S-1 1 s-1.txt FORM S-1 REGISTRATION STATEMENT 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 2000 REGISTRATION NO. 333- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ TELECT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 3661 91-1182148 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)

2111 N. MOLTER ROAD LIBERTY LAKE, WASHINGTON 99019 (509) 926-6000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ WAYNE E. WILLIAMS PRESIDENT AND CHIEF EXECUTIVE OFFICER TELECT, INC. 2111 N. MOLTER ROAD P.O. BOX 665 LIBERTY LAKE, WASHINGTON 99019-0665 (509) 926-6000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JOHN M. STEEL SCOTT L. SIMPSON PATRICK J. SCHULTHEIS MARK F. HOFFMAN CHRISTOPHER J. HOGSTAD LAWRENCE J. STEELE W. MICHAEL HUTCHINGS THOMAS L. MCKEIRNAN CHRISTIAN E. MONTEGUT KIMBERLY A. WATSON PAINE, HAMBLEN, COFFIN, MARK A. CALLON GRAY CARY WARE & BROOKE & MILLER LLP WILSON SONSINI GOODRICH & ROSATI FREIDENRICH LLP 717 W. SPRAGUE AVE., STE. 1200 PROFESSIONAL CORPORATION 999 THIRD AVE., STE. 4000 SPOKANE, WA 99201-3505 5300 CARILLON POINT SEATTLE, WA 98104-4099 KIRKLAND, WA 98033-7356

------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. [ ] _______ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] _______ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] _______ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] _______ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE ------------------------------------------------------------------------------------------------------------ Common stock, par value $0.001 per share.................... $150,000,000 $39,600 ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------

(1) In accordance with Rule 457(o) under the Securities Act, the number of shares being registered and the proposed maximum offering price per share are not included in this table. (2) Estimated solely for the purposes of determining the registration fee pursuant to Rule 457(o) promulgated under the Securities Act. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 30, 2000 [TELECT LOGO] -------------------------------------------------------------------------------- Shares Common Stock -------------------------------------------------------------------------------- This is the initial public offering of Telect, Inc. and we are offering shares of our common stock. No public market currently exists for our common stock. We anticipate the initial public offering price will be between $ and $ per share. We have applied to list our common stock on the Nasdaq National Market under the symbol "TLEC." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

We have granted the underwriters the right to purchase up to additional shares to cover over-allotments. DEUTSCHE BANC ALEX. BROWN CHASE H&Q U.S. BANCORP PIPER JAFFRAY THE DATE OF THIS PROSPECTUS IS , 2000 3 PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that investors should consider before investing in our common stock. Investors should carefully read the entire prospectus, including "Risk Factors" and our financial statements, before making an investment decision. OUR BUSINESS We are a leading provider of broadband connectivity and power distribution products and services for the telecommunications industry. Our products are used primarily in telecommunications network facilities, known as points of presence, that contain network equipment. Points of presence include central offices, or COs, remote offices, or ROs, remote terminals and wireless base stations. We sell our products and services in the United States primarily to telecommunications service providers, including incumbent local exchange carriers, or ILECs, competitive local exchange carriers, or CLECs, original equipment manufacturers, or OEMs, systems integrators, equipment distributors and private network operators. Internationally, we sell our products to OEMs and telecommunications service providers in the public and private telecommunications network markets. Our customers include AT&T, Sprint North Supply, Verizon, Walker and Associates and WorldCom. We offer a range of broadband connectivity and power distribution products and services. Our broadband connectivity products interconnect copper, coaxial cable and fiber optic telecommunications networks and are key elements of COs, ROs, remote terminals and wireless base stations. Our connectivity products are designed to be compact but allow for maximum circuit capacity, which is called density. These products also are designed to be configurable and modular, to facilitate easy integration into existing telecommunications networks. Our power distribution products provide power management throughout COs, ROs and other network points of presence. We also offer engineering, configuration and installation services to assist our customers in configuring telecommunications solutions using our products and integrating these solutions into a telecommunications network. We operate manufacturing facilities in the United States and abroad and also outsource a portion of our manufacturing. Our objective is to become the leading provider of telecommunications network connectivity and power products and services. We plan to achieve this objective by leveraging our technology expertise to continue to develop high-density network connectivity and power distribution equipment for worldwide use. We also plan to increase our manufacturing capacity by expanding our manufacturing facilities and hiring additional operations personnel, and intend to broaden our offerings and are working to develop new products, such as optical components, and expand our global engineering, configuration and installation services. We also intend to expand our global presence by designing and developing localized versions of our products for use in specific global regions and enhancing our relationships with OEMs to develop our product offerings. We sell our products and services worldwide through our direct sales force and domestic and international distributors, as well as through OEMs which incorporate our equipment into the network products and services they offer. We were incorporated in Washington on October 14, 1982. Our principal executive offices are located at 2111 N. Molter Road, P.O. Box 665, Liberty Lake, WA 99019-0665. Our telephone number is (509) 926-6000. Our web site is www.telect.com. The information contained on, or linked to, our web site does not constitute part of this prospectus. Telect(R), Telzon(R) and StarDAX(R) are registered trademarks of Telect, Inc., including our subsidiaries, Telect de Mexico, S.A. de C.V., Telect Polska S.A., Telect do Brasil Ltda., Telect Holdings, Inc., Telect International, Inc., and Telect Mfg. LLC. This prospectus also refers to trademarks and trade names of other organizations. 1 4 THE OFFERING Common stock offered by Telect........................ shares Common stock to be outstanding after this offering......... shares Use of proceeds............... To make a distribution of previously undistributed Subchapter S corporation income of approximately $63 million as of June 30, 2000, to fund our operations, including continued development of existing products and research and development of additional products, to fund potential acquisitions of complementary businesses, technologies or products and for general corporate purposes, including working capital and expansion of our manufacturing facilities. We may also use the net proceeds of the offering to repay some or all of our approximately $27 million of outstanding debt. See "Use of Proceeds" on page 20 for more detailed information. Proposed Nasdaq National Market symbol................. TLEC Unless otherwise indicated, the information in this prospectus assumes that the underwriters do not exercise the over-allotment option granted to them to purchase additional shares in this offering and also assumes a 1,000-for-one stock split that occurred on July 18, 2000. The number of shares of common stock to be outstanding after completion of this offering is based on the number of shares outstanding as of August 15, 2000 and excludes: - 0 --------- shares of common stock issuable on the exercise of stock options outstanding as of August 15, 2000; and - 19,375,500 shares of common stock reserved for issuance under our equity incentive plan and our employee stock purchase plan. 2 5 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA) The information below should be read in conjunction with our consolidated financial statements and the notes thereto and the sections of this prospectus captioned "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" included elsewhere in this prospectus. For all periods presented, we operated as a Subchapter S corporation and were not subject to federal and certain state corporate income taxes. Upon completion of this offering, we will become subject to federal and state corporate income taxes applicable to Subchapter C corporations. Pro forma net income reflects the provision for income taxes that would have been recorded had we been a Subchapter C corporation during the periods presented. Pro forma net income per share is based on the weighted average number of shares of common stock outstanding during the period plus shares, which is the estimated portion of the shares being offered that would be necessary to fund the distribution of previously taxed but undistributed Subchapter S corporation earnings, which is estimated to be approximately $63 million as of June 30, 2000. See "Subchapter S Corporation and Termination of Subchapter S Corporation Status" and notes 2 and 11 of our consolidated financial statements.

