IXIA, 424B4, 2000-10-18

IXIA
424B4, 2000-10-18
INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS

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<PAGE> 1

AS FILED PURSUANT TO RULE 424(b)(4)
UNDER THE SECURITIES ACT OF 1933
REGISTRATION NO. 333-42678

PROSPECTUS

5,500,000 SHARES

[IXIA LOGO]
COMMON STOCK
----------------------

This is Ixia's initial public offering.

Prior to this offering, no public market existed for the shares. The
shares have been approved for quotation on the Nasdaq National Market under the
symbol "XXIA."

INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.

----------------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $13.00 $71,500,000
Underwriting discount....................................... $.91 $5,005,000
Proceeds, before expenses, to Ixia.......................... $12.09 $66,495,000
</TABLE>

The underwriters may also purchase up to an additional 825,000 shares
from Ixia at the public offering price, less the underwriting discount, within
30 days from the date of this prospectus to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The shares will be ready for delivery on or about October 23, 2000.

----------------------

MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
DAIN RAUSCHER WESSELS
----------------------

The date of this prospectus is October 17, 2000.
<PAGE> 2

IXIA GRAPHICS DESCRIPTION

INSIDE FRONT COVER

Background is divided approximately into a top one-third section which is
medium blue, and lower two thirds section which is black.

Top third section has two lines of white text in the upper portion of the
section. The first line of text is "High-speed, multi-port" and is flushed left.
The second line of text (slightly smaller print than the first) is "network
performance analysis systems" and is flushed right. In the lower left corner of
the section is the Ixia logo. In the lower middle to lower right corner of the
section is a small chassis and large chassis to the right of the small chassis.

In the lower two-thirds section, directly below the small chassis there is
the orange text "IXIA 400", and directly below the large chassis there is the
orange text "IXIA 1600". Below such text, there are two large interface cards
with one above and overlapping the other, both with an orange background glow
around them. The upper, overlapping, interface card is at a diagonal from upper
right to lower left, with the orange text "Optical Interface Card" immediately
to its left. The lower interface card is at a diagonal from upper left to lower
right with the text "Electrical Interface Card" immediately to its right. To the
left of the interface cards, and directly below the Ixia logo in the upper
section, there is a column of white text with one to three words on each line
which reads: "Ixia's systems generate network and Internet protocol data traffic
and analyze the performance, accuracy and reliability of advanced, high-speed
optical fiber and electrical cable based networks."

GATEFOLD

Background is divided into a horizontal black band section across the top,
with the area below divided in equal quadrants (two upper and two lower). The
two upper quadrants are medium blue on the left side and fade to light blue on
the right side of the quadrant. The lower two quadrants are light blue on the
left side and fade into medium blue on the right side. In the middle, where the
four quadrants meet, and overlapping each, is an amorphous middle section with a
background of clouds.

The black band area has two lines of orange text. The upper line of text is
off-center to the left and reads "Ixia Addresses Multiple Network" and the lower
line of text is off-center to the right and reads "Performance Analysis
Applications." In the lower left corner of the black band area is the Ixia logo.

The upper left quadrant has a horizontal black rectangle in the lower left
corner containing the yellow text "Performance Analysis of a Network of
Routers". In this quadrant, there is a diagram with a chassis in the upper left
corner. Above the upper right corner of the chassis is a black oval with the
white text "IXIA 1600". Connected to the chassis on the right there is a gray
outline of an arrow pointing right. To the right of the arrow there is a
vertically positioned interface card, with the text "Ixia Interface Card"
immediately above the interface card. Below the interface card, to the lower
right and to the lower left, there is a vertical box illustration, each with the
text "Router" immediately to the right of the box's lower right corner. There is
a two-way arrow between the boxes, a two-way 90 degree angle arrow coming from
the lower front of the interface card and pointing to the box on the lower left,
and a two-way 90 degree angle arrow between the upper front of the interface
card and the box on the lower right, with the text "Optical Interface"
immediately to the right of the arrow.

The upper right quadrant has a horizontal black rectangle in the lower
right corner containing the yellow text "Performance Validation of a Server Load
Balancer." Customers can insert our Gigabit Ethernet or Ethernet interface cards
into our IXIA 1600 chassis to evaluate the performance of Web server load
balancers at different network speeds.". In this quadrant, there is a diagram
with a chassis in the upper right corner. Above the upper right corner of the
chassis is a black oval with the white text "IXIA 1600". To the lower left of
the chassis there is a horizontal orange box illustration with the text "Server
Load Balancer" immediately below it. There is a 90 degree angle two-way arrow
between the right side of the box and the bottom of the chassis with the text
"Optical Interface" immediately above the
<PAGE> 3

arrow. There are four 90 degree angle two-way arrows between the top of the box
and the left of the chassis, with the text "Electrical Interface" immediately to
their left.

The lower left quadrant has a horizontal black rectangle in the lower left
corner containing the yellow text "Performance Verification of a Single Router".
In this quadrant, there is a diagram with a chassis in the upper left corner.
Above the upper right corner of the chassis is a black oval with the white text
"IXIA 1600". To the lower right of the chassis is a vertical orange box
illustration with the text "Router" immediately below it. There is a 90 degree
angle two-way arrow between the right side of the chassis and the top of the box
with the text "Optical Interface" immediately above the arrow. There is a 90
degree angle two-way arrow between the bottom of the chassis and the left of the
box.

The lower right quadrant has a horizontal black rectangle in the lower
right corner containing the yellow text "Performance Verification of a Cable
Modem Network". In this quadrant, there is a diagram with a chassis in the upper
right corner. Above the upper right corner of the chassis is a black oval with
the white text "IXIA 1600". To the lower left of the chassis is a horizontal
orange box illustration with the text "Cable Modem Termination System"
immediately below it. There is a 90 degree angle two-way arrow between the left
side of the chassis and the top of the box with the text "Electrical Interface"
immediately above the arrow. Extending from the right side of the box there is a
horizontal two-way arrow which extends below the chassis and ends with five dots
in a row. Between the two-way arrow and the chassis there are three small
horizontal orange box illustrations in a row, and each with a vertical two-way
arrow between it and the chassis and a vertical two-way arrow between it and the
horizontal two-way arrow. Below the row of three boxes, and below the two-way
arrow, there is the text "Cable Modems". In the lower left corner there is a
horizontal two-way arrow and immediately to the right of the arrow, there is the
text "represents data traffic".

The cloud background middle section has a diagram with three rows of box
illustrations. In the middle of the diagram, between the second and third rows,
is the text "Internet". The top row is in the upper right corner of the section
and has four vertical box illustrations in a row which slopes downward to the
right, with the text "Web Servers" above the row. The second row has (from left
to right) two vertical box illustrations and one horizontal box illustration
connected together by a line. Each of the boxes in the top row is connected by a
line to the horizontal box illustration in the second row, which has the text
"Server Load Balancer" immediately above it. The first box in the second row has
the text "Router" immediately to its left. Between, and to the left of, the
second and the third rows is a vertical box illustration with the text "Router"
immediately to its left and this box is connected to the first box in the second
and third rows by lines. The third row has six box illustrations, from left to
right, two vertical box illustrations, one horizontal box illustration and three
small horizontal box illustrations. The first three boxes are connected by a
line. The first box has the text "Router" below it and the first and second
boxes are connected to the second box of the second row by lines. The third box
has the text "Cable Modem Termination System" below it, and to the right of the
third box there is a line which extends right and ends with a row of five dots.
Above the line are the three smaller boxes, which are connected to the line and
which have the text "Multiple Cable Modems" below the line below them. Between
the second and third of these smaller boxes, there is a break in the line with
forward tilting slashes on each side of the break.

Below the cloud background middle section, there is the following block of
text which overlaps the two lower quadrants:

"This diagram shows some of the equipment that comprises the Internet. The
equipment includes:

- routers that distribute data traffic,

- Web servers that host and transmit Web site information and content,

- server load balancers that distribute traffic among multiple Web servers,

- cable modems that connect users to the Internet, and

- cable modem termination systems that aggregate cable modem traffic.

Our systems connect through our interface cards to networks or network
equipment using either optical interfaces, which use optical fiber, or
electrical interfaces, which use electrical cable".
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 8
Forward-Looking Statements.................................. 19
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 34
Management.................................................. 47
Principal Shareholders...................................... 56
Related Party Transactions.................................. 58
Description of Capital Stock................................ 61
Shares Eligible for Future Sale............................. 63
Underwriting................................................ 65
Legal Matters............................................... 68
Experts..................................................... 68
Where You Can Find More Information......................... 69
Index to Consolidated Financial Statements.................. F-1
</TABLE>

----------------------

You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus, regardless of the time of delivery of this
prospectus or any sales of shares of our common stock. Our business, financial
condition, results of operations and prospects may have changed since that date.
"Ixia," "we," "us" and "our" refer to Ixia and its subsidiaries and not to the
underwriters.

IXIA(TM) is a trademark and the Ixia logo is a registered trademark of
Ixia. All other trade names, trademarks and product names used in this
prospectus are the property of their respective holders.
<PAGE> 5

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including "Risk
Factors" beginning on page 8 and the financial statements, related notes and
other financial data, included elsewhere in this prospectus before making an
investment decision.

IXIA

We are a provider of high-speed, multi-port network performance analysis
systems. These systems allow our customers to measure the performance of their
data communications equipment and networks by simulating a large-scale network
environment. Each of our systems consists of a chassis and one or more of a
variety of interface cards that reside within the chassis and connect to the
equipment or network being tested. These interface cards simulate the
information that networks carry by generating, receiving and analyzing different
types of data traffic, including Internet Protocol, or IP, traffic.

Our systems analyze different types of networks, including advanced
optical networks that carry data traffic over optical fiber, as well as
electrical networks that carry data traffic over electrical cable. These
networks include:

- Packet Over SONET networks, which transmit units of information, called
packets, over high-speed optical networks; and

- Gigabit Ethernet networks, which are high-speed local area networks
used typically within a single building or a group of buildings.

Our systems are designed to meet the needs of network equipment
manufacturers, Internet and network service providers, communications chip
manufacturers and network users such as large corporations. Since our inception,
we have sold our systems to over 170 customers. Based on revenues for the 12
months ended June 30, 2000, our largest customers by category include:

- Leading network equipment manufacturers such as Cisco Systems, Extreme
Networks and Nortel Networks;

- Internet and network service providers such as AT&T and UUNET
Technologies;

- Communications chip manufacturers such as Broadcom and Level One
Communications, which is now part of Intel; and

- Network users such as Lockheed Martin and Bank of America.

We generated net revenues of $4.9 million in 1998, $24.5 million in 1999
and $28.3 million in the six months ended June 30, 2000. To date, we have sold
our systems primarily to network equipment manufacturers.

In addition, due to the demand of network users for consistent and high
levels of performance from their Internet and network service providers, these
service providers must ensure that the equipment they deploy can deliver the
required performance. As a result, network equipment manufacturers, Internet and
network service providers, communications chip manufacturers and network users
are each demanding increasingly sophisticated network performance analysis
systems.

3
<PAGE> 6

To address our customers' increasing demands, our systems provide the
following key benefits:

- High Performance. Our systems generate and receive data traffic at wire
speed, which is the maximum rate that data traffic can be transmitted
over the network. Our systems analyze the performance of the network in
real-time, that is, as the transmission is actually occurring. By
analyzing each discrete packet of information on a packet-by-packet
basis, our systems allow our customers to precisely measure the
performance of their networks.

- Highly Scalable. Each of our interface cards provides one or more ports
through which our systems generate and receive data traffic. Our
customers can easily increase port density, which is the number of
ports in an individual chassis, by inserting additional interface
cards. By connecting multiple chassis and synchronizing up to thousands
of ports to operate simultaneously, our customers can simulate
large-scale networks. We believe that our systems offer our customers
the highest port density and therefore the most scalable systems
available.

- Highly Modular. Our modular systems allow our customers to quickly and
easily create complex and custom test configurations. The modularity of
our systems also allows our customers to integrate new technologies
into our existing systems by inserting new interface cards as we
release them.

- Flexibility. Our customers can easily reconfigure our systems through
software changes to address different protocols and applications
without changing hardware or replacing interface cards.

- Ease of Use. Our systems can be installed easily and operated with
minimal training and set-up. Our customers configure and control our
systems through a graphical user interface that features a familiar
Microsoft Windows point-and-click environment and allows users to
interact easily and intuitively with our systems. Through this
interface, our customers can conduct a wide range of tests and analyses
by accessing the pre-designed test configurations included in our
systems. They can also design customized tests using industry standard
programming languages.

Our goal is to be the industry leader in multi-port traffic generation
and performance analysis systems for the high-speed data communications market.
To pursue our goal, we plan to:

- Continue to expand into high-growth markets such as advanced optical
networks that route data traffic throughout the Internet and emerging
networks that allow high-speed access to the Internet, known as
broadband access networks;

- Maintain our focus on technology leadership by developing new systems
and system applications that address the needs of evolving technology
and industry requirements;

- Expand and further penetrate our customer base by developing and
offering systems that meet customers' needs and by providing superior
customer support; and

- Expand our domestic and international sales and marketing efforts and
promote our brand name.

CORPORATE INFORMATION

Ixia was incorporated in California in May 1997. Our principal executive
offices are located at 26601 W. Agoura Road, Calabasas, California 91302, and
our telephone number is (818) 871-1800. Our Web site is located at
www.ixiacom.com. Information contained on our Web site does not constitute part
of this prospectus.

4
<PAGE> 7

THE OFFERING

Common stock offered by Ixia..... 5,500,000 shares

Common stock to be outstanding
after this offering.............. 52,912,293 shares

Use of proceeds.................. For general corporate purposes. For
additional information, see "Use of
Proceeds" on page 20.

Nasdaq National Market symbol.... XXIA

Unless we specifically state otherwise, the information in this
prospectus does not take into account the sale of up to 825,000 shares of common
stock which the underwriters have the option to purchase solely to cover
over-allotments. If the underwriters exercise their over-allotment option in
full, 53,737,293 shares of common stock will be outstanding after the offering.

The number of shares of common stock that will be outstanding after the
offering is based on the number of shares outstanding as of September 30, 2000
and excludes:

- 10,595,207 shares of common stock issuable upon exercise of options
outstanding as of September 30, 2000 under our 1997 stock option plan
with a weighted average exercise price of $2.25 per share;

- an additional 3,842,500 shares of common stock reserved for issuance
under our 1997 stock option plan as of September 30, 2000;

- 80,000 shares of common stock issuable upon exercise of warrants with
an exercise price of $7.00 per share;

- 300,000 shares of common stock reserved for issuance under our employee
stock purchase plan, subject to annual automatic increases; and

- 200,000 shares of common stock reserved for issuance under our director
stock option plan.

From September 30, 2000 through the date of this prospectus, we granted
options to purchase 190,000 shares of common stock with an exercise price of
$11.00 per share.

All share and per share information in this prospectus reflects our March
1998 five-for-one stock split and our March 2000 three-for-one stock split.

5
<PAGE> 8

SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" beginning on page 26 and our consolidated financial
statements and the notes to those consolidated financial statements beginning on
page F-1 in this prospectus. The statement of operations data set forth below
for the period from May 27, 1997, our inception, through December 31, 1997 and
for the years ended December 31, 1998 and 1999 are derived from, and are
qualified by reference to, our audited consolidated financial statements
included elsewhere in this prospectus. The statement of operations data set
forth below for the six months ended June 30, 1999 and 2000 and the balance
sheet data as of June 30, 2000 are derived from, and are qualified by reference
to, our unaudited condensed consolidated financial statements included elsewhere
in this prospectus.

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
MAY 27, 1997 DECEMBER 31, ENDED JUNE 30,
(INCEPTION) THROUGH ----------------- -----------------
DECEMBER 31, 1997 1998 1999 1999 2000
------------------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN
THOUSANDS, EXCEPT PER SHARE DATA):
Net revenues....................... $ -- $ 4,916 $24,499 $ 8,214 $28,268
Cost of revenues(1)................ -- 1,309 4,944 1,412 5,626
------- ------- ------- ------- -------
Gross profit.................... -- 3,607 19,555 6,802 22,642
------- ------- ------- ------- -------
Operating expenses:
Research and development........ 513 1,580 2,780 1,182 2,744
Sales and marketing............. -- 940 4,443 1,531 4,372
General and administrative...... 110 509 1,660 588 1,733
Stock-based compensation(2)..... -- 154 1,847 407 6,250
------- ------- ------- ------- -------
Total operating expenses... 623 3,183 10,730 3,708 15,099
------- ------- ------- ------- -------
Income (loss) from
operations................. (623) 424 8,825 3,094 7,543
Interest income, net............... 7 14 88 18 221
------- ------- ------- ------- -------
Income (loss) before income
taxes...................... (616) 438 8,913 3,112 7,764
Income tax expense (benefit)....... (294) 118 4,103 1,362 5,477
------- ------- ------- ------- -------
Net income(loss).............. $ (322) $ 320 $ 4,810 $ 1,750 $ 2,287
======= ======= ======= ======= =======

Earnings (loss) per share:
Basic........................... $ (0.01) $ 0.01 $ 0.11 $ 0.04 $ 0.05
Diluted......................... $ (0.01) $ 0.01 $ 0.10 $ 0.04 $ 0.04
Weighted average number of shares
outstanding:
Basic........................... 43,041 43,200 43,574 43,218 45,236
Diluted......................... 43,041 45,619 48,896 46,340 52,989

------------
(1) Stock-based compensation included
in cost of revenues.............. $ -- $ 8 $ 38 $ 10 $ 386
======= ======= ======= ======= =======
(2) Stock-based compensation:
Research and development...... $ -- $ 92 $ 669 $ 94 $ 2,597
Sales and marketing........... -- 62 449 124 1,771
General and administrative.... -- -- 729 189 1,882
------- ------- ------- ------- -------
$ -- $ 154 $ 1,847 $ 407 $ 6,250
======= ======= ======= ======= =======
</TABLE>

6
<PAGE> 9

<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA):
Cash and cash equivalents................................. $ 8,952 $74,147
Working capital........................................... 15,072 80,267
Total assets.............................................. 25,119 90,314
Total shareholders' equity................................ 17,647 82,842
</TABLE>

------------

(1) As adjusted to reflect the sale of 5,500,000 shares of common stock offered
hereby at the initial public offering price of $13.00 per share after
deducting the underwriting discount and estimated offering expenses payable
by us.

7
<PAGE> 10

RISK FACTORS

You should carefully consider the risks described below before making a
decision to buy our common stock. If any of the following risks actually occur,
our business could be harmed, the trading price of our common stock could
decline and you may lose all or part of your investment. You should also refer
to the other information contained in this prospectus, including our
consolidated financial statements and the related notes.

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

Our quarterly and annual operating results may fluctuate significantly
due to a variety of factors, most of which are outside of our control. Some of
the factors that could cause our quarterly and annual operating results to
fluctuate include the other risks discussed in this "Risk Factors" section.

We may experience a shortfall or delay in generating or recognizing
revenues for a number of reasons. Orders on hand at the beginning of a quarter
and orders generated in a quarter do not always result in the shipment of
products and the recognition of revenues for that quarter. Failure to ship
products by the end of the quarter in which they are ordered may adversely
affect our operating results for that quarter. Our customer agreements typically
provide that the customer may delay scheduled delivery dates and cancel orders
within specified time frames without penalty. Because we incur operating
expenses based on anticipated revenues trends and a high percentage of our
expenses are fixed in the short term, any delay in generating or recognizing
forecasted revenues could significantly harm our quarterly results of
operations.

Additionally, our operating results may vary as a result of the timing of
our release of new products. The introduction of a new product in any quarter
may cause an increase in revenues in that quarter that may not be sustainable in
subsequent quarters.

If our operating results fall below market expectations, the trading
price of our common stock could 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

The market for our products is characterized by:

- 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.

We expect that new technologies will continue to emerge as the need for
higher and more cost-effective bandwidth increases. Our performance will depend
on our successful development, introduction and market acceptance of new and
enhanced performance analysis products that address these new technologies and
changes in customer requirements. If we experience any delay in the development
or introduction of new products or enhancements to our existing products, our
operating results may suffer. For instance, undetected software or hardware
errors, which frequently occur when new products are first introduced, could
result in the delay or loss of market acceptance of our products and the loss of
credibility with our customers. In addition, if we are not able to develop, or
license from third parties, the underlying core technologies necessary to create
new products and enhancements, our existing products are likely to become
technologically obsolete over time and our operating results will suffer. If the
rate of
8
<PAGE> 11

development of new technologies and transmission protocols by our customers is
delayed, the growth of the market for our products and therefore our sales and
operating results may be harmed.

Our ability to successfully introduce new products in a timely fashion
will depend on several factors, including our ability to:

- 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.

The development of new, technologically advanced products is a complex
and uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technology and market trends. We cannot assure you that we will be able to
identify, develop, manufacture, market or support new or enhanced products
successfully, if at all, or on a timely or cost-effective basis. Further, we
cannot assure you that our new products will gain market acceptance or that we
will be able to respond effectively to technological changes, emerging industry
standards or product announcements by our competitors. If we fail to respond to
technological change and the needs of our markets, we will lose revenues and our
competitive position will suffer.

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

Our business and products are concentrated in the market for systems that
analyze and measure the performance of network equipment and systems. This
market is in an early stage of development and there is uncertainty regarding
its size and scope. Our performance will depend on increased sales of our
existing systems and the successful development, introduction and market
acceptance of new and enhanced products. We cannot assure you that we will be
successful in increasing these sales or in developing and introducing new
products. Our failure to do so would significantly harm our revenues and results
of operations.

SOME KEY COMPONENTS IN OUR PRODUCTS COME FROM SOLE OR LIMITED SOURCES OF SUPPLY,
WHICH EXPOSES US TO POTENTIAL SUPPLY SHORTAGES THAT COULD DISRUPT THE
MANUFACTURE AND SALE OF OUR PRODUCTS

We and our contract manufacturers currently purchase a number of key
components used to manufacture our products from sole or limited sources of
supply for which alternative sources may not be available. From time to time, we
have experienced shortages of key components, including chips, oscillators and
optical modules. We and our contract manufacturers have no guaranteed or
long-term supply arrangements for these or other components, including field
programmable gate arrays, or FPGA's, which are integrated circuits that can be
repeatedly reprogrammed to perform different sets of functions as required.
Additionally, there is currently a worldwide shortage of the high-speed lasers
required for the production of our proposed OC-192c Packet Over SONET interface
card. Financial or other difficulties faced by our suppliers or significant
changes in market demand for necessary components could limit the availability
to us and our contract manufacturers of these components. Any interruption or
delay in the supply of any of these components could significantly harm our
ability to meet scheduled product deliveries to our customers and cause us to
lose sales.

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<PAGE> 12

In addition, the purchase of these components on a sole source basis
subjects us to risks of price increases and potential quality assurance
problems. Consolidation involving suppliers could further reduce the number of
alternatives available to us and affect the cost of components. An increase in
the cost of components could make our products less competitive and result in
lower margins.

There are no substitute supplies available for many of these components,
including field programmable gate arrays. All of these components are critical
to the production of our products, and competition exists with other
manufacturers for these key components. In the event that we can no longer
obtain materials from a sole source supplier, we might not be able to qualify or
identify alternative suppliers in a timely fashion, or at all.

COMPETITION IN OUR MARKET COULD SIGNIFICANTLY HARM OUR RESULTS OF OPERATIONS

The market for our products is highly competitive. We face competition
primarily from test equipment manufacturers such as Agilent Technologies, Netcom
Systems and Adtech. We also compete with start-up companies such as Antara which
are focused on network performance analysis and measurement. Additionally, some
of our network equipment manufacturer customers have developed, or may develop,
in-house performance analysis products for their own use or for sale to others.
For example, Cisco Systems, our largest customer, has used internally developed
test products for a number of years. Although Cisco Systems has purchased our
products in increasing amounts through June 30, 2000, we cannot assure you that
it will continue to do so.

As we broaden our product offerings, we may move into new markets and
face additional competition. Moreover, our competitors may have more experience
operating in these new markets and be better established with the customers in
these new markets.

Some of our competitors and potential competitors have greater brand name
recognition and greater financial, technical, marketing, sales and distribution
capabilities than we do. Moreover, our competitors may consolidate with each
other, or with other companies, giving them even greater capabilities with which
to compete against us. For example, Spirent, which owns Adtech, has acquired
Netcom Systems.

Increased competition in the network performance analysis and measurement
market could result in increased pressure on us to reduce prices and could
result in a reduction in our revenues and/or a decrease in our margins, each of
which could significantly harm our results of operations. In addition, increased
competition could prevent us from increasing our market share, or cause us to
lose our existing market share, either of which would harm our revenues and
profitability.

We cannot predict whether our current or future competitors will develop
or market technologies and products that offer higher performance or more
features or are more cost-effective than our current or future products. To
remain competitive, we must continue to develop cost-effective products and
product enhancements which offer higher performance and more functionality. Our
failure to do so will harm our revenues and results of operations.

IF WE DO NOT DIVERSIFY OUR CUSTOMER BASE, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS OR INCREASE OUR PROFITABILITY

Our growth depends in part on our ability to diversify our customer base
by increasing sales to Internet and network service providers, communications
chip manufacturers and network users. To effectively compete for the business of
these customers, we must develop new products and enhancements to existing
products and expand our sales, marketing and customer support capabilities,
which will result in increases in operating costs. If we cannot offset these
increases in costs with an increase in our revenues, our net income and our
stock price may fall. Some of our existing and potential competitors have
existing relationships with many Internet and network service providers,
communications chip manufacturers and network users. We cannot assure you that
we will be successful in increasing our sales presence in these markets. Any
failure by us to increase sales in these markets would adversely affect our
growth.

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BECAUSE WE DEPEND ON A LIMITED NUMBER OF NETWORK EQUIPMENT MANUFACTURERS 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

Historically, a small number of network equipment manufacturing customers
has accounted for a significant portion of our net revenues. Sales to our five
largest customers represented 62.0% of our net revenues in 1998, 51.0% of our
net revenues in 1999 and 53.1% of our net revenues in the six months ended June
30, 2000. Sales to Cisco Systems, our largest customer, accounted for 31.6% of
our net revenues in 1998, 30.8% of our net revenues in 1999 and 34.0% of our net
revenues in the six months ended June 30, 2000. We expect that significant
customer concentration will continue for the foreseeable future and that our
operating results will continue to depend to a significant extent upon revenues
from a small number of customers.

Our dependence on large orders from a limited number of network equipment
manufacturers makes our relationships with these manufacturers critical to the
success of our business. We cannot assure you that we will be able to retain our
largest customers, that we will be able to increase our sales to our other
existing customers or that we will be able to attract additional customers. From
time to time, we have experienced delays and reductions in orders from some of
our major customers. In addition, our customers have sought price concessions
from us and may continue to do so. We do not have long-term contracts with our
customers, and our major customers can stop purchasing our products at any time
without penalty and are free to purchase products from our competitors. The loss
of one or more of our largest customers, any reduction or delay in sales to
these customers, our inability to successfully develop and maintain
relationships with existing and new customers or requirements that we make price
concessions could significantly harm our revenues and results of operations.

