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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



xQUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934.



For the quarterly period ended March 31, 2003



OR



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934.



Commission File Number 0-24707



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INET TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)



|Delaware                                                       |  | 75-2269056                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (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 þ No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No ̈



Number of shares of common stock outstanding at April 25, 2003: 38,361,954



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Inet
Technologies, Inc.



Index



|                              
|------------------------------
|                              
|Part I  Financial Information
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|Part II  Other Information   
|                              
|                              
|                              
|                              
|                              
|Signatures                    
|                              
|Certifications                





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PART I. FINANCIAL
INFORMATION



Item 1. Financial Statements



INET TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)



|                                                                                                                          |  | March 31, 2003 |         |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | -
|ASSETS                                                                                                                    |  |                |         |   |                   |  
|Current assets:                                                                                                           |  |                |         |   |                   |  
|Cash and cash equivalents                                                                                                 |  | $              | 163,139 |   |                   | $
|Trade accounts receivable, net of allowance for doubtful accounts of $507 at March 31,
2003 and $484 at December 31, 2002 |  |                | 11,738  |   |                   |  
|Unbilled receivables                                                                                                      |  |                | 180     |   |                   |  
|Inventories                                                                                                               |  |                | 8,425   |   |                   |  
|Deferred income taxes                                                                                                     |  |                | 850     |   |                   |  
|Other current assets                                                                                                      |  |                | 4,747   |   |                   |  
|                                                                                                                          |  |                |         |   |                   |  
|Total current assets                                                                                                      |  |                | 189,079 |   |                   |  
|Property and equipment, net                                                                                               |  |                | 13,844  |   |                   |  
|Other assets                                                                                                              |  |                | 602     |   |                   |  
|                                                                                                                          |  |                |         |   |                   |  
|Total assets                                                                                                              |  | $              | 203,525 |   |                   | $
|                                                                                                                          |  |                |         |   |                   |  
|                                                                                                                         
|LIABILITIES AND STOCKHOLDERS
EQUITY                                                                                      |  |                |         |   |                   |  
|                                                                                                                         
|Current liabilities:                                                                                                      |  |                |         |   |                   |  
|Accounts payable                                                                                                          |  | $              | 1,473   |   |                   | $
|Accrued compensation and benefits                                                                                         |  |                | 2,811   |   |                   |  
|Deferred revenues                                                                                                         |  |                | 24,011  |   |                   |  
|Income taxes payable                                                                                                      |  |                | 3,195   |   |                   |  
|Other accrued liabilities                                                                                                 |  |                | 5,393   |   |                   |  
|                                                                                                                          |  |                |         |   |                   |  
|Total current liabilities                                                                                                 |  |                | 36,883  |   |                   |  
|Deferred income taxes                                                                                                     |  |                | 18      |   |                   |  
|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  47,158,643 at March 31, 2003 and 47,157,543 at December 31, 2002          |  |                | 47      |   |                   |  
|Additional paid-in capital                                                                                                |  |                | 75,095  |   |                   |  
|Unearned compensation                                                                                                     |  |                | (266    | ) |                   |  
|Retained earnings                                                                                                         |  |                | 126,496 |   |                   |  
|Treasury stock, 8,796,939 common shares at March 31, 2003 and no common shares at
December 31, 2002, at cost              |  |                | (34,748 | ) |                   |  
|                                                                                                                          |  |                |         |   |                   |  
|Total stockholders equity                                                                                                |  |                | 166,624 |   |                   |  
|                                                                                                                          |  |                |         |   |                   |  
|Total liabilities and stockholders equity                                                                                |  | $              | 203,525 |   |                   | $
|                                                                                                                          |  |                |         |   |                   |  



See
accompanying notes to consolidated financial statements.



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INET
TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)



|                                         |  | Three months ended March 31, |       
|---------------------------------------- |  | ---------------------------- | ------
|                                         |  | 2003                         |       
|Revenues:                                |  |                              |       
|Product and license fees                 |  | $                            | 17,518
|Services                                 |  |                              | 7,524 
|                                         |  |                              |       
|Total revenues                           |  |                              | 25,042
|                                        
|Cost of revenues:                        |  |                              |       
|Product and license fees                 |  |                              | 2,902 
|Services                                 |  |                              | 4,167 
|                                         |  |                              |       
|Total cost of revenues                   |  |                              | 7,069 
|                                         |  |                              |       
|                                        
|Gross profit                             |  |                              | 17,973
|Operating expenses:                      |  |                              |       
|Research and development                 |  |                              | 7,685 
|Sales and marketing                      |  |                              | 3,515 
|General and administrative               |  |                              | 2,419 
|                                         |  |                              |       
|                                         |  |                              | 13,619
|                                         |  |                              |       
|Income from operations                   |  |                              | 4,354 
|Other income (expense):                  |  |                              |       
|Interest income                          |  |                              | 426   
|Other income (expense)                   |  |                              | 16    
|                                         |  |                              |       
|                                         |  |                              | 442   
|                                         |  |                              |       
|Income before provision for income taxes |  |                              | 4,796 
|Provision for income taxes               |  |                              | 1,541 
|                                         |  |                              |       
|Net income                               |  | $                            | 3,255 
|                                         |  |                              |       
|                                        
|Earnings per common share:               |  |                              |       
|Basic                                    |  | $                            | 0.08  
|                                         |  |                              |       
|Diluted                                  |  | $                            | 0.08  
|                                         |  |                              |       
|Weighted-average shares outstanding:     |  |                              |       
|Basic                                    |  |                              | 40,395
|                                         |  |                              |       
|Diluted                                  |  |                              | 40,563
|                                         |  |                              |       



See
accompanying notes to consolidated financial statements.



