INET TECHNOLOGIES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-24707

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

DELAWARE 75-2269056
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)

1500 NORTH GREENVILLE AVENUE 75081
RICHARDSON, TEXAS (Zip code)
(Address of principal executive offices)

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

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Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE

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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 _X_ NO ___

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. ___

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT ON JANUARY 31, 2002 WAS $119,938,632.

THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING OF THE REGISTRANT ON
FEBRUARY 26, 2002 WAS 46,879,538.

DOCUMENTS INCORPORATED BY REFERENCE

CERTAIN INFORMATION REQUIRED BY PART III OF THIS ANNUAL REPORT IS
INCORPORATED BY REFERENCE FROM THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE
DELIVERED TO STOCKHOLDERS IN CONNECTION WITH THE REGISTRANT'S 2002 ANNUAL
MEETING OF STOCKHOLDERS.

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PART I

ITEM 1. BUSINESS.

THIS ANNUAL REPORT ON FORM 10-K 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.

OVERVIEW

Inet Technologies, Inc. is 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.

- NETWORK INTELLIGENCE SOLUTIONS - Our network intelligence solutions include
the GeoProbe-TM- and the GeoProbe Mobile-TM-. The GeoProbe provides real-time,
network-wide monitoring of a

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carrier's Common Channel Signaling System #7, or SS7, and next-generation
networks. The GeoProbe's monitoring applications enable early warning of
network faults, collection of network performance statistics for evaluations,
real-time call or session tracing and troubleshooting. These applications are
used by carriers to optimize the performance and monitor the health of their
networks, as well as to protect the security and integrity of their networks
from unauthorized access. The GeoProbe also serves as a data-forwarding
engine for our IT:seven-TM- business intelligence solutions. Our network
intelligence solution for wireless networks, the GeoProbe Mobile, gives
carriers, in real time, a comprehensive, end-to-end view of their networks
whether they employ Global System for Mobile Communications, or GSM, IS-41 or
General Packet Radio Service (wireless data), or GPRS, technologies to direct
traffic. The GeoProbe Mobile's non-intrusive monitoring capabilities enable
the carrier to improve service quality, minimize time-to-market of new services,
enhance roaming profitability, introduce revenue-generating, location-based
services and help protect the network against fraud and cyber terrorism.

- BUSINESS INTELLIGENCE SOLUTIONS - Our IT:seven suite of business
intelligence solutions addresses the areas of revenue assurance, customer care
and Quality of Service, or QoS. These solutions create business intelligence
information by leveraging data collected from a carrier's signaling network. We
currently offer four primary IT:seven applications - GeoBill-TM-, GeoCare-TM-,
GeoConnect-TM- and GeoRoam-TM-. The IT:seven suite of applications provides
reconciliation of billing between carriers, service quality reports detailing
interconnect partner or roaming performance, and marketing data identifying
trends relative to services, interconnect partners and customers.

- DIAGNOSTICS SOLUTIONS - We currently offer three products in the
diagnostics area - the Spectra-TM- and the Spectra Trunk Tester-TM-, which
address current-generation networks, and the Spectra2 MG-TM-, which addresses
next-generation networks. Our Spectra products have been purchased by
approximately 550 companies worldwide for commissioning, interoperability
testing and on-going maintenance of SS7, ISDN and X.25 telecommunications
networks, as well as the development of revenue-generating services. These
multi-protocol analyzers provide diagnostic, emulation and load generation
capabilities for use by service providers or equipment manufacturers in the
design, deployment, commissioning and diagnosis of current- and
next-generation signaling networks and related elements. The Spectra Trunk
Tester measures the quality of packetized and circuit-switched voice networks
under extreme pressure, stressing networks with up to 1.8 million calls per
hour, while simultaneously generating test calls that inject and detect tones
on digital voice channels. The Spectra2 MG addresses next-generation networks
using H.323, Session Initiation Protocol, or SIP, Media Gateway Control
Protocol, or MGCP, and SIGTRAN protocols and also performs packet media QoS
testing. Spectra2 MG provides developers, carriers and manufacturers the
ability to verify the performance of media gateways, softswitches, SIP
servers and other elements of next-generation networks. The Spectra2 MG is
capable of conformance testing and call generation on one platform. Together,
our diagnostics products support over 450 national, international and
proprietary protocol variants.

Founded in 1989, our mission is to be a leading provider of network
intelligence, business intelligence and diagnostics solutions for current- and
next-generation communications networks worldwide. Key elements of our strategy
to achieve this objective include:

- expanding our global market share in key geographic regions and
market segments;

- maintaining a high level of repeat business with our existing
customers;

- introducing new products and enhancements to existing product
offerings to facilitate growth; and

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- continuing to invest in research and development to differentiate our
offerings and broaden our product portfolio.

As of December 31, 2001, we had sold our solutions to approximately 600
customers in more than 50 countries. Our target customers include current- and
next-generation wireline and wireless carriers as well as communications
equipment manufacturers throughout the world. A partial list of our carrier
customers includes AT&T, British Telecom, Deutsche Telekom, Eircom Ireland,
Intelig, KPN Telecom, Level 3, mmO2 (formerly BT Cellnet), Orange
Communications, Qwest Communications, Sprint, Swisscom Fixnet, Swisscom Mobile,
Telefonica Moviles, Telenor, TTNet and Worldcom. A partial list of our equipment
manufacturer customers includes Alcatel, Cisco, Lucent, Motorola, Nokia and
Nortel.

INDUSTRY BACKGROUND

THE TELECOMMUNICATIONS INDUSTRY

Historically, telecommunications carriers operated in a highly regulated
environment with little or no competition. During the past two decades,
governments worldwide have deregulated, or are in the process of deregulating,
the telecommunications industry. Deregulation increases the competitive
landscape by allowing the emergence of competitive communications carriers. New
entrants to the global communications landscape include competitive long
distance and local exchange carriers; Internet Protocol, or IP, next-generation
network providers; Internet Service Providers, or ISPs; competitors to
government post, telephone and telegraph companies, or PTTs, and other licensed
operators outside the U.S.; wireless carriers; and communications service
resellers such as prepaid calling card providers. This competitive environment
has put pressure on all telecommunications carriers to protect or grow revenues,
reduce operating costs, improve service performance levels and quickly introduce
new and enhanced services.

Increased competition has forced communications carriers to differentiate
themselves by providing advanced, value-added services and features while
delivering a high level of quality of service to their customers. Examples of
these value-added services include toll-free "800" numbers, virtual private
networks, prepaid calling cards, caller ID, three-way calling, customized
routing and billing, voice messaging, Local Number Portability, or LNP, and
internet access.

Competition and the growth of internet traffic are also forcing carriers to
better manage and control their network operating costs and capital spending.
Carriers must efficiently provision, monitor and bill for multiple services to
both manage expenses and enhance services to their customers. As current- and
next-generation networks are integrated, carriers need end-to-end management and
interoperability solutions to prevent compromised network security and service
quality degradation.

Communications networks operate in real time and are mission-critical to
their end users and, as a result, communications carriers must provide the
highest quality and reliability of services to remain competitive. This
competition is forcing carriers to more closely examine the performance of their
service levels. The ability to provide high performance services to customers is
a key to minimizing customer turnover, or churn, in a carrier's customer base.

SS7 AND MODERN COMMUNICATIONS NETWORK ARCHITECTURES

The following discussion of the evolution of communications networks and
related signaling is provided to help illustrate the increased complexity of
these networks as they have evolved and the specific needs that our solutions
address.

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A communications network must not only convey information between points, it
must also determine the best routes for connections, control the allocation of
resources used to transfer the information and keep transaction records for
billing and measurement purposes. A simple communications session, or other
multi-service session, involves two types of information: the session content
(voice, computer data or video) and information about the session (such as the
identity of the party initiating the session and the destination party) that is
required to connect, manage and bill for the session. This intelligence about a
communications session or other services is generally referred to as signaling.

The first generation of telephone networks was designed to pass both call
content and signaling over a single internal network path, called a trunk, from
the source of the call to the called destination. Signaling information was
passed in a single path through audio tones or voltage changes on the telephone
line or trunk connection. However, this single path method of transferring both
call content and signaling became inefficient and unreliable as network traffic
grew, leading to network congestion and reduced service quality. Single path
signaling also inhibited or prevented many advanced service offerings because
the control information could not be separated easily from the call content
flowing over a trunk.

These problems were first recognized during the 1960s and subsequently were
resolved through the development and deployment of common channel signaling. In
common channel signaling, the call content is separated from the signaling
information. The signaling information is then passed over an entirely separate
physical path through the carrier's network, while the call content is passed
over a trunk. Signaling paths in the network are connected to a set of systems
that control and monitor the progress of calls and other transactions and route
the signaling information as required. The signaling paths, or links, and
signaling network control systems comprise a separate network infrastructure,
called a signaling network, that operates in parallel with the network of trunks
used to convey call content. The technique is called common channel signaling
because signaling information for multiple calls passes over a shared, or
common, set of signaling channels. This method of combining signaling
information for multiple calls results in much higher overall network
efficiency.

Traditional signaling networks are based on a globally standardized
architecture and set of protocols called SS7, or sometimes referred to
internationally as C7. Since the mid-1980s, SS7 has been implemented by
telecommunications carriers worldwide, including incumbent carriers, emerging
competitive service providers, ISPs and wireless carriers. SS7 utilizes digital
packet-switching technology and is designed to be robust, flexible and scalable,
enabling telecommunications carriers to provide new services quickly and to
optimize the network bandwidth used for trunk connections. When a call is
placed, the originating location's call switching equipment uses the SS7 network
to look ahead and determine whether the destination is busy or otherwise
unavailable before allocating a trunk to the call and connecting both parties.
This look ahead operation also enables information such as caller ID to be
passed before the call is actually connected. The SS7 network's speed and power
allow these operations to occur almost instantly, which significantly reduces
the time required to process each call and improves service to the end user.