3 6 The preceding table summarizes: - Our actual balance sheet as of June 30, 2000. - Our pro forma balance sheet reflecting the declaration and payment of the Subchapter S corporation distribution, estimated to be approximately $63 million as of June 30, 2000. It also reflects the deferred income tax assets and liabilities that would have been recorded at that date had we not elected to be taxed as a Subchapter S corporation. - Our pro forma as adjusted balance sheet reflects our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and our estimated offering expenses. 4 7 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks and uncertainties and the other information in this prospectus before deciding whether to invest in shares of our common stock. Any of the following risks could adversely affect our business, financial condition and operating results as well as adversely affect the value of an investment in our common stock. RISKS RELATED TO OUR BUSINESS WE EXPECT THAT THE RECENT RATE OF GROWTH IN DEMAND FOR OUR PRODUCTS WILL DECLINE, WHICH COULD HARM OUR BUSINESS AND ADVERSELY AFFECT OUR OPERATING RESULTS. Our business depends on continued growth in the telecommunications industry. Demand for broadband connectivity and power distribution products has been growing at an exceptionally high rate in recent periods. We expect the current rate of growth of this demand to subside. In addition, if overall demand for broadband connectivity and power products were to decrease for any reason, our sales would likely decline, and there could be increased price competition among equipment and service providers, which would further decrease our sales, harm our business and operating results and cause our stock price to decline. Demand for broadband connectivity and power products may decline based on a number of factors, including: - a decrease in the rate of network infrastructure build-out, which historically has occurred on a cyclical basis; - a decrease in the number of telecommunications service providers in the United States seeking to collocate their equipment in the central and remote offices of other service providers; - a downturn in the telecommunications industry in general, or in our customers' financial performance; or - a decrease in demand for high-bandwidth applications. We do not know how long the current cycle of network infrastructure build-out might last, or how long the current collocation trend in the United States might continue. Our sales may not continue to grow at the current rate, or they may decline. WE EXPECT OUR GROSS MARGIN TO DECLINE AS OUR BUSINESS EVOLVES, WHICH COULD HARM OUR BUSINESS AND OUR OPERATING RESULTS. We derive a majority of our net sales from our higher-margin digital signal cross-connect, or DSX, products. We expect our gross margin to decrease over time as a result of several factors, including: - the likelihood that demand will subside for our higher-margin DSX products; - our plans to expand our lower-margin product and service offerings; - our plans to increase the percentage of our net sales represented by lower-margin sales to original equipment manufacturer, or OEM, customers; and - price competition, which we expect will increase as the current excess of demand for broadband connectivity and power distribution products subsides. We believe that each of these factors will exert downward pressure on our gross margin in the future. A decrease in our gross margin would adversely affect our operating results and could cause our stock price to decline. 5 8 IF WE DO NOT DECREASE THE TIME IT TAKES US TO FILL OUR CUSTOMERS' ORDERS WE WILL LIKELY LOSE CURRENT AND POTENTIAL FUTURE ORDERS, WHICH WOULD REDUCE OUR SALES AND INCOME. If we do not increase our manufacturing capacity to meet the increasing demand for telecommunications network equipment and the delivery schedules of our customers, our business and operating results may suffer. We believe a customer's selection of telecommunications network equipment is based, in part, on which supplier can supply the requested equipment within the shortest time period. Customers can cancel their purchase orders with us at any time, and we have lost, and may continue to lose, potential or current orders because of our inability to fill orders as quickly as our customers request. During the first half of 2000, the amount of time it took us to fill a customer order increased from approximately one to two weeks to approximately 8 to 12 weeks. In addition, our backlog of unshipped customer orders was approximately $14 million at December 31, 1999 and increased to approximately $42 million at June 30, 2000. We are currently unable to increase our manufacturing capacity, internal or outsourced, at a rate that allows us to keep up with customer orders. Our inability to meet the full demand of our existing customers may cause them to cancel orders or decline to place future orders with us. In addition, our limited manufacturing capacity may inhibit our ability to attract new customers. OUR BUSINESS HAS GROWN RAPIDLY IN THE PAST AND IF WE EXPERIENCE RAPID GROWTH IN THE FUTURE WE MAY HAVE DIFFICULTIES MANAGING THE GROWTH, WHICH COULD HARM OUR BUSINESS. In recent periods, our business has grown more rapidly than our management, operational and financial resources. Insufficient resources could: - prevent or delay expansion of our operations, which would prevent or delay growth of sales and income; - reduce the quality of our products and services, which could cause us to lose sales and income; - reduce the effectiveness of our management, which could harm our operating results; or - prevent or delay development of new or improved products and services, which could cause us to lose sales and income. Within the past five years we have experienced rapid growth and expansion that is straining our resources. For example, in the first six months of 2000, our net sales increased by $51.8 million, a 69.1% increase over our sales levels in the first six months of 1999. In the 12 months ended June 30, 2000, we increased our number of employees from 1,030 to 1,711 and increased our total manufacturing floor space by 125,000 square feet, a 58% increase. This expansion has not simply been increasing volume of manufacturing and sales. It has also been complicated by adding new products and product lines, adding international operations and engaging in acquisitions. In general, we plan to continue to expand our operations rapidly and to significantly add to our infrastructure. This expansion is expected to place a further strain on our management, operational and financial resources, and we may not effectively manage this growth. We will not be able to adequately manage our current growth or anticipated future growth unless we invest substantial amounts of time and capital in and successfully expand: - technical, sales, operations and management personnel; - manufacturing capacity; and - management and operational control systems. Our failure to manage our growth effectively could substantially harm our business and operating results and cause our stock price to decline. 6 9 OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH WOULD LIKELY CAUSE OUR STOCK PRICE TO DECLINE. Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future depending on a number of factors described below and elsewhere in this "Risk Factors" section of the prospectus, including: - the volume and timing of orders from and shipments to major customers; - the timing of and the ability to obtain new customer contracts; - the timing of new product and service announcements by us and our competitors; - the availability of raw materials, particularly copper, brass and ceramics, and fiber optic components; - the availability and cost of key product components; - the ability to deliver products and services on a timely basis; - our manufacturing capacity; - the overall level of capital expenditures by our customers and potential customers; - market acceptance of new and enhanced versions of our products and services; - variations in the mix of products and services we offer; - obsolescence of inventory; and - operating results in the first quarter of the year that tend to be relatively lower than other quarters' results. Due to these and other factors, our operating results could fluctuate substantially in the future, and quarterly comparisons may not be reliable indicators or provide a reliable indication of future performance. If our operating results do not meet or exceed the expectations of securities analysts and investors, our stock price is likely to decline. OUR INABILITY TO OBTAIN NECESSARY COMPONENT PARTS OR RAW MATERIALS FROM SUPPLIERS MAY ADD TO OUR ORDER BACKLOG AND OUR INABILITY TO MEET CUSTOMER DELIVERY TIME DEMANDS, WHICH COULD HARM OUR BUSINESS. The telecommunications industry is currently facing shortages of copper, brass and ceramics, as well as various components used in the manufacture of network equipment. We have in the past experienced difficulties obtaining sheet metal, copper, brass, ceramics, fiber optic cable and some electrical components used to manufacture our products. These shortages reduced our productivity and increased the time required to satisfy customer orders. If suppliers of equipment components and raw materials are unable to meet our demands for these products, we may be unable to meet our customers' demands for our products and may have to delay release of some new products, which would increase our order backlog and could harm our business and operating results. 7 10 EXPANDING OUR MANUFACTURING CAPACITY WILL SUBJECT US TO RISKS OF REDUCED PRODUCT QUALITY AND UNRECOVERED COSTS THAT COULD HARM OUR BUSINESS. We are in the process of expanding, and plan to further expand, our manufacturing capacity by increasing our internal capacity and outsourcing additional manufacturing and product assembly. This expansion subjects us to the following risks: - we may not be able to maintain quality in our products as we increase the volume produced, which could damage our reputation and cause us to lose customers and revenue; and - our efforts to increase capacity involve significant fixed costs and if demand for our products does not cause us to utilize the new capacity, we will not be able to recover the costs of increasing capacity, which could harm our operating results. WE OBTAIN KEY INPUTS FROM SOLE OR LIMITED SOURCES OF SUPPLY WITHOUT LONG TERM CONTRACTUAL COMMITMENTS TO AVAILABILITY OF THE INPUTS. IF THESE SOURCES ARE NO LONGER AVAILABLE, OUR PRODUCTION AND PRODUCT QUALITY MAY DECLINE WHICH COULD HURT OUR RELATIONSHIPS WITH OUR CUSTOMERS AND OUR FINANCIAL RESULTS. We obtain key components for a number of our products from single sources or a small number of sources. These arrangements do not provide us with long-term contractual rights to obtain these inputs. If one or more of these suppliers in the future is unable or unwilling to continue to provide us with inputs meeting our requirements, any of the following consequences could result: - we may not be able to find alternative sources of the inputs in time to prevent decreased production capacity and delayed order fulfillment; - we may not be able to find alternative sources of the inputs on terms that are acceptable to us; - alternative sources for inputs may be more costly; and - alternative sources of inputs may compromise the quality of our products. Any of these consequences could result in customer dissatisfaction, loss of orders and loss of revenues. IF WE DO NOT ATTRACT AND RETAIN ADDITIONAL SKILLED PERSONNEL TO MEET OUR CURRENT AND FUTURE STAFFING NEEDS, WE WILL NOT BE ABLE TO GROW OUR BUSINESS TO MEET CURRENT AND FUTURE DEMAND, WHICH WILL HURT OUR BUSINESS. To successfully satisfy demand for our products, increase our manufacturing capacity and grow our business, we must identify, attract, retain and motivate skilled sales, marketing, technical, administrative and operations personnel. Much of the slowdown in the time it takes to fill our customers' orders is the result of our difficulty in hiring and training new employees, particularly engineering and manufacturing employees, at a sufficient rate to keep up with our growth. As of August 15, 2000, we had approximately 260 outstanding unfilled job openings, and are outsourcing some of our manufacturing and product assembly in response to labor shortages in the telecommunications industry. Competition for highly qualified and experienced personnel is intense due to the limited number of people available with the necessary technical skills. The Spokane, Washington metropolitan area, the location of our largest manufacturing facilities, has a relatively small pool of potential employees with the technical skills that we require. Spokane is also a small city in a relatively rural part of the country, making it more difficult for us to recruit employees from 8 11 larger metropolitan areas of the country where there are larger numbers of people with the technical skills we require. In addition, competition for qualified technical and operations personnel is increasing for our Guadalajara operation due to an increase in other manufacturing plants opening or expanding in the area. Failure to attract and retain the necessary personnel would inhibit our growth and harm our business. IF WE ARE UNABLE TO ANTICIPATE AND ADAPT TO RAPIDLY CHANGING TECHNOLOGY, OUR EXISTING PRODUCTS MAY BECOME OBSOLETE OR UNMARKETABLE. We compete in the market for telecommunications network equipment and services. This market is characterized by rapid technological changes, evolving industry standards, particularly for fiber optic transmission products, changing customer needs and frequent new equipment and service introductions. These changes could make our existing products or products under development obsolete or unmarketable. Our future success will depend, in large part, on our ability to timely and cost-effectively: - respond to emerging industry standards and other technological changes; - develop and enhance our internal technical capabilities and expertise; - broaden our network equipment and service offerings; and - adapt our products and services to new technologies, new markets and new customer requirements as they emerge. If we fail to anticipate or respond on a cost-effective and timely basis to these market changes, our business, operating results and financial condition will be harmed and our stock price will decline. Even if we are successful in developing products in a timely and cost-effective manner to meet these market changes, we may not effectively market those products. Development efforts necessary to meet these technological and market challenges will require us to incur substantial expenses, which will reduce our operating results in the near term. POOR QUALITY PRODUCTION FROM SUBCONTRACTORS COULD DELAY OUR FULFILLMENT OF ORDERS OR RESULT IN DECREASED QUALITY OF OUR PRODUCTS, WHICH WOULD RESULT IN CUSTOMER DISSATISFACTION AND POTENTIAL LOST SALES. Subcontractors perform some aspects of the manufacture of our products. Quality problems with subcontractors could delay production, or degrade the quality, of our products. This could cause customer dissatisfaction and loss of sales and revenues. We have less control over the manufacturing processes of our subcontractors than we have over our own manufacturing processes. This means that we are not able to monitor manufacturing quality as closely as we do with our own manufacturing processes. Also, if a subcontractor experiences quality problems in its manufacturing processes, we may not discover the problem until after the problem components have been incorporated into our products. Additionally, we may not be able to cause the subcontractor to correct the problem in time to prevent delays in production, or at all. INDEPENDENT MANUFACTURERS WITH WHOM WE CONTRACT MAY NOT BE ABLE TO MANUFACTURE OR ASSEMBLE OUR PRODUCTS IN A TIMELY MANNER, WHICH COULD HARM OUR BUSINESS. We currently use several independent manufacturers to assemble and manufacture our products. Our reliance on independent manufacturers involves a number of risks, including the absence of adequate capacity and reduced control over delivery schedules, manufacturing yields and costs. Some of our independent manufacturers may be undercapitalized. Our independent manufacturers may not be able to continue to provide manufacturing services to us. Also, we do not have long-term contractual commitments with our independent manufacturers. They could discontinue providing us manufacturing services at any time. If these independent 9 12 manufacturers are unable or unwilling to continue to manufacture or assemble our products in required volumes, we will have to identify and qualify acceptable additional or alternative manufacturers, which could take in excess of three months. Alternative sources may not be available to us quickly enough to satisfy our production requirements on a timely basis or may not be available to us at all. WE HAVE SIGNIFICANT MANUFACTURING OPERATIONS AND SELL OUR PRODUCTS IN SEVERAL COUNTRIES AND OUR INTERNATIONAL OPERATIONS EXPOSE US TO NUMEROUS RISKS THAT COULD HARM OUR BUSINESS. International sales accounted for approximately 14.2% of our net sales in fiscal 1999, 15.0% of our net sales in fiscal 1998 and 1.0% of our net sales in fiscal 1997. We expect international sales to increase as a percentage of our net sales in the future. In support of our international sales, we operate manufacturing and assembly facilities in Mexico and Poland and plan to develop manufacturing facilities in Brazil and China. Our international sales and international manufacturing operations expose our business to numerous risks that could harm our business, including: - difficulties in managing remote facilities or the need to rely on new, local management; - regional and global economic and market conditions; - regional political instability; - unexpected changes in or impositions of legislative or regulatory requirements; - fluctuations in the exchange rate of the U.S. dollar and other foreign currencies; - tariffs and other barriers and restrictions; - longer payment cycles; - language and cultural differences; - difficulties in enforcing intellectual property and contract rights; - greater difficulty in accounts receivable collection; - potentially adverse taxes; - the burdens of complying with a variety of foreign laws and telecommunications standards; and - risks associated with natural occurrences because our factory in Mexico is in an earthquake zone. Any of these factors could harm our business and operating results. EMPLOYEES AT OUR MEXICO AND POLAND FACILITIES ARE MEMBERS OF LABOR UNIONS. IF THESE EMPLOYEES STRIKE OR TAKE OTHER COLLECTIVE LABOR ACTION, PRODUCTION AT THE AFFECTED FACILITIES COULD BE REDUCED AND CUSTOMERS COULD BECOME DISSATISFIED. A significant number of employees at our facilities in Mexico and Poland are union members and their employment is governed by collective bargaining agreements with those unions. Any collective action by these employees could stop production at the affected facilities. This could prevent us from filling customer orders in a timely manner which could cause customer dissatisfaction and loss of sales and market share. While the collective bargaining agreements for both Mexico and Poland are for indefinite terms, at some point the collective bargaining agreements will be renegotiated. The terms of the renegotiated agreements may be less favorable to us and may increase our production costs. 10 13 WE PLAN TO PURSUE THE ACQUISITION OF NEW AND COMPLEMENTARY BUSINESSES, PRODUCTS AND TECHNOLOGIES TO GROW OUR BUSINESS. UNSUCCESSFUL ACQUISITIONS COULD HARM OUR OPERATING RESULTS, BUSINESS AND GROWTH. We have acquired in the past, and plan to acquire in the future, businesses, products and technologies that complement or augment our existing businesses, services and technologies as opportunities for such acquisitions come to our attention. If we are not able to integrate any newly acquired entities or technologies effectively, our operating results, business and growth could be harmed. Integrating any newly acquired businesses or technologies may be expensive and time consuming, and will divert our management's attention away from our day-to-day operating activities. In addition, acquisition of new businesses, products and technologies can lead to disputes, which will further divert our management's attention. For example, we recently resolved a dispute, and are currently resolving the remaining issues, with a company from which we acquired a product line. To finance any acquisitions, we may need to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms that are not favorable to us and, in the case of equity financings, may result in dilution to our shareholders. We may also not be able to operate any acquired businesses profitably or otherwise implement our business strategy successfully. OUR SUCCESS DEPENDS ON THE CONTINUING CONTRIBUTION OF OUR KEY PERSONNEL, WHO MAY LEAVE US AT ANY TIME, INCLUDING SEVERAL KEY MEMBERS OF OUR MANAGEMENT TEAM, AND OUR ABILITY TO INTEGRATE NEW PERSONNEL. Our future success depends to a significant extent on the continued service of our key technical, sales and senior management personnel. In particular, the loss of the services of Wayne E. Williams, our president and chief executive officer, could harm our business. We do not have employment agreements with any of our key personnel, and they may leave us at any time and compete with us. If we are unable to retain our executive officers and key personnel, the search for replacements could be time consuming and could distract our management team from the day-to-day operations of our business. A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR NET SALES AND THE LOSS OF, OR A REDUCTION IN ORDERS FROM, A KEY CUSTOMER COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR OPERATING RESULTS AND CAUSE OUR STOCK PRICE TO DECLINE. A small number of customers account for a significant portion of our net sales. The loss of any of our key customers could result in lower than expected net sales and cause our stock price to decline. For the fiscal year ended December 31, 1999, sales to our ten largest customers accounted for approximately 59% of net sales. For the six months ended June 30, 2000, sales to our top ten customers were also 59% of net sales. Substantially all of our sales are made on a purchase order basis and most of our customers are not obligated to purchase additional products or services from us or to continue using our products or services. The future loss or deferral of, or any reduction in orders from, one or more significant customers could have a negative impact on our net sales and could harm our business and operating results. OUR PRODUCTS ARE USED BY TELECOMMUNICATIONS SERVICE PROVIDERS THAT INSIST ON HIGHLY RELIABLE PRODUCTS AND ANY DEFECTS OR PERCEIVED DEFECTS IN OUR PRODUCTS COULD GREATLY DAMAGE OUR REPUTATION AND OUR BUSINESS. If we deliver equipment with undetected defects, if our equipment fails, or if our equipment is perceived to be defective, our reputation and equipment sales could suffer. This is especially true because our customers are telecommunications service providers, which insist on high 11 14 standards of quality and reliability from equipment suppliers. Perceived defects in our products could result from any of the following factors: - Our products require customers to conduct occasional maintenance. Failure to do proper maintenance could result in performance problems that could be perceived as defects. - Most of the products we sell are not installed by us and our products work with other equipment in a complex environment that is densely packed with other complex equipment. This can lead to incorrect installation of our products, which could be perceived to be a defect in our products. - Our equipment is often integrated with our customers' equipment, and it can be difficult to identify the source of a problem should one occur. Our equipment may be erroneously identified as the source of a problem caused by equipment other than our own. The occurrence of defects, errors or failures, or perceived defects or errors, could result in delays in installation, product returns, product liability and warranty claims and other losses to us or to our customers. We may be exposed to a higher risk of product defects due to our foreign manufacturing facilities and outsourcing, each of which is more difficult to manage than our domestic manufacturing facilities. We carry insurance policies covering some of these possible liabilities, but these policies may not provide sufficient or any protection should a claim be asserted. A material product liability claim or rejection or return of products, whether successful or not, could be costly, damage our reputation and distract key personnel, any of which could harm our business and operating results. IF WE ARE NOT ABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OUR FINANCIAL CONDITION AND OPERATING RESULTS MAY SUFFER. We seek to protect our intellectual property by relying on a combination of copyright, trademark and trade secret laws, and contractual restrictions. If these efforts are not successful, our competitors will be better able to compete against us. This could reduce our sales and our margins. We hold 25 domestic patents and have filed ten domestic pending patent applications to protect our proprietary technology. We also pursue limited patent protection for some of our technology outside the United States. These pending applications may not be approved or, if approved, may not be issued with the scope of the claims we seek. Also, any patents we receive may be challenged or invalidated, or may otherwise be ineffective in protecting our proprietary technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. We generally enter into confidentiality agreements with all of our employees and consultants. We also limit access to and distribution of our proprietary information. We cannot assure you that we or our customers will continue to take the steps we currently take or that the steps will be adequate to prevent our respective proprietary rights from being compromised, particularly as we increase our foreign operations. Despite our efforts to protect our intellectual property, third parties may obtain or infringe upon our intellectual property. That party might be able to capture a portion of our market and, if they can manufacture less expensively than we do, they could become a price leader in our market, which would reduce our margins and could adversely impact our net sales. For example, we believe a company in Taiwan is manufacturing DSX products based on our DSX designs and is selling them in Taiwan and elsewhere in Asia. These sales are adversely affecting our Taiwanese and other Asian sales. This and other pirating of our intellectual property could adversely affect our business, gross margin and operating results. 12 15 WE HAVE IN THE PAST BEEN INVOLVED IN LITIGATION WITH RESPECT TO OUR INTELLECTUAL PROPERTY RIGHTS AND COULD BE INVOLVED IN SIMILAR LITIGATION IN THE FUTURE, WHICH COULD HARM OUR BUSINESS AND OPERATING RESULTS. We have in the past sued, and have been sued by, third parties concerning our intellectual property rights. New products or technology applications may subject us to patent infringement suits in the future. If we do not prevail, we may be required to pay substantial damages, be required to stop using some of our intellectual property, or be required to pay license fees to a third party to use the intellectual property. Any required licenses, if available, could be very costly. Whether or not we prevail, involvement in litigation can be very expensive and can divert a significant amount of our management's time and could harm our business and operating results. In addition, new product introductions could be delayed until potential patent issues are resolved. IF WE ARE UNABLE TO MEET OUR ADDITIONAL CAPITAL NEEDS IN THE FUTURE, WE MAY NOT BE ABLE TO EXECUTE OUR BUSINESS GROWTH STRATEGY. We currently anticipate that our available cash resources, combined with the net proceeds from this offering, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 18 months. However, our resources may not be sufficient to satisfy our requirements. We may need to raise additional funds sooner than anticipated, through public or private debt or equity financings. Any additional financing we may need might not be available on terms favorable to us, or at all. If we are unable to obtain additional funds on acceptable terms, then we could be unable to: - take advantage of potential business opportunities, including more rapid expansion; - make selective acquisitions of complementary businesses or technologies; - develop and maintain higher working capital levels; - devote more funds to our research and development efforts; or - respond to competitive pressures. If additional funds are raised through the issuance of equity securities, the percentage of ownership of our shareholders will be reduced. Newly issued equity securities may have rights, preferences and financing privileges senior to those of the common shares sold in this offering. The terms of any debt could impose restrictions on our operations and our ability to secure additional financing through equity securities. Debt financing could also require interest payments that could divert cash from other productive uses. IF WE DO NOT MAINTAIN AND STRENGTHEN THE TELECT BRAND, OUR REPUTATION COULD BE ADVERSELY AFFECTED. To increase our customer base, we must maintain and strengthen the Telect brand. To be successful in maintaining our brand, participants in the telecommunications industry must believe that we offer high quality, timely and reliable products and services that will reduce their costs. Our reputation and brand name could be adversely affected if: - we experience difficulties in introducing new products and services; - our products and services are not accepted by customers; - we are unable to deliver our products and services in a timely fashion; - we are required to discontinue existing products and services; or - our products do not function properly. 13 16 OUR FORMER STATUS AS A SUBCHAPTER S CORPORATION COULD EXPOSE US TO LIABILITY IF IT IS DETERMINED THAT WE WERE NOT ENTITLED TO SUBCHAPTER S STATUS. We elected Subchapter S corporation status under the Internal Revenue Code on April 1, 1987, and held such status prior to the completion of this offering. Although we believe that we met the Subchapter S corporation requirements under the Internal Revenue Code for this period, we have not requested, and the Internal Revenue Service has not made, a determination as to our status. If the Internal Revenue Service were to challenge our status and determine that we did not meet the Internal Revenue Code requirements for Subchapter S corporations, we could be liable for unpaid federal and state corporate income taxes for all or a part of the time that we elected Subchapter S corporation status, plus interest and possible penalties. Tax indemnification agreements that we have entered into with our shareholders may not cover all liabilities to which we would be subject. HAZARDOUS SUBSTANCES IN OUR MANUFACTURING PROCESSES OR FACILITIES COULD SUBJECT US TO LIABILITY. We use hazardous substances in our manufacturing processes and have purchased facilities where hazardous substances may have been used in the past. Use of hazardous substances is regulated by federal, state, local and international governments. If we violate these regulations in our handling of hazardous substances or our use of facilities containing hazardous substances, we may face monetary penalties or other legal obligations. We may also have limitations imposed on how we operate our business. If a release of hazardous substances occurs on or from any of the properties that we lease or use, we may be held liable and may be required to pay the cost of remediation and other financial penalties. The amount of any such liability could be material and could harm our business and operating results. Changing regulations could also force us to change material used in some of our products. Such changes could increase our expenses and delay product shipments. RISKS RELATED TO OUR INDUSTRY THE TELECOMMUNICATIONS NETWORK EQUIPMENT AND SERVICES MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND IF WE CANNOT COMPETE EFFECTIVELY, OUR BUSINESS WILL SUFFER. Competition among companies who supply telecommunications network equipment and services to telecommunications service providers is intense. If we are unable to compete effectively against our current or future competitors, our operating results will suffer and our business will be harmed. We currently face competition for the sale of all of our products and services from at least three substantially larger, established telecommunications suppliers: ADC Telecommunications, Inc., Lucent Technologies Inc. and Corning, Inc., which acquired Siecor Corporation and Siecor GmbH, in February 2000. We face competition for our broadband connectivity products and services principally from ADC Telecommunications, Corning and Lucent Technologies. The principal competitors for our power distribution products are Hendry Telephone Products Plc., Marconi Communications Plc., PECO II, Inc., Siemens and TSI, a division of Emerson Electric Co. We expect increased competition from existing competitors and from other companies that may offer new or improved broadband connectivity or power products. Increased competition may result in price reductions, a reduced gross margin and loss of market share. Several of our competitors have significantly greater financial, manufacturing, sales and marketing, technical and labor resources than we do. For example, many of these competitors have the ability to provide customers with end-to-end telecommunications networks and systems, including the network connectivity and power distribution equipment that we provide. As a result, such competitors may be able to respond more rapidly to new or emerging 14 17 technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products, than we can. Such competitors may enter our existing or future markets with solutions that may be less costly, provide higher performance or additional features or may be introduced earlier than our solutions. In addition, some of our competitors are also able to provide purchase financing, which is an increasingly important element of the equipment market. We do not provide purchase financing to our customers. Some of our customers manufacture telecommunications equipment and may in the future decide to manufacture products they have previously purchased from us. In our industry it is often necessary to be on a telecommunications service provider's approved vendor list to sell equipment to that service provider, and most telecommunications service providers typically have only two or three approved vendors for each type of product or service they purchase. Our success will depend on our maintaining approved vendor status with existing customers, as well as obtaining approved vendor status for additional telecommunications service providers. WE DO NOT HAVE LONG-TERM COMMITMENTS FROM OUR CUSTOMERS, SO THEY MAY DISCONTINUE PURCHASING FROM US AT ANY TIME. Virtually all of our customers purchase our products on a purchase order basis, without any contractual commitment to purchase from us in the future. This makes us vulnerable to losing our customers to providers of competing products. CONSOLIDATION IN THE TELECOMMUNICATIONS INDUSTRY COULD REDUCE DEMAND FOR OUR PRODUCTS. In recent years, several telecommunications service providers have been acquired by their competitors. Our contracts do not require that a customer purchase a minimum level of equipment from us. As a result, if one of our customers is acquired by a company that does not buy our products, we may lose that business. Acquisitions have in the past negatively impacted our sales as the merged entities reassessed their collective network equipment. In the future, orders from a customer that acquires, or is acquired by, another company may temporarily decrease or entirely cease as the customer coordinates or streamlines its purchasing efforts. WE SELL OUR PRODUCTS AND SERVICES TO CUSTOMERS THAT ARE SUBJECT TO GOVERNMENT REGULATIONS THAT ARE CHANGING AND THAT COULD REDUCE DEMAND FOR OUR PRODUCTS AND SERVICES. We sell our products and services to customers in the telecommunications industry, which is subject to regulation in the United States and other countries. These regulatory requirements continue to change. It is possible that future changes in regulations applicable to our customers, or future effects from past regulatory changes, could reduce the demand for our products. We cannot accurately predict what the effects of these changes will be. Recent regulatory changes in the United States include the enactment of the Telecommunications Act of 1996. The Telecommunications Act made sweeping changes to the competitive landscape in the telecommunications industry. In addition, in 1999, the Federal Communications Commission, or FCC, issued an order requiring incumbent local exchange carriers, or ILECs, to make new collocation arrangements available to competitive local exchange carriers, or CLECs. Also, when collocation space is exhausted at a particular location, ILECs must permit collocation in adjacent structures. Our success will depend in part on the reaction of our existing and prospective customers to these new regulatory trends. The full impact of these regulatory changes on the market for our products is difficult to predict. Competition in the market for telecommunications network 15 18 equipment could intensify as a result of the changes in regulation. Changes in current or future laws or regulations in the United States or elsewhere could adversely affect our business. MANY OF OUR PRODUCTS REQUIRE GOVERNMENT AND/OR INDUSTRY CERTIFICATION AND OUR BUSINESS COULD BE NEGATIVELY IMPACTED IF CERTIFICATION OF OUR PRODUCTS BY CERTIFICATION AGENCIES IS DELAYED. Many of our products must meet governmental and industry safety requirements, either directly or because our customers are required to comply with safety regulations and require that the products they order from us comply with the regulations. Typically, our products must be compliant with and certified by certifying agencies and bodies, including the Underwriters Laboratories, Canadian Safety Agency, European Conformity and, more recently, the Network Equipment Building Standard and FCC requirements for electro-magnetic emissions from active products. Certification typically requires a company to secure lab time to perform testing on the equipment to be certified. It is often difficult to secure adequate lab time because there are a limited number of labs that are capable of providing certification services. We may not be able to obtain the regulatory approvals and certifications we need to sell our products on a timely basis, or at all. If a product fails these tests, we would incur significant redesign expense and product release would be delayed. If we fail to obtain these approvals and certifications on a timely basis, we would likely lose sales and revenues and our stock price could decline. If any of our approvals or certifications are revoked, we would likely lose a portion of our sales and our business and stock price would likely be harmed. THE SUCCESS OF OUR BUSINESS DEPENDS ON THE SUCCESS OF EMERGING TELECOMMUNICATIONS SERVICE PROVIDERS, WHICH MAY BE UNABLE TO EFFECTIVELY COMPETE AGAINST ESTABLISHED COMPANIES. Some of our customers are emerging telecommunications service providers who compete against existing telephone companies. These new participants only recently began to enter these markets, and many of these service providers are still building their networks and introducing their services. They require substantial capital for the development, construction and expansion of their networks and the introduction of their services. If emerging telecommunications service providers fail to acquire and retain customers or are unsuccessful in raising needed funds or responding to any other trends, such as price reductions for their services or diminished demand for telecommunications services in general, they could be forced to reduce their capital spending programs, which would harm our business. RISKS RELATED TO THIS OFFERING OUR EXECUTIVE OFFICERS AND DIRECTORS WILL HAVE SIGNIFICANT VOTING CONTROL OVER US AND MAY APPROVE OR REJECT MATTERS CONTRARY TO SOME OF OUR SHAREHOLDERS' VOTE. Our executive officers and directors, together with their affiliates, will beneficially own an aggregate of approximately % of our outstanding common stock following the completion of this offering. These shareholders, if acting together, will be able to significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or similar transactions, even if other shareholders disagree. This concentration of ownership may also have the effect of delaying or preventing a change in control, which could result in a lower stock price and prevent shareholders from realizing a premium price for their shares associated with an acquisition. 16 19 WE HAVE BROAD DISCRETION TO USE THE NET OFFERING PROCEEDS AND OUR INVESTMENT OF THESE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN. Our management will have considerable discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. We intend to use the net proceeds from this offering to fund our operations, including continued development of existing products and research and development of additional products, to make a distribution of previously undistributed Subchapter S income of approximately $63 million as of June 30, 2000, to expand our manufacturing facilities, to fund potential acquisitions and for general corporate purposes, including working capital. We may also use the net proceeds of this offering to repay some or all of our approximately $27 million of outstanding debt. The net proceeds of this offering may be used for corporate purposes that do not increase our operating results or our market value. Pending any such uses, we plan to invest the net proceeds of this offering in short-term investment-grade, interest-bearing securities. We cannot predict whether such investments will yield a favorable return. ANTI-TAKEOVER PROVISIONS THAT APPLY TO US COULD DELAY OR PREVENT AN ACQUISITION OF OUR COMPANY. Provisions of our articles of incorporation, bylaws and Washington law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. Provisions with possible anti-takeover effects include those which: - divide our board of directors into three classes; - authorize the issuance of preferred shares that can be created and issued by the board of directors without prior shareholder approval, commonly referred to as "blank check" preferred shares, with rights senior to those of common shares; - prohibit shareholders from calling special meetings; - establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by shareholders at a meeting; and - prohibit transactions, including mergers and asset sales, without approval of our board of directors. See "Description of Capital Stock" for a description of these documents and statutes. OUR SECURITIES HAVE NO PRIOR MARKET, AND OUR STOCK PRICE MAY DECREASE AFTER THIS OFFERING. Our common stock has never been sold in a public market. An active trading market for our common stock may not develop or be sustained after completion of this offering. The initial public offering price may not be indicative of the prices that will prevail in the public market after this offering, and the market price of the common stock could decline below the initial public offering price. WE MAY BE SUBJECT TO COSTLY LITIGATION IF OUR COMMON STOCK PRICE IS VOLATILE. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against companies. The institution of class action litigation against us could result in substantial costs and a diversion of our management's attention and resources, which would harm our business, financial condition and operating results, and cause our stock price to decline. Any adverse determination in such litigation could also subject us to significant liabilities. 17 20 SHARES ELIGIBLE FOR FUTURE SALE AFTER THIS OFFERING COULD CAUSE OUR STOCK PRICE TO DECLINE. If our shareholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline. Such sales might also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock, as potential investors could purchase shares in the public market, instead of directly from us. See "Shares Eligible for Future Sale" for more information regarding future sales of our common stock. WE DO NOT INTEND TO PAY DIVIDENDS OTHER THAN OUR SUBCHAPTER S CORPORATION DIVIDENDS. We have been treated as a Subchapter S corporation for federal income tax purposes since April 1, 1987. We have in the past made annual distributions of cash to shareholders to cover our shareholders' tax liabilities. Our Subchapter S corporation status will terminate immediately prior to the closing of this offering, and in connection with such termination we will distribute approximately $63 million, as of June 30, 2000, in the form of promissory notes to our current shareholders to cover previously undistributed Subchapter S income. Following the offering, we intend to retain any future earnings for funding the development and growth of our business and, therefore, do not expect to pay any dividends in the foreseeable future. NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF THEIR PERCENTAGE INTEREST IN OUR ASSETS. If you purchase shares of our common stock, you will incur immediate and substantial dilution in pro forma net tangible book value. Investors participating in this offering will pay a price per share that substantially exceeds their interests in the value of our assets after subtracting our liabilities represented by the shares they purchase. You will contribute % of the total amount we have received from sales of our stock, but will own only % of our outstanding shares. If the holders of options exercise those options, you will suffer further dilution. You also will suffer additional dilution when shares of common stock are issued under our stock purchase plan. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "intends," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties. Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those we discuss in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of those statements. Before investing in our common stock, you should be aware that the occurrence of the events described under "Risk Factors" and elsewhere in this prospectus could have a material adverse effect on our business, financial condition and operating results. 18 21 SUBCHAPTER S CORPORATION AND TERMINATION OF SUBCHAPTER S CORPORATION STATUS We have been treated as a Subchapter S corporation for federal income tax purposes since April 1, 1987. As a result, we have not been liable for federal and certain state corporate income taxes, and all of our earnings have been subject to federal and certain state income taxation directly at the shareholder level. Our Subchapter S corporation status will terminate immediately prior to the closing of this offering, at which time we will become subject to corporate income taxation under Subchapter C of the Internal Revenue Code and applicable state income tax laws. Pro forma statement of operations data included in this prospectus have been adjusted to include pro forma income tax provisions as if we had been a Subchapter C corporation during the relevant periods. In connection with the closing of this offering, we intend to make a distribution to our shareholders of record on the day prior to the effective date of this offering, in the approximate amount of $63 million as of June 30, 2000. This is the approximate amount of our cumulative Subchapter S income for the period we were a Subchapter S corporation, minus distributions made to our shareholders during that period. The distribution will be made in the form of promissory notes bearing interest at the Bank of America prime rate. The notes will be repaid following consummation of this offering from the net proceeds of this offering. Investors purchasing shares in this offering will not receive any portion of the distribution. We expect to enter into a tax indemnification agreement with our existing shareholders providing for, among other things, the shareholders to indemnify us for any federal and state income taxes, including interest and penalties, incurred by us if for any reason we are deemed to be treated as a Subchapter C corporation during any period in which we reported our taxable income as a Subchapter S corporation. The tax indemnification obligation of each existing shareholder is limited to the aggregate amount of all distributions made to such shareholders by us since the first day of the first tax year that we are deemed to be treated as a Subchapter C corporation. We believe we have met the requirements for a Subchapter S corporation and the tax indemnification agreement will provide for payment by our existing shareholders to us and by us to our existing shareholders to adjust for any increases or decreases in tax liability arising from a tax audit that affects our tax liability and results in a corresponding adjustment to the tax liability of our existing shareholders. The amount of any payment cannot exceed the amount of refund received from the Internal Revenue Service by us or our existing shareholders attributable to the adjustment. 19 22 USE OF PROCEEDS We estimate that our net proceeds from the sale of the shares of common stock we are offering at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses, will be approximately $ . If the underwriters' over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $ . We expect to use the net proceeds from this offering: - to make a distribution of previously undistributed Subchapter S income of approximately $63 million as of June 30, 2000; - to fund our operations, including continued development of existing products and research and development of additional products; - to fund potential acquisitions of complementary businesses, technologies or products, although we have no arrangements or understandings for any acquisitions at this time; and - for general corporate purposes, including working capital and expansion of our manufacturing facilities. We may also use the net proceeds from the offering to repay some or all of our outstanding debt. Our outstanding debt is approximately $27 million as of June 30, 2000. Our management may spend the proceeds from this offering in ways that the shareholders may not deem desirable. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the growth of our business. Until we use the net proceeds from this offering for the above purposes, we intend to invest the funds in short-term, investment grade, interest-bearing securities. We cannot predict whether the proceeds invested will yield a favorable return. DIVIDEND POLICY Except for the Subchapter S corporation distribution and our contractual obligations under the tax indemnification agreement, we do not anticipate declaring or paying cash dividends in the foreseeable future. We currently intend to retain all future earnings, if any, to finance the expansion and continued development of our business. Restrictions or limitations on the payment of dividends currently exist and may be imposed in the future under the terms of credit agreements or under other contractual provisions. In the absence of such restrictions or limitations, the declaration and payment of any dividends will be at the discretion of our board of directors. 20 23 CAPITALIZATION The following table sets forth our capitalization as of June 30, 2000: - on an actual basis; - on a pro forma basis to give effect to the intended distributions to Subchapter S corporation shareholders of approximately $63 million of cumulative undistributed Subchapter S corporation taxable income as of June 30, 2000, for which shareholders of record prior to the closing of this offering have been or will be taxed; and - on a pro forma as adjusted basis to give effect to the sale of shares of common stock by us in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses.