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INET
TECHNOLOGIES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

(Unaudited)

(In thousands, except share data)



|                                                                                                            |  | Common Stock |  | Additional Paid-in Capital |    | Unearned Compensation |   |        | Retained Earnings |   | Treasury Stock |        |  | Total Stockholders Equity |        
|----------------------------------------------------------------------------------------------------------- |  | ------------ |  | -------------------------- | -- | --------------------- | - | ------ | ----------------- | - | -------------- | ------ |  | -------------------------- | -------
|                                                                                                            |  | Shares       |  | Amount                     |    |                       |   |        | Shares            |   |                | Amount |  |                           
|Balance at December 31, 2002                                                                                |  | 47,157,543   |  | $                          | 47 |                       | $ | 75,075 |                   | $ | (407           | )      |  | $                          | 123,241
|Repurchase of common stock                                                                                  |  |             |  |                            |   |                       |   |       |                   |   |               |        |  |                            |       
|Issuance of common stock under employee stock option and stock purchase plans, including
tax benefit of $87 |  | 1,100        |  |                            |   |                       |   | 20     |                   |   |               |        |  |                            |       
|Net income                                                                                                  |  |             |  |                            |   |                       |   |       |                   |   |               |        |  |                            | 3,255  
|Amortization of restricted stock awards                                                                     |  |             |  |                            |   |                       |   |       |                   |   | 141            |        |  |                            |       
|                                                                                                            |  |              |  |                            |    |                       |   |        |                   |   |                |        |  |                            |        
|Balance at March 31, 2003                                                                                   |  | 47,158,643   |  | $                          | 47 |                       | $ | 75,095 |                   | $ | (266           | )      |  | $                          | 126,496
|                                                                                                            |  |              |  |                            |    |                       |   |        |                   |   |                |        |  |                            |        



See
accompanying notes to consolidated financial statements.



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INET
TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                                                       |  | Three months ended March 31, |        
|---------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                                                                       |  | 2003                         |        
|                                                                                                                      
|Cash flows from operating activities:                                                                                  |  |                              |        
|Net income                                                                                                             |  | $                            | 3,255  
|Adjustments to reconcile net income to net cash provided by operating
activities:                                      |  |                              |        
|Depreciation                                                                                                           |  |                              | 1,803  
|Stock compensation                                                                                                     |  |                              | 141    
|Change in assets and liabilities:                                                                                      |  |                              |        
|Increase in trade accounts receivable                                                                                  |  |                              | (1,527 
|(Increase) decrease in unbilled receivables                                                                            |  |                              | (25    
|Decrease in income taxes receivable                                                                                    |  |                              |       
|(Increase) decrease in inventories                                                                                     |  |                              | (967   
|(Increase) decrease in other assets                                                                                    |  |                              | (395   
|Increase in accounts payable                                                                                           |  |                              | 395    
|Increase in taxes payable                                                                                              |  |                              | 1,329  
|Increase (decrease) in accrued compensation and benefits                                                               |  |                              | (1,302 
|Increase in deferred revenues                                                                                          |  |                              | 5,688  
|Increase in other accrued liabilities                                                                                  |  |                              | 1,415  
|                                                                                                                       |  |                              |        
|Net cash provided by operating activities                                                                              |  |                              | 9,810  
|                                                                                                                      
|Cash flows from investing activities:                                                                                  |  |                              |        
|Purchases of property and equipment                                                                                    |  |                              | (932   
|                                                                                                                       |  |                              |        
|Net cash used in investing activities                                                                                  |  |                              | (932   
|                                                                                                                      
|Cash flows from financing activities:                                                                                  |  |                              |        
|Repurchase of common stock                                                                                             |  |                              | (35,431
|Proceeds from issuance of common stock upon exercise of stock options and purchases
under employee stock purchase plan |  |                              | 616    
|                                                                                                                       |  |                              |        
|Net cash (used in) provided by financing activities                                                                    |  |                              | (34,815
|                                                                                                                       |  |                              |        
|Net (decrease) increase in cash and cash equivalents                                                                   |  |                              | (25,937
|Cash and cash equivalents at beginning of period                                                                       |  |                              | 189,076
|                                                                                                                       |  |                              |        
|Cash and cash equivalents at end of period                                                                             |  | $                            | 163,139
|                                                                                                                       |  |                              |        
|                                                                                                                      
|Supplemental disclosure:                                                                                               |  |                              |        
|Income taxes paid                                                                                                      |  | $                            | 155    
|                                                                                                                       |  |                              |        



See
accompanying notes to consolidated financial statements.





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INET
TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 1Summary of Significant Accounting Policies



The Company



Inet Technologies, Inc. is a leading global provider of
communications software solutions that enable communications carriers to more strategically operate their businesses. Current offerings in our Unified AssuranceTMsolution convert network information into valuable and actionable intelligence that carriers use to help ensure the health of their revenue-generating infrastructure. These real-time powered solutions
help carriers realize organizational efficiencies in managing their operations. Our diagnostics solutions allow communications carriers and equipment manufacturers to quickly and cost-effectively design, deploy and maintain current- and
next-generation networks and network elements.



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, 2002 included in our Annual Report on Form 10-K filed with
the Securities and Exchange Commission, or SEC, on February 28, 2003. Operating results for the three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for any other interim period or for the year
ending December 31, 2003.



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, revenue recognition and taxes. 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.



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Allowance for Doubtful Accounts



A large portion of our revenues and receivables are attributable to our carrier customers in the communications industry and, to a lesser extent, to our equipment manufacturer customers who supply equipment into the communications
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 usually unsecured, we periodically evaluate the collectibility of our
accounts based on a combination of factors, including a particular customers ability to pay and 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 obligations 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.



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, 2003 and December 31, 2002, inventories consisted of the following (in thousands):



|                |  | March 31, 2003 |       | December 31, 2002
|--------------- |  | -------------- | ----- | -----------------
|Raw materials   |  | $              | 3,268 |                  
|Work-in-process |  |                | 154   |                  
|Finished goods  |  |                | 5,003 |                  
|                |  |                |       |                  
|                |  | $              | 8,425 |                  
|                |  |                |       |                  



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 record 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. Amounts in work-in-process and finished goods inventory typically relate to firm orders and, therefore, are not subject to obsolescence risk.



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 Unified Assurance solutions contain multiple billing milestones, such as 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 of the fee is considered probable. When we have significant
obligations subsequent to shipment, such as installation and system integration, revenues are recognized when there are, in our judgment, no significant unfulfilled obligations. Revenues from arrangements that include



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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 our unaudited consolidated
statements of income.



Contracts for our Unified
Assurance 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 for which we would sell the element 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.



Income Taxes



Our income taxes are computed using the asset and liability
method of accounting. Under the asset and liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards.