AS 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

Consolidation of our customers could reduce the number of customers to
whom our products could be sold. Some of our customers have recently merged.
These merged customers could obtain products from a source other than us or
demand more favorable terms and conditions from us, which would harm our
revenues and profitability. In addition, our network equipment manufacturer
customers may merge with or acquire our competitors and discontinue their
relationships with us.

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

Historically, we have relied primarily on a limited direct sales
organization, supported by third-party manufacturers' representatives and
distributors, to sell our products. Our distribution strategy focuses primarily
on developing and expanding our direct sales organization and our network of
manufacturers' representatives and distributors. We may not be able to
successfully expand our sales and distribution channels, and the cost of any
expansion may exceed the revenues that we generate. To the extent that we are
successful in expanding our sales and distribution channels, we cannot assure
you that we will be able to compete successfully against the significantly
larger and better-funded sales and marketing operations of many of our current
or potential competitors. We have granted exclusive rights to substantially all
of our distributors and manufacturers' representatives to market our products in
their specified territories. Our distributors and manufacturers' representatives
may not market our products effectively or devote the resources necessary to
provide us with effective sales, marketing and technical support. Our inability
to effectively manage the expansion of our sales and support staff, or to
maintain existing or establish new relationships with successful manufacturers'
representatives and distributors, would harm our revenues and results of
operations.

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IF WE ARE UNABLE TO EXPAND OUR INTERNATIONAL SALES AND DISTRIBUTION CHANNELS OR
MANAGE THEM EFFECTIVELY, OUR RESULTS OF OPERATIONS WOULD BE HARMED

Historically, a significant portion of our sales have been made to
customers in the United States. Sales in the United States accounted for 86.9%
of our net revenues in 1999 and 86.2% of our net revenues during the six months
ended June 30, 2000. In the past, we have depended on distributors for the
substantial majority of our international sales. The loss of one or more of our
international distributors or their failure to sell our products would limit our
ability to sustain and grow our revenues in international markets. We intend to
expand or enter into additional international markets, including Europe and the
Asia Pacific region, by adding distributors and international sales and support
personnel. Our failure in these efforts could significantly harm our results of
operations and decrease the value of our stock. We only have limited
international sales experience and believe that the growth of our sales outside
of the United States will be subject to a number of additional risks and
uncertainties, including:

- adoption of different local technical and regulatory standards;

- the need to maintain and establish new relationships with distributors
and the sales performance of these distributors, who may not be as
effective or loyal as our employees;

- the costs and complexity of staffing and managing more widely dispersed
foreign sales activities, including the ability to identify, attract
and retain qualified managers and sales personnel, overcoming cultural,
linguistic and nationalistic barriers and adapting to foreign business
practices;

- longer payment cycles of foreign customers compared with customers in
the United States;

- seasonal reductions in business activities in some parts of the world,
such as during the summer months in Europe;

- legal uncertainties regarding liability, export and import
restrictions, tariffs and other trade barriers;

- potential political and economic instability; and

- inadequate protection of intellectual property in some countries.

Any of these factors could significantly harm our international sales or
significantly impair our ability to expand into international markets.

Our international sales currently are U.S. dollar-denominated. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less cost-effective in international markets.

IF WE FAIL TO ACCURATELY FORECAST OUR MANUFACTURING REQUIREMENTS, WE COULD INCUR
ADDITIONAL COSTS AND EXPERIENCE MANUFACTURING DELAYS

We provide our contract manufacturers with rolling forecasts based on
anticipated product orders to determine our manufacturing requirements. Some of
the components used in our products have significant lead times or lead times
which may unexpectedly increase depending on factors such as the specific
supplier, contract terms and the demand for components at a given time. Because
of these long lead times, we are often forced to forecast and order products
before we know what our specific manufacturing requirements will be. If we
overestimate our product orders, our contract manufacturers may have excess
inventory of completed products which we would be obligated to purchase. This
will lead to increased costs and the risk of obsolescence. If we underestimate
our product orders, our contract manufacturers may have inadequate inventory,
which could result in delays in shipments, the loss or deferral of revenues and
higher costs of sales. It may also add costs to our products to expedite
delivery of our products to customers or those components with long lead times
to our contract manufacturers. We cannot assure you that we will be able to
accurately forecast our product orders and may in the future carry excess or
obsolete inventory, be unable to fulfill customer demand, or both, thereby
harming our revenues, results of operations and customer relationships.

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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

We currently rely on a limited number of contract manufacturers to
manufacture and assemble our products. We may experience delays in receiving
product shipments from contract manufacturers or other problems, such as
inferior quality and insufficient quantity of product. We cannot assure you that
we will be able to effectively manage our contract manufacturers or that these
manufacturers will meet our future requirements for timely delivery of products
of sufficient quality and quantity. We intend to introduce new products and
product enhancements, which will require that we rapidly achieve volume
production by effectively coordinating with our suppliers and contract
manufacturers. We do not have any long-term contracts with our contract
manufacturers. The inability of our contract manufacturers to provide us with
adequate supplies of high-quality products or the loss of any of our contract
manufacturers would cause a delay in our ability to fulfill customer orders
while we obtain a replacement manufacturer and would harm our revenues, results
of operations, competitive position and reputation.

We may not be able to expand our contract manufacturing capacity or our
internal testing or quality assurance functions as required to keep up with
demand for our products. Any such failure would in turn hinder our growth. If we
do not expand these capacities and functions effectively or in a timely manner,
we may experience disruptions in product flow which could limit our revenues,
adversely affect our competitive position and reputation and result in
additional cost, cancellation of orders or both.

BECAUSE OF INTENSE COMPETITION FOR TECHNICAL PERSONNEL, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN NECESSARY PERSONNEL ON A COST-EFFECTIVE BASIS

Our success will depend in large part upon our ability to identify, hire,
retain and motivate highly skilled employees. We plan to significantly increase
the number of our research and development, marketing, sales, customer support
and operations employees. Competition for highly skilled employees in our
industry is intense. In addition, employees may leave our company and
subsequently compete against us. Our failure to attract and retain these
qualified employees could significantly harm our ability to develop new products
and maintain customer relationships. The loss of the services of any of our
qualified employees, the inability to attract or retain qualified personnel in
the future or delays in hiring required personnel could hinder the development
and introduction of new and enhanced products and harm our ability to sell our
products. Moreover, companies in our industry whose employees accept positions
with competitors frequently claim that those competitors have engaged in unfair
hiring practices. We may be subject to such claims as we seek to retain or hire
qualified personnel, some of whom may currently be working for our competitors.
Some of these claims may result in material litigation. We could incur
substantial costs in defending ourselves against these claims, regardless of
their merits. Such claims could also discourage potential employees who
currently work for our competitors from joining us.

AS A RESULT OF A LAWSUIT BY ONE OF OUR COMPETITORS, OUR VICE PRESIDENT,
MARKETING MAY BE PREVENTED FROM CONTINUING HIS EMPLOYMENT WITH US

In June 2000, one of our competitors, Netcom Systems, filed a lawsuit
against Eran Karoly, our Vice President, Marketing, who had previously worked
for Netcom Systems. In the lawsuit, Netcom Systems alleges that in the course of
his employment, Mr. Karoly has misappropriated Netcom Systems' trade secrets,
engaged in unfair competition and breached his agreements with Netcom Systems.
If Netcom Systems were to prevail in its lawsuit against Mr. Karoly, we could be
prevented from employing Mr. Karoly in business development and marketing work
for a period of 24 months. We cannot assure you that the lawsuit will not harm
our results of operations or competitive position. For more information on the
lawsuit, see "Business -- Legal Proceedings" on page 45.

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THE LOSS OF ANY OF OUR KEY PERSONNEL COULD SIGNIFICANTLY HARM OUR RESULTS OF
OPERATIONS AND COMPETITIVE POSITION

Our success depends to a significant degree upon the continuing
contributions of our key management, technical, marketing and sales employees,
particularly Errol Ginsberg, our President and Chief Executive Officer. There
can be no assurance that we will be successful in retaining our key employees or
that we can attract or retain additional skilled personnel as required. Failure
to retain key personnel could significantly harm our results of operations and
competitive position.

CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE US TO INCUR COSTS
TO MAINTAIN AND UPGRADE OUR MANAGEMENT AND OPERATIONAL RESOURCES

We have experienced and are continuing to experience a period of rapid
growth. Unless we manage our growth effectively, we may have difficulty in
operating our business. As a result, we may inaccurately forecast sales and
materials requirements, fail to integrate new personnel or fail to maintain
adequate internal controls, which may result in fluctuations in our operating
results and cause the price of our stock to decline. We plan to continue to
expand our operations significantly. This anticipated growth will continue to
place a significant strain on our management and operational resources. In order
to manage our growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. If we cannot manage growth
effectively, our profitability could be significantly harmed.

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 existing products and any new or enhanced products we introduce may
contain undetected software or hardware defects when they are first introduced
or as new versions are released. These problems may cause us to incur
significant damages or warranty and repair costs, divert the attention of our
engineering personnel from our product development efforts and cause significant
customer relation problems or loss of customers and reputation, all of which
would harm our results of operations. A successful claim against us for an
amount exceeding the limit on our product liability insurance policy would force
us to use our own resources, to the extent available, to pay the claim, which
could result in an increase in our expenses and a reduction of our working
capital available for other uses, thereby harming our profitability and capital
resources.

OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM OUR
RESULTS OF OPERATIONS AND REPUTATION

Our success and ability to compete is dependent in part on our ability to
protect and maintain our proprietary rights to our intellectual property. We
currently rely on a combination of trade secret, trademark and copyright laws to
establish and protect our intellectual property. We also expect to rely on
patents to protect some of our proprietary technology. To date, we have relied
primarily on trade secret laws to protect our proprietary processes and
know-how. Although we have filed applications for two U.S. patents, we cannot
assure you that either of these applications will issue into patents or that, if
issued, the patents will be upheld. We also cannot assure you that such patents,
if issued, will be effective in protecting our proprietary technology.

We generally enter into confidentiality agreements with our officers,
employees and consultants. We also generally limit access to and distribution of
our source code and further limit the disclosure and use of our other
proprietary information. However, these measures provide only limited protection
of our intellectual property rights. In addition, we may not have signed
agreements containing adequate protective provisions in every case, and the
contractual provisions that are in place may not provide us with adequate
protection in all circumstances. Further, we have not included copyright notices
on all of our copyrightable intellectual property. Any infringement of our
proprietary rights could result in significant litigation costs,

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and any failure to adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in loss of one or
more competitive advantages and decreased revenues.

Despite our efforts to protect our proprietary rights, existing trade
secret, copyright, patent and trademark laws afford us only limited protection.
In addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States. Others may
attempt to copy or reverse engineer aspects of our products or to obtain and use
information that we regard as proprietary. Accordingly, we may not be able to
prevent misappropriation of our technologies or to deter others from developing
similar technologies. Further, monitoring the unauthorized use of our products
and our proprietary rights is difficult. Litigation may be necessary to enforce
our intellectual property rights or to determine the validity and scope of the
proprietary rights of others. Litigation of this type could result in
substantial costs and diversion of resources and could significantly harm our
results of operations and reputation.

CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS

From time to time, other parties may assert patent, copyright, trademark
and other intellectual property rights to technologies and in various
jurisdictions that are important to our business. We cannot provide assurance
that others will not claim that we are infringing their intellectual property
rights or that we do not in fact infringe those intellectual property rights. We
have not conducted a search to determine whether the technology we have in our
products infringes or misappropriates intellectual property held by third
parties. In addition, because patent applications in the United States are not
publicly disclosed until the patent is issued, applications may have been filed
which could relate to our products.

Any claims asserting that our products infringe or may infringe
proprietary rights of third parties, if determined adversely to us, could
significantly harm our results of operations. Any claims, with or without merit,
could:

- be time-consuming;

- result in costly litigation;

- divert the efforts of our technical and management personnel;

- require us to develop alternative technology, thereby causing product
shipment delays and the loss or deferral of revenues;

- require us to cease selling the products containing the infringing
intellectual property;

- require us to pay substantial damage awards;

- damage our reputation; or

- require us to enter into royalty or licensing agreements which, if
required, may not be available on terms acceptable to us, if at all.

In the event a claim against us were successful and we could not obtain a
license to the relevant technology on acceptable terms or license a substitute
technology or redesign our products to avoid infringement, our revenues, results
of operations and competitive position would be harmed.

IF WE FAIL TO MAINTAIN OUR RELATIONSHIPS WITH INDUSTRY EXPERTS, OUR PRODUCTS MAY
LOSE INDUSTRY AND MARKET RECOGNITION AND SALES COULD DECLINE

Our relationships with industry experts in the field of performance
analysis and measurement of networks and network equipment are critical for
maintaining our industry credibility and for developing new products and testing
methodologies in a timely fashion. These experts have established standard
testing methodologies that evaluate new network equipment products and
technologies. We provide these experts and their testing labs with our products
and engineering assistance to perform tests on these new

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<PAGE> 18

network equipment products and technologies. These industry experts refer to our
products in their publications which has given our products industry
recognition. In addition, these labs offer us the opportunity to test our
products on the newest network equipment and technologies, thereby assisting us
in developing new products that are designed to meet evolving technological
needs. We cannot assure you that we will be able to maintain our relationships
with industry experts or that our competitors will not obtain similar or
superior relationships with industry experts. If we are unable to maintain our
relationships with industry experts, our products may lose industry and market
recognition which could harm our reputation and competitive position and cause
our sales to decline.

ANY ACQUISITIONS THAT WE MAY UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT
OUR BUSINESS, DILUTE SHAREHOLDER VALUE AND SIGNIFICANTLY HARM OUR OPERATING
RESULTS

We expect to review opportunities to acquire other businesses or
technologies that would complement our current products, expand the breadth of
our markets, enhance our technical capabilities or otherwise offer growth
opportunities. While we have no current agreements or negotiations underway, we
may acquire businesses, products or technologies in the future. If we make any
acquisitions, we could issue stock that would dilute existing shareholders'
percentage ownership, incur substantial debt or assume contingent liabilities.
We have no experience in acquiring other businesses and technologies and believe
potential acquisitions could involve the following risks:

- problems assimilating the acquired operations, technologies or
products;

- unanticipated costs associated with the acquisition;

- 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.

We cannot assure you that we would be successful in overcoming problems
in connection with such acquisitions, and our inability to do so could
significantly harm our revenues and results of operations.

OUR HEADQUARTERS, MANY OF OUR CUSTOMERS AND SOME OF OUR CONTRACT MANUFACTURERS
AND SUPPLIERS ARE LOCATED IN CALIFORNIA WHERE NATURAL DISASTERS MAY OCCUR

Currently, our corporate headquarters, many of our customers and some of
our contract manufacturers and suppliers are located in California. California
historically has been vulnerable to natural disasters and other risks, such as
earthquakes, fires and floods, which at times have disrupted the local economy
and posed physical risks to our property. We and some of our customers, contract
manufacturers and suppliers do not have redundant, multiple site capacity. In
the event of a natural disaster, our ability to conduct business could be
significantly disrupted, thereby harming our results of operations.

OUR PRINCIPAL SHAREHOLDERS WILL CONTINUE TO OWN A LARGE PERCENTAGE OF OUR VOTING
STOCK AFTER THIS OFFERING, WHICH WILL ALLOW THEM TO CONTROL SUBSTANTIALLY ALL
MATTERS REQUIRING SHAREHOLDER APPROVAL

Upon completion of this offering, our principal shareholder will
beneficially own 25,425,000 shares or, based on the number of shares of our
common stock outstanding as of September 30, 2000, approximately 48.1% of our
outstanding shares of common stock, or approximately 47.3%, assuming the full
exercise of the underwriters' over-allotment option. Upon completion of this
offering, our directors and officers and entities affiliated with them will
beneficially own 12,326,374 shares or, based on the number of shares of our
common stock outstanding as of September 30, 2000, approximately 23.2% of our
shares of common stock, or approximately 22.8%, assuming the full exercise of
the underwriters' over-allotment option. If these shareholders act together,
they would be able to elect at least a majority of our board of directors and to
control all other matters requiring approval by shareholders, including the
approval of mergers or other business combination transactions, going private
transactions and other extraordinary transactions, and the terms of any of these
transactions. In addition, through cumulative voting, our

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principal shareholder by itself will be able to elect two of our five directors.
This concentration of ownership could have the effect of delaying or preventing
a change in our control or otherwise discouraging a potential acquirer from
attempting to obtain control of us, which in turn could have an adverse effect
on the market price of our common stock or prevent our shareholders from
realizing a premium over the market price for their shares of common stock.

OUR MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS
OFFERING AND MAY NOT OBTAIN A SIGNIFICANT RETURN ON THE USE OF THESE PROCEEDS

We have not determined any specific purpose for the net proceeds of this
offering. Our management will have broad discretion in determining how to spend
the net proceeds from this offering and may spend the proceeds in a manner that
our shareholders may not deem desirable. We cannot assure you that the use of
the net proceeds of this offering will yield favorable returns or results.

THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK IN THE PUBLIC
MARKET AFTER THIS OFFERING MAY DEPRESS THE MARKET PRICE OF OUR STOCK

Sales of substantial amounts of our common stock in the public market
following this offering, or the perception that substantial sales may be made
could cause the market price of our common stock to decline. In addition to the
adverse effect a price decline could have on holders of our common stock, such a
decline would likely impede our ability to raise capital through the issuance of
additional equity securities. Upon completion of this offering, based on the
number of shares of our common stock outstanding as of September 30, 2000, we
will have 52,912,293 shares of common stock outstanding or 53,737,293 shares
outstanding if the underwriters' over-allotment option is exercised in full. Of
these, at least 2,655,000 shares will become available for sale 181 days after
the date of this prospectus upon the expiration of lock-up agreements. Merrill
Lynch, Pierce, Fenner & Smith Incorporated, however, may waive the lock-up
restrictions at its sole discretion without notice. In addition, 44,757,293
additional shares will become eligible for sale at various times following the
expiration of the lock-up agreements, subject to the restrictions imposed by
Rule 144 and Rule 701 and, in the case of our principal shareholder, additional
contractual restrictions. Of these shares, we have granted registration rights
with respect to 25,425,000 shares of common stock held by our principal
shareholder. For more information, see "Shares Eligible for Future Sale" on page
63.

YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF THE STOCK YOU PURCHASE

The initial public offering price of our common stock will be
substantially higher than the pro forma net tangible book value per share of the
outstanding common stock immediately after the offering. Based on an initial
public offering price of $13.00 per share and our net tangible book value as of
June 30, 2000, if you purchase our common stock in this offering you will suffer
immediate dilution of approximately $11.41 in pro forma net tangible book value
per share, or $11.31 if all options and warrants to purchase our common stock
outstanding as of September 30, 2000 are exercised. Net tangible book value per
share represents the amount of our total tangible assets less our total
liabilities, divided by the number of shares of our common stock outstanding
immediately after this offering. If additional shares are sold by the
underwriters following exercise of their over-allotment option, there will be
further dilution. We have outstanding a large number of stock options with
exercise prices significantly below the initial public offering price of the
shares. To the extent additional options are granted or shares issued, there
will be further dilution.

PROVISIONS OF OUR ARTICLES OF INCORPORATION, BYLAWS AND AN AGREEMENT WITH OUR
PRINCIPAL SHAREHOLDER MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US,
DESPITE THE POSSIBLE BENEFITS TO OUR SHAREHOLDERS

Following the offering, our board of directors will have the authority to
issue up to 1,000,000 shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
those shares without any further vote or action by the shareholders. The rights

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of the holders of our common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that we may issue.
The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. Furthermore, some provisions of our articles of incorporation and bylaws
could delay or make more difficult a merger, tender offer or proxy contest
involving us.

Technology Capital Group S.A., our principal shareholder, and Stephane
Ratel, the principal shareholder of Technology Capital Group, and our principal
beneficial shareholder, have agreed to some restrictions on the sale of their
shares. Technology Capital Group has agreed that for a period of 360 days after
the date of this prospectus, it will not sell or otherwise dispose of its shares
of our common stock in private transactions without our prior consent. In
addition, Mr. Ratel has agreed that during the same 360-day period he will not
sell or otherwise dispose of his shares of Technology Capital Group without our
prior consent. These consent requirements may discourage third parties from
attempting to acquire the shares of our common stock held beneficially by Mr.
Ratel during that period.

Technology Capital Group, but not Mr. Ratel, has also agreed that for an
additional period of three years or until any earlier time that it owns less
than 25% of the outstanding shares of our common stock, it will provide us with
at least 30 days advance notice before agreeing to a sale or other disposition
of one percent or more of our outstanding shares in a private transaction. This
notice requirement may delay a third party's acquisition of the shares of our
common stock held by Technology Capital Group and also provide us with an
opportunity to propose other buyers for the shares who may be more acceptable to
us, to propose to repurchase the shares proposed to be sold or to propose to
register the shares for sale in an underwritten public offering. This notice
requirement may also discourage third parties from attempting to acquire the
shares of our common stock held by Technology Capital Group during that period.
Mr. Ratel has not agreed to comparable restrictions with respect to his shares
of Technology Capital Group. For more information, see "Related Party
Transactions -- Agreement with Principal Shareholder" on page 59.

These provisions of our articles of incorporation and bylaws and this
agreement may have the effect of delaying, deferring or preventing a change in
our control despite possible benefits to our shareholders, may discourage bids
at a premium over the market price of our common stock and may harm the market
price of our common stock and the voting and other rights of our shareholders.

OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY BE UNABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL PUBLIC OFFERING PRICE

There previously has not been a public market for our common stock. We
cannot predict the extent to which investor interest in us will lead to the
development of a trading market or how active that market might become. The
initial public offering price for our common stock was determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the trading market. For a
discussion of the factors to be considered in determining the initial public
offering price, see "Underwriting" on page 65.

Following this offering, the price for our shares of common stock could
be highly volatile and subject to wide fluctuations in response to factors,
including the following:

- actual or anticipated variations in our operating results;

- announcements of technological innovations or new products by us or by
our competitors or customers;

- the loss of significant customers;

- changes in financial estimates or recommendations by stock market
analysts regarding us or our competitors;

- additions or departures of key personnel; and

- changes in general market and economic conditions.

18
<PAGE> 21

In addition, the stock market in general, and the Nasdaq National Market
and stocks of technology companies in particular, have often experienced extreme
price and volume fluctuations. This volatility is often unrelated or
disproportionate to the operating performance of these companies. Broad market
and industry factors may decrease the market price of our common stock,
regardless of our actual operating performance. If our share price is volatile,
we may be the target of securities litigation, which is costly and
time-consuming to defend. Historically, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been initiated against that company. Litigation of this type could result
in substantial costs and a diversion of management's attention and resources,
which would harm our business.

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. In some cases, you
can identify forward-looking statements by terms such as "may," "will,"
"should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "project," "predict," "potential" and similar expressions intended
to identify forward-looking statements. These statements reflect our current
views with respect to future events and are based on assumptions and subject to
risks and uncertainties. These risks, uncertainties and other factors may cause
our actual results, performances or achievements to be materially different from
those expressed or implied by our forward-looking statements. Our
forward-looking statements in this prospectus include, but are not limited to,
statements relating to:

- our business strategy;

- the market opportunity for our systems, including anticipated growth of
our industry and expected demand for our products;

- our plans for hiring additional personnel;

- our estimates regarding our capital requirements and needs for
additional financing; and

- any of our other plans, objectives, expectations and intentions
contained in this prospectus that are not historical facts.

Factors that may cause our actual results to differ materially from our
forward-looking statements include, among others, changes in general economic
and business conditions and the risks and other factors set forth in "Risk
Factors" beginning on page 8.

You should read this prospectus completely and with the understanding
that our actual results may be materially different from what we expect. We will
not update these forward-looking statements, even though our situation may
change in the future. We qualify all of our forward-looking statements by these
cautionary statements.

In this prospectus, we refer to statistics concerning Internet traffic
that we obtained from publicly available materials prepared by Ryan Hankin Kent,
Inc. and to statistics concerning network equipment that we obtained from
publicly available materials prepared by International Data Corporation. These
statistics are based on a number of assumptions. If these assumptions turn out
to be incorrect, actual results may vary from the statistics we have included in
this prospectus. We did not retain these organizations to provide this
information and also have not sought the consent of these organizations to refer
to their data in this prospectus.

19
<PAGE> 22

USE OF PROCEEDS

We estimate our net proceeds from our sale of the 5,500,000 shares of
common stock to be approximately $65.2 million, or approximately $75.2 million
if the underwriters exercise their over-allotment option in full, at the initial
public offering price of $13.00 per share, in each case after deducting the
estimated underwriting discount and estimated offering expenses.

The principal purposes of this offering are to increase our equity
capital and to create a public market for our common stock. We believe this will
facilitate our future access to the public equity markets and enhance our
ability to use our common stock as consideration for acquisitions and as a means
of attracting and retaining key employees.

We intend to use the net proceeds of this offering for general corporate
purposes. We may also use a portion of the net proceeds to fund acquisitions or
licenses of products or technologies, or acquisitions of businesses, that are
related or complementary to our business. However, we have no current agreements
or commitments and are not currently engaged in any negotiations with respect to
any such transactions. We will retain broad discretion in the allocation and
uses of the net proceeds of this offering. Pending use of the net proceeds for
the foregoing purposes, we intend to invest the net proceeds from this offering
in short-term, investment grade, interest bearing securities.

DIVIDEND POLICY

We have never declared or paid dividends on our common stock. We
currently intend to retain earnings to finance the growth and development of our
business and we do not anticipate paying any cash dividends on our common stock
in the foreseeable future. Any determination to pay dividends will be at the
discretion of our board of directors and will depend on our financial condition,
results of operations, capital requirements and other factors the board of
directors deems relevant.

20
<PAGE> 23

CAPITALIZATION

The following table sets forth our cash and cash equivalents and
capitalization as of June 30, 2000:

- on an actual basis; and

- on an as adjusted basis to give effect to the sale by us of shares of
common stock in this offering at an initial public offering price of
$13.00 per share after deducting the underwriting discount and
estimated offering expenses, and our receipt and application of the net
proceeds.