The preceding table is based on shares outstanding as of June 30, 2000. This table does not include 12,917,000 shares of common stock reserved for issuance under our 2000 Equity Incentive Plan and 6,458,500 shares of common stock reserved for issuance under our 2000 Employee Stock Purchase Plan. This table should be read in conjunction with the sections of this prospectus captioned "Subchapter S Corporation and Termination of Subchapter S Corporation Status," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and the related notes included elsewhere in this prospectus. 21 24 DILUTION Our net tangible book value as of June 30, 2000 was approximately $56.0 million, or $0.47 per share of common stock. Net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of common stock outstanding. After giving effect to an estimated Subchapter S corporation distribution of approximately $63 million as of June 30, 2000 to be declared immediately prior to completion of this offering, our net tangible book value at June 30, 2000 would have been $ million, or $ per share. After giving effect to our sale of the shares of common stock offered by this prospectus, based upon the initial public offering price of $ per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value at June 30, 2000 would have been $ million, or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing shareholders and an immediate dilution of $ per share to new investors purchasing shares at the initial public offering price. Dilution is determined by subtracting net tangible book value per share after this offering from the initial public offering price per share. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ ----- Net tangible book value per share as of June 30, 2000..... $0.47 Net decrease per share attributed to Subchapter S corporation distributions.............................. ----- Increase in net tangible book value per share attributable to this offering....................................... ----- Adjusted net tangible book value per share after this offering.................................................. ----- Dilution per share to new investors......................... =====

The following table sets forth, as of June 30, 2000, the difference between the number of shares of common stock purchased from us, the total consideration paid, and the average price per share paid by existing shareholders and by investors purchasing shares in this offering, based upon the initial public offering price of $ per share, before deducting underwriting discounts and commissions and estimated offering expenses and excluding the assumed issuance of shares in connection with the Subchapter S corporation distribution:

If the underwriters' over-allotment option is exercised in full, the number of shares held by new investors will increase to , or % of the total shares of common stock outstanding after this offering. In the event that we issue additional shares of common stock in the future, purchasers of common stock in this offering may experience further dilution. As of June 30, 2000, there were no options outstanding. Subsequent to June 30, 2000, we have reserved 12,917,000 shares of common stock for issuance under our 2000 Equity Incentive Plan and 6,458,500 shares of common stock for issuance under our 2000 Employee Stock Purchase Plan. To the extent the options issuable under our equity incentive plan are exercised, and to the extent common stock is issued pursuant to our stock purchase plan, new investors will experience further dilution. 22 25 SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data should be read in conjunction with the consolidated financial statements and the notes to such statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1995, 1996, 1997, 1998 and 1999, and for each of the six-month periods ended June 30, 1999 and 2000, and the balance sheet data as of December 31, 1995, 1996, 1997, 1998 and 1999, and at June 30, 2000, are derived from our financial statements. The 1997, 1998 and 1999 annual financial statements, which have been audited by Deloitte & Touche LLP, independent auditors, and their related report are included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1995 and 1996 are derived from our historical financial statements not included in this prospectus. In the opinion of management, the unaudited consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements which appear elsewhere in this prospectus and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of the financial position and results of operations for the unaudited periods. Results for the six months ended June 30, 2000 are not necessarily indicative of results for the year. We have been treated as a Subchapter S corporation under the applicable provisions of the Internal Revenue Code since April 1, 1987. As a Subchapter S corporation, we have not been subject to federal and certain state corporate income taxes. Our Subchapter S corporation status will terminate immediately prior to completion of this offering. Therefore, the historical net income and net income per share data set forth below do not include provisions for federal and certain state corporate income taxes. The pro forma income tax expense and pro forma net income data set forth below are unaudited and reflect the provision for income taxes that would have been recorded had we been a Subchapter C corporation. The pro forma balance sheet data set forth below reflects the declaration and payment of the Subchapter S corporation distribution, estimated to be approximately $63 million as of June 30, 2000. It also reflects the deferred income tax assets and liabilities that would have been recorded at that date had we not elected to be taxed as a Subchapter S corporation. 23 26

24 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and notes included elsewhere in this prospectus. The discussion in this prospectus contains forward-looking statements that involve risks, uncertainties and assumptions, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this prospectus. Our actual results may differ materially from those discussed here. Factors that could cause or contribute to the differences include those discussed in "Risk Factors," as well as those discussed elsewhere in this prospectus. OVERVIEW Telect designs, manufactures and deploys network connectivity equipment for the telecommunications industry. Our products monitor, patch and organize copper, commonly referred to as twisted-pair, coaxial cable and fiber optic interconnections in central and remote offices of telecommunications networks. We also provide power distribution and protection equipment for telecommunications networks, as well as engineering, configuration and installation services for our customers. We began business in 1982 as a manufacturer of custom cable assemblies for the telecommunications industry. In response to our customers' needs, we have gradually expanded our product line to include a variety of broadband network connectivity and power distribution products. In 1998 and 1999, we divested certain lines of business, including custom cable assemblies, in an effort to concentrate our focus on connectivity and power distribution products. In March 2000, we acquired the Telzon line of mainframe terminal block products from Thomas & Betts Corporation. We intend to increase our research, development and engineering expenditures in an effort to further broaden our product line to include more fiber optic components and power distribution products. We recently began offering engineering, configuration and installation services through our Integrated Systems Group. Although our service revenues have not been material to date, we intend to expand our global engineering, configuration and installation services in the future. Our primary manufacturing and administrative facilities are located near Spokane, Washington. We have gradually expanded those facilities. In 1998, we opened a manufacturing facility in Mexico and on February 29, 2000, we acquired a manufacturing facility in Poland. We currently occupy approximately 410,000 square feet of manufacturing and administrative space, and expect to increase this to approximately 570,000 square feet by the end of 2000. We sell our products worldwide to telecommunications service providers through direct sales and indirectly through distributors and, to a lesser extent, OEMs. All of our sales, net of discounts, are recognized at the time of shipment to both end-user customers and distributors. We do not have a written return policy and address customer return requests on a case-by-case basis. Historically, returns have been immaterial. We derive a majority of our revenues from the sale of broadband connectivity products. Power distribution products accounted for 14.1% of our net sales in the first six months of 2000, and we expect sales of these products to account for a greater percentage of our net sales in the future. International sales were $0.9 million, $17.3 million and $24.7 million for 1997, 1998 and 1999, and we expect international sales to increase in absolute dollars, and as a percentage of our net sales. Our sales are generally denominated in U.S. dollars. Sales denominated in foreign currencies have not been material, but are expected to increase as we expand our international operations and sales. 25 28 Cost of sales consists primarily of raw materials, labor, shipping and indirect manufacturing expenses associated with the production and packaging of our products. In July 1999, we implemented a cost-reduction program, which included improvements to manufacturing efficiency, inventory management and procurement practices, as well as increased component and manufacturing outsourcing. Our cost of sales as a percentage of net sales varies from quarter to quarter as a result of variations in product mix, raw materials cost fluctuations and adjustments for inventory obsolescence. Research, development and engineering expenses consist principally of the costs of personnel and materials associated with the development of new products and changes to existing products, and are charged to operations as incurred. We engage in applied research programs designed to develop new products and product applications. We also have substantial ongoing product and process improvement engineering and support programs relating to existing products. Selling, general and administrative expenses primarily include salaries and employee benefits, selling commissions, marketing and advertising costs, software license fees, professional and consulting fees, facility lease expenses, travel expenses and depreciation and amortization expense. We have been treated as a Subchapter S corporation for federal income tax purposes since 1987. As a result, we have not been liable for federal and certain state corporate income taxes. Instead, our earnings have been subjected to these income taxes at the shareholder level, and we have made periodic distributions to our shareholders to enable them to pay these taxes. Our Subchapter S corporation status will terminate immediately prior to the closing of this offering, at which time we will become subject to corporate income taxation under Subchapter C of the Internal Revenue Code and applicable state income tax laws. Statement of operations data included in this prospectus have been adjusted to include pro forma income tax provisions as if we had been a Subchapter C corporation during the relevant periods. In connection with the closing of this offering, we intend to make a distribution to our shareholders of record on the day prior to the effective date of this offering, in the approximate amount of $63 million as of June 30, 2000. This is the approximate amount of our cumulative Subchapter S income for the period we were a Subchapter S corporation, minus distributions made to our shareholders during that period. The distribution will be made in the form of promissory notes bearing interest at the Bank of America prime rate. These notes will be repaid following the consummation of this offering from the net proceeds of this offering. Investors purchasing shares in this offering will not receive any portion of this distribution. 26 29 RESULTS OF OPERATIONS The following table shows selected statement of operations data, expressed as a percentage of net sales for the periods indicated:

