-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BLaEpugSgbOEU2P0Nn3wQdGt/Kz5DSqq3LfTuWgha5R07Ir/YXz3tkv9CBGwiJpX OebhduXyQsZZz9ft8BiqlQ== 0000912057-02-016580.txt : 20020425 0000912057-02-016580.hdr.sgml : 20020425 ACCESSION NUMBER: 0000912057-02-016580 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020425 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INET TECHNOLOGIES INC CENTRAL INDEX KEY: 0001065351 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 752269056 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24707 FILM NUMBER: 02621066 BUSINESS ADDRESS: STREET 1: 1255 WEST 15TH STREET, SUITE 600 CITY: PLANO STATE: TX ZIP: 75075-7270 BUSINESS PHONE: 9725786100 10-Q 1 a2077710z10-q.htm 10-Q

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2002

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

Commission File Number 0-24707

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

Delaware
(State or other jurisdiction
of incorporation or organization)

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

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

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

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

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

Inet Technologies, Inc.
Index

			Page No.
Part I—Financial Information (Unaudited)
	Item 1. Financial Statements
		Consolidated Balance Sheets	3
		Consolidated Statements of Operations	4
		Consolidated Statement of Stockholders' Equity	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements	7
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		13
	Item 3. Quantitative and Qualitative Disclosures about Market Risk		28
Part II—Other Information
	Item 2. Changes in Securities and Use of Proceeds		29
	Item 6. Exhibits and Reports on Form 8-K		30
Signatures			30

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INET TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

ASSETS

				March 31, 2002		December 31, 2001
				(In thousands, except share data)
Current assets:
	Cash and cash equivalents			$	166,363	$	154,889
	Trade accounts receivable, net of allowance for doubtful accounts of $723 at both March 31, 2002 and December 31, 2001				15,319		14,934
	Unbilled receivables				1,406		1,955
	Income taxes receivable				—		532
	Inventories				12,309		12,454
	Deferred income taxes				2,608		2,608
	Other current assets				5,058		5,307

			Total current assets		203,063		192,679
Property and equipment, net					17,481		18,677
Other assets					172		172

			Total assets	$	220,716	$	211,528

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	942	$	938
	Accrued compensation and benefits				2,887		2,475
	Deferred revenues				18,659		16,793
	Income taxes payable				920		—
	Other accrued liabilities				4,693		2,357

		Total current liabilities			28,101		22,563
Deferred income taxes					482		482
Commitments and contingencies
Stockholders' equity:
	Preferred stock, $.001 par value:
		Authorized shares—25,000,000 Issued shares—None			—		—
	Common stock, $.001 par value:
		Authorized shares—175,000,000 Issued shares—46,882,138 at March 31, 2002 and 46,757,009 at December 31, 2001			47		47
	Additional paid-in capital				73,714		72,804
	Retained earnings				118,372		115,632

			Total stockholders' equity		192,133		188,483

			Total liabilities and stockholders' equity	$	220,716	$	211,528

See accompanying notes to consolidated financial statements.

INET TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

				Three months ended March 31,
				2002			2001
				(In thousands, except per share data)
Revenues:
	Product and license fees			$	21,003		$	26,011
	Services				6,492			5,433

		Total revenues			27,495			31,444
Cost of revenues:
	Product and license fees				6,232			10,017
	Services				3,158			2,606

		Total cost of revenues			9,390			12,623

			Gross profit		18,105			18,821
Operating costs and expenses:
	Research and development				8,456			11,706
	Sales and marketing				4,107			5,739
	General and administrative				2,020			2,736
	Restructuring costs				—			526

					14,583			20,707

			Income (loss) from operations		3,522			(1,886	)
Other income (expense):
	Interest income				690			1,966
	Other expense				(180	)		(42	)

					510			1,924

Income before provision for income taxes					4,032			38
Provision for income taxes					1,292			13

Net income				$	2,740		$	25

Earnings per common share:
			Basic	$	0.06		$	0.00

			Diluted	$	0.06		$	0.00

Weighted-average shares outstanding:
			Basic		46,838			46,470

			Diluted		47,194			46,900

See accompanying notes to consolidated financial statements.

