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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

|ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | ----------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2002

or

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------

Commission File Number 0-24707

LOGO

INET TECHNOLOGIES, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction
of incorporation or organization)

75-2269056(I.R.S. employer identification no.)


1500 North Greenville Avenue
Richardson, Texas 75081(Address of principal executive offices, including zip code)

(469) 330-4000(Registrant's telephone number, including area code)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Number
of shares of common stock outstanding at April 24, 2002: 46,882,138

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Inet Technologies, Inc.
Index



|                                         |                                                                                               | Page No.
|---------------------------------------- | --------------------------------------------------------------------------------------------- | --------
|Part IFinancial Information (Unaudited) |                                                                                               |         
|                                         | Item 1. Financial Statements                                                                  |         
|                                         |                                                                                               |         
|                                         |                                                                                               |         
|                                         |                                                                                               |         
|                                         |                                                                                               |         
|                                         |                                                                                               |         
|                                         | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |         
|                                         | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |         
|Part IIOther Information                |                                                                                               |         
|                                         | Item 2. Changes in Securities and Use of Proceeds                                             |         
|                                         | Item 6. Exhibits and Reports on Form 8-K                                                      |         
|Signatures                               |                                                                                               | 30      

2

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PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

INET TECHNOLOGIES, INC.        CONSOLIDATED BALANCE SHEETS(Unaudited)ASSETS

|                                     |                                                                                                                        | March 31,
2002                                                                                               |                                            | December 31,
2001
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | -----------------
|
|Current assets:                      |                                                                                                                        |                                                                                                              |                                            |                  
|                                     | Cash and cash equivalents                                                                                              |                                                                                                              | $                                          | 166,363          
|                                     | Trade accounts receivable, net of allowance for doubtful accounts of $723 at both March 31, 2002 and December 31, 2001 |                                                                                                              |                                            | 15,319           
|                                     | Unbilled receivables                                                                                                   |                                                                                                              |                                            | 1,406            
|                                     | Income taxes receivable                                                                                                |                                                                                                              |                                            |                 
|                                     | Inventories                                                                                                            |                                                                                                              |                                            | 12,309           
|                                     | Deferred income taxes                                                                                                  |                                                                                                              |                                            | 2,608            
|                                     | Other current assets                                                                                                   |                                                                                                              |                                            | 5,058            
|                                     |                                                                                                                        |                                                                                                              |                                            |                  
|                                     |                                                                                                                        |                                                                                                              | Total current assets                       |                  
|Property and equipment, net          |                                                                                                                        |                                                                                                              | 17,481                                     |                  
|Other assets                         |                                                                                                                        |                                                                                                              | 172                                        |                  
|                                     |                                                                                                                        |                                                                                                              |                                            |                  
|                                     |                                                                                                                        |                                                                                                              | Total assets                               |                  
|                                     |                                                                                                                        |                                                                                                              |                                            |                  
|LIABILITIES AND STOCKHOLDERS' EQUITY
|Current liabilities:                 |                                                                                                                        |                                                                                                              |                                            |                  
|                                     | Accounts payable                                                                                                       |                                                                                                              | $                                          | 942              
|                                     | Accrued compensation and benefits                                                                                      |                                                                                                              |                                            | 2,887            
|                                     | Deferred revenues                                                                                                      |                                                                                                              |                                            | 18,659           
|                                     | Income taxes payable                                                                                                   |                                                                                                              |                                            | 920              
|                                     | Other accrued liabilities                                                                                              |                                                                                                              |                                            | 4,693            
|                                     |                                                                                                                        |                                                                                                              |                                            |                  
|                                     |                                                                                                                        | Total current liabilities                                                                                    |                                            |                  
|Deferred income taxes                |                                                                                                                        |                                                                                                              | 482                                        |                  
|Commitments and contingencies        |                                                                                                                        |                                                                                                              |                                            |                  
|Stockholders' equity:                |                                                                                                                        |                                                                                                              |                                            |                  
|                                     | Preferred stock, $.001 par value:                                                                                      |                                                                                                              |                                            |                  
|                                     |                                                                                                                        | Authorized shares25,000,000
Issued sharesNone                                                              |                                            |                  
|                                     | Common stock, $.001 par value:                                                                                         |                                                                                                              |                                            |                  
|                                     |                                                                                                                        | Authorized shares175,000,000
Issued shares46,882,138 at March 31, 2002
and 46,757,009 at December 31, 2001 |                                            |                  
|                                     | Additional paid-in capital                                                                                             |                                                                                                              |                                            | 73,714           
|                                     | Retained earnings                                                                                                      |                                                                                                              |                                            | 118,372          
|                                     |                                                                                                                        |                                                                                                              |                                            |                  
|                                     |                                                                                                                        |                                                                                                              | Total stockholders' equity                 |                  
|                                     |                                                                                                                        |                                                                                                              |                                            |                  
|                                     |                                                                                                                        |                                                                                                              | Total liabilities and stockholders' equity |                  
|                                     |                                                                                                                        |                                                                                                              |                                            |                  

See
accompanying notes to consolidated financial statements.

3

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INET TECHNOLOGIES, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

|                                         |                            | Three months ended
March 31, |                              
|---------------------------------------- | -------------------------- | ---------------------------- | -----------------------------
|
|
|Revenues:                                |                            |                              |                              
|                                         | Product and license fees   |                              | $                            
|                                         | Services                   |                              |                              
|                                         |                            |                              |                              
|                                         |                            | Total revenues               |                              
|Cost of revenues:                        |                            |                              |                              
|                                         | Product and license fees   |                              |                              
|                                         | Services                   |                              |                              
|                                         |                            |                              |                              
|                                         |                            | Total cost of revenues       |                              
|                                         |                            |                              |                              
|                                         |                            |                              | Gross profit                 
|Operating costs and expenses:            |                            |                              |                              
|                                         | Research and development   |                              |                              
|                                         | Sales and marketing        |                              |                              
|                                         | General and administrative |                              |                              
|                                         | Restructuring costs        |                              |                              
|                                         |                            |                              |                              
|                                         |                            |                              | 14,583                       
|                                         |                            |                              |                              
|                                         |                            |                              | Income (loss) from operations
|Other income (expense):                  |                            |                              |                              
|                                         | Interest income            |                              |                              
|                                         | Other expense              |                              |                              
|                                         |                            |                              |                              
|                                         |                            |                              | 510                          
|                                         |                            |                              |                              
|Income before provision for income taxes |                            |                              | 4,032                        
|Provision for income taxes               |                            |                              | 1,292                        
|                                         |                            |                              |                              
|Net income                               |                            | $                            | 2,740                        
|                                         |                            |                              |                              
|Earnings per common share:               |                            |                              |                              
|                                         |                            |                              | Basic                        
|                                         |                            |                              |                              
|                                         |                            |                              | Diluted                      
|                                         |                            |                              |                              
|Weighted-average shares outstanding:     |                            |                              |                              
|                                         |                            |                              | Basic                        
|                                         |                            |                              |                              
|                                         |                            |                              | Diluted                      
|                                         |                            |                              |                              

See
accompanying notes to consolidated financial statements.

4

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INET TECHNOLOGIES, INC.        CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY(Unaudited)

|                             |                                                                      | Common Stock |         |   |    |   |   |       
|---------------------------- | -------------------------------------------------------------------- | ------------ | ------- | - | -- | - | - | ------
|
|
|
|Balance at December 31, 2001 |                                                                      | 46,757,009   |         | $ | 47 |   | $ | 72,804
|                             | Issuance of common stock under stock option and stock purchase plans |              | 125,129 |   |    |  |   |       
|                             | Net income                                                           |              |        |   |    |  |   |       
|                             |                                                                      |              |         |   |    |   |   |       
|Balance at March 31, 2002    |                                                                      | 46,882,138   |         | $ | 47 |   | $ | 73,714
|                             |                                                                      |              |         |   |    |   |   |       

See
accompanying notes to consolidated financial statements.