<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------
ACTUAL AS ADJUSTED
---------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
Cash and cash equivalents................................... $ 8,952 $ 74,147
======== ========
Shareholders' equity:
Preferred stock, no par value; 1,000,000 shares authorized
and none outstanding................................... -- --
Common stock, no par value; 75,000,000 shares authorized,
46,746,079 shares issued and outstanding, actual, and
52,246,079 shares issued and outstanding, as
adjusted............................................... 910 66,105
Additional paid-in capital................................ 34,288 34,288
Deferred stock-based compensation......................... (24,305) (24,305)
Notes receivable from shareholders........................ (341) (341)
Retained earnings......................................... 7,095 7,095
-------- --------
Total capitalization.............................. $ 17,647 $ 82,842
======== ========
</TABLE>

The actual and as adjusted information set forth in the table excludes:

- 10,595,207 shares of common stock issuable upon the exercise of options
outstanding as of September 30, 2000 under our 1997 stock option plan,
with a weighted average exercise price of $2.25 per share;

- an additional 3,842,500 shares of common stock reserved for issuance
under our 1997 stock option plan as of September 30, 2000;

- 80,000 shares of common stock issuable upon exercise of warrants with
an exercise price of $7.00 per share;

- 300,000 shares of common stock reserved for issuance under our employee
stock purchase plan, subject to annual automatic increases;

- 200,000 shares of common stock reserved for issuance under our director
stock option plan; and

- an additional 125,000,000 shares of common stock authorized for
issuance under our amended articles of incorporation after June 30,
2000.

From September 30, 2000 through the date of this prospectus, we granted
options to purchase 190,000 shares of common stock with an exercise price of
$11.00 per share.

For further information regarding our stock option and purchase plans,
see "Management -- Benefit Plans" on page 51.

21
<PAGE> 24

DILUTION

The net tangible book value of our common stock as of June 30, 2000, was
approximately $17,647,000, or $0.38 per share of common stock. Net tangible book
value per share represents the amount of our total tangible assets, less our
total liabilities, divided by the total number of shares of common stock
outstanding. After giving effect to the issuance and sale by us of 5,500,000
shares of common stock offered by this prospectus at an initial public offering
price of $13.00 per share and after deducting the underwriting discount and
estimated offering expenses, our pro forma net tangible book value as of June
30, 2000 would have been 82,842,000, or $1.59 per share. This represents an
immediate increase in the pro forma net tangible book value of $1.21 per share
to existing shareholders and an immediate dilution of $11.41 per share to new
investors in this offering. The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $13.00
Net tangible book value per share as of June 30, 2000..... $0.38
Increase in net tangible book value per share attributable
to new investors....................................... 1.21
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.59
------
Dilution per share to new investors......................... $11.41
======
</TABLE>

The following table sets forth on a pro forma basis as of June 30, 2000:

- the number of shares of common stock purchased from us;

- the total consideration paid to us;

- the average price per share paid by existing shareholders; and

- the average price per share paid by new shareholders before deducting
the underwriting discount and estimated offering expenses payable by
us:

<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
---------------- ----------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------- ------- -------------
(IN THOUSANDS, EXCEPT PERCENT AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Existing shareholders............................. 46,746 89.5% $ 2,210 3.0% $ 0.05
New shareholders.................................. 5,500 10.5 71,500 97.0 13.00
------ ----- ------- -----
Total........................................... 52,246 100.0% $73,710 100.0%
====== ===== ======= =====
</TABLE>

The foregoing discussion and tables assume no exercise of any stock
options or warrants outstanding. As of September 30, 2000, there were options
and warrants outstanding to purchase a total of approximately 10,675,207 shares
of common stock with a weighted average exercise price of $2.29 per share. From
September 30, 2000 through the date of this prospectus, we granted options to
purchase 190,000 shares of common stock with an exercise price of $11.00 per
share.

The following table sets forth on a pro forma basis, assuming full
exercise of all outstanding options and warrants for the purchase of our common
stock, as of September 30, 2000:

- the number of shares of common stock purchased from us;

- the total consideration paid to us;

- the average price per share paid by existing shareholders; and

22
<PAGE> 25

- the average price per share paid by new shareholders before deducting
the underwriting discount and estimated offering expenses payable by
us:

<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
---------------- ----------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------- ------- -------------
(IN THOUSANDS, EXCEPT PERCENT AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Existing shareholders............................. 58,088 91.3% $26,729 27.2% $ 0.46
New shareholders.................................. 5,500 8.7 71,500 72.8 13.00
------ ----- ------- -----
Total........................................... 63,588 100.0% $98,229 100.0%
====== ===== ======= =====
</TABLE>

An additional 4,342,500 shares of common stock were available as of
September 30, 2000 for future issuance under our stock option and purchase
plans. For further information regarding our stock option and purchase plans,
including provisions for the automatic increase in reserved shares, see
"Management -- Benefit Plans" on page 51. To the extent that additional shares
reserved for issuance under our plans are issued, there will be further dilution
to the new shareholders.

23
<PAGE> 26

SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes to those consolidated financial statements included elsewhere in this
prospectus. The statement of operations data set forth below for the period from
May 27, 1997, our inception, through December 31, 1997 and for the years ended
December 31, 1998 and 1999 and the balance sheet data as of December 31, 1998
and 1999 are derived from, and are qualified by reference to, our audited
consolidated financial statements included elsewhere in this prospectus. The
balance sheet data as of December 31, 1997 are derived from our consolidated
financial statements not included in this prospectus. The statement of
operations data set forth below for the six month periods ended June 30, 1999
and 2000 and the balance sheet data as of June 30, 2000 are derived from, and
are qualified by reference to, our unaudited consolidated financial statements
included elsewhere in this prospectus. The unaudited consolidated financial
statements include all normal recurring adjustments that we consider necessary
for a fair presentation of our financial position and results of operations. The
results of operations for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 2000, or any other future period.

<TABLE>
<CAPTION>
MAY 27, 1997
(INCEPTION) YEAR ENDED SIX MONTHS
THROUGH DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, --------------------------- -----------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS,
EXCEPT PER SHARE DATA):
Net revenues.................................. $ -- $ 4,916 $24,499 $ 8,214 $28,268
Cost of revenues(1)........................... -- 1,309 4,944 1,412 5,626
------- ------- ------- ------- -------
Gross profit................................ -- 3,607 19,555 6,802 22,642
------- ------- ------- ------- -------
Operating expenses:
Research and development.................... 513 1,580 2,780 1,182 2,744
Sales and marketing......................... -- 940 4,443 1,531 4,372
General and administrative.................. 110 509 1,660 588 1,733
Stock-based compensation(2)................. -- 154 1,847 407 6,250
------- ------- ------- ------- -------
Total operating expenses............... 623 3,183 10,730 3,708 15,099
------- ------- ------- ------- -------
Income (loss) from operations............... (623) 424 8,825 3,094 7,543
Interest income, net.......................... 7 14 88 18 221
------- ------- ------- ------- -------
Income (loss) before income taxes........... (616) 438 8,913 3,112 7,764
Income tax expense (benefit).................. (294) 118 4,103 1,362 5,477
------- ------- ------- ------- -------
Net income (loss)........................... $ (322) $ 320 $ 4,810 $ 1,750 $ 2,287
======= ======= ======= ======= =======

Earnings (loss) per share:
Basic....................................... $ (0.01) $ 0.01 $ 0.11 $ 0.04 $ 0.05
Diluted..................................... $ (0.01) $ 0.01 $ 0.10 $ 0.04 $ 0.04
Weighted average number of shares outstanding:
Basic....................................... 43,041 43,200 43,574 43,218 45,236
Diluted..................................... 43,041 45,619 48,896 46,340 52,989
------------
(1) Stock-based compensation included in cost of
revenues.................................... $ -- $ 8 $ 38 $ 10 $ 386
======= ======= ======= ======= =======
(2) Stock-based compensation:
Research and development.................. $ -- $ 92 $ 669 $ 94 $ 2,597
Sales and marketing....................... -- 62 449 124 1,771
General and administrative................ -- -- 729 189 1,882
------- ------- ------- ------- -------
$ -- $ 154 $ 1,847 $ 407 $ 6,250
======= ======= ======= ======= =======
</TABLE>

24
<PAGE> 27

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1997 1998 1999 2000
---- ---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents.......................... $304 $1,124 $ 8,733 $ 8,952
Working capital.................................... 691 1,232 7,500 15,072
Total assets....................................... 669 3,266 15,822 25,119
Total shareholders' equity......................... 578 1,760 8,610 17,647
</TABLE>

25
<PAGE> 28

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors,
including those set forth under "Risk Factors" beginning on page 8 and elsewhere
in this prospectus. The following discussion should be read together with our
consolidated financial statements and the notes to those consolidated financial
statements included elsewhere in this prospectus.

OVERVIEW

We develop, market and sell high-speed, multi-port network performance
analysis systems for advanced optical communications equipment and networks, as
well as electrical communications equipment and networks. Our products address a
broad range of network equipment and systems that are used throughout the
Internet and local, metropolitan and wide area networks. Our products allow
customers to generate network and Internet protocol traffic and analyze the
performance, accuracy and reliability of equipment and systems that they either
manufacture for sale to others or purchase for use in their own networks. Our
customers include manufacturers of network equipment, Internet and network
service providers, communications chip manufacturers and network users.

Our product offerings include a variety of interface cards, chassis that
can hold up to 16 interface cards each and related software products. Our
interface cards can generate traffic over a variety of optical and electrical
interfaces such as Packet Over SONET and Gigabit Ethernet. The following table
sets forth, for the periods indicated, our net revenues by principal product
category in absolute dollars and as a percentage of total net revenues:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------- SIX MONTHS ENDED
PRODUCTS 1998 1999 JUNE 30, 2000
-------- -------------- --------------- -----------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Optical interface cards.................... $2,060 41.9% $12,672 51.7% $17,134 60.6%
Electrical interface cards................. 2,248 45.7 8,757 35.8 8,268 29.3
Chassis, software and other products....... 608 12.4 3,070 12.5 2,866 10.1
------ ----- ------- ----- ------- -----
Total.................................... $4,916 100.0% $24,499 100.0% $28,268 100.0%
====== ===== ======= ===== ======= =====
</TABLE>

We were incorporated in May 1997. From inception through March 1998, our
operating activities consisted primarily of research and development, staffing
and establishing relationships with potential customers. During this development
period, we funded operations by raising approximately $1.6 million in initial
equity contributions and $500,000 through a short-term loan from a major
shareholder that was repaid in September 1999. We commenced product shipments in
April 1998 and, since then, we have been able to fund operations from internal
cash flows.

Sales to our five largest customers collectively accounted for
approximately $12.5 million or 51.0% of our net revenues in 1999 and $15.0
million or 53.1% of our net revenues for the six months ended June 30, 2000. To
date, we have sold our systems primarily to network equipment manufacturers.
While we expect that we will continue to have some customer concentration for
the foreseeable future, we have sold our systems to a wide variety of customers.
Through June 30, 2000, we had shipped our systems to over 170 customers. To the
extent we develop a broader and more diverse customer base, we anticipate that
our reliance on any one customer will diminish.

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

26
<PAGE> 29

over the 12-month service period. Revenues from maintenance contracts are
deferred and recognized ratably over the term of the contracts.

Cost of Revenues. Our cost of revenues consists of materials, payments to
third party manufacturers, salaries and related expenses for manufacturing
personnel and the warranty cost of hardware to be replaced during the one-year
warranty period. We outsource the majority of our manufacturing operations, and
we conduct final assembly, supply chain management, quality assurance,
documentation control and shipping at our facility. Accordingly, a significant
portion of our cost of revenues consists of payments to our contract
manufacturers. In addition, cost of revenues includes a non-cash component
related to the amortization of deferred stock-based compensation allocated to
manufacturing personnel.

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

- demand for our products;

- new product introductions by us and by our competitors;

- changes in our pricing policies and those of our competitors;

- the mix of our products sold;

- the mix of sales channels through which our products are sold; and

- the pricing we are able to obtain from our component suppliers and
contract manufacturers.

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

Research and development expenses consist primarily of salaries and
related personnel and consulting costs related to the design, development,
testing and enhancements of our systems. We expense our research and development
costs as they are incurred. We also capitalize and depreciate over a two-year
period some costs of our systems used for internal purposes. We expect research
and development expenses to increase as we seek to attain our strategic product
development objectives and to meet changing customer requirements and
technological advances.

Sales and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in sales and marketing and customer
support functions, as well as costs associated with promotional and other
marketing activities. We expect sales and marketing expenses to increase
substantially as we hire additional sales and marketing personnel and
independent sales representatives, initiate additional marketing programs and
establish new sales offices in domestic and international locations. We also
expect to significantly expand our technical support staff to strengthen our
relationships with our customers.

General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, human resources, information technology
and administrative personnel, as well as recruiting and professional fees,
insurance costs and other general corporate expenses, including rent. We expect
general and administrative expenses to increase as we add personnel and incur
additional costs related to the growth of our business and operation as a public
company.

In connection with the grant of stock options and the sale of restricted
stock, we recorded deferred stock-based compensation of $422,000 in 1998, $6.6
million in 1999 and $26.0 million in the six months ended June 30, 2000. These
amounts represent the difference between the deemed fair value of our common
stock for accounting purposes and (1) the exercise price of the options at the
date of grant or

27
<PAGE> 30

(2) the purchase price of the restricted stock. Deferred stock-based
compensation is presented as a reduction of shareholders' equity, with
amortization recorded over the vesting period, which is typically four years. We
amortized $162,000 of deferred stock-based compensation in 1998, $1.9 million in
1999 and $6.6 million for the six months ended June 30, 2000. Based on the
unvested options and stock subject to repurchase as of June 30, 2000, we expect
to record additional stock-based compensation expense relating to deferred
stock-based compensation approximately as follows: $7.9 million during the
remaining six months of 2000, $9.4 million during 2001, $4.7 million during 2002
and $2.3 million during 2003 and thereafter. The amount of deferred stock-based
compensation expense to be recorded in future periods could decrease if options
and stock subject to repurchase for which unearned compensation has been
recorded are forfeited or repurchased.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------- --------------
1998 1999 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................................... 26.6 20.2 17.2 19.9
----- ----- ----- -----
Gross profit......................................... 73.4 79.8 82.8 80.1
----- ----- ----- -----
Operating expenses:
Research and development............................... 32.1 11.3 14.4 9.7
Sales and marketing.................................... 19.1 18.1 18.6 15.5
General and administrative............................. 10.4 6.8 7.2 6.1
Stock-based compensation............................... 3.1 7.5 4.9 22.1
----- ----- ----- -----
Total operating expenses.......................... 64.7 43.8 45.1 53.4
----- ----- ----- -----
Income from operations............................... 8.6 36.0 37.7 26.7
Interest income, net...................................... 0.3 0.4 0.2 0.8
----- ----- ----- -----
Income before income taxes........................... 8.9 36.4 37.9 27.5
Income tax expense........................................ 2.4 16.8 16.6 19.4
----- ----- ----- -----
Net income........................................... 6.5% 19.6% 21.3% 8.1%
===== ===== ===== =====
</TABLE>

From our inception through December 31, 1997, we generated no revenues.

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000

Net Revenues. Net revenues increased 244.1% from $8.2 million for the six
months ended June 30, 1999 to $28.3 million for the six months ended June 30,
2000. Of this increase in net revenues, approximately half came from expanded
sales of existing products and approximately half came from sales of new
products, including primarily new versions of our Packet Over SONET interface
cards and, to a lesser extent, new versions of our Gigabit Ethernet interface
cards. Sales to our five largest customers collectively accounted for $15.0
million or 53.1% of net revenues for the six months ended June 30, 2000 compared
to $4.3 million or 52.3% for the six months ended June 30, 1999.

Gross Profit. Gross profit increased 232.9% from $6.8 million for the six
months ended June 30, 1999 to $22.6 million for the six months ended June 30,
2000. As a percentage of net revenues, gross profit decreased from 82.8% for the
six months ended June 30, 1999 to 80.1% for the six months ended June 30, 2000.
Of this 2.7 percentage point drop in gross margin, approximately half is
attributable to stock-based compensation related to individuals engaged in
operations activities. The balance is attributable to changes in a variety of
factors, including selling prices, product mix and component costs, none of
which was individually significant.

28
<PAGE> 31

Research and Development Expenses. Research and development expenses
increased from $1.2 million for the six months ended June 30, 1999 to $2.7
million for the six months ended June 30, 2000. This increase was primarily
related to higher compensation expense and related benefit costs due to the
addition of engineering personnel. Research and development expenses decreased
as a percentage of net revenues from 14.4% for the six months ended June 30,
1999 to 9.7% for the six months ended June 30, 2000 due to the significant
increase in sales. Including stock-based compensation related to individuals
engaged in research and development activities, research and development expense
increased from $1.3 million in the six months ended June 30, 1999 to $5.3
million in the six months ended June 30, 2000.

Sales and Marketing Expenses. Sales and marketing expenses increased from
$1.5 million for the six months ended June 30, 1999 to $4.4 million for the six
months ended June 30, 2000. This increase was primarily due to increases in
commissions and increases in the number of direct sales and marketing personnel.
Sales and marketing expenses decreased as a percentage of net revenues from
18.6% for the six months ended June 30, 1999 to 15.5% for the six months ended
June 30, 2000 due to a significant increase in sales. Including stock-based
compensation related to individuals engaged in sales and marketing activities,
sales and marketing expense increased from $1.7 million in the six months ended
June 30, 1999 to $6.1 million in the six months ended June 30, 2000.

General and Administrative Expenses. General and administrative expenses
increased from $588,000 for the six months ended June 30, 1999 to $1.7 million
for the six months ended June 30, 2000. This increase was related to higher
compensation expense resulting from increased staffing and increased expenses
for professional services, primarily legal, recruiting and accounting. General
and administrative expenses decreased as a percentage of net revenues from 7.2%
for the six months ended June 30, 1999 to 6.1% for the six months ended June 30,
2000 due to a significant increase in sales. Including stock-based compensation
related to individuals engaged in general and administrative activities, general
and administrative expense increased from $777,000 in the six months ended June
30, 1999 to $3.6 million in the six months ended June 30, 2000.

Stock-based Compensation. For the six months ended June 30, 1999 we
recorded deferred compensation of $1.2 million relating to stock and option
awards compared to $26.0 million recorded for the six months ended June 30,
2000. These amounts are being amortized over the vesting periods of the stock
and option awards. Stock-based compensation increased from $407,000 for the six
months ended June 30, 1999 to $6.3 million for the six months ended June 30,
2000.

Interest Income, Net. Interest income, net increased from $18,000 for the
six months ended June 30, 1999 to $221,000 for the six months ended June 30,
2000. This increase was the result of an increase in cash and cash equivalents.
We have incurred minimal interest expense.

Income Tax Expense. Income tax expense increased from $1.4 million for
the six months ended June 30, 1999, or an effective rate of 43.8%, to $5.5
million for the six months ended June 30, 2000, or an effective tax rate of
70.5%. The difference between the effective rate and the statutory rate was
primarily due to the impact of non-deductible stock-based compensation charges
and state taxes offset by research and development credits. Excluding the impact
of stock-based compensation, the effective rates would have been 38.9% for the
six months ended June 30, 1999 and 39.0% for the six months ended June 30, 2000.

COMPARISON OF THE PERIOD FROM MAY 27, 1997 (INCEPTION) THROUGH DECEMBER 31, 1997
AND YEARS ENDED DECEMBER 31, 1998 AND 1999

Net Revenues. For the period from May 27, 1997 through December 31, 1997,
we were a development stage company and did not ship product or generate
revenues. We commenced product shipments in April 1998 and had net revenues of
$4.9 million in 1998 and $24.5 million in 1999. The 398.4% increase from 1998 to
1999 reflects increased unit sales across our product lines, the introduction of
new product lines, sales to new customers and a full year of product sales in
1999. Sales to our five

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<PAGE> 32

largest customers collectively accounted for $3.0 million or 62.0% of net
revenues in 1998 compared to $12.5 million or 51.0% of net revenues in 1999.

Gross Profit. Gross profit increased 442.1% from $3.6 million in 1998 to
$19.6 million in 1999. Our gross margin increased from 73.4% in 1998 to 79.8% in
1999. This increase in gross margin primarily reflects purchasing and volume
manufacturing efficiencies as production and sales volumes increased.

Research and Development Expenses. Research and development expenses
increased from $513,000 in the period from our inception in May 1997 through
December 31, 1997 to $1.6 million in 1998 and to $2.8 million in 1999. The
increases in both 1998 and 1999 were primarily related to higher compensation
expense and related costs due to the addition of engineering personnel. Research
and development expenses declined as a percentage of net revenues from 32.1% in
1998 to 11.3% in 1999, reflecting the substantial increase in net revenues in
1999 over 1998. Including stock-based compensation related to individuals
engaged in research and development activities, research and development expense
increased from $1.7 million in 1998 to $3.4 million in 1999.

Sales and Marketing Expenses. We did not incur any sales and marketing
expenses in the period from our inception in May 1997 through December 31, 1997.
In 1998, we incurred sales and marketing expenses of $940,000 as we began sales
and marketing activities. These expenses increased to $4.4 million in 1999,
primarily due to increases in the number of direct sales and marketing personnel
and in the commissions paid to independent sales representatives. As a
percentage of net revenues, these expenses remained relatively stable at 19.1%
in 1998 and 18.1% in 1999. Including stock-based compensation related to
individuals engaged in sales and marketing activities, sales and marketing
expense increased from $1.0 million in 1998 to $4.9 million in 1999.

General and Administrative Expenses. General and administrative expenses
increased from $110,000 in the period from our inception in May 1997 through
December 31, 1997 to $509,000 in 1998 and to $1.7 million in 1999. The increase
in 1998 was primarily related to an increase in the number of administrative
personnel. The substantial increase in 1999 was related to higher compensation
expense resulting from increased staffing and increased expenses for
professional services, primarily legal, recruiting and accounting. General and
administrative expenses declined as a percentage of net revenues from 10.4% in
1998 to 6.8% in 1999. Including stock-based compensation related to individuals
engaged in general and administrative activities, general and administrative
expense increased from $509,000 in 1998 to $2.4 million in 1999.

Stock-based Compensation. We did not record any deferred stock-based
compensation for the period from our inception in May 1997 through December 31,
1997. In 1998 we recorded deferred stock-based compensation of $422,000 relating
to stock and option awards compared to $6.6 million recorded in 1999. These
amounts are being amortized over the vesting periods of the options and stock
subject to repurchase. Stock-based compensation increased from $154,000 in 1998
to $1.8 million in 1999.

Interest Income, Net. Interest income, net increased from $7,000 in the
period from our inception in May 1997 through December 31, 1997 to $14,000 in
1998 and to $88,000 in 1999. This increase was the result of an increase in cash
and cash equivalents. We have incurred minimal interest expense.

Income Tax Expense. For the period from our inception in May 1997 through
December 31, 1997, we recorded an income tax benefit of $294,000. This amount
reflects the net federal and state statutory rate net of research and
development credits. Income tax expense increased from $118,000 in 1998 to $4.1
million in 1999. The income tax expense was based on an annual effective tax
rate of 26.9% in 1998 and 46.0% in 1999. The annual effective tax rate in 1998
and 1999 differs from the statutory rate primarily due to stock-based
compensation and state taxes offset by research and development tax credits.
Excluding the effects of deferred stock-based compensation, the effective tax
rate in 1998 would have been 14.8% and the effective tax rate in 1999 would have
been 38.2%.

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<PAGE> 33

QUARTERLY RESULTS OF OPERATIONS

The following table presents unaudited quarterly statement of operations
data for the ten quarters ended June 30, 2000 expressed in dollars and as a
percentage of net revenues. We have prepared this information using our
unaudited interim financial statements that, in our opinion, have been prepared
on a basis consistent with our annual financial statements. We believe this
information reflects all normal non-recurring adjustments necessary for a fair
presentation of such information in accordance with accounting principles
generally accepted in the United States. The results for any quarter may not be
indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $ -- $ 918 $1,734 $2,264 $3,062 $5,152
Cost of revenues....................... -- 140 455 714 489 923
----- ------ ------ ------ ------ ------
Gross profit......................... -- 778 1,279 1,550 2,573 4,229
Operating expenses:
Research and development............. 361 368 338 513 539 643
Sales and marketing.................. 21 145 290 484 506 1,025
General and administrative........... 39 123 162 185 239 349
Stock-based compensation............. 18 36 45 55 86 321
----- ------ ------ ------ ------ ------
Total operating expenses........... 439 672 835 1,237 1,370 2,338
----- ------ ------ ------ ------ ------
Income (loss) from operations........ (439) 106 444 313 1,203 1,891
Interest income, net................... -- 6 4 4 7 11
----- ------ ------ ------ ------ ------
Income (loss) before income taxes.... (439) 112 448 317 1,210 1,902
Income tax expense (benefit)........... (118) 30 121 85 486 876
----- ------ ------ ------ ------ ------
Net income (loss).................... $(321) $ 82 $ 327 $ 232 $ 724 $1,026
===== ====== ====== ====== ====== ======
AS A PERCENTAGE OF NET REVENUES:
Net revenues........................... -- 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... -- 15.3 26.2 31.5 16.0 17.9
----- ------ ------ ------ ------ ------
Gross profit......................... -- 84.7 73.8 68.5 84.0 82.1
Operating expenses:
Research and development............. -- 40.1 19.5 22.7 17.6 12.5
Sales and marketing.................. -- 15.8 16.7 21.4 16.5 19.9
General and administrative........... -- 13.4 9.3 8.2 7.8 6.8
Stock-based compensation............. -- 3.9 2.6 2.4 2.8 6.2
----- ------ ------ ------ ------ ------
Total operating expenses........... -- 73.2 48.2 54.6 44.7 45.4
----- ------ ------ ------ ------ ------
Income from operations............... -- 11.5 25.6 13.8 39.3 36.7
Interest income, net................... -- 0.7 0.2 0.2 0.2 0.2
----- ------ ------ ------ ------ ------
Income before income taxes........... -- 12.2 25.8 14.0 39.5 36.9
Income tax expense..................... -- 3.3 7.0 3.8 15.9 17.0
----- ------ ------ ------ ------ ------
Net income........................... -- 8.9% 18.9% 10.2% 23.6% 19.9%
===== ====== ====== ====== ====== ======

<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1999 1999 2000 2000
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $7,128 $9,157 $11,193 $17,075
Cost of revenues....................... 1,532 2,000 2,141 3,485
------ ------ ------- -------
Gross profit......................... 5,596 7,157 9,052 13,590
Operating expenses:
Research and development............. 664 934 1,083 1,661
Sales and marketing.................. 1,345 1,567 1,631 2,741
General and administrative........... 429 643 652 1,081
Stock-based compensation............. 457 983 2,236 4,014
------ ------ ------- -------
Total operating expenses........... 2,895 4,127 5,602 9,497
------ ------ ------- -------
Income (loss) from operations........ 2,701 3,030 3,450 4,093
Interest income, net................... 28 42 97 124
------ ------ ------- -------
Income (loss) before income taxes.... 2,729 3,072 3,547 4,217
Income tax expense (benefit)........... 1,257 1,484 2,200 3,277
------ ------ ------- -------
Net income (loss).................... $1,472 $1,588 $ 1,347 $ 940
====== ====== ======= =======
AS A PERCENTAGE OF NET REVENUES:
Net revenues........................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... 21.5 21.8 19.1 20.4
------ ------ ------- -------
Gross profit......................... 78.5 78.2 80.9 79.6
Operating expenses:
Research and development............. 9.3 10.2 9.7 9.7
Sales and marketing.................. 18.9 17.1 14.6 16.1
General and administrative........... 6.0 7.0 5.8 6.3
Stock-based compensation............. 6.4 10.7 20.0 23.5
------ ------ ------- -------
Total operating expenses........... 40.6 45.1 50.0 55.6
------ ------ ------- -------
Income from operations............... 37.9 33.1 30.8 24.0
Interest income, net................... 0.4 0.5 0.9 0.7
------ ------ ------- -------
Income before income taxes........... 38.3 33.5 31.7 24.7
Income tax expense..................... 17.6 16.2 19.7 19.2
------ ------ ------- -------
Net income........................... 20.7% 17.3% 12.0% 5.5%
====== ====== ======= =======
</TABLE>

Net revenues have increased in each of the last nine quarters as a result
of increased sales of new and existing products to an expanding customer base.
In the quarter ended June 30, 2000, net revenues increased by $5.9 million, or
52.6%, in comparison to the quarter ended March 31, 2000. This increase was
primarily due to the initial launch of our Packet over SONET OC-48c interface
cards. Gross margins were relatively stable in the 80% range in the last six
quarters, reflecting a consistent mix of revenues from chassis, interface cards
and software. Quarterly increases in operating expenses reflect the continued
expansion of our operations throughout the ten-quarter period.