In the preparation of our provision for income taxes and
determination of whether deferred tax assets will be realized in full or in part, we must estimate several factors. When it is more likely than not that all or some portion of the deferred tax asset will not be realized, a valuation allowance must
be established for the amount of the deferred tax assets that are determined not to be realizable. As of March 31, 2003 and March 31, 2002, a valuation for deferred tax assets was not deemed necessary. Accordingly, if the facts or financial results
were to change, thereby impacting the likelihood of realizing the deferred tax assets, judgment would have to be applied to determine the amount of valuation allowance required in any given period. Additionally, our income tax returns are subject to
review and examination in the various jurisdictions in which we operate. We are currently not aware of any issues that have been raised by taxing jurisdictions, and management believes that all income tax issues which may be raised as a result of
such reviews and examinations in the future will be resolved with no material impact on our financial position or future results of operations. However, in the event there was an assessment by any of these jurisdictions, it could impact our tax
provision.



Stock Options



We have elected to follow Accounting
Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for our employee stock options. Under APB 25, if the exercise price of an employees stock options equals or exceeds the market price of
the underlying stock on the date of grant, no compensation expense is recognized. At March 31, 2003, we had three stock-based compensation plans covering employees and directors. We account for stock-based compensation for non-employees under the
fair value method prescribed by Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation. Through March 31, 2003, there have been no significant grants to non-employees. As of March 31, 2003,
unearned stock compensation related to our Stock Issuance Program was $0.3 million. We had no unearned stock compensation at March 31, 2002.



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Although SFAS
123 allows us to continue to follow the present APB 25 guidelines in accounting for employee stock options and employee stock purchase rights, we are required to disclose pro forma net income (loss) and net income (loss) per share as if we had
adopted SFAS 123 in accounting for employee stock options and employee stock purchase rights. The pro forma impact of applying SFAS 123 in the three months ended March 31, 2003 and the three months ended March 31, 2002 will not necessarily be
representative of the pro forma impact in future periods. Our pro forma information is as follows (in thousands, except per share data):



|                                                                                                 |  | Three months ended March 31, |       
|------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------
|                                                                                                 |  | 2003                         |       
|Net income, as reported                                                                          |  | $                            | 3,255 
|Stock compensation expense recorded under the intrinsic value method, net of income
taxes        |  |                              | 96    
|Pro forma stock compensation (expense) computed under the fair value method, net of
income taxes |  |                              | (2,499
|                                                                                                 |  |                              |       
|Pro forma net income (loss)                                                                      |  | $                            | 852   
|                                                                                                 |  |                              |       
|Basic earnings per common share, as reported                                                     |  | $                            | 0.08  
|                                                                                                 |  |                              |       
|Diluted earnings per common share, as reported                                                   |  | $                            | 0.08  
|                                                                                                 |  |                              |       
|Pro forma basic earnings (loss) per common share                                                 |  | $                            | 0.02  
|                                                                                                 |  |                              |       
|Pro forma diluted earnings (loss) per common share                                               |  | $                            | 0.02  
|                                                                                                 |  |                              |       



Inputs
used for the fair value method for our employee stock options are as follows:



|                                               |  | Three months ended March 31, |     
|---------------------------------------------- |  | ---------------------------- | ----
|                                               |  | 2003                         |     
|Volatility                                     |  |                              | 0.97
|Weighted-average expected lives                |  |                              | 3.68
|Expected dividend yields                       |  |                              |    
|Weighted-average risk-free interest rates      |  |                              | 2.10
|Weighted-average fair value of options granted |  | $                            | 4.15



Inputs
used for the fair value method for our employee stock purchase rights are as follows:



|                                                              |  | Three months ended March 31, |     
|------------------------------------------------------------- |  | ---------------------------- | ----
|                                                              |  | 2003                         |     
|Volatility                                                    |  |                              | 0.98
|Weighted-average expected lives                               |  |                              | 0.50
|Expected dividend yields                                      |  |                              |    
|Weighted-average risk-free interest rates                     |  |                              | 1.32
|Weighted-average fair value of employee stock purchase rights |  | $                            | 2.52



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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 consulting agreement for which it is paid a monthly fee per full-time programmer plus
reimbursement of reasonable business expenses. We expensed approximately $0.1 million for these services in the three months ended March 31, 2003 and approximately $0.3 million for these services in the three months ended March 31, 2002.



Note 3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,
|----------------------------------------------------------------------------- |  | ----------------------------
|                                                                              |  | 2003                        
|Numerator:                                                                    |  |                             
|Net income for basic and diluted earnings per share                           |  | $                           
|                                                                              |  |                             
|Denominator:                                                                  |  |                             
|Denominator for basic earnings per share  weighted-average shares            |  |                             
|Dilutive securities: Employee stock options and purchase rights               |  |                             
|                                                                              |  |                             
|Denominator for diluted earnings per share  adjusted weighted-average
shares |  |                             
|                                                                              |  |                             
|Basic earnings per common share                                               |  | $                           
|                                                                              |  |                             
|Diluted earnings per common share                                             |  | $                           
|                                                                              |  |                             



Note 4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, |  
|------------------------------ |  | ---------------------------- | -
|                               |  | 2003                         |  
|United States                  |  | 19.2                         | %
|Export:                        |  |                              |  
|Asia/Pacific                   |  | 8.0                          |  
|Europe, Middle East and Africa |  | 71.2                         |  
|Other                          |  | 1.6                          |  
|                               |  |                              |  
|Total export revenues          |  | 80.8                         |  
|                               |  |                              |  
|                               |  | 100.0                        | %
|                               |  |                              |  



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For the three
months ended March 31, 2003, revenues from one international customer accounted for approximately 44% of total revenues. For the three months ended March 31, 2002, revenues from the same international customer accounted for approximately 42% of
total revenues.



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



Note
5Common Stock Repurchase



On January
21, 2003, we repurchased in a privately-negotiated transaction 8,969,984 restricted shares of our common stock from one of our founders, who was also a member of our board of directors, for an aggregate cash purchase price of approximately $35.4
million. We funded the transaction with available cash. The shares repurchased represented approximately 19% of our total shares outstanding immediately prior to the transaction.