5

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INET TECHNOLOGIES, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)

|                                                                                                                       |                                             | Three months ended
March 31,                             |        
|---------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | -------------------------------------------------------- | -------
|
|
|Cash flows from operating activities:                                                                                  |                                             |                                                          |        
|Net income                                                                                                             |                                             | $                                                        | 2,740  
|Adjustments to reconcile net income to net cash provided by operating activities:                                      |                                             |                                                          |        
|                                                                                                                       | Depreciation                                |                                                          |        
|                                                                                                                       | Deferred income taxes                       |                                                          |        
|                                                                                                                       | Change in operating assets and liabilities: |                                                          |        
|                                                                                                                       |                                             | (Increase) decrease in trade accounts receivable         |        
|                                                                                                                       |                                             | (Increase) decrease in unbilled receivables              |        
|                                                                                                                       |                                             | Decrease in income taxes receivable                      |        
|                                                                                                                       |                                             | (Increase) decrease in inventories                       |        
|                                                                                                                       |                                             | (Increase) decrease in other assets                      |        
|                                                                                                                       |                                             | Increase in accounts payable                             |        
|                                                                                                                       |                                             | Increase in taxes payable                                |        
|                                                                                                                       |                                             | Increase (decrease) in accrued compensation and benefits |        
|                                                                                                                       |                                             | Increase (decrease) in deferred revenues                 |        
|                                                                                                                       |                                             | Increase (decrease) in other accrued liabilities         |        
|                                                                                                                       |                                             |                                                          |        
|Net cash provided by operating activities                                                                              |                                             |                                                          | 11,115 
|Cash flows from investing activities:                                                                                  |                                             |                                                          |        
|Purchases of property and equipment                                                                                    |                                             |                                                          | (551   
|                                                                                                                       |                                             |                                                          |        
|Net cash used in investing activities                                                                                  |                                             |                                                          | (551   
|Cash flows from financing activities:                                                                                  |                                             |                                                          |        
|Proceeds from issuance of common stock upon exercise of stock options and purchases under employee stock purchase plan |                                             |                                                          | 910    
|                                                                                                                       |                                             |                                                          |        
|Net cash provided by financing activities                                                                              |                                             |                                                          | 910    
|                                                                                                                       |                                             |                                                          |        
|Net increase in cash and cash equivalents                                                                              |                                             |                                                          | 11,474 
|Cash and cash equivalents at beginning of period                                                                       |                                             |                                                          | 154,889
|                                                                                                                       |                                             |                                                          |        
|Cash and cash equivalents at end of period                                                                             |                                             | $                                                        | 166,363
|                                                                                                                       |                                             |                                                          |        
|Supplemental disclosures:                                                                                              |                                             |                                                          |        
|                                                                                                                       | Income taxes paid                           |                                                          | $      
|                                                                                                                       |                                             |                                                          |        

See
accompanying notes to consolidated financial statements.

6

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INET TECHNOLOGIES, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

Note 1Summary of Significant Accounting Policies

The Company

We are a global provider of communications software solutions that enable carriers to more effectively design, deploy, diagnose, monitor and manage communications
networks that carry signaling information used to control and deliver communications sessions and services. These communications sessions include phone calls, dial-up internet access and
other service transactions and sessions. Our solutions also address the fundamental business needs of communications carriers, such as improved billing, targeted sales and marketing, fraud prevention
and enhanced routing. We provide these comprehensive offerings through our network intelligence, business intelligence and diagnostics solutions.

Consolidation

The consolidated financial statements include the accounts of our wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.

Unaudited Interim Financial Statements

We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States for
interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the
information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In our opinion, all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair statement of the results for the interim periods presented have been included. These financial statements should be read in conjunction with the audited
financial statements and related notes for the three years ended December 31, 2001, included in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission, or SEC, on February 28, 2002. Operating results for the three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for any
other interim period or for the year ending December 31, 2002.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. As discussed below, we make significant estimates and assumptions in the areas of accounts receivable, inventories and revenue
recognition. Although we believe that our estimates and assumptions are reasonable, actual results may differ, and such differences could be significant to our financial results.

Cash and Cash Equivalents

Cash and cash equivalents consist of bank deposits and money-market funds. All highly-liquid securities with original maturities of three months or less are
classified as cash equivalents. The carrying value of cash equivalents approximates fair market value.

7

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Allowance for Doubtful Accounts

A large proportion of our revenues and receivables are attributable to our carrier customers in the telecommunications industry and, to a lesser extent, to our
customers who supply equipment into the telecommunications industry. Our trade accounts receivable balance is recorded net of allowances for amounts not expected to be collected from our customers.
Because our accounts receivable are typically
unsecured, we periodically evaluate the collectibility of our accounts based on a combination of factors, including a particular customer's ability to pay as well as the age of the receivables. To
evaluate a specific customer's ability to pay, we analyze financial statements, payment history, third-party credit analysis reports and various information or disclosures by the customer or other
publicly available information. In cases where the evidence suggests a customer may not be able to satisfy its obligation to us, we set up a specific reserve in an amount we determine appropriate for
the perceived risk. Most of our contracts include multiple payment milestones, some of which occur in advance of revenue recognition, which mitigates our risk both in terms of collectibility and
adjustments to recorded revenue. Given that most of our customers are large public companies with substantial resources, we have not historically experienced significant losses on uncollectible
accounts and our allowance has been less than 5% of recorded receivables. If the current downturn in the telecommunications industry continues, the financial condition of our customers could
deteriorate and they may not be able to meet their financial obligations to us. If this were to occur, the net value realized from our receivables may be materially different from the net balance
recorded on our balance sheet.

Inventories

Inventories are valued at the lower of standard cost, which approximates actual cost determined on a first-in, first-out basis, or market.
At March 31, 2002 and December 31, 2001, inventories consisted of the following (in thousands):

March 31,
2002

December 31,
2001Raw materials

$
6,772

$
6,923Work-in-process


162


615Finished goods


5,375


4,916$
12,309

$
12,454


Inventories
are recorded net of allowances for unsalable or obsolete raw materials, work-in-process and finished goods. We evaluate on a quarterly basis the
status of our inventory to ensure the amount recorded in our financial statements reflects the lower of our cost or the value we expect to receive
when we sell the inventory. This estimate is based on several factors, including the condition and salability of our inventory and the forecasted demand for the particular products incorporating these
components. Based on current backlog and expected orders, we forecast the upcoming usage of current stock. We recognize reserves for obsolete and slow-moving parts ranging from 0% for
active parts with sufficient forecasted demand up to 100% for excess parts with insufficient demand or obsolete parts.

8

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Revenue Recognition

We derive revenues primarily from the sale of products and software license fees as well as services, which include training, warranty and product support
services. The majority of the contracts for our network intelligence and business intelligence solutions contain multiple billing milestones (e.g., contract award, shipment, installation and
acceptance), not all of which are associated with revenue recognition. Except as otherwise discussed below, revenues from product and license fees are recognized in the period that we have completed
all hardware manufacturing and/or software development to contractual specifications, factory testing has been completed, the product has been shipped to the customer, the fee is fixed and
determinable and collection is considered probable. When we have significant obligations subsequent to shipment, such as installation and system integration, revenues are recognized when there are no
significant unfulfilled obligations. Revenues from arrangements that include significant acceptance terms and/or provisions are recognized when acceptance has occurred. Revenues from our diagnostics
solutions are typically recognized upon shipment. All shipping costs are included in cost of revenues in the statement of income.