The movement of carriers towards next-generation networks is driven primarily
by the potential to dramatically reduce the cost of switching and control
infrastructure. This opportunity has not previously been available to carriers,
but recent advances in packet technology and semiconductors have enabled the
emergence of a new breed of packet switching, which provides very attractive
cost savings to carriers. The challenge to carriers is how to effectively merge
this new and dissimilar technology with their existing and substantial
investment in traditional circuit switches. This

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technology will initially interoperate with and eventually may replace the
current networks over an extended period of time.

The network intelligence that SS7 provides in current networks is the
keystone to the adoption of these next-generation packet networks. For current-
and next-generation networks to interoperate successfully, SS7 must interact
with its signaling peer in the IP environment and enable calls to be exchanged
between these two different types of networks. This interaction occurs through
network infrastructure, and may be managed and maintained with solutions such as
our GeoProbe and Spectra. Natively within the next-generation packet network,
the intelligence for control is carried in virtual channels, which are
comparable to SS7 signaling links in the current networks. The protocol or
language of this intelligence may take many forms, such as MGCP or SIP.
Collectively, SS7, MGCP, SIP and other languages formulate the intelligence of
current- and next-generation networks. These languages route and connect calls
among similar, as well as between dissimilar, networks.

Signaling is also critical in wireless communications. In fact, wireless
networks are inherently more complex than wireline networks. As a result, there
is a greater volume of signaling messages required to handle roaming, customer
authentication and wireless transactions in addition to basic call setup.

For a wireless network installed today, the principle network elements that
transmit signaling traffic include:

- - MOBILE SERVICES SWITCHING CENTER, OR MSC. Similar to a switch in the
circuit-switched network, the MSC handles voice and SMS traffic and ensures
that it is routed correctly. MSCs communicate with other network elements in
the same network and in other mobile networks. The Gateway MSC is also the
connection point between a wireless network and the Public Switched Telephone
Network, or PSTN, enabling wireline and mobile phone users to communicate
with each other.

- - BASE STATION SUBSYSTEM, OR BSS. Provides the connection between the MSC and
mobile devices. The BSS, also called a base station, handles all wireless
communications within pre-defined areas, called "cells." The base station
handles such functions as selecting the best frequency for communicating with
the mobile device, and handing-off a mobile device from one cell to another
as the user moves between cells.

- - MOBILE DEVICE. Typically a mobile or cellular phone, but could also be a
wireless-enabled Personal Digital Assistant, or PDA, a computer, or other
specialized equipment that uses wireless communications. The mobile device
transmits and receives information to and from the base station nearest its
current location.

Large tracking databases called registers are continuously updated to reflect
changes in the network regarding mobile devices and their users. The primary
registers include:

- - EQUIPMENT IDENTITY REGISTER, OR EIR. Keeps track of the individual mobile
devices that can be used in the network, and provides authentication
information used to verify identity.

- - HOME LOCATION REGISTER, OR HLR. Keeps track of the location, capabilities and
billing information for each subscriber.

- - VISITOR LOCATION REGISTER, OR VLR. Keeps track of the detailed location of
users, and maintains subscriber based information for the MSC. This device is
typically co-located with the MSC.

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- - SHORT MESSAGE SERVICE CENTER, OR SMSC. Provides the transfer of SMS messages
to and from mobile devices. The SMSC receives the short message from the
sender and forwards it to the recipient after the recipient's location has
been determined. If the recipient cannot be located or if the mobile device
is turned off, the SMSC stores the message for later delivery.

Wireless carriers use the signaling network to transport the information
needed to establish a voice call, in addition to the information to perform
wireless transactions such as those described below. Wireless transactions are
increasing in importance as the adoption of data services using mobile devices
continues to increase. One of the most popular wireless transaction types is
Short Message Service, or SMS. SMS messages are transactions sent through a
wireless carrier's signaling network. According to the GSM Association, over 30
billion SMS messages are sent in a month on a global basis.

A wireless carrier performs many transactions transparent to the user that
are associated with any mobile device whether or not it is in use. Examples
include:

- - REGISTRATION TRANSACTIONS. Ensures that the mobile device is one that
is registered to the network and calls made will be billable.

- - LOCATION UPDATE TRANSACTIONS. Updates a user's location so that the
HLR can route calls directly to the nearest location's MSC.

- - AUTHENTICATION TRANSACTIONS. Checks the unique identification of a
mobile device against a list of non-approved or stolen equipment.

Wireless networks, including signaling, are in a state of evolution. The
vision of seamless integration of voice, data and video can only be realized
through the future generations of wireless technology and signaling
transactions. Wireless carriers are moving to adopt and deploy next-generation
wireless network technology that will be used to carry multimedia
communications. As carriers add transaction-based and integrated voice-data
services, the signaling network will begin to play an even larger role than it
does today and its complexity will only continue to increase.

WIRELESS: AN ILLUSTRATIVE EXAMPLE

In order to better illustrate the critical role of signaling in a wireless
network and to demonstrate the complexity of a wireless network, consider the
example of a user in France, who is visiting from Germany, who wishes to call
the Inet office in Germany.

The visitor from Germany has just turned on his mobile phone. After powering
up, the phone transmits a signaling transaction to the closest base station. The
base station receives the signaling transaction and requests registration in the
French network. The base station is responsible for notifying the VLR that there
is a user in the French network from Germany. The VLR, in another series of
signaling transactions, communicates with the HLR in Germany to ensure that this
user's phone is registered in the home network, has not been listed as stolen
and has roaming authorization in the visited network.

After these initial transactions are completed, the mobile phone is
authorized to make a call. The user dials the Inet office in Germany and places
the call. The base station receives the calling information and communicates
with the MSC, which sets up the call using SS7 transactions. The calling route
is identified from the mobile network in France, through a wireline carrier to
the German office.

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While they are speaking over the phone, the mobile user begins traveling in a
taxi. The base station is continuously keeping track of the user's location
through a series of signaling transactions. The base station hands-off the call
to another base station when the user leaves the original cell where the call
was established. The hand-off transactions reoccur as the mobile user moves from
one cell to another, while the call is in process and even after the call is
complete.

During the call to Inet's German office, the mobile user requested revised
flight information for his return trip later that day. So that he would have it
for quick reference later, the staff at the German office agreed to send an SMS
text message with the new flight information. The staff in the German office
types the message on a mobile phone, enters the phone number of the person in
France and sends the message. The message is directed to an SMSC in the German
network. The SMSC looks at the HLR and finds that the recipient is roaming in a
French network. The SMSC determines the best route for the SMS message. The
message is then carried over the signaling network, from the mobile network in
Germany to the mobile network in France where it is delivered to the mobile
user.

THE NEED FOR SIGNALING NETWORK MANAGEMENT AND OPTIMIZATION SOLUTIONS FOR
COMMUNICATIONS NETWORKS

Our solutions provide carriers the intelligence needed to proactively manage
their networks in today's complex environment.

As the example above illustrates, even a relatively simple transaction like a
wireless call requires a sophisticated series of signaling network operations.
Long-distance authorization codes, prepaid calling cards, "800" and other
advanced services increase the number of signaling messages required for each
network session, which in turn tends to increase the number of elements, the
complexity of the elements and the links required in the network. As carriers
roll out new services within their networks, the complexity of the networks
increase, which makes network management more of a challenge. As previously
described, network complexity is especially an issue for wireless carriers as
their networks generate more than double the signaling of a wireline network due
to wireless network architecture and customer roaming.

Each signaling network typically contains equipment and software manufactured
by multiple vendors. Moreover, multiple signaling networks are connected among
multiple carriers, often spanning international boundaries. The entire network
of networks must operate as a seamless whole, in real time, with a minimal
number of errors. Any indication of trouble in the network must be detected and
diagnosed as quickly as possible. If network problems are not detected on a
timely basis, they can result in network and service downtime. Network capacity
utilization must be monitored continuously for bottlenecks and other detrimental
conditions. To maintain reliability, each new connection between two carriers'
networks must be certified and approved by the engineering staffs at both
carriers before traffic is allowed to flow through the connection.

In the past, when signaling was used exclusively on wireline networks to
complete standard telephone calls, it was sufficient for carriers to employ
localized diagnostic equipment and a large number of technicians who could be
dispatched in a reasonable timeframe to any point where trouble was suspected or
where new connections were being installed. However, this approach is not
readily scalable. It requires a significant number of people with specialized
domain expertise and does not adequately provide for diagnosis of network-wide,
interrelated conditions that tend to arise in complex environments. The
combination of new and different types of interconnected signaling networks
(such as satellite, cellular and packetized networks), increased traffic levels
and complexity within each signaling network and strict performance requirements
has led to an increased need for systems and software that enable carriers to
get a complete picture of all signaling network facilities

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and monitor any or all signaling message traffic in real time. Comprehensive
solutions are required to enable advanced intelligent networks to maintain
existing service levels and to reach their full potential.

There also is a growing need for signaling network management solutions like
ours to be fully integrated into the overall collection of systems that manage
all aspects of a carrier's operations, such as billing, service order entry,
provisioning, repair and service definition. Seamless integration of signaling
management with applications that enable a carrier to use and leverage the
information gathered in its signaling network allows a carrier to improve its
customer service, reduce operating costs, minimize capital expenditures related
to network expansion, increase operational efficiency and realize revenues when
otherwise not possible. To provide a carrier with these advantages, our
signaling network management solutions offer a suite of software applications
more robust than the basic monitoring and diagnostic functions of traditional
network solutions.