Note 6Recent Accounting Pronouncements



In July 2002, the Financial Accounting Standards Board, or FASB, issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement nullifies Emerging Issues Task Force, or EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. This statement is
applicable to exit or disposal activities initiated after December 31, 2002. The adoption of this standard did not have a significant effect on our financial position or results of operations.



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:



| |  |  | Our operating results are difficult to predict and are likely to vary significantly from quarter to quarter in the future;
| | - |  | --------------------------------------------------------------------------------------------------------------------------

| |  |  | We could be materially harmed in the event of a continued general economic slowdown, reduced spending by communications carriers and equipment manufacturers or
consolidations involving our current or prospective customers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We could be materially harmed if demand for our solutions is less than we anticipate;
| | - |  | -------------------------------------------------------------------------------------

| |  |  | We could be materially harmed if the market for current- and next-generation network solutions fails to develop as we currently anticipate;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Expected increased competition could result in further price reductions and reduced margins, as well as loss of market share; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

| |  |  | Other risks indicated below under the caption Risk Factors.
| | - |  | -------------------------------------------------------------



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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, 2003. 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



Inet Technologies, Inc. is a leading global provider of
communications software solutions that enable communications carriers to more strategically operate their businesses. Current offerings in our Unified AssuranceTMsolution convert network information into valuable and actionable intelligence that carriers use to help ensure the health of their revenue-generating infrastructure. These real-time powered solutions
help carriers realize organizational efficiencies in managing their operations. Our diagnostics solutions allow communications carriers and equipment manufacturers to quickly and cost-effectively design, deploy and maintain current- and
next-generation networks and network elements.



·Unified Assurance Solution  Our Unified Assurance solution strategy, which was introduced in
early 2003 and includes current and future products, will ultimately be comprised of products that address network, service and customer assurance. Our Unified Assurance solution will transform key performance indicators into actionable intelligence
to empower a carriers customer service, sales, marketing and network operations organizations to proactively manage the quality of service delivered to its most valuable customers. The key benefits of our Unified Assurance solution will
include opportunities for improved acquisition and retention rates of high-value customers, streamlined operational support systems, reduced operating expenses and capital expenditures resulting from increased organizational efficiencies, and
informed business planning. Products and applications that we currently offer as part of our network assurance and service assurance solutions help carriers achieve many of these benefits today. Carriers that use our complete Unified Assurance
solution will be able to simultaneously manage their voice and data services at the network, service and customer layers in an interactive and real-time manner to proactively detect network and service problems and identify the customers most
impacted by any service degradation. Our Unified Assurance solution is comprised of the following:



·Network
Assurance Our product that addresses network assurance is the GeoProbeTM. The GeoProbe allows
communications carriers to proactively monitor, manage and diagnose the overall health of voice and data networks based on performance metrics. In addition to accelerating problem detection and resolution, network engineers are empowered to make
informed capacity planning and traffic management decisions. We also offer a suite of revenue assurance applications as part of this solution. These revenue assurance applications, fueled by the GeoProbe, were formerly marketed as part of our
IT:sevenTMbusiness intelligence applications.



·Service Assurance  Our product that addresses service assurance is OrionTM.
Orion has two applications that are currently generally available  one that addresses interconnection management and another that addresses customer mobility issues for wireless carriers. The products real-time and



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comprehensive analysis capabilities empower service managers and engineers to immediately
initiate corrective actions when service quality falls below acceptable levels, to implement preventive actions to maintain service performance integrity and to continuously monitor performance metrics for planning purposes. We will be introducing
new applications and functionality for Orion throughout 2003 that will add the capability for Orion to interact with our customer assurance product to provide the information needed to address the performance of a carriers most profitable
services, both within and beyond network boundaries, with an actionable path to problem resolution.



·Customer
Assurance  Our product that will address customer assurance is BeamerTM. Beamer is currently in
beta-test phase and is expected to be generally available later in 2003. Once available, Beamer will provide visibility into the actual quality of service levels experienced by a carriers highest-value customers. The product will help carriers
achieve organizational efficiencies and improve the acquisition and retention rates of those customers that are most desirable and profitable to them.



A variety of applications will be available for each product so that our customers can customize the system to meet their specific needs
and objectives. Carriers can purchase our products individually or as the complete Unified Assurance solution. A key capability of the complete Unified Assurance solution will be its ability to seamlessly link workforce processes and activities
among a carriers network, service and customer-facing organizations and to do so across multiple voice and data technologies. The resulting benefit is that carriers will be able to achieve high levels of network assurance across multiple
technologies, service assurance across multiple networks and customer assurance across multiple services.



·Diagnostics
Solutions Our diagnostics solutions are used by communications carriers and equipment manufacturers for commissioning, interoperability testing and on-going maintenance of communications networks, as well as the development of
revenue-generating services. We currently offer three products in the diagnostics area  the Spectra2TM, which
addresses next-generation communications networks, and the SpectraTMand Spectra Trunk TesterTM, which address current-generation communications networks. These multi-protocol analyzers provide diagnostic, emulation and
load generation capabilities for use in the design, deployment, commissioning and diagnosis of current- and next-generation networks and network elements.



Founded in 1989, our mission is to be a leading provider of communications software solutions for current- and next-generation carriers
and equipment manufacturers worldwide. Our target customers include current- and next-generation tier-one wireless and wireline carriers as well as communications equipment manufacturers throughout Europe, the Middle East and Africa, or collectively
EMEA, North America and select countries in the Asia/Pacific region.



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, 2003 are not necessarily indicative of the results that may be expected for any future periods.