Our quarterly and annual operating results may fluctuate significantly
due to a variety of factors, most of which are outside of our control, as
discussed in "Risk Factors -- 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" on page 8.

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<PAGE> 34

Most of our expenses, such as employee compensation and lease payments
for facilities and equipment, are relatively fixed in the near term. In
addition, our expense levels are based in part on our expectations regarding
future revenues. As a result, if our actual revenues fall short of our
expectations, our operating results could vary significantly from quarter to
quarter. Due to these factors, you should not rely on our quarterly revenues and
operating results to predict our future performance.

LIQUIDITY AND CAPITAL RESOURCES

To date, we have funded our operations primarily from:

- $1.9 million in equity contributions;

- the issuance of a $500,000 note to a shareholder that was repaid in
September 1999; and

- cash flow from operations since our initial product launch in the
second quarter of 1998.

As of June 30, 2000, we had cash and cash equivalents of $9.0 million.

Net cash provided by operating activities was $45,000 in 1998, $9.0
million in 1999 and $1.7 million for the six months ended June 30, 2000. Net
cash generated in 1998, 1999 and in the six months ended June 30, 2000 was
primarily provided by the growth in net income offset by non-cash expenses and
an increase in working capital requirements. Additionally, for 1999, $4.5
million of the $9.0 million provided by operations relates to the timing of
payments for our 1999 estimated income tax liability. Due to the method in which
estimated income tax payments are made, in 1999 we paid only $66,000 in
estimated taxes during the year and, as of December 31, 1999, we had $4.5
million in accrued income taxes payable. During March 2000, we made an estimated
income tax payment of $4.6 million relating to the 1999 liability. Had this
payment been made in 1999, net cash provided by operations would have been $4.4
million in 1999 and $6.3 million in the six months ended June 30, 2000.

Cash used in investing activities was $425,000 in 1998, $1.0 million in
1999 and $1.6 million in the six months ended June 30, 2000. Cash used in
investing activities consisted exclusively of capital expenditures related to
the acquisition of property and equipment.

Financing activities provided net cash of $1.2 million in 1998, used net
cash of $336,000 in 1999 and provided net cash of $127,000 in the first six
months of 2000. Financing activities in 1998, 1999 and the first six months of
2000 consisted of a $700,000 capital contribution and proceeds from a $500,000
note issued to a shareholder which has been repaid and proceeds from the sale of
common stock and stock option exercises.

We had no material commitments for capital expenditures as of June 30,
2000, but we expect such expenditures to total $3.1 million in 2000, of which
$1.6 million was spent in the six months ended June 30, 2000. These expenditures
will be incurred primarily for the acquisition of property and equipment. As of
June 30, 2000, we also had total minimum lease obligations of $6.2 million
through May 31, 2007 under non-cancelable operating leases. We do not have any
capital leases.

We believe that our existing balances of cash and cash equivalents,
together with the net proceeds of this offering and cash flow expected to be
generated from our operations, will be sufficient to meet our cash needs for
working capital and capital expenditures for at least the next 12 months,
although we could be required, or could elect, to seek additional funding prior
to that time. Our capital requirements will depend on many factors, including
the growth rate of our net revenues, our profitability, our capital
expenditures, working capital requirements, the timing and extent of spending to
support product development efforts and the expansion of our sales, marketing
and technical support efforts.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

We do not hold financial instruments for trading or speculative purposes.
Our financial instruments have short maturities and therefore are not subject to
significant interest rate risk. We generally place funds that are in excess of
our current needs in high credit quality instruments with maturities of less
than

32
<PAGE> 35

one year, such as money market accounts and certificates of deposit. We do not
have any financial liabilities that are subject to interest rate risk. We do not
expect any material loss from our investments and therefore believe that our
potential interest rate exposure is not material. We do not use any derivatives
or similar instruments to manage our interest rate risk.

YEAR 2000 COMPLIANCE

We have not experienced, and do not expect to experience, any significant
problems associated with year 2000 issues. We did not incur material
expenditures to test, repair or replace equipment. In addition, to our
knowledge, our suppliers and other third parties with whom we conduct business
have not experienced material year 2000 problems to date.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Adoption of SAB 101 is required in the fourth quarter of
2000. We have historically recognized and currently recognize revenue under the
guidelines as currently provided by SAB 101.

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB Opinion 25." Interpretation No. 44
became effective on July 1, 2000, except for the provisions relating to
repricings and the definition of an employee, which apply to awards issued after
December 31, 1998. Interpretation No. 44 clarifies the application of APB
Opinion 25 for various matters, specifically:

- the definition of an employee for purposes of applying APB Opinion 25;

- the criteria for determining whether a plan qualifies as a
noncompensatory plan;

- the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and

- the accounting for an exchange of stock compensation awards in a
business combination.

We do not anticipate that the adoption of Interpretation No. 44 will have
a material impact on our financial position or results of operations.

33
<PAGE> 36

BUSINESS

OVERVIEW

We are a provider of systems that allow our customers to measure the
performance of their data communications equipment and networks. Our systems
generate and analyze data traffic, including Voice over IP traffic, which sends
voice communication over data networks using a protocol known as the Internet
Protocol, or IP. The networks our systems analyze include advanced optical
networks, such as Packet Over SONET networks, which transmit packets of
information over high-speed optical networks. Other networks include Gigabit
Ethernet networks, which carry data traffic over optical fiber as well as over
electrical cable and are typically used within a single building or a group of
buildings. In the six months ended June 30, 2000, optical interface cards
accounted for 60.6% of our net revenues. Our systems are highly modular,
scalable and easy to use.

Since our inception, we have sold our systems to over 170 customers.
Based on revenues for the 12 months ended June 30, 2000, our largest customers
by category include:

- Leading network equipment manufacturers such as Cisco Systems, Extreme
Networks and Nortel Networks;

- Internet and network service providers such as AT&T and UUNET
Technologies;

- Communications chip manufacturers such as Broadcom and Level One
Communications, which is now part of Intel; and

- Network users such as Lockheed Martin and Bank of America.

We intend to expand our business by focusing on high-growth markets such
as advanced optical networks which route data traffic throughout the Internet,
as well as networks that provide high-speed access to the Internet, known as
broadband access networks. We intend to maintain our focus on technology
leadership, expanding and further penetrating our customer base and expanding
our international presence.

INDUSTRY BACKGROUND

The popularity of the Internet and the number of Internet-based
applications and services have fueled dramatic growth in the volume of data
traffic. According to Ryan Hankin Kent, Inc., a leading communications market
research firm, Internet traffic is expected to increase from 350,000 terabytes,
or trillions of bytes, per month at the end of 1999 to over 15,000,000 terabytes
per month during 2003, representing a compound annual average growth rate of
over 150%. To accommodate the growth in traffic, investments in network
equipment such as multi-port switches and routers that carry and route data
traffic throughout networks have accelerated. Likewise, increasingly complex
networks have emerged, including local, metropolitan and wide area networks. A
local area network is a data communications network composed of interconnected
computers within a single building or group of buildings. Metropolitan area
networks are local area networks that are joined together in close proximity,
such as within a city. Wide area networks typically interconnect metropolitan
area networks or remote computers across long distances.

As a result of the development of these complex networks, performance
analysis has become more difficult, requiring increasingly sophisticated network
performance analysis systems. We believe that the market for network performance
analysis systems will be driven by several specific market trends, including the
further deployment of Packet Over SONET and Gigabit Ethernet networks and the
associated increased requirements for switching and routing equipment. For
example, International Data Corporation, a data communications market research
firm, estimates that high-speed router shipments will increase from 3.8 million
units in 1999 to 16.1 million units in 2003, representing a compound annual
average growth rate of 44%.

34
<PAGE> 37

THE INCREASING NEED FOR NETWORK ANALYSIS AND MEASUREMENT

The performance of the Internet and other networks such as local,
metropolitan and wide area networks and the analysis and measurement of their
performance are important to the following groups:

- Network Users. Network users such as large corporations increasingly
use specialized systems in order to verify that they are receiving the
level of service that they have contracted to receive from Internet and
network service providers. They also increasingly use these systems to
measure the performance of equipment before deployment in the network.

- Internet and Network Service Providers. Internet and network service
providers seek to provide network users with the high quality network
services they demand. Failure to provide satisfactory service can be
costly and may result in the loss of customers. To ensure these desired
service levels are met, Internet and network service providers must
verify the performance of network equipment and systems prior to
deployment and during operation. In addition, as more complex network
and transmission protocols are developed and implemented, the need to
measure system performance will continue to increase.

- Equipment Manufacturers. To meet the higher standards specified by
network operators and end users, equipment manufacturers who provide
infrastructure equipment and systems must ensure the quality of their
products during development and manufacturing and prior to shipping.
Failure to ensure the consistent performance of their products may
result in the loss of customers, increased research and development
costs, customer service charges and losses resulting from the return of
products.

- Communications Chip Manufacturers. Communications chip manufacturers
require equipment to evaluate and analyze the performance of their
chips during the design and development phase.

The following characteristics are used to evaluate the performance of
network infrastructure equipment and systems:

- Throughput is the maximum rate at which a network device or network can
transmit distinct units of data, called packets, without loss of
packets;

- Latency is the time that it takes a packet to travel through a network
device or network;

- Loss is the percentage of packets lost during transmission through a
network device or network;

- Jitter is the variation in the time intervals between packets
transmitted through a network device or network;

- Integrity checking confirms that the user information transmitted
through a network device or network has not been corrupted; and

- Sequence checking verifies that packets are received in the same order
in which they were sent through a network device or network.

CHARACTERISTICS DEMANDED OF NETWORK PERFORMANCE ANALYSIS AND MEASUREMENT
EQUIPMENT

Performance requirements of network equipment and systems are becoming
increasingly demanding. As a result, precise performance verification is
becoming more important throughout the design, development, production,
deployment and operation of network equipment and systems. Because this
performance verification must take place across multiple layers of the network
infrastructure and across all optical and electrical technologies, network
performance verification systems are required to be highly flexible and modular.
In order to address multi-port switches and routers, performance verification
systems must also be highly scalable and capable of generating and analyzing
large amounts of data at high speeds over increasingly complex configurations.
The rapid evolution of complex network technologies and protocols, including the
emergence of new, highly complex protocols such as Packet Over SONET

35
<PAGE> 38

and Gigabit Ethernet, has also resulted in the need for performance verification
systems that are easy to use with minimal training and set-up.

THE IXIA SOLUTION

We are a provider of multi-port traffic generation and performance
analysis systems for the high-speed data communications market, including the
Internet infrastructure and local, metropolitan and wide area networks. Our
systems address the need for accurate and reliable performance verification of
optical and electrical networks. The optical and electrical interfaces these
networks use include Packet Over SONET OC-48c, OC-12c and OC-3c, Gigabit
Ethernet and 10/100 megabits per second Ethernet. Our systems meet the
requirements of a wide variety of customers, including network equipment
manufacturers, Internet and network service providers, communications chip
manufacturers and network users.

Our systems provide the following key benefits to our customers:

High Performance. Our systems generate and receive data traffic at wire
speed, which is the maximum rate that data traffic can be transmitted over the
network. Our systems provide accurate analysis across multiple layers of the
overall network and of individual network components in real-time, that is, as
the transmission is actually occurring. By analyzing each discrete packet of
information on a packet-by-packet basis, our systems allow our customers to
precisely measure the performance of their networks and individual network
components. This precision allows customers to accurately measure critical
quality of service parameters such as throughput, latency, loss and jitter and
check data integrity and packet sequence throughout the network, as well as to
locate various network problems. Our systems also allow users to precisely
repeat complex test scenarios in order to evaluate the impact of changes made to
network equipment and systems.

Highly Scalable. Each of our interface cards provides one or more ports
through which our systems generate and receive data traffic. Our customers can
easily increase port density, which is the number of ports in an individual
chassis, by inserting additional interface cards. By connecting multiple chassis
and synchronizing up to thousands of ports to operate simultaneously, our
customers can simulate large-scale networks. We believe that our systems offer
our customers the highest port density and therefore the most scalable systems
available. In addition, our client server architecture allows multiple users in
the same or different geographic locations to simultaneously access and operate
different interface cards contained in the same chassis without affecting one
another.

Highly Modular. Our hardware products consist of stackable and portable
chassis which can be configured with any mix of up to 16 of our optical and
electrical interface cards. This modular design allows our customers to quickly
and easily create complex and custom test configurations. Our systems also allow
for the convenient integration of additional network technologies into existing
systems through the addition of specific interface cards.

Flexibility. Our customers can easily reconfigure our systems to address
changing technologies, protocols and applications without changing system
hardware or replacing interface cards. For example, a customer can reconfigure
our systems through software changes downloaded from our Web site. A customer
might download these changes to test new network protocols or types of
equipment.

Ease of Use. We have designed our systems so that users can install and
operate them with minimal training and set-up. Our systems are easy to use and
offer our customers a wide range of readily accessible pre-designed test
configurations. These tests include industry standard and application-specific
tests. Users can easily configure and operate our systems to generate and
analyze data traffic over any combination of interface cards or ports through
our graphical user interface that features a familiar Microsoft Windows
point-and-click environment. Our systems also support the commonly used tool
command programming language, or Tcl, software which allows users to create
custom and automated testing applications tailored to meet their specific
requirements.

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<PAGE> 39

STRATEGY

Our objective is to be the industry leader in multi-port traffic
generation and performance analysis systems for the high-speed data
communications market, including the Internet infrastructure and local,
metropolitan and wide area networks. Key elements of our strategy to achieve
this objective include the following:

Continue to Expand into High-Growth Markets. We plan to further expand
into high-growth markets such as advanced optical networks that route data
traffic throughout the Internet and emerging networks that allow high-speed
access to the Internet, known as broadband access networks. We believe that we
can leverage our core competencies in high-speed transmission protocols into
leadership positions as these technologies are extended across multiple markets
and applications.

Maintain Focus on Technology Leadership. We intend to continue to focus
on research and development in order to maintain our technology leadership
position and to offer performance analysis systems that address new and evolving
network technologies. We intend to maintain an active role in industry standards
committees such as the Internet Engineering Task Force and to continue our
active involvement in industry forums such as the Gigabit Ethernet Alliance. We
also plan to continue to work closely with customers who are developing emerging
network technologies, including Cisco Systems, Extreme Networks, Alteon
WebSystems, Nortel Networks and Juniper Networks, as well as leading edge
start-up companies, to enhance the performance and functionality of our existing
systems and to design future products that specifically address our customers'
needs as they evolve.

Expand and Further Penetrate Customer Base. We plan to strengthen and
further penetrate our existing customer relationships, particularly those with
network equipment manufacturers and Internet and network service providers, and
to pursue sales to new customers. For example, AT&T and UUNET Technologies
currently use our systems to verify the performance and reliability of network
equipment before deployment. We believe we have the potential to increase sales
to Internet and network service providers as they increasingly require
performance measurement and analysis systems that allow them to monitor the
in-service performance of their networks. We plan to strengthen our customer
relationships and to expand our customer base by:

- developing and offering new and innovative systems that meet our
existing and potential customers' needs;

- expanding our sales and marketing efforts; and

- building our reputation and brand name recognition.

We also plan to continue our focus on customer support by maintaining and
expanding the capabilities of our highly qualified and specialized internal
customer engineering group. This group of technically trained professionals
provides our customers with extensive support and assistance, including
assistance with customized requirements and on-site training and support.

Expand International Market Presence. We plan to pursue sales in key
international markets, including Europe and the Asia Pacific region. In order to
pursue sales in these markets, we intend to continue to develop and expand our
relationships with key customers and distributors. In March 2000, we established
a European sales support subsidiary based in the United Kingdom.

PRODUCTS

Our product line is made up of network traffic generation and performance
analysis systems that simulate large-scale networks. Our systems consist of
interchangeable optical and electrical interface cards, multi-slot chassis,
which are metal cases that incorporate a computer, a power supply and a
backplane, which is a hardware component used to connect the interface cards to
the computer. The interface cards generate, receive and analyze data traffic.
The software for these systems includes management software and
application-specific test suites.

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<PAGE> 40

The operator can utilize our analysis systems in either test labs or
within networks. Our systems are operated through standard computer peripheral
devices. These devices include a monitor, keyboard and mouse. The operator of
our systems sets up test parameters for the performance analysis by inputting
data using the keyboard and mouse. The operator observes the results of the
performance analysis using the monitor.

The operator configures our systems based on the specific interfaces of
the network equipment being tested. For example, if the operator wanted to
analyze the performance of a router with Ethernet interfaces, the operator would
insert Ethernet interface cards into our system.

CHASSIS

Our primary chassis, the IXIA 1600 and the IXIA 400, are highly scalable
and can be configured with any combination of optical and electrical interface
cards. Any mix of up to 256 IXIA 1600s and IXIA 400s can be linked together and
time-synchronized to support a diverse range of complex test configurations. The
IXIA 1600 is a 19-inch rack-mountable 16-slot chassis, and the IXIA 400 is a
compact portable four-slot chassis.

INTERFACE CARDS

Each one of our optical and electrical interface cards contains from one
to four independent traffic generation and analysis ports. These ports operate
at wire speed, the maximum rate that data traffic can be transmitted over the
network. Each port on each interface card has a unique transmit stream engine
that is used to generate packets of information and a real-time receive analysis
engine capable of analyzing the packets as they are being received. The transmit
stream engine generates millions of Internet protocol data packets at wire speed
that are transmitted through the network and received by the analysis engine.
The analysis engine then measures throughput, latency, loss and jitter, and
checks data integrity and packet sequence on a packet-by-packet basis. These
measurements can be performed on different types of data traffic such as Web
traffic and Voice over IP. In addition, our systems measure the effectiveness of
networks in prioritizing different types of traffic.

The following tables describe our optical and electrical interface cards.
In the "Optical Interface Cards" table, the "Fiber Type" column distinguishes
between optical interface cards capable of transmitting data traffic over
distances typically longer than one kilometer, known as single-mode cards, and
optical interface cards used for transmitting data traffic over distances
typically shorter than one kilometer, known as multi-mode cards. In both the
"Optical Interface Cards" table and the "Electrical Interface Cards" table, the
"Transmission Speed" column identifies the speed at which data is sent out of
and received by each port on the interface cards, and the "Number of Ports per
Interface Card" column identifies how many ports are contained on a single card.

38
<PAGE> 41

OPTICAL INTERFACE CARDS

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
NUMBER OF PORTS
OUR PRODUCT NAMES FIBER TYPE TRANSMISSION SPEED PER INTERFACE CARD
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Packet Over SONET/SDH
-----------------------------------------------------------------------------------------------------
OC-12c/3c Multi-mode 622/155 Mbps 2
-----------------------------------------------------------------------------------------------------
OC-12cSM/3cSM Single-mode 622/155 Mbps 2
-----------------------------------------------------------------------------------------------------
OC-48c Single-mode 2.488 Gbps 1
-----------------------------------------------------------------------------------------------------
Gigabit Ethernet
-----------------------------------------------------------------------------------------------------
1000LX3 Single-mode 1.25 Gbps 2
-----------------------------------------------------------------------------------------------------
1000LX Single-mode 1.25 Gbps 2
-----------------------------------------------------------------------------------------------------
1000SX3 Multi-mode 1.25 Gbps 2
-----------------------------------------------------------------------------------------------------
1000SX Multi-mode 1.25 Gbps 2
-----------------------------------------------------------------------------------------------------
1000GBIC (with modular Multi-mode 1.25 Gbps 2
fiber-type transceivers) Single-mode
-----------------------------------------------------------------------------------------------------
Ethernet and Fast Ethernet
-----------------------------------------------------------------------------------------------------
100FX Multi-mode 100 Mbps 4
-----------------------------------------------------------------------------------------------------
</TABLE>

ELECTRICAL INTERFACE CARDS

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
NUMBER OF PORTS
OUR PRODUCT NAMES TRANSMISSION SPEED PER INTERFACE CARD
<S> <C> <C>
-----------------------------------------------------------------------------------------------------
Gigabit Ethernet
-----------------------------------------------------------------------------------------------------
1000T 1.25 Gbps 2
-----------------------------------------------------------------------------------------------------
Ethernet and Fast Ethernet
-----------------------------------------------------------------------------------------------------
100TX3 10/100 Mbps 4
-----------------------------------------------------------------------------------------------------
100TX 10/100 Mbps 4
-----------------------------------------------------------------------------------------------------
</TABLE>

SYSTEM MANAGEMENT SOFTWARE

Our systems are managed through graphical user interfaces which consist
of two proprietary applications and the commonly used tool command language, or
Tcl, programming environment. Our graphical user interfaces allow users to
configure our hardware chassis and interface cards in order to generate and
analyze traffic. In addition, our graphical user interfaces allow our users to
execute a variety of industry standard and application-specific tests written by
us. Tcl allows users to create custom and automated test applications tailored
to meet their specific requirements.

APPLICATION SPECIFIC TEST SUITES

We have a large suite of software applications that measure equipment and
network performance, including throughput, latency, loss, jitter, integrity
checking and sequence checking. These measurements allow network equipment
manufacturers and Internet and network service providers to evaluate the
performance of the equipment before and after the equipment is deployed in a
network. These performance measurements also allow network users and Internet
and network service providers to validate network performance and to verify that
the requirements of service level agreements, or SLAs, are being met. Our
application-specific test suites include the following:

Internet Backbone Router Tester. Our Internet Backbone Router Tester
offers a complete system for validation of advanced routers that route data
traffic throughout the Internet and are being deployed by Internet service
providers. It provides the ability to generate and receive data traffic at wire
speed. The Internet Backbone Router Tester provides an integrated mix of Packet
Over SONET and Gigabit Ethernet interfaces. Utilizing routing protocol emulation
software based on BGP-4, a standard industry routing
39
<PAGE> 42

protocol, our tester can simulate the data traffic of millions of users to
automatically configure the routing table within a single router or within a
network of routers. Our system thereby provides performance and reliability
testing of the router or network of routers in realistic conditions.

Cable Modem Automated Test Suite. Our Cable Modem Automated Test Suite
addresses many of the verification requirements of cable modem and cable modem
termination system vendors to obtain Data Over Cable Service Interface
Specifications, or DOCSIS, certification for their equipment from CableLabs, a
cable industry organization, and from EuroDOCSIS, the European cable standards
organization.

Benchmarking Methodology for Network Interconnect Devices (RFC-2544) Test
Suite. Our RFC-2544 Test Suite offers the complete benchmarking validation tests
defined by the Internet Engineering Task Force's Request for Comments 2544.
These tests include throughput, latency and loss tests. These tests can be
readily applied to any device or network utilizing any mix of Packet Over SONET,
Gigabit Ethernet or 10/100 megabits per second Ethernet interfaces. These tests
provide the basic industry accepted benchmarking metrics to qualify a router or
switch before network deployment.

LAN Switching Devices (RFC-2285) Test Suite. Our RFC-2285 Test Suite
complements our RFC-2544 Test Suite by offering a number of additional tests to
qualify the behavior of switching devices for local area networks. These tests
can be readily applied to any device or network utilizing any mix of Gigabit
Ethernet and 10/100 megabits per second Ethernet interfaces.

Quality of Service (QoS) Test Suite. Our Quality of Service, or QoS, Test
Suite offers a comprehensive set of tools designed to verify how effectively a
router distinguishes between different types of data traffic and then routes the
traffic through the network based on those distinctions. The QoS routing
technique assigns a higher priority to some traffic types and a lower priority
to other traffic types, which enables a user to determine the quality of service
of a given traffic type. This test suite supports many combinations of Packet
Over SONET, Gigabit Ethernet and 10/100 megabits per second Ethernet interfaces.

IP Multicast Test Suite. IP Multicast is a protocol that allows a single
computer to distribute data traffic to multiple recipients. For example, a
single Web server could transmit an audio or video broadcast to millions of
users simultaneously. Our IP Multicast Test Suite provides a comprehensive set
of tests designed to evaluate the behavior of Internet protocol multicast
routers, switches and networks. This test suite supports Packet Over SONET,
Gigabit Ethernet and 10/100 megabits per second Ethernet interfaces.

PRODUCTS IN DEVELOPMENT

We are currently developing a number of new products which we plan to
introduce to the market within the next several months. These products include:

Packet Over SONET OC-192c. Our OC-192c Packet Over SONET interface card
will operate at a transmission speed of 9.952 gigabits per second.

IXIA 100 Quality of Service (QoS) Performance Tester. The IXIA 100
Quality of Service Performance Tester will feature an integrated global
positioning system, or GPS, receiver that provides a precise time stamp for each
packet carried by the network. We expect Internet service providers will deploy
IXIA 100's in multiple locations in their networks. Although IXIA 100 units may
be at various geographic locations, they can be time synchronized by utilizing
the GPS-provided time stamp. By doing so, they will be able to accurately
validate network performance and measure the quality of service parameters
specified in service level agreements with their customers.

40
<PAGE> 43

Server Load Balancer Test Suite. The Server Load Balancer Test Suite will
measure the performance of Web server load balancers which distribute traffic
among multiple Web servers.

We may delay or cancel our introduction of these, or any other, new
products to the market as a result of a number of factors, some of which are
beyond our control. For more information regarding these factors, see "Risk
Factors -- If we are unable to successfully introduce new products to keep pace
with rapid technological changes that characterize our market, our results of
operations will be significantly harmed" on page 8 and "Business -- Research and
Development" on page 44.