Revenues
for contracts that require significant software development and are generally in duration in excess of nine months are recognized using the
percentage-of-completion method, which relies on estimates of total expected contract costs. We believe that this method is appropriate because of our ability to determine
performance milestones and determine dependable estimates of our costs applicable to each phase of a contract. Since the financial reporting of these contracts depends on estimates, which are assessed
continually during the term of the contract, costs are subject to revisions as the contract progresses to completion. Revenues from these contracts are recognized upon attainment of the scheduled
performance milestones. Revisions in gross margin estimates are reflected in the period in which the facts that give rise to the revisions become known. Anticipated losses on fixed-price contracts are
recognized through cost of revenues when estimable.

Contracts
for our network intelligence and business intelligence solutions are typically multiple element arrangements, which means they involve multiple deliverables. We determine the
fair value of each of the contract deliverables using vendor-specific objective evidence, or VSOE. VSOE for each element is based on the price that we would sell the element to the customer on a
stand-alone basis. We offer our customers product support services, which include the correction of software problems, telephone access to our technical personnel and the right to receive unspecified
product updates, upgrades and enhancements, when and if they become available. Revenues from these services, including product warranty services included in initial licensing fees, are recognized
ratably over the contract period. Product warranty services included in the initial licensing fee are allocated from the total contract
amount based on the relative fair value of these services determined using VSOE. Revenues from other services, such as training, are recognized when the services have been completed.

Deferred
revenues represent amounts billed to customers, but not yet recognized as revenue. Unbilled receivables represent amounts recognized as revenue, but not yet billed to customers.

Note 2Related Party Transaction

Epygi Technologies, Ltd., or Epygi, an entity controlled by Samuel S. Simonian, one of our founders and chairman of our board, currently performs
development services for us pursuant to a

9

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Consulting Agreement for which it is paid a monthly fee per full-time programmer plus reimbursement of reasonable business expenses. We expensed approximately $0.3 million for
these services for the three months ended March 31, 2002 and approximately $0.2 million for these services for the three months ended March 31, 2001.

Note 3Restructuring

We recorded a restructuring charge for the three months ended March 31, 2001 of approximately $0.5 million related primarily to a workforce
reduction of approximately 40 employees. The reduction affected all areas of the company. The charge consisted primarily of employee severance, professional fees and outplacement services. In the
fourth quarter of 2001, we decreased this charge by $0.1 million due to changes in previous estimates related to severance and professional fees. At March 31, 2002, we had paid all costs
associated with this workforce reduction.

In
May 2001, we announced our decision to refocus our strategy and streamline operations to reduce our cost structure in response to the generally weakened economic environment
and changing demand characteristics in some of our markets. As part of this decision, we discontinued all efforts with respect to our VIA softswitch offering and reduced our workforce by
approximately 115 employees. The reduction affected all areas of the company. We recorded a restructuring charge for the three months ended June 30, 2001 of approximately $1.7 million,
which consisted of employee severance of approximately $1.1 million, professional fees and outplacement services of approximately $0.3 million and the write-off of assets
related to the VIA softswitch of approximately $0.3 million. In the fourth quarter of 2001, we decreased this charge by $0.1 million due to changes in previous estimates related to
professional fees. At March 31, 2002, the balance of these costs that remained to be paid totaled approximately $0.2 million, consisting primarily of employee severance, professional
fees and costs related to excess facilities. We expect to pay the remaining amounts prior to September 30, 2002.

10

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Note 4Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

Three months ended
March 31,2002

2001Numerator:Net income for basic and diluted earnings per share

$
2,740

$
25Denominator:Denominator for basic earnings per shareweighted-average shares


46,838


46,470Dilutive securities: Employee stock options and purchase rights


356


430Denominator for diluted earnings per shareadjusted weighted-average shares


47,194


46,900Basic earnings per common share

$
0.06

$
0.00Diluted earnings per common share

$
0.06

$
0.00


Note 5Comprehensive Income

For all periods presented, we had no components of comprehensive income other than net income.

Note 6Segment Information

We operate in a single industry segment, providing communications software solutions and associated services to our customers through our sales personnel and
certain foreign distributors. As a result, the financial information disclosed in this report represents all material financial information related to our sole operating segment. The geographic
distribution of our revenues as a percentage of total revenues is as follows:

Three months ended
March 31,2002

2001United States

23.1
%
34.6
%Export:Asia/Pacific

10.3

6.0Europe, Middle East and Africa

65.1

56.0Other

1.5

3.4Total export revenues

76.9

65.4100.0
%
100.0
%


For
the three months ended March 31, 2002, revenues from one customer accounted for approximately 42% of total revenues. For the three months ended March 31, 2001, revenues
from three

11

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customers each accounted for more than 10% of total revenues, individually accounting for approximately 15%, approximately 11% and approximately 10% of total revenues.

We
have no significant long-lived assets deployed outside of the United States.

Note 7Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 141,Business
Combinations,and SFAS No. 142,Goodwill and Other Intangible Assets, which we adopted on January 1, 2002.
SFAS 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting and prohibits the use of the
pooling-of-interests method. SFAS 142 changes the accounting for goodwill and certain intangible assets from an amortization method to an impairment-only
approach. Adoption of SFAS 142 did not have an impact on our results of operations or our financial position.

In
August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,
which we adopted on January 1, 2002. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS
No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Ofand the
accounting and reporting provisions of APB Opinion No. 30,Reporting the Results of Operations for a Disposal of a Segment of a Business.
Adoption of SFAS 144 did not have an impact on our results of operations or our financial position.

12

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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than historical or current facts, including, without limitation,
statements about our business strategy, plans and objectives of management and our future prospects, are forward-looking statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. Such
risks and uncertainties include, without limitation, the following:



These risks and uncertainties are beyond our control and, in many cases, we cannot predict the risks and uncertainties that could cause our actual results to
differ materially from those indicated by the forward-looking statements. When used in this document, the words "believes," "plans," "expects," "anticipates," "intends," "continue," "may," "will,"
"could," "should," "future," "potential," "estimate," or the negative of such terms and similar expressions as they relate to us or our management are intended to identify forward-looking
statements.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included
in Item 1 of this Quarterly Report and the consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual
Report on Form 10-K filed with the SEC on February 28, 2002. Historical results and percentage relationships among any amounts in the financial statements are not necessarily
indicative of trends in operating results for any future periods.

Overview

We were founded in 1989, and during the early years of our operations we focused primarily on developing and selling diagnostics tools for a predecessor to the
Signaling System #7, or SS7, signaling protocol. As the telecommunications industry increasingly adopted SS7, we shifted our focus to developing and deploying SS7-based solutions as
well as broadening our product offerings. Our diagnostics solution, Spectra, was first introduced in December 1990 and is currently in its tenth generation release. Beginning in
1993, we focused a significant portion of our product development efforts on developing a complete monitoring and surveillance solution for SS7 networks, culminating in the introduction of our network
intelligence solution, the GeoProbe, in late 1995. Since the

13

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introduction of the GeoProbe, we have continued to add capabilities and applications within our network intelligence solutions area. In late 1999 and through early 2001, we introduced a suite of
business intelligence solutions called IT:seven. These applications enable carriers to protect and generate additional revenues and reduce capital or operating expenses within their
networks by managing the performance of services delivered through their networks and the points of interconnection with networks of other carriers. Since the initial introduction of our IT:seven
suite of business intelligence applications, we have continued to add new capabilities and applications within this solution area. In 2001, we introduced the Spectra2 MG, a diagnostic
tool to address next-generation networks. We continue to focus significant resources on the development of new products as well as enhancements, new features and new applications for all
of our existing product areas.

Historically,
we have generated substantially all of our revenues from sales of our network intelligence and diagnostics solutions. Revenues attributable to the GeoProbe have represented
a majority of our total revenues since 1998. We expect revenues from our network intelligence and business intelligence offerings to represent a majority of our revenues in future periods given the
relatively higher growth rates expected for these solutions. Our remaining revenues are derived from services relating to these products. These services include training, warranty and product support.

