in
2006 and thereafter will be reduced for estimated forfeitures based on historical
experience as well as future expectations. Forfeitures are required to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. We will evaluate the assumptions used to
value stock awards on a periodic basis. If factors change and we employ different
assumptions, stock-based compensation expense may differ significantly from what we
have recorded in the past. If there are any modifications or cancellations of the
underlying unvested share-based awards, we may be required to accelerate, increase or
cancel any remaining unearned stock-based compensation expense. To the extent that we
grant additional share-based awards to employees, our stock-based compensation expense
may increase by the additional unearned compensation resulting from those grants. Had
we adopted SFAS 123R in prior periods, the impact would have been similar to the
current pro forma disclosures required under SFAS 123 (see Notes 1 and 8 to our
Consolidated Financial Statements).
    
    Contingencies and Litigation. We evaluate contingent liabilities, including
threatened or pending litigation, in accordance with SFAS 5, Accounting for
Contingencies, and we record accruals when the loss is deemed probable and the
liability can reasonably be estimated. We make these assessments based on the facts
and circumstances of each situation and in some instances based in part on the advice
of outside legal counsel.
 37




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Results of Operations
  Year Ended December 31,2006
    
    2005
    
    2004Revenues:Products
    
    
    86.3
    %
    
    
    86.2
    %
    
    
    87.8
    %Services
    
    
    13.7
    
    
    
    13.8
    
    
    
    12.2Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and operating expenses:(1)Cost of revenues  products
    
    
    16.3
    
    
    
    16.1
    
    
    
    18.6Cost of revenues  amortization of purchased technology
    
    
    2.6
    
    
    
    2.6
    
    
    
    2.8Cost of revenues  services
    
    
    1.5
    
    
    
    1.5
    
    
    
    1.3Research and development
    
    
    24.1
    
    
    
    21.4
    
    
    
    22.5Sales and marketing
    
    
    32.8
    
    
    
    26.0
    
    
    
    27.6General and administrative
    
    
    13.2
    
    
    
    10.9
    
    
    
    11.3Amortization of intangible assets
    
    
    1.0
    
    
    
    0.9
    
    
    
    1.4Total costs and operating expenses
    
    
    91.5
    
    
    
    79.4
    
    
    
    85.5Income from operations
    
    
    8.5
    
    
    
    20.6
    
    
    
    14.5Interest and other income, net
    
    
    5.2
    
    
    
    3.3
    
    
    
    2.7Income before income taxes
    
    
    13.7
    
    
    
    23.9
    
    
    
    17.2Income tax expense
    
    
    6.2
    
    
    
    5.0
    
    
    
    3.6Net income
    
    
    7.5
    %
    
    
    18.9
    %
    
    
    13.6
    %(1) Stock-based compensation included in:Cost of revenues  products
    
    
    0.3
    %
    
    
    0.0
    %
    
    
    0.0
    %Cost of revenues  services
    
    
    0.1
    
    
    
    0.0
    
    
    
    0.0Research and development
    
    
    3.6
    
    
    
    0.0
    
    
    
    0.2Sales and marketing
    
    
    4.4
    
    
    
    0.0
    
    
    
    0.1General and administrative
    
    
    1.6
    
    
    
    0.0
    
    
    
    0.0
 Comparison of the Years Ended December 31, 2006 and 2005
 Revenues.
 Cost of Revenues
 38




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Research and Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 Amortization of Intangible Assets.
 Interest and Other Income, Net.
 Income Tax Expense.
 39




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Comparison of the Years Ended December 31, 2005 and 2004
 Revenues.
 Cost of Revenues
 Research and Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 Amortization of Intangible Assets.
 Interest and Other Income, Net.
 40




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Income Tax Expense.
 Liquidity and Capital Resources
      41




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Financial Commitments
  Year Ending December 31,Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    ThereafterOperating leases
    
    $
    9,879
    
    
    $
    4,059
    
    
    $
    2,286
    
    
    $
    980
    
    
    $
    861
    
    
    $
    544
    
    
    $
    1,149Purchase obligations(1)
    
    
    7,280
    
    
    
    7,280
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    17,159
    
    
    $
    11,339
    
    
    $
    2,286
    
    
    $
    980
    
    
    $
    861
    
    
    $
    544
    
    
    $
    1,149
 
 (1)
    
    In the normal course of business we issue purchase orders to certain of our contract
manufacturers to produce 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. Recent Accounting Pronouncements
     42




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Sensitivity
  Exchange Rate Sensitivity
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  43




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Item 9A. Controls and Procedures
 Restatement
      Evaluation of Disclosure Controls and Procedures
   44




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Managements Report on Internal Control over Financial Reporting
  Internal Control  Integrated Framework
    45




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Internal Control  Integrated Framework
  Remediation Efforts to Address Material Weakness
  
    
    License Management System (LMS) In December 2006, we completed the implementation
of a license management system, or LMS, for all of our significant software products.
This system locks a software license to a specific computer or Ixia hardware chassis on
which our software resides and manages the provision of software upgrades to ensure that
the upgrades are only provided to customers that are entitled to receive such upgrades
during an initial or extended PCS period. The use of the LMS to control our software
upgrades is a significant improvement over the use of our legacy password system that
did not sufficiently control the circumstances under which upgrades were provided for
many of our software products. Under our legacy password system, the software upgrade
files were protected with passwords that were readily accessible to sales and support
personnel. These passwords were not frequently changed and were not provided under any
system of license management. During the accounting review, management determined that,
for a variety of reasons, including to (i) provide bug fixes, (ii) facilitate the sale
of new products that did not function with a customers existing Ixia products, and
(iii) meet competitive pressures, our sales and support personnel used such readily
accessible passwords and/or disseminated them to customers to provide software upgrades
at a time when the customers were not contractually entitled to receive such PCS. The
practices were not documented (for example, on sales quotations or customer purchase
orders) in a manner that identified them to our management and finance personnel to
enable them to review and account for them in accordance with SOP 97-2. As a result, we
did not, as required by SOP 97-2, defer revenue for these implied PCS obligations. Our
completion during the fourth quarter of 2006 of a license management system for all of
our significant software products now provides us with an effective preventative control
in that the license management system restricts the provision of software upgrades to
only those customers that are entitled to such upgrades. This system should eliminate
the possibility of customers receiving free PCS without the knowledge of our finance
personnel. For certain software products that are not subject to license management and
for certain customers for which free extended PCS periods are to be provided, we will
defer revenue for implied PCS obligations in accordance with SOP 97-2.
    