SIX MONTHS ENDED JUNE 30, 2000 AND 1999 NET SALES. Net sales increased 69.1%, from $75.0 million in the first six months of 1999 to $126.8 million in the first six months of 2000. The increase was primarily due to increased customer demand for our broadband connectivity products, sales of which increased by $41.8 million, or 62.3%, compared to the first six months of 1999. This increase was due in part to orders from CLECs seeking to collocate their switching and transmission equipment in the central and remote offices of traditional wireline carriers, as well as sales of our Telzon product line, which we acquired in March 2000. Sales of our power distribution products in the first six months of 2000 increased by $10.0 million, or 126.4%, compared to the first half of 1999. Historically, we have experienced lower sales growth during the first quarter of the year, including the first quarter of 1999. During the first quarter of 2000, however, we did not experience a seasonal slowdown, which further contributed to the sharp percentage increase in net sales for the first half of 2000 compared to the first half of 1999. We do not believe the current rate of growth of our sales is sustainable, and we expect it to subside as the current cycle of telecommunications infrastructure buildout matures. COST OF SALES. Cost of sales increased 70.0%, from $36.6 million in the first six months of 1999 to $62.2 million in the first six months of 2000. As a percentage of net sales, cost of sales increased slightly, from 48.8% to 49.0%, between the six-month periods, primarily due to a write-off of slow-moving and obsolete inventories in the first six months of 2000, which was partially offset by a shift of product mix between periods to higher-margin products. Gross profit as a percentage of net sales therefore decreased slightly, from 51.2% in the first six months of 1999 to 51.0% in the first six months of 2000. 27 30 Since the end of 1999, we have achieved higher gross margins as a result of a shift toward a higher-margin product mix as well as the effects of our cost-reduction program. In addition, we believe that demand for broadband connectivity and power distribution equipment presently exceeds available supply, and that this has dampened price competition for these products. We anticipate that price competition will intensify in the future, and as a result our gross margins will decline. We also expect that the planned expansion of our offerings to include additional lower-margin products and services, subsiding demand for our higher-margin DSX products, and our efforts to increase lower-margin sales to OEMs will exert downward pressures on our gross margins in the future. RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES. Research, development and engineering expenses increased 79.2%, from $2.4 million in the first six months of 1999 to $4.3 million in the first six months of 2000. This increase was primarily due to an increase in engineering headcount from 68 to 109, resulting in a $1.0 million increase in salaries and related benefits between the two periods, a $0.5 million increase in prototype expenditures, and an increase in travel costs. We plan to continue to increase our expenditures for research, development and engineering in an effort to broaden our product offerings and adapt our products to meet the requirements of an increasing number of OEM customers. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 47.8%, from $18.4 million in the first six months of 1999 to $27.2 million in the first six months of 2000. The increase between periods was primarily due to an increase in the infrastructure required to support the rapid growth of our sales. This includes an increase in sales, marketing and administration headcount from 257 to 390, which resulted in a $4.6 million increase in salaries and related benefits between the two periods. Travel, depreciation and amortization, and miscellaneous expenses accounted for the remainder of the increase between periods. As a percentage of our net sales, selling, general and administrative expenses have decreased over the past several years due to economies of scale that have allowed certain fixed costs to be spread over an increasing sales base. We expect these expenses to increase in the future, in part due to increased administrative costs associated with being a publicly held company; however we expect these expenses to decrease as a percentage of net sales. INTEREST EXPENSE, NET. Interest expense decreased from $1.1 million in the first six months of 1999 to $0.9 million in the first six months of 2000. The decrease was primarily due to increased cash flows from operations in the first six months of 2000, which enabled us to reduce the borrowings under our line of credit. OTHER INCOME (EXPENSE), NET. Other income decreased from $1.6 million in the first six months of 1999 to $0.1 million of expense in the first six months of 2000. The decrease was primarily due to a reduction in patent royalty income from $2.1 million in the first six months of 1999 to $0 in the first six months of 2000 resulting from a $5.0 million lump-sum royalty settlement in the second half of 1999. PRO FORMA NET INCOME. As a result of the factors discussed above, our pro forma net income increased 75.0%, from $11.6 million in the first six months of 1999 to $20.3 million in the first six months of 2000. YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 NET SALES. Net sales increased 38.2%, from $82.9 million in 1997 to $114.6 million in 1998, and by 46.9% to $168.3 million in 1999. The increases during both 1998 and 1999 were primarily due to increased customer demand for our broadband connectivity and power distribution products. Sales of our broadband connectivity products increased by $26.7 million, or 35.0%, in 1998, and by $46.7 million, or 45.4%, in 1999. Sales of our power distribution products increased by $5.0 million, or 75.4%, in 1998, and by $7.0 million, or 60.1%, in 28 31 1999. The percentage of our 1999 net sales derived from our broadband connectivity and power distribution products was 88.9% and 11.1%. See note 12 to our notes to consolidated financial statements. COST OF SALES. Cost of sales increased 36.9%, from $45.8 million in 1997 to $62.7 million in 1998, and by 36.5% to $85.6 million in 1999. As a percentage of net sales, cost of sales decreased from 55.3% in 1997 to 54.7% in 1998, and to 50.9% in 1999. The decrease on a percentage basis during 1998 was primarily due to more efficient utilization of our production facilities resulting in economies of scale and a change in our product mix to lower-cost products. The decrease on a percentage basis during 1999 was primarily attributable to a shift in product mix toward lower cost products, lower labor costs associated with operations in Mexico, as well as the effects of our cost reduction program. As a result of these factors, gross profit as a percentage of net sales increased from 44.7% in 1997 to 45.3% in 1998, and to 49.1% in 1999. RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES. Research, development and engineering expenses increased 14.3%, from $3.5 million in 1997 to $4.0 million in 1998, and by 37.5% to $5.5 million in 1999. The increase in both 1998 and 1999 was primarily due to the hiring of more engineers to develop products, as well as related product development costs and travel expenses. Engineering headcount grew from 58 employees at December 31, 1997 to 74 at December 31, 1999, resulting in increased salaries and related benefits of $0.5 million in 1998 and $0.9 million in 1999. Additionally, prototype product expenses increased in 1999 over 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 34.1%, from $22.3 million in 1997 to $29.4 million in 1998, and by 34.0% to $39.4 million in 1999. The increases in both 1998 and 1999 were primarily due to expansion of our infrastructure to support sales growth. Sales, marketing and administrative salaries, as well as related benefits, increased in both 1998 and 1999 as professional and support staff were added in these areas. The total headcount in sales, marketing and administrative functions increased from 217 at December 31, 1997 to 335 at December 31, 1999, resulting in increased salaries and related benefits of $3.7 million in 1998 and $4.7 million in 1999. Travel, samples, sales commission and advertising also increased with the growth in sales during these periods. As a percentage of our net sales, selling, general and administrative expenses decreased from 26.9% in 1997 to 25.6% in 1998, and to 23.4% in 1999, due to economies of scale that have allowed fixed costs to be spread over an increasing sales base. INTEREST EXPENSE, NET. Interest expense increased from $1.0 million in 1997 to $2.0 million in 1998, and decreased to $1.7 million in 1999. The increase in 1998 was primarily due to increased borrowings under our line of credit necessary to fund increased working capital needs. The decrease in 1999 was primarily due to increased cash flows from operations, which enabled us to reduce our working capital borrowings under our line of credit. OTHER INCOME (EXPENSE), NET. Other income of $1.5 million in 1997 decreased to $0.6 million in 1998, primarily due to a decrease of patent royalty income.* Other income increased to $7.0 million in 1999, primarily resulting from a $5.0 million lump-sum royalty settlement in the second half of 1999 and an increase in patent royalty income. Before the royalty settlement, patent royalty income varied significantly quarter to quarter. PRO FORMA NET INCOME. As a result of the factors discussed above, our pro forma net income increased 25.7%, from $7.4 million in 1997 to $9.3 million in 1998, and by 191.4% to $27.1 million in 1999. 29 32 QUARTERLY RESULTS OF OPERATIONS The following table presents a summary of our consolidated results of operations for our six most recent quarters ended June 30, 2000. The information for each of these quarters is unaudited and has been prepared on a basis consistent with our audited consolidated financial statements appearing elsewhere in this prospectus. This information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for fair presentation of this information when read in conjunction with our audited consolidated financial statements and related notes appearing elsewhere in this prospectus. Statement of operations data included in this table have been adjusted to include pro forma corporate income tax provisions as if we had been a Subchapter C corporation during all of the quarterly periods. Our operating results have varied on a quarterly basis and may fluctuate significantly in the future. Results of operations for any quarter are not necessarily indicative of results for any future quarter or for a full fiscal year.

30 33

LIQUIDITY AND CAPITAL RESOURCES Historically, we have financed our business primarily with cash generated from operations. Temporary working capital needs have been provided by a bank line of credit and term loans. Net cash provided by operations was $30.5 million for the first six months of 2000, and $34.0 million for the twelve months of 1999. Net cash provided by operations during those periods consisted primarily of net income, as adjusted for increases in accounts payable and accrued payroll, partially offset by increases in accounts receivable and inventories. Net cash used for investing activities was $19.7 million for the first six months of 2000, and $5.5 million for the twelve months of 1999. Net cash used for investing activities during those periods consisted primarily of equipment and furniture purchases, as well as acquisitions of the Telzon product line and our Polish manufacturing facility in the first six months of 2000. Net cash used for financing activities was $14.0 million for the first six months of 2000, and $25.8 million for the twelve months of 1999, primarily representing payments of dividends and net borrowings. At June 30, 2000, we had no cash equivalents, due to aggressive cash management designed to minimize line of credit balances. We have an unsecured revolving line of credit with Bank of America with a maximum borrowing limit of $30.0 million, maturing on May 1, 2001. Interest is payable monthly at the bank's fully floating prime rate of 9.00% at June 30, 2000, or, at our option, at the LIBOR rate plus 1.75%. At June 30, 2000, the outstanding balance was $21.1 million. We intend to use some of the net proceeds of this offering to repay a portion of this indebtedness. Total capital expenditures were $6.3 million for the first six months of 2000, and $6.1 million for the twelve months of 1999. These expenditures were primarily used to purchase manufacturing equipment to increase production capacity. We anticipate total capital 31 34 expenditures of approximately $13.0 million during fiscal 2000 primarily to purchase additional manufacturing equipment. We believe that cash generated from operations and amounts available under our line of credit, together with the net proceeds of this offering, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next 18 months. However, if our anticipated levels of cash flow are not realized, then we may need or desire to seek additional funding through public or private financings or other arrangements prior to that time. Adequate funds may not be available when needed or may not be available on terms acceptable to us. If additional funds are raised by issuing equity securities, dilution to existing shareholders will result. The terms of any debt could impose restrictions on our operations and our ability to secure additional financing through equity securities. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products, expand our facilities, enter new markets, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and operating results. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board, or FASB, issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be used specifically as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, or the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. In July 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133. We will adopt the requirements of SFAS No. 133 for the year ending December 31, 2001. We do not expect the adoption of SFAS No. 133 to have a material effect on our financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in Financial Statements. SAB 101 summarizes some of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In March 2000, the SEC issued SAB No. 101A to defer for one quarter, and in June 2000 issued SAB 101B to defer for an additional two quarters, the effective date of implementing SAB 101, with earlier application encouraged. We are required to adopt SAB 101 in the fourth quarter of 2000. We do not expect the adoption of SAB 101 to have a material effect on our financial statements. In March 2000, the FASB issued FASB Interpretation No. 44, or FIN 44, Accounting for Certain Transactions Involving Stock Compensation -- an Interpretation of APB Opinion No. 25, which clarifies the application of Accounting Principles Board Opinion No. 25, Stock Issued to Employees, for Certain Stock-Based Compensation Issues. Among other issues, this interpretation clarifies (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, except for certain provisions which were effective before that date. We do not expect the adoption of FIN 44 to have a material effect on our financial statements. 32 35 INFLATION AND INTEREST RATE RISK Our operating results may be affected by changes in rates of inflation and market interest rates. In particular, an increase in market interest rates could adversely affect our sales by increasing the cost of financing construction of telecommunications networks. Higher interest rates would also increase our interest expense as most of our indebtedness bears interest at floating rates. Inflation to date has not materially affected our operating results, although it may in the future. Our revolving credit facility and a subordinated term note facility with Bank of America bear interest at floating rates. Accordingly, we are exposed to potential losses related to changes in interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes. As of June 30, 2000, approximately 80% of our outstanding borrowings were exposed to interest rate risk. Assuming a one percent increase in interest rates, based on our indebtedness outstanding on that date, our annual interest expense would have increased by approximately $0.2 million. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Our sales have been made predominantly to U.S.-based customers and distributors in U.S. dollars. As a result, we have not had any material exposure to factors such as changes in foreign currency exchange rates. However, in future periods, we expect to expand selling into international markets, including Europe and Asia. Because our sales are denominated in U.S. dollars, a strengthening of the U.S. dollar could make our products less competitive in international markets. Our interest income and expense are sensitive to changes in interest rates, which can affect the interest earned on our cash equivalents. 33 36 BUSINESS OVERVIEW We design, manufacture and deploy network connectivity equipment for the telecommunications industry. Our products monitor, patch and organize copper, coaxial cable and fiber optic interconnections in central and remote offices of telecommunications networks. We also provide power distribution and protection equipment for telecommunications networks, as well as engineering, configuration and installation services. We sell our products and services in the United States primarily to telecommunications service providers, including incumbent local exchange carriers, or ILECs, competitive local exchange carriers, or CLECs, original equipment manufacturers, or OEMs, systems integrators, equipment distributors and private network operators. Internationally, we sell our products to OEMs and telecommunications service providers in the public and private telecommunications networks. Our customers include AT&T, Sprint North Supply, Verizon, Walker and Associates and WorldCom. INDUSTRY BACKGROUND Growing demand for broadband communications Consumers and businesses are demanding increased bandwidth as the amount of high-speed data, video and voice traffic being carried over telecommunications networks has grown dramatically. The substantial growth in bandwidth requirements is being driven in part by the increasing use of the Internet by businesses and consumers for communicating, conducting online business and transactions and telecommuting. Growth is also being fueled by the increasing demand for data-intensive applications, including secure data networks, virtual private networks used by corporations, remote local area network access, data-rich content and on-demand video services. Bandwidth requirements are also being driven by the increasing deployment of wireless voice and data communications systems, including greater use of wireless Internet, which also require broadband wireline network infrastructure equipment. An example of the increasing demand for high bandwidth access infrastructure is the growth in digital subscriber line, or DSL, deployments. According to TeleChoice, Inc., a third party market strategy consulting firm, the DSL installed base, measured by the number of lines in service, is projected to grow from 575,000 in 1999 to 9.6 million in 2003. Global deregulation and privatization of the telecommunications industry has dramatically changed the competitive environment for telecommunications equipment providers. In the United States, deregulation has resulted in a proliferation of CLECs that compete with the ILECs, which, until the Telecommunications Act of 1996, had been the primary operators of telecommunications networks. The Telecommunications Act requires ILECs to permit CLECs to collocate, or install their network equipment in the ILECs' facilities, allowing them to use the ILECs' local connections infrastructure. In addition, in 1999, the FCC issued an order requiring ILECs to make new collocation arrangements available to CLECs. When collocation space is exhausted at a particular location, ILECs are required to permit collocation in adjacent structures. Increasing investment in network architectures Today, CLECs are actively engaged in efforts to collocate in the ILECs' facilities and are rapidly deploying broadband services. According to New Paradigm Resources Group, Inc., an independent research market report firm, there are now over 200 CLECs in the United States that have installed network hardware in their own sites or collocated within the ILECs' facilities, compared to 110 in 1997 and 13 before the passage of the Telecommunications Act. In response to this growing competition and the increasing demand for broadband communication services, ILECs are quickly building or upgrading network capabilities and adding new services to protect their customer base. These 34 37 investments in network infrastructure being made by ILECs and CLECs to upgrade existing networks and to create new networks to provide reliable, high-bandwidth services include: - adoption of new network protocols, which enable switching among all communications mediums; - increased use of fiber optic cable, which can transmit large volumes of data at high speeds, substantially increasing the efficiency and capacity of telecommunications networks; and - proliferation of high-speed data technology, such as DSL and hybrid fiber coaxial cable, which are being deployed by ILECs, CLECs and other telecommunications service providers as cost-effective broadband access solutions. Telecommunications networks consist of multiple locations, called points of presence, that contain the equipment comprising the networks. Points of presence include central offices, or COs, remote offices, or ROs, and remote terminals. The primary communications equipment within a CO or RO includes switching, transmission, network connectivity and power elements. Connectivity equipment is used to physically connect transmission, switching and other equipment within and between network points of presence. Power equipment directs or distributes power to network equipment and protects the equipment from damage caused by power faults. Challenges faced by telecommunications service providers Telecommunications providers and other service providers engaged in upgrading or building new networks, or collocating in the COs and ROs of other telecommunications service providers, face several challenges. These include: MANAGING PROLIFERATION OF BROADBAND LINES. The tremendous growth in the amount of data being transmitted over networks has required corresponding growth in the number of physical broadband lines that are used in communications networks. This proliferation has given rise to the need for connectivity equipment that allows easy installation of new lines. COs and ROs often have a fixed amount of space in which to locate an increasing amount of equipment for a growing number of telecommunications service providers. As a result, there is a need for connectivity equipment that is compact while allowing for maximum circuit capacity, also known as density. DEPLOYING NETWORK EQUIPMENT QUICKLY. Telecommunications service providers desire network equipment that can be quickly delivered to and installed in a CO or RO while physical space remains available. Speed of network deployment is also an important factor in capturing new customers. ESTABLISHING GLOBAL MANUFACTURING RELATIONSHIPS. The rapid growth of telecommunications infrastructure is occurring globally. Network equipment must be configured for specific global regions due to differences in power supplies, configurations and localized customer needs. To address this demand, network equipment providers must be able to manufacture, deliver and install products quickly, and provide ongoing product support on a global basis. OBTAINING TURNKEY SOLUTIONS. Upgrading or building a telecommunications network requires skilled systems integrators who can quickly install equipment in a network point of presence. Many telecommunications service providers rely on third party systems integrators for network configuration and installation. We believe there is a growing demand for full systems integrators that can engineer, furnish and install network infrastructure products on a global basis. 35 38 ADDRESSING INCREASED POWER DEMANDS. Power distribution and protection are critical for transmission equipment to function reliably and effectively. The rapid growth in telecommunications network infrastructure is increasing the need for power and power distribution products to protect network equipment. Telecommunications service providers, including ILECs, CLECs, systems integrators, and other private network operators, need suppliers of network connectivity and power distribution equipment that can solve these challenges. OUR SOLUTION We are a leading provider of broadband connectivity and power distribution products and services for the telecommunications industry. We design, manufacture and configure network connectivity and power solutions for telecommunications service providers. Our solutions are designed to provide the following benefits: DENSITY AND RELIABILITY -- We help telecommunications service providers to maximize use of limited space in network points of presence by providing compact, high-density products. Our products are engineered for reliability and peak performance. Many of our products incorporate monitoring and configuration features that help users to maintain an effective network. CONNECTIVITY ACROSS MEDIA -- With the increased use of fiber optic technology, there is a growing need for equipment using this technology that is also interoperable with existing network transmission media, such as copper and coaxial cable. Our understanding of these three types of networks enables us to manufacture reliable and interoperable physical connectivity products. CONFIGURABLE AND MODULAR PORTFOLIO OF PRODUCTS -- Our modular products are easily integrated into a telecommunications network. Our product designs help customers to easily install and add new products to their existing systems with simple configuration and with fewer cable connections than are necessary for less modular products. GLOBAL MANUFACTURING AND DEVELOPMENT -- Our global manufacturing and development capabilities enable us to create regionalized products, scale production quickly and efficiently and decrease delivery times. By obtaining some materials locally for production in our international manufacturing facilities, we manufacture products that help us and our OEM partners meet product distribution and development requirements mandated by local governments. POWER DISTRIBUTION AND PROTECTION PRODUCTS -- We provide power distribution and protection products that efficiently distribute power and protect equipment within network points of presence. Our experience in designing and manufacturing physical connectivity solutions enables us to develop power products designed to meet the power requirements of network points of presence. INTEGRATED SYSTEMS AND OTHER SERVICES -- We offer broadband connectivity and power distribution solutions that integrate the physical network architecture. In addition to designing and manufacturing broadband connectivity and power distribution products, we also assist our customers in configuring solutions using our products and integrating these solutions into a telecommunications network. 36 39 OUR STRATEGY Our objective is to become the leading provider of telecommunications network connectivity and power products and services. Our strategy to achieve this objective consists of the following elements: LEVERAGE TECHNOLOGY EXPERTISE. We intend to leverage our technology expertise to continue to develop high-density network connectivity and power distribution equipment for worldwide use. Our core competencies include the design and development of high-density fiber and digital signal cross-connect, or DSX, network connectivity equipment. We will continue to develop our expertise in copper, coaxial cable, fiber optic and power technologies. We also plan to continue to increase our research and development expenditures and to hire additional engineers globally. BROADEN PRODUCT AND SERVICE OFFERINGS. We intend to expand our share of the telecommunications network connectivity and power distribution equipment market by broadening our product and service offerings. We are working to develop optical components, and are also seeking to extend our power management and distribution offerings. We also intend to expand our global engineering, configuration and installation services and use of the Internet to help customers design, configure and order their network equipment online. We plan to do this by continuing our efforts to develop our product and service offerings, and will continue to explore potential acquisitions of complementary technologies and product lines. INCREASE MANUFACTURING CAPACITY. We plan to continue to increase our manufacturing capacity to meet the growing demand for network connectivity equipment and to increase market penetration of our products and services. To achieve this goal, we intend to expand our manufacturing facilities, increase capital expenditures and hire additional operations personnel. We intend to continue to meet our short-term capacity requirements by outsourcing manufacturing of some products. EXPAND GLOBAL PRESENCE. We intend to expand the global reach of our products by designing, developing and manufacturing localized versions of our products for use in specific global regions. We currently manufacture our products in the United States, Mexico and Poland, which helps us to deliver our products on a global basis rapidly and cost-effectively. We are expanding our geographic reach and customer base by investing in our global sales, marketing and research and development activities. ENHANCE OEM RELATIONSHIPS. We intend to enhance relationships with OEMs to develop our product offerings and to continue development of private label versions of our products. We believe our broadband connectivity and power distribution products and services will help OEMs to satisfy their network connectivity and power needs from a single source while expanding the global reach of our products. 37 40 PRODUCTS AND SERVICES We design, manufacture and install network connectivity and power equipment for use within network points of presence. Our offerings include broadband connectivity and power distribution products and services. BROADBAND CONNECTIVITY Our broadband connectivity products interconnect copper, coaxial cable and fiber optic telecommunications networks. These products facilitate the testing, installation, monitoring and reconfiguration of our customers' telecommunications systems. Our product portfolio includes key connectivity elements of COs, ROs, remote terminals and wireless base stations. Principal products in this group include: DSX PRODUCTS. This product line consists of panels and bays used to connect equipment within or between network points of presence. Our DSX products are used for patching, testing, monitoring and rearranging voice, data and video signals that are transmitted over copper lines or coaxial cables. This product line provides connections between high-bandwidth transmission systems and telecommunications network equipment. FIBER OPTIC CONNECTIVITY PRODUCTS. This product line includes cable assemblies, distribution frames and cable management systems. Our fiber optic products allow for the efficient connection and interconnection of the fiber optic electronics required to support, transmit, receive, test and monitor the quality and integrity of voice, data and video signals. Our fiber optic connectivity products also include fiber cable management solutions. MAINFRAME TERMINATION PRODUCTS. This product line includes terminal blocks that terminate local exchange lines at distribution frames within network points of presence. Each local exchange line that comes into a CO must terminate at a location where it can be connected to either the switch or to other equipment. POWER DISTRIBUTION Our power distribution products provide power management throughout COs, ROs and other network points of presence. These products distribute power to equipment racks and bays and protect network equipment and cabling through fuse and breaker panels. Principal products in this group include: POWER DISTRIBUTION PANELS. We offer low, intermediate and high current distribution panels that distribute direct current, or DC, power, from 20 to 100 amps of power, to equipment used throughout COs, ROs and other network points of presence. These fuse and circuit panels are used to distribute power from a single power source to multiple pieces of network equipment. These panels also protect equipment and cabling from damage caused by power faults. BATTERY DISTRIBUTION FUSE BAYS. Battery distribution fuse bays provide the primary distribution point for DC power within a CO or RO. These fuse bays can provide power directly to individual equipment or to secondary low, intermediate or high current distribution panels. These bays utilize fuses or breakers designed to manage and distribute up to 2000 amps of power. PROTECTOR BLOCKS AND PANELS. Our protector blocks and panels are used to protect telecommunications network lines from conducting potentially damaging electricity into the network. These blocks are located where copper lines enter the network and prevent electricity from damaging wires or equipment. 38 41 PRIVATE LABEL PRODUCTS Our StarDAX digital cross-connect and integrated access devices electronically perform the same cross-connecting functions that our DSX products manually perform plus additional circuit management functions. This product is sold under the Telect brand name but is manufactured for us by a third party. We also manufacture custom versions of our products for OEMs to sell on a private label basis. INTEGRATED SYSTEMS GROUP We integrate broadband connectivity, power distribution and third party equipment into racks, cabinets and frames that can be shipped pre-assembled to expedite installation. We have the knowledge and experience to assist telecommunications service providers in the design and configuration of equipment for COs, ROs, collocations and other network points of presence. SALES, MARKETING AND CUSTOMER SUPPORT We sell our products and services in the United States primarily to telecommunications service providers, including CLECs, ILECs, OEMs, systems integrators, equipment distributors and private network operators. Internationally, we sell our products and services to participants in the public and private telecommunications network markets. We market and sell our products and services through the following channels: - DIRECT SALES. We have a direct sales force operating in various global regions. Our domestic sales effort is organized by customer type and regional territory. Our international sales personnel are located in Canada, China, England, France, Hong Kong and Mexico. Our international sales efforts are primarily organized by regional territory and cover Europe, Canada, Africa, Latin America, including Mexico, and Asia/Pacific. As of August 15, 2000, we had 118 direct sales personnel. - CONTRACTED DISTRIBUTORS, DEALER ORGANIZATIONS AND SALES REPRESENTATIVES. We utilize nine domestic and multiple international distributors, dealer organizations and sales representatives located in the United States and abroad. - ORIGINAL EQUIPMENT MANUFACTURERS. We sell to and through various domestic and international OEMs, which incorporate our broadband connectivity and power network equipment into the copper, coaxial cable and fiber optic network products and services they offer. We also sell customized and private label versions of our products to support their systems sales. We engage in a number of marketing activities to create brand awareness, market demand and sales opportunities. These include providing product exhibits at industry tradeshows, targeted advertising in selected publications, public relations activities with trade and business press, channel marketing programs and co-marketing programs. Our marketing and sales activities also include providing sales support, responding to requests for proposals, giving product presentations, interfacing with operations, developing new business opportunities and responding to customer requests for information. We also provide technical support, educational services and professional services for customizing, installing and servicing our products. We recognize the importance of offering quality service and support to all customers. Our web site currently allows customers to retrieve product pricing and delivery information and configure products online, and we expect that customers will be able to submit purchase orders online in the fourth quarter of 2000. We also employ sales engineers who work with our customers to design and configure systems that meet their specific needs. 39 42 CUSTOMERS We sell our products and services to customers in the United States public communications network market, such as ILECs, CLECs, long distance carriers, wireless service providers, cable television operators and other domestic public network providers. We also sell to corporate and government customers. Internationally, we sell our products and services to public and private telecommunications service providers and other parties with a telecommunication network point of presence. The following is an alphabetical list of our fifteen largest customers, based on our 1999 net revenues: AT&T Sprint North Supply Anicom Sunbelt Telecommunications Anixter Time Warner Graybar Electric Company Verizon GTE Supply Walker and Associates Nextlink Communications Williams Communications Group Nortel Networks WorldCom Power & Telephone Supply Company