THE INET STRATEGY

Our mission is to be a leading provider of network intelligence, business
intelligence and diagnostics solutions for current- and next-generation
communications networks worldwide. Key elements of our strategy to achieve this
objective include:

EXPANDING OUR GLOBAL MARKET SHARE IN KEY GEOGRAPHIC REGIONS AND MARKET
SEGMENTS. We are pursuing business throughout the world in markets that are in
the process of being deregulated or privatized, including various emerging
markets in Latin America and the Asia/Pacific region. The percentage of our
revenues attributable to international markets was 62% in 2001 and is expected
to remain a substantial portion of our revenues going forward. We intend to
expand our international presence by adding offices and/or distributors in key
global markets as business conditions warrant. We are also pursuing business in
various market segments, most significantly wireless, because of the higher
potential growth opportunities of this segment. We believe that our future
growth and profitability requires further penetration - in the form of
expansions to existing systems as well as new applications - of international
markets and the wireless segment.

MAINTAINING A HIGH LEVEL OF REPEAT BUSINESS WITH OUR EXISTING CUSTOMERS. We
intend to seek additional revenue opportunities by working closely with our
installed customer base to identify opportunities for the sale of expansion
systems, additional business applications and other new offerings. Based on
experience with our existing customers, we believe that achieving early
widespread deployment of our network intelligence solutions in a particular
carrier's network provides significant ongoing opportunities for sales of new
and expansion systems, additional applications and other new offerings.

INTRODUCING NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCT OFFERINGS TO
FACILITATE GROWTH. We believe that we have gained significant expertise in
signaling, IP and broadband communications technologies in the course of the
design, development and implementation of our current product offerings and
through our work with our existing customer base. We intend to leverage our core
competency in signaling technologies to expand our current product offerings and
to develop new product offerings for complementary signaling environments such
as IP, Asynchronous Transfer Mode, or ATM, and internet telephony. We believe
that the combination of new products and enhancements to our existing products
will facilitate growth by both expanding our global market share and further
penetrating our existing customer base.

CONTINUING TO INVEST IN RESEARCH AND DEVELOPMENT TO DIFFERENTIATE OUR
OFFERINGS AND BROADEN OUR PRODUCT PORTFOLIO. We intend to continue to invest in
the strategic area of research and development, or R&D, to facilitate
differentiation through the performance, features and scalability

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of our products as well as the breadth and depth of our product portfolio. We
believe that continued R&D investments - for both new product development and
enhancements to our current offerings - will help us maintain and strengthen
our position as a technological leader in our chosen markets.

THE INET SOLUTIONS

We provide network intelligence, business intelligence and diagnostics
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.

NETWORK INTELLIGENCE SOLUTIONS

Our network intelligence solutions include the GeoProbe and the GeoProbe
Mobile. The GeoProbe's network-wide monitoring applications enable early warning
of network faults, collection of statistics for service performance evaluations,
real-time session tracing and troubleshooting. The GeoProbe Mobile is our
network intelligence solution targeted to wireless carriers worldwide. The
GeoProbe system contains the following key elements:

- An open, proprietary core hardware platform designed by us as a scalable,
distributed, RISC-based multi-processing data input/output platform, which
captures network data traffic and processes this data in real time through
multiple software applications.

- Advanced signaling network monitoring software applications.

- Open interfaces to allow data delivery to third-party systems.

The GeoProbe can provide a network-wide view regardless of topology, number
of protocols or number of different vendor elements in use. The GeoProbe
passively, or non-intrusively, monitors all messages that flow over each
signaling link and can automatically correlate these messages in real time to
reconstruct every session in a carrier's network. This capability provides
session analysis for troubleshooting, problem detection and network integrity
assurance. In addition, the information collected by the GeoProbe improves a
carrier's ability to optimize its network and provide enhanced services to its
customers.

The GeoProbe provides session data and network status information to users
through a graphical user interface and through Web-based reporting applications.
The GeoProbe displays maps that represent network elements, such as Signal
Transfer Points, or STPs, Signaling Service Points, or SSPs, Service Control
Points, or SCPs, MSCs and Base Station Controllers, or BSCs. The GeoProbe also
provides users with the flexibility to configure their system to set up triggers
to detect events, filters, alarms and statistics based on their specific needs.
When failures or user-specified events occur, an icon representing the affected
network element changes colors to alert the user to potential trouble or the
occurrence of the failure or event.

The platform's modular design accommodates growth in a carrier's network and
facilitates the implementation of enhanced features simply by the addition of
processor cards to the system or deployment of additional system components in
conjunction with adding software capabilities.

We have developed a number of software applications for use with the GeoProbe
that incorporate Oracle's relational database and the X-Windows OSF/Motif
toolkit. In addition, our open interfaces allow the carrier's personnel or a
third-party software developer to expand or customize existing applications or
develop new applications using data collected by the GeoProbe.

9

Some of the GeoProbe applications include:

- NETWORK SURVEILLANCE. Enables detection of faults, alarming, mass call
onset detection and other network-related performance measurements.

- NETWORK MONITORING AND TROUBLESHOOTING. Provides real-time and historical
network-wide protocol analysis as well as call trace functions for use in
troubleshooting call- and transaction-related failures. Also provides
performance metrics and data at the network, network element and routing
levels.

- SERVICE PERFORMANCE MONITORING. Provides performance measurement of a
number of services, such as toll-free 800, freephone, LNP, roaming and
other intelligent network applications.

- FRAUD MANAGEMENT. Collects call and transaction detail records in real
time and feeds them to third-party fraud detection systems.

- NETWORK SECURITY. Provides real-time monitoring of network-wide traffic
activity to detect suspicious events and scenarios and alerts appropriate
personnel for handling.

The GeoProbe and the GeoProbe Mobile provide many advantages, including:

- GLOBAL NETWORK VIEW. These solutions are designed to provide a
comprehensive end-to-end view of a carrier's signaling network. This
design ensures that relevant events, regardless of the point of origin,
path and termination point, are properly correlated and processed for
presentation to network management systems or network operations
personnel. In the absence of such a global approach, carriers must rely on
a patchwork of systems scattered throughout their networks in order to
diagnose problems. This approach typically results in optimization at the
network element level, which is less effective than an end-to-end network
approach. Our proprietary tracking technology enables a carrier to
reconstruct an entire session and its related transactions at any time
during or after the session. By contrast, traditional sampling techniques
tend to produce erroneous and inaccurate results because collected data is
usually incomplete and only local in scope.

- REAL-TIME FUNCTIONALITY. The GeoProbe solutions are designed to collect,
process and present data in real time, even under extreme network load
conditions. This key attribute makes real-time management and operation of
signaling networks possible. Without a real-time monitoring system,
carrier networks are more vulnerable to overloads, fraud and delayed
problem resolution, which can lead to network failure, customer
dissatisfaction and compromised network integrity.

- ADVANCED ENGINEERING AND PLANNING CAPABILITIES. The GeoProbe provides an
accurate and detailed view of real-time and historical statistics on a
carrier's signaling network usage and the service applications delivered
through the network. This allows carriers to implement network
architectures optimized for cost and performance, and to refine network
configuration over time based on changes in demand and traffic patterns.
For example, a carrier can use data collected by the GeoProbe to identify
a point in the network that is constricting traffic flow. The carrier can
then either reroute traffic or install additional capacity at that point,
which increases the throughput of its entire network.

10

- FAST, COST-EFFECTIVE DIAGNOSTICS. The GeoProbe's software applications
rapidly isolate problems between interconnected signaling elements and
networks, enabling communications carriers to reduce downtime, maintenance
and costs.

- REDUNDANCY AND RELIABILITY. The GeoProbe is available with various levels
of redundancy in order to guard against data loss and help ensure that
critical applications remain operational. Available redundancy features
include power, interfaces, processors, storage devices, transport network
access, and various business applications such as billing.

- VENDOR INDEPENDENCE. All applications are based on data captured directly
from the signaling network, as opposed to information provided in
vendor-specific format by individual network elements such as STPs, SCPs
or next-generation network elements. As a result, carriers can use the
GeoProbe to gain an independent view regardless of which vendors'
equipment is deployed in their signaling network.

Pricing for a GeoProbe system or individual applications varies based on a
number of factors, such as the volume of network traffic, network size, network
configuration, number of protocols present, number of links monitored and number
and type of applications desired. Prices for GeoProbe systems have ranged from
less than $500,000 to more than $20 million. Since 1995, we have sold GeoProbe
systems to approximately 95 customers worldwide.

BUSINESS INTELLIGENCE SOLUTIONS

Our business intelligence solutions, called IT:seven, enable carriers to
leverage the data collected by the GeoProbe to achieve minutes-of-use
interconnect billing, billing for SMS and mobility traffic, interconnection
performance measurement, quality-based routing, customer quality assurance and
service level performance monitoring. The primary applications that were
introduced beginning in late 1999 and through early 2001 include GeoBill,
GeoCare, GeoConnect and GeoRoam. These applications utilize the raw signaling
data gathered from a carrier's network to provide support for revenue generating
or cost savings opportunities in areas that include interconnect billing,
customer care and quality of service monitoring. In mid-2001, GeoConnect
Destination Quality Verifier-TM- was introduced to route traffic based on
quality performance levels and to manage Service Level Agreements, or SLAs.
An SLA is an agreement between carriers that defines their roles and
responsibilities with respect to interconnection activity, including such
matters as fees and quality levels.