Results of Operations

The following table sets forth, for the periods presented, certain data derived from our unaudited consolidated statements of income expressed as a percentage of
total revenues. The operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for any future periods.

Three months ended
March 31,2002

2001Revenues:Product and license fees

76.4
%
82.7
%Services

23.6

17.3Total revenues

100.0

100.0Cost of revenues:Product and license fees

22.7

31.8Services

11.5

8.3Total cost of revenues

34.2

40.1Gross profit

65.8

59.9Operating expenses:Research and development

30.8

37.2Sales and marketing

14.9

18.3General and administrative

7.3

8.7Restructuring costs

0.0

1.7Total operating expenses

53.0

65.9Income (loss) from operations

12.8

(6.0
)Other income

1.9

6.1Income before provision for income taxes

14.7

0.1Provision for income taxes

4.7

0.0Net income

10.0
%
0.1
%


14

---

Revenues

Product and license fees.Revenues from product and license fees decreased 19.3% to $21.0 million in the three months
ended March 31, 2002 from $26.0 million in the three months ended March 31, 2001. The decline in revenues from product and license fees was primarily attributable to lower sales
volumes in all areas of our business, which reflected a decrease in demand for our solutions. This decrease in demand was primarily driven by the general slowdown in the economy, which began to impact
our revenues in the first quarter of 2001, and the decreased levels of spending within the telecommunications sector. We also experienced relatively lower sales prices for certain basic applications
within our network intelligence solutions area, which is expected as applications mature or are duplicated in competitor offerings. Prices for new applications or applications for which there are no
significant competitive offerings were stable.

Services.Revenues from services increased 19.5% to $6.5 million in the three months ended March 31, 2002 from
$5.4 million in the three months ended March 31, 2001. The increase in services revenues was due to an increase in our number of customers and a larger installed base of products with
existing customers for which we provide product support services. For the remainder of 2002, we expect revenues from services to increase from 2001 levels because of a larger installed base of
products driven by both new and existing customers. However, we expect the rate of increase to be less than that experienced in prior years because of an industry-wide focus on decreasing
support costs and the economies-of-scale pricing for customers with a large footprint of our solutions.

Concentration of revenues.For the three months ended March 31, 2002, revenues from one international customer
accounted for approximately 42% of total revenues. For the three months ended March 31, 2001, revenues from three customers each accounted for more than 10% of total revenues, individually
accounting for approximately 15%, approximately 11% and approximately 10% of total revenues. Going forward we expect one or two customers will account for more than 10% of total revenues in most
quarters, but we do not expect revenues from any single customer to represent as high a percentage of total revenues as was experienced in the three months ended March 31, 2002. A large
percentage of our revenues are typically derived from a small number of customers, the specific make up of which varies from one quarter to the next. On a quarterly basis, our 10 largest customers
typically account for 50% to 80% of total revenues for that quarter. We expect this trend to continue for the foreseeable future.

International revenues.In the three months ended March 31, 2002, international revenues accounted for 76.9% of total
revenues compared to 65.4% of total revenues in the three months ended March 31, 2001. Variations in the percentage of total revenues derived from international markets may occur as a result of
the economic conditions in the regions in which we operate and the concentration of revenues in a particular period from a small number of customers. The relatively higher percentage of international
revenues in the three months ended March 31, 2002 versus the same period in the prior year was driven by the significant revenues from one international customer. For the remainder of 2002, we
expect revenues from international markets to continue to represent the majority of our total revenues.

Cost of Revenues

Product and license fees.Cost of product and license fees consists primarily of hardware, personnel and overhead expenses
related to the manufacturing, integration and installation of our products. Cost of product and license fees was $6.2 million, or 29.7% of product and license fees revenues, in the three months
ended March 31, 2002, and $10.0 million, or 38.5% of product and license fees revenues, in the three months ended March 31, 2001. The decrease in both absolute dollars and as a
percentage of product and license fees revenues resulted primarily from decreased hardware costs and, to a lesser extent, decreased labor and overhead costs. The decrease in hardware costs is

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attributable to a higher percentage of our network intelligence and business intelligence implementations being derived from the expansion of existing systems rather than new system implementations,
which typically have relatively higher hardware costs. New product offerings or changes in our product mix, in terms of both solution area and proportion of new systems versus system expansions, can
affect the cost of revenues as a percentage of product and license fees revenues.

Services.Cost of services consists of expenses, primarily personnel costs, related to our product support, training, and
warranty and non-warranty activities. Cost of services was $3.2 million, or 48.6% of services revenues, in the three months ended March 31, 2002 and $2.6 million, or
48.0% of services revenues, in the three months ended March 31, 2001. During the three months ended March 31, 2002, we released GeoProbe and GeoProbe Mobile Version 5.
Certain costs related to research and development personnel were included in cost of goods sold as they supported these new version releases and other recently-introduced new products. In general,
cost of services for product support tends to increase during the rollout of new products or new versions of existing products. Historically, cost of services as a percentage of services revenues has
fluctuated as a result of the relative mix of product support, training and warranty and non-warranty work during a specific period. We expect these trends to continue into the foreseeable
future.

Operating Expenses

Research and Development Expenses.Research and development expenses consist primarily of personnel expenses, including
incentive and other compensation expenses, and contract labor, travel and facilities expenses. These expenses decreased to $8.5 million in the three months ended March 31, 2002 from
$11.7 million in the three months ended March 31, 2001. Research and development expenses as a percentage of total revenues were 30.8% in the three months ended March 31, 2002 and
37.2% in the three months ended March 31, 2001. The decrease in absolute dollars and as a percentage of total revenues was attributable to decreased staffing dedicated to research and
development activities and, to a lesser extent, decreased use of third-party research and development services and decreased purchases of equipment for research and development activities. The average
headcount of our research and development organization was 277 in the three months ended March 31, 2002, compared to 337 in the three months ended March 31, 2001. The decrease in
headcount was primarily attributable to discontinued research and development efforts with respect to our VIA softswitch offering. Our research and development efforts include
expenditures for new products and applications, and new features or enhancements for existing products, primarily in the areas of next-generation wireless and packet-based technologies.

Software
development costs are expensed as incurred until technological feasibility has been established, at which time subsequent costs are permitted to be capitalized until the product
is available for general release to customers. To date, either the establishment of technological feasibility of our products has substantially coincided with their general release, or costs incurred
subsequent to the
achievement of technological feasibility have not been material. As a result, software development costs qualifying for capitalization have been insignificant, and we have not capitalized any software
development costs.

Sales and Marketing Expenses.Sales and marketing expenses consist primarily of personnel, travel and facilities expenses as
well as marketing expenses such as trade show and advertising expenses. These expenses decreased to $4.1 million in the three months ended March 31, 2002 from $5.7 million in the
three months ended March 31, 2001. Sales and marketing expenses as a percentage of total revenues were 14.9% in the three months ended March 31, 2002 and 18.3% in the three months ended
March 31, 2001. The decrease in absolute dollars and as a percentage of total revenues was attributable to decreased average headcount, decreased sales commissions due to lower order levels and
cost reduction efforts primarily related to travel, advertising and promotional activities. Average headcount

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in the three months ended March 31, 2002 was 81 compared to 108 in the three months ended March 31, 2001.

General and Administrative Expenses.General and administrative expenses consist primarily of personnel, facilities and legal
and professional expenses of our finance, administrative and executive departments. These expenses decreased to $2.0 million in the three months ended March 31, 2002 from
$2.7 million in the three months ended March 31, 2001. General and administrative expenses as a percentage of total revenues were 7.3% in the three months ended March 31, 2002
compared to 8.7% in the three months ended March 31, 2001. The decrease in absolute dollars and as a percentage of total revenues was primarily attributable to decreased average headcount.
Average headcount in the three months ended March 31, 2002 was 48 compared to 69 in the three months ended March 31, 2001.