    Enhanced Revenue Recognition Policies and Practices During the quarter ended
December 31, 2006 and in light of the Companys accounting review and Restatement, we
thoroughly reviewed, supplemented and clarified our written revenue recognition policies
and practices in an effort to ensure that our sales, support and other personnel are
aware of and clearly understand these policies. The Audit Committee has reviewed, and
we are currently in the process of finalizing, the enhanced documentation for our
revenue recognition policies and practices. By the end of the first quarter of 2007,
members of senior management and finance will distribute the revised and enhanced
revenue recognition policies and practices to all Company personnel. We will also post
a copy of the policies and practices on our Intranet site for easy reference.
    
    Communication and Training Regarding PCS and Revenue Recognition Policies 
Subsequent to the determination that we had a practice of providing software upgrades
and support to certain customers
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that differed from our standard PCS policies and contractual agreements beginning in the
quarter ended December 31, 2006, we have expressly and repeatedly communicated and
reinforced, both orally and in writing, to our sales, support, management and finance
personnel, our policy with respect to the provision of PCS services (i.e., no
unauthorized out-of-maintenance services should be provided). We have also begun to
create additional training materials regarding our PCS and revenue recognition policies,
which materials will be distributed to our sales, support, product management and order
management personnel (as well as to new hires in those groups) in order to ensure that
such personnel appropriately understand and consider these policies in the course of
their employment with the Company. These materials will include copies of the policies
and an explanation of the role that sales and support personnel play in ensuring that we
comply with those policies. In 2007, we plan to continue to enhance our communication
and training program regarding PCS and revenue recognition policies by conducting a
number of revenue recognition training sessions that will be presented by persons having
expertise in SOP 97-2 and in-depth knowledge regarding our business, our PCS policies
and our revenue recognition policies and practices. The training program included
training provided at our January 2007 international sales conference for all sales
personnel and will include new hire training, as well as annual, mandatory training
sessions and regular refresher sessions. To the extent practicable, we will conduct
training in person and in small group sessions to enhance the effectiveness of the
training. In 2006, we also communicated to our sales and customer support personnel
that we will take appropriate disciplinary actions, up to and including termination of
employment, if they do not comply with our PCS policies and our policies and procedures
that affect our accounting for matters relating to revenue recognition.
    
    Communication among Functional Groups within the Company The practices and errors
that resulted in the Restatement occurred in part because of a lack of effective
communication among various Ixia departments and specifically between our finance group,
on the one hand, and our sales and customer support personnel, on the other. The
Company is in the process of implementing more formalized and regular communications
among the various functional groups within the Company, including finance, sales,
customer support, product management and order management personnel, with respect to
matters that may affect the Companys accounting and financial reporting. The Company
plans, among other things, to arrange for regular meetings between members of these
departments and finance and for discussions across departments regarding field-level and
other practices that may affect the Companys accounting and financial statements.
    
    Finance Group The Company has taken and is continuing to take steps to ensure that
the Companys finance group receives adequate resources and is effectively staffed and
organized. The Company is also requiring that its finance personnel regularly attend
continuing education training courses in accounting and finance to enhance their
knowledge of and expertise in the accounting principles applicable to the Companys
business and particularly SOP 97-2.
    
    Revenue Recognition Senior Manager In late February 2007, we further strengthened
our control environment with respect to revenue recognition by hiring a Senior Manager,
Revenue Recognition who has technical understanding and experience in this highly
complex area. This individual, who is a certified public accountant is responsible for
monitoring and helping ensure compliance with our revenue recognition policies,
including training our internal personnel (e.g., sales, finance, customer support,
product management and order management personnel) with regard to the policies,
participating in reviewing contract provisions and sales and other business practices,
including our PCS policies and practices, that affect revenue recognition and overseeing
the implementation of and monitoring controls designed to ensure compliance with our
revenue recognition policies and GAAP.
    
    Quarterly Certification Letters We have also revised, supplemented and clarified
the certification letters that certain sales personnel are required to execute on a
quarterly basis regarding the absence of side letter agreements and concessions and
regarding other matters that affect our accounting for sales transactions. We have
revised these certifications to ensure that the persons signing them clearly understand
the meaning of the representations that they are making in the certifications, including
representations that would require them to identify any circumstances that might give
rise to implied PCS obligations, and that they clearly understand the PCS practices that
are prohibited, as well as the consequences to the individual and to the Company of
violating those prohibitions. We first presented
 47




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##### Table of Contents



the revised certification form to certain sales employees with respect to the quarter
ended September 30, 2006. We have also created a similar certification letter that
certain support personnel will be required to execute on a quarterly basis. We first
presented this new certification form to those employees with respect to the quarter
ended December 31, 2006. In order to promote substantive understanding of and
communication about the certifications generally and about any transactions that are
potentially exceptions to the certifications, we also plan to modify, beginning with the
quarter ending March 31, 2007, the processes by which personnel complete and return
their certification letters. These revised processes will impress upon Company
personnel the need for accurate representations, the Companys reliance on these
representations, and the potentially severe consequences of inaccurate or improper
certifications.
  Changes in Internal Control over Financial Reporting
  Inherent Limitations on Effectiveness of Controls
  
 Item 9B. Other Information
  48




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PART III
 
 Item 10.
Directors, Executive Officers and Corporate Governance
   
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management
  
 Item 13.
Certain Relationships and Related Transactions and Director
Independence
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
  Consolidated Financial Statements
 49




