##### Table of Contents



FORM 10-Q UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934
 Commission file number 0-24701 CATAPULT COMMUNICATIONS CORPORATION  Nevada
    
    77-0086010(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 160 South Whisman Road
Mountain View, California 94041 (650) 960-1025 (Address, including zip code, and telephone number, including
area code, of principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x As of June 30, 2004, there were 13,167,114 shares of the Registrants
Common Stock, $0.001 par value, outstanding.




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TABLE OF CONTENTS  Part I. Financial InformationItem 1. Financial StatementsUNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETSUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOMEUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 6. Exhibits and Reports on Form 8-K.SIGNATURESEXHIBIT INDEXEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32    Table of Contents  CATAPULT COMMUNICATIONS CORPORATION
FORM 10-Q INDEX PagePart I-Financial InformationItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets at June 30, 2004
and September 30, 2003
    
    
    3Unaudited Condensed Consolidated Statements of Income for the three months and
nine months ended June 30, 2004 and 2003
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended
June 30, 2004 and 2003
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26Part IIOther InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    27Signatures
    
    
    27
 2




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Part I. Financial Information 
 Item 1. Financial Statements CATAPULT COMMUNICATIONS CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    September 30,2004
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    24,309
    
    
    $
    11,770Short-term investments
    
    
    22,174
    
    
    
    18,901Accounts receivable, net
    
    
    8,353
    
    
    
    10,598Inventories
    
    
    2,893
    
    
    
    2,325Deferred income taxes
    
    
    2,407
    
    
    
    2,407Prepaid expenses and other current assets
    
    
    2,092
    
    
    
    1,096Total current assets
    
    
    62,228
    
    
    
    47,097Property and equipment, net
    
    
    2,782
    
    
    
    3,384Goodwill
    
    
    49,394
    
    
    
    49,394Other intangible assets, net
    
    
    5,327
    
    
    
    6,093Other assets
    
    
    1,068
    
    
    
    1,121Total assets
    
    $
    120,799
    
    
    $
    107,089LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,399
    
    
    $
    1,216Accrued liabilities
    
    
    8,169
    
    
    
    6,002Deferred revenue
    
    
    6,448
    
    
    
    5,576Convertible notes payable
    
    
    17,368
    
    
    
    17,674Total current liabilities
    
    
    33,384
    
    
    
    30,468Stockholders Equity:Common stock
    
    
    13
    
    
    
    13Additional paid-in capital
    
    
    23,503
    
    
    
    21,187Deferred stock-based compensation
    
    
    (48
    )
    
    
    (75
    )Accumulated other comprehensive income
    
    
    658
    
    
    
    575Retained earnings
    
    
    63,289
    
    
    
    54,921Total stockholders equity
    
    
    87,415
    
    
    
    76,621Total liabilities and stockholders equity
    
    $
    120,799
    
    
    $
    107,089
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3




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CATAPULT COMMUNICATIONS CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Products
    
    $
    11,267
    
    
    $
    8,344
    
    
    $
    33,619
    
    
    $
    27,842Services
    
    
    3,053
    
    
    
    2,253
    
    
    
    8,992
    
    
    
    7,176Total revenues
    
    
    14,320
    
    
    
    10,597
    
    
    
    42,611
    
    
    
    35,018Cost of revenues:Products
    
    
    1,196
    
    
    
    1,113
    
    
    
    3,762
    
    
    
    4,282Services
    
    
    787
    
    
    
    669
    
    
    
    2,418
    
    
    
    2,127Amortization of purchased technology
    
    
    171
    
    
    
    171
    
    
    
    514
    
    
    
    514Total cost of revenues
    
    
    2,154
    
    
    
    1,953
    
    
    
    6,694
    
    
    
    6,923Gross profit
    
    
    12,166
    
    
    
    8,644
    
    
    
    35,917
    
    
    
    28,095Operating expenses:Research and development
    
    
    2,973
    
    
    
    3,349
    
    
    
    8,693
    
    
    
    10,412Sales and marketing
    
    
    4,234
    
    
    
    3,571
    
    
    
    12,845
    
    
    
    10,901General and administrative
    
    
    1,676
    
    
    
    1,485
    
    
    
    5,131
    
    
    
    5,048Total operating expenses
    
    
    8,883
    
    
    
    8,405
    
    
    
    26,669
    
    
    
    26,361Income from operations
    
    
    3,283
    
    
    
    239
    
    
    
    9,248
    
    
    
    1,734Interest income, net
    
    
    117
    
    
    
    96
    
    
    
    321
    
    
    
    332Other income (expense)
    
    
    (1
    )
    
    
    (70
    )
    
    
    161
    
    
    
    670Income before income taxes
    
    
    3,399
    
    
    
    265
    
    
    
    9,730
    
    
    
    2,736Provision for (benefit from) income taxes
    
    
    476
    
    
    
    (1,096
    )
    
    
    1,362
    
    
    
    (404
    )Net income
    
    $
    2,923
    
    
    $
    1,361
    
    
    $
    8,368
    
    
    $
    3,140Net income per share:Basic
    
    $
    0.22
    
    
    $
    0.11
    
    
    $
    0.64
    
    
    $
    0.24Diluted
    
    $
    0.20
    
    
    $
    0.10
    
    
    $
    0.58
    
    
    $
    0.24Shares used in per share calculation:Basic
    
    
    13,139
    
    
    
    12,863
    
    
    
    13,014
    
    
    
    12,971Diluted
    
    
    14,582
    
    
    
    13,034
    
    
    
    14,463
    
    
    