TECHNOLOGY

The design of all of our systems requires a combination of sophisticated
technical competencies, including design of field programmable gate arrays, or
FPGA's, which are integrated circuits that can be repeatedly reprogrammed to
perform different sets of functions as required. The design of all of our
systems also requires high-speed digital hardware design, software engineering
and optical and mechanical engineering. We have built an organization of
professional staff with skills in all of these areas. The integration of these
technical competencies enables us to design and manufacture performance analysis
systems with optical and electrical interfaces and easy-to-use user interface
software meeting the needs of our customers.

Complex Logic Design. Our systems use field programmable gate arrays that
are programmed by the host personal computer and therefore can be reconfigured
for different applications. Our newest products have clock frequencies, which
are the timing signals that synchronize all components within our system, of up
to 200 megahertz, and logic densities, which are the number of individual
switching components, or gates, of up to one million gates per chip. Our
customers can download new features and enhancements from our Web site using a
Web browser that runs on our system, thereby allowing rapid updates of the
system. Almost all of our logic is designed in VHDL hardware description
language, which is a unique programming language tailored to the development of
logic chips. This language enables the easy migration of the hardware design to
application specific integrated circuits as volumes warrant. We develop VHDL
code in a modular fashion for reuse in logic design, which comprises a critical
portion of our intellectual property. This reusable technology allows us to
reduce the time-to-market for our new and enhanced products.

Software Technology. We devote substantial engineering resources to the
development of software technology for use in our product lines. We have
developed software to control our systems, analyze data collected by our
systems, and monitor, maintain and self-test our hardware and field programmable
gate array subsystems. A majority of our software technology and expertise is
focused on the use of object-oriented development techniques to design software
subsystems that can be reused across multiple product lines. These objects are
client and server independent allowing for distributed network applications.
This software architecture allows all of the software tools developed for our
existing products to be utilized in all of our new products with very little
modification. Another important component of our software technology is our
graphical user interface design. Customer experience with our test products has
enabled us to design a simple yet effective method to display complex
configurations in clear and concise graphical user interfaces for intuitive use
by engineers.

CUSTOMERS

During the period from our inception in May 1997 through June 30, 2000,
we shipped our systems to over 170 customers. No customer other than Cisco
Systems accounted for more than 10% of our net revenues in 1999 or the six
months ended June 30, 2000. Our five largest customers collectively accounted
for 51.0% of our net revenues in 1999 and 53.1% of our net revenues in the six
months ended June 30, 2000. To date, we have sold our systems primarily to
network equipment manufacturers.

We have no long term contracts with any of our customers, and they may
reduce or discontinue their purchases at any time.

41
<PAGE> 44

Customers who purchased more than $100,000 of our products during the
12-month period ended June 30, 2000 include:

<TABLE>
<CAPTION>
<S> <C> <C>
3COM Ericsson NBase Communications
Alcatel Extreme Networks Network Peripherals
Alidian Networks Force 10 Networks Nishan Systems
Allied Telesyn International GTE Nokia
Alteon WebSystems Hewlett Packard Nortel Networks
AT&T IBM Northchurch
Bank of America Intel ONI Systems
Broadband Access Systems IronBridge Networks Redback Networks
Broadcom Juniper Networks River Delta Networks
Cabletron Systems Lockheed Martin Telseon
Cisco Systems Lucent Technologies TeraBeam Networks
Compaq Computer MCI TurboNet Communications
Comverse MMC Networks UUNET Technologies
Ellacoya Networks Motorola
</TABLE>

COMPETITION

The market for network performance measurement and analysis systems for
use in the high-speed data communications industry is highly competitive, and we
expect this competition to increase in the future. We currently compete with
test equipment manufacturers such as Agilent Technologies, Netcom Systems and
Adtech. Netcom Systems and Adtech are both within the Spirent group of
companies. We also compete with start-up companies, such as Antara, which are
focused on network performance measurement. In addition, we compete with network
equipment manufacturers that have developed or may develop in-house performance
analysis products for their own use or for sale to others.

We believe that the principal competitive factors in our market include:

- timeliness of new product introductions;

- product quality, reliability and performance;

- ease of installation, integration and use;

- breadth of product offerings and features;

- price and overall cost of product ownership;

- customer service and technical support; and

- company reputation and size.

We believe that we compete favorably in the key competitive factors that
impact our markets, including technical expertise, new product introductions and
product features, services and support. We intend to remain competitive through
ongoing research and development efforts to enhance existing systems and to
develop new systems. We will also seek to expand our market presence through
marketing and sales efforts. However, our market is still evolving and we may
not be able to compete successfully against current or future competitors.

We expect competition to increase significantly from existing providers
of network performance measurement and analysis products and from companies that
may enter our existing or future markets. These companies may develop similar or
substitute solutions that may be more cost-effective or provide better
performance or functionality than our systems. Also, as we broaden our product
offerings, we may move into new markets in which we will have to compete against
companies already established in those markets. Some of our existing and
potential competitors have longer operating histories, significantly greater
financial, marketing, service, support, technical and other resources,
significantly greater name recognition and a larger installed base of customers
than we do. In addition, many of our competitors have
42
<PAGE> 45

well established relationships with our current and potential customers and have
extensive knowledge of our industry. It is possible that new competitors or
alliances among competitors will emerge and rapidly acquire market share.
Moreover, our competitors may consolidate with each other, or with other
companies, giving them even greater capabilities with which to compete against
us.

To be successful, we must continue to respond promptly and effectively to
the challenges of changing customer requirements, technological advances and
competitors' innovations. Accordingly, we cannot predict what our relative
competitive position will be as the market evolves for network performance
measurement and analysis systems. For more information regarding some of the
risks of competition, see "Risk Factors -- Competition in our market could
significantly harm our results of operations" on page 10.

SALES, MARKETING AND TECHNICAL SUPPORT

Sales. Our direct sales force and manufacturers' representatives market
and sell our systems primarily in the United States. Our distributors market and
sell our systems primarily outside of the United States. Our net revenues from
international product shipments were $565,000 in 1998, $3.2 million in 1999 and
$3.9 million in the six months ended June 30, 2000. Our direct sales force
maintains close contact with our customers and provides technical support to our
manufacturers' representatives and distributors.

Marketing. We have a number of marketing programs to support the sale and
distribution of our systems and to inform existing and potential customers and
our manufacturers' representatives and distributors about the capabilities and
benefits of our systems. Our marketing efforts also include promoting our
business in the following ways:

- participating in industry trade shows and technical conferences;

- advertising in trade journals; and

- communicating through our corporate Web site.

Technical Support. We maintain a technically knowledgeable and responsive
customer service and support staff that is critical to our development of
long-term customer relationships. This highly qualified and specialized internal
customer engineering group:

- offers our customers customized solutions for their performance
validation needs;

- develops custom applications at our company headquarters;

- can be deployed to customer sites on short notice; and

- provides our customers with the training necessary to optimally utilize
our systems.

MANUFACTURING

Our manufacturing operations consist primarily of materials planning and
procurement, quality control, logistics, final assembly and testing and
distribution. We outsource the manufacture and assembly of printed circuit
boards to third party contract manufacturers and assembly companies. This
manufacturing process enables us to operate without substantial space and
personnel dedicated to manufacturing operations. As a result, we can conserve a
significant portion of the working capital and capital expenditures that would
be required for funding inventory and manufacturing processes.

We are dependent upon sole or limited source suppliers for key components
and parts used in our systems, including field programmable gate arrays, chips,
oscillators and optical modules. Additionally, there is currently a worldwide
shortage of the high-speed lasers required for the production of our proposed
OC-192c Packet Over SONET interface card. We and our contract manufacturers
purchase components through purchase orders and have no guaranteed or long-term
supply arrangements with our respective suppliers. In addition, the availability
of many components is dependent in part on our ability and the

43
<PAGE> 46

ability of our contract manufacturers and assembly companies to provide
suppliers with accurate forecasts of future requirements. Any extended
interruption in the supply of any of the key components currently obtained from
a sole or limited source, delay in transitioning to a replacement supplier's
product or replacement component into our systems, could disrupt our operations
and significantly harm our business in any given period. For more information
regarding risks associated with our contract manufacturing arrangements, see
"Risk Factors -- 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" on page 9 and "Risk
Factors -- 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" on page 13.

Lead times for materials and components ordered by us and by our contract
manufacturers vary and depend on factors such as the specific supplier, contract
terms and demand for a component at a given time. We and our contract
manufacturers acquire materials, complete standard subassemblies and assemble
fully-configured systems based on sales forecasts and historical purchasing
patterns. If orders do not match forecasts or substantially deviate from
historical patterns, we and our contract manufacturers may have excess or
inadequate inventory of materials and components, as discussed in "Risk
Factors -- If we fail to accurately forecast our manufacturing requirements, we
could incur additional costs and experience manufacturing delays" on page 12.

RESEARCH AND DEVELOPMENT

We believe that research and development is critical to our business. We
focus our research and development efforts on developing new products and on
further enhancing existing products. Our development efforts include
anticipating and addressing the performance analysis needs of network equipment
manufacturers, Internet and network service providers, communications chip
manufacturers and network users and focusing on emerging high growth network
technologies.

Our future success depends on our ability to continue to enhance our
existing products and to develop products that address the needs of our
customers. We closely monitor changing customer needs by communicating and
working directly with our customers and distributors. We also receive input from
active participation in industry groups responsible for establishing technical
standards.

Development schedules for technology products are inherently difficult to
predict, and we cannot assure you that we will introduce any proposed new
products in a timely fashion. Also, we cannot assure you that our product
development efforts will result in commercially successful products or that our
products will not contain software errors or other performance problems or be
rendered obsolete by changing technology or new product announcements by other
companies. For information regarding some of the risks associated with our
research and development, see "Risk Factors -- 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"
on page 8.

We plan to continue to make significant investments in research and
development. Our research and development expenditures, excluding stock-based
compensation, were $513,000 in 1997, $1.6 million in 1998, $2.8 million in 1999
and $2.7 million in the six months ended June 30, 2000.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

Our success and ability to compete is dependent in part upon our ability
to protect and maintain our proprietary rights to our intellectual property. We
currently rely on a combination of trademark, trade secret and copyright laws
and restrictions on disclosure to establish and protect our intellectual
property. We also expect to rely on patents to protect some of our proprietary
technology. We have filed applications for two U.S. patents but cannot assure
you that the applications will issue into patents or that the patents will be
upheld if they are issued. We also cannot assure you that such patents, if
issued, will be effective in protecting our proprietary technology. We have
registered our Ixia logo and other Ixia trademarks in the

44
<PAGE> 47

United States and have filed for registration of one of our trademarks in other
jurisdictions. We are also in the process of filing applications for
registration of additional Ixia trademarks.

We generally enter into confidentiality agreements with our officers,
employees and consultants. We also generally limit access to and distribution of
our source code and further limit the disclosure and use of other proprietary
information. However, these measures provide only limited protection of our
intellectual property rights. In addition, we may not have signed agreements
containing adequate protective provisions in every case, and the contractual
provisions that are in place may not provide us with adequate protection in all
circumstances. Further, we have not included copyright notices on all of our
copyrightable intellectual property.

Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain or use technology that we regard
as proprietary. We cannot assure you that the steps taken by us to protect our
proprietary rights will be adequate to prevent misappropriation of our
technology or that our competitors will not independently develop technologies
that are similar or superior to our technology. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent as do
the laws of the United States. Any infringement of our proprietary rights could
result in significant litigation costs, and any failure to adequately protect
our proprietary rights could result in our competitors offering similar
products, potentially resulting in loss of competitive advantage and decreased
revenues. Litigation may be necessary to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. Litigation of this type could result in substantial costs and diversion
of resources and could significantly harm our business.

The data communications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to our business. We have not conducted a search to determine whether
the technology we have in our products infringes or misappropriates intellectual
property held by third parties. In addition, because patent applications in the
United States are not publicly disclosed until the patent is issued,
applications may have been filed which could relate to our products. Any claims
asserting that our systems infringe or may infringe proprietary rights of third
parties, if determined adversely to us, could significantly harm our business.

For information regarding some of the risks associated with our
intellectual property and proprietary rights, see "Risk Factors -- Our failure
to protect our intellectual property may significantly harm our results of
operations and reputation" on page 14 and "Risk Factors -- Claims that we
infringe third-party intellectual property rights could result in significant
expenses or restrictions on our ability to sell our products" on page 15.

LEGAL PROCEEDINGS

From time to time, we may be subject to disputes and potential claims by
third parties that are incidental to the conduct of our business. Additionally,
our employees may be subject to disputes and potential claims by third parties
with whom they have a prior employment relationship. On June 21, 2000, one of
our competitors, Netcom Systems, filed an action in the Los Angeles County
Superior Court against Eran Karoly, our Vice President, Marketing and a former
employee of Netcom Systems. In the action, Netcom Systems alleges principally
that Mr. Karoly misappropriated trade secrets and wrongfully solicited employees
of Netcom Systems. Netcom Systems is seeking, among other things, recovery of
damages and an injunction preventing Mr. Karoly and any persons acting in
concert with him from disclosing or using its alleged trade secrets, soliciting
its employees and performing business development or marketing work for Ixia for
a period of 24 months. We were not named as a defendant in the action but are
mentioned in the pleadings as the current employer of Mr. Karoly and as the
competitor for whose benefit the alleged wrongful conduct has occurred. On June
27, 2000 and September 8, 2000 the court denied Netcom Systems' applications for
a temporary restraining order. On October 2, 2000 the court denied Netcom
Systems' motion for a preliminary injunction to enjoin Mr. Karoly, among other
things,

45
<PAGE> 48

from working for us pending the outcome of the lawsuit. Mr. Karoly denies Netcom
Systems' allegations and, based on our preliminary investigation, we believe
that he has substantial defenses. Subject to certain limitations, we have agreed
to defend and indemnify Mr. Karoly in this action. We cannot assure you that the
results of the claims, including the costs of litigation, will not harm our
results of operations or competitive position.

FACILITIES

Our corporate headquarters are located in Calabasas, California, where
currently we lease approximately 45,000 square feet of an approximately 50,000
square-foot facility which houses our research and development, sales and
marketing, finance and administration and manufacturing operations for which we
currently pay $90,000 per month. We expect that in the future we will pay some
additional amount per month as a result of our lease of the remainder of the
facility and usual and customary adjustments. The lease expires in May 2007. We
also lease office space for our sales offices in Santa Clara, California and
Richardson, Texas and for our sales support office in the United Kingdom. We
believe that our current facilities will be adequate to meet our needs for at
least the next 12 months, and that we will be able to obtain additional space
when and as needed on acceptable terms.

EMPLOYEES

As of September 30, 2000, we had 128 full-time employees. We also from
time to time hire temporary and part-time employees and independent contractors.
Our future performance depends, to a significant degree, on our continued
ability to attract and retain highly skilled and qualified technical, sales and
marketing and senior management personnel. Our employees are not represented by
any labor unions. We consider our relations with our employees to be good.

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<PAGE> 49

MANAGEMENT

The executive officers, directors and key employees of Ixia as of
September 30, 2000 and their positions with Ixia and ages are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Errol Ginsberg...................... 44 President, Chief Executive Officer
and Director
Thomas B. Miller.................... 45 Chief Financial Officer
Paul Mallinder...................... 42 Vice President, Worldwide Sales
Eran Karoly......................... 37 Vice President, Marketing
Joseph A. Noble..................... 49 Vice President, North American Sales
Mark MacWhirter..................... 42 Vice President, Software Development
Cliff Hannel........................ 38 Senior Director of Engineering
Joel Weissberger.................... 50 Director of Hardware Engineering
Walid Chamoun....................... 38 Director of Manufacturing
Jean-Claude Asscher................. 72 Chairman of the Board
Robert W. Bass...................... 54 Director
Howard Oringer...................... 58 Director
Jon F. Rager........................ 60 Director
</TABLE>

Mr. Asscher, Mr. Bass and Mr. Oringer are members of our audit committee.
Mr. Oringer and Mr. Rager are members of our compensation committee.

Mr. Ginsberg has served as our Chief Executive Officer since September
2000, as a director since May 1997 and as our President since June 1997. From
February 1996 to March 1997, Mr. Ginsberg served as Vice President, Engineering
of NetVantage, Inc., a network equipment manufacturer. From November 1994 to
February 1996, he served as an engineering consultant to Netcom Systems, Inc., a
test equipment manufacturer.

Mr. Miller has served as our Chief Financial Officer since March 2000.
From March 1997 to October 1999, Mr. Miller was employed by CoCensys, a biotech
research and development company, where he served as Director of Finance and
Controller. From September 1996 to February 1997, Mr. Miller served as a
consultant to various companies. From May 1995 to August 1996, he served as
Controller, Financial Operations of Emulex Corporation, a manufacturer of
network products.

Mr. Mallinder joined Ixia as Director of Marketing in October 1998. He
served as Vice President, Sales and Marketing from February 1999 to April 2000
when he assumed his present position as Vice President, Worldwide Sales. From
June 1998 to September 1998, Mr. Mallinder served as Director of Product
Marketing for OneBox Networks, a network equipment manufacturer. From February
1989 to January 1998, Mr. Mallinder was employed by ECI Telematics, a network
equipment manufacturer, and its predecessor, where he served as a network
consultant from January 1992 to May 1996, as Director, Product Marketing from
May 1996 to January 1998 and as Associate Vice President of Marketing from
January 1998 to May 1998.

Mr. Karoly joined Ixia as Vice President, Marketing in April 2000. From
October 1998 until March 2000, he served as Product Marketing Manager for Netcom
Systems. From November 1995 to September 1998, Mr. Karoly was employed by ECI
Telematics where he served as Product Marketing Manager from November 1995 to
January 1998 and as Director, Product Marketing from January 1998 to September
1998. From October 1994 until October 1995, Mr. Karoly served as Project Manager
for ECI Telecom, a network equipment manufacturer.

Mr. Noble joined Ixia as Vice President, Sales in March 1999. He assumed
his present position as Vice President, North American Sales in April 2000. From
January 1998 to March 1999, Mr. Noble served as Regional Sales Manager, Southern
Region, for Box Hill Systems, a provider of data storage and storage area
network systems. From March 1991 to January 1998, Mr. Noble served as Marketing

47
<PAGE> 50

Director of Lampi LLC, a lighting manufacturer, where he was responsible for
worldwide sales and marketing.

Mr. MacWhirter joined Ixia as Vice President, Software Development in
August 1999. From December 1994 to August 1999, Mr. MacWhirter served as
President of LearningCurve, Inc., a software consulting company. From August
1997 to August 1999, Mr. MacWhirter served as a consultant to Ixia in his
capacity as President of LearningCurve.

Mr. Hannel joined Ixia as Senior Director of Engineering in May 2000.
From August 1996 to May 2000, he served as Vice President, Product Development
of Internet Dynamics, a developer of network security software. From May 1995 to
August 1996, Mr. Hannel served as a Senior Project Manager for Alpharel, Inc., a
developer of client and server document management systems.

Mr. Weissberger has served as our Director of Hardware Engineering since
June 1997. From April 1996 to June 1997, Mr. Weissberger served as an
engineering consultant for NetVantage, Inc. From May 1990 to April 1996, he
served as a contracting engineer for Jet Propulsion Laboratory.

Mr. Chamoun joined Ixia as Director of Manufacturing in February 2000.
From February 1991 to November 1999, Mr. Chamoun was employed by ACT Networks, a
network equipment manufacturer, where he served as Manufacturing Manager from
July 1995 to June 1997, as Director of Manufacturing from June 1997 to November
1998 and as Vice President of Manufacturing from November 1998 to November 1999.

Mr. Asscher has been a director of Ixia since May 1997 and Chairman of
the Board since June 1997. He has been the President and principal shareholder
of Tekelec-Airtronic, S.A., a French electronics company, since he founded that
company in 1961. Mr. Asscher is Chairman of the Board of Tekelec, a
telecommunications equipment manufacturer.

Mr. Bass has been a director of Ixia since August 2000. Since December
1991, Mr. Bass has been employed by Xircom, Inc., a provider of mobile
information access solutions, where he has most recently served as Vice
President, Worldwide Operations from October 1995 to January 1997 and as Senior
Vice President, Worldwide Operations since January 1997.

Mr. Oringer has been a director of Ixia since May 1997. Since November
1994, Mr. Oringer has served as Managing Director of Communications Capital
Group, a business consulting firm. From August 1996 until December 1996, Mr.
Oringer also served as a consultant to Tekelec. Mr. Oringer also serves as a
member of the Board of Directors of Tekelec, Verilink Corporation, Digital
Microwave Corporation and Vertel Corp.

Mr. Rager has been a director of Ixia since May 1997 and served as our
Chief Financial Officer from June 1997 until March 2000. Mr. Rager also serves
as a director of Tekelec. Since 1976, Mr. Rager has been a practicing accountant
with, and President of, Rager Bell Doskocil & Meyer CPAs and its predecessors.

There is no family relationship between any of our directors or executive
officers and any of our other directors or executive officers.

BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

Our bylaws require that our board of directors consist of four to seven
directors. The number of directors is currently fixed at five. Directors are
elected annually and serve until their successors are duly elected and qualified
or until their earlier resignation, removal or death.

The audit committee consists of Jean-Claude Asscher, committee chairman,
Robert W. Bass and Howard Oringer. The audit committee will review our records
and affairs to determine our financial condition, oversees the adequacy of our
system of internal accounting controls and reviews our accounting methods.

48
<PAGE> 51

The compensation committee consists of Jon F. Rager, committee chairman,
and Howard Oringer. The compensation committee determines compensation for our
officers and administers our 1997 stock option plan and our employee stock
purchase plan.

DIRECTOR COMPENSATION

Employees of Ixia do not receive any compensation for serving on the
board of directors. Non-employee directors receive an annual retainer of $3,000
for serving on the Board or $6,000 if they are serving as Chairman of the Board.

All of our directors may be reimbursed for reasonable travel expenses
incurred in attending board meetings. Our non-employee directors will also
participate in our 2000 director stock option plan. For more information
regarding this plan, see "Management -- Benefit Plans -- Director Stock Option
Plan" on page 53.

On August 2, 2000, Mr. Bass received warrants to purchase 80,000 shares
of common stock with an exercise price of $7.00 per share. The warrants vest in
four equal installments on a quarterly basis commencing September 30, 2000.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth selected information for 1999 concerning
compensation paid, or accrued by Ixia, to or on behalf of our President and
Chief Executive Officer, each of our other two most highly compensated executive
officers for 1999 whose aggregate salary and bonus exceeded $100,000 and one
additional executive officer as of December 31, 1999:

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($)(1) BONUS($) OPTIONS(#)
--------------------------- ------------ -------- -------------------
<S> <C> <C> <C>
Errol Ginsberg(2)................................. $192,304 $290,000 --
President and Chief Executive Officer
Paul Mallinder(3)................................. 153,466 207,000 300,000
Vice President, Worldwide Sales
Joseph A. Noble(4)................................ 229,376(5) -- 450,000
Vice President, North American Sales
Mark MacWhirter(6)................................ -- -- --
Vice President, Software Development
</TABLE>

------------
(1) Includes amounts, if any, deferred at the election of the named officer
under our 401(k) plan.

(2) Mr. Ginsberg has served as our President since June 1997 and became our
Chief Executive Officer in September 2000.

(3) Mr. Mallinder became an executive officer in February 1999 and served as
Vice President, Sales and Marketing from February 1999 to April 2000 when he
became our Vice President, Worldwide Sales.

(4) Mr. Noble commenced his employment with and became an executive officer of
Ixia in March 1999 and served as Vice President, Sales from March 1999 to
April 2000 when he became our Vice President, North American Sales.

(5) Includes sales commissions of $168,644 in lieu of participation in our bonus
plans.

(6) Mr. MacWhirter commenced his employment with and became an executive officer
of Ixia in August 1999 at an annual salary rate of $184,000.

49
<PAGE> 52

OPTION GRANTS IN 1999

The following table sets forth selected information concerning stock
option grants in 1999 to the executive officers named in the Summary
Compensation Table:

<TABLE>
<CAPTION>
POTENTIAL REALIZATION
INDIVIDUAL GRANTS(1) VALUE AT
---------------------------------------------------- ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION -------------------------
NAME GRANTED (#) IN 1999(2) ($/SHARE)(3) DATE 5% 10%
---- ----------- ---------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Errol Ginsberg........... -- -- -- -- -- --
Paul Mallinder........... 75,000 2.3% $0.17 01/10/09 $1,567,807 $ 2,496,471
225,000 6.8 0.28 05/15/09 4,660,687 7,421,365
Joseph A. Noble.......... 450,000 13.6 0.23 03/31/09 9,358,024 14,901,089
Mark MacWhirter.......... -- -- -- -- -- --
</TABLE>

------------
(1) The options in this table were granted under our 1997 stock option plan and
vest and become exercisable as to 25% of the shares covered thereby on the
one-year anniversary of the date of grant and as to the remaining 75% of the
shares covered thereby in 12 equal quarterly installments beginning on the
last day of the first full calendar quarter following the one-year
anniversary of the date of grant. In the event of a change in control prior
to March 31, 2001, Mr. Noble's options will vest as to 50% of the shares as
to which the options are then unvested. The options in this table were
granted for terms of ten years subject to earlier termination under
specified circumstances relating to termination of employment.

(2) In 1999, we granted options to employees to purchase an aggregate of
3,300,000 shares.

(3) The exercise price on the date of grant was equal to 100% of the fair market
value on the date of grant, as determined by the board of directors.

(4) Assumes a per share fair market value equal to the initial public offering
price of $13.00. The dollar amounts under these columns represent the
potential realizable value of each grant assuming that the market value of
our stock appreciates from the date of grant to the expiration of the option
at annualized rates of 5% and 10%. These assumed rates of appreciation have
been specified by the Securities and Exchange Commission for illustrative
purposes only and are not intended to forecast future financial performance
or possible future appreciation in the price of our stock. The actual amount
the executive officer may realize will depend on the extent to which the
stock price exceeds the exercise price of the options on the date the option
is exercised.

AGGREGATE OPTION EXERCISES IN 1999 AND OPTION VALUES AT DECEMBER 31, 1999

The executive officers named in the Summary Compensation Table did not
exercise any stock options in 1999. The following table sets forth selected
information concerning unexercised options held as of December 31, 1999 by those
executive officers:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/99 OPTIONS AT 12/31/99($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Errol Ginsberg............................. -- -- -- --
Paul Mallinder............................. 56,250 468,750 $721,873 $5,989,374
Joseph A. Noble............................ -- 450,000 -- 5,745,015
Mark MacWhirter............................ 75,000 300,000 971,250 3,815,010
</TABLE>

------------
(1) Assumes a per share fair market value equal to the initial public offering
price of $13.00 per share.