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##### Table of Contents



Financial Statement Schedule
  Exhibits
 3.1
    
    Amended and Restated Articles of Incorporation, as amended(1)3.2
    
    Bylaws, as amended(2)10.1*
    
    Amended and Restated 1997 Equity Incentive Plan (3)10.2*
    
    Amended and Restated Non-Employee Director Stock Option Plan(4)10.3*
    
    Employee Stock Purchase Plan(5)10.3.1*
    
    Amendment No. 1, dated May 9, 2003, to Ixia Employee Stock Purchase Plan(6)10.3.2
    
    Supplemental Provisions, effective April 14, 2006, to Ixia Employee Stock Purchase Plan(7)10.4*
    
    Officer Severance Plan(8)10.5*
    
    Form of Indemnity Agreement between Ixia and its directors and executive officers(9)10.6
    
    Office Lease Agreement dated November 5, 1999 between Malibu Canyon Office Partners, LLC and Ixia
First Amendment to Office Lease dated as of March 22, 2000 and Second Amendment to Office Lease
dated May 8, 2003(10)10.6.1
    
    Third Amendment to Office Lease dated September 2004 between Malibu Canyon Office Partners, LLC and
Ixia(11)10.6.2
    
    Fourth Amendment to Office Lease, effective October 27, 2005, between Malibu Canyon Office Partners,
LLC and Ixia(12)10.7*
    
    Warrants dated August 2, 2000 to Purchase 80,000 Shares of Common Stock issued to Robert W.
Bass(13)10.8
    
    Registration Rights and Stock Transfer Restriction Agreement dated as of September 1, 2000 among
Ixia, Technology Capital Group S.A. and Stéphane Ratel(14)10.9*
    
    Employment offer letter agreement dated October 27, 2001 between Ixia and David
Anderson(15)10.10*
    
    Employment offer letter agreement dated as of February 27, 2003 between Ixia and Robert W.
Bass(16)10.12
    
    License, Distribution and Option Agreement, dated July 7, 2003, between NetIQ Corporation and
Ixia(17)10.12.1
    
    First Amendment to License, Distribution and Option Agreement dated as of January 6, 2005 between
the Registrant and NetIQ Corporation(18)10.12.2
    
    Second Amendment to License, Distribution and Option Agreement dated as of June 16, 2005 between the
Registrant and NetIQ Corporation(19)(20)10.13*
    
    2005 Employee Bonus Plan(21)10.14*
    
    2006 Employee Bonus Plan(22)10.15*
    
    Summary of 2005 Compensation for the Registrants Named Executive Officers(23)10.16
    
    Summary of 2006 Compensation for the Registrants Named Executive Officers10.17
    
    Summary of Compensation for the Registrants Non-Employee Directors14.1
    
    Code of Ethics for Chief Executive and Senior Financial Officers(24)21.1
    
    Subsidiaries of the Registrant23.1
    
    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 2002.31.2
    
    Certificate of Chief Financial Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of Chief Executive Officer and Chief Financial Officer of Ixia pursuant to Rule
13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002.
 50




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##### Table of Contents



*
    
    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 No. 3.1 to Amendment No. 1 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 5, 2000.(2)
    
    Incorporated by reference to Exhibit No. 3.2 to Amendment No. 2 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 19, 2000.(3)
    
    Incorporated by reference to Exhibit 4.1 to the Registrants Registration Statement on
Form S-8 (Reg. No. 333-117969) filed with the Commission on August 5, 2004.(4)
    
    Incorporated by reference to Exhibit 4.2 to the Registrants Registration Statement on
Form S-8 (Reg. No. 333-117969) filed with the Commission on August 5, 2004.(5)
    
    Incorporated by reference to Exhibit No. 10.3 to Amendment No. 1 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 5, 2000.(6)
    
    Incorporated by reference to Exhibit 4.2 to the Registrants Registration Statement on
Form S-8 (Registration No. 333-107818) filed with the Commission on August 8, 2003.(7)
    
    Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K (File No. 000-31523) filed with the Commission on April 20, 2006.(8)
    
    Incorporated by reference to Exhibit No. 10.4 to Amendment No. 1 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 5, 2000.(9)
    
    Incorporated by reference to Exhibit No. 10.5 to Amendment No. 1 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 5, 2000.(10)
    
    Incorporated by reference to Exhibit No. 10.14 to the Registrants Registration
Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on July 31, 2000.(11)
    
    Incorporated by reference to Exhibit 10.6.1 to the Registrants Annual Report on Form
10-K (File No. 000-31523) for the fiscal year ended December 31, 2004.(12)
    
    Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K (File No. 000-31523) filed with the Commission on December 6, 2005.(13)
    
    Incorporated by reference to Exhibit No. 10.15 to Amendment No. 1 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 5, 2000.(14)
    
    Incorporated by reference to Exhibit No. 10.17 to Amendment No. 3 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on
September 27, 2000.(15)
    
    Incorporated by reference to Exhibit No. 10.13 to the Registrants Annual Report on
Form 10-K (File No. 000-31523) for the fiscal year ended December 31, 2001.(16)
    
    Incorporated by reference to Exhibit No. 10.14 to the Registrants Annual Report on
Form 10-K (File No. 000-31523) for the fiscal year ended December 31, 2002.(17)
    
    Incorporated by reference to Exhibit 10.2 to the Registrants Quarterly Report on Form
10-Q (File No. 000-31523) for the fiscal quarter ended September 30, 2003.(18)
    
    Incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form
10-Q (File No. 000-31523) for the fiscal quarter ended June 30, 2005.(19)
    
    Incorporated by reference to Exhibit 10.2 to the Registrants Quarterly Report on Form
10-Q (File No. 000-31523) for the fiscal quarter ended June 30, 2005.(20)
    
    Confidential treatment has been requested with respect to a portion of this exhibit,
which portion has been omitted and filed separately with the Commission.(21)
    
    Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K (File No. 000-31523) filed with the Commission on May 19, 2005.(22)
    
    Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K (File No. 000-31523) filed with the Commission on July 12, 2006. 51




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##### Table of Contents



(23)
    
    Incorporated by reference to Exhibit 10.3 to the Registrants Quarterly Report on Form
10-Q (File No. 000-31523) for the fiscal quarter ended June 30, 2005.(24)
    