- IT:SEVEN GEOBILL. An interconnect billing application that presents data
in the form of Call Detail Records, or CDRs, and usage measurement data,
and feeds the data in industry-standard billing records to the carrier's
accounting system for rating and invoicing. GeoBill enables carriers to
streamline their interconnection billing process while reducing their
reliance on switch vendors and mediation devices for billing data. GeoBill
also provides the capability for special studies by the carrier, such as
monitoring the results of marketing campaigns, traffic analysis and
proactive capacity planning.

- IT:SEVEN GEOCARE. A marketing and customer care application for dynamic
service and customer management. GeoCare collects and displays real-time
and historical performance information so that a carrier can efficiently
maximize the revenue potential from its highest-value customers and
revenue generating dialed services. With GeoCare, carriers can more
cost-effectively monitor, optimize, deliver and demonstrate superior
service quality for their targeted key customers.

11

- IT:SEVEN GEOCONNECT. An interconnect billing verification and
interconnection performance application for auditing usage and quality.
GeoConnect collects and correlates all of the signaling traffic at the
gateways or point of connection to other carriers' networks. The
application generates CDRs from the signaling data and creates
user-friendly reports based on this data. The reports can be used to
generate bills to interconnect partners or to support the auditing and
verification of invoices received from other carriers. GeoConnect can also
be used to document the quality of service delivered to and from
interconnect carriers and compare their performance and quality levels to
that of other carriers or to determine compliance to levels dictated in
SLAs. This application enables carriers to better determine capacity
trading decisions, SLA management and traffic routing decisions.

- IT:SEVEN GEOROAM. An interconnect QoS application that is targeted to
wireless service providers to aid them in generating revenue from roamers
by ensuring high quality roaming services. GeoRoam helps carriers protect
and maximize their revenue streams by measuring the QoS of mobility
traffic and SMS traffic to and from their interconnect and roaming
partners. GeoRoam utilizes existing signaling data to monitor carrier
service performance for both visiting roamers and a carrier's own
subscribers roaming into other carriers' networks.

DIAGNOSTICS SOLUTIONS

Our diagnostics solutions provide communications carriers and equipment
manufacturers with the ability to quickly and cost-effectively design, deploy
and maintain their networks and network elements. We provide vendor-independent
tools that provide diagnostic, emulation and load generation capabilities for
use in the design, deployment, commissioning and diagnosis of signaling networks
as well as quality of service measurement in voice-over-packet networks.
Currently, our diagnostics solutions include the Spectra and the Spectra Trunk
Tester, which address current-generation networks, and the Spectra2 MG, which
addresses next-generation networks. These products can be integrated within the
GeoProbe platform or used on a stand-alone basis with a carrier's own equipment.
These products are also used by developers and equipment manufacturers in the
design of new products through the products' extensive emulation and conformance
packages and their ability to simulate network conditions.

These multi-protocol diagnostic tools are targeted to the needs of advanced
SS7/C7, GSM, IS-41, X.25 and ISDN networks and development environments. These
tools also support next-generation networks using H.323, SIP, MGCP and SIGTRAN
protocols. They are designed for ease-of-use, with an intuitive user interface
featuring pop-up menus and single-keystroke commands. These tools can be
configured by the user to change message text and monitoring scenarios and to
save commonly used configurations, filters, tests and other settings for quick
setup. They translate complex signaling messages into plain language, and the
display format shows network statistics and test results in an
easy-to-understand format.

Key benefits of our diagnostics solutions are:

- EASE OF USE. These products provide a multitude of easy-to-access
emulation and diagnostic functions. These capabilities allow testing and
troubleshooting personnel to quickly and effectively perform tasks that
would otherwise require lengthy set-up times and programming efforts. The
products are also known for being very user friendly and easy to learn to
operate.

- COMPREHENSIVE CAPABILITIES. Our diagnostics solutions provide customers
with the ability to monitor, emulate and generate signaling data for use
in troubleshooting, validation,

12

conformance and regression testing of switches and other network
equipment. The load generation capabilities and multiple emulation
functions can test the various layers of the signaling protocol, up to
and including the signaling information involved with complex
applications, such as LNP and wireless.

- MULTIPLE PROTOCOL SUPPORT. These solutions enable network equipment
manufacturers and communications carriers to perform end-to-end testing of
applications utilizing multiple signaling protocols, including
country-specific variations of signaling. They alleviate the need to use
multiple diagnostic tools and provide easy and consolidated access to test
results. We support over 450 national, international and proprietary
protocol variants.

- VERSATILE CONFIGURATION AND COMPATIBILITY WITH THE GEOPROBE. We offer
these products in a rack-mounted configuration that can monitor up to 16
full-duplex links and a portable version capable of monitoring up to four
full-duplex links. The versatility is enhanced by the product's
portability as well as the ability to integrate with the GeoProbe system.

Prices for a unit generally fall within a range of $60,000 to $80,000.
However, depending on configuration and enhancements, the price for a unit can
exceed $100,000. Since the first diagnostic sale in 1990, over 4,700 units have
been sold to approximately 550 customers worldwide.

Together, our network intelligence, business intelligence and diagnostics
solutions represent an integrated and comprehensive set of offerings for network
design, monitoring, management, testing and diagnosis. Our solutions directly
address the key areas of network security, quality of service, interconnect
management, customer care, special studies and diagnostics.

PRODUCTS UNDER DEVELOPMENT

We utilize an open architecture approach in the design of our products. This
approach facilitates and accelerates the development of new applications and
products and permits us to enhance existing products by substituting new
hardware or software modules. This modular approach helps to extend the life
cycles of our products, simplify the manufacturing process and facilitate cost
reduction.

Current and planned product enhancements for our network intelligence
solutions include the ability to monitor GPRS, Universal Mobile
Telecommunications Systems, or UMTS, and signaling in IP networks.

Current and planned product enhancements for our business intelligence
solutions include additional quality of service capabilities for GeoConnect and
GeoRoam as well as additional applications in the interconnection performance
management area.

Current and planned product enhancements for our diagnostics solutions
include increased call generation capacity and adding support for emerging
wireless (UMTS/3G) and Voice over Internet Protocol, or VoIP, signaling
protocols.

CUSTOMERS

As of December 31, 2001, we had sold our solutions to approximately 600
customers in more than 50 countries. In 2001, Deutsche Telekom accounted for
approximately 12% of our total revenues. In 2000, British Telecom and Worldcom
each accounted for approximately 13% of our total revenues. No individual
customer accounted for 10% or more of our total revenues in 1999. Our target
customers include communications carriers and equipment manufacturers throughout
Europe,

13

the Middle East and Africa, or collectively EMEA, North America, Latin
America and the Asia/Pacific region.

The following is a sampling of customers in various market segments that
collectively accounted for approximately 80% of our total revenues in 2001.

SALES, MARKETING AND SUPPORT

SALES AND MARKETING

We sell our products to communications carriers and equipment manufacturers
globally through both direct and indirect channels. Domestically, the direct
channel is used for all solution areas. Our domestic sales force is structured
around a two-tiered model focused on strategic accounts and geographic areas.
Internationally, we use both channels. Our network intelligence and business
intelligence solutions are sold directly and in cooperation with systems
integrators, distributors and consultants, while our diagnostics solutions are
sold primarily through distributors. At year end, we had eight sales offices in
the U.S. and three sales offices outside the U.S., near London, England, near
Frankfurt, Germany and in Roissey, France. We also have a direct sales presence
in Sydney, Australia, in Tokyo, Japan, in Seoul, Korea and in Singapore.

The sales cycle for our solutions can be 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
products.

Our primary marketing activities include raising potential customer awareness
of the benefits of proactively managed signaling networks and interoperability
benefits as well as identification of new opportunities with existing customers.
To accomplish these tasks, we use direct sales and marketing efforts,
advertising in trade publications, exhibitions at industry trade shows and
presence on the internet through our Web site. These activities focus on
generating qualified sales leads and demonstration opportunities for our
solutions.

We provide extensive training and support to our direct sales force and our
worldwide distributors, including classroom training, product brochures,
demonstration systems and promotional literature.

CUSTOMER OPERATIONS, SERVICES, SUPPORT AND WARRANTY

14

We believe that customer service, support and training are important to
building and maintaining strong customer relationships. We service, repair and
provide technical support for our products. We currently offer two levels of
support services that provide either 24-hour, seven days a week or 8-hour, five
days a week technical support. Both levels provide for remote access assessment
and servicing capabilities, installation support and advance replacements for
emergency situations.

We maintain an in-house repair facility and provide on-going telephone
assistance to customers from our support center in Richardson, Texas. In
addition, we service our customers from product support offices located near
London, England and near Frankfurt, Germany. As our customers become more
geographically diverse and as business conditions warrant, we may open support
offices in other key locations.

We typically warrant our products against defects in materials and
workmanship for one year after the sale. We also provide varying levels of
extended product support under support services agreements. Support services
agreements are typically sold to customers for a one-year term and may be
renewed for additional one-year periods. Customers that do not renew their
support services agreements but wish to obtain product updates and new version
releases generally are required to purchase such items from us at market prices.

15

RESEARCH AND DEVELOPMENT

Our primary development facilities are located at our Richardson, Texas
headquarters. Our research and development efforts include expenditures for new
products, new applications, new features or enhancements for existing products
or applications and sustaining engineering activities.

Our products and solutions are designed to comply with a significant number
of standards and regulations, some of which are evolving as new technologies are
deployed. For sales to customers in the U.S., our products must comply with
various standards established by Telcordia (formerly Bellcore) and the American
National Standards Institute. Internationally, our products must comply with
standards established by telecommunications authorities in various countries as
well as with recommendations of the International Telecommunications Union and
the European Telephone Standards Institute.