Restructuring Costs.We did not record any restructuring costs during the three months ended March 31, 2002. We
recorded a restructuring charge for the three months ended March 31, 2001 of approximately $0.5 million related primarily to a workforce reduction of approximately 40 employees. The
reduction affected all areas of the company. The charge consisted primarily of employee severance, professional fees and outplacement services. In the fourth quarter of 2001, we decreased this charge
by $0.1 million due to changes in previous estimates related to severance and professional fees.

Other Income (Expense)

Other income consists of interest income earned on our cash and cash equivalents partially offset by foreign translation adjustments and losses on the disposal of
assets. Other income was $0.5 million in the three months ended March 31, 2002, compared to $1.9 million in the three months ended March 31, 2001. The decrease was
primarily attributable to the overall decrease in interest rates paid on our investments. In the three months ended March 31, 2002, we recognized a return on our average cash balance of 1.7%
compared to 5.6% in the three months ended March 31, 2001.

Provision for Income Taxes

We recorded an income tax expense of $1.3 million for the three months ended March 31, 2002 compared to an income tax expense of $13,000 for the
three months ended March 31, 2001. Our effective tax rates for these periods were 32.0% for the three months ended March 31, 2002, and 34.2% for the three months ended March 31,
2001. Federal income taxes for the periods presented have been calculated on the basis of an estimated annual rate. Our effective tax rate for 2002 differs from the U.S statutory rate primarily due to
the extra-territorial income tax benefit and utilization of the research and development tax credit.

Our
financial statements reflect net deferred tax assets of $2.1 million as of March 31, 2002, comprised of credit carryforwards and deductible temporary differences.
Although realization is not assured, we have concluded that it is more likely than not that the net deferred tax assets will be realized based on the scheduling of deferred tax liabilities and
projected taxable income. The amount of the net deferred tax assets actually realized, however, could vary if there are differences in the timing or amount of future reversals of existing deferred tax
liabilities or changes in the actual amounts of future taxable income.

Liquidity and Capital Resources

Since our inception, we have funded our operations and met our capital expenditure requirements primarily through cash flows from operations and to a lesser
extent during our initial years of operations through bank borrowings. At March 31, 2002, we had working capital of $175.0 million compared to $170.1 million at
December 31, 2001. We had $166.4 million in cash and cash equivalents

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at March 31, 2002, an increase of $11.5 million from $154.9 million in cash and cash equivalents at December 31, 2001. At March 31, 2002, we had no
long-term debt.

Our
revolving credit facility expired on August 15, 2001. We believe that our current cash balances are sufficient for our near-term needs, and we therefore chose not
to renew or replace the facility.

Net
cash provided by operating activities was $11.1 million for the three months ended March 31, 2002, compared to $19.4 million during the same period in 2001. Net
cash provided by operating activities resulted primarily from net income and changes in components of working capital. The decrease in net cash provided by operating activities for the three months
ended March 31, 2002, compared to the three months ended March 31, 2001, was attributable to significant collections on trade accounts receivable and receipt of an income tax refund in
the three months ended March 31, 2001.

Net
cash used in investing activities was $0.6 million for the three months ended March 31, 2002 compared to $3.6 million during the same period in 2001. Net cash
used in investing activities for both periods related to purchases of property and equipment.

Net
cash provided by financing activities was $0.9 million for the three months ended March 31, 2002 and $1.9 million during the same period of 2001. Net cash
provided by financing activities in both periods resulted from proceeds from the issuance of common stock upon the exercise of stock options and purchases under our employee stock purchase plan.

We
may in the future pursue acquisitions of businesses, products or technologies, or enter into joint venture arrangements, that could complement or expand our business and product
offerings. Any material acquisition or joint venture could result in a decrease in our working capital depending on the amount, timing and nature of the consideration to be paid.

We
believe that current cash balances and expected future cash flows will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities
through the next twelve months. After that time, if current sources are not sufficient to meet our needs, we may seek additional equity or debt financing. In addition, any material acquisition of
other businesses, products or technologies or material investments in joint ventures could require us to obtain additional equity or debt financing. There can be no assurance that additional financing
would be available on acceptable terms, if at all.

Accounting Policies

In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we use certain estimates and
assumptions that affect the reported amounts and related disclosures and may vary from actual results. We consider the following accounting policies as those most important to the portrayal of our
financial condition and those that require the most subjective judgment. Although we believe that our estimates and assumptions are reasonable, actual results may differ, and such differences could be
significant to our financial results.

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Revenue Recognition

General.We derive revenues primarily from the sale of products and software license fees as well as services, which include
training, warranty and product support services. The majority of the contracts for our network intelligence and business intelligence solutions contain multiple billing milestones (e.g., contract
award, shipment, installation and acceptance), not all of which are associated with revenue recognition. Except as otherwise discussed below, revenues from product and license fees are recognized in
the period that we have completed all hardware manufacturing and/or software development to contractual specifications, factory testing has been completed, the product has been shipped to the
customer, the fee is fixed and determinable and collection is considered probable. When we have significant obligations subsequent to shipment, such as installation and system integration, revenues
are recognized when there are no significant unfulfilled obligations. Revenues from arrangements that include significant acceptance terms and/or provisions are recognized when acceptance has
occurred. Revenues from our diagnostics solutions are typically recognized upon shipment.

Multiple element arrangements.Contracts for our network intelligence and business intelligence solutions are typically
multiple element arrangements, which means they involve multiple deliverables. We determine the fair value of each of the contract deliverables using vendor-specific objective evidence, or VSOE. VSOE
for each element is based on the price that we would sell the element to the customer on a stand-alone basis. We offer our customers product support services, which include the correction of software
problems, telephone access to our technical personnel and the right to receive unspecified product updates, upgrades and enhancements, when and if they become available. Revenues from these services,
including product warranty services included in initial licensing fees, are recognized ratably over the contract period. Product warranty services included in the initial licensing fee are allocated
from the total contract amount based on the relative fair value of these services determined using VSOE. Revenues from other services, such as training, are recognized when the services have been
completed. If we determine that we do not have VSOE on an undelivered element of an arrangement, we may not be able to recognize revenue until all elements of the arrangement were delivered. This
occurrence could materially impact our financial results because of the significant dollar amount of many of our contracts and the significant portion of total revenues that a single contract may
represent in any particular period.

Percentage-of-completion accounting.Revenues for contracts that require significant software
development and are generally in duration in excess of nine months are recognized using the
percentage-of-completion method, which relies on estimates of total expected contract costs. We believe that this method is appropriate because of our ability to determine
performance milestones and determine dependable estimates of our costs applicable to each phase of a contract. Since the financial reporting of these contracts depends on estimates, which are assessed
continually during the term of the contract, costs are subject to revisions as the contract progresses to completion. Revenues from these contracts are recognized upon attainment of the scheduled
performance milestones. Revisions in gross margin estimates are reflected in the period in which the facts that give rise to the revisions become known. Anticipated losses on fixed-price contracts are
recognized through cost of revenues when estimable. For the quarter ended March 31, 2002, less than 7% of our revenues was attributable to contracts under
percentage-of-completion accounting. To date, we have not recorded significant adjustments to revenues and expenses as a result of changes in estimates on long-term
contracts.

Returns and cancellations.Generally, our contracts do not include right-of-return clauses. As a
result, we have experienced few returns or cancellations for our products. Revenues on contracts that include right-of-return clauses are not recognized until the
right-of-return period has expired. Accordingly, we do not record a provision for returns.