    Incorporated by reference to Exhibit 14.1 to the Registrants Annual Report on Form
10-K (File No. 000-31523) for the fiscal year ended December 31, 2003. (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.
 52




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##### Table of Contents



SIGNATURES
  Dated: March 16, 2007
    IXIA/s/ Errol GinsbergErrol GinsbergPresident and Chief Executive Officer  Name
    
    Title
    
    Date/s/ Errol Ginsberg

Errol Ginsberg
    
    President, Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 16, 2007/s/ Thomas B. Miller

Thomas B. Miller
    
    Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    March 16, 2007/s/ Jean-Claude Asscher

Jean-Claude Asscher
    
    Chairman of the Board
    
    March 16, 2007/s/ Jon F. Rager

Jon F. Rager
    
    Director
    
    March 16, 2007/s/ Massoud Entekhabi

Massoud Entekhabi
    
    Director
    
    March 16, 2007/s/ Gail Hamilton

Gail Hamilton
    
    Director
    
    March 16, 2007/s/ Jonathan Fram

Jonathan Fram
    
    Director
    
    March 16, 2007
 53




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##### Table of Contents



IXIA
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    55Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    57Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004
    
    
    58Consolidated Statements of Shareholders Equity for the years ended December 31, 2006,
2005 and 2004
    
    
    59Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    60Notes to Consolidated Financial Statements
    
    
    61
 54




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
          55




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##### Table of Contents



56




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##### Table of Contents



IXIA
 
 Consolidated Balance Sheets
 (in thousands)
 December 31,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    64,644
    
    
    $
    51,837Short-term investments in marketable securities
    
    
    152,703
    
    
    
    124,456Accounts receivable, net
    
    
    36,221
    
    
    
    31,565Inventories
    
    
    11,604
    
    
    
    9,846Deferred income taxes
    
    
    6,382
    
    
    
    8,588Prepaid expenses and other current assets
    
    
    4,182
    
    
    
    3,519Total current assets
    
    
    275,736
    
    
    
    229,811Investments in marketable securities
    
    
    4,354
    
    
    
    25,392Property and equipment, net
    
    
    22,044
    
    
    
    19,750Deferred income taxes
    
    
    9,486
    
    
    
    13,018Intangible assets, net
    
    
    20,224
    
    
    
    20,462Goodwill
    
    
    16,728
    
    
    
    13,468Other assets
    
    
    487
    
    
    
    315Total assets
    
    $
    349,059
    
    
    $
    322,216Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    2,195
    
    
    $
    2,872Accrued expenses
    
    
    15,873
    
    
    
    12,399Deferred revenues
    
    
    17,346
    
    
    
    19,233Income taxes payable
    
    
    5,154
    
    
    
    4,131Total current liabilities
    
    
    40,568
    
    
    
    38,635Deferred revenues and other liabilities
    
    
    7,702
    
    
    
    20,101Total liabilities
    
    
    48,270
    
    
    
    58,736Commitments and contingencies (Note 7)Shareholders equity:Preferred stock, without par value; 1,000
shares authorized and none outstanding
    
    
    
    
    
    
    Common stock, without par value; 200,000
shares authorized at December 31, 2006 and
December 31, 2005; 67,351 and 66,580 shares
issued and outstanding as of December 31, 2006
and December 31, 2005, respectively
    
    
    132,413
    
    
    
    126,792Additional paid-in capital
    
    
    86,305
    
    
    
    68,098Retained earnings
    
    
    82,071
    
    
    
    68,590Total shareholders equity
    
    
    300,789
    
    
    
    263,480Total liabilities and shareholders equity
    
    $
    349,059
    
    
    $
    322,216
 The accompanying notes are an integral part of these consolidated financial statements
 57




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##### Table of Contents



IXIA
 
 Consolidated Statements of Income
 (in thousands, except per share data)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Revenues:Products
    
    $
    155,388
    
    
    $
    130,045
    
    
    $
    97,200Services
    
    
    24,744
    
    
    
    20,808
    
    
    
    13,464Total revenues
    
    
    180,132
    
    
    
    150,853
    
    
    
    110,664Costs and operating expenses:(1)Cost of revenues  products
    
    
    29,437
    
    
    
    24,239
    
    
    
    20,592Cost of revenues  amortization of purchased
technology
    
    
    4,705
    
    
    
    3,891
    
    
    
    3,044Cost of revenues  services
    
    
    2,681
    
    
    
    2,216
    
    
    
    1,423Research and development
    
    
    43,450
    
    
    
    32,404
    
    
    
    24,960Sales and marketing
    
    
    59,020
    
    
    
    39,359
    
    
    
    30,566General and administrative
    
    
    23,800
    
    
    
    16,438
    
    
    
    12,479Amortization of intangible assets
    
    
    1,745
    
    
    
    1,278
    
    
    
    1,532Total costs and operating expenses
    
    
    164,838
    
    
    
    119,825
    
    
    
    94,596Income from operations
    
    
    15,294
    
    
    
    31,028
    
    
    
    16,068Interest and other income, net
    
    
    9,409
    
    
    
    5,055
    
    
    
    2,960Income before income taxes
    
    
    24,703
    
    
    
    36,083
    
    
    
    19,028Income tax expense
    
    
    11,222
    
    
    
    7,593
    
    
    
    4,007Net income
    
    $
    13,481
    
    
    $
    28,490
    
    
    $
    15,021Earnings per share:Basic
    
    $
    0.20
    
    
    $
    0.44
    
    
    $
    0.25Diluted
    
    $
    0.20
    
    
    $
    0.41
    
    
    $
    0.23Weighted average number of common and common
equivalent shares outstanding:Basic
    
    
    67,005
    
    
    
    65,168
    
    
    
    60,687Diluted
    
    
    68,792
    
    
    
    69,227
    
    
    
    64,745(1)Stock-based compensation included in:Cost of revenues  products
    
    $
    590
    
    
    $
    
    
    
    $
    30Cost of revenues  services
    
    
    224
    
    
    
    
    
    
    
    3Research and development
    
    
    6,481
    
    
    
    
    
    
    