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|                                         |  | Three months ended March 31, |  
|---------------------------------------- |  | ---------------------------- | -
|                                         |  | 2003                         |  
|Revenues:                                |  |                              |  
|Product and license fees                 |  | 70.0                         | %
|Services                                 |  | 30.0                         |  
|                                         |  |                              |  
|Total revenues                           |  | 100.0                        |  
|Cost of revenues:                        |  |                              |  
|Product and license fees                 |  | 11.6                         |  
|Services                                 |  | 16.6                         |  
|                                         |  |                              |  
|Total cost of revenues                   |  | 28.2                         |  
|                                         |  |                              |  
|Gross profit                             |  | 71.8                         |  
|Operating expenses:                      |  |                              |  
|Research and development                 |  | 30.7                         |  
|Sales and marketing                      |  | 14.0                         |  
|General and administrative               |  | 9.7                          |  
|                                         |  |                              |  
|Total operating expenses                 |  | 54.4                         |  
|                                         |  |                              |  
|Income from operations                   |  | 17.4                         |  
|Other income                             |  | 1.8                          |  
|                                         |  |                              |  
|Income before provision for income taxes |  | 19.2                         |  
|Provision for income taxes               |  | 6.2                          |  
|                                         |  |                              |  
|Net income                               |  | 13.0                         | %
|                                         |  |                              |  



Revenues



Product and license fees.Revenues from product and license fees decreased 16.6% to $17.5 million in the three months ended March 31, 2003 from $21.0 million in the three months ended March 31, 2002. The decline in revenues
from product and license fees was primarily attributable to a decrease in the average transaction size of our network assurance and service assurance solutions. We continue to experience pressure on sales prices within our network assurance
solutions area, specifically for those applications for which there is a competitive offering, or in highly competitive situations involving prospective customers. Although the typical mix of applications for our network assurance and service
assurance solutions sold in the three months ended March 31, 2003 was different than the typical mix sold in the three months ended March 31, 2002, we believe prices for our most basic network assurance applications have decreased by approximately
20% to 30%. In addition, in the three months ended March 31, 2003 compared to the same period in the prior year, for our network assurance and service assurance solutions, we experienced a decrease in the average transaction size by approximately
18%.



Services. Revenues from services
increased 15.9% to $7.5 million in the three months ended March 31, 2003 from $6.5 million in the three months ended March 31, 2002. The increase in services revenues was primarily attributable to a larger installed base of products with customers
for which we provide warranty or product support services, somewhat mitigated by decreasing prices of approximately 10% to 15%. Going forward, we expect to sell additional applications or expand the footprint of our solutions with existing customers
and to add new customers, which should continue to increase our installed base of products. However, we expect that continued pressure on prices for product support renewals may partially offset the effect of this increase.



Concentration of revenues. For the three months ended
March 31, 2003, revenues from one international customer accounted for approximately 44% of total revenues. For the three months ended March 31, 2002, revenues from one international customer accounted for approximately 42% of total revenues. A



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large
percentage of our revenues are typically derived from a small number of customers, the specific make up of which typically 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, 2003, international revenues accounted for 80.8% of total revenues compared to 76.9% of total revenues in the three months ended March
31, 2002. 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. For the remainder of 2003, we expect revenues from international markets to represent a substantial 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 $2.9 million, or 16.6% of product and license fees revenues, in the three months ended March 31, 2003, and $6.2 million, or 29.7% of product and
license fees revenues, in the three months ended March 31, 2002. The decreases in both absolute dollars and as a percentage of product and license fees revenues resulted primarily from decreased hardware costs, which were approximately $2.2 million
lower in the three months ended March 31, 2003 than in the same period in the prior year and, to a lesser extent, decreased installation costs. The decrease in hardware costs is attributable to a higher percentage of our network assurance
implementations being derived from expansions of existing systems or from the sales of software applications, rather than new system implementations, which typically have a higher hardware component.



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 $4.2 million, or 55.4% of services revenues, in the three months ended March 31, 2003 and $3.2 million, or 48.6% of
services revenues, in the three months ended March 31, 2002. The increases in both absolute dollars and as a percentage of total services revenues were attributable to increased effort to support a larger installed base of products, increased
expenses related to customer support and systems engineering and temporarily increased telecommunications costs in the United Kingdom. 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 fluctuations to continue into the foreseeable future.



Operating Expenses



Research and development expenses.Research and development expenses consist primarily of personnel expenses and contract labor,
travel and facilities expenses incurred by our research and development organization. These expenses decreased to $7.7 million in the three months ended March 31, 2003 from $8.5 million in the three months ended March 31, 2002. Research and
development expenses as a percentage of total revenues were 30.7% in the three months ended March 31, 2003 and 30.8% in the three months ended March 31, 2002. The decrease in absolute dollars 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, which were $0.2 million lower in the three months ended March 31, 2003 compared to the same period in the prior year. The
average headcount of our research and development organization was 247 in the three months ended March 31, 2003 compared to 278 in the three months ended March 31, 2002. Our research and development efforts include expenditures for new





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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 expenses associated
with personnel, including commissions from direct sales, travel, facilities and marketing, such as trade show and advertising expenses. These expenses decreased to $3.5 million in the three months ended March 31, 2003 from $4.1 million in the three
months ended March 31, 2002. Sales and marketing expenses as a percentage of total revenues were 14.0% in the three months ended March 31, 2003 and 14.9% in the three months ended March 31, 2002. The decrease in absolute dollars and as a percentage
of total revenues was attributable to decreased average headcount. Average headcount in the three months ended March 31, 2003 was 64 compared to 81 in the three months ended March 31, 2002.



General and administrative expenses.General and
administrative expenses consist primarily of personnel, facilities and legal and professional expenses of our finance, legal and executive departments. These expenses increased to $2.4 million in the three months ended March 31, 2003 from $2.0
million in the three months ended March 31, 2002. General and administrative expenses as a percentage of total revenues were 9.7% in the three months ended March 31, 2003 compared to 7.3% in the three months ended March 31, 2002. The increases in
absolute dollars and as a percentage of total revenues were attributable to increased legal and professional fees of approximately $0.3 million primarily related to our repurchase of restricted common stock outstanding and general legal and
accounting activities.



Other Income



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 $0.4 million in the three months ended March 31, 2003, compared to $0.5 million in the three
months ended March 31, 2002. The decrease was primarily attributable to the overall decrease in interest rates received on our investments. In the three months ended March 31, 2003, we recognized a return on our average cash balance of 1.0% compared
to 1.7% in the three months ended March 31, 2002.