MANUFACTURING

Our solutions are comprised of both third-party and proprietary hardware.
Third-party hardware consists primarily of servers and personal computers, which
are standard devices configured for our specific needs. For proprietary
hardware, our internal production process consists of procurement and inspection
of various components, final assembly, burn-in, quality control testing and
packaging, all of which are performed primarily at our headquarters in
Richardson, Texas. We outsource the manufacturing of our proprietary hardware to
a number of Texas-based contract manufacturers. We have obtained ISO 9001
certification for in-house processes and have obtained the CE certification for
shipments to the European Community.

We generally use industry-standard components, which are available from
multiple sources. However, our products currently utilize various semiconductors
that are available from only one manufacturer and other components that are
available from one or a limited number of suppliers. We attempt to minimize the
need for sole and limited source components by performing design reviews, prior
to the manufacture of any new product, during which we seek to eliminate sole
source components when feasible. We forecast annual parts usage and meet with
key vendors to obtain their commitment to meet forecasted supply needs. As
necessary, we reevaluate the sources of components identified as having
potential delivery problems and the costs and benefits of redesigning our
products to incorporate alternative components. If any sole or limited source
components should become unavailable, we believe that we could design similar
functionality into our products using other components, although the amount of
time and effort required could vary widely depending on the function and
complexity of the component.

COMPETITION

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. Our
network intelligence solutions principally compete with products offered by
Agilent Technologies and, to a lesser extent in specific geographical areas,
Acterna, Nettest, Tekelec and Tektronix. The market for our business
intelligence solutions is somewhat new and extremely fragmented, and there is
not a group of competitors that offers an entire suite of applications such as
ours. As a result, we compete with various companies on an
application-by-application basis, including companies listed as competitors in
our network intelligence solution area, and other companies whose main business
is geared towards billing and customer care solutions. Our diagnostics solutions
principally compete with products offered by Agilent Technologies, Catapult
Communications, Tekelec and Tektronix.

16

We believe that our ability to compete successfully depends on numerous
factors, both within and outside our control, including: responsiveness to
customer needs; our ability to support existing and new industry standards; the
development of technical innovations; the attraction and retention of qualified
personnel; regulatory changes; the quality, reliability and security of our
products and services and our competitors' products and services; sufficient
market presence by us; ease of use of our products; the pricing policies of our
competitors and suppliers; the timing of introductions of new products and
services by us and our competitors; and general market and economic conditions.

PROPRIETARY RIGHTS

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.
We hold several U.S. patents, and although we have additional patent
applications pending and are in the process of preparing additional patent
applications for filing, there can be no assurance that we will be granted
additional patents. 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.

We rely upon certain software that we license from Oracle, Cognos Corporation
and other third parties, including software that is integrated with our
internally developed software and used in our products to perform key functions.

The trademarks Inet, Inet Technologies, Destination Quality Verifier,
GeoProbe, GeoProbe Mobile, GeoBill, GeoCare, GeoConnect, GeoRoam, IT:seven,
Spectra, Spectra Trunk Tester and Spectra2 MG used herein are registered or
unregistered trademarks owned by us.

EMPLOYEES

As of December 31, 2001, we had 524 employees, of which 284 were engaged in
research and development, 75 were engaged in sales and marketing, 117 were
engaged in operations and 48 were engaged in administrative and other business
support functions. We believe we have experienced good employee relations to
date.

ITEM 2. PROPERTIES.

We are headquartered in Richardson, Texas, under a lease that expires in
2010. In the U.S., we also lease offices for sales personnel in California,
Georgia, Indiana, Maryland, New Jersey, Pennsylvania and Washington. These
leases expire on various dates through 2002. Outside the U.S., we lease offices
near London, England and near Frankfurt, Germany, for product service and sales
personnel, and in Roissey, France, for sales personnel. These leases expire on
various dates through 2005.

ITEM 3. LEGAL PROCEEDINGS.

We are involved in various legal proceedings and claims that arise in the
normal course of our business. While many of these matters involve inherent
uncertainty, our management believes that the amount of the liability, if any,
ultimately incurred by us with respect to any existing proceedings and claims,
net of applicable reserves and available insurance, will not materially harm our
business, financial condition or results of operations.

17

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the fourth
quarter of 2001.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

Our common stock trades publicly on the Nasdaq Stock Market under the symbol
"INTI." The following table sets forth, for the periods indicated, the high and
low sales prices for our common stock as reported on the Nasdaq Stock Market.

On February 26, 2002, the last reported sales price of our common stock on the
Nasdaq Stock Market was $10.20 per share. As of February 26, 2002, there were
approximately 125 stockholders of record (not including beneficial holders of
stock held in street name) of our common stock.

We have never paid cash dividends on our common stock and do not intend to
pay cash dividends on our common stock in the foreseeable future. Future
dividends, if any, will be determined by our board of directors.

18

ITEM 6. SELECTED FINANCIAL DATA.

The selected consolidated financial data below should be read in conjunction
with Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and our consolidated financial statements included in
Part IV, Item 14.

- ------------------
(1) Includes a gain of $5.9 million from the sale of our wireless data assets in
September 1999.

(2) See Note 1 to our consolidated financial statements for the determination of
shares used in computing basic and diluted earnings per share.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

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

19

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 indicated, the percentage of
total revenues represented by certain items reflected in our consolidated
statements of operations:

* Includes a gain of $5.9 million from the sale of our wireless data
assets in September 1999.

REVENUES

PRODUCT AND LICENSE FEES. Revenues from product and license fees decreased
40.2% to $84.1 million in 2001 from $140.6 million in 2000, and increased 41.1%
in 2000 from $99.6 million in 1999. In 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 was primarily driven by the general slowdown in the
economy, and the

20

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 are typically stable, which was the case in 2001. In 2000, the
growth in revenues from product and license fees was primarily due to an
increase in our installed customer base for our network intelligence
solutions and an increase in unit sales of our diagnostics solutions.

SERVICES. Revenues from services increased 24.2% to $22.9 million in 2001
from $18.4 million in 2000, and increased 77.9% in 2000 from $10.4 million in
1999. 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. In 2001, we added
approximately 15 new network intelligence and business intelligence solutions
customers. In 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 from 2000 to 2001 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. In 2001, revenues from Deutsche Telekom
accounted for approximately 12% of total revenues. In 2000, revenues from
British Telecom and Worldcom each accounted for approximately 13% of total
revenues. No individual customer accounted for 10% or more of total revenues
in 1999. 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. International revenues accounted for 61.7% of
total revenues in 2001, 55.8% of total revenues in 2000 and 51.7% of total
revenues in 1999. Revenues from EMEA accounted for 51.9% of total revenues in
2001, 44.9% of total revenues in 2000 and 39.9% of total revenues in 1999.
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. In 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 $34.7 million in 2001, $32.6 million in 2000 and $24.7
million in 1999, representing 41.3% of product and license fees revenues in
2001, 23.2% of product and license fees revenues in 2000 and 24.8% of product
and license fees revenues in 1999. During 2001, the increase in absolute
dollars over the prior year was primarily due to increased personnel
expenses, increased expenses associated with a higher level of installation
contract labor and increased reserves for excess and obsolete inventory,
mitigated somewhat by decreased hardware costs attributable to lower sales
volumes. The increase in 2001 as a percentage of product and license fees
revenues was primarily attributable to these same factors as well as the
decreased level of revenues. During 2000, the increase in absolute dollars
over the prior year resulted primarily from additional hardware costs and
related installation expenses associated with increased sales volumes. The
decrease as a percentage of product and license fees revenues in 2000 was
primarily attributable to a higher percentage of revenues being derived from
more profitable expansions of existing systems versus new system
installations. New product offerings or changes in our product mix, in terms
of

21

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 $8.9 million in 2001, $8.6
million in 2000 and $7.0 million in 1999, representing 38.6% of services
revenues in 2001, 46.4% of services revenues in 2000 and 67.6% of services
revenues in 1999. 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 this variability will 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 were $39.3 million in 2001, $34.0 million in 2000 and $21.8
million in 1999, representing 36.8% of total revenues in 2001, 21.3% of total
revenues in 2000 and 19.8% of total revenues in 1999. The increase in
absolute dollars in 2001 compared to 2000 was primarily due to increased
average headcount, higher average wage levels required to retain qualified
technical and engineering personnel and greater use of Epygi Technologies,
Ltd. for third-party research and development services. The increase as a
percentage of total revenues in 2001 was attributable to these same factors
coupled with the decreased level of revenues. The increase in absolute
dollars and as a percentage of total revenues in 2000 compared to 1999 was
primarily related to increased average headcount. 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 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. Sales and marketing
expenses were $18.8 million in 2001, $20.3 million in 2000 and $12.6 million
in 1999, representing 17.6% of total revenues in 2001, 12.8% of total
revenues in 2000 and 11.5% of total revenues in 1999. The decrease in
absolute dollars in 2001 compared to 2000 was primarily attributable to a
decrease in sales commissions, due to lower order levels, and cost reduction
efforts primarily related to promotional activities. The increase as a
percentage of total revenues in 2001 was primarily attributable to the
decreased level of revenues. The increase in absolute dollars and as a
percentage of total revenues in 2000 compared to 1999 was primarily
attributable to higher average headcount, increased commissions, expansion of
international sales activities and increased marketing and promotional
activities.

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. General
and administrative expenses were $9.7 million in 2001, $12.3 million in 2000
and $9.0 million in 1999, representing 9.0% of total revenues in 2001, 7.8%
of total revenues in 2000 and 8.2% of total revenues in 1999. The decrease in
absolute dollars in 2001 compared to 2000 was primarily related to decreased
incentive compensation, decreased average headcount and decreased
professional fees. The increase as a percentage of total revenues in 2001 was
attributable to the decreased level of revenues. The increase in absolute
dollars in 2000 compared to 1999 was primarily attributable to increased
average headcount and facility-related expansion efforts associated with the
growth of our business. General and administrative expenses decreased as a
percentage of total revenues during 2000 primarily due to higher revenues.