    271Sales and marketing
    
    
    7,838
    
    
    
    
    
    
    
    77General and administrative
    
    
    2,890
    
    
    
    
    
    
    
    38
 The accompanying notes are an integral part of these consolidated financial statements
 58




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##### Table of Contents



IXIA
 
 Consolidated Statements of Shareholders Equity
 (in thousands)
 Additional
    
    
    DeferredCommon Stock
    
    
    Paid-In
    
    
    Stock-based
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Earnings
    
    
    TotalBalance as of December 31, 2003
    
    
    59,642
    
    
    $
    84,048
    
    
    $
    48,769
    
    
    $
    (419
    )
    
    $
    25,079
    
    
    $
    157,477Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,021
    
    
    
    15,021Exercise of stock options
and employee stock purchase
plan options
    
    
    2,510
    
    
    
    12,333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,333Issuance of common stock in
connection with acquisition
    
    
    307
    
    
    
    3,763
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,763Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    419
    
    
    
    
    
    
    
    419Stock option tax benefit
    
    
    
    
    
    
    
    
    
    
    4,478
    
    
    
    
    
    
    
    
    
    
    
    4,478Balance as of December 31, 2004
    
    
    62,459
    
    
    
    100,144
    
    
    
    53,247
    
    
    
    
    
    
    
    40,100
    
    
    
    193,491Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,490
    
    
    
    28,490Exercise of stock options
and employee stock purchase
plan options
    
    
    4,121
    
    
    
    26,648
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,648Stock option tax benefit
    
    
    
    
    
    
    
    
    
    
    14,851
    
    
    
    
    
    
    
    
    
    
    
    14,851Balance as of December 31, 2005
    
    
    66,580
    
    
    
    126,792
    
    
    
    68,098
    
    
    
    
    
    
    
    68,590
    
    
    
    263,480Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,481
    
    
    
    13,481Exercise of stock options
and employee stock purchase
plan options
    
    
    771
    
    
    
    5,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,621Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    18,023
    
    
    
    
    
    
    
    
    
    
    
    18,023Stock option tax benefit
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    184Balance as of December 31, 2006
    
    
    67,351
    
    
    $
    132,413
    
    
    $
    86,305
    
    
    $
    
    
    
    $
    82,071
    
    
    $
    300,789
 The accompanying notes are an integral part of these consolidated financial statements
 59




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##### Table of Contents



IXIA
 
 Consolidated Statements of Cash Flows
 (in thousands)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    13,481
    
    
    $
    28,490
    
    
    $
    15,021Adjustments to reconcile net income to net cash
provided by operating activities, net of effect of
acquisitions:Depreciation and amortization
    
    
    10,038
    
    
    
    5,925
    
    
    
    3,418Amortization of intangible assets
    
    
    6,450
    
    
    
    5,169
    
    
    
    4,576Allowance for doubtful accounts
    
    
    320
    
    
    
    12
    
    
    
    432Stock-based compensation
    
    
    18,023
    
    
    
    
    
    
    
    419Deferred income taxes
    
    
    5,739
    
    
    
    (8,141
    )
    
    
    (1,737
    )Tax benefit from stock option transactions
    
    
    184
    
    
    
    14,851
    
    
    
    4,478Excess tax benefits from stock-based compensation
    
    
    (255
    )
    
    
    
    
    
    
    Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable
    
    
    (4,976
    )
    
    
    (9,389
    )
    
    
    (5,130
    )Inventories
    
    
    (1,758
    )
    
    
    (3,156
    )
    
    
    (1,002
    )Income taxes receivable
    
    
    
    
    
    
    1,687
    
    
    
    315Prepaid expenses and other current assets
    
    
    (663
    )
    
    
    (629
    )
    
    
    (696
    )Other assets
    
    
    (172
    )
    
    
    297
    
    
    
    6Accounts payable
    
    
    (677
    )
    
    
    1,312
    
    
    
    432Accrued expenses
    
    
    2,168
    
    
    
    3,339
    
    
    
    (89
    )Deferred revenues
    
    
    (15,014
    )
    
    
    10,299
    
    
    
    7,634Income taxes payable
    
    
    1,023
    
    
    
    (72
    )
    
    
    1,365Net cash provided by operating activities
    
    
    33,911
    
    
    
    49,994
    
    
    
    29,442Cash flows from investing activities:Purchases of property and equipment
    
    
    (12,332
    )
    
    
    (13,396
    )
    
    
    (8,707
    )Purchases of available-for-sale securities
    
    
    (153,400
    )
    
    
    (143,336
    )
    
    
    (82,551
    )Proceeds from available-for-sale securities
    
    
    114,225
    
    
    
    109,186
    
    
    
    47,750Purchases of held-to-maturity securities
    
    
    (7,978
    )
    
    
    (22,030
    )
    
    
    (24,181
    )Proceeds from held-to-maturity securities
    
    
    39,944
    
    
    
    37,104
    
    
    
    29,000Purchases of technology and other intangible assets
    
    
    (165
    )
    
    
    (180
    )
    
    
    (1,447
    )Payments in connection with acquisitions
    
    
    (7,274
    )
    
    
    (8,536
    )
    
    
    (6,389
    )Net cash used in investing activities
    
    
    (26,980
    )
    
    
    (41,188
    )
    
    
    (46,525
    )Cash flows from financing activities:Exercise of stock options and employee stock
purchase plan options
    
    
    5,621
    
    
    
    26,648
    
    
    
    12,333Excess tax benefits from stock-based compensation
    
    
    255
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    5,876
    
    
    
    26,648
    
    
    
    12,333Net increase (decrease) in cash and cash
equivalents
    
    
    12,807
    
    
    
    35,454
    
    
    
    (4,750
    )Cash and cash equivalents at beginning of year
    
    
    51,837
    
    
    
    16,383
    
    
    
    21,133Cash and cash equivalents at end of year
    
    $
    64,644
    
    
    $
    51,837
    
    
    $
    16,383Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes
    
    $
    4,291
    
    
    $
    853
    
    
    $
    2,109Non-cash activities:Common stock issued in connection with acquisition
    