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Allowance for Doubtful Accounts

A large proportion of our revenues and receivables are attributable to our carrier customers in the telecommunications industry and, to a lesser extent, to our
customers who supply equipment into the telecommunications industry. Our trade accounts receivable balance is recorded net of allowances for amounts not expected to be collected from our customers.
Because our accounts receivable are typically unsecured, we periodically evaluate the collectibility of our accounts based on a combination of factors, including a particular customer's ability to pay
as well as the age of the receivables. To evaluate a specific customer's ability to pay, we analyze financial statements, payment history, third-party credit analysis reports and various information
or disclosures by the customer or other publicly available information. In cases where the evidence suggests a customer may not be able to satisfy its obligation to us, we set up a specific reserve in
an amount we determine appropriate for the perceived risk. Most of our contracts include multiple payment milestones, some of which occur in advance of revenue recognition, which mitigates our risk
both in terms of collectibility and adjustments to recorded revenue. Given that most of our customers are large public companies with substantial resources, we have not historically experienced
significant losses on uncollectible accounts and our allowance has been less than 5% of recorded receivables. If the current downturn in the telecommunications industry continues, the financial
condition of our customers could deteriorate and they may not be able to meet their financial obligations to us. If this were to occur, the net value realized from our receivables may be materially
different from the net balance recorded on our balance sheet.

Inventory Reserves

Inventories are recorded net of allowances for unsalable or obsolete raw materials, work-in-process and finished goods. We evaluate on a
quarterly basis the status of our inventory to ensure the amount recorded in our financial statements reflects the lower of our cost or the value we expect to receive when we sell the inventory. This
estimate is based on several factors, including the condition and salability of our inventory and the forecasted demand for the particular products incorporating these components. Based on current
backlog and expected orders, we forecast the upcoming usage of current stock. We recognize reserves for obsolete and slow-moving parts ranging from 0% for active parts with sufficient
forecasted demand up to 100% for excess parts with insufficient demand or obsolete parts. If market conditions deteriorate or the expected future demand for our products otherwise decreases, or if
changes in our business strategy reduce our need for these components, our estimate of the carrying value of our inventory could be reduced by a material amount.

Risk Factors

You should carefully consider the risks described below before making a decision to invest in our common stock. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties that we do not presently know, or that we currently view as immaterial, may also impair our business operations. This report is qualified
in its entirety by these risk factors.

If
any of the following risks actually occur, they could materially harm our business, financial condition or results of operations. In that case, the trading price of our common stock
could decline.

Our quarterly financial results fluctuate and are difficult to predict.

Since our future financial results are likely to vary significantly from quarter to quarter, you should not rely on our results of operations during any
particular quarter as an indication of our future performance in any quarterly period or fiscal year. Our quarterly financial results have varied significantly in the past and are likely to vary
significantly from quarter to quarter in the future based

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on a number of factors, many of which are outside of our control. These factors include but are not limited to:



A
significant portion of our operating expenses, including rent and salaries, is largely fixed in nature. Accordingly, if revenues are below expectations, our financial results are
likely to be adversely and disproportionately affected because these operating expenses are not variable in the short term and cannot be quickly reduced to respond to unanticipated decreases in
revenues.

Our
financial results are also likely to fluctuate due to factors that impact our current and prospective customers. Expenditures by customers tend to vary in cycles that reflect overall
economic conditions and individual budgeting and buying patterns and, in some cases, the ability of some of our customers to obtain the financing they require to make capital expenditures. Our
business has been adversely affected by a softening economy, and we would be further harmed by a continued decline in the economic prospects of our customers or the economy in general. In many cases,
these adverse economic conditions have altered current and prospective customers' capital spending priorities or budget cycles, or extended our sales cycle, and these adverse effects could continue.
Our business also could be harmed by changes in customer spending patterns reflecting industry trends. In addition, our financial results historically have been influenced by seasonal fluctuations,
with revenues tending to be strongest in the fourth quarter of each year and revenues in our first quarter tending to be consistent with, or decreasing from, the level achieved in the preceding
quarter. We believe that this seasonality has been due to the capital appropriation practices of many of our customers; however, it is unclear how these historical trends will be affected by the
overall slowdown in the telecommunications industry.

As
a result of all of the foregoing, we cannot assure you that our revenues will grow in future periods or that we will be profitable. In addition, in some future quarters our financial
results may be below the expectations of public market analysts. In such event, the market price of our common stock would likely fall.

Our revenues are highly concentrated among a small number of customers.

A large percentage of our revenues are typically derived from a small number of customers. For example, in the three months ended March 31, 2002,
approximately 78% of our revenues were derived from our 10 largest customers in that quarter, with one customer accounting for approximately 42% of total revenues. We have historically experienced
high concentrations on a quarterly basis, and we expect this trend to continue. Although the customer make up of our largest projects varies from quarter to quarter, a small number of customers
frequently account for a significant portion of our revenues in a given period. If one or more of our significant customers experiences adverse conditions in its industry or operations, including the
continued impact of the current economic downturn, these customers may

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not be able to meet their ongoing financial obligations to us or complete the purchase of additional products.

Consolidations in the telecommunications industry or a further slowdown in telecommunications spending could harm our business, financial condition and results of
operations.

We
have derived substantially all of our revenues from sales of products and related services to the telecommunications industry. Since early 2001, we and a number of other companies
have been impacted by reduced spending by telecommunications carriers and equipment manufacturers. Our business, financial condition and results of operations could be materially harmed in the event
that conditions continue to worsen in our industry or in the event there are consolidations of our current or prospective customers. Slowdowns in spending often cause delays in sales and installations
and could cause cancellations of current or planned projects, any of which could harm our financial results in a particular period.

Changes or delays in the implementation or customer acceptance of our products could harm our financial results.

Revenues
for our network intelligence and business intelligence solutions are typically recognized upon the completion of installation, or when we have no significant additional
obligations. On a quarterly basis, a significant portion of our revenues is derived from a small number of customer projects. Customer-or Inet-caused delays in the commencement or
completion of scheduled product installations, which from time to time result from site-readiness delays, the often comprehensive processes for testing and acceptance maintained by certain
of our customers, insufficient resources or other issues, and
lengthening of implementation schedules due to the introduction of new features or applications, could materially harm our financial results. With respect to contracts providing for a significant
payment or performance milestone tied to customer acceptance or allowing customer return, termination or similar rights prior to acceptance, revenue will generally not be recognized until acceptance.
For new products, we typically recognize revenue upon acceptance until a track record of acceptance is achieved, after which revenue recognition generally is tied to the completion of installation. In
cases where the recognition of revenue is tied to customer acceptance, the failure to obtain acceptance or delayed acceptance could harm our expected financial results for a particular period.
Additionally, we may be subject to penalties for a failure to meet contractually agreed upon milestones or deadlines.

Any reversal or slowdown in deregulation of telecommunications markets could materially harm the markets for our products.

Future
growth in the markets for our products will depend in part on continued privatization, deregulation and the restructuring of telecommunications markets worldwide, as the demand
for our products is generally higher when a competitive environment exists. Any reversal or slowdown in the pace of this privatization, deregulation or restructuring could materially harm the markets
for our products. Moreover, the consequences of deregulation are subject to many uncertainties, including judicial and administrative proceedings that affect the pace at which the changes contemplated
by deregulation occur, and other regulatory, economic and political factors. Any invalidation, repeal or modification of the requirements imposed by the Telecommunications Act of 1996, the local
telephone competition rules adopted by the U.S. Federal Communications Commission to implement that Act or similar international regulation could materially harm our business, financial condition and
results of operations. Furthermore, the uncertainties associated with deregulation have in the past, and could in the future, cause our customers to delay purchasing decisions pending the resolution
of these uncertainties.

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The sales cycle for our products is long, which could harm our quarterly financial results.