50
<PAGE> 53

CHANGE-IN-CONTROL ARRANGEMENTS

Under our officer severance plan, all of our current executive officers
are entitled to receive severance benefits following the termination of their
employment if the termination is non-temporary, involuntary and without cause.
In addition, if we experience a "change in control," as that term is defined by
the plan, an eligible officer will receive benefits under the severance plan if
the officer terminates his or her employment either for any reason within one
year following the change in control or for "good reason," as that term is
defined by the plan, within two years following the change in control. Good
reason includes the assignment to the officer of duties significantly
inconsistent with his or her prior position or a reduction in his or her
compensation or benefits.

Each eligible officer's severance pay equals the product of:

- his or her highest annual compensation (i.e., base salary plus bonus);
and

- a percentage determined in accordance with the following table:

<TABLE>
<CAPTION>
HIGHEST OFFICE HELD AT OR PRIOR TO TERMINATION
--------------------------------------------------------------------------------
CHIEF
EXECUTIVE
SENIOR VICE PRESIDENT/ CHIEF FINANCIAL OFFICER/ OFFICER/
LENGTH OF EMPLOYMENT PERIOD VICE PRESIDENT EXECUTIVE VICE PRESIDENT CHIEF OPERATING OFFICER PRESIDENT
--------------------------- -------------- ------------------------ ------------------------ ---------
<S> <C> <C> <C> <C>
Less than One Year................. 50% 55% 60% 65%
Between One and Three Years........ 75% 80% 85% 100%
Between Three and Five Years....... 100% 105% 110% 200%
More than Five Years............... 125% 130% 140% 300%
</TABLE>

Based on these factors, the amounts that would be payable under the
severance plan to the executive officers named in the Summary Compensation Table
on page 49, if their employment were terminated as of September 15, 2000 under
circumstances entitling them to severance benefits under the severance plan
would be as follows: Mr. Ginsberg -- $1,080,000, Mr. Mallinder -- $305,250, Mr.
Noble -- $189,708 and Mr. MacWhirter -- $151,424. Severance benefits also
include the continuation, at our expense, of health care insurance for a period
of 18 months following termination of employment. In the event that an officer's
severance benefits upon termination will exceed three times the officer's base
compensation for purposes of Section 280G of the Internal Revenue Code of 1986,
as amended, the benefits will automatically be reduced by the minimum amount
necessary to ensure that the benefits do not exceed the amount determined
pursuant to Section 280G.

In connection with the commencement of Joseph A. Noble's employment with
us in March 1999, we granted to him stock options to purchase 450,000 shares of
our common stock. The stock options vest over four years provided Mr. Noble is
employed by us on the vesting dates. The options will also vest as to one-half
of the shares as to which they are then unvested in the event that prior to
March 31, 2001 more than 80% of our common stock outstanding as of March 1999 is
sold to a third party or we sell all or substantially all of our assets or merge
or consolidate with another company and are not the surviving company.

BENEFIT PLANS

1997 STOCK OPTION PLAN

Our 1997 stock option plan was adopted by our board of directors in
November 1997 and approved by our shareholders in May 1998. A total of
17,000,000 shares of common stock has been reserved for issuance under the plan.
The plan provides for the granting to employees of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and for the granting to employees and consultants of nonstatutory stock
options.

The plan is administered by the board of directors or a committee
appointed by the board of directors. The administrator has the power to
determine the terms of the options granted, including the exercise price, the
number of shares subject to the option and the exercisability thereof.

51
<PAGE> 54

The administrator establishes the option exercise price which must be at
least the fair market value of the common stock on the date of the grant or 110%
of fair market value with respect to optionees who own at least 10% of the
outstanding common stock. In the absence of a public market for our common
stock, fair market value is determined by the administrator in its sole
discretion, exercised in good faith. If there is a public market for the common
stock, fair market value is the closing sales price on the date of grant or the
first preceding day on which there was such a reported price. If closing sales
prices are not reported, the fair market value is the average of the closing bid
and asked prices on the date of grant or the first preceding day on which there
were such reported prices.

Options granted under the plan are generally not transferable by the
optionee except by will or the laws of descent and distribution, and each option
is exercisable, during the lifetime of the optionee, only by the optionee.
Options generally must be exercised within 30 days after the optionee's
termination for cause, three months following the end of the optionee's status
as an employee or consultant, other than for cause or for death or disability,
or within six months after the optionee's termination by disability or death.
However, in no event may an option be exercised later than the earlier of the
expiration of the term of the option or ten years from the date of the grant of
the option or, where an optionee owns stock representing more than 10% of the
voting power, five years from the date of the grant of the option.

The maximum number of shares of common stock which may be awarded as
options under the plan during any calendar year to any optionee is 1,500,000
shares. Any incentive stock options granted to an optionee which, when combined
with all other incentive stock options becoming exercisable for the first time
in any calendar year that are held by that person, would have an aggregate fair
market value in excess of $100,000, shall automatically be treated as
nonstatutory stock options.

The plan may be amended, altered, suspended or terminated by the
administrator at any time, but no such amendment, alteration, suspension or
termination may adversely affect the terms of any option previously granted
without the consent of the affected optionee. Unless terminated sooner, the plan
will terminate automatically in November 2007.

As of September 30, 2000, options to purchase 10,595,207 shares of common
stock were outstanding and exercisable at a weighted average price of $2.25 per
share. As of September 30, 2000, 2,562,293 shares had been issued upon exercise
of options under the plan and 3,842,500 shares were available for future option
grants. From September 30, 2000 through the date of this prospectus, we granted
options to purchase 190,000 shares at an exercise price of $11.00 per share.

In 2000, through September 30, we granted options to purchase 6,285,200
shares of common stock at a weighted average exercise price of $3.67 per share.
These grants included options to purchase an aggregate of 20,100 shares at an
exercise price of $0.37 per share and 110,000 shares at an exercise price of
$7.00 per share to one of our four named executive officers, and options to
purchase an aggregate of 750,000 shares at an exercise price of $0.37 per share
to our other executive officers.

EMPLOYEE STOCK PURCHASE PLAN

Our employee stock purchase plan was adopted by our board of directors in
September 2000 and approved by our shareholders in September 2000. The plan will
become effective upon the closing of our initial public offering. We have
reserved a total of 300,000 shares of common stock for issuance under the plan,
together with an automatic annual increase in the number of shares reserved
under the plan on May 1, 2001 and each May 1 thereafter equal to the lesser of:

- 200,000 shares;

- 1% of our outstanding shares of common stock on the last day of our
prior fiscal year; or

- an amount determined by our board.

The plan will be administered by our board of directors and is intended
to qualify under Section 423 of the Internal Revenue Code. Our employees,
including our officers and employee directors, are eligible to participate in
the plan if they are customarily employed for at least 20 hours per week and for
more than five months in any calendar year. The plan permits eligible employees
to purchase common
52
<PAGE> 55

stock through payroll deductions, which may not exceed 15% of an employee's
compensation, defined as Form W-2 compensation plus contributions to our 401(k)
plan, or $25,000 per annum.

Unless our board of directors determines otherwise, the plan will be
implemented in a series of overlapping 24-month offering periods with new
offering periods commencing on May 1 and November 1 of each year. The initial
offering period under the plan will commence on November 1, 2000, and subsequent
offering periods will begin on the first trading day on or after May 1 and
November 1 of each year. Each offering period will be divided into four
consecutive six-month purchase periods. All participants in an offering period
will be granted an option on the first day of the offering period, and the
option will be automatically exercised on the last day of each purchase period
throughout the offering period. The purchase price of our common stock for each
purchase period within an offering period will be 85% of the lesser of the fair
market value per share on the first trading day of the offering period or on the
last trading day of the applicable purchase period, whichever is lower. If the
fair market value of our common stock on any purchase date is lower than the
fair market value on the start date of the offering period, then all
participants in the offering period will be automatically withdrawn from the
offering period following the purchase date and will be re-enrolled in the
immediately following offering period. Fair market value on a trading day is the
closing sales price on such day or the first preceding day on which there was
such a reported price. If closing sales prices are not reported, the fair market
value is the average of the closing bid and asked prices on such day or the
first preceding day on which there were such reported prices. In the absence of
a public market for our common stock, fair market value is determined in good
faith by our board of directors.

Under the plan, no employee may be granted an option if immediately after
the grant, the employee would own stock and/or hold outstanding options to
purchase stock equaling five percent or more of the total voting power or value
of all classes of our stock or that of our subsidiaries. In addition, no
employee may purchase in any purchase period shares having a fair market value,
based on the fair market value of our common stock on the first trading day of
the offering period, of more than $12,500.

Employees may end their participation in an offering period at any time,
and their participation ends automatically on termination of employment with our
company.

The plan will terminate in September 2010, unless our board of directors
terminates it sooner.

DIRECTOR STOCK OPTION PLAN

Our director stock option plan was adopted by our board of directors in
September 2000 and approved by our shareholders in September 2000. We have
reserved a total of 200,000 shares of common stock for issuance under the plan.

The option grants under the plan are automatic and non-discretionary, and
the exercise price of the options is 100% of the fair market value of our common
stock on the grant date. Fair market value is the closing sales price on the
date of grant or the first preceding day on which there was such a reported
price. If closing sales prices are not reported, the fair market value is the
average of the closing bid and asked prices on the date of grant or the first
preceding day on which there were such reported prices. In the absence of a
public market for our common stock, fair market value is determined in good
faith by our board of directors.

The plan provides for an initial grant to a non-employee director of an
option to purchase 10,000 shares of common stock upon the director's initial
election or appointment to the board. The plan also provides for each
non-employee director to be granted an option to purchase 5,000 shares of common
stock upon the director's re-election to the board at an annual meeting of
shareholders, provided the director has served as a non-employee director for at
least six months preceding the date of the annual meeting. The grants become
exercisable in four equal quarterly installments commencing on the last day of
the calendar quarter in which the option is granted. The term of the options
granted under the director stock option plan is seven years.

The plan will terminate in September 2010, unless our board of directors
terminates it sooner.
53
<PAGE> 56

401(k) RETIREMENT PLAN

Effective as of June 1997, we adopted a tax-qualified employee savings
and retirement plan, or 401(k) plan, that covers all of our employees. Pursuant
to our 401(k) plan, participants may elect to reduce their current compensation,
on a pre-tax basis, by up to 15% of their taxable compensation or of the
statutorily prescribed annual limit, whichever is lower, and have the amount of
the reduction contributed to the 401(k) plan. The 401(k) plan permits us, in our
sole discretion, to make additional employer contributions to the 401(k) plan of
up to 6% of an employee's compensation. Our contributions vest 25% per year over
four years. Our 401(k) plan is intended to qualify under Section 401(k) of the
Internal Revenue Code. As such, contributions by employees or by us to the
401(k) plan, and the income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) plan, and we can deduct our
contributions, if any, at the time they are made. We made contributions to our
401(k) plan of $18,000 in 1998 and $59,000 in 1999.

2000 BONUS PLAN

On September 1, 2000, our board of directors approved our 2000 Bonus
Plan. Under the 2000 Bonus Plan, all of our non-commissioned employees are
eligible to receive bonuses of between 10% and 150% of their salaries depending
on their position and based upon our achievement of specified net revenues
thresholds. The executive officers named in the Summary Compensation Table on
page 49 are eligible to receive bonuses of between 40% and 150% of their
salaries.

LIMITATION, LIABILITY AND INDEMNIFICATION MATTERS

Our articles of incorporation limit the liability of our directors to the
maximum extent permitted by California law. California law provides that the
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for any of
the following:

- acts or omissions not in good faith or that involve intentional
misconduct or a knowing and culpable violation of law;

- acts or omissions that a director believes to be contrary to the best
interest of the corporation or its shareholders;

- acts or omissions that show a reckless disregard for the director's
duty to the corporation or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary
course of performing his duties, of a risk of serious injury to the
corporation or its shareholders;

- acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of a director's duty to the corporation
or its shareholders;

- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or

- any transaction from which the director derived an improper personal
benefit.

This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.

Our articles of incorporation and bylaws provide that we will indemnify
our directors and executive officers, and that we may indemnify our other
officers and employees and other agents, to the fullest extent permitted by law.
Our bylaws also permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his actions
in such capacity, regardless of whether the bylaws would permit indemnification.

54
<PAGE> 57

We have entered into with our executive officers and directors agreements
to indemnify them, in addition to the indemnification provided for in our
bylaws. These agreements, among other things, provide for indemnification of our
directors and executive officers for expenses, judgments, fines and settlement
amounts incurred by any such person in any action or proceedings arising out of
such person's services as our director or executive officer or at our request.
We also maintain directors' and officers' liability insurance.

55
<PAGE> 58

PRINCIPAL SHAREHOLDERS

The following table shows information regarding beneficial ownership of
our common stock as of September 30, 2000, assuming (1) 47,412,293 shares
outstanding as of September 30, 2000 and 52,912,293 shares outstanding
immediately following this offering, and (2) no exercise of the underwriters'
over-allotment option, by:

- each person known by us to be the beneficial owner of more than five
percent of our common stock;

- each of our directors;

- each of the executive officers listed in the Summary Compensation Table
under "Management -- Executive Compensation" on page 49; and

- all of our directors and executive officers as a group.

Each person has the sole power to vote or dispose of shares of our common
stock, subject to applicable community property laws and except as described in
the footnotes to the table and for the lock-up agreements described under
"Related Party Transactions -- Agreement with Principal Shareholder" on page 59
and "Underwriting -- No Sales of Similar Securities" on page 66. In computing
the number of shares beneficially owned by an individual and the percentage
ownership of that individual, shares of common stock subject to options owned by
that individual that can be exercised within 60 days after September 30, 2000
are deemed outstanding for that individual, but not for any other persons.

<TABLE>
<CAPTION>
PERCENT OF COMMON STOCK
BENEFICIALLY OWNED
NUMBER OF SHARES ------------------------
OF COMMON STOCK BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Stephane Ratel(1)..................................... 25,425,000 53.6% 48.1%
Errol Ginsberg........................................ 9,595,500(2) 20.2 18.1
Joel Weissberger...................................... 4,800,000(3) 10.1 9.1
Jon F. Rager.......................................... 897,500(4) 1.9 1.7
Howard Oringer........................................ 675,000(5) 1.4 1.3
Mark MacWhirter....................................... 468,750(6) 1.0 *
Jean-Claude Asscher................................... 269,000(7) * *
Paul Mallinder........................................ 196,874(8) * *
Joseph A. Noble....................................... 168,750(9) * *
Robert W. Bass........................................ 5,000(10) * *
Executive officers and directors as a group (10
persons)............................................ 12,326,374(11) 25.9 23.2
</TABLE>

------------
* Less than one percent.

(1) Mr. Ratel is the principal beneficial owner of Technology Capital Group
S.A., an investment company organized under the laws of Luxembourg.
Technology Capital Group S.A., is the record owner of 25,425,000 shares of
our common stock, which it acquired from Natinco, S.A. in a private
transaction in March 2000. Natinco, S.A. acquired the shares in private
transactions as follows:

- 13,725,000 of the shares were acquired from Jean-Claude Asscher in June
1998;

- 2,700,000 of the shares were acquired from Mr. Asscher in November 1999;
and

- 9,000,000 of the shares were acquired from Mr. Asscher's adult children in
November 1999.

Mr. Ratel's business address is c/o Technology Capital Group S.A., 5,
boulevard de la Foire, L-1528 Luxembourg, Grand-Duchy of Luxembourg.

(2) Includes:

- 8,199,500 shares held by The Errol Ginsberg and Annette R. Michelson
Family Trust, of which Mr. Ginsberg and Annette R. Michelson are trustees;

56
<PAGE> 59

- 600,000 shares held by The Errol Ginsberg 1999 QuickGRAT, of which Mr.
Ginsberg is the sole trustee;

- 600,000 shares held by The Annette R. Michelson 1999 QuickGRAT, of which
Ms. Michelson is the sole trustee;

- 98,000 shares held by The Genia Katz 2000 QuickGRAT, of which Mr.
Ginsberg is the sole trustee; and

- 98,000 shares held by The Roleen Postan 2000 QuickGRAT, of which Mr.
Ginsberg is the sole trustee.

Ms. Michelson is the wife of Mr. Ginsberg. Of the shares held by the
Family Trust, 225,000 shares were subject to repurchase as of September
30, 2000 under specified circumstances upon a termination of Mr.
Ginsberg's employment. For more information regarding our repurchase
rights, see "Related Party Transactions" on page 58. Mr. Ginsberg's
business address is c/o Ixia, 26601 W. Agoura Road, Calabasas, California
91302.

(3) Includes 112,500 shares subject to repurchase as of September 30, 2000
under specified circumstances upon a termination of employment. For more
information regarding our repurchase rights, see "Related Party
Transactions" on page 58. Mr. Weissberger's business address is c/o Ixia,
26601 W. Agoura Road, Calabasas, California 91302.

(4) These shares are held by The Rager Family Trust, of which Mr. Rager and his
wife are co-trustees.

(5) These shares are held by the Oringer Family LLC, of which Mr. Oringer is
Executive Managing Member.

(6) Includes 93,750 shares subject to options held by Mr. MacWhirter which are
exercisable or become exercisable within 60 days after September 30, 2000.
Also includes 225,000 shares subject to repurchase rights under specified
circumstances upon a termination of employment. For more information
regarding our repurchase rights, see "Related Party Transactions" on page
58.

(7) Does not include an aggregate of 1,980,000 shares held by Mr. Asscher's
adult children.

(8) Includes 107,813 shares subject to options held by Mr. Mallinder which are
exercisable or become exercisable within 60 days after September 30, 2000.

(9) Includes 56,250 shares subject to options held by Mr. Noble which are
exercisable or become exercisable within 60 days after September 30, 2000.

(10) Includes 5,000 shares subject to warrants held by Mr. Bass which are
exercisable or become exercisable within 60 days after September 30, 2000.

(11) Includes:

- 262,813 shares subject to options and warrants held by current officers
and directors as a group which are exercisable or become exercisable
within 60 days after September 30, 2000; and

- a total of 450,000 shares held by executive officers which were subject
to repurchase as of September 30, 2000 under specified circumstances
upon a termination of employment. For more information regarding our
repurchase rights, see "Related Party Transactions" on page 58 and
footnotes 2 and 6 above in this table.

57
<PAGE> 60

RELATED PARTY TRANSACTIONS

COMMON STOCK ISSUANCES

In June 1997, we issued 9,000,000 shares of common stock to Errol
Ginsberg, our Chief Executive Officer and President, and 4,500,000 shares of
common stock to Joel Weissberger, one of our principal shareholders, in exchange
for their assignment to Ixia of all of their right, title and interest in and to
our original technology and proprietary rights and aggregate cash consideration
of $100.

In June 1997, we also issued the following shares of common stock at a
price of approximately $0.01 per share:

- 27,450,000 shares to Jean-Claude Asscher, our Chairman, for an
aggregate cash purchase price of $277,272;

- 900,000 shares to an affiliate of Jon F. Rager, one of our directors,
for an aggregate cash purchase price of approximately $9,090; and

- 675,000 shares to an affiliate of Howard Oringer, one of our directors,
for an aggregate cash purchase price of approximately $6,818.

In June 1999, we issued 225,000 shares of common stock to Jean-Claude
Asscher, our Chairman, at a price of approximately $0.28 per share for an
aggregate purchase price of $63,750. Mr. Asscher paid the full amount of the
purchase price for the shares by delivering to us a full recourse promissory
note. The note bore interest at the rate of 8% per annum, was collateralized by
the shares of stock purchased by Mr. Asscher and was payable in June 2002. Mr.
Asscher paid the note in full in September 1999.

SALES OF SHARES SUBJECT TO REPURCHASE RIGHTS

In August 1999, we sold 600,000 shares of common stock to Mr. Ginsberg at
a price of approximately $0.28 per share for an aggregate purchase price of
$170,000. In August 1999, we also sold 300,000 shares of common stock to Mr.
Weissberger at a price of approximately $0.28 per share for an aggregate
purchase price of $85,000. Each of Mr. Ginsberg and Mr. Weissberger paid the
full amount of the purchase price for his shares by delivering to us a full
recourse promissory note. Each note bears interest at the rate of 8% per annum,
is collateralized by the shares of common stock purchased by the shareholder and
is payable in August 2002. As of August 20, 2000, the aggregate amount of
principal and interest outstanding under Mr. Ginsberg's note was $183,600 and
under Mr. Weissberger's note was $91,800.

In September 1999, we sold 300,000 shares of common stock to Mark
MacWhirter, our Vice President, Software Development, at a price of
approximately $0.28 per share for an aggregate cash purchase price of $85,000.

The shares purchased by Mr. Ginsberg, Mr. Weissberger and Mr. MacWhirter,
described above, vest over time and are subject to repurchase rights held by us.
The shares purchased by Mr. Ginsberg and Mr. Weissberger vest in eight equal
quarterly installments beginning in September 1999. The shares purchased by Mr.
MacWhirter vested as to 75,000 shares in September 2000 and vest as to the
remaining 225,000 shares in 12 equal quarterly installments beginning in
December 2000. The shares held by each shareholder continue to vest as long as
the shareholder continues to serve as our employee. If before the vesting of all
of a shareholder's shares, we terminate the shareholder's employment for cause
or the shareholder terminates his employment other than for good reason, as
those terms are defined in their agreements with us, we can repurchase the
unvested shares at their original purchase price. If before the vesting of all
of the shares we terminate the shareholder's employment other than for cause or
the shareholder terminates his employment for good reason, all of the shares
will vest on the date of the termination of his employment.

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<PAGE> 61

AGREEMENT WITH PRINCIPAL SHAREHOLDER

We have entered into an agreement with our principal shareholder,
Technology Capital Group S.A., and Stephane Ratel, who is the principal
shareholder of Technology Capital Group, pursuant to which Technology Capital
Group S.A. has agreed:

- for a period of 180 days after the date of this prospectus, not to:

- offer, pledge, sell or contract to sell any shares of our common
stock;

- sell any option or contract to purchase any shares of our common
stock;

- purchase any option or contract to sell any shares of our common
stock;

- grant any option, right or warrant for the sale of any shares of our
common stock;

- lend or otherwise dispose of or transfer any shares of our common
stock;

- request or demand that we file a registration statement related to
our common stock; or

- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any shares of our
common stock whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise;

- for an additional period of 180 days following the end of the initial
180-day period, not to sell shares except as may be permitted under
Rule 144 of the Securities Act of 1933, as amended; and

- for a period of either three years following the end of the second 180
day period, or the time when it owns less than 25% of our outstanding
shares of common stock, to give us 30 days notice prior to entering
into any binding agreement to engage in any transaction of the types
prohibited during Technology Capital Group's initial 180-day lock-up
period as described in the above bullet points with respect to one
percent or more of our outstanding shares of capital stock.

Under this agreement, Mr. Ratel has agreed that for a period of 360 days
after the date of this prospectus he will not engage in any transaction of the
types prohibited during Technology Capital Group's initial 180-day lock-up
period as described in the first bullet point above with respect to his shares
of capital stock of Technology Capital Group. Mr. Ratel has not agreed to any
restriction comparable to that described in the third bullet point above.

In exchange for these agreements, we have granted to Technology Capital
Group demand registration rights to effect registrations for three offerings of
shares of our common stock which it owns and unlimited piggyback registration
rights with respect to the registration of those shares. For more information
regarding these registration rights, please see "Shares Eligible for Future
Sale -- Registration Rights" on page 64.

EQUIPMENT LEASE

We lease some of our computer equipment from Synchronous Network
Solutions, Inc. pursuant to an Equipment Lease Agreement dated October 1, 1997.
Tekelec-Airtronic, S. A. is the principal shareholder of Synchronous Network
Solutions, Inc., and Jean-Claude Asscher, our Chairman, is the President and
principal shareholder of Tekelec-Airtronic S.A. Jon F. Rager, one of our
directors, is the Chief Financial Officer of Synchronous Network Solutions, Inc.
We made aggregate rental payments under the lease of $4,373 in 1997, $22,159 in
1998 and $28,582 in 1999. The lease expired on October 1, 2000.

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<PAGE> 62

SALES OF SYSTEMS

We sell our systems to several companies which until May 2000 were
affiliates of Tekelec-Airtronic, S.A. Jean-Claude Asscher, our Chairman, is the
President and principal shareholder of Tekelec-Airtronic, S.A. Our aggregate
sales to these companies were $47,039 in 1999. As of December 31, 1999, these
companies owed us approximately $8,517 for purchases of our systems.

We also sell our systems to Tekelec, Ltd., a subsidiary of Tekelec and a
distributor of our products. Mr. Asscher is the Chairman of the Board and a
principal shareholder of Tekelec, and Howard Oringer and Jon F. Rager are
directors of Tekelec. Our aggregate sales to Tekelec, Ltd. were $95,050 in 1998
and $388,461 in 1999. As of December 31, 1999, Tekelec, Ltd. owed us
approximately $19,125 for purchases of our systems.

NOTE ISSUED TO DIRECTOR

On June 1, 1998, we received $500,000 from Mr. Asscher in exchange for a
note. We used the proceeds for general corporate purposes and repaid the note in
full in September 1999. We paid no interest on the note.

GUARANTEE

In October 1999, we guaranteed the obligations of Natinco, S.A., a
Luxembourg investment company, to UBS AG in the maximum principal amount of
$1,000,000 plus accrued interest. The guarantee was cancelled in December 1999.
Natinco, S.A. was one of our principal shareholders at the time we entered into
the guarantee.

LOAN TO OFFICER

In July 2000, in connection with the exercise by Mark MacWhirter, our
Vice President, Software Development, of options to purchase 75,000 shares of
our common stock for a total purchase price of $3,750, we advanced to Mr.
MacWhirter the amount of $78,433 for the payment of related taxes. We made this
loan pursuant to a full recourse promissory note that bears interest at the rate
of 8% per annum and is collateralized by the 75,000 shares purchased by Mr.
MacWhirter. The note is payable in July 2003, except that Mr. MacWhirter is
required to apply against the note one-half of all proceeds received from any
sale of the shares pledged as collateral for the note until the note is paid in
full.

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DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 200,000,000 shares of common
stock and 1,000,000 shares of preferred stock. The following is a summary of the
material terms of our common stock and preferred stock. Please see our articles
of incorporation and bylaws, filed as exhibits to the registration statement of
which this prospectus is a part, for more detailed information.

COMMON STOCK

Currently, our authorized common stock consists of 200,000,000 shares of
common stock. As of September 30, 2000, there were outstanding 47,412,293 shares
of common stock held of record by 62 holders. As of September 30, 2000,
10,675,207 shares of common stock were issuable upon the exercise of outstanding
options and warrants and an additional 3,842,500 shares of common stock were
reserved for issuance under our 1997 stock option plan. From September 30, 2000
through the date of this prospectus, we granted options to purchase 190,000
shares of common stock under our 1997 stock option plan. We currently also have
200,000 shares of common stock reserved for issuance under our director stock
option plan and 300,000 shares of common stock reserved for issuance under our
employee stock purchase plan, subject to annual automatic increases. Upon the
closing of this offering and based on shares outstanding as of September 30,
2000, we expect to have 52,912,293 shares of common stock issued and
outstanding.