    $
    
    
    
    $
    
    
    
    $
    3,763
 The accompanying notes are an integral part of these consolidated financial statements
 60




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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
  Restated Financial Information
   61




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     Cash and Cash Equivalents
  Fair Value of Financial Instruments
   Investments in Marketable Securities
  62




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Accounts Receivable and Allowance for Doubtful Accounts
  Inventories
  Property and Equipment
  Amortization of Intangible Assets and Goodwill Impairment
  63




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Litigation
  Product Warranty Costs
  Revenue Recognition
      64




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     Cost of Revenues
  Research and Development
  65




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Software Developed for Internal Use
  Advertising
  Stock-Based Compensation
    66




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Income Taxes
  Earnings Per Share
  Foreign Currency Translation
  Comprehensive Income
  Segments
  67




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Reclassifications and Presentation
  Recent Accounting Pronouncements
      68




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  2. Concentrations
 Credit Risk
  Significant Customer
  Year Ended December 31,2006
    
    2005
    
    2004Amount of total revenues
    
    $
    46,280
    
    
    $
    53,045
    
    
    $
    34,950As a percentage of total revenues
    
    
    26
    %
    
    
    35
    %
    
    
    32
    %
  International Data
  Year Ended December 31,2006
    
    2005
    
    2004Amount of total revenues
    
    $
    57,275
    
    
    $
    40,917
    
    
    $
    29,128As a percentage of total revenues
    
    
    32
    %
    
    
    27
    %
    
    
    26
    %
  Sources of Supply
  3. Selected Balance Sheet Data (in thousands)
 Accounts Receivable, Net
 69




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  December 31,
    
    
    December 31,2006
    
    
    2005Trade accounts receivable
    
    $
    37,395
    
    
    $
    32,419Allowance for doubtful accounts
    
    
    (1,174
    )
    
    
    (854
    )$
    36,221
    
    
    $
    31,565
  Balance at
    
    Charged to
    
    Reversals to
    
    
    
    
    
    Balance atBeginning
    
    Cost and
    
    Cost and
    
    
    
    
    
    End ofYear Ended December 31,
    
    of Period
    
    Expenses
    
    Expenses
    
    Deductions
    
    Period2006
    
    $
    854
    
    
    $
    335
    
    
    $
    
    
    
    $
    (15
    )
    
    $
    1,1742005
    
    
    842
    
    
    
    300
    
    
    
    (150
    )
    
    
    (138
    )
    
    
    8542004
    
    
    410
    
    
    
    450
    
    
    
    
    
    
    
    (18
    )
    
    
    842
 Investments in Marketable Securities
  Carrying
    
    
    FairValue
    
    
    ValueAvailable-for-sale  short-term:Auction rate securities
    
    $
    128,701
    
    
    $
    128,701Held-to-maturity  maturities of less than one year:U.S. government and federal agency debt securities
    
    
    23,002
    
    
    
    22,928Corporate debt securities
    
    
    1,000
    
    
    
    998152,703
    
    
    
    152,627Held-to-maturity  maturities of one to five years:U.S. government and federal agency debt securities
    
    
    4,354
    
    
    
    4,2924,354
    
    
    
    4,292$
    157,057
    
    
    $
    156,919
  Carrying
    
    
    FairValue
    
    
    ValueAvailable-for-sale  short-term:Auction rate securities
    
    $
    89,526
    
    
    $
    89,526Held-to-maturity  maturities of less than one year:U.S. government and federal agency debt securities
    
    
    20,917
    
    
    
    20,759Corporate debt securities
    
    
    14,013
    
    
    
    13,901124,456
    
    
    
    124,186Held-to-maturity  maturities of one to five years:U.S. government and federal agency debt securities
    
    
    24,392
    
    
    
    24,010Corporate debt securities
    
    
    1,000
    
    
    
    97525,392
    
    
    
    24,985$
    149,848
    
    
    $
    149,171
 70




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IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Inventories
  December 31,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    3,391
    
    
    $
    3,574Work in process
    
    
    6,891
    
    
    
    3,426Finished goods
    
    
    1,322
    
    
    
    2,846$
    11,604
    
    
    $
    9,846
 Property and Equipment, Net
  December 31,
    
    
    December 31,Useful Life
    
    
    2006
    
    
    2005(in years)Computer equipment
    
    3
    
    
    $
    6,667
    
    
    $
    5,168Computer software
    
    3
    
    
    
    6,697
    
    
    
    5,236Demonstration equipment
    
    2
    
    
    
    11,397
    
    
    
    9,538Development equipment
    
    5
    
    
    
    10,643
    
    
    
    8,416Furniture and other equipment
    
    5
    
    
    
    12,751
    
    
    
    10,160Leasehold improvements
    
    7
    
    
    
    3,443
    
    
    
    2,02451,598
    
    
    
    40,542Accumulated depreciation
    
    
    
    
    
    
    (29,554
    )
    
    
    (20,792
    )$
    22,044
    
    
    $
    19,750
 Accrued Expenses
  December 31,
    
    
    December 31,2006
    
    
    2005Accrued payroll
    
    $
    3,253
    
    
    $
    2,926Accrued vacation
    
    
    2,315
    
    
    
    1,639Accrued bonuses
    
    
    1,704
    
    
    
    1,533Accrued legal and professional fees
    
    
    1,635
    
    
    
    910Accrued commissions
    
    
    1,401
    
    
    
    1,275Due to Bell Canada (Note 4)
    
    
    1,000
    
    
    
    Accrued travel
    
    
    644
    
    
    
    591Employee stock purchase plan payroll deductions
    
    
    550
    
    
    
    644Accrued property taxes
    
    
    452
    
    
    
    887Accrued warranty
    
    
    344
    
    
    
    230Sales tax payable
    
    
    308
    
    
    
    530Other
    
    
    2,267
    
    
    
    1,234$
    15,873
    
    
    $
    12,399
 71




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 4. Acquisitions
 Acquisition of Test Business from Dilithium Networks
   Intangible assets
    