Sales
of our network intelligence and business intelligence products and solutions are made predominately to large communications service providers and involve significant capital
expenditures and lengthy implementation processes. Sales to this type of customer generally require an extensive sales effort throughout the customer's organization and final approval by an executive
officer or other senior level approval. We expend substantial funds and management effort pursuing these sales. Additionally, potential customers often maintain comprehensive processes for internal
approval, contracting and procurement, which may cause potential sales to be delayed or foregone. As a result of these and other factors, the sales cycle for our solutions is long, historically
ranging from six to 12 months for our network intelligence and business intelligence solutions (excluding the cycle for subsequent applications and enhancements, which varies widely) and up to
three months for occasional, large sales of our diagnostics solutions. In addition, we have experienced lengthening sales cycles during the current soft economy. Accordingly, our ability to forecast
the timing and amount of specific sales is
limited, and the deferral or loss of one or more significant sales could materially harm anticipated financial results in a particular quarter, especially if there are significant sales and marketing
expenses associated with any deferred or lost sales.

Any decrease in demand for our products would significantly decrease our sales.

Our principal products, the GeoProbe, IT:seven and Spectra, generate substantially all of our revenues today and are expected to continue to account for
substantially all of our revenues for the foreseeable future. Our business has been adversely affected by a softening economy, and we would be further harmed by a continued decline in the economic
prospects of our customers or the economy in general. Any further downturn in the demand for our products would materially harm our business, financial condition and results of operations. We cannot
assure you that we will be successful in developing any other products or taking any other steps to reduce the risk associated with any slowdown in demand for the GeoProbe, IT:seven and/or Spectra.

Increased competition could result in price reductions, reduced margins and loss of market share.

Competition
for all of our solutions is intense and is expected to continue, and in some cases intensify, in the future. We compete with a number of U.S. and international suppliers that
vary in size, and in the scope and breadth of the products and services offered. Certain of our competitors have, in relation to us, longer operating histories, larger installed customer bases,
longer-standing relationships with customers, greater name recognition and significantly greater financial, technical, marketing, customer service, public relations, distribution and other resources.
Additionally, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. As a result, these competitors may be able to more quickly
develop or adapt to new or emerging technologies and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products. Increased competition could
result in price reductions, reduced margins and loss of market share.

Our business depends on retaining our existing key personnel.

Our business depends to a significant extent upon the continued service and performance of a relatively small number of key senior managers, technical personnel
and sales and marketing personnel, few of whom are bound by an employment agreement. The loss of any existing key personnel, or the inability to attract, motivate and retain additional key personnel,
could harm our business, financial condition and results of operations.

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We may be unable to adapt to rapid technological change and evolving customer requirements.

The
introduction of communications network management products involving superior technologies or the evolution of alternative technologies or new industry protocol standards could
render our existing products, as well as products currently under development, obsolete and unmarketable. We believe that our future success will depend in part upon our ability, on a timely and
cost-effective basis, to continue to:



We
cannot assure you that we will achieve these objectives.

Our future success will depend on our ability to develop new products based on emerging technologies.

Over
the long term, we expect carrier spending for legacy networks to decrease, which requires that we develop solutions for networks based on emerging packet technologies and standards,
such as IP and ATM. We may not successfully develop competitive products for these technologies and standards, which could harm our business, financial condition and results of operations.

Products
as complex as those currently under development by us frequently are subject to delays, and we cannot assure you that we will not encounter difficulties that could delay or
prevent the successful and timely development, introduction and marketing of these potential new products. Even if such potential new products are developed and introduced, we cannot assure you that
they will achieve any significant degree of market acceptance.

Half or more of our revenues have historically come from our international customers, and, as a result, our business may be harmed by political and economic conditions in
foreign markets and the challenges associated with operating internationally.

A
substantial portion of our business is subject to the risks inherent in international business activities, including:



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Continued
international expansion of our business would require further significant management attention and financial resources. This expansion may be costly and
time-consuming and may not generate returns for a significant period of time, if at all. Additionally, in order to further expand internationally, we may be required to establish
relationships with additional distributors and third-party integrators. We cannot assure you that we will effectively establish such relationships. If international revenues are not adequate to offset
the additional expenses of expanding international operations, it could harm our business, financial condition and results of operations.

To
date, a very high percentage of our international sales have been denominated in U.S. dollars, and we have not been significantly exposed to fluctuations in non-U.S.
currency exchange rates. As a result, our revenues in international markets may be negatively impacted by a strengthening U.S. dollar. However, we expect that in future periods a greater portion of
international sales may be denominated in currencies other than U.S. dollars, thereby exposing us to exchange rate gains and losses on non-U.S. currency transactions. We may choose to
limit such exposure by entering into various hedging arrangements. We cannot be certain that any hedging strategies that we undertake would be successful in avoiding exchange-related losses.

We may be unable to produce sufficient quantities of our products because we obtain various key components from sole and limited source suppliers. If we are unable to obtain
these components, or if the prices of these components increase, we could be unable to ship our products in a timely manner or our product costs could be materially impacted.

We
could experience delays or reductions in product shipments or increases in product costs if we are unable to obtain sufficient key components as required or to develop alternative
sources if and as required in the future. Currently, our products utilize various semiconductors that are available from only one manufacturer and other components that are available from only one or
a limited number of suppliers. While alternative suppliers have been identified for a variety of key components, those alternative sources have not been qualified or activated by us. Our qualification
process could be
lengthy, and we cannot assure you that additional sources would become available to us on a timely basis, or if such sources were to become available, that the components would be comparable in price
and quality to our current components. We have no long-term agreements with our suppliers and, in the case of many components, make our purchases with purchase orders on an
"as-needed basis." Certain components require long order lead-times, in certain cases up to nine months. Other components that currently are readily available may become
difficult to obtain in the future. Our failure to order sufficient quantities of these components in advance of product delivery deadlines could prevent us from adequately responding to unanticipated
increases in customer orders. In the past, we have experienced delays in the receipt of a variety of our key components, which have resulted in delays in product deliveries. In addition, the cost of
various key components of our products has fluctuated significantly in the past based on supply and demand factors. Significant changes in supply and demand characteristics in the future could cause
the cost of various components to increase, which could adversely impact our product costs.

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Our inventory may become obsolete or unusable.

We make advance purchases of various component parts in relatively large quantities to ensure that we have an adequate and readily available supply. Our failure
to accurately project our needs for these components and the demand for our products that incorporate them, or changes in our business strategy that reduce our need for these components, could result
in these components becoming obsolete prior to their intended use or otherwise unusable in our business.

We rely on third-party subcontractors to manufacture and develop our products. Our ability to sell products to our customers could be impaired if these subcontractors do not
meet their commitments to us.

Any
disruption in our relationships with third-party subcontractors and our inability to develop alternative sources if and as required in the future could result in delays or reductions
in product shipments or increases in product costs. We rely exclusively upon third-party subcontractors to manufacture our subassemblies, and we have retained, from time to time, third-party design
services in the development of application-specific integrated circuits and the layout of circuit boards. We also frequently subcontract the development of specific features and enhancements of our
products. Our reliance on third-party subcontractors involves a number of risks, including the potential absence of adequate capacity, the unavailability of or interruption in access to various
process technologies, and reduced control over product quality, delivery schedules, manufacturing yields and costs.

We rely upon software licensed from third parties. If we are unable to maintain these software licenses on commercially reasonable terms, our business, financial condition and
results of operations could be harmed.

We
rely upon software that we license from third parties, including software that is integrated with our internally developed software and used in our products to perform key functions.
The inability to maintain any software licenses on commercially reasonable terms could result in shipment delays or reductions until equivalent software could be developed or licensed and integrated
into our products, which could harm our business, financial condition and results of operations.

We may not receive the intended benefits of future acquisitions, joint ventures or other business relationships.