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RESTRUCTURING COSTS. 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 December 31, 2001,
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 December 31, 2001, the balance of these
costs that remained to be paid totaled approximately $0.3 million, consisting
primarily of employee severance, professional fees and costs related to
excess facilities. We expect to substantially pay these amounts prior to June
30, 2002.

OTHER INCOME

Other income is primarily interest income earned on our cash and cash
equivalents. Other income was $5.3 million in 2001, $8.2 million in 2000 and
$9.9 million in 1999. The decrease during 2001 compared to 2000 was primarily
attributable to the overall decrease in interest rates paid on our
investments. In 2001, we recognized a return on our average cash balance of
3.7% compared to 6.0% in 2000. The decrease in 2000 compared to 1999 resulted
from a $5.9 million gain on the sale of our wireless data assets realized in
1999. Excluding this gain, the increase in other income in 2000 resulted from
increased interest earned on higher average balances of cash and cash
equivalents, which resulted from proceeds from our May 1999 initial public
offering, proceeds from the issuance of stock under our employee stock option
and stock purchase plans and increased income from operations.

PROVISION FOR INCOME TAXES

We recorded an income tax benefit of $1.3 million in 2001 compared to
income tax expense of $19.9 million in 2000 and $15.0 million in 1999. Our
effective income tax rates were (117.6%) in 2001 and 33.5% in 2000 and 1999.
The effective annualized tax rate for 2001 differed from the 35% statutory
corporate tax rate primarily due to our lower level of income combined with
the effect of tax benefits such as the utilization of the research and
development tax credit. In 2000, the effective tax rate benefit of 1.5%
varies from the U.S. statutory rate primarily due to the effect of our
foreign sales corporation and the utilization of the research and development
tax credit.

We recorded a tax benefit resulting in related net deferred tax assets of
$2.1 million as of December 31, 2001, reflecting 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

23

differences in the timing or amount of future reversals of existing deferred
tax liabilities or changes in the actual amounts of future taxable income.

SALE OF INET GLOBAL RESEARCH, L.L.C.

Effective January 1, 2000, we sold our membership interest in Inet Global
Research, L.L.C. to Epygi Technologies, Ltd., or Epygi, an entity controlled
by Samuel S. Simonian, one of our founders and the chairman of our board, for
a cash purchase price of $82,000. No gain or loss was recorded for the sale.
This transaction was approved by the independent members of our board of
directors. Epygi is currently performing development services for us for
which it is paid a monthly fee per full-time programmer plus reimbursement of
reasonable business expenses. We paid approximately $1.6 million for these
services for the year ended December 31, 2001, and approximately $0.7 million
for the year ended December 31, 2000.

SALE OF WIRELESS DATA ASSETS

In September 1999, we sold our wireless data product line and related
assets to Nextcell, Inc. (now known as Enfora, Inc.), an entity controlled by
Mark A. Weinzierl, one of our founders and a director, for a cash purchase
price of $7.0 million. A special committee of our independent directors
approved the transaction. In 1999, we recorded a pre-tax gain of $5.9 million
and an after-tax gain of $3.9 million, or $0.09 per share on a diluted basis.
Excluding the gain on the sale of the wireless data assets, our diluted
earnings per share were $0.57 for 1999. Revenues from the wireless data
product line were approximately $1.7 million from January 1, 1999, through
the date of sale.

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 December 31, 2001, we had working capital of $170.1 million
compared to $167.2 million at December 31, 2000. We had $154.9 million in
cash and cash equivalents at December 31, 2001, an increase of $23.5 million
from $131.4 million in cash and cash equivalents at December 31, 2000. At
December 31, 2001, we had no long-term debt.

Cash provided by operating activities was $28.9 million in 2001, $13.9
million in 2000 and $48.1 million in 1999. Operating cash flows in 2001
increased primarily due to collections on trade accounts receivable and
receipt of an income tax refund. Operating cash flows in 2000 decreased
primarily due to increased accounts receivable, increased inventory and
increased income taxes receivable.

Cash used in investing activities was $8.5 million in 2001 and $14.2
million in 2000 compared to cash provided by investing activities of $1.8
million in 1999. Net cash used in investing activities in 2001 and 2000 was
related to purchases of property and equipment. Net cash provided by
investing activities in 1999 resulted from proceeds from the sale of our
wireless data assets of $7.0 million less cash used to purchase property and
equipment of approximately $5.2 million.

Financing activities provided cash of $3.0 million in 2001, $3.8 million
in 2000 and $56.1 million in 1999. Net cash provided by financing activities
in 2001 and 2000 related to proceeds from the issuance of stock under our
employee stock option and stock purchase plans. Net cash provided by
financing activities in 1999 resulted primarily from proceeds from our
initial public offering.

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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.

At December 31, 2001, we had material commitments for our operating leases,
as described in Note 7 to our consolidated financial statements, including
commitments of approximately $5.5 million relating to 2002. We currently have no
material commitments for capital expenditures. In 2002, we expect capital
expenditures to be similar to levels experienced in 2001.

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 2002. Thereafter, 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

25

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 would not be able to recognize revenue until all elements of
the arrangement were delivered. This occurrence could materially impact our
financial results because of the significant dollar amount of many of our
contracts and the significant portion of total revenues that a single contract
may represent in any particular period.

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. Favorable changes
in estimates result in improved gross margins, and unfavorable changes in
estimates result in lower gross margins. Anticipated losses on fixed-price
contracts are recognized through cost of revenues when estimable. Less than 5%
of our revenues from 2001, 2000 and 1999 was attributable to contracts under
percentage-of-completion accounting. Had our estimates of the costs to complete
all contracts accounted for under percentage-of-completion accounting been 1%
higher at December 31, 2001, our gross margins would have been unfavorably
impacted by approximately $0.1 million. 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

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

26

uncollectible accounts and our allowance has been less than 5% of recorded
receivables. If the current downturn in the telecommunications industry
continues, the financial condition of our customers could deteriorate and they
may not be able to meet their financial obligations to us. If this were to
occur, the net value realized from our receivables may be materially different
from the net balance recorded on our balance sheet.

INVENTORY RESERVES

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

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. 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. At December 31, 2001, we did not have any goodwill or
intangible assets which will be subject to SFAS 142 and, accordingly, adoption
of these standards will not have a material effect on our financial statements.

In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, which we adopted 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. We do not expect the
adoption of SFAS 144 to have a significant effect on our financial condition and
results of operations.

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. 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.

27

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.

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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 2001, approximately 55% of our revenues
were derived from 10 customers, with Deutsche Telekom accounting for
approximately 12% of total revenues, and in 2000, approximately 50% of our
revenues were derived from 10 customers, with British Telecom and Worldcom
each accounting for approximately 13% of total revenues. We have historically
experienced similar 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 number of customers, including those listed
above, 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 or complete the purchase of additional products.

29

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,
insufficient resources or other issues, and lengthening of implementation
schedules due to the introduction of new features or applications, could
materially harm our financial results. With respect to contracts providing for a
significant payment or performance milestone tied to customer acceptance or
allowing customer return, termination or similar rights prior to acceptance,
revenue will generally not be recognized until acceptance. For new products, we
typically recognize revenue upon acceptance until a track record of acceptance
is achieved, after which revenue recognition generally is tied to the completion
of installation. In cases where the recognition of revenue is tied to customer
acceptance, the failure to obtain acceptance or delayed acceptance could harm
our expected financial results for a particular period. Additionally, we may be
subject to penalties for a failure to meet contractually agreed upon milestones
or deadlines.

ANY REVERSAL OR SLOWDOWN IN DEREGULATION OF TELECOMMUNICATIONS MARKETS COULD
MATERIALLY HARM THE MARKETS FOR OUR PRODUCTS.

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

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THE SALES CYCLE FOR OUR PRODUCTS IS LONG, WHICH COULD HARM OUR QUARTERLY
FINANCIAL RESULTS.

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

ANY DECREASE IN DEMAND FOR OUR PRODUCTS WOULD SIGNIFICANTLY DECREASE
OUR SALES.

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

INCREASED COMPETITION COULD RESULT IN PRICE REDUCTIONS, REDUCED MARGINS AND
LOSS OF MARKET SHARE.

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

OUR BUSINESS DEPENDS ON RETAINING OUR EXISTING KEY PERSONNEL.

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

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WE MAY BE UNABLE TO ADAPT TO RAPID TECHNOLOGICAL CHANGE AND EVOLVING CUSTOMER
REQUIREMENTS.

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

- 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.

We expect carrier spending for legacy networks to decrease over time, 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;

32

- 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

33

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

34

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

35

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 76% OF OUR COMMON STOCK, WHICH ALLOWS
THEM TO CONTROL THE MANAGEMENT AND AFFAIRS OF OUR COMPANY AND PREVENT A CHANGE
OF CONTROL.

As of December 31, 2001, our three founders, Samuel S. Simonian, Elie S.
Akilian and Mark A. Weinzierl, beneficially owned approximately 76% 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;

36

- 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 7A. 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 61.7% of total revenues in
2001, 55.8% of total revenues in 2000 and 51.7% of total revenues in 1999, to
date, less than 1.0% of international 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. We expect that
in future periods a greater portion of international revenues may 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 7 -- "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 $1.5 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See our consolidated financial statements included in Part IV, Item 14.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

37

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information called for by Item 10 will be included under "ELECTION OF
DIRECTORS", "EXECUTIVE COMPENSATION" and "SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" in our definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders, which information is incorporated in this Annual Report
by reference.