INET TECHNOLOGIES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

		Common Stock
		Common Stock			Additional Paid-in Capital		Retained Earnings		Total Stockholders' Equity
		Shares	Amount		Additional Paid-in Capital		Retained Earnings		Total Stockholders' Equity
		(In thousands, except share data)
Balance at December 31, 2001		46,757,009	$	47	$	72,804	$	115,632	$	188,483
	Issuance of common stock under stock option and stock purchase plans	125,129		—		910		—		910
	Net income	—		—		—		2,740		2,740

Balance at March 31, 2002		46,882,138	$	47	$	73,714	$	118,372	$	192,133

See accompanying notes to consolidated financial statements.

INET TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

			Three months ended March 31,
			2002			2001
			(In thousands)
Cash flows from operating activities:
Net income			$	2,740		$	25
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation			1,747			1,669
	Deferred income taxes			—			(283	)
	Change in operating assets and liabilities:
		(Increase) decrease in trade accounts receivable		(385	)		22,959
		(Increase) decrease in unbilled receivables		549			(698	)
		Decrease in income taxes receivable		532			9,223
		(Increase) decrease in inventories		145			(3,127	)
		(Increase) decrease in other assets		249			(2,853	)
		Increase in accounts payable		4			658
		Increase in taxes payable		920			—
		Increase (decrease) in accrued compensation and benefits		412			(5,249	)
		Increase (decrease) in deferred revenues		1,866			(2,054	)
		Increase (decrease) in other accrued liabilities		2,336			(856	)

Net cash provided by operating activities				11,115			19,414
Cash flows from investing activities:
Purchases of property and equipment				(551	)		(3,582	)

Net cash used in investing activities				(551	)		(3,582	)
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of stock options and purchases under employee stock purchase plan				910			1,945

Net cash provided by financing activities				910			1,945

Net increase in cash and cash equivalents				11,474			17,777
Cash and cash equivalents at beginning of period				154,889			131,419

Cash and cash equivalents at end of period			$	166,363		$	149,196

Supplemental disclosures:
	Income taxes paid		$	—		$	144

See accompanying notes to consolidated financial statements.

INET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Summary of Significant Accounting Policies

The Company

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

Consolidation

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

Unaudited Interim Financial Statements

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

Accounting Estimates

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

Cash and Cash Equivalents

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

Allowance for Doubtful Accounts

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

Inventories

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

	March 31, 2002		December 31, 2001
Raw materials	$	6,772	$	6,923
Work-in-process		162		615
Finished goods		5,375		4,916

	$	12,309	$	12,454

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

Revenue Recognition

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

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

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

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

Note 2—Related Party Transaction

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

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

Note 3—Restructuring

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

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

Note 4—Earnings Per Share

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

			Three months ended March 31,
			2002		2001
Numerator:
	Net income for basic and diluted earnings per share		$	2,740	$	25

Denominator:
	Denominator for basic earnings per share—weighted-average shares			46,838		46,470
	Dilutive securities: Employee stock options and purchase rights			356		430

	Denominator for diluted earnings per share—adjusted weighted-average shares			47,194		46,900

		Basic earnings per common share	$	0.06	$	0.00

		Diluted earnings per common share	$	0.06	$	0.00

Note 5—Comprehensive Income

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

Note 6—Segment Information

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

			Three months ended March 31,
			2002		2001
United States			23.1	%	34.6	%
Export:
	Asia/Pacific		10.3		6.0
	Europe, Middle East and Africa		65.1		56.0
	Other		1.5		3.4

		Total export revenues	76.9		65.4

			100.0	%	100.0	%

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

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

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

Note 7—Recent Accounting Pronouncements

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

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

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 further general economic slowdown, a reversal or slowdown in the pace of the privatization, restructuring or deregulation of the telecommunications industry, a continued slowdown in the growth of that industry or consolidations involving our current or prospective customers;
•: We could be materially harmed by any reduction in demand for our network intelligence, business intelligence and diagnostics solutions;
•: We could be materially harmed if the market for current- and next-generation network solutions fails to grow as we currently anticipate;
•: Expected increased competition could result in price reductions, reduced margins and loss of market share; and
•: Other risks indicated below under the caption "Risk Factors."