OPERATIONS We currently operate manufacturing facilities in Spokane and Liberty Lake, Washington; Wroclaw, Poland; and Guadalajara, Mexico. We expect shortly to begin operating a manufacturing facility in Campinas, Brazil. We expect our international facilities to enhance our global presence, reduce customer delivery times and allow us to manufacture and sell our products more cost-effectively. Our facilities in the United States and Poland are ISO 9001 certified for quality assurance in design and manufacturing and we are currently seeking certification for our other manufacturing facilities. Many of our customers also require that our products meet or exceed established domestic or international quality standards. We utilize quality assurance tests and procedures in our manufacturing processes to meet these standards. We use a combination of standard components, which are generally available from more than one vendor, and custom components, each of which we obtain from sole sources. We have occasionally experienced difficulties obtaining supplies from our vendors in the past. To alleviate these difficulties, we have added vendors, increased purchasing staff and have taken steps to increase our allocation of components from our suppliers. If we are unable to obtain sufficient quantities of necessary supplies, or if there is a significant increase in the price of key components or materials, delays or reductions in manufacturing or product shipments could occur, which would harm our business and adversely affect our operating results. We are operating at 100% of our manufacturing capacity. Our backlog of firm orders as of June 30, 1999 was $16.0 million, and our backlog increased by 158% to $41.3 million at June 30, 2000. We expect that there will be a backlog of approximately $30.0 million at December 31, 2000. Customers can cancel their purchase orders with us at any time, and we have lost, and may continue to lose, potential or current orders because of our inability to meet a customer's time schedule. We intend to continue to meet our short-term capacity requirements by outsourcing the manufacture of some of our products to help meet increased demand and reduce our costs. If we are unable to increase our manufacturing capacity to meet the increased demand for telecommunications network equipment and the shortened delivery schedules of our customers, our business and operating results may suffer. 40 43 PRODUCT DEVELOPMENT AND TECHNOLOGY We believe that timely deployment of new and enhanced products is critical to our success. Our product development process includes monitoring customer needs and changes in the market place, obtaining input from customers, developing product ideas and technologies, determining product requirements and designing, testing and developing our products. Our principal product development work is concentrated on enhancing our existing products, as well as developing technologies that can lead to new products. During 1999, we spent approximately $5.5 million on research, development and engineering and intend to increase this amount in future periods. We are focusing our technology development efforts on copper, coaxial cable and high-bandwidth fiber optic technologies. We are also working to increase the density of our products, improve power efficiency and integrate fiber optic technology into additional products. COMPETITION Competition among telecommunications network equipment and service providers is intense, with a large number of manufacturers and suppliers providing a variety of products to diverse market segments within the telecommunications industry. We believe that the principal competitive factors in our markets include: - customer service and support; - performance, quality and reliability; - total turnkey solutions; - ability to respond to customer delivery schedules; - ease and speed of product installation; - price; - custom design and configuration; - technological capabilities; - flexibility, scalability and ease of use; and - scope of functions, features and benefits. We believe that we compete favorably on each of these factors. We also believe that customer financing, which we currently do not offer, is increasingly becoming a competitive factor in our market. Our competitive strategy includes leveraging our global reach and scale and our focus on a total connectivity solution for network infrastructure environments. We face competition for our broadband connectivity products and services principally from ADC Telecommunications, Corning and Lucent Technologies. The principal competitors for our power distribution products are Hendry Telephone Products, Marconi Communications, PECO II, Siemens and TSI, a division of Emerson Electric. We expect increased competition from existing competitors and from other companies that may offer new or improved broadband connectivity or power products. Several of our competitors have significantly greater financial, manufacturing, sales and marketing, technical and labor resources than we do. For example, many of these competitors have the ability to provide customers with end-to-end telecommunications networks and systems, including the network connectivity and power distribution equipment that we provide. As a result, such competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products, than we 41 44 can. Our failure to successfully compete in the telecommunications network equipment market would harm our business, financial condition and operating results. INTELLECTUAL PROPERTY We depend on our proprietary information and technology. We rely primarily on a combination of patent, copyright, trademark, trade secret laws and license agreements to establish and protect our rights in our products and other proprietary technology. We generally require employees and consultants to enter into confidentiality agreements to limit use of, access to, and distribution of, our proprietary information. Despite these precautions, our means of protecting our proprietary rights may not be adequate to prevent misappropriation. For example, if an employee or consultant were to violate a nondisclosure agreement, we could lose rights in our proprietary technology. Also, despite the steps taken by us to protect our proprietary rights, unauthorized third parties may be able to copy aspects of our products, reverse engineer our products or otherwise obtain and use information that we regard as proprietary. Furthermore, others may independently develop technologies similar or superior to our technology, or design around our proprietary rights. We have 25 issued patents with an additional ten patent applications pending in the United States. These patents include terminal block designs and features, basic design of our DSX products, including switching jacks, fiber optic panels and overhead cable management, and expire in years ranging from 2005 to 2017. We also pursue limited patent protection for some of our technology outside the United States. We may file additional patent applications in the future. Our patent applications may not be approved or, if approved, may not be effective in protecting our proprietary technology. The telecommunications industry is characterized by a large number of patents and fairly frequent litigation alleging patent infringement. While our patents in the aggregate represent a valuable asset, we believe that our business is not dependent on any single patent or group of related patents. We have registered or filed applications to register in the United States all principal trademarks used in the course of our business. The laws of some foreign countries may not protect our proprietary rights as fully or in the same manner as do the laws of the United States. FACILITIES Our headquarters are located in Liberty Lake, Washington, where we lease approximately 94,000 square feet of manufacturing space and approximately 58,000 square feet of office space. We are in the process of expanding these facilities to add approximately 43,000 square feet of office space and approximately 53,000 square feet of manufacturing space. We also lease approximately 138,000 square feet of manufacturing space and approximately 10,000 square feet of office space in Spokane, Washington. We currently occupy approximately 58,000 square feet of manufacturing space in Poland. We also own an additional 273,000 square feet of administrative and manufacturing space in Poland that we sublease to third parties on a month-to-month basis. The Polish government owns the real estate on which our facilities are located. We lease approximately 100,000 square feet of manufacturing space in Guadalajara, Mexico and approximately 20,000 square feet of manufacturing space in Campinas, Brazil. Operations in Brazil are expected to commence during the fourth quarter of 2000. We believe that our current facilities, with these additions and expansions, will meet our needs for the next 12 months and that we will be able to secure additional facilities on acceptable terms if needed. We use hazardous substances in our manufacturing processes and have purchased facilities where hazardous substances may have been used in the past. Use of hazardous substances is regulated by federal, state, local and international governments. If we violate these regulations 42 45 in our handling of hazardous substances or our use of facilities containing hazardous substances, we may face monetary penalties or other legal obligations or have limitations imposed on how we operate our business. If a release of hazardous substances occurs on or from any of the properties that we lease or use, we may be held liable and may be required to pay the cost of remediation and other financial penalties. EMPLOYEES As of August 15, 2000, we employed 1,940 full-time employees and 16 part-time employees, of whom 565 were in sales, marketing, administration and technology and 1,391 were in operations. We have 1,280 employees in the United States and 676 in foreign countries. From time to time as our needs require, we also hire temporary employees. Only our employees in Mexico and Poland are covered by collective bargaining agreements. We have never experienced a work stoppage and we believe we have good relations with our employees. We currently have approximately 260 outstanding unfilled job openings. We may not be able to attract and retain qualified personnel in sufficient numbers to meet our needs. LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. From time to time we have been, and expect to continue to be, subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of third-party trademarks and other intellectual property rights. Such claims, even if not meritorious, could require the expenditure of significant financial and managerial resources. 43 46 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The names, ages and positions of our current executive officers and directors, as of August 15, 2000, are as follows:

Executive Officers Bill B. Williams, Jr. and his wife, Judith A. Williams, co-founded Telect in October 1982. He has served as our Chairman of the Board since April 1995 and as one of our directors since inception. He was our President from October 1982 to April 1995 and our Chief Executive Officer from March 1989 to April 1997. Judith A. Williams is a co-founder of Telect along with her husband, Bill B. Williams, Jr. She has served as our Vice-Chairman of the Board since April 1997 and as one of our directors since October 1985. She also has served as our Treasurer since May 1999, as well as during various periods prior to that, and as our Secretary since October 1995. She was our Executive Vice-President from March 1993 to April 1997. Wayne E. Williams has served as our President since April 1995 and as our Chief Executive Officer since April 1997. He also has served as one of our directors since March 1986. He joined us in September 1982 and has held various positions, including Vice-President of Product Development, Sales and Marketing from March 1993 to April 1995 and Vice-President of Sales and Marketing from March 1989 to March 1993. Mr. Williams has completed the Owner/ President Management Program at Harvard University. He is the son of Bill B. Williams, Jr. and Judith A. Williams. Timothy L. Szymanowski has served as our Vice-President of Sales and Marketing since April 2000. He was our Vice-President of Sales from April 1998 to April 2000. Prior to that, he was with Van Waters & Rogers, Inc., a chemical distribution company, in various positions, most recently as Branch Manager from March 1996 to October 1997 and Materials Manager from September 1994 to February 1996. Mr. Szymanowski holds a B.A. in business administration from Northwest Nazarene College and a M.Div. in theology from Western Seminary. E. Susan Meyer has served as our Vice-President of Human Resources and Corporate Relations since January 1999. From November 1995 until January 1998, she was the Director of Community Relations for Washington and Idaho for the Gas Transmission Division of Pacific Gas & Electric, a gas and electric utility. From May 1988 to November 1995, she was the Executive Director of Momentum, Inc., a non-profit economic development organization. Ms. Meyer holds a B.A. in psychology and an M.B.A. from Eastern Washington University. 44 47 William F. McMillan has served as our Vice-President of Engineering and Technology since January 1999. He was our Director of Quality Assurance from May 1995 to December 1996 and he was our Director of Engineering from December 1996 to January 1999. Mr. McMillan holds a B.A. in mathematics and an M.S. in computer science from Washington State University. Stanley E. Hilbert has served as our Vice-President of Finance and Information Technology since May 1999. He was our Director of Finance from January 1999 to May 1999. Before joining us, he held various finance positions with Hecla Mining Company, including Corporate Controller from May 1996 to December 1999 and Assistant Controller from January 1992 to May 1996. Mr. Hilbert holds a B.S. in business/accounting from the University of Idaho and is a certified public accountant. Jeffrey N. Gibson has served as our Vice-President of Operations since June 1999. From February 1993 to May 1999, he was employed by Key Tronic Corporation, a keyboard manufacturer, in various positions, including Senior Manager of Engineering, Director of Engineering, Director of Keyboard Technology and Director of Technology. Mr. Gibson holds a B.S. in mechanical engineering from California Polytechnic University. Directors Thomas C. Simpson has served as one of our directors since January 2000. He has been the Managing Partner of Northwest Venture Associates, Inc., a venture capital firm, since September 1995. From June 1987 to August 1995, he was a Managing Director with Dain Bosworth, an investment banking firm. Mr. Simpson holds a B.A. in business administration from the University of Washington and an M.B.A. from the University of Pennsylvania, Wharton School of Business. Samuel L. Hayes III has served as one of our directors since August 2000. He holds the Jacob H. Schiff Chair in Investment Banking at the Harvard Business School, where he has taught since 1971. He serves as a director of the Eaton-Vance mutual funds, the Nvest and Kobrick mutual funds and Tiffany & Company. Mr. Hayes holds an A.B. in political science from Swarthmore College and an M.B.A. and a D.B.A. from Harvard Business School. BOARD OF DIRECTORS Our board of directors is currently comprised of five directors, with one vacancy currently existing. In accordance with the terms of our articles of incorporation, our board of directors is divided into three classes: Class 1, whose term will expire at the annual meeting of shareholders in 2001, Class 2, whose term will expire at the annual meeting of shareholders to be held in 2002, and Class 3, whose term will expire at the annual meeting of shareholders to be held in 2003. The Class 1 director is Bill B. Williams, Jr., the Class 2 directors are Judith A. Williams and Samuel L. Hayes III, and the Class 3 directors are Wayne E. Williams and Thomas C. Simpson. At each annual meeting, commencing with the 2001 shareholder meeting, each director will be elected to serve from the time of election and qualification until the third annual meeting following election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of our directors. BOARD COMMITTEES Our board of directors has established an audit committee and a compensation committee. The audit committee, which consists of Thomas C. Simpson and Samuel L. Hayes III, reviews the results and scope of the annual audit and meets with our independent auditors to review our internal accounting policies and procedures. The compensation committee, which consists of Thomas C. Simpson and Samuel L. Hayes III, makes recommendations to the board of 45 48 directors with respect to our general and specific compensation policies and practices and administers our employee benefit plans. DIRECTOR COMPENSATION Non-employee directors receive $ per year for services rendered as members of our board of directors plus an additional $ for attendance at each quarterly board meeting and $ for attendance at each committee meeting or, in the case of a committee chairman, $ for attendance at each committee meeting. We also reimburse directors for reasonable expenses in connection with their attendance at board of director and committee meetings. In addition, under our 2000 Equity Incentive Plan, our non-employee directors will receive stock option grants to purchase shares of common stock when first appointed to the board, and grants to purchase shares of common stock annually thereafter. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of our executive officers serves as a director or member of the compensation committee or other board committee performing equivalent functions of another entity that has one or more executive officers serving on the board of directors or compensation committee of Telect. Prior to the formation of our compensation committee, compensation decisions were made by the board of directors. 46 49 EXECUTIVE COMPENSATION The following table sets forth in summary form information concerning the compensation paid by us during the fiscal year ended December 31, 1999 to our Chief Executive Officer and each of our six other most highly compensated executive officers. These individuals are referred to as the named executive officers in this prospectus. SUMMARY COMPENSATION TABLE