The holders of common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of shareholders, including the
election of directors. However, upon a shareholder giving notice prior to the
voting as required by law, shareholders may cumulate their votes in the election
of directors. This means that the shareholders would be entitled to a number of
votes equal to the number of their shares multiplied by the number of directors
to be elected. A shareholder would then be entitled to cast all of the
shareholder's votes for any director or for any two or more directors as the
shareholder would choose.

Subject to the rights, preferences, privileges and restrictions
applicable to any outstanding preferred stock, holders of common stock are
entitled to receive dividends when, as, and if declared by the board of
directors out of legally available funds. Upon liquidation or dissolution, the
holders of common stock will be entitled to share ratably in the assets legally
available for the distribution to shareholders after payment of liabilities and
subject to the prior rights of any holders of preferred stock then outstanding.
The holders of common stock have no conversion, sinking fund, redemption,
preemptive or subscription rights. The rights, preferences and privileges of
holders of common stock are subject to the rights of the holders of shares of
any series of preferred stock that may be issued in the future.

PREFERRED STOCK

Our articles of incorporation provide that we may issue up to 1,000,000
shares of preferred stock in one or more series as may be determined by our
board of directors who may, at the time of issuance, establish the number of
shares to be included in each such series, fix the dividend rights, dividend
rates, any conversion rights or right of exchange, any voting rights, rights and
terms of redemption, including sinking fund provisions, the redemption price or
prices, the liquidation preferences, and any other rights, preferences,
privileges, and restrictions of any series of preferred stock of each such
series, and increase or decrease the number of shares of any such series without
any further vote or action by the shareholders. The board of directors may
authorize, without shareholder approval, the issuance of preferred stock with
voting and conversion rights that could harm the voting power and other rights
of holders of common stock. Preferred stock could be issued quickly with terms
calculated to delay or prevent a change in our control or to make the removal of
management more difficult. This could have the effect of decreasing the market
price of the common stock.

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<PAGE> 64

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
AND AN AGREEMENT WITH OUR PRINCIPAL SHAREHOLDER

Some provisions of our articles of incorporation may have the effect of
delaying or preventing changes in control or management of Ixia, which could
have an adverse effect on the market price of our common stock. These include:

- authorizing the board to issue additional preferred stock;

- limiting the persons who may call special meetings of shareholders to
our board of directors, our chairman of the board, our president and
holders of shares entitled to cast not less than 10% of the votes at
the meeting; and

- establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted on
by shareholders at shareholder meetings.

Some provisions of our agreement with Technology Capital Group S.A., our
principal shareholder, and Stephane Ratel, the principal shareholder of
Technology Capital Group, may also have the effect of delaying, deferring or
preventing changes in control or management of Ixia. For more information, see
"Related Party Transactions -- Agreement with Principal Shareholder" on page 59.

LISTING

Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "XXIA."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar of our common stock is U.S. Stock
Transfer Corporation, 1745 Gardena Avenue, Suite 200, Glendale, California
91204. Its telephone number is (818) 502-1404.

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<PAGE> 65

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the offering and based on shares outstanding at
September 30, 2000, we will have outstanding 52,912,293 shares of common stock,
or 53,737,293 shares if the underwriters' over-allotment option is exercised in
full, in each case excluding 10,675,207 shares underlying options and warrants,
based on options and warrants outstanding at September 30, 2000. From September
30, 2000 through the date of this prospectus, we granted options to purchase an
additional 190,000 shares of common stock. Of the outstanding shares, all of the
shares sold in this offering (5,500,000 shares, or 6,325,000 shares if the
underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act
except for any shares purchased by an "affiliate," which will be subject to the
limitations of Rule 144 of the Securities Act. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly, or indirectly through one or
more intermediaries, controls, is controlled by or is under common control with
the issuer. The remaining outstanding shares of common stock will be "restricted
securities" as defined in Rule 144 and may not be resold in the absence of
registration under the Securities Act or pursuant to an exemption from such
registration, including exemptions provided by Rule 144. Immediately following
this offering and based on shares outstanding at September 30, 2000, our
existing shareholders will own 47,412,293 restricted shares, representing
approximately 89.6% of the then outstanding shares of common stock, 88.2% if the
underwriters' over-allotment option is exercised in full. On September 30, 2000,
our executive officers and directors beneficially owned 12,326,374 shares.

LOCK-UP AGREEMENTS

We and our executive officers and directors, and most of our existing
shareholders and optionholders, have agreed not to offer, pledge, sell, contract
to sell or otherwise dispose of any common stock or any securities convertible
into or exchangeable for common stock for a period of 180 days after the date of
this prospectus without the prior written consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, subject to some exceptions as described in
"Underwriting -- No Sales of Similar Securities" on page 66. Our principal
shareholder, Technology Capital Group S.A., has also agreed to further restrict
its sale of shares of our common stock in accordance with the terms of the
agreement described in "Related Party Transactions -- Agreement with Principal
Shareholder" on page 59.

RULE 144

In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person who has beneficially owned and fully paid for restricted
shares for at least one year, including persons who are affiliates, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:

- 1% of the then outstanding shares of our common stock, or approximately
529,123 shares immediately after this offering; or

- the reported average weekly trading volume of our common stock during
the four calendar weeks preceding a sale by such person.

Sales under Rule 144 are also subject to manner-of-sale provisions,
notice requirements and the availability of current public information.

RULE 144(k)

Under Rule 144(k), a person who has not been one of our affiliates during
the 90 days preceding a sale, and who has beneficially owned the shares proposed
to be sold for at least two years, is free to sell such shares without regard to
the volume, manner-of-sale or other limitations contained in Rule 144. Subject
to the 180-day lock-up agreements, upon completion of this offering, holders of
2,655,000 shares of our common stock will be eligible to freely sell those
shares under Rule 144(k).

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Prior to this offering, there has been no public market for our common
stock and we can make no predictions about the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
of our common stock prevailing from time to time. Future sales of substantial
amounts of our common stock in the public market, or the perception that such
sales may occur, may cause the market price of our common stock to decline.

OPTIONS AND WARRANTS

As of September 30, 2000, options and warrants to purchase 10,675,207
shares of our common stock were outstanding. From September 30, 2000 through the
date of this prospectus, we granted options to purchase 190,000 shares of common
stock. We intend to file a registration statement on Form S-8 under the
Securities Act to register all of the shares of our common stock reserved for
issuance under our stock option and stock purchase plans and warrant agreement.
The filing of this registration statement will allow these shares, other than
those held by members of management who are deemed to be affiliates, to be
eligible for sale without restriction, subject to the lock-up period related to
this offering. After the effective date of the registration statement on Form
S-8 and, if applicable, the expiration of the lock-up period related to this
offering, shares purchased upon exercise of options granted pursuant to the
stock option plan or currently outstanding warrants generally will be available
for resale in the public market by non-affiliates without restriction. Sales by
our affiliates of shares registered on the registration statement on Form S-8
are subject to all of the Rule 144 restrictions except for the one-year minimum
holding period requirement.

In addition to possibly being able to sell option and warrant shares
without restriction under a Form S-8 registration statement when effective,
persons other than our affiliates are allowed under Rule 701 under the
Securities Act to sell shares of our common stock issued upon exercise of stock
options and warrants beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144 and to the lock-up
period related to this offering. Our affiliates may also begin selling option
and warrant shares beginning 90 days after the date of this prospectus but are
subject to all of the Rule 144 restrictions except for the one-year holding
period requirement and to the 180-day lock-up period related to this offering.

REGISTRATION RIGHTS

We have entered into an agreement with our principal shareholder,
Technology Capital Group S.A., pursuant to which, beginning on March 15, 2002,
Technology Capital Group will be entitled to demand the registration of all or a
portion of its shares of our common stock. Under the agreement we will be
required to effect up to three registrations pursuant to this demand right. In
addition, after the closing of this offering, if we propose to register any
securities under the Securities Act on Form S-1, S-2 or S-3, Technology Capital
Group will be entitled to include its shares in the registration subject to
quantitative limitations imposed by any underwriters. Under the agreement we
will pay Technology Capital Group's expenses, except underwriting and legal
expenses, in connection with the registration rights. Registration of any of the
shares of our common stock held by Technology Capital Group would result in such
shares becoming freely tradeable immediately upon effectiveness of the
registration. The registration rights will expire after eight years or earlier
if Technology Capital Group can resell all of its shares under Rule 144 during
any 90-day period.

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UNDERWRITING

GENERAL

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin &
Jenrette Securities Corporation and Dain Rauscher Incorporated, are acting as
representatives of the underwriters named below. Subject to the terms and
conditions described in a purchase agreement among us and the underwriters, we
have agreed to sell to the underwriters, and the underwriters severally have
agreed to purchase from us, the number of shares listed opposite their names
below.

<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITER ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 2,400,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,440,000
Dain Rauscher Incorporated.................................. 960,000
Brean Murray & Co., Inc..................................... 100,000
Dominick & Dominick LLC..................................... 100,000
Janney Montgomery Scott LLC................................. 100,000
Legg Mason Wood Walker, Incorporated........................ 100,000
PMG Capital................................................. 100,000
Brad Peery Inc.............................................. 100,000
Tucker Anthony Incorporated................................. 100,000
---------
Total......................................... 5,500,000
=========
</TABLE>

The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
non-defaulting underwriters may be increased or the purchase agreement may be
terminated.

We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.

COMMISSIONS AND DISCOUNTS

The representatives have advised us that the underwriters propose
initially to offer the shares to the public at the initial public offering price
set forth on the cover page of this prospectus and to dealers at that price less
a concession not in excess of $.54 per share. The underwriters may allow, and
the dealers may reallow, a discount not in excess of $.10 per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.

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The following table shows the public offering price, underwriting
discount and proceeds before expenses to us. The information assumes either no
exercise or full exercise by the underwriters of their over-allotment option.

<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price................................... $13.00 $71,500,000 $82,225,000
Underwriting discount................................... $.91 $5,005,000 $5,755,750
Proceeds, before expenses, to Ixia...................... $12.09 $66,495,000 $76,469,250
</TABLE>

The expenses of the offering, not including the underwriting discount,
are estimated at approximately $1,300,000 and are payable by us.

OVER-ALLOTMENT OPTION

We have granted an option to the underwriters to purchase up to 825,000
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise this option for 30 days from the date of this
prospectus solely to cover any over-allotments. If the underwriters exercise
this option, each will be obligated, subject to conditions contained in the
purchase agreement, to purchase a number of additional shares proportionate to
that underwriter's initial amount reflected in the above table.

RESERVED SHARES

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 8% of the shares offered by this prospectus for
sale to some of our business associates and related persons. If these persons
purchase reserved shares, this will reduce the number of shares available for
sale to the general public. Any reserved shares that are not orally confirmed
for purchase within one day of the pricing of this offering will be offered by
the underwriters to the general public on the same terms as the other shares
offered by this prospectus.

NO SALES OF SIMILAR SECURITIES

We and our executive officers and directors and most of our existing
shareholders and option holders have agreed not to sell or transfer any common
stock for 180 days after the date of this prospectus without first obtaining the
written consent of Merrill Lynch. Specifically, we and these other individuals
have agreed not to directly or indirectly:

- offer, pledge, sell or contract to sell any common stock;

- sell any option or contract to purchase any common stock;

- purchase any option or contract to sell any common stock;

- grant any option, right or warrant for the sale of any common stock;

- lend or otherwise dispose of or transfer any common stock;

- request or demand that we file a registration statement related to the
common stock; or

- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.

This lock-up provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the person
executing the agreement or for which the person executing the agreement later
acquires the power of disposition. The lock-up provision will not apply to
specified limited transactions including the following, so long as the acquirer
agrees to hold acquired shares of common stock subject to the lock-up provision:

- the acquisition of shares upon an option holder's exercise of an
option;

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<PAGE> 69

- the transfer of shares during a shareholder's lifetime or on death, by
will or intestacy, to his or her immediate family or to a trust, the
beneficiaries of which are the shareholder and/or a member of his or
her immediate family; and

- our issuance of shares of common stock in connection with the
acquisition of a business.

Additionally, the lock-up provisions will not apply to our issuance of
shares upon exercise of outstanding options or warrants or to our issuance of
shares or grant of options pursuant to existing employee benefit plans but will
apply to sales of shares issued under those plans to individuals who have
previously signed lock-up agreements. Additionally, during the 180-day lock-up
period, we intend to require that any holders of shares issued or options
granted under our existing employee benefit plans during that period enter into
lock-up agreements. We expect these agreements will have the same terms as the
lock-up agreements entered into by our existing shareholders and option holders
in connection with the offering. As of September 30, 2000, 10,595,207 shares of
common stock were issuable upon the exercise of outstanding options and an
additional 3,842,500 shares of common stock were reserved for issuance under our
1997 stock option plan. From September 30, 2000 through the date of this
prospectus, we granted options to purchase 190,000 shares of common stock under
our 1997 stock option plan. We currently also have 200,000 shares of common
stock reserved for issuance under our director stock option plan and 300,000
shares of common stock reserved for issuance under our employee stock purchase
plan, subject to annual automatic increases.

QUOTATION ON THE NASDAQ NATIONAL MARKET

Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "XXIA."

Before this offering, there has been no public market for our common
stock. The initial public offering price was determined through negotiations
among us and the representatives. In addition to prevailing market conditions,
the factors considered in determining the initial public offering price were:

- the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;

- our financial information;

- the history of, and the prospects for, our company and the industry in
which we compete;

- an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues;

- the present state of our development; and

- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.

An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.

The underwriters do not expect to sell more than 5% of the shares being
offered in this offering to accounts over which they exercise discretionary
authority.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

Until the distribution of the common shares is completed, SEC rules may
limit the underwriters from bidding for or purchasing our common shares.
However, the representatives may engage in transactions that stabilize the price
of the common shares, such as bids or purchases that peg, fix or maintain that
price.

The underwriters may purchase and sell the common shares in the open
market. These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by

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short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares in the offering. The underwriters may close
out any covered short position by either exercising their option to purchase
additional shares or purchasing shares in the open market. In determining the
source of shares to close out the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through
the over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common shares in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of common shares made by the underwriters in
the open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common shares or preventing or retarding a decline in
the market price of the common shares. As a result, the price of the common
shares may be higher than the price that might otherwise exist in the open
market.

Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common shares. In addition, neither
we nor any of the representatives make any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.

INTERNET OFFERING

Merrill Lynch will be facilitating Internet distribution for this
offering to some of its Internet subscription customers. Merrill Lynch intends
to allocate a limited number of shares for sale to its online brokerage
customers. An electronic prospectus is available on the Web site maintained by
Merrill Lynch. Other than the prospectus in electronic format, the information
on the Merrill Lynch Web site relating to this offering is not a part of this
prospectus.

LEGAL MATTERS

Bryan Cave LLP, Santa Monica, California, will pass upon the validity of
our common stock and certain other legal matters related to this offering.
Ronald W. Buckly, who is of counsel to Bryan Cave LLP, is our Corporate
Secretary and beneficially owns 898,000 shares of our outstanding common stock,
84,375 of which are subject to vesting requirements related to his continuing to
serve as our Corporate Secretary. Skadden, Arps, Slate, Meagher & Flom LLP, Los
Angeles, California, will pass upon certain legal matters in connection with
this offering for the underwriters. In addition, several members and employees
of Bryan Cave LLP have expressed an interest in purchasing a total of
approximately 6,500 shares of our common stock in this offering through our
directed share program.

EXPERTS

The financial statements as of December 31, 1998 and 1999, and for the
period from May 27, 1997 (inception) through December 1997 and for the years
ended December 31, 1998 and 1999, included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
68
<PAGE> 71

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form S-1, of which this
prospectus is a part, with the Securities and Exchange Commission under the
Securities Act with respect to the common stock offered in this offering. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement, parts of
which are omitted as permitted by the rules and regulations of the Commission.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete. For further information pertaining
to us and our common stock, we refer you to our registration statement and the
exhibits thereto, which can be obtained from the Web site identified below and
copies of which may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part of the registration statement
may be obtained at prescribed rates from the Commission. Please call the
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.

Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Exchange Act and, in
accordance therewith, will file periodic reports, proxy and information
statements and other information with the Commission. Such periodic reports,
proxy and information statements and other information will be available for
inspection and copying at the regional offices, public reference facilities and
Web site of the Commission referred to above.

We intend to furnish our shareholders with annual reports containing
audited financial statements and an opinion thereon expressed by independent
certified public accountants. We also intend to furnish other reports as we may
determine or as required by law.

69
<PAGE> 72

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and Consolidated Balance Sheet as of June 30, 2000........ F-3
Consolidated Statements of Operations for the period from
May 27, 1997 (inception) through December 31, 1997 and for
the years ended December 31, 1998 and 1999 and for the six
months ended June 30, 1999 and 2000....................... F-4
Consolidated Statements of Shareholders' Equity for the
period from May 27, 1997 (inception) through December 31,
1997 and for the years ended December 31, 1998 and 1999
and for the six months ended June 30, 2000................ F-5
Consolidated Statements of Cash Flows for the period from
May 27, 1997 (inception) through December 31, 1997 and for
the years ended December 31, 1998 and 1999 and for the six
months ended June 30, 1999 and 2000....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 73

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Ixia:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity, and cash
flows present fairly, in all material respects, the financial position of Ixia
and its subsidiary (the "Company") as of December 31, 1998 and 1999, and the
results of its operations and its cash flows for the period from May 27, 1997
(inception) through December 31, 1997 and for the years ended December 31, 1998
and 1999, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Woodland Hills, California
May 12, 2000, except for Note 11,
as to which the date is September 1, 2000

F-2
<PAGE> 74

IXIA

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $1,124 $ 8,733 $ 8,952
Accounts receivable, net.............................. 1,126 4,357 8,519
Inventories........................................... 404 746 3,056
Deferred income taxes................................. 64 585 1,414
Prepaid expenses and other current assets............. 20 291 603
------ ------- --------
Total current assets............................. 2,738 14,712 22,544
Property and equipment, net............................. 383 952 2,155
Deferred income taxes................................... 126 27 112
Other assets............................................ 19 131 308
------ ------- --------
Total assets..................................... $3,266 $15,822 $ 25,119
====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 492 $ 1,087 $ 3,232
Accrued expenses...................................... 427 1,382 2,408
Deferred revenue...................................... 73 270 360
Income taxes payable.................................. 14 4,473 1,472
Related-party note.................................... 500 -- --
------ ------- --------
Total liabilities................................ 1,506 7,212 7,472
Shareholders' equity:
Preferred stock, no par value; 1,000 shares authorized
and none outstanding............................... -- -- --
Common stock, no par value; 75,000 shares authorized,
43,200, 45,626 and 46,746 shares issued and
outstanding as of December 31, 1998 and 1999 and
June 30, 2000, respectively........................ 300 783 910
Additional paid-in capital............................ 1,722 8,294 34,288
Deferred stock-based compensation..................... (260) (4,947) (24,305)
Notes receivable from shareholders.................... -- (328) (341)
Retained earnings (deficit)........................... (2) 4,808 7,095
------ ------- --------
Total shareholders' equity....................... 1,760 8,610 17,647
------ ------- --------
Total liabilities and shareholders' equity....... $3,266 $15,822 $ 25,119
====== ======= ========
</TABLE>

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

F-3
<PAGE> 75

IXIA

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
MAY 27, 1997
(INCEPTION) SIX MONTHS
THROUGH YEAR ENDED YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------
1997 1998 1999 1999 2000
------------- ------------ ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................... $ -- $ 4,916 $24,499 $ 8,214 $28,268
Cost of revenues(1)............. -- 1,309 4,944 1,412 5,626
------- ------- ------- ------- -------
Gross profit............. -- 3,607 19,555 6,802 22,642
Operating expenses:
Research and development...... 513 1,580 2,780 1,182 2,744
Sales and marketing........... -- 940 4,443 1,531 4,372
General and administrative.... 110 509 1,660 588 1,733
Stock-based compensation(2)... -- 154 1,847 407 6,250
------- ------- ------- ------- -------
Total operating
expenses............ 623 3,183 10,730 3,708 15,099
------- ------- ------- ------- -------
Income (loss) from
operations............ (623) 424 8,825 3,094 7,543
Interest income, net............ 7 14 88 18 221
------- ------- ------- ------- -------
Income (loss) before
income taxes.......... (616) 438 8,913 3,112 7,764
Income tax expense (benefit).... (294) 118 4,103 1,362 5,477
------- ------- ------- ------- -------
Net income (loss)........ $ (322) $ 320 $ 4,810 $ 1,750 $ 2,287
======= ======= ======= ======= =======

Earnings (loss) per share:
Basic......................... $ (0.01) $ 0.01 $ 0.11 $ 0.04 $ 0.05
Diluted....................... $ (0.01) $ 0.01 $ 0.10 $ 0.04 $ 0.04
Weighted average number of
shares outstanding:
Basic......................... 43,041 43,200 43,574 43,218 45,236
Diluted....................... 43,041 45,619 48,896 46,340 52,989

------------
(1)Stock-based compensation
included in cost of
revenues.............. $ -- $ 8 $ 38 $ 10 $ 386
======= ======= ======= ======= =======
(2)Stock-based compensation:
Research and
development........... $ -- $ 92 $ 669 $ 94 $ 2,597
Sales and marketing...... -- 62 449 124 1,771
General and
administrative........ -- -- 729 189 1,882
------- ------- ------- ------- -------
$ -- $ 154 $ 1,847 $ 407 $ 6,250
======= ======= ======= ======= =======
</TABLE>

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

F-4
<PAGE> 76

IXIA

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE RETAINED
--------------- PAID-IN STOCK-BASED FROM EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS (DEFICIT) TOTAL
------ ------ ---------- ------------ ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of May 27, 1997
(Inception)....................... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock.......... 43,200 300 300
Additional contribution of
capital......................... 600 600
Net loss.......................... (322) (322)
------ ---- ------- -------- ----- ------ -------
Balance as of December 31, 1997..... 43,200 300 600 -- -- (322) 578
Additional contribution of
capital......................... 700 700
Deferred stock-based
compensation.................... 422 (422) --
Amortization of deferred
stock-based compensation........ 162 162
Net income........................ 320 320
------ ---- ------- -------- ----- ------ -------
Balance as of December 31, 1998..... 43,200 300 1,722 (260) -- (2) 1,760
Exercise of stock options......... 776 15 15
Issuance of common stock.......... 1,650 468 (319) 149
Deferred stock-based
compensation.................... 6,572 (6,572) --
Amortization of deferred
stock-based compensation........ 1,885 1,885
Interest receivable from
shareholder..................... (9) (9)
Net income........................ 4,810 4,810
------ ---- ------- -------- ----- ------ -------
Balance as of December 31, 1999..... 45,626 783 8,294 (4,947) (328) 4,808 8,610
Exercise of stock options......... 1,120 127 127
Deferred stock-based
compensation.................... 25,994 (25,994)
Amortization of deferred
stock-based compensation........ 6,636 6,636
Interest receivable from
shareholders.................... (13) (13)
Net income........................ 2,287 2,287
------ ---- ------- -------- ----- ------ -------
Balance as of June 30, 2000
(unaudited)....................... 46,746 $910 $34,288 $(24,305) $(341) $7,095 $17,647
====== ==== ======= ======== ===== ====== =======
</TABLE>

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

F-5
<PAGE> 77

IXIA

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
MAY 27, 1997 SIX MONTHS
(INCEPTION) THROUGH YEAR ENDED YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------
1997 1998 1999 1999 2000
------------------- ------------ ------------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $(322) $ 320 $ 4,810 $1,750 $ 2,287
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation....................... 9 105 452 163 430
Stock-based compensation........... -- 162 1,885 417 6,636
Interest receivable from
shareholders..................... -- -- (9) -- (13)
Deferred income tax (benefit)
provision........................ (294) 104 (422) (203) (914)
Changes in operating assets and
liabilities:
Accounts receivable, net......... -- (1,126) (3,231) (1,473) (4,162)
Inventories...................... -- (404) (342) (426) (2,310)
Prepaid expenses and other
current assets................ (1) (18) (271) (48) (312)
Other assets..................... (7) (12) (112) (5) (177)
Accounts payable................. 72 419 595 211 2,145
Accrued expenses................. 19 408 955 468 1,026
Deferred revenue................. -- 73 197 86 90
Income taxes payable............. -- 14 4,459 1,522 (3,001)
----- ------- ------- ------ -------
Net cash provided by (used in)
operating activities........ (524) 45 8,966 2,462 1,725
----- ------- ------- ------ -------
Cash used in investing activities:
Purchases of property and equipment... (72) (425) (1,021) (284) (1,633)
----- ------- ------- ------ -------
Cash used in investing
activities.................. (72) (425) (1,021) (284) (1,633)
----- ------- ------- ------ -------
Cash flows from financing activities:
Issuance of common stock.............. 300 -- 149 -- --
Exercise of stock options............. -- -- 15 -- 127
Contributed capital from
shareholder........................ 600 700 -- -- --
Proceeds (repayment) of related-party
note............................... -- 500 (500) -- --
----- ------- ------- ------ -------
Net cash provided by (used in)
financing activities........ 900 1,200 (336) -- 127
----- ------- ------- ------ -------
Net increase in cash and cash
equivalents................. 304 820 7,609 2,178 219
Cash and cash equivalents at beginning
of period............................. -- 304 1,124 1,124 8,733
----- ------- ------- ------ -------
Cash and cash equivalents at end of
period................................ $ 304 $ 1,124 $ 8,733 $3,302 $ 8,952
===== ======= ======= ====== =======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Income taxes....................... $ -- $ -- $ 66 $ 41 $ 9,392
===== ======= ======= ====== =======
Supplemental disclosure of noncash
transactions:
Issuance of shareholder notes
receivable......................... $ -- $ -- $ 319 $ 64 $ --
===== ======= ======= ====== =======
</TABLE>

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

F-6
<PAGE> 78

IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Ixia (the "Company") was incorporated on May 27, 1997 as a California
corporation. The Company designs and markets high-speed, multi-port network
performance analysis systems that generate and analyze data traffic over optical
and electrical networks. Through March 1998, the Company was considered to be in
the development stage and was principally engaged in research and development,
raising capital and forming its management team. During April 1998, the Company
ceased to be in the development stage. As of June 30, 2000, the Company is
majority owned (54%) by Technology Capital Group ("TCG"), a Luxembourg private
investment company. TCG acquired its interest in a private transaction from a
former shareholder in March 2000.

Use of Estimates

In the normal course of preparing financial statements in conformity with
accounting principles generally accepted in the United States, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

Consolidation

All subsidiaries are consolidated. All intercompany transactions and
accounts are eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are carried at cost, which approximates fair value.