    $
    2,430Goodwill
    
    
    3,260Total assets acquired
    
    
    5,690Current liabilities assumed
    
    
    (477
    )Net assets acquired
    
    $
    5,213
  Acquisition of Certain Assets from Bell Canada
  Communication Machinery Corporation
  72




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Current assets
    
    $
    144Property and equipment
    
    
    11Deferred taxes
    
    
    727Intangible assets
    
    
    2,420Goodwill
    
    
    2,091Total assets acquired
    
    
    5,393Current liabilities assumed
    
    
    (254
    )Deferred taxes
    
    
    (958
    )Net assets acquired
    
    $
    4,181
  G3 Nova Technology, Inc.
   Current assets
    
    $
    355Property and equipment
    
    
    131Intangible assets
    
    
    3,700Goodwill
    
    
    7,285Total assets acquired
    
    
    11,471Current liabilities assumed
    
    
    (722
    )Deferred taxes
    
    
    (1,279
    )Net assets acquired
    
    $
    9,470
   73




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 5. Goodwill and Other Intangible Assets
  AccumulatedDescription
    
    Gross
    
    
    Amortization
    
    
    NetGoodwill
    
    $
    16,728
    
    
    $
    
    
    
    $
    16,728Other intangible assets:Technology
    
    $
    31,900
    
    
    $
    (15,313
    )
    
    $
    16,587Non-compete
    
    
    912
    
    
    
    (802
    )
    
    
    110Trademark
    
    
    676
    
    
    
    (327
    )
    
    
    349Workforce
    
    
    395
    
    
    
    (346
    )
    
    
    49Customer relationships
    
    
    3,246
    
    
    
    (1,170
    )
    
    
    2,076Other
    
    
    1,955
    
    
    
    (902
    )
    
    
    1,053$
    39,084
    
    
    $
    (18,860
    )
    
    $
    20,224
  AccumulatedDescription
    
    Gross
    
    
    Amortization
    
    
    NetGoodwill
    
    $
    13,468
    
    
    $
    
    
    
    $
    13,468Other intangible assets:Technology
    
    $
    27,653
    
    
    $
    (10,106
    )
    
    $
    17,547Non-compete
    
    
    862
    
    
    
    (699
    )
    
    
    163Trademark
    
    
    676
    
    
    
    (227
    )
    
    
    449Workforce
    
    
    395
    
    
    
    (247
    )
    
    
    148Customer relationships
    
    
    2,026
    
    
    
    (604
    )
    
    
    1,422Other
    
    
    1,260
    
    
    
    (527
    )
    
    
    733$
    32,872
    
    
    $
    (12,410
    )
    
    $
    20,462
  2007
    
    $
    6,1022008
    
    
    5,2852009
    
    
    4,3532010
    
    
    2,4882011
    
    
    795Thereafter
    
    
    1,201$
    20,224
 74




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 6. Income Taxes
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    4,672
    
    
    $
    13,086
    
    
    $
    4,335State
    
    
    503
    
    
    
    2,635
    
    
    
    1,571Foreign
    
    
    309
    
    
    
    14
    
    
    
    79Deferred:Federal
    
    
    4,785
    
    
    
    (5,109
    )
    
    
    156State
    
    
    1,212
    
    
    
    (3,049
    )
    
    
    (2,079
    )Foreign
    
    
    (259
    )
    
    
    16
    
    
    
    (55
    )Income tax expense
    
    $
    11,222
    
    
    $
    7,593
    
    
    $
    4,007
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Federal statutory expense
    
    $
    8,646
    
    
    $
    12,629
    
    
    $
    6,657State taxes, net of federal benefit
    
    
    1,242
    
    
    
    (244
    )
    
    
    (133
    )Research and development credits
    
    
    (969
    )
    
    
    (1,937
    )
    
    
    (1,475
    )Stock-based compensation
    
    
    2,644
    
    
    
    (1,924
    )
    
    
    (968
    )Other
    
    
    (341
    )
    
    
    (931
    )
    
    
    (74
    )Income tax expense
    
    $
    11,222
    
    
    $
    7,593
    
    
    $
    4,007Net effective income tax rate
    
    
    45.4
    %
    
    
    21.0
    %
    
    
    21.1
    %
  December 31,
    
    
    December 31,2006
    
    
    2005Deferred tax assets:Allowance for doubtful accounts
    
    $
    465
    
    
    $
    353Research and development credit carryforward
    
    
    6,176
    
    
    
    9,298Deferred revenue
    
    
    5,277
    
    
    
    12,282Stock-based compensation
    
    
    4,548
    
    
    
    1,220Inventory adjustments
    
    
    1,532
    
    
    
    1,149Net operating loss carryforward
    
    
    870
    
    
    
    706Accrued liabilities and other
    
    
    1,209
    
    
    
    1,249Total deferred tax assets
    
    
    20,077
    
    
    
    26,257Deferred tax liabilities:Depreciation and amortization
    
    
    (4,209
    )
    
    
    (4,651
    )Net deferred taxes
    
    $
    15,868
    
    
    $
    21,606
 75




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     7. Commitments and Contingencies
 Leases
  Year EndingDecember 31,2007
    
    $
    4,0592008
    
    
    2,2862009
    
    
    9802010
    
    
    8612011
    
    
    544Thereafter
    
    
    1,149$
    9,879
   Litigation
  Indemnifications
  76




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 8. Shareholders Equity
 Stock Option Plans
    WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Exercise Price
    
    
    Contractual
    
    
    Intrinsicof Options
    
    
    Per Share
    
    
    Life (in years)
    
    
    ValueOutstanding as of December 31,
2005
    
    
    10,465
    
    
    $
    10.62Granted
    
    
    1,153
    
    
    
    11.10Exercised
    
    
    (425
    )
    
    
    6.33Forfeited/canceled
    
    
    (1,073
    )
    
    
    13.06Outstanding as of December 31,
2006
    
    
    10,120
    
    
    $
    10.59
    
    
    
    4.63
    
    
    $
    12,908Exercisable as of December 31,
2006
    
    
    6,671
    
    
    $
    9.34
    
    
    