------------------------- (1) Premiums paid by us on split dollar life insurance policies. EMPLOYEE BENEFIT PLANS EQUITY INCENTIVE PLAN Our 2000 Equity Incentive Plan provides for the grant of incentive stock options to our employees, including our officers and employee directors, and for the grant of nonstatutory stock options, restricted stock purchase rights and bonuses, performance shares and units and stock purchase rights to our employees, directors and consultants. The equity incentive plan was adopted by our board of directors and approved by our shareholders in August 2000. A total of 12,917,000 shares of our common stock have been reserved for issuance under the equity incentive plan. 47 50 Administration Our board of directors or the compensation committee administers the equity incentive plan. The administrator has the power to determine, among other things: - the persons to whom, and the time or times at which, awards shall be granted; - the number of shares subject to each award; - the exercisability of each award; and - the form of consideration payable upon the exercise of each award. Options The administrator determines the exercise price of options granted under our equity incentive plan, but with respect to all incentive stock options and nonstatutory stock options intended to qualify as "performance-based" compensation within the meaning of Section 162(m) of the Internal Revenue Code, the exercise price must at least equal the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who owns 10% or more of the voting power of all classes of our outstanding capital stock, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the date of grant. The administrator determines the term of all other options. After termination of one of our employees, directors or consultants, he or she may exercise his or her option for the period of time stated in the option agreement. Generally, if termination is due to death or disability, the option will remain exercisable for six months. If termination follows a change in control, the option will generally be exercisable for six months. If termination is for cause, the option will generally terminate immediately upon such termination. In all other cases, the option will generally remain exercisable for one month. However, an option may never be exercised later than the expiration of its term. Restricted Stock Awards The administrator determines the exercise price of restricted stock awards under our equity incentive plan. A restricted stock award may be in the form of a restricted stock bonus, which is a grant of our common stock, or restricted stock purchase right, which is a grant of a right to purchase our common stock. Unless the administrator determines otherwise, we will retain an option to repurchase shares acquired pursuant to a restricted stock bonus or restricted stock purchase right that we may exercise on the voluntary or involuntary termination of the purchaser's services with us for any reason, including death or disability. The purchase price for the shares we repurchase will generally be the original price paid by the purchaser. The administrator determines the rate at which our repurchase option will lapse. Transferability of Options and Restricted Stock Awards Our equity incentive plan generally does not allow for the transfer of options or restricted stock awards, other than by will or by the laws of descent or distribution, and only the optionee may exercise an option or restricted stock award during his or her lifetime. The administrator determines if nonstatutory options may be assignable or transferable subject to all applicable securities laws. Automatic Option Grants to Non-Employee Directors Our equity incentive plan also provides for the automatic grant of shares of common stock to non-employee directors effective upon initial appointment to the board. Each non-employee director will automatically be granted an option to purchase shares of common 48 51 stock each year following the date of our annual shareholders' meeting. The option will fully vest upon the earlier of the first day of the twelfth month following the date of grant or the day before the next annual shareholders' meeting, provided that the non-employee director is then a board member. All options automatically granted to non-employee directors will have a term of five years and the exercise price will be 100% of fair market value per share of common stock on the date of grant. Performance Awards Our equity incentive plan provides for performance awards in the form of performance shares, which is a right to receive payment equal to the value of the shares, or performance units, which is a right to receive payment equal to the value of the units. The administrator determines the terms and conditions of performance awards granted under the plan, including establishing performance goals and performance periods. Unless the administrator determines otherwise, the initial value of performance shares shall be equal to the fair market value of our common stock on the date of grant and the initial value of each performance unit shall be $100. The final value of a performance award depends upon the attainment of certain performance goals determined by our administrator. After completion of a performance period, the participant will be paid the difference between the initial value and the final value of the award, though the administrator will generally have the right to reduce the amount to be awarded to the participant. A performance award payment may be made in cash, shares of our common stock, or a combination of cash and stock, as determined by the administrator. The administrator determines if shares of our common stock will be subject to vesting provisions when paid as a performance award. Upon the termination of one of our employees due to death or disability, a performance award shall be prorated based upon the number of days of the employee's service during the performance period. Our equity incentive plan provides that if an employee is terminated after our merger with or into another corporation or a sale of substantially all of our assets, the administrator may provide that a performance award is payable for its final value, subject to certain accounting provisions. In all other cases, a performance award will be forfeited in its entirety upon the voluntary or involuntary termination of the employee. Transferability of Performance Awards Our equity incentive plan does not allow for the transfer, exchange or pledging of performance shares or performance units, other than by will or by the laws of descent and distribution until the completion of the performance period. Only the employee may exercise a performance share or performance unit during his or her lifetime. Stock Appreciation Rights Our equity incentive plan provides for the grant of stock appreciation rights, meaning the right to receive a payment from us in an amount equal to the excess of the fair market value of a share of our common stock on the date of exercise over the strike price. The administrator determines the terms and conditions of stock appreciation rights that may be granted under the plan. The strike price of a stock appreciation right shall be the fair market value of a share of our common stock on the date of the grant. The administrator determines when and upon what conditions a stock appreciation right is exercisable, but in no event shall a stock appreciation right become exercisable prior to the date a participant commences service. The plan provides that the exercise of a stock appreciation right shall be paid by us to the participant in the form of cash or check or a cash equivalent. 49 52 Upon termination of a participant due to death or disability, the final value of a stock appreciation right will be determined and paid at the completion of the exercisability period. The plan provides that if a participant is terminated following our merger with or into another corporation or a sale of substantially all of our assets, the administrator may provide that a stock appreciation right is payable for its final value, subject to certain accounting provisions. In all other cases, a stock appreciation right will be forfeited in its entirety upon the voluntary or involuntary termination of the participant. Transferability of Stock Appreciation Rights Our equity incentive plan does not allow for the transfer of a stock appreciation right other than by will or by the laws of descent and distribution. Only the participant may exercise a stock appreciation right during his or her lifetime. Adjustments upon Merger or Asset Sale Our equity incentive plan provides that, in the event of our merger with or into another corporation or a sale of substantially all of our assets, the successor corporation may assume or substitute an equivalent option or right for each outstanding option or stock appreciation right. The board, at its discretion, may accelerate the vesting or payment of any or all options, restricted stock awards, stock appreciation rights and performance awards prior to the effective date of the change in control. In the event of a change in control, any non-employee director will have the right to exercise the option as to all of the shares subject to the option, including shares that would not otherwise be exercisable as of the date ten days prior to the date of the change in control. Amendment and Termination of the 2000 Equity Incentive Plan The administrator has the authority to terminate or amend our equity incentive plan at any time, provided it does not adversely affect any previously granted option or restricted stock award or any previously issued shares of common stock and subject to applicable laws and regulations requiring shareholder approval of amendments. 2000 EMPLOYEE STOCK PURCHASE PLAN Our 2000 Employee Stock Purchase Plan was adopted by our board of directors and approved by our shareholders in August 2000 and will become effective upon the completion of this offering. A total of 6,458,500 shares of our common stock has been reserved for issuance under the stock purchase plan. Structure of the 2000 Employee Stock Purchase Plan The stock purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code, contains consecutive six month offering periods. The offering periods generally start on the first trading day after February 1 and August 1 of each year and terminate on or about the last day of July or January, respectively, occurring thereafter, except for the first such offering period which will start on the effective date of this offering and will end on or about January 31, 2001. Eligibility All of our employees are eligible to participate if they are customarily employed by us or any majority-owned subsidiary for more than 20 hours per week and more than five months in 50 53 any calendar year. However, an employee may not be granted an option to purchase stock under our stock purchase plan if such employee: - immediately after the acquisition of stock, possesses 5% or more of the total combined voting power or value of all classes of our capital stock; or - accrues rights to purchase stock in excess of $25,000 worth of stock for each calendar year. Purchases Our stock purchase plan permits participants to purchase common stock through payroll deductions of up to 15% of their eligible compensation, which includes a participant's base straight time gross earnings and commissions but is exclusive of overtime pay, shift premium, incentive compensation, incentive payments, bonuses and other compensation. A participant may purchase a maximum of the lesser of that number of whole shares of our common stock determined by dividing $12,500 by the fair market value of a share of common stock on the offering date or 1,000 shares of common stock during a six-month offering period. Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end of each six month offering period. The price is 85% of the lesser of the fair market value of our common stock either: - at the beginning of an offering period; or - at the end of the offering period or such other purchase date as the administrator establishes. Participants may end their participation at any time during an offering period and will be paid their payroll deductions accumulated during that offering period. Participants may change their level of participation in the plan at any time during an offering period. Participation ends automatically upon termination of employment with us. Transferability of Rights A participant may not transfer rights granted under our stock purchase plan other than by will, the laws of descent or distribution, or as otherwise provided under the stock purchase plan. Merger or Asset Sale In the event of our merger with or into another corporation or sale of all or substantially all of our assets, a successor corporation may assume or substitute each purchase right. If the successor corporation refuses to assume or substitute for the purchase rights, the offering period then in process will be shortened, and a new purchase date will be established on a date prior to the merger or sale. Amendment and Termination of the 2000 Employee Stock Purchase Plan Our board of directors has the authority to amend or terminate our stock purchase plan, subject to applicable laws and regulations requiring shareholder approval of amendments, except that no such action may adversely affect any outstanding rights to purchase stock under the purchase plan. 401(K) PLAN We maintain a tax-qualified retirement and deferred savings plan for our employees, commonly known as a 401(k) plan. The 401(k) plan provides that each participant may contribute up to 12% of his or her pre-tax gross compensation up to the statutory limit, which 51 54 was $10,000 in the 1999 calendar year. Under our 401(k) plan, we may make matching contributions of up to 8.0% of annual compensation on a tiered matching scale. In 1999, we made an aggregate of $835,000 in contributions to the 401(k) plan. PERFORMANCE INCENTIVE PLAN In August 2000, our board of directors adopted our 2000 Performance Incentive Plan. This plan is a bonus plan that covers our executive officers and certain other management or key employees. The plan goals are set annually and include corporate, financial and/or individual goals, which are weighted differently depending on the employee's position. Depending upon the degree of attainment of these goals, the eligible employee can receive a bonus up to a percentage of his or her salary ranging from 15% to 35%. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Our articles of incorporation limit the liability of our directors to the maximum extent permitted by Washington law. Washington law provides that a corporation's articles of incorporation may contain a provision eliminating or limiting the personal liability of directors for monetary damages for breach of their fiduciary duty as directors, except liability for: - acts or omissions that involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 23B.08.310 of the Washington Business Corporation Act; or - any transaction from which the director derives a personal benefit in money, property or services to which the director is not legally entitled. Our articles of incorporation also provide that we shall indemnify our directors and officers to the fullest extent permitted by law, and that we may maintain insurance on behalf of any director, officer, employee or agent of Telect, or of another company or enterprise if serving at our request, regardless of whether we would have the power to indemnify such person against liability under Washington law. We have entered into agreements to indemnify our directors and executive officers, in addition to the indemnification provided for in our articles of incorporation. These agreements, among other things, indemnify our directors and executive officers for certain liabilities and expenses, including attorneys fees, judgments, fines and settlement amounts, incurred by such person in any action or proceeding, including any action by or in the right of us, arising out of such person's services as a director, officer, employee or agent of Telect, or of another company or enterprise if serving at our request. These agreements also provide officers with a similar limitation or release of liability for monetary damages that the Washington Business Corporation Act and our articles of incorporation provide to directors. These agreements may limit the liability of, and indemnify, our directors and officers to a greater extent than otherwise provided under Washington law or our articles of incorporation. We believe that our articles of incorporation and indemnification agreements are necessary to attract and retain qualified directors and officers. Upon completion of this offering, we will also maintain directors and officers liability insurance. At present, we are not aware of any pending litigation or proceeding involving a director, officer, employee or agent of ours in which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. 52 55 CERTAIN TRANSACTIONS The following is a summary of transactions in the last three years to which we have been a party, in which the amount involved in the transaction exceeds $60,000 and in which any executive officer, director or holder of more than 5% of our common stock had or will have a direct or indirect material interest other than compensation arrangements which are otherwise described under "Management." We lease our existing facilities at Liberty Lake, Washington, from Jubilation Enterprises, LLC, a Washington limited liability company whose sole members are Bill B. Williams, Jr., and Judith A. Williams. Mr. and Mrs. Williams are two of our directors, executive officers and major shareholders and the parents of Wayne E. Williams, one of our directors, executive officers and major shareholders. We paid rent for these facilities of approximately $712,000 in 1997, $1,380,000 in 1998 and $1,380,000 in 1999. We are also responsible for payments to third parties for taxes, insurance and maintenance. Jubilation Enterprises, LLC is currently constructing two new buildings at our Liberty Lake facilities. One new building will be leased to us under an amendment to our existing lease and the other new building will be leased to us under a separate new lease. The amended lease and the new lease provide for annual rent of $1,883,448 and $314,676, respectively. We will continue to be responsible for payments to third parties for taxes, insurance and maintenance. We have entered into two split dollar life insurance agreements with the Wayne and Terina Williams Family Irrevocable Trust established for the benefit of the children of Wayne E. Williams, and three split dollar life insurance agreements with the Williams Family Irrevocable Trust established for the benefit of the children of Bill B. Williams, Jr. and Judith A. Williams. These agreements provide for the payment of a portion of the premiums on life insurance policies on the lives of Bill B. Williams, Jr., Judith A. Williams, Wayne E. Williams and Terina J. Williams, with a total death benefit for all agreements of $13,000,000. Total premiums paid by us under the agreements were $225,110 in 1997, $224,451 in 1998 and $223,510 in 1999. Under the terms of the agreements, we are entitled to repayment of the amount of premium payments we have advanced. The receivable was $1,242,405 at December 31, 1999. We will terminate our Subchapter S corporation status immediately prior to the closing of this offering and, in connection with the closing of this offering, we intend to distribute to our existing shareholders a final amount representing our previously taxed but undistributed Subchapter S corporation earnings through the Subchapter S corporation termination date. At June 30, 2000, the amount of our undistributed Subchapter S corporation earnings was approximately $63 million. The distribution will be made in the form of promissory notes bearing interest at the Bank of America prime rate and will be repaid following the consummation of this offering from the net proceeds of this offering. In connection with this offering and the termination of our Subchapter S corporation tax status, we will enter into a tax indemnification agreement with our existing shareholders providing for, among other things, the shareholders to indemnify us for any federal and state corporate income taxes, including interest and penalties, incurred by us if for any reason we are deemed to be treated as a Subchapter C corporation during any period in which we reported our taxable income as a Subchapter S corporation. The tax indemnification obligation of each existing shareholder is limited to the aggregate amount of all distributions made to such shareholder by us since the first day of the first tax year that we are deemed to be treated as a Subchapter C corporation. We believe we have met the requirements for a Subchapter S corporation and the tax indemnification agreement will provide for payment by our existing shareholders to us and by us to our existing shareholders to adjust for any increases or decreases in tax liability arising from a tax audit that affects our tax liability and results in a corresponding adjustment to the tax liability of our existing shareholders. The amount of any payment cannot exceed the amount of refund received from the Internal Revenue Service by us or our existing shareholders attributable to the adjustment. 53 56 In 1997 and 1998, some of our existing shareholders made loans to us. These loans were payable on demand or in monthly installments, were evidenced by promissory notes and bore interest at the rate of 8.0% per annum. We have repaid these loans in full. Each of the following shareholders or affiliates of shareholders made loans to us in the aggregate amounts set forth opposite his or her name in 1997 and 1998:

In February 1994, we entered into a Put Option Agreement with Wayne E. Williams pursuant to which Mr. Williams had the right to require us to purchase a certain number of his shares of our stock. This agreement has been terminated and is of no further force or effect. In December 1992, we entered into a Stockholders' Agreement with all of our shareholders, including Bill B. Williams, Jr., Judith A. Williams, Wayne E. Williams, Donna L. Zier and Karen S. Williams. Mrs. Zier and Ms. Williams are daughters of Bill B. Williams, Jr. and Judith A. Williams. The agreement provides for restrictions on transferability of our stock. This agreement will terminate on the closing of this offering. On June 1, 1999, we sold our Diversified Products Group to Harold D. Alexander, a former officer, 5% shareholder and director. The assets of the Diversified Products Group consisted of inventory and certain fixed assets with a book and estimated fair market value of approximately $2.8 million. The transaction was structured as an exchange of all the shares of our Diversified Products Group subsidiary for 2,151,000 shares of our common stock. The price was determined by negotiation between the parties. INDEBTEDNESS OF MANAGEMENT In 1999 and 2000, we made loans to Jubilation Enterprises, LLC in the form of construction advances in connection with the expansion of our Liberty Lake facilities. These loans are paid off monthly, are not evidenced by promissory notes and bear no interest. As of June 30, 2000, Jubilation Enterprises, LLC was indebted to us in the amount of $458,143 on these loans. The highest outstanding balance on these loans to that date was $710,041. We intend to continue to make additional loans of this type to Jubilation Enterprises, LLC in the future in connection with remaining construction of these expansions to our Liberty Lake facilities. In 1997 and 1998, we also made loans to Jubilation Enterprises, LLC in the form of construction advances in connection with the prior expansion of our Liberty Lake facilities. These loans remained outstanding during construction, were not evidenced by promissory notes and bore interest at a variable rate not exceeding 8.0% per annum. The highest outstanding balance on these loans was $7,987,709. After completion of construction, a portion of these loans remained outstanding and were payable in monthly installments, were evidenced by promissory notes and bore interest at the rate of 8.0% per annum. These loans have been repaid in full. INDEMNIFICATION AGREEMENTS We have entered into indemnification agreements with our directors and executive officers containing provisions that may require us to indemnify them against liabilities that may arise by reason of their status or service as directors or executive officers and to advance their expenses incurred as a result of any proceeding against them. See "Management -- Limitation of Liability and Indemnification Matters." 54 57 PRINCIPAL SHAREHOLDERS The following table sets forth as of August 15, 2000, and as adjusted to reflect the sale of the shares of common stock offered hereby, certain information with respect to the beneficial ownership of the common stock as to: - each person or group of affiliated persons who is known by us to own beneficially 5% or more of our common stock; - each of the named executive officers; - each of our directors; and - all of our directors and executive officers as a group. Except as indicated in the table or footnotes below, and subject to applicable community property laws, the persons named below have sole voting and investment power with respect to all shares of common stock held by them. Applicable percentage ownership in the table is based on 119,170,000 shares of common stock outstanding as of August 15, 2000, and shares outstanding immediately following the completion of this offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Shares of common stock subject to options that are presently exercisable or exercisable within 60 days of August 15, 2000 are deemed outstanding for the purpose of computing the percentage ownership of the person or entity holding options, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or entity. Unless otherwise indicated below, each person named below has an address in care of Telect, Inc., 2111 Molter Road, Liberty Lake, Washington 99019.