ITEM 11. EXECUTIVE COMPENSATION.

Information called for by Item 11 will be included under the caption
"EXECUTIVE COMPENSATION" in our Proxy Statement for the 2002 Annual Meeting of
Stockholders, which information is incorporated in this Annual Report by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information called for by Item 12 will be included under the caption
"PRINCIPAL STOCKHOLDERS" in our Proxy Statement for the 2002 Annual Meeting of
Stockholders, which information is incorporated in this Annual Report by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information called for by Item 13 will be included under the caption "CERTAIN
TRANSACTIONS WITH MANAGEMENT" in our Proxy Statement for the 2002 Annual Meeting
of Stockholders, which information is incorporated in this Annual Report by
reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.

(a) (1) CONSOLIDATED FINANCIAL STATEMENTS

The following consolidated financial statements are filed as part of
this Annual Report on the pages indicated:

38

Schedules other than those listed are omitted as the required information
is inapplicable or the information is presented in the consolidated
financial statements or related notes.

(3) EXHIBITS

The following exhibits are incorporated in this Annual Report by reference
or are filed with this report as indicated below. The exhibits filed with
this report have been included only with the copy filed with the
Securities and Exchange Commission. Copies of exhibits will be furnished,
upon request, subject to payment of a reasonable fee to reimburse us for
our reproduction costs.

------------
(1) Previously filed as an exhibit to the registrant's
Registration Statement on Form S-1 (Reg. No.
333-59753) and incorporated herein by reference.
(2) Previously filed as an exhibit to the registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000 and incorporated herein by reference.
(3) Filed herewith.
(4) Previously filed as an exhibit to the registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 and incorporated herein by reference.
(5) Previously filed as an exhibit to the registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and incorporated herein by
reference.
(6) Previously filed as an exhibit to the registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 and incorporated herein by
reference.
(7) Management contract or compensatory plan or
arrangement required to be filed

39

as an exhibit to this form pursuant to Item 14(c) of
Form 10-K.

(b) Reports on Form 8-K

We did not file any Current Reports on Form 8-K during the fourth quarter
of 2001.

40

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: February 27, 2002 By: /s/ Elie S. Akilian
--------------------------------
Elie S. Akilian
President, Chief Executive Officer
and Director
(Principal executive officer)

POWER OF ATTORNEY

Each person whose signature appears below hereby authorizes and constitutes
Mark H. Kleinman and Jeffrey A. Kupp, and each of them singly, his true and
lawful attorneys-in-fact with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities to sign and file
any and all amendments to this report with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and he hereby ratifies and confirms all that said attorneys-in-fact or any of
them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Date: February 27, 2002 By: /s/ Samuel S. Simonian
------------------------------------------
Samuel S. Simonian
Chairman of the Board

Date: February 27, 2002 By: /s/ Elie S. Akilian
------------------------------------------
Elie S. Akilian
President, Chief Executive Officer
and Director
(Principal executive officer)

Date: February 27, 2002 By: /s/ William H. Mina
------------------------------------------
William H. Mina
Senior Vice President,
Administration and Legal Affairs
and Director

41

Date: February 27, 2002 By: /s/ Jeffrey A. Kupp
------------------------------------------
Jeffrey A. Kupp
Vice President and Chief Financial Officer
(Principal financial and accounting officer)

Date: February 27, 2002 By: /s/ Mark A. Weinzierl
------------------------------------------
Mark A. Weinzierl
Director

Date: February 27, 2002 By: /s/ James R. Adams
------------------------------------------
James R. Adams
Director

Date: February 27, 2002 By: /s/ Grant A. Dove
------------------------------------------
Grant A. Dove
Director

Date: February 27, 2002 By: /s/ George H. Heilmeier
------------------------------------------
George H. Heilmeier
Director

42

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Inet Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Inet
Technologies, Inc., or the Company, as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Inet Technologies,
Inc. at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

/s/ Ernst & Young LLP

Dallas, Texas
January 18, 2002

F-1

INET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

ASSETS

See accompanying notes to consolidated financial statements.

F-2

INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

F-3

INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes to consolidated financial statements.

F-4

INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

F-5

INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 or
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.

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.

INVENTORIES

Inventories are valued at the lower of standard cost, which approximates
actual cost determined on a first-in, first-out basis, or market. Inventories
consist of the following (in thousands):

DECEMBER 31,
----------------
2001 2000
------- ------

Raw materials.......... $6,923 $4,183
Work-in-process........ 615 241
Finished goods......... 4,916 4,957
------- ------
$12,454 $9,381
======= ======

F-6

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.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation and
amortization and are depreciated on a straight-line basis over their estimated
useful lives, as follows:

Computers and other equipment...... 3-5 years
Software........................... 3 years
Office furniture and fixtures...... 7 years
Leasehold improvements............. Term of lease

RESEARCH AND DEVELOPMENT EXPENDITURES

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 capitalized
until the product is available for general release to customers. To date, either
the establishment of technological feasibility of our products and their general
release have substantially coincided, 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.
Research and development expenditures, including software development, are
charged to expense in the period incurred.

REVENUE RECOGNITION

Effective January 1, 2000, we adopted Statement of Position, or SOP, 98-9,
MODIFICATION OF SOP 97-2, `SOFTWARE REVENUE RECOGNITION' WITH RESPECT TO CERTAIN
TRANSACTIONS, which did not require a significant change to our revenue
recognition policies. In December 1999, the Securities and Exchange Commission,
or SEC, issued Staff Accounting Bulletin, or SAB, No. 101, REVENUE RECOGNITION
IN FINANCIAL STATEMENTS, which we adopted in the fourth quarter of 2000
retroactive to January 1, 2000. The adoption of SAB 101 did not materially
affect our revenue recognition policies.

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

F-7

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 operations.

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. Favorable changes in estimates result in
improved gross margins, and unfavorable changes in estimates result in lower
gross margins. Anticipated losses on fixed-price contracts are recognized
through cost of revenues when estimable. Less than 5% of our revenues in 2001,
2000 and 1999 was attributable to contracts under percentage-of-completion
accounting.

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.

STOCK OPTIONS

We have elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, or APB 25, in accounting for our
employee stock options. Under APB 25, if the exercise price of an employee's
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

Effective July 1, 2000, we adopted Financial Accounting Standards Board
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION, or FIN 44, an interpretation of APB 25, which requires changes to
previous practice regarding the accounting for certain stock compensation
arrangements. FIN 44 does not change APB 25's intrinsic value method, under
which compensation expense is generally not recognized for grants of stock
options to employees with an exercise price equal

F-8

to the market price of the stock at the date of grant, but FIN 44 has narrowed
the application of ABP 25. Adoption of FIN 44 did not have a significant effect
on our results of operations.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject us to concentration of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. All cash equivalents are maintained with nationally recognized
financial institutions, which are insured to lessen the risk of loss.

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.

RISKS AND UNCERTAINTIES

Our future results of operations and financial condition could be impacted by
the following factors, among others: our dependence on the communications
industry; the pace of deregulation of the telecommunications market; general
economic conditions; market growth for current- and next-generation network
solutions; lengthy sales cycles for our products; any delays in product
implementations; customer and sector revenue concentrations; the highly
competitive marketplace in which we operate; our dependence on key personnel,
rapid technological change and our need to continually develop new products; the
significance of our international operations; proprietary rights of us or others
and any product liability.

COMPREHENSIVE INCOME

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

EARNINGS PER SHARE

Basic earnings per common share data is computed using the weighted-average
number of common shares outstanding for the relevant period. Diluted earnings
per common share data is computed using the weighted-average number of common
shares outstanding plus common share equivalents represented by stock options
and purchase rights, if such stock options and purchase rights have a dilutive
effect in the aggregate.

F-9

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

Outstanding employee stock options to purchase 2,194,397 shares at December
31, 2001, 370,196 shares at December 31, 2000 and 72,450 shares at December 31,
1999, were not included in the respective earnings per share calculations
because the effect of their inclusion would have been anti-dilutive.

DERIVATIVES

On January 1, 2001, we adopted Statement of Financial Accounting Standards,
or SFAS, No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
as amended. SFAS 133 requires that all derivatives be recognized at fair value
on the balance sheet, and that the corresponding gains or losses be included in
comprehensive income, depending on the type of hedging relationship that exists.
To date, we have not entered into contracts that would be classified as
derivative financial instruments under SFAS 133. However, we may enter into
contracts that are classified as derivative financial instruments in the future.
Adoption of SFAS 133 did not have an impact on our results of operations or our
financial position. We cannot estimate its impact on our future results of
operations or our financial position.

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. 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. At December 31, 2001, we did not have any goodwill or
intangible assets which will be subject to SFAS 142 and, accordingly, adoption
of these standards will not have a material effect on our financial statements.

F-10

In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, which we adopted 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. We do not expect the
adoption of SFAS 144 to have a significant effect on our financial condition and
results of operations.

NOTE 2 - RELATED PARTY TRANSACTIONS

Effective January 1, 2000, we sold our membership interest in Inet Global
Research, L.L.C. to Epygi Technologies, Ltd., or Epygi, an entity controlled by
Samuel S. Simonian, one of our founders and the chairman of our board, for a
cash purchase price of $82,000. No gain or loss was recorded for the sale. This
transaction was approved by the independent members of our board of directors.
Epygi is currently performing development services for us for which it is paid a
monthly fee per full-time programmer plus reimbursement of reasonable business
expenses. We paid approximately $1.6 million for these services for the year
ended December 31, 2001, and approximately $0.7 million for the year ended
December 31, 2000.