Fair Value of Financial Instruments

The Company's financial instruments, including cash and cash equivalents,
certificates of deposit, accounts receivable, accounts payable and other
liabilities are carried at cost, which approximates their fair values because of
the short-term maturity of these instruments and the relative stability of
interest rates.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or
market. Appropriate consideration is given to obsolescence and other factors in
evaluating net realizable value.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based upon the estimated
useful lives of the assets, ranging from two to seven years. Useful lives are
evaluated regularly by management in order to determine recoverability in light
of current technological conditions. Repairs and maintenance are charged to
expense as incurred while renewals and improvements are capitalized. Upon the
sale or retirement of property and equipment, the accounts are relieved of the
cost and the related accumulated depreciation, with any resulting gain or loss
included in the Statement of Operations.

F-7
<PAGE> 79
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets

The Company identifies and records impairment losses on long-lived assets
when events and circumstances indicate that such assets might be impaired. In
the event the expected undiscounted future cash flow attributable to the asset
is less than the carrying amount of the asset, an impairment loss equal to the
excess of the asset's carrying value over its fair value is recorded. To date,
no such impairment has been recorded.

Hardware Product Warranty Costs

The Company generally warrants its products for one year after sale and
provides for estimated future warranty costs at the time revenue is recognized.
Accrued hardware product warranty costs are included as a component of accrued
expenses on the accompanying balance sheet.

Revenue Recognition

The software component of the Company's products is an integral part of
its functionality. As such, the Company applies the provisions of the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, "Software Revenue Recognition." The Company's products are fully
functional at the time of shipment. The software component of the Company's
product does not require significant production, modification or customization.
As such, revenue from product sales is recognized upon shipment provided that
(1) a purchase order has been received or a contract has been executed; (2)
title has transferred; (3) the fee is fixed and determinable; and (4)
collectibility is deemed probable. Revenue associated with multiple-element
arrangements (products and post-contract customer support ("PCS")) are allocated
to each element based on vendor-specific objective evidence of fair value.
Revenue related to future PCS is initially deferred and subsequently recognized
ratably over the term of the service period. Extended warranty and other service
revenues are recognized ratably over the respective service periods. Such
service revenue has not been significant to date.

Research and Development

Costs incurred in the research and development of products are expensed
as incurred. Costs incurred to establish the technological feasibility of a
software product are considered research and development costs and are expensed
as incurred. Once technological feasibility is established, all development
costs incurred until general product release are subject to capitalization. To
date, the establishment of technological feasibility of the Company's products
and general release have substantially coincided. As a result, the costs
qualifying for such capitalization have not been significant and the Company has
not capitalized any of these software development costs.

Software Developed for Internal Use

The Company capitalizes costs of software, consulting services, hardware
and payroll-related costs incurred to purchase or develop internal-use software.
The Company expenses costs incurred during preliminary project assessment,
research and development, re-engineering, training and application maintenance
phases. To date, capitalized internal use software costs have not been
significant.

Advertising

Advertising costs are expensed as incurred. Advertising costs were
$52,000 and $256,000 for the years ended December 31, 1998 and 1999,
respectively. The Company incurred no advertising costs for the period ended
December 31, 1997.
F-8
<PAGE> 80
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation

The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock and stock options issued. Accordingly, any compensation
expense is recognized over the vesting period and represents the difference
between the deemed fair value for accounting purposes of the underlying stock
and the purchase price or the exercise price at the date of grant. The Company
has provided additional disclosures (Note 6) required by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") 96-18.

Income Taxes

The Company accounts for income taxes using the liability method.
Deferred taxes are determined based on the differences between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.

Earnings Per Share

Earnings per share are computed using the weighted average number of
shares outstanding and dilutive common stock equivalents (options and restricted
stock) in accordance with SFAS No. 128, "Earnings per Share."

Comprehensive Income

Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income/(loss),
other than net income/(loss).

Unaudited Interim Financial Information

The interim financial information as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 are unaudited and have been prepared on the
same basis as the audited financial statements. In the opinion of management,
such unaudited financial information includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
interim information. Operating results for the six months ended June 30, 2000
are not necessarily indicative of the results for the year ending December 31,
2000.

Segments

Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company has determined that it did not have any separately
reportable business segments as of, and for the periods ended, December 31,
1997, 1998 and 1999. All of the Company's long-lived assets were located in the
United States as of December 31, 1998 and 1999.
F-9
<PAGE> 81
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements.
Adoption of SAB 101 is required in the fourth quarter of 2000. The Company's
revenue recognition policies comply with SAB 101.

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes to grantee status
that occur on or after July 1, 2000, except for the provisions related to
repricings and the definition of an employee, which apply to awards issued after
December 15, 1998. The provisions related to modifications to fixed stock option
awards to add a reload feature are effective for awards modified after January
12, 2000. The Company does not expect the adoption of FIN 44 to have a material
impact on its financial statements.

2. CONCENTRATIONS

Credit Risk:

Financial instruments which subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains its cash and cash equivalents with reputable
financial institutions, and at times, cash balances may be in excess of the FDIC
insurance limits. The Company extends differing levels of credit to customers,
does not require collateral deposits, and maintains reserves for potential
credit losses based upon the expected collectibility of accounts receivable.
Credit losses to date have been within management's expectations and have not
been significant.

Customers comprising at least 10% of net revenues are as follows (in
thousands except percentages):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------------------- ENDED JUNE 30,
1998 1999 2000
----------------- ----------------- -----------------
% OF NET % OF NET % OF NET
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Customer A................................... $1,522 32% $7,549 31% $9,612 34%
Customer B................................... 493 10 -- -- -- --
</TABLE>

As of December 31, 1998 and 1999 and June 30, 2000, the Company had
receivable balances from Customer A approximating 24%, 16% and 24%, of total
accounts receivable, respectively.

International Revenues:

Net revenues from international product shipments were $565,000 in 1998,
$3.2 million in 1999, and $3.9 million for the six months ended June 30, 2000.

Sources of Supply:

The Company currently buys a number of key components of its products
from a limited number of suppliers. Although there are a limited number of
manufacturers of these components, management believes that other suppliers
could provide similar integrated circuits on comparable terms. A change in

F-10
<PAGE> 82
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. CONCENTRATIONS (CONTINUED)
suppliers, however, could cause a delay in manufacturing and a possible loss of
sales, which could affect operating results adversely.

3. SELECTED BALANCE SHEET DATA (IN THOUSANDS)

Accounts Receivable, Net

Accounts receivable, net consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts receivable............................. $ 1,151 $ 4,446 $ 8,737
Allowance for doubtful accounts....................... (25) (89) (218)
--------- ---------- ----------
$ 1,126 $ 4,357 $ 8,519
========= ========== ==========
</TABLE>

Inventories

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials......................................... $ 119 $ 546 $ 2,417
Work in process....................................... 141 179 152
Finished goods........................................ 153 66 682
Reserve for obsolescence.............................. (9) (45) (195)
--------- ---------- ----------
$ 404 $ 746 $ 3,056
========= ========== ==========
</TABLE>

Property and Equipment, Net

Property and equipment, net consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.................................... $ 97 $ 232 $ 431
Computer software..................................... 47 155 197
Demonstration equipment............................... 332 1,021 1,686
Furniture and other equipment......................... 21 110 837
--------- ---------- ----------
497 1,518 3,151
Accumulated depreciation.............................. (114) (566) (996)
--------- ---------- ----------
$ 383 $ 952 $ 2,155
========= ========== ==========
</TABLE>

F-11
<PAGE> 83
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SELECTED BALANCE SHEET DATA (CONTINUED)
Accrued Expenses

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll........................................ $ 34 $ 95 $ 156
Accrued commissions.................................... 71 393 614
Accrued bonuses........................................ 161 414 751
Accrued warranty....................................... 25 140 282
Other.................................................. 136 340 605
---- ------ ------
$427 $1,382 $2,408
==== ====== ======
</TABLE>

4. INCOME TAXES

Income tax expense (benefit) consists of the following (in thousands):

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- JUNE 30,
1997 1998 1999 2000
------ ----- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal.............................................. $ -- $ 13 $3,685 $5,035
State................................................ -- 1 840 1,356
Deferred:
Federal.............................................. (229) 134 (445) (748)
State................................................ (65) (30) 23 (166)
----- ---- ------ ------
$(294) $118 $4,103 $5,477
===== ==== ====== ======
</TABLE>

The net effective income tax rate differs from the federal statutory
income tax rate as follows (in thousands):

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------ JUNE 30,
1997 1998 1999 2000
----- ----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal statutory expense (benefit)................... $(202) $ 149 $3,030 $2,640
State taxes, net of federal benefit................... (34) 25 520 452
Research and development credits...................... (58) (125) (156) (158)
Nondeductible stock-based compensation................ -- 53 702 2,502
Other................................................. -- 16 7 41
----- ----- ------ ------
Actual income tax expense (benefit)................... $(294) $ 118 $4,103 $5,477
===== ===== ====== ======
Net effective income tax rate......................... (47.7)% 26.9% 46.0% 70.5%
</TABLE>

F-12
<PAGE> 84
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. INCOME TAXES (CONTINUED)
The primary components of temporary differences that gave rise to
deferred taxes as of December 31, 1998 and 1999 and June 30, 2000 are as follows
(in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ -----------
1998 1999 2000
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
State income taxes........................................ $ -- $261 $ 452
Allowance for doubtful accounts........................... 11 38 93
Depreciation and amortization............................. -- 29 120
Research and development credit carryforward.............. 99 -- --
Warranty accrual.......................................... 11 60 121
Deferred revenue.......................................... 31 116 154
Stock-based compensation.................................. 12 58 216
Bonus accruals............................................ -- -- 322
Other..................................................... 26 50 48
---- ---- ------
Total deferred tax assets.............................. $190 $612 $1,526
==== ==== ======
</TABLE>

Realization of the December 31, 1999 deferred tax assets of $612,000 is
dependent on the Company generating sufficient taxable income in the future.
Although realization is not assured, the Company believes it is more likely than
not that the deferred tax assets will be realized. The amount of the deferred
tax assets considered realizable, however, could be reduced in the future if
estimates of future taxable income are reduced.

5. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its facility and certain computer equipment under
noncancelable operating leases for varying periods through January 2005,
excluding options to renew. The following are the future minimum commitments
under these leases (in thousands):

<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
2000.............................................. $ 424
2001.............................................. 486
2002.............................................. 461
2003.............................................. 475
2004.............................................. 489
Thereafter........................................ 61
------
$2,396
======
</TABLE>

Rent expense for the period from May 27, 1997 (inception) through
December 31, 1997 and the years ended December 31, 1998 and 1999 was $19,000,
$67,000 and $171,000, respectively.

In March 2000, the Company amended its facility operating lease to
include additional square footage and to extend the term of the lease. In
connection with the amended lease agreement, monthly payments increased from
$29,000 to $68,000 and the lease term was extended through May 2007.

F-13
<PAGE> 85
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation

From time to time, certain legal actions may arise in the ordinary course
of the Company's business. To date, such legal actions have not had a material
adverse effect on the Company's financial position, results of operations or
cash flows.

6. SHAREHOLDERS' EQUITY

Contribution of Capital

During the period from May 27, 1997 (inception) through December 31, 1997
and during the year ended December 31, 1998, the Company's then principal
shareholder contributed additional cash to the Company of $600,000 and $700,000,
respectively. The contributions were non-reciprocal in nature and were recorded
in shareholders' equity as a component of additional paid-in capital.

Stock Splits

In January 1998, the Board of Directors authorized a five-for-one split
of the Company's common stock, effected in the form of a stock dividend paid to
shareholders of record on March 16, 1998.

In February 2000, the Board of Directors authorized a three-for-one split
of the Company's common stock, effected in the form of a stock dividend paid to
shareholders of record on March 21, 2000.

The share information in the accompanying financial statements and
related notes for all periods prior to these stock splits have been adjusted to
reflect the stock splits on a retroactive basis.

Common Stock

In June 1999, the Company issued 225,000 shares of common stock to a
director in exchange for services and $64,000. The deemed fair value of these
shares for accounting purposes was determined to be $243,000, of which the
intrinsic value of $179,000 was recognized as stock-based compensation expense
for the year ended December 31, 1999.

In August 1999, the Company issued 900,000 shares of common stock to its
two employee founders in exchange for services and notes receivable totaling
$255,000. The shares are subject to a lapsing repurchase right which allows the
Company at its option to repurchase any unvested shares at the original purchase
price of $0.28 per share. The shares vest in eight equal quarterly installments
commencing on September 30, 1999, subject to acceleration provisions for certain
employment termination situations. The deemed fair value of these shares for
accounting purposes was determined to be $1,287,000, resulting in deferred
stock-based compensation totaling $1,032,000, of which approximately $323,000
was recognized as stock-based compensation expense for the year ended December
31, 1999. As of December 31, 1999, 675,000 of these shares were unvested.

In September 1999, the Company issued 225,000 shares of common stock to a
non-employee shareholder in exchange for services and note receivable totaling
$64,000. The shares are subject to a lapsing repurchase right which allows the
Company at its option to repurchase any unvested shares at the original purchase
price of $0.28 per share. The shares vest in eight equal quarterly installments
commencing on September 30, 1999, subject to acceleration provisions for certain
service termination situations. As of December 31, 1999, the deemed fair value
of the unvested shares for accounting purposes was estimated to be $1,006,000,
resulting in deferred stock-based compensation of $1,002,000, of which
approximately $275,000 was recognized as stock-based compensation expense for
the year ended December 31, 1999. This stock award is a variable award. For the
six months ended June 30, 2000, an

F-14
<PAGE> 86
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. SHAREHOLDERS' EQUITY (CONTINUED)
additional $900,000 of deferred stock-based compensation was recorded related to
this issuance. As of December 31, 1999, 169,000 of these shares were unvested.

In September 1999, the Company issued 300,000 shares of common stock to
an employee in exchange for $85,000. The shares are subject to a lapsing
repurchase right which allows the Company at its option to repurchase any
unvested shares at the original purchase price of $0.28 per share. 75,000 of the
shares vest on September 30, 2000 with the remaining shares vesting in twelve
equal quarterly installments commencing on December 31, 2000. The deemed fair
value of these shares for accounting purposes was determined to be $462,000,
resulting in deferred stock-based compensation totaling $377,000, of which
stock-based compensation expense for the year ended December 31, 1999 was
$98,000. As of December 31, 1999, all of these shares were unvested.

For the six months ended June 30, 2000, stock-based compensation expense
related to the stock issuances described above was $1,383,000.

Notes Receivable from Shareholders

As of December 31, 1999, the Company held promissory notes from the
Company's two employee founders and a non-employee shareholder totaling $319,000
for the issuance of 1,125,000 shares of common stock. The notes bear interest at
8% per annum and are due at various dates through September 2002. The notes,
which are classified as a component of shareholders' equity, are full recourse
and are collateralized by the related shares of the Company. For the year ended
December 31, 1999 and the six months ended June 30, 2000, the Company recorded
interest income of approximately $9,000 and $13,000, respectively, relating to
these notes receivable.

Stock Options

The Company's 1997 Stock Option Plan, as amended in July 1999 (the "1997
Plan"), provides for the issuance of stock-based awards to qualified employees,
directors and consultants of the Company. The stock-based awards may include
incentive stock options or nonqualified stock options. Options become
exercisable over a vesting period as determined by the Board of Directors and
expire over terms not exceeding 10 years from the date of grant. The exercise
price for options granted under the 1997 Plan may not be granted at less than
100% of the fair market value of the Company's common stock on the date of grant
(110% if granted to an employee who owns more than 10% of the voting price of
the outstanding stock).

Options generally vest 25% on the first anniversary of the grant date with
the remaining options vesting in 12 equal quarterly installments with the first
installment vesting on the last day of the first full calendar quarter following
the first anniversary. In the event the holder ceases to be employed by the
Company, all unvested options are forfeited and all vested options may be
exercised within a period of up to 30 days after optionee's termination for
cause, up to three months after termination other than for cause or death or
disability, or up to six months after termination by disability or death. If an
optionee ceases to serve as an employee, as defined by the 1997 Plan, any
options exercised are subject to repurchase at the option of the Company at the
higher of the original exercise price or fair market value at the termination
date. The Company's repurchase right terminates upon the earlier of (1) the
first public offering of common stock or (2) a merger or consolidation of the
Company, as defined in the 1997 Plan. As of June 30, 2000, the Company has
reserved 15,000,000 shares of its common stock for issuance under the 1997 Plan,
4,338,000 of which are available for future grant.

F-15
<PAGE> 87
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information relating to stock option
activity under the 1997 Plan for the period from May 27, 1997 (inception)
through December 31, 1997, for the years ended December 31, 1998 and 1999, and
for the six months ended June 30, 2000 (in thousands, except per share data):

<TABLE>
<CAPTION>
WEIGHTED
OUTSTANDING AVERAGE
OPTIONS EXERCISE
NUMBER PRICE
OF SHARES PER SHARE
----------- ---------
<S> <C> <C>
Options outstanding as of May 27, 1997 (inception).......... -- $ --
Granted..................................................... 1,125 0.01
Exercised................................................... -- --
Canceled.................................................... -- --
-----
Options outstanding as of December 31, 1997................. 1,125 0.01
Granted..................................................... 2,690 0.07
Exercised................................................... -- --
Canceled.................................................... -- --
-----
Options outstanding as of December 31, 1998................. 3,815 0.05
Granted..................................................... 3,300 0.29
Exercised................................................... 776 0.02
Canceled.................................................... 91 0.28
-----
Options outstanding as of December 31, 1999................. 6,248 0.18
Granted..................................................... 3,720 1.05
Exercised................................................... 1,120 0.11
Canceled.................................................... 82 0.34
-----
Options outstanding as of June 30, 2000..................... 8,766 $0.55
=====
</TABLE>

Options granted for the years ended December 31, 1998 and 1999, and for
the six months ended June 30, 2000 resulted in total deferred stock-based
compensation of $422,000, $3,982,000 and $25,094,000, respectively, and were
recorded as deferred compensation in shareholders' equity. There was no deferred
stock-based compensation recognized for the period ended December 31, 1997. The
deferred stock-based compensation represented the difference between the deemed
fair value of the Company's common-stock for accounting purposes and the
exercise price of these options at the date of grant. The deferred stock-based
compensation is recognized as stock-based compensation expense in the statements
of operations over the related vesting periods of the options.

For the years ended December 31, 1998 and 1999, and for the six months
ended June 30, 1999 and 2000, stock-based compensation expense related to stock
option grants included in the accompanying statements of operations amounted to
$162,000, $1,010,000, $238,000 and $5,253,000, respectively. There was no
stock-based compensation expense for the period ended December 31, 1997. Annual
amortization of deferred stock-based compensation as of December 31, 1999 is
approximately $3,073,000, $1,275,000, $465,000 and $134,000 for the years ending
December 31, 2000, 2001, 2002 and 2003, respectively.

F-16
<PAGE> 88
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. SHAREHOLDERS' EQUITY (CONTINUED)
Additional information with respect to stock options outstanding as of
December 31, 1999 is as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01 to $0.02 1,453 8.00 $0.01 312 $0.02
0.05 to 0.07 837 7.33 0.06 363 0.06
0.13 to 0.17 823 8.77 0.16 219 0.16
0.23 to 0.33 3,135 9.50 0.29 4 0.29
----- ---
$0.01 to 0.33 6,248 8.72 $0.18 898 $0.07
===== ===
</TABLE>

The deemed fair value for accounting purposes of options granted was
$0.01, $0.25 and $1.69 per share for the period from May 27, 1997 (inception)
through December 31, 1997 and for the years ended December 31, 1998 and 1999,
respectively. There were no options exercised subject to repurchase as of
December 31, 1999.

The Company calculated the fair value of each option grant on the
respective dates of grant using the Black-Scholes option pricing model as
prescribed by SFAS No. 123 using the following assumptions:

<TABLE>
<CAPTION>
MAY 27, 1997
(INCEPTION)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Expected lives (in years)............................. 10 10 10
Risk-free interest rates.............................. 5.00% 5.75% 6.00%
Dividend yield........................................ 0% 0% 0%
Expected volatility................................... 0% 0% 0%
</TABLE>

F-17
<PAGE> 89
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. SHAREHOLDERS' EQUITY (CONTINUED)
Had compensation costs been determined based upon the Black-Scholes
methodology prescribed under SFAS No. 123, the Company's net income (loss) and
basic and diluted net income (loss) per share would approximate the following
pro forma amounts (in thousands, except per share data):

<TABLE>
<CAPTION>
PRO
AS REPORTED FORMA
----------- ------
<S> <C> <C>
For the period ended December 31, 1997:
Net loss.................................................. $ (322) $ (323)
Basic and diluted net loss per share...................... $(0.01) $(0.01)
For the year ended December 31, 1998:
Net income................................................ $ 320 $ 297
Earnings per share -- Basic............................... $ 0.01 $ 0.01
Earnings per share -- Diluted............................. $ 0.01 $ 0.01
For the year ended December 31, 1999:
Net income................................................ $4,810 $4,664
Earnings per share -- Basic............................... $ 0.11 $ 0.11
Earnings per share -- Diluted............................. $ 0.10 $ 0.10

For the six months ended June 30, 1999:
Net income................................................ $1,750 $1,733
Earnings per share -- Basic............................... $ 0.04 $ 0.04
Earnings per share -- Diluted............................. $ 0.04 $ 0.04
For the six months ended June 30, 2000:
Net income................................................ $2,287 $2,169
Earnings per share -- Basic............................... $ 0.05 $ 0.05
Earnings per share -- Diluted............................. $ 0.04 $ 0.04
</TABLE>

F-18
<PAGE> 90
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated (in thousands, except per
share data):

<TABLE>
<CAPTION>
MAY 27, 1997
(INCEPTION) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------- ---------------------
1997 1998 1999 1999 2000
------------ ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic presentation
Numerator:
Net income (loss)......................... $ (322) $ 320 $ 4,810 $ 1,750 $ 2,287
Denominator:
Weighted average common shares............ 43,041 43,200 44,029 43,218 46,169
Adjustment for common shares subject to
repurchase............................. -- -- (455) -- (933)
------- ------- ------- ------- -------
Adjusted weighted average common shares... 43,041 43,200 43,574 43,218 45,236
======= ======= ======= ======= =======
Basic net income (loss) per share........... $ (0.01) $ 0.01 $ 0.11 $ 0.04 $ 0.05
======= ======= ======= ======= =======
Diluted presentation
Denominator:
Shares used above......................... 43,041 43,200 44,029 43,218 46,169
Weighted average effect of dilutive
securities:
Stock options.......................... -- 2,419 4,412 3,122 5,887
Common shares subject to repurchase.... -- -- 455 -- 933
------- ------- ------- ------- -------
Denominator for diluted calculation......... 43,041 45,619 48,896 46,340 52,989
======= ======= ======= ======= =======
Diluted net income (loss) per share......... $ (0.01) $ 0.01 $ 0.10 $ 0.04 $ 0.04
======= ======= ======= ======= =======
</TABLE>

The diluted per share computations for the period ended December 31,
1997, exclude 1,125,000 options which were antidilutive. There were no shares
excluded from the diluted earnings computation for the years ended December 31,
1998 and 1999, and the six month periods ended June 30, 1999 and 2000.

8. RETIREMENT PLAN

Effective June 1997, the Company adopted a 401(k) Retirement Plan (the
"Plan") under which eligible employees may authorize up to 15% of their
compensation to be invested in employee elected investment funds. As determined
annually by the Board of Directors, the Company may contribute matching funds of
up to 6% of the employee's compensation which vest over a four-year period. For
the period from May 27, 1997 (inception) through December 31, 1997, the Company
made no contributions to the Plan. For the years ended December 31, 1998 and
1999, the Company expensed and made contributions to the Plan in the amount of
approximately $18,000 and $59,000, respectively.

F-19
<PAGE> 91
IXIA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. RELATED PARTY TRANSACTIONS

In June 1998, the Company received $500,000 from a director/shareholder
of the Company in exchange for a note. In September 1999, the Company repaid the
note in full.

For the years ended December 31, 1998 and 1999, respectively, the Company
recorded $95,000 and $436,000 of revenues to companies in which a
director/shareholder of the Company is a major shareholder. Related party
accounts receivable as of December 31, 1998 and 1999 were $81,000 and $28,000,
respectively.

10. LEGAL PROCEEDINGS

An employee of the Company is a named defendant in an action taken by the
employee's former employer Netcom Systems ("Netcom") alleging that the employee
misappropriated trade secrets and wrongfully solicited Netcom's employees.
Netcom is seeking damages and an injunction. The courts have twice denied
Netcom's application for a temporary restraining order. The Company, while it is
not a named defendant in this matter, may under certain circumstances (as set
forth in an agreement with the employee) be required to indemnify the employee
for any damages and related costs which result from this action. While the
ultimate outcome of this matter cannot be determined at this time, it is the
opinion of the Company's management, based upon the information available at
this time, that the outcome of this matter will not have a material adverse
effect on the financial condition or results of operations of the Company.

11. SUBSEQUENT EVENTS

On July 29, 2000, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission ("SEC") that
would permit the Company to sell shares of the Company's common stock in
connection with a proposed initial public offering. In addition, the Board of
Directors reserved an additional 500,000 shares of common stock for future stock
and option awards and approved an increase in the number of common shares
authorized for issuance from 75 million to 200 million.

From July 1, 2000 to September 1, 2000, the Company granted 1,840,000
options to purchase common shares at exercise prices ranging from $3.50 to $9.00
per share. In connection with these grants, the Company will record deferred
stock-based compensation of approximately $6,088,000, which will be amortized
over the respective four-year vesting period.

During August of 2000, the Company issued warrants to purchase 80,000
shares of common stock to a director. The warrants have an exercise price of
$7.00 and vest in four equal quarterly installments commencing September 30,
2000. The Company will record deferred stock-based compensation of approximately
$217,000 which will be amortized ratably over the vesting period.

Also in August of 2000, the Company's Board of Directors reserved an
additional 2 million shares of common stock for issuance under the Company's
1997 stock option plan.

On September 1, 2000, the Company's Board of Directors approved the
Company's 2000 Bonus Plan (the "Bonus Plan") and its Officer Severance Plan (the
"Severance Plan"). The Bonus Plan is based on the Company's achievement of
certain revenue thresholds. All non-commissioned employees are eligible to
receive bonuses of between 10% and 150% of their salaries. Under the Severance
Plan, executive officers are entitled under certain circumstances to receive
severance benefits following the termination of their employment.

F-20
<PAGE> 92

[IXIA LOGO]
<PAGE> 93

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

Through and including November 12, 2000, all dealers effecting
transactions in these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligations to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.

5,500,000 SHARES

[IXIA LOGO]

COMMON STOCK

----------------------

PROSPECTUS
----------------------

MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
DAIN RAUSCHER WESSELS

OCTOBER 17, 2000
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