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

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

Overview

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

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

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

Results of Operations

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

			Three months ended March 31,
			2002		2001
Revenues:
	Product and license fees		76.4	%	82.7	%
	Services		23.6		17.3

		Total revenues	100.0		100.0
Cost of revenues:
	Product and license fees		22.7		31.8
	Services		11.5		8.3

		Total cost of revenues	34.2		40.1

Gross profit			65.8		59.9
Operating expenses:
	Research and development		30.8		37.2
	Sales and marketing		14.9		18.3
	General and administrative		7.3		8.7
	Restructuring costs		0.0		1.7

		Total operating expenses	53.0		65.9

Income (loss) from operations			12.8		(6.0	)
Other income			1.9		6.1

Income before provision for income taxes			14.7		0.1
Provision for income taxes			4.7		0.0

Net income			10.0	%	0.1	%

Revenues

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

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

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

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

Cost of Revenues

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

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

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

Operating Expenses

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

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

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

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

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

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

Other Income (Expense)

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

Provision for Income Taxes

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

Accounting Policies

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

Revenue Recognition

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

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

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

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

Allowance for Doubtful Accounts

Inventory Reserves

Risk Factors

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

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

Our quarterly financial results fluctuate and are difficult to predict.

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

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

•: the size, timing and 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 mix of products and services sold by us;
•: the relative percentages of products sold through our direct and indirect sales channels;
•: customer order deferrals in anticipation of enhancements or new products;
•: 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 and individual budgeting and buying patterns and, in some cases, the ability of some of our customers to obtain the financing they require to make capital expenditures. Our business has been adversely affected by a softening economy, and we would be further harmed by a continued decline in the economic prospects of our customers or the economy in general. In many cases, these adverse economic conditions have altered current and prospective customers' capital spending priorities or budget cycles, or extended our sales cycle, and these adverse effects could continue. Our business also could be harmed by changes in customer spending patterns reflecting industry trends. In addition, our financial results historically have been influenced by seasonal fluctuations, with revenues tending to be strongest in the fourth quarter of each year and revenues in our first quarter tending to be consistent with, or decreasing from, the level achieved in the preceding quarter. We believe that this seasonality has been due to the capital appropriation practices of many of our customers; however, it is unclear how these historical trends will be affected by the overall slowdown in the telecommunications industry.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our business depends on retaining our existing key personnel.

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

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

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

•: enhance our network intelligence, business intelligence and diagnostics solutions;
•: develop and introduce new products or applications for the communications market;
•: keep pace with evolving industry protocol standards and changing customer needs; and
•: achieve broad market acceptance for our products.

We cannot assure you that we will achieve these objectives.

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

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

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

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

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

•: management of geographically dispersed operations;
•: a longer sales cycle, 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;
•: 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 pace of deregulation, taxation of our business and the general business climate for foreign companies.

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

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

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

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

Our inventory may become obsolete or unusable.

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

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

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

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

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

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

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

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

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

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

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

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

We may face potential liability for product defects.

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

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

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

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

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

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

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

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

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

•: variations in our results of operations;
•: changes in our business strategy;
•: future sales of common stock;
•: the announcement of technological innovations or new products by us, our competitors and others;
•: market analysts' estimates of our performance;
•: 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 telecommunications companies for reasons that have often been unrelated to financial results. This volatility has and may continue to materially harm the market price of our common stock as well as our visibility and credibility in our markets.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

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

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

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

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

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

10.1: Consulting Agreement dated April 1, 2002, between Epygi Technologies, Ltd. and the Registrant.

(b): We did not file any Current Reports on Form 8-K during the quarter ended March 31, 2002.

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

Date: April 25, 2002

EX-10.1 3 a2077710zex-10_1.htm EXHIBIT 10.1
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AGREEMENT FOR CONSULTING SERVICES

THIS AGREEMENT FOR CONSULTING SERVICES (this "Agreement") is made effective as of April 1, 2002 (the "Effective Date") by and between Inet Technologies, Inc., a Delaware corporation having a principal place of business at 1500 N. Greenville Ave, Richardson, Texas 75081 ("INET"), and Epygi Technologies, Ltd., a Texas limited partnership having a principal place of business at 5040 Addison Circle #225, Addison, Texas 75001 ("CONTRACTOR"). The term CONTRACTOR shall refer to the officers, directors, employees and agents of CONTRACTOR.