In September 1999, we sold our wireless data product line and related assets
to Nextcell, Inc. (now known as Enfora, Inc.), an entity controlled by Mark A.
Weinzierl, one of our founders and directors, for a cash purchase price of $7.0
million, resulting in a pre-tax gain of $5.9 million. A special committee of our
independent directors approved the transaction. Revenues from the wireless data
product line were approximately $1.7 million from January 1, 1999, through the
date of sale.

NOTE 3 - RESTRUCTURING COSTS

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 December 31, 2001, 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 December
31, 2001, the balance of these costs that remained to be paid totaled
approximately $0.3 million, consisting primarily of employee severance,
professional fees and costs related to excess facilities. We expect to
substantially pay these amounts prior to June 30, 2002.

F-11

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

NOTE 5 - CREDIT FACILITY

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.

NOTE 6 - INCOME TAXES

Components of the provision (benefit) for income taxes were as follows (in
thousands):

The provision (benefit) for income taxes is reconciled with the federal
statutory rate as follows (in thousands):

F-12

The significant components of our deferred tax assets and liabilities were as
follows (in thousands):

At December 31, 2001, we had tax credit carryforwards for federal income tax
purposes of approximately $1.4 million. These carryforwards will expire in 2020
and 2021 and are restricted to future taxable income. We currently believe it is
more likely than not our deferred income tax assets will be realized in future
periods. Accordingly, we have not recorded a valuation allowance to reduce the
carrying value of these assets.

NOTE 7 - OPERATING LEASES

We lease our corporate office facility as well as certain equipment under
noncancelable operating lease agreements. Rental expense for these operating
leases was $6.0 million in 2001, $3.9 million in 2000 and $1.9 million in 1999.

At December 31, 2001, future minimum lease payments under noncancelable
operating leases were as follows (in thousands):

2002.......... $ 5,468
2003.......... 5,312
2004.......... 5,307
2005.......... 5,535
Thereafter.... 25,823
-------
$47,445
=======

NOTE 8 - STOCKHOLDERS' EQUITY

PREFERRED STOCK

Our board of directors has the authority to issue up to 25,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.

F-13

EMPLOYEE STOCK OPTION AND STOCK PURCHASE PLANS

Our 1998 Stock Option/Stock Issuance Plan, or the 1998 Plan, is our successor
equity incentive program to our 1995 Employee Stock Option Plan, or the 1995
Plan. The 1998 Plan became effective on July 23, 1998 upon adoption by our board
of directors and was subsequently approved by our stockholders on July 23, 1998.
At December 31, 2001, common stock authorized for issuance pursuant to options
granted or available for grant under the 1998 Plan was 5,991,223 shares. The
share reserve automatically increases on the first trading day of January each
calendar year by a number of shares equal to one percent (1%) of the total
number of shares of common stock outstanding on the last trading day of the
immediately preceding calendar year. No such annual increase can exceed 500,000
shares. In no event may any one participant in the 1998 Plan receive option
grants or direct stock issuances for more than 1,000,000 shares in the aggregate
in a calendar year. During the year ended December 31, 2001, all stock options
granted were under the 1998 Plan.

The 1998 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program, under which eligible individuals in our
employ or service (including officers, non-employee directors and consultants)
may, at the discretion of the plan administrator, be granted options to purchase
shares of common stock at an exercise price determined by the plan
administrator, which is generally the fair market value of those shares on the
grant date, (ii) the Stock Issuance Program, under which such individuals may,
in the plan administrator's discretion, be issued shares of common stock
directly, through the purchase of such shares at a price determined by the plan
administrator or as a bonus tied to the performance of services and (iii) the
Automatic Option Grant Program, under which option grants will automatically be
made at periodic intervals to eligible non-employee directors to purchase shares
of common stock at an exercise price equal to 100% of the fair market value of
those shares on the grant date. Generally, options granted under the
Discretionary Option Grant Program become exercisable ratably over a period of
four years and expire ten years from the date of grant. Options granted under
the Automatic Option Grant Program are immediately exercisable, vest ratably
over a period of one or three years, and expire ten years from the date of
grant.

Our 1995 Plan provided for incentive options and nonqualified options that
were granted to our key employees, officers and directors. Options were granted
generally at prices not less than the fair value of our common stock as
determined by our board of directors at the dates of grant. Options granted
under the 1995 Plan vest at rates established by our board and expire ten years
after the date of grant.

Outstanding options under the 1995 Plan have been incorporated into the 1998
Plan, and no further option grants will be made under the 1995 Plan. The
incorporated options will continue to be governed by their existing terms,
unless the plan administrator elects to extend one or more features of the 1998
Plan to those options. However, except as otherwise noted above, the outstanding
options under the 1995 Plan contain substantially the same terms and conditions
summarized above for the Discretionary Option Grant Program in effect under the
1998 Plan.

F-14

Stock option transactions for the years ended December 31, 2001, 2000 and
1999, are summarized as follows:

At December 31, 2001, 867,323 shares were exercisable at a weighted-average
exercise price of $25.23 and 2,185,574 shares were available for future grants
to employees under the 1998 Plan.

Information related to options outstanding at December 31, 2001, is
summarized below:

Our Employee Stock Purchase Plan, or the Purchase Plan, was adopted by our
board of directors and approved by our stockholders on July 23, 1998. The
Purchase Plan provides for the issuance of up to 750,000 shares of common stock.
Eligible employees can have up to 15% of their earnings withheld, subject to
certain limitations, to be used to purchase shares of our common stock on every
January 31st and July 31st. The price of the common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the
common stock on the commencement date of the offering period or the fair market
value of the common stock on the specified purchase date. The Purchase Plan has
been implemented in a series of successive offering periods, each with a maximum
duration of 24 months, except that the initial offering period began on June 1,
1999 and ended on the last business day of July 2001. The next offering period
commenced on the first business day in August 2001, and subsequent offering
periods will commence as designated by the plan administrator. At December 31,
2001, 359,850 shares had been issued under the Purchase Plan.

Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK
BASED COMPENSATION, or SFAS 123, requires the disclosure of pro forma net income
and earnings per share information computed as if we had accounted for our
employee stock options granted subsequent to December 31, 1994 and the Purchase
Plan, under the fair value method set forth in SFAS 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rates of 4.62% for 2001, 6.16% for 2000, and 5.74% for 1999; a dividend
yield of 0% for 2001, 2000 and 1999; and volatility factors of 1.09 for 2001,
1.01 for 2000, and 1.08 for 1999. In addition, the fair value of these options
was estimated based on an expected life of 1.2 years from the vesting date for
2001 and 2000 and one-half year from the vesting date for 1999 using the
multiple option method. The fair value for the purchase rights under the
Purchase Plan was estimated at

F-15

the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions: a risk-free interest rate of 3.02% in
2001, 6.04% in 2000 and 5.81% in 1999; a dividend yield of 0% in 2001, 2000
and 1999; and volatility factors of 1.07 in 2001, 1.05 in 2000 and 1.08 in
1999. In addition, the fair value of these purchase rights was estimated
based on an expected life of 0.50 years for 2001, 0.60 years for 2000 and
0.67 years for 1999.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
our employee stock options and purchase rights have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
our opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options and purchase rights. In
addition, because options vest over several years and additional option grants
and purchase rights are expected, the effects of these hypothetical calculations
are not likely to be representative of similar future calculations.

For purposes of pro forma disclosures, the estimated fair value of the
options and purchase rights is amortized to expense over the options' vesting
period or purchase rights' purchase period. Our pro forma information follows
(in thousands, except for per share information):

NOTE 9 - 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:

We have no significant long-lived assets deployed outside of the U.S.

In 2001, revenues from Deutsche Telekom accounted for approximately 12% of
total revenues. In 2000, revenues from British Telecom and Worldcom each
accounted for approximately 13% of total revenues. No individual customer
accounted for 10% or more of total revenues in 1999. Sales to

F-16

customers in the United Kingdom accounted for approximately 19% of total
revenues in 2001 and approximately 16% in 2000. Sales to customers in Germany
accounted for approximately 14% of total revenues during 2001. No other
individual country accounted for 10% or more of total revenues in 2001, 2000
or 1999.

NOTE 10 - EMPLOYEE BENEFIT PROGRAM

We have a retirement savings plan structured under Section 401(k) of the
Internal Revenue Code, or the Code. The plan covers substantially all employees
meeting minimum service requirements. Under the plan, employees may elect to
reduce their current compensation by up to 15%, subject to certain maximum
dollar limitations prescribed by the Code, and have the amount contributed to
the plan as salary deferral contributions. We may make contributions to the plan
at the discretion of our board of directors. No discretionary contributions were
accrued in 2001. We accrued discretionary contributions to the plan totaling
$2.0 million in 2000 and $1.6 million in 1999.

NOTE 11 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table contains selected financial information from unaudited
consolidated statements of operations for each quarter of 2001 and 2000.

(1) Earnings (loss) per common share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings (loss) per
common share information may not equal the annual earnings per common share
due to rounding differences.
(2) Includes impact of restructuring costs of $1.7 million. See Note 3.
(3) Includes impact of restructuring costs of $526,000. See Note 3.

F-17

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Inet Technologies, Inc.

We have audited the consolidated financial statements of Inet Technologies, Inc.
as of December 31, 2001 and 2000, and for each of the three years in the period
ended December 31, 2001, and have issued our report thereon dated January 18,
2002. Our audits also included the financial statement schedule listed in Item
14 of this Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Dallas, Texas
January 18, 2002

S-1

INET TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2001, 2000 and 1999
(In thousands)

(1) Activity includes uncollectible accounts written off, net of recoveries.

S-2

INET TECHNOLOGIES, INC.
INDEX TO EXHIBITS