We
may in the future pursue acquisitions of businesses, products and technologies, or the establishment of joint venture, strategic partnership or other arrangements that could expand
our business. The negotiation of potential acquisitions or strategic relationships, as well as the integration of an acquired or jointly developed business, technology or product, could cause
diversion of management's time and resources. Future acquisitions and strategic relationships by us could result in potentially dilutive issuances of equity securities, a material reduction in cash
reserves, the incurrence of debt and contingent liabilities, research and development write-offs and other acquisition-related expenses. We cannot assure you that any acquisition or joint
venture will be successfully integrated with our operations. If we were to pursue any such acquisition or strategic relationship, we may not receive the intended benefits of the acquisition or
strategic relationship. Also, we have in the past and may in the future pursue arrangements with third parties to perform specified activities for us such as the development of products or product
features. We cannot assure you that these arrangements will produce to the level of quality or in the time frame expected, which could materially harm our business.

We may be accused of infringing the proprietary rights of others, which could subject us to costly and time-consuming litigation.

The
communications industry is characterized by the existence of a large number of patents and frequent allegations of patent infringement. We have received, and may receive in the
future, notices from holders of patents that raise issues as to possible infringement by our products. Currently, we are engaged in correspondence and discussions with one third-party patent holder.
As the number of competitive products increases and the functionality of these products further overlaps, we believe that

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we may become increasingly subject to allegations of infringement. While we believe that our products do not infringe on any valid patents, questions of infringement and the validity of patents in
the field of communications signaling technologies involve highly technical and subjective analyses. We cannot assure you that any patent holders will not initiate legal proceedings in the future
against us, or that if any proceedings were initiated, we would be successful in defending ourselves. Any proceeding could be time consuming and expensive to defend or resolve, result in substantial
diversion of management resources, cause product shipment delays, or force us to enter into royalty or license agreements rather than dispute the merits of any such proceeding initiated against us. We
cannot assure you that any such royalty or license agreements would be available on terms acceptable to us, if at all.

Our limited ability or failure to protect our intellectual property may materially harm our ability to compete.

Our
continued success is dependent in part upon our proprietary technology. To protect our proprietary technology, we rely on a combination of technical innovation, trade secret,
copyright and trademark laws, non-disclosure agreements and, to a lesser extent, patents, each of which affords only limited protection. In addition, the laws of some foreign countries do
not protect our proprietary rights in the products to the same extent as do the laws of the U.S. Despite the measures taken by us, it may be possible for a third party to copy or otherwise obtain and
use our proprietary technology and
information without authorization. Policing unauthorized use of our products is difficult, and litigation may be necessary in the future to enforce our intellectual property rights. Any litigation
could be time consuming and expensive to prosecute or resolve, result in substantial diversion of management resources, and materially harm our business, financial condition and results of operations.
We cannot assure you that we will be successful in protecting our proprietary technology or that our proprietary rights will provide us a meaningful competitive advantage.

We may face potential liability for product defects.

Products as complex as ours may contain undetected defects or errors when first introduced or as enhancements are released that, despite our testing, are not
discovered until after a product has been installed and used by customers. Defects or errors could result in delayed market acceptance of the product or damage to our reputation and business. We
generally include provisions in our agreements with customers that are intended to limit our exposure to potential liability for damages arising out of defects or errors in our products. However, the
nature and extent of these limitations vary from agreement to agreement, and it is possible that these limitations may not be effective as a result of unfavorable judicial decisions or current or
future laws enacted in one or more of the jurisdictions in which we do business. Although we have not experienced any product liability suits to date, the sale and support of our products entail the
risk of these claims. Any product liability claim brought against us, regardless of its merit, could result in material expense to us, diversion of management time and attention, and damage to our
business reputation and our ability to retain existing customers or attract new customers.

Our three founders own approximately 73% of our common stock, which allows them to control the management and affairs of our company and prevent a change of
control.

As
of March 31, 2002, our three founders, Samuel S. Simonian, Elie S. Akilian and Mark A. Weinzierl, beneficially owned approximately 73% of the outstanding shares of our common
stock. Consequently, two or more of these individuals acting together could effectively control the outcome of all matters submitted for stockholder action, including the election of our board of
directors and the approval of significant corporate transactions. They effectively control the management and affairs of our company, which could have the effect of delaying or preventing a change in
control of our company. In addition, Messrs. Simonian, Akilian and Weinzierl are members of our board of directors and have significant influence in directing the actions taken by our board.

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Our business and reputation could suffer if we do not prevent security breaches.

We
have included security features in some of our products that are intended to protect the privacy and integrity of customer data. Despite the existence of these security features, our
products may be vulnerable to breaches in security due to unknown defects in the security mechanisms, as well as vulnerabilities inherent in the operating system or hardware platform on which the
product runs and/or the networks linked to that platform. Security vulnerabilities, regardless of origin, could jeopardize the security of information stored in and transmitted through the computer
systems of our customers. Any security problem may require significant capital expenditures to solve and could materially harm our reputation and product acceptance.

We have adopted anti-takeover defenses that could delay or prevent an acquisition of our company.

Our
certificate of incorporation and bylaws and Delaware law contain provisions that may have the effect of discouraging, delaying or preventing a change in control of our company or
unsolicited acquisition proposals that a stockholder may consider favorable. For example, we have a classified board of directors with three-year terms, our stockholders are unable to take
action by written consent and our stockholders are limited in their ability to make proposals at stockholder meetings.

Volatility in our stock price could result in claims against us.

The market price of our common stock has been, and is likely to continue to be, highly volatile and may be significantly affected by factors such as:



The
public markets have experienced significant volatility that has particularly affected the market prices of securities of many technology and telecommunications companies for reasons
that have often been unrelated to financial results. This volatility has and may continue to materially harm the market price of our common stock as well as our visibility and credibility in our
markets.

Additionally,
in the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its common stock. We may be
the target of similar litigation in the future. Securities litigation could result in substantial costs and divert our management's attention and resources.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

We
are exposed to immaterial levels of market risk. Although revenues from customers located outside of the U.S. represented 76.9% of total revenues in the three months ended
March 31, 2002, and 65.4% of total revenues in the three months ended March 31, 2001, to date, less than 1.0% of total revenues have been denominated in currencies other than the U.S.
dollar. Accordingly, we have not been significantly exposed to fluctuations in currency exchange rates. In the quarter ended June 30, 2002 and in future periods, we expect a substantially
greater portion of total revenues could be

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denominated in currencies other than U.S. dollars, thereby increasing our exposure to exchange rate gains and losses on non-U.S. currency transactions.

Our
international business is subject to the typical risks of any international business, including, but not limited to, the risks described in Item 2"Management's
Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors." Accordingly, our future results could be materially harmed by changes in these or other factors.

Currently,
our cash is solely invested in money market funds denominated in U.S. dollars. We account for these investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. These cash equivalents are treated as available-for-sale under
SFAS 115. The carrying value of these cash equivalents approximates fair market value. Our investments are subject to interest rate risk, the risk that our financial condition and results of
operations could be adversely affected due to movements in interest rates. If interest rates were to change by 100 basis points, our investment income would be impacted by approximately
$1.6 million on an annual basis.

PART II. OTHER INFORMATION

Item 2.Changes in Securities and Use of Proceeds

The
Securities and Exchange Commission on May 26, 1999 declared effective our registration statement on Form S-1 (File No. 333-59753)
relating to the initial public offering of our common stock. As of March 31, 2002, we have used all of the net offering proceeds for the purchase of temporary investments, consisting of cash,
cash equivalents, and short-term investments. We currently intend to use the net proceeds of the offering for working capital and general corporate purposes, including financing accounts
receivable and capital expenditures made in the ordinary course of business. We also may apply a portion of the proceeds of the offering to acquire businesses, products and technologies, or enter into
joint venture arrangements, that are complementary to our business and product offerings; however, at this time we have not identified a specific acquisition or joint venture or allocated a specific
amount for this purpose.

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Item 6.Exhibits and Reports on Form 8-K



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

| |  | INET TECHNOLOGIES, INC.
| |  | -----------------------
| |  | By:                    

Date:
April 25, 2002

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