------------------------- * Less than 1% of the outstanding shares of common stock. (1) Includes 21,223,237 shares held by Judith A. Williams in which Bill B. Williams, Jr. has a community property interest. Also includes 5,300,000 shares held in a trust for which Mr. Williams serves as trustee. (2) Includes 21,223,237 shares held by Bill B. Williams, Jr. in which Judith A. Williams has a community property interest. Also includes 5,300,000 shares held in a trust for which Mrs. Williams serves as trustee. 55 58 (3) Includes 3,519,000 shares held by trusts for the benefit of Mr. Williams' three children. Mr. Williams exercises sole voting and dispositive power over these shares. Also includes 1,173,000 shares held by Mr. Williams' spouse. Mr. Williams disclaims beneficial ownership of the shares held in trust and by his spouse, except to the extent of his financial interest in these shares. (4) Includes 3,519,000 shares held by trusts for the benefit of Mrs. Zier's three children and 4,634,000 shares held in trust for the benefit of Mrs. Zier's sister, Karen S. Williams. Mrs. Zier exercises sole voting and dispositive power over these shares. Also includes 1,173,000 shares held by Mrs. Zier's spouse. Mrs. Zier disclaims beneficial ownership of the shares held in trust and by her spouse, except to the extent of her financial interest in these shares. (5) Includes 4,634,000 shares held by trusts for the benefit of Ms. Williams and included in the beneficial ownership of Mrs. Zier as referenced in footnote 4. Ms. Williams has no voting or dispositive power over these shares. 56 59 DESCRIPTION OF CAPITAL STOCK Our articles of incorporation provide for total authorized capital stock of 400,000,000 shares of common stock, $0.001 par value per share, and 100,000,000 shares of preferred stock, $0.001 par value. The following summary does not purport to be complete and is subject to, and qualified in its entirety by, provisions of our articles of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and provisions of applicable law. COMMON STOCK As of August 15, 2000, there were 119,170,000 shares of common stock outstanding, held of record by 36 holders. Upon the closing of this offering, there will be shares of common stock outstanding. The number of shares of common stock to be outstanding upon the closing of this offering does not include shares of common stock issuable upon exercise of stock options outstanding as of , 2000 and shares of common stock reserved for issuance under our equity incentive plan or our employee stock purchase plan. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. There are no cumulative voting rights. Holders of common stock have no preemptive rights or rights to convert their common stock into any other securities. Subject to preferences that may be granted to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of funds legally available. If we are liquidated, dissolved or wound up, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and liquidation preferences that may be granted to any outstanding preferred stock. There are no redemption or sinking funds provisions applicable to the common stock. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued upon the completion of this offering will be fully paid and non-assessable. PREFERRED STOCK Pursuant to our articles of incorporation, our board of directors has the authority, without further action by the shareholders, to designate and issue up to 100,000,000 shares of preferred stock in one or more series. Our board of directors may designate the preferences, powers and privileges thereof, including dividend rights, liquidation preferences, voting rights, conversion rights and redemption or sinking fund provisions, any or all of which may be greater than the rights of common stock. Our board, without shareholder approval, can issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could thus be issued quickly with terms calculated to delay or prevent a change in control of Telect or make removal of management more difficult. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of our common stock. Upon the closing of this offering, there will be no shares of preferred stock outstanding and we have no current plans to issue any of the preferred stock. 57 60 ANTI-TAKEOVER EFFECTS OF ARTICLES OF INCORPORATION, BYLAWS AND OF WASHINGTON LAW Charter Documents There are provisions in our articles of incorporation and bylaws that could discourage potential takeover attempts and could make attempts to change management more difficult. These provisions could also adversely affect the market price of our common stock and include: - division of our board of directors into three separate classes with staggered three-year terms; - elimination of cumulative voting in the election of directors; - limiting removal of directors for cause only; - prohibiting our shareholders from calling special meetings; and - establishing advance notice requirements for submitting nominations for election to the board of directors and for proposing various matters that can be acted upon by shareholders at a meeting. In addition, subject to limitations prescribed by law, our board of directors has the authority to issue up to 100,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights of any preferred stock so issued, without any further vote or action by the shareholders, which rights may be superior to the rights of our common stock. The issuance of preferred stock, while providing flexibility in connection with possible financings or acquisitions or other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. Washington Law Section 23B.19 of the Washington Business Corporation Act generally prohibits a "target corporation" from engaging in certain significant business transactions with an "acquiring person," which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after the acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation's board of directors prior to the time of acquisition. Prohibited significant business transactions include, among other things: - A merger or consolidation with, dispositions of assets to, or issuance or redemption of stock to or from, the acquiring person; - termination of 5% or more of the employees of the target corporation as a result of the acquiring person's acquisition of 10% or more of the shares; or - allowing the acquiring person to receive any disproportionate benefits as a shareholder. After the five-year period, a "significant business transaction" may occur as long as it complies with certain "fair price" provisions of this statute. A corporation may not "opt out" of this statute. This provision may have the effect of delaying, deterring or preventing a change in control of our company. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is . Its address is , and its telephone number is . 58 61 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, we will have outstanding shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of options after August 15, 2000. Of these shares, of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act; provided however, that if shares are purchased by "affiliates" as that term is defined in Rule 144 of the Securities Act, their sales of shares would be subject to certain limitations and restrictions that are described below. The remaining 119,170,000 shares of common stock held by existing shareholders were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. All of these shares will be subject to lock-up agreements described below. These shares will become eligible for sale as follows:

In addition, we have 19,375,500 shares of our common stock available for future grant pursuant to our equity incentive plan and stock purchase plan, and no shares subject to outstanding options at August 15, 2000. All outstanding options are also subject to a 180-day lock-up. We intend to register, prior to the expiration of the lock-up, all of the shares of common stock reserved for issuance under our equity incentive plan and stock purchase plan. This registration will permit the resale of shares by non-affiliates in the public market without restriction beginning on expiration of the lock-ups. We, and each of our officers and directors and all of our shareholders and option holders, have agreed with Deutsche Bank Securities Inc. not to sell or otherwise dispose of any their shares for a period of 180 days after the date of this prospectus without the prior written consent of Deutsche Bank Securities Inc. Deutsche Bank Securities Inc., however, may in its sole discretion, at any time and without notice, release all or any portion of the shares subject to lock-up agreements. Deutsche Bank Securities Inc. does not have any current plans to effect such a release. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or - the average weekly trading volume of the common stock on the Nasdaq National Market System during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. 59 62 Sales under Rule 144 are also subject to other requirements regarding the manner of sale, notice filing and the availability of current public information about us. RULE 144(K) Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, would be entitled to sell these shares under Rule 144(k) without regard to the requirements described above. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. RULE 701 In general, any employee, director, officer, consultant or advisor who purchases shares from us in connection with a written compensatory plan or contract before the effective date of the offering is entitled to resell these shares 90 days after the effective date of the offering in reliance on Rule 144, without having to comply with certain restrictions, including the holding period, contained in Rule 144. The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of these options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than "affiliates" subject only to the manner of sale restrictions of Rule 144 and by "affiliates" under Rule 144 without compliance with its one-year minimum holding requirement. Of the 119,170,000 shares of common stock held by existing shareholders as of August 15, 2000, none will be eligible for resale pursuant to Rule 701 upon the expiration of the 180-day lock-up. 60 63 UNDERWRITING Subject to the terms and conditions of the underwriting agreement the underwriters named below, through their representatives Deutsche Bank Securities Inc., Chase Securities Inc. and U.S. Bancorp Piper Jaffray Inc. have severally agreed to purchase from us the following respective number of shares of common stock at a public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus:

The underwriting agreement provides that the obligations of the several underwriters to purchase the shares of common stock offered hereby are subject to conditions precedent and that the underwriters will purchase all shares of the common stock offered hereby, other than those covered by the over-allotment option described below, if any of these shares are purchased. The underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover of this prospectus and to dealers at a price that represents a concession not in excess of $ per share under the public offering price. The underwriters may allow, and these dealers may re-allow, a concession of not more than $ per share to other dealers. After the initial public offering, representatives of the underwriters may change the offering price and other selling terms. We have granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to additional shares of common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the common stock offered hereby. To the extent that the underwriters exercise this option, each of the underwriters will become obligated, subject to conditions, to purchase approximately the same percentage of additional shares of common stock as the number of shares of common stock to be purchased by it in the above table bears to the total number of shares of common stock offered hereby. We will be obligated, as a result of the option, to sell these additional shares of common stock to the underwriters to the extent the option is exercised. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered. The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is % of the initial public offering price. We have agreed to pay the underwriters the following fees, assuming either no exercise or full exercise by the underwriters of the underwriters' over-allotment option:

In addition, we estimate that our share of the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $ . We have agreed to indemnify the underwriters against some specified types of liabilities, including liabilities under 61 64 the Securities Act, and to contribute to payments the underwriters may be required to make in respect of any of these liabilities. Each of our officers and directors, and all of our shareholders and holders of options to purchase our stock, have agreed not to offer, sell, contract to sell or otherwise dispose of, or enter into any transaction that is designed to, or could be expected to, result in the disposition of any shares of our common stock or other securities convertible into or exchangeable or exercisable for shares of our common stock or derivatives of our common stock owned by these persons prior to this offering or common stock issuable upon exercise of options held by these persons for a period of 180 days after the date of this prospectus without the prior written consent of Deutsche Bank Securities Inc. This consent may be given at any time without public notice. We have entered into a similar agreement with the representatives of the underwriters, except that we may grant options and sell shares pursuant to our 2000 Equity Incentive Plan and our 2000 Employee Stock Purchase Plan without such consent. There are no agreements between the representatives and any of our shareholders or affiliates releasing them from these lock-up agreements prior to the expiration of the 180-day period. The representatives of the underwriters have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. In order to facilitate the offering of our common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of our common stock. Specifically, the underwriters may over-allot shares of our common stock in connection with this offering, thus creating a short position in our common stock for their own account. A short position results when an underwriter sells more shares of common stock than that underwriter is committed to purchase. Additionally, to cover these over-allotments or stabilize the market price of our common stock, the underwriters may bid for, and purchase, shares of our common stock in the open market. Finally, the representatives, on behalf of the underwriters, may also reclaim selling concessions allowed to an underwriter or dealer if the underwriting syndicate repurchases shares distributed by that underwriter or dealer. Any of these activities may maintain the market price of our common stock at a level above that which might otherwise prevail in the open market. These transactions may be effected on the Nasdaq National Market or otherwise. The underwriters are not required to engage in these activities and, if commenced, may end any of these activities at any time. At our request, the underwriters have reserved for sale, at the initial public offering price, up to shares for our vendors, employees, family members of employees, customers and other third parties. The number of shares of our common stock available for sale to the general public will be reduced to the extent these reserved shares are purchased. Any reserved shares that are not purchased by these persons will be offered by the underwriters to the general public on the same basis as the other shares in this offering. PRICING OF THIS OFFERING Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for our common stock was determined by negotiation among Telect and the representatives of the underwriters. Among the factors considered in determining the public offering price were: - prevailing market conditions; - our results of operations in recent periods; - the present stage of our development; - the market capitalizations and stages of development of other companies that we and the representatives of the underwriters believe to be comparable to us; and - estimates of our business potential. 62 65 LEGAL MATTERS The validity of the common stock offered hereby and certain other legal matters in connection with the offering will be passed upon for Telect by Paine, Hamblen, Coffin, Brooke & Miller LLP, Spokane, Washington. Certain additional legal matters in connection with the offering will be passed upon for Telect by Gray Cary Ware & Freidenrich LLP, Seattle, Washington, and certain legal matters in connection with the offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Kirkland, Washington. As of the date of this prospectus, partners of Paine, Hamblen, Coffin, Brooke & Miller LLP beneficially own an aggregate of 7,760 shares of our common stock. EXPERTS The consolidated financial statements of Telect and its subsidiaries at December 31, 1998 and 1999 and for each of the three years in the period ended December 31, 1999, included in this prospectus have been audited by Deloitte & Touche, LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock to be sold in this offering. When used in this prospectus, the term "registration statement" includes amendments to the registration statement. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement. As used herein, the term "registration statement" means the initial registration statement, including the exhibits, schedules, financial statements and notes filed as part thereof, and any and all amendments thereto. This prospectus omits certain information contained in the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and the common stock offered hereby, reference is made to the registration statement. Statements herein concerning the contents of any contract or other document are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed with the SEC as an exhibit to the registration statement, each such statement being qualified by and subject to such reference in all respects. With respect to each such document filed with the SEC as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matter involved. As a result of this offering, we will become subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, will file reports and other information with the SEC. Reports, registration statements, proxy statements, and other information filed by us with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling 1-800-732-0330. The SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. We intend to furnish holders of the common stock with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited condensed financial information for the first three quarters of each fiscal year. We intend to furnish such other reports as it may determine or as may be required by law. 63 66 TELECT, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1 67 INDEPENDENT AUDITORS' REPORT Board of Directors Telect, Inc. Spokane, Washington: We have audited the accompanying consolidated balance sheets of Telect, Inc. (the "Company") as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Telect, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP March 24, 2000 F-2 68 TELECT, INC. CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements. F-3 69 TELECT, INC. CONSOLIDATED STATEMENTS OF INCOME

See notes to consolidated financial statements. F-4 70 TELECT, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

See notes to consolidated financial statements. F-5 71 TELECT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

F-6 72 TELECT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

See notes to consolidated financial statements. F-7 73 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY Description of business Telect, Inc. and its wholly owned subsidiaries, Telect de Mexico, Telect Polska (acquired February 29, 2000), Telect do Brasil and Telect International, Inc., (collectively, the "Company") design, manufacture, and install broadband connectivity and power distribution products for the telecommunications industry on a worldwide basis. 2. PRO FORMA INFORMATION (UNAUDITED) The Company intends to file a registration statement on Form S-1 for an initial public offering (IPO) with the Securities and Exchange Commission. Immediately prior to completion of the IPO, the Company's Subchapter S corporation status will terminate and it will become subject to federal and state income taxes applicable to a Subchapter C corporation. Additionally, upon completion of the IPO, the Company will distribute the earned, but undistributed, accumulated Subchapter S corporation earnings (the "S Corporation Distribution") from April 1, 1987 through the date the Company becomes a Subchapter C corporation. Undistributed Subchapter S corporation earnings through June 30, 2000 were approximately $63.0 million. The difference between the S Corporation Distribution and historical retained earnings consists primarily of temporary timing differences between book and tax income, effect of elimination entries and retained earnings of the subsidiaries. Pro forma unaudited consolidated balance sheet The pro forma unaudited consolidated balance sheet as of June 30, 2000 reflects the termination of the Company's Subchapter S corporation status and the distribution of the S Corporation Distribution through the creation of a shareholder note payable which will be satisfied subsequent to the IPO. It also reflects the deferred income tax assets and liabilities that would have been recorded as of that date. A reduction in shareholders' equity is reflected as a result of the S Corporation Distribution. Pro forma unaudited consolidated statements of income data The unaudited pro forma results of operations information includes a pro forma income tax benefit (provision) for each of the three years ended December 31, 1997, 1998 and 1999, assuming effective tax rates of 36.5%, 36.2%, and 37.4%, respectively, (see Note 11), comparable to what would have been reported had the Company operated as a Subchapter C corporation. Pro forma unaudited consolidated net earnings per common share The Company has adopted the provisions of SFAS No. 128, Earnings Per Share, for purposes of presenting pro forma basic and diluted net income per common share. The following table reconciles the historical weighted average shares outstanding to the pro forma weighted average shares outstanding:

F-8 74 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include the accounts of Telect, Inc. and its wholly owned subsidiaries which include Telect de Mexico, Telect Polska, Telect do Brasil and Telect International, Inc. Intercompany transactions and balances have been eliminated. Cash and cash equivalents The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Cash equivalents are recorded at cost, which approximates fair value. Investments The Company has classified its investment in marketable equity securities as available-for-sale. The aggregate value of all available-for-sale securities held on December 31, 1999 and 1998, are $27,841 and $58,064, respectively, and are included in prepaid expenses and other current assets. Unrealized gains are $25,438 and $30,223 for the years ended December 31, 1999 and 1998, respectively, and are reported in accumulated other comprehensive income. Derivative financial instruments The Company uses interest rate swap agreements in the management of interest rate exposure. The resulting amounts paid or received are recognized as interest income or expense in the periods in which they accrue. Inventories Inventories are stated at the lower of average cost or market using the first-in, first-out method. Cost includes raw materials and labor, plus direct overhead. The Company provides for obsolete and unsaleable inventories based on specific identification of inventory against current demand and recent usage. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the life of the related assets or the life of the lease. The estimated useful lives of the Company's assets are as follows: Molds, tools, and dies.............................. 2 - 8 years Computer equipment.................................. 3 - 5 years Software............................................ 5 years Vehicles............................................ 5 years Machinery and equipment............................. 8 - 10 years Furniture and fixtures.............................. 8 - 10 years Buildings........................................... 40 years