WITNESSETH

WHEREAS, INET desires to retain the services of the CONTRACTOR, and CONTRACTOR agrees to provide such services to INET, subject to the terms and conditions of this Agreement;

NOW, THEREFORE, in consideration of the premises and the mutual promises hereinafter set forth, the parties agree as follows:

1.

The term for providing services under this Agreement (the "Term") shall be from the date of this Agreement until terminated by either party upon thirty days written notice to the other, which termination shall also terminate all Statements of Work (herein so called) hereunder unless a separate term commitment is set forth therein.

2.

During the Term of this Agreement, CONTRACTOR shall perform services as set forth and more particularly described in a Statement of Work signed by both parties. Such services shall be performed under the direction of the INET Representative whom INET may designate to CONTRACTOR. CONTRACTOR shall perform all services hereunder in accordance with industry standards, observing all milestones and otherwise complying with all quality and other standards as may be determined by INET.

3.

INET agrees to pay the CONTRACTOR in consideration of the services performed hereunder as provided in the Statement of Work. CONTRACTOR shall submit a statement for services performed, with a brief description of the services performed and a listing of the number of CONTRACTOR employees who performed such activities and a listing of each employee's rate. The statement shall be submitted to the INET representative who shall review and approve such statement and submit such statement for prompt payment. Payment terms shall be thirty (30) days from date of invoice.

4.

CONTRACTOR's statement shall also set forth the amount of reimbursable travel and living expenses, if any, and be accompanied by such supporting documentation as INET reasonably requests.

5.

CONTRACTOR and its agents and employees are independent contractors and shall be free to exercise discretion and independent judgment as to the method and means of performance of the services in connection with the assignments made hereunder by INET. Neither CONTRACTOR nor any of its employees are employees of INET and neither shall, by virtue of this Agreement, be entitled to any benefits or privileges provided by INET to its employees. CONTRACTOR shall not represent itself as an agent of INET and may not commit or obligate INET in any way to other parties. CONTRACTOR also agrees that during the Term of this Agreement, CONTRACTOR will not act in any manner which compromises INET or implies INET's endorsement of any product.

6.

In view of the confidential relations contemplated hereunder between CONTRACTOR and INET, and in consideration of the payments to be made to CONTRACTOR as herein set forth, CONTRACTOR and Inet agree that:

a.: all hardware, firmware and software inventions and all technical or business innovations and writings or other works of authorship for INET's products or related technology that are

made, created or conceived by CONTRACTOR during the Term of this Agreement (whether or not patentable or copyrightable and whether made solely by CONTRACTOR or jointly with others) in the course of performing the services under this Agreement, or which results from information derived from INET or its employees shall be the exclusive property of INET or its nominees whether or not patented or copyrighted and without regard to any termination of this Agreement;

i.: CONTRACTOR hereby assigns to INET all of its rights, title and interest in and to (1) all inventions for INET's products or related technology that are made or conceived by the CONTRACTOR in the course of performing services for INET during the Term of this Agreement whether patentable or not ("Inventions") and (2) any and all patent applications and patents for the Inventions, in any and all countries of the world..
ii.: CONTRACTOR hereby assigns to INET all of its rights, title and interest in and to (1) all other works of authorship for INET's products or related technology that are created by the CONTRACTOR in the course of performing services for INET during the Term of this Agreement including, without limitation, computer programs and listings of any type ("Works of Authorship"), and (2) all of its copyrights in the Works of Authorship, in any and all countries of the world. CONTRACTOR further agrees not to assert any moral rights in connection with the Works of Authorship.