Provision for Income Taxes



We recorded an income tax expense of $1.5 million for the three months ended March 31, 2003 compared to $1.3 million for the three months ended March 31, 2002. Our effective tax rates for these periods were 32.1% for the three months
ended March 31, 2003, and 32.0% for the three months ended March 31, 2002. Federal income taxes for the periods presented have been calculated on the basis of an estimated annual rate. Our effective tax rate for the three months ended March 31, 2003
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 $0.8 million as of March 31, 2003, 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



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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, 2003, we had working capital of $152.2 million compared to $182.5 million at December 31, 2002. We had $163.1 million in cash and cash
equivalents at March 31, 2003, a decrease of $26.0 million from $189.1 million in cash and cash equivalents at December 31, 2002. The decrease in cash and working capital is attributable to our funding of a privately-negotiated repurchase
transaction that closed on January 21, 2003, under which we repurchased 8,969,984 restricted shares of common stock for an aggregate cash purchase price of approximately $35.4 million. We funded the transaction with available cash.



Net cash provided by operating activities was $9.8 million for
the three months ended March 31, 2003, compared to $11.1 million during the same period in 2002. 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, 2003, compared to the three months ended March 31, 2002, was primarily attributable to changes in amounts of accounts receivable, inventory and accrued compensation and benefits
in each quarter.



Net cash used in investing
activities was $0.9 million for the three months ended March 31, 2003, compared to $0.6 million during the same period in 2002. Net cash used in investing activities for both periods related to purchases of property and equipment.



Net cash used in financing activities was $34.8 million in the
three months ended March 31, 2003, compared to net cash provided by financing activities of $0.9 million in the three months ended March 31, 2002. In the three months ended March 31, 2003, we used approximately $35.4 million to repurchase 8,969,984
restricted shares of common stock from one of our founders in a privately-negotiated transaction. 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.



At March 31, 2003, we had no long-term debt or material commitments for capital expenditures. We believe that our 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 for at least the next 12 months. Beyond that, 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.



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Accounting
Policies



In preparing our consolidated
financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, 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 judgment or the greatest use of estimates. Although we believe that our estimates and assumptions are reasonable,
actual results may differ, and such differences could be significant to our financial results.



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 Unified Assurance solutions contain multiple billing milestones, such as 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 of the fee is considered probable. When we have significant obligations subsequent to shipment, such as installation and system integration, revenues are recognized when, in our judgment, 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 Unified Assurance 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 for which we would sell the element 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
service 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 determined that we do not have VSOE on an undelivered element of an arrangement, we would 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.



Trade Accounts Receivable and Allowance for Doubtful
Accounts



A large portion of our
revenues and receivables are attributable to our carrier customers in the communications industry and, to a lesser extent, to our equipment manufacturer customers who supply equipment into the communications 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 usually unsecured, we periodically evaluate the collectibility of our accounts based on a combination of factors,
including a particular customers ability to pay and 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 obligations to



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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 communications
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 the status of our inventory on a quarterly basis to ensure that 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 record 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. Amounts in work-in-process and finished goods inventory typically relate to firm orders and, therefore, are not subject to obsolescence risk. 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.



Income Taxes



In the preparation of our provision for income taxes and
determination of whether deferred tax assets will be realized in full or in part, we must estimate several factors. When it is more likely than not that all or some portion of the deferred tax asset will not be realized, a valuation allowance must
be established for the amount of the deferred tax assets that are determined not to be realizable. As of March 31, 2003 and December 31, 2002, a valuation for deferred tax assets was not deemed necessary. Accordingly, if the facts or financial
results were to change, thereby impacting the likelihood of realizing the deferred tax assets, judgment would have to be applied to determine the amount of valuation allowance required in any given period. Additionally, our income tax returns are
subject to review and examination in the various jurisdictions in which we operate. We are currently not aware of any issues that have been raised by taxing jurisdictions, and management believes that all income tax issues which may be raised as a
result of such reviews and examinations in the future will be resolved with no material impact on our financial position or future results of operations. However, in the event there was an assessment by any of these jurisdictions, it could impact
our tax provision.



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.



The actual occurrence of any of the following risks could materially harm our business, financial condition and results of operations. In
that case, the trading price of our common stock could decline.



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Our
quarterly financial results fluctuate and are difficult to predict.



Our quarterly financial results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future based on a number of factors, many of which are outside
of our control. As a result, 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. The factors that could affect our quarterly financial
results include:



| |  |  | the size, timing, pricing structure and other terms of specific orders by our customers;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the timing of the delivery to and the installation and acceptance of our products by our customers;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the timing of our development and introduction of new products;
| | - |  | ---------------------------------------------------------------



| |  |  | the mix of products and services sold by us;
| | - |  | --------------------------------------------



| |  |  | the relative percentages of products sold through our direct and indirect sales channels;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the timing of and level of our investments in research and development activities, and the timing of and magnitude of our sales and marketing and general and
administrative expenses;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in, and our ability to implement, our strategy; and
| | - |  | -----------------------------------------------------------



| |  |  | other risks described below.
| | - |  | ----------------------------



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, 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, which has extended our sales cycle. These adverse effects could continue and
could impact our customers ability to meet their financial obligations to us. Our business also could be harmed by changes in customer spending patterns reflecting industry trends. For example, customer budgetary constraints have contributed
to sales price pressure for some of our solutions and could pressure prices for the renewal of product support agreements for our Unified Assurance solutions, which would adversely affect our revenues. In addition, our financial results historically
have been influenced by seasonal fluctuations, with orders and revenues tending to be strongest in the fourth quarter of each year and orders and revenues in our first quarter tending to be lower than the levels achieved in the preceding quarter. We
believe that this seasonality has been due in large part to the capital appropriation practices of many of our customers.



As a result of all of the foregoing, we cannot assure you that our revenues will grow or remain stable in future periods or that we will
remain profitable. In addition, in some future quarters our financial results may be below the



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expectations
of public market analysts or investors. 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, and we expect this trend to continue. For example, in the three months ended March 31, 2003, approximately 69% of our revenues were derived from our 10 largest customers, with one international customer accounting for
approximately 44%. Additionally, British Telecom and Deutsche Telekom, on a combined basis, accounted for approximately 32% of total revenues in 2002 and approximately 48% of total revenues in the first quarter of 2003. Although the customer make-up
of our largest projects varies from quarter to quarter, a small number of significant customers frequently account for a significant portion of our revenues in a given period. If we were to lose one of our significant customers, our financial
results could be harmed. Additionally, if one or more of these significant customers experiences adverse conditions in its industry or operations, including the continued impact of the current economic downturn and reductions in communications
spending, these customers may not be able to meet their ongoing financial obligations to us or complete the purchase of additional products.