On January 1, 1999, the Company adopted Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This requires capitalization of certain costs incurred in connection with developing and obtaining internal use software and F-9 75 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) amortization of these costs over future periods which prior to the adoption of SOP 98-1 were expensed. The costs capitalized are not material. Intangible assets Intangible assets consist primarily of acquired patents and trademarks which are amortized on a straight-line basis over their estimated useful lives of five years. Impairment of long-lived assets The Company periodically evaluates the carrying value of its long-lived assets, including, but not limited to, property, equipment and leasehold improvements, intangible assets and other long-term assets. The carrying value of a long-lived asset is considered impaired when the undiscounted net cash flow from such asset is estimated to be less than its carrying value. Should a long-lived asset be deemed to be impaired, the Company would record the difference between the undiscounted net cash flow and carrying value as impairment. During 1998, $496,911 of unamortized patent costs and $92,113 of equipment costs were written-off due to impairment. This write-down is included in other income (expense), net. Management does not believe that there were any long-lived assets which were subject to impairment during 1999. Concentration of credit risk Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of trade receivables. The Company performs ongoing credit evaluations of its customers and maintains reserves for probable credit losses. For the years ended December 31, 1997, 1998 and 1999, the Company has not experienced significant losses related to receivables from individual customers or groups of customers in any particular industry or geographic region. Warranty costs The Company provides, by a current charge to income, an amount it estimates will be needed to cover future warranty obligations for products sold. The accrued liability for warranty costs is included in the caption other long-term liabilities in the accompanying consolidated balance sheets. The warranty costs for the years ended December 31, 1997, 1998 and 1999 are $18,028, $77,121 and $390,697 respectively. The accrued liability for warranty costs at December 31, 1999 is $300,000. Revenue recognition Revenue from product sales is generally recognized upon shipment. In cases where a broad right of return exists, revenue is recognized upon the successful completion of the evaluation period. Research, development, and engineering expenses The Company is actively engaged in technology and applied research programs designed to develop new products and product applications. In addition, substantial ongoing product and process improvement engineering and support programs relating to existing products are conducted within engineering departments. Engineering, research, and development costs are charged to operations as incurred. F-10 76 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Advertising costs Costs for advertising are recorded as expense the first time the advertisement appears. Advertising expense totaled $2,134,362, $1,851,099 and $2,475,658 for the years ended December 31, 1997, 1998 and 1999, respectively. Other income Other income in 1999 was primarily made up of royalty payments and a lump sum royalty settlement of $5,000,000. Income taxes In 1987, the Company elected to be treated as a Subchapter S corporation for federal income tax purposes. Because the Company is a Subchapter S corporation, income or loss is reported on the individual tax returns of the owners. The Company recognized expense for certain state and foreign income taxes, which totaled $291,984, $136,061 and $1,698,257 in 1997, 1998 and 1999, respectively. Net income per common share Basic net income (loss) per common share was calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Dilutive net income per common share was calculated by dividing net income by the weighted average number of shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common share equivalents had been issued. There were no dilutive common share equivalents for each of the three years in the period ended December 31, 1999. Foreign currency translation The consolidated financial statements are prepared in United States dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. Beginning in 1998 the Company's consolidated subsidiary, Telect de Mexico, changed its functional currency to the United States dollar. As a result, revenues, costs of sales, and expenses for the subsidiary are translated using an average rate for the related reporting period. Monetary assets and liability accounts are translated at the current exchange rate at the reporting date. The cumulative foreign currency translation adjustments through the date of the change in the functional currency on January 1, 1998, are classified as a component of stockholders' equity. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because of various factors affecting future costs and operations, actual results could differ from estimates. F-11 77 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Reclassifications Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 presentation. Interim financial information The interim financial information as of June 30, 2000, and for the six-month periods ended June 30, 1999 and 2000, was prepared by the Company in a manner consistent with the audited consolidated financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. The unaudited information, in management's opinion, reflects all adjustments that are of a normal recurring nature and that are necessary to present fairly the results for the periods presented. The results of operations for the six-month period ended June 30, 2000 are not necessarily indicative of the results to be expected for the entire year. Stock split A 1000-for-1 stock split of the Company's Common Stock was effected on July 18, 2000. All references in the financial statements to shares, share price, per share amounts and stock plans have been adjusted retroactively for the 1000-for-1 stock split. Recent accounting pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 established new standards of accounting and reporting for derivative instruments and hedging activities. SFAS No. 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income (loss), depending on the type of hedging relationship that exists. In July 1999, the FASB issued SFAS No. 137 Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133. The Company will adopt the requirements of SFAS No. 133 in its financial statements for the year ending December 31, 2001. The Company does not expect adoption of SFAS No. 133 to have a material effect on the financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In March 2000 the SEC issued SAB 101A to defer for one quarter, and in June 2000 issued SAB 101B to defer for an additional two quarters, the effective date of implementing SAB 101, with earlier application encouraged. The Company is required to adopt SAB 101 in the fourth quarter of 2000. The Company does not expect the adoption of SAB 101 to have a material effect on the financial statements. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, or FIN 44, Accounting for Certain Transactions Involving Stock Compensation -- An Interpretation of APB Opinion No. 25, which clarifies the application of Accounting Principles Board Opinion No. 25, Stock Issued to Employees, for Certain Stock-Based Compensation Issues. Among other issues, this Interpretation clarifies (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms F-12 78 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, except for certain provisions which were effective before that date. The Company had no stock options outstanding as of December 31, 1999, and will apply the provisions of FIN 44 upon adoption of a stock option plan. 4. BALANCE SHEET COMPONENTS Inventories The following is a summary of inventories by major category:

Property, plant and equipment Property, plant and equipment consist of the following:

5. LINE OF CREDIT AND LONG-TERM DEBT Revolving Line of Credit At December 31, 1999, the Company had an unsecured $20,000,000 line of credit maturing September 1, 2000. Interest is payable monthly at the bank's fully floating prime rate of 8.50% at December 31, 2000, or, at the Company's option, at the LIBOR rate plus 1.75%. F-13 79 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company has entered into interest rate swap agreements with a bank to effectively convert $7,000,000 of the Company's variable rate debt from variable to fixed rates ranging from 6.67% to 6.95% (see Note 8 for fair value information). Swaps in the notional amount of $2,000,000 and $5,000,000 expire on November 2, 2000 and December 1, 2000, respectively. Long-Term Debt Long-term debt consisted of the following:

F-14 80 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Annual principal payments required on long-term debt are as follows:

Certain notes payable totaling $1,664,937 and $1,009,371 as of December 31,1999 and 1998, respectively, are secured by equipment, furniture and fixtures. Certain debt agreements contain debt covenants, including minimum working capital, minimum net worth, minimum cash flow coverage, maximum liabilities-to-stockholders' equity, and capital expenditure limitations. The Company was in compliance with all covenants at December 31, 1999. 6. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company may be a party to various legal claims, actions and complaints. The Company believes that the disposition of these matters will not have a material adverse effect on the financial statements. F-15 81 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company has noncancellable operating leases from related and unrelated parties for office, production and storage space and equipment expiring at various dates through September 2012. Certain leases allow the Company, at its option, to renew the leases for a period of five years. Future minimum payments required under operating leases at December 31, 1999, are as follows:

Total rent expense under noncancellable operating leases is approximately as follows:

7. RELATED PARTY TRANSACTIONS Notes receivable due from stockholders represents construction advances on behalf of Jubilation Enterprises, LLC, a Washington limited liability company owned by majority stockholders of the Company, for construction of the Liberty Lake, Washington manufacturing facility which is leased by the Company from Jubilation Enterprises LLC. The Notes are due on demand and bear interest at rates ranging from 7% to 8% for the years ended December 31, 1998 and 1999. Notes payable to affiliates consisted of the following:

The Company's notes payable to affiliates are unsecured. Interest expense to affiliates was $35,000, $44,000 and $34,000 for the years ended December 31, 1997, 1998 and 1999, respectively. F-16 82 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's stockholders' agreement gives the Company the option, but not the obligation, upon death of a stockholder to purchase all or any part of the stock owned by the deceased stockholder as of the date of his or her death. The purchase price is determined by either mutual agreement of the parties, a current appraisal, or through a formula specified in the shareholders' agreement, depending on existing facts and circumstances. There is no requirement that the Company maintain any life insurance on the life of the stockholder. The Company has entered into split dollar life insurance agreements with irrevocable family trusts (the "Trusts"). These agreements provide for the partial payment of premiums on life insurance policies on the lives of certain principal stockholders, with a total death benefit of $13,000,000. The policies are owned by the Trusts. Under the terms of the agreements, the Company is entitled to policy proceeds equal to the amount of premium payments advanced. The receivable was $1,018,895, $1,242,405 and $1,356,533 (unaudited) at December 31, 1998 and 1999 and June 30, 2000, respectively. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate the value: Cash, cash equivalents, accounts receivable and other current receivables The carrying value approximates fair value due to the short maturity of these instruments. Notes receivable The fair value of the Company's notes receivable with fixed interest rates is estimated by discounting future cash flows using current rates at which similar loans would be made with similar credit rating and maturities. Debt The fair value of the Company's fixed rate debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Carrying value of the variable rate debt approximates fair value. Interest rate swap agreements The fair value of the interest rate swaps is the amount at which they could be settled. The estimated fair values of the Company's financial instruments based on information available to management at December 31, 1999, are as follows:

9. DISCONTINUED OPERATIONS Diversified Products Group During March 1999, the Company adopted plans to sell its Diversified Products Group. The division is accounted for as a discontinued operation and, accordingly, its operations are F-17 83 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) segregated in the accompanying income statement. Net sales, operating costs and expenses, and other income and expense for fiscal years 1999, 1998 and 1997 have been reclassified to segregate items associated with this discontinued division. The Company sold inventory and certain fixed assets with a book and estimated fair market value of approximately $2.8 million to the Company's previous Chief Financial Officer in exchange for 2,151,000 shares of the Company's common stock. No gain or loss was recognized on the sale of this division as the fair value of shares received approximated the book value of the net assets of the division. The sale was closed on June 1, 1999. Telect Control Products During February 1998, the Company adopted plans to sell Telect Control Products. The division is accounted for as a discontinued operation and, accordingly, its operations are segregated in the accompanying income statement. Net sales, operating costs and expenses, and other income and expense for fiscal years 1999 and 1998 have been reclassified to segregate items associated with this discontinued division. On November 13, 1998, the Company completed the sale of the assets of the division to an unrelated party for a purchase price of $500,000, of which $100,000 was cash and the remaining $400,000 was a note receivable from buyer. The Company retained interest in several contracts associated with the disposed segment. All retained contracts should be completed in 2000. Sales and related gains (losses), net of taxes associated with the discontinued divisions for the prior three fiscal years were as follows:

F-18 84 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The components of net assets of discontinued operations included in the consolidated balance sheets are as follows:

10. PROFIT SHARING PLAN The Company has a qualified employee profit sharing 401(k) plan which covers substantially all employees who meet certain minimum age and service requirements. The Company's discretionary profit sharing contributions to the plan are determined annually by the Board of Directors and were $122,020, $120,000 and $0 for the years ended December 31, 1997, 1998 and 1999, respectively. Eligible employees may elect to defer up to 12% of their compensation each year. The Company may make discretionary matching contributions equal to a percentage of each participant's elective deferrals for the plan year. The matching percentage is determined annually by the plan sponsor. The Company's matching contributions for the years ended December 31, 1997, 1998 and 1999, were $588,002, $735,549 and $834,942, respectively. 11. PRO FORMA INCOME TAXES (UNAUDITED) The Company has elected to be a Subchapter S corporation, and therefore, its federal taxable income and certain state taxable income has been reported on the shareholders' individual income tax returns. The Company's subsidiary operations in Mexico are subject to taxation in Mexico. F-19 85 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In connection with the IPO (see Note 2), the Company's Subchapter S corporation status will terminate and it will become subject to federal and state income taxes applicable to Subchapter C corporations. The consolidated statements of income reflect a pro forma provision (benefit) for all periods for federal and state taxes, as if the consolidated group had been subject to taxation as a Subchapter C corporation at effective tax rates of 36.5%, 36.2%, and 37.4% for 1997, 1998, and 1999, respectively. The difference between the effective rate and the statutory rate of 35.0% is as follows:

Upon termination of the Subchapter S corporation status, and based upon management's determination that it is more likely than not that deferred tax assets will be realized, the Company will record increases in net deferred tax assets and liabilities and an accompanying one-time tax benefit to reflect the differences between the financial statement and income tax bases of the assets and liabilities at Subchapter C corporation rates. If the Subchapter S corporation status had been terminated on June 30, 2000, deferred tax assets and liabilities for each temporary difference would have been increased to the following amounts: DEFERRED TAX LIABILITIES: Basis differential in property, plant and equipment.......................................... $(1,593,000) Other................................................ (77,000) ----------- Total deferred tax liabilities..................... $(1,670,000) =========== DEFERRED TAX ASSETS: Inventory............................................ $ 1,326,000 Accrued expenses..................................... 422,000 Allowance for bad debts.............................. 190,000 ----------- Total deferred tax assets.......................... $ 1,938,000 =========== Net deferred tax assets............................ $ 268,000 ===========

12. SEGMENT REPORTING Telect operates in the global telecommunications industry and has four reportable segments: Broadband Connectivity, Power Distribution, Control Products and Diversified Products. Broadband Connectivity products are used to interconnect copper, coaxial cable and fiber optic devices used in the telecommunications industry. These products include specialized and patented switching jacks, interoffice repeaters, electrical to optical converters, fiber optic polishing, fiber and copper cable management and protection systems. Power Distribution products direct or distribute power from a power source to various loads or end uses. Products in this segment include filtered and non-filtered fuse panels, battery distributed fused bays, F-20 86 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) protector blocks and panels, and circuit breaker panels. Control Products design, manufacture and install physical access control systems for prisons. This segment was sold in late 1998. Diversified Products manufactured custom electrical cabling. This segment was sold in 1999. The "management approach" called for by SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," has been used to present the segment information which follows. That approach is based upon the way management organizes segments within an enterprise for making operating decisions and assessing performance. Accounting policies used by the segments are the same as those described in Note 3. Intersegment sales were not significant. The following costs are not allocated to segment results: - Interest income; and - Other non-operating income or expense. Corporate assets consist primarily of cash, leasehold improvements, furniture and fixtures, data processing software and intangibles. Capital expenditures do not include amounts arising from the purchase of businesses. F-21 87 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) International sales to external customers are on a "shipped to" basis. No single foreign country has property and equipment which is material enough to warrant disclosure. Sales to one customer amounted to 17.3%, 10.4% and 9.4% of Telect's consolidated sales in 1997, 1998 and 1999, respectively. No other single customer accounted for more than ten percent of Telect's consolidated sales.

F-22 88 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. SUBSEQUENT EVENTS Acquisitions: On February 29, 2000, the Company purchased more than 99% of the outstanding common stock of Zaklady Elektroniczne ELWRO S.A. (ELWRO) in Wroclaw, Poland for $3,142,000. Acquired assets and liabilities primarily consisted of property and equipment ($1,912,000), inventory ($275,000), other current assets ($1,659,000) and account payables and accruals ($704,000). The purchase gave the Company ownership of all ELWRO assets, including the manufacturing plant, equipment, and existing product lines. ELWRO offers advanced mold and tool design, manufacturing and maintenance, injection molding, metal fabrication, and engineering services to eastern and western European markets. The transaction was accounted for under the purchase method of accounting. On March 6, 2000, the Company purchased the assets of the Telzon(TM) product line from Thomas & Betts Corporation for approximately $11,000,000, subject to a post closing adjustment. The assets consisted primarily of inventory ($6,650,000), patents and trademarks ($4,000,000) and equipment ($300,000). Telzon products include analog and digital copper cross-connect and mainframe terminal block connectivity products. Line of Credit (unaudited): On April 4, 2000, the Company amended its line of credit agreement by increasing the line from $20,000,000 to $30,000,000 and extending the maturity date to May 1, 2001. Authorized Shares (unaudited): On July 18, 2000, the Company amended its Articles of Incorporation to change the authorized number of shares of all classes of stock of the Company to 500,000,000 shares, consisting of 400,000,000 shares of common stock with a par value of $0.001 per share and 100,000,000 shares of preferred stock with a par value of $0.001 per share after giving effect to the 1,000-for-1 stock split. Stock Plans (unaudited): 2000 Employee Stock Purchase Plan The Company adopted the 2000 Employee Stock Purchase Plan (the ESPP) on August 24, 2000. The ESPP will be implemented upon the effectiveness of an IPO. The ESPP is intended to qualify under Section 423 of the Code, and permits eligible employees of the Company and its subsidiaries to purchase common stock through payroll deductions of up to 15% of their compensation. Under the ESPP, no employee may purchase common stock worth more than $25,000 in any calendar year. In addition, owners of 5% or more of the Company's or subsidiary's common stock may not participate in the ESPP. An aggregate of 6,458,500 shares of common stock are authorized for issuance under the ESPP. The ESPP will be implemented with six-month offering periods, the first such period to commence upon the effectiveness of an IPO. Thereafter, offering periods will begin on each February 1 and August 1. The price of common stock purchased under the ESPP will be the lesser of 85% of the fair market value on the first day of an offering period and 85% of the fair market value on the last day of an offering period. The ESPP does not have a fixed expiration date, but may be terminated by the Company's Board of Directors at any time. No shares have been issued under the ESPP. F-23 89 TELECT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2000 Equity Incentive Plan On August 24, 2000, the Board of Directors approved the implementation of the 2000 Equity Incentive Plan (the Plan). The Plan provides employees an opportunity to purchase shares of stock pursuant to options which may qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the Code), and employees, outside directors, and consultants of the Company an opportunity to purchase shares of stock pursuant to options which are not described in Section 422 of the Code (nonqualified stock options). 12,917,000 shares of stock are available for the grant of options or the issuance of stock under the Plan. F-24 90 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. TABLE OF CONTENTS

UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. DEALERS ARE ALSO OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. [TELECT LOGO] SHARES COMMON STOCK DEUTSCHE BANC ALEX. BROWN CHASE H&Q U.S. BANCORP PIPER JAFFRAY PROSPECTUS , 2000 91 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Stock being registered. All amounts shown are estimates except for the registration fee, the NASD filing fee and the Nasdaq National Market fee. Securities and Exchange Commission registration fee......... $39,600 NASD filing fee............................................. 15,500 Nasdaq National Market Listing fee.......................... 95,000 Blue sky qualification fees and expenses.................... * Printing and engraving expenses............................. * Legal fees and expenses..................................... * Accounting fees and expenses................................ * Transfer agent and registrar fees........................... * Miscellaneous............................................... * ------- Total..................................................... * =======

------------------------- * To be completed by amendment. ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation Act (the "WBCA") authorize a court to award, or a corporation's board of directors to grant, indemnification to directors and officers on terms sufficiently broad to permit indemnification under some circumstances for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). The Registrant's Amended and Restated Articles of Incorporation (Exhibit 3.1 hereto) provide for indemnification of the Registrant's directors, officers, employees and agents to the maximum extent permitted by Washington law. The directors and officers of the Registrant also may be indemnified against liability they may incur for serving in that capacity pursuant to a liability insurance policy maintained by the Registrant for such purpose. Such insurance is maintained on a regular basis (and not specifically in connection with this offering) against liabilities arising on the part of the Registrant out of its foregoing indemnification provisions, subject to certain exclusions and to the policy limits. Section 23B.08.320 of the WBCA authorizes a corporation to limit a director's liability to the corporation or its shareholders for monetary damages for acts or omissions as a director, except in circumstances involving intentional misconduct, knowing violations of law or illegal corporate loans or distributions, or any transaction from which the director personally receives a benefit in money, property or services to which the director is not legally entitled. The Registrant's Amended and Restated Articles of Incorporation contain provisions implementing, to the fullest extent permitted by Washington law, as applicable, such limitations on a director's liability to the registrant and its shareholders. The Registrant will enter into indemnification agreements with its officers and directors to indemnify them against certain liabilities arising out of their service as officers and directors, as applicable, and to advance expenses to defend claims subject to indemnification. Reference is also made to the Form of Underwriting Agreement to be filed as Exhibit 1.1 to this registration statement for certain provisions regarding indemnification of officers and directors of the Registrant by the Underwriters and cross-indemnification provisions by the Registrant of officers, directors and agents of the Underwriter. II-1 92 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. None. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.

II-2 93

------------------------- * To be filed by amendment. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, employee or II-3 94 agent of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, employee or agent in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 95 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Spokane, County of Spokane, State of Washington, on the day of August 30, 2000. TELECT, INC. By: /s/ WAYNE E. WILLIAMS --------------------------------------- Wayne E. Williams President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Wayne E. Williams and Stanley E. Hilbert, or either of them, as his or her attorney-in-fact, each with full power of substitution and resubstitution, for him or her in any and all capacities, to sign any and all amendments to this Registration Statement, including post-effective amendments and any and all new registration statements filed pursuant to Rule 462 under the Securities Act in connection with or related to the Offering contemplated by this Registration Statement as amended, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorney-in-fact or his or her substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

II-5 96 INDEX TO EXHIBITS

------------------------- * To be filed by amendment.

TELECT INC S-1