b.: CONTRACTOR will assist INET and its nominees as reasonably necessary (including, without limitation, by assigning to INET any and all Inventions and Works of Authorship if for any reason this Agreement does not qualify as an assignment of such rights) during and subsequent to the Term of this Agreement (entirely at INET's or its nominees' expense) to obtain for INET's or its nominees' benefit patents, copyright registrations or other forms of legal protection for the Inventions and Works of Authorship in any and all countries of the world, including any perfection of the intellectual property rights as provided for in this Paragraph 6. INET shall promptly reimburse CONTRACTOR for reasonable labor costs incurred by CONTRACTOR to assist INET in obtaining patent, copyright, or other forms of legal protection for INET's intellectual property.
c.: CONTRACTOR will make and maintain adequate and current written records of all Inventions and Works of Authorship, in the form of notes, sketches, drawings or reports relating thereto, which records shall be available to INET at all times;
d.: except as an authorized representative of INET may otherwise consent in writing, CONTRACTOR will not disclose at any time either during or subsequent to the Term of this Agreement, any information, knowledge or data of INET (or information which INET has received in confidence from a third party) [the terms "confidential information" and "proprietary information" are used interchangeably in this Agreement and refer to INET's confidential information as well as the confidential information received from third parties which INET is obligated to maintain in confidence] which CONTRACTOR may receive, develop or obtain during said Term, relating to inventions, discoveries, formulae, processes, methods, machines, compositions, computer programs, accounting methods, or business plans and information systems, or other proprietary matters, and CONTRACTOR shall not use such confidential information, knowledge or data outside this consultation except as the President and Chief Executive Officer of INET may otherwise consent in writing. The confidentiality obligations provided in this paragraph shall not apply to any information that CONTRACTOR can demonstrate (i) was actually known to CONTRACTOR prior to the execution of this Agreement, or (ii) was properly obtained or evolved by CONTRACTOR independently of such confidential information and apart from performing services for INET under this Agreement, all without breach of any confidential relationship, or (iii) became publicly

available without act of CONTRACTOR, or (iv) is independently available to CONTRACTOR from a third party who is not under restriction or duty imposed by INET;

e.: all data, computer programs, designs, drawings, blueprints, tracings, plans, layouts and specifications, and any and all other intangible and tangible information or works (written or otherwise), including, but not limited to, any and all written information which may be or has been furnished to CONTRACTOR and that may be produced, prepared, or designed by CONTRACTOR in performing the services under this Agreement (the "Work Product") shall be, become, and remain the exclusive property of INET. CONTRACTOR shall not make copies of any Work Product except to the extent absolutely required to enable CONTRACTOR to perform its services under this Agreement. Upon the termination of this Agreement or upon completion of the services performed hereunder or upon earlier request by INET, any and all Work Product, together with all copies and reprints in CONTRACTOR's possession, custody, or control, shall be promptly transferred and delivered to INET and CONTRACTOR shall thereafter make no further use or utilization, either directly or indirectly, of any Work Product. CONTRACTOR shall certify to INET that its obligations under this paragraph has been complied with;
f.: in the conduct of work under this Agreement, CONTRACTOR shall not communicate or otherwise disclose to INET confidential or proprietary information, including trade secrets, of others.
g.: INET acknowledges that prior to the date of commencing work for INET, CONTRACTOR developed and acquired and further that CONTRACTOR has continued and will continue to develop or acquire its own proprietary technology unrelated to INET's products or related technology, as well as general experience, skills and knowledge recorded in the unaided memory of its employees ("CONTRACTOR Information"). INET acknowledges and agrees that CONTRACTOR shall at all times own the CONTRACTOR Information and may use and disclose such information in its business so long as the INET confidential and proprietary information is not used or disclosed. The provisions of this paragraph shall survive the termination or expiration of this Agreement.

7.

CONTRACTOR represents and warrants to INET that:

a.: With respect to any information, knowledge or data disclosed by CONTRACTOR to INET in the performance of the Agreement, the CONTRACTOR has the full and unrestricted right to disclose the same; and that INET shall have the unrestricted right anywhere in the world to copy, make, use, have made, sell or license any product based on such disclosed information, knowledge or data; and
b.: CONTRACTOR is free to undertake the services required by this Agreement and that there is no conflict of interest between CONTRACTOR's performance of this Agreement and any obligation CONTRACTOR may have to other parties.

INET represents and warrants to CONTRACTOR that:

a.: The disclosure of any information by INET to CONTRACTOR pursuant to this Agreement does not violate or infringe any rights of any third party; and
b.: INET is free to enter into and perform this Agreement in accordance with its terms.

8.: CONTRACTOR agrees to obtain from each and every employee (full and part-time), contract employee (full and part time), agent, officer and director who is employed to assist or is in any way associated with any work to be performed by INET a fully executed confidentiality agreement and assignment of intellectual property rights at least as protective of INET's rights as the provisions by which CONTRACTOR is bound pursuant to this Agreement.