Consolidations and bankruptcies in the communications industry or a further slowdown in communications 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 communications industry. Since early 2001, we and a number of other companies have been impacted by reduced spending by
communications carriers and equipment manufacturers, and some industry analysts project further spending reductions in future periods. In some cases, the continued viability of some carriers and equipment manufacturers is in question. 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 that there are consolidations or bankruptcies of our current or prospective customers, which
could result in reduced revenues or significant write-offs of uncollectible accounts. 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 Unified Assurance solutions are typically recognized upon the completion of system installation or customer acceptance.
Delays caused by us or our customers in the commencement or completion of scheduled product installations and acceptance testing may occur from time to time due to site-readiness delays, the often comprehensive processes for testing and acceptance
required by certain of our customers, insufficient personnel on the part of us or our customers to complete a project, the lengthening of implementation schedules due to the introduction of new features or applications, or other issues. Because a
significant portion of our revenues on a quarterly basis is derived from a small number of customer projects, product installation delays could materially harm our financial results for a particular period. 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, we generally do not recognize revenue until acceptance is achieved. For new products, we
typically recognize revenue initially upon acceptance. As a result, in cases where the recognition of revenue is tied to customer acceptance, the failure to obtain acceptance or delayed acceptance could harm our financial results for a particular
period. Additionally, we may be subject to penalties or other customer claims for a failure to meet contractually agreed upon milestones or deadlines.



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



Future growth in the demand for our products will depend in part on continued privatization, deregulation and the restructuring of
communications markets worldwide, as the demand for our products has generally been higher when a relatively more competitive communications 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 and other regulatory, economic and political factors.
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.



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



Sales of our Unified Assurance solutions are made predominantly to large communications carriers and involve significant capital expenditures as well as lengthy sales cycles and 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 18 months for our network assurance and service assurance solutions (excluding the cycle for subsequent applications and enhancements, which varies widely) and averaging three months for
occasional, large sales of our diagnostics solutions. We expect that the sales cycle for our customer assurance solution will be comparable to that for our network assurance and service assurance solutions. 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 our financial results in a particular quarter, especially if there are significant sales and marketing expenses
associated with any deferred or lost sales.



Our financial results could be materially harmed if demand for our new products is less than we anticipate.



A key component of our strategy is the ability to successfully develop, introduce and market new products and applications within our
Unified Assurance solutions. Although we have obtained feedback from our customers and potential customers regarding our development and product strategy, we have made certain assumptions as to the needs of our customers and the features and
functionality expected by them. We cannot assure you that our current or prospective customers will order these new products and applications.



Also, purchase decisions for certain new products and applications within our Unified Assurance solutions may be made by individuals
within organizations with which we have no significant existing relationships, such as customer service or sales and marketing departments. We cannot assure you that we will be successful in developing the relationships necessary to sell our Orion
and Beamer products and applications.



Increased competition could result in pricing pressure, reduced margins and the 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,



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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 pricing pressure, reduced margins and the loss of market share. We continue to experience pressure on sales prices within our network assurance solutions
area, specifically for those applications for which there is a competitive offering, or in highly competitive situations involving prospective customers.



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, none of whom are bound by an agreement to remain in our employ. 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.



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



The introduction by others of 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 unsalable. We believe that our future success will depend in part upon our ability, on a timely and cost-effective basis, to
continue to:



| |  |  | develop and introduce new products or applications for the communications market;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | enhance our Unified Assurance and diagnostics solutions;
| | - |  | --------------------------------------------------------



| |  |  | keep pace with evolving industry protocol standards, next-generation technologies and changing customer needs; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | achieve broad market acceptance for our products.
| | - |  | -------------------------------------------------



We cannot assure you that we will achieve these objectives.



Over the long term, we expect carrier spending for legacy networks to decrease from current levels, which
requires that we develop solutions for networks based on next-generation wireless and emerging packet-based technologies and standards, such as General Packet Radio Service, or GPRS, Universal Mobile Telecommunications System, or UMTS, Internet
Protocol, or IP, and Asynchronous Transfer Mode, or ATM. We may not successfully develop competitive products for these technologies and standards.



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, such as the inability to assign a sufficient number of qualified technical personnel to key projects or other unanticipated causes, 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.



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A
majority 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.



Historically, revenues from
international markets have represented the majority of our total revenues, and we expect revenues from international markets to continue to represent the majority of our total revenues. International business activities involve certain risks,
including:



| |  |  | management of our geographically dispersed operations;
| | - |  | ------------------------------------------------------



| |  |  | longer sales cycles in certain countries, especially on initial entry into a new geographical market;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | greater difficulty in evaluating a customers ability to pay, longer accounts receivable payment cycles and greater difficulty in the collection of past-due
accounts;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulty in establishing and maintaining relationships with government-owned or subsidized communications providers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | general economic conditions in each country;
| | - |  | --------------------------------------------



| |  |  | currency controls and exchange rate fluctuations;
| | - |  | -------------------------------------------------



| |  |  | challenges associated with operating in diverse cultural and legal environments;
| | - |  | --------------------------------------------------------------------------------



| |  |  | seasonal reductions in business activity specific to certain markets;
| | - |  | ---------------------------------------------------------------------



| |  |  | loss of revenues, property and equipment from expropriation, nationalization, war, insurrection, terrorism and other political risks;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | foreign taxes and the overlap of different tax structures, including modifications to the U.S. tax code as a result of international trade regulations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | greater difficulty in safeguarding intellectual property;
| | - |  | ---------------------------------------------------------



| |  |  | import and export licensing requirements and other trade restrictions;
| | - |  | ----------------------------------------------------------------------



| |  |  | involuntary renegotiation of contracts with foreign governments and communications carriers; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | existence or adoption of laws and regulations affecting the operation and taxation of our business and the general business climate for foreign companies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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 components that are available from only one or a limited number of suppliers. While alternative suppliers have been identified for a variety of key



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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 generally do not execute long-term supply agreements with our suppliers and, in the case of many components, make our purchases with purchase orders on an as-needed basis. Some of the components our products
utilize 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.