    3.82
    
    
    $
    12,580
  77




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  WeightedAverage GrantNumber
    
    
    Date Fair Valueof Awards
    
    
    Per ShareOutstanding as of December 31,
2005
    
    
    
    
    
    $
    Awarded
    
    
    338
    
    
    
    9.64Released
    
    
    (1
    )
    
    
    10.72Forfeited/canceled
    
    
    (14
    )
    
    
    9.64Outstanding as of December 31,
2006
    
    
    323
    
    
    $
    9.64
  Employee Stock Purchase Plan
     78




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Stock-Based Compensation Expense
  Year Ended December 31,2006
    
    2005
    
    2004Expected lives (in years)
    
    
    4.1
    
    
    
    4.0
    
    
    
    3.7Risk-free interest rates
    
    
    4.8
    %
    
    
    4.2
    %
    
    
    3.1
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    61.0
    %
    
    
    62.4
    %
    
    
    92.8
    %
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Net income  as reported for prior period (1)
    
    
    N/A
    
    
    $
    28,490
    
    
    $
    15,021Stock-based compensation expense related to share-based
awards, net of tax (2)
    
    $
    (13,949
    )
    
    
    (8,402
    )
    
    
    (13,612
    )Net income  including the effects of stock-based
compensation (3)
    
    $
    13,481
    
    
    $
    20,088
    
    
    $
    1,409Earnings per share:Basic  as reported for prior period (1)
    
    
    N/A
    
    
    $
    0.44
    
    
    $
    0.25Basic  including the effects of stock-based
compensation (3)
    
    $
    0.20
    
    
    $
    0.31
    
    
    $
    0.02Diluted  as reported for prior period (1)
    
    
    N/A
    
    
    $
    0.41
    
    
    $
    0.23Diluted  including the effects of stock-based
compensation (3)
    
    $
    0.20
    
    
    $
    0.29
    
    
    $
    0.02
 
 (1)
    
    Net income and earnings per share for the years ended December 31, 2005 did not include stock-based
compensation expense for share-based awards under SFAS 123 because we did not adopt the recognition
provisions of SFAS 123. For the year ended December 31, 2004, we recognized $419,000 of stock-based
compensation expense in accordance with APB 25.(2)
    
    Stock-based compensation expense prior to fiscal 2006 is calculated based on the pro forma application
of SFAS 123, and excludes $419,000 of stock-based compensation expense recognized in accordance with APB
25 for the year ended December 31, 2004. Stock-based compensation expense, excluding tax effects, under
SFAS 123R and SFAS 123 for the years ended December 31, 2006, 2005 and 2004 was $18.0 million, $15.4
million and $17.4 million, respectively.(3)
    
    Net income and earnings per share prior to fiscal 2006 represent pro forma information based on SFAS 123. Warrants
  79




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##### Table of Contents



IXIA
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 9. Retirement Plan
  10. Earnings Per Share
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Basic PresentationNumerator:Net income
    
    $
    13,481
    
    
    $
    28,490
    
    
    $
    15,021Denominator:Weighted average common shares
    
    
    67,005
    
    
    
    65,168
    
    
    
    60,687Basic earnings per share
    
    $
    0.20
    
    
    $
    0.44
    
    
    $
    0.25Diluted presentationDenominator:Shares used above
    
    
    67,005
    
    
    
    65,168
    
    
    
    60,687Weighted average effect of
stock options and other
share-based awards
    
    
    1,787
    
    
    
    4,059
    
    
    
    4,058Denominator for diluted computation
    
    
    68,792
    
    
    
    69,227
    
    
    
    64,745Diluted earnings per share
    
    $
    0.20
    
    
    $
    0.41
    
    
    $
    0.23
  11. Quarterly Financial Summary (Unaudited) (in thousands, except per share data)
 Three Months EndedDec. 31
    
    Sep. 30
    
    Jun. 30
    
    Mar. 31
    
    Dec. 31
    
    Sep. 30
    
    Jun. 30
    
    Mar. 312006
    
    2006
    
    2006
    
    2006
    
    2005
    
    2005
    
    2005
    
    2005(in thousands, except per share data)Statement of Income Data:(1)Total revenues
    
    $
    47,367
    
    
    $
    55,228
    
    
    $
    40,470
    
    
    $
    37,067
    
    
    $
    35,537
    
    
    $
    39,892
    
    
    $
    38,954
    
    
    $
    36,470Total cost of revenues
    
    
    9,868
    
    
    
    9,579
    
    
    
    9,285
    
    
    
    8,091
    
    
    
    7,146
    
    
    
    8,187
    
    
    
    7,781
    
    
    
    7,232Gross profit
    
    
    37,499
    
    
    
    45,649
    
    
    
    31,185
    
    
    
    28,976
    
    
    
    28,391
    
    
    
    31,705
    
    
    
    31,173
    
    
    
    29,238Income (loss) before income taxes
    
    
    7,949
    
    
    
    15,378
    
    
    
    1,620
    
    
    
    (244
    )
    
    
    5,123
    
    
    
    10,582
    
    
    
    10,767
    
    
    
    9,611Net income (loss)
    
    
    4,501
    
    
    
    8,100
    
    
    
    942
    
    
    
    (62
    )
    
    
    3,649
    
    
    
    7,980
    
    
    
    8,531
    
    
    
    8,330Earnings (loss) per share:Basic
    
    $
    0.07
    
    
    $
    0.12
    
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.13Diluted
    
    $
    0.07
    
    
    $
    0.12
    
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.05
    
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.12
 
 (1)
    
    Due to the adoption of SFAS 123R effective January 1, 2006, our results of
operations for 2006 include $4.9 million, $4.4 million, $4.9 million and $3.8 million of
pre-tax stock-based compensation expense for the first, second, third and fourth quarters,
respectively (approximately $3.9 million, $3.4 million, $3.8 million and $2.8 million,
respectively, on an after tax basis). 80




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description10.16
    
    Summary of 2006 Compensation for the Registrants Named
Executive Officers10.17
    
    Summary of Compensation for the
Registrants Non-Employee Directors21.1
    
    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
 81