9.: Intentionally deleted.
10.: CONTRACTOR agrees to the following Covenant Not to Compete:

As an independent covenant and in consideration of the payments which are made by INET, CONTRACTOR agrees that during the Term of this Agreement and for a period of twelve (12) months following the completion of any services performed hereunder, CONTRACTOR will not perform services that are the same as or similar to the services performed by Contractor under this Agreement for any person or entity anywhere in the world. CONTRACTOR agrees that this covenant is proper and necessary inasmuch as INET confidential and proprietary information may be inevitably disclosed to INET's competitors by the performance of the same work for a competitor of INET since such technical information is of a nature that it cannot be readily separated from the application of basic engineering principles.

11.: Except as expressly stated in paragraph 10 above, CONTRACTOR shall not be prohibited from engaging in engineering and design services or from using any basic engineering principles and basic engineering knowledge in the possession of CONTRACTOR.
12.: CONTRACTOR will obtain at its expense all insurance (including, but not limited to, workman's compensation, liability and automobile) necessary or prudent in connection with the services to be performed hereunder, and shall be wholly responsible for the payment of all taxes (including but not limited to social security—employer contribution) due or owing as a result of work performed by employees and contractors of CONTRACTOR. CONTRACTOR shall also be responsible for the appropriate withholding of employee's taxes as required by the governmental taxing authorities and compliance with all other applicable laws. CONTRACTOR agrees to indemnify and hold INET harmless for any willful infringement or misappropriation of any patent or confidential/proprietary information or copyright; provided that CONTRACTOR shall not be obligated to indemnify INET or hold it harmless where such infringement or misappropriation arises solely from the use by CONTRACTOR of information provided by INET. CONTRACTOR further agrees to hold INET harmless from any causes of action that may be brought by any taxing authorities in connection with payment and withholding of taxes.
13.: Nothing in this Agreement shall be construed as creating a license for CONTRACTOR to use the technology, copyrights or INET's Know How or proprietary information in any future work of CONTRACTOR.
14.: This Agreement shall expire at the end of the Term of this Agreement unless it is extended by mutual written agreement of the parties hereto. The provisions of paragraphs 6, 10, 12 and 17 shall survive the termination of this Agreement.
15.: This Agreement shall be governed by and construed in accordance with the laws of the State of Texas.
16.: The compensation set forth on this Agreement shall be the sole compensation payable to CONTRACTOR by INET for any services rendered hereunder, and no additional compensation or fee shall be payable by INET to CONTRACTOR by reason of any benefit gained by INET directly or indirectly through CONTRACTOR's efforts on Inet's behalf, nor shall INET be liable in any way for any additional compensation or fee unless INET shall have expressly agreed thereto in writing.
17.: CONTRACTOR may disclose that it is providing programming services for INET but shall not (i) disclose the specific nature of the services being performed or (ii) publicly reveal any of the terms and conditions of this Agreement.
18.: This Agreement may not be assigned or transferred without the prior written consent of both parties.

19.: Neither party will actively solicit the other party's employees for employment.
20.: This Agreement shall constitute the sole agreement between the parties hereto with respect to the subject matter hereof and shall supersede any and all prior agreements or understandings relating to the subject matter hereof. No change or amendment of this Agreement shall be binding unless in writing and signed by both parties.

IN WITNESS WHEREOF, the parties hereto have duly executed the Agreement, in duplicate, by the respective officers thereunto duly authorized, to be effective as of the day and year first written above.

Inet Technologies, Inc.		Epygi Technologies, Ltd.
By: /s/ Jeffrey A. Kupp		By: Epygi Labs GP, LLC, its General Partner
Name Jeffrey A. Kupp		By: /s/ George Saleh
Title VP		Name: George Saleh
		Title: VP

Exhibit A
Form of Statement of Work

Statement of Work #
Dated , 200
Under the Agreement for Consulting Services dated April 1, 2002

METHOD OF COMPENSATION:

COMMITMENT OF RESOURCES

DESCRIPTION OF WORK TO BE PERFORMED:

Milestones:

Deliverables:

Requirements for Acceptance of Work:

Inet Responsible Person:

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AGREEMENT FOR CONSULTING SERVICES
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STATEMENT OF WORK #
AUTHORIZED BY:

ACCEPTED BY:

Inet Technologies, Inc.

Epygi Technologies, Ltd.