Key components used in our products may become obsolete. If we are unable to find and design in replacement parts, we may be unable to ship our products in sufficient quantities.



From time to time, components used in
our products are declared obsolete and no longer produced by our suppliers. Historically, we have typically received adequate notice from these suppliers so that we may procure quantities of these parts sufficient to allow us time to find and design
new parts into our products; however, we cannot assure you that we will always be provided adequate notice. If we are not given adequate notice, we may be unable to produce sufficient quantities of our products to satisfy demand. Also, we cannot
assure you that replacement parts will be readily available or that we will be able to design new parts into our products on a timely basis at a reasonable cost. If we are not able to produce sufficient quantities of our products, our financial
results could be harmed.



Our inventory may
become obsolete or unusable.



From time
to time, 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, which in turn could
result in significant write-offs of inventory.



We rely in part on third-party subcontractors in the manufacture and development of 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 layout of circuit boards. We also frequently subcontract the development of specific features or enhancements for 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.



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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 Oracle
Corporation, Cognos Incorporated and other third parties, including software that is integrated with our internally developed software and used in our products to perform key functions. In certain cases, we are unable to obtain long-term pricing
commitments for this software. 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.
Additionally, the presence of defects or errors in this software could result in claims against us or damage to our reputation and business, recourse for which might not be available against the third party.



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 and product offerings. 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.



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. As the number of competitive products increases and the functionality
of these products further overlaps, we believe that we may become increasingly subject to allegations of infringement. 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 claim or
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 claim made or 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



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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 attention and 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 especially 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, claims against us 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 attention and resources, and damage to our business reputation and our ability to retain existing customers or attract new customers.



Our two largest stockholders own approximately 64% 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, 2003, Samuel S. Simonian and Elie S. Akilian, two of our founders, beneficially owned approximately 64% of the outstanding
shares of our common stock. Consequently, 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 and Akilian are members of our board
of directors and have significant influence in directing the actions taken by our board.



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.



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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, our stockholders are limited in their ability to make proposals at stockholder meetings, and our board of directors is empowered to issue blank-check preferred stock without any need to obtain stockholder approval.



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:



| |  |  | variations in our results of operations;
| | - |  | ----------------------------------------



| |  |  | changes in our business strategy;
| | - |  | ---------------------------------



| |  |  | future sales of our common stock, particularly by institutional investors with large holdings and by our founders;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the announcement of technological innovations or new products by us, our competitors and others;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | market analysts estimates of our performance, our customers or competitors performance or the performance of the communications industry in
general;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the financial and other announcements made by our competitors and customers;
| | - |  | ----------------------------------------------------------------------------



| |  |  | general market and economic conditions; and
| | - |  | -------------------------------------------



| |  |  | equity market conditions and industry-specific equity market trends.
| | - |  | --------------------------------------------------------------------



The public markets have experienced significant volatility that has particularly affected the market prices
of securities of many technology and communications 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 diversion of management attention and resources.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



Historically, we have been exposed to immaterial levels of market risk and have not been significantly exposed to fluctuations in currency exchange rates. Prior to 2002, less than 1% of total revenues
had been denominated in currencies other than the U.S. dollar. In 2002, approximately 3% of total revenues was denominated in currencies other than the U.S. dollar, principally the Euro. In the three months ended March 31, 2003, approximately 2% of
total revenues was denominated in currencies other than the U.S. dollar. In future periods, we believe a greater portion of total revenues could be denominated in



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



Our international subsidiaries operate in currencies other than the U.S. dollar, which results in translation gains and losses; however,
the U.S. dollar is the functional currency of all our subsidiaries.



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 the actual occurrence of these or other risks.



Currently, our cash is invested in bank deposits and money market funds denominated in U.S. dollars. We
account for these investments in accordance with SFAS 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, which is 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 50 basis points, or 0.5%, our investment income would be impacted by approximately $0.8 million on an annual basis.



Item 4. Controls and Procedures



| | (a) |  | Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures designed to provide reasonable assurance that information
required to be disclosed in the periodic reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the rules of the SEC. Within 90 days prior to the filing of this Quarterly Report on Form
10-Q, we carried out an evaluation, under the supervision and the participation of our management, including our chief executive officer and chief financial officer, of the design and operation of these disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the company
(including our consolidated subsidiaries) required to be included in our periodic SEC filings.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Changes in internal controls. There have been no significant changes in internal controls or other factors that could significantly affect our internal
controls subsequent to the date of our evaluation.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, 2003, 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



| | (a) |  | Exhibits
| | --- |  | --------



| | 99 |  | Additional Exhibit: Section 906 certifications
| | -- |  | ----------------------------------------------



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



During the three months ended March 31, 2003 we filed a Current Report on Form 8-K on January 21, 2003. The report included information
reported under Item 2  Acquisition or Disposition of Assets.



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:

/s/ Jeffrey A. KuppJeffrey A. Kupp Vice President and Chief Financial Officer (Principal accounting and financial officer)




Date: April 28,
2003



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CERTIFICATION



I, Elie S. Akilian, certify that:



| | 1. |  | I have reviewed this Quarterly Report on Form 10-Q of Inet Technologies, Inc.;
| | -- |  | ------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date ); and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date: April 28, 2003 |  | By: |  | /s/ Elie S. Akilian
|-------------------- |  | --- |  | -------------------
|                     |  |     |  |                    
|                     |  |     |  |                    



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CERTIFICATION



I, Jeffrey A. Kupp, certify
that:



| | 1. |  | I have reviewed this Quarterly Report on Form 10-Q of Inet Technologies, Inc.;
| | -- |  | ------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date ); and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date: April 28, 2003 |  | By: |  | /s/ Jeffrey A. Kupp
|-------------------- |  | --- |  | -------------------
|                     |  |     |  |                    
|                     |  |     |  |                    





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##### Table Of Contents



INET
TECHNOLOGIES, INC.

INDEX TO EXHIBITS



|Exhibit Number |  | Description                                   
|-------------- |  | ----------------------------------------------
|              
|99             |  | Additional Exhibit: Section 906 certifications



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