    13,119
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4




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CATAPULT COMMUNICATIONS CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine months endedJune 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    8,368
    
    
    $
    3,140Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    1,340
    
    
    
    1,259Amortization of deferred stock-based compensation
    
    
    27
    
    
    
    27Amortization of intangible assets
    
    
    766
    
    
    
    966Provision for doubtful accounts
    
    
    61
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    332Amortization of premium on note payable
    
    
    (306
    )
    
    
    (306
    )Change in assets and liabilities:Accounts receivable
    
    
    2,165
    
    
    
    2,074Inventories
    
    
    (556
    )
    
    
    1,216Prepaid expenses and other current assets
    
    
    (967
    )
    
    
    (209
    )Assets of discontinued operations
    
    
    
    
    
    
    2,636Other assets
    
    
    55
    
    
    
    (3
    )Accounts payable
    
    
    137
    
    
    
    (1,940
    )Accrued liabilities
    
    
    2,135
    
    
    
    (7,610
    )Deferred revenue
    
    
    871
    
    
    
    643Liabilities of discontinued operations
    
    
    
    
    
    
    (889
    )Net cash provided by operating activities
    
    
    14,096
    
    
    
    1,336Cash flows from investing activities:Sales (purchases) of investments, net
    
    
    (3,289
    )
    
    
    9,548Purchases of property and equipment
    
    
    (714
    )
    
    
    (1,178
    )Net cash provided by (used in) investing activities
    
    
    (4,003
    )
    
    
    8,370Cash flows from financing activities:Repurchase of common stock
    
    
    
    
    
    
    (1,761
    )Proceeds from issuance of common stock
    
    
    2,316
    
    
    
    339Net cash provided by (used in) financing activities
    
    
    2,316
    
    
    
    (1,422
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    130
    
    
    
    101Increase in cash and cash equivalents
    
    
    12,539
    
    
    
    8,385Cash and cash equivalents, beginning of period
    
    
    11,770
    
    
    
    12,575Cash and cash equivalents, end of period
    
    $
    24,309
    
    
    $
    20,960
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5




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CATAPULT COMMUNICATIONS CORPORATION 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1THE COMPANY AND BASIS OF PRESENTATION Catapult Communications Corporation (the Company) designs, develops,
manufactures, markets and supports advanced software-based test systems
offering integrated suites of testing applications for the global
telecommunications industry. The Companys advanced test systems assist its
customers in the design, integration, installation and acceptance testing of a
broad range of digital telecommunications equipment and services. The Company
was founded in 1986 and has been incorporated in Nevada since June 19, 1998.
The Company has operations in the United States, Canada, the United Kingdom and
Europe, Australia and Japan. The Company conducts its business within one
industry segment. On August 30, 2002, the Company purchased certain assets and assumed
certain liabilities of the Network Diagnostics Business (NDB) of Tekelec. The
assets acquired included the shares of Tekelecs Japanese subsidiary, Tekelec
Limited. The total purchase price of $68.3 million consisted of a cash payment
of $42.5 million, two 2% convertible subordinated notes in the aggregate
principal amount of $17.3 million maturing on August 30, 2004, a premium of
$0.8 million ascribed to the convertible notes payable, transaction costs of
$4.4 million and a cash payment of $3.3 million in September 2003 in settlement
of a net working capital adjustment and other matters. Under a letter agreement
the Company entered into with Tekelec on March 18, 2004, in certain
circumstances Tekelec may extend the maturity date of the notes to September
30, 2004. The accompanying unaudited interim condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to such rules and
regulations. These unaudited condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Companys Annual Report on Form 10-K for the year
ended September 30, 2003, and filed with the SEC on December 5, 2003. The
unaudited condensed consolidated financial statements as of June 30, 2004, and
for the three and nine months ended June 30, 2004 and 2003, reflect, in the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial information set forth
herein. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for any subsequent interim period or
for an entire year. The September 30, 2003 balance sheet was derived from
audited financial statements at that date, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. NOTE 2RECENT ACCOUNTING PRONOUNCEMENTS In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition (SAB No. 104), which codifies, revises and rescinds
certain sections of SAB No. 101, Revenue Recognition, in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material impact upon the Companys financial position, cash
flows or results of operations. In April 2004, the Emerging Issues Task Force issued Statement No. 03-06
Participating Securities and the Two-Class Method Under FASB Statement No.
128, Earnings Per Share (EITF 03-06). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. EITF 03-06 also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 is effective for fiscal periods beginning after 6




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March 31, 2004. The Company has evaluated the effect of adopting EITF 03-06 and
does not believe that it will have any effect on its results of operations or net income per share. At
its November 2003 meeting, the EITF reached a consensus on disclosure
guidance previously discussed under EITF 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. The consensus provided for certain
disclosure requirements that were effective for
fiscal years ending after December 15, 2003. At
its March 2004 meeting, the EITF reached a consensus on recognition
and measurement guidance previously discussed under EITF 03-01.
The consensus clarifies the meaning of other-than-temporary
impairment and its application to investments classified as either
available-for-sale or held-to-maturity under FASB Statement
No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and investments accounted for under the cost
method or the equity method. The recognition and measurement guidance
for which the consensus was reached in the March 2004 meeting is to
be applied to other-than-temporary impairment evaluations in
reporting periods beginning after June 15, 2004. The
Company has evaluated the effect of adopting the further guidance
with respect to EITF 03-01 and does not believe that it will
have any effect on its results of operations or net income per share. NOTE 3STOCK-BASED COMPENSATION The Company accounts for stock-based employee and director compensation
arrangements in accordance with provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, as
interpreted by FASB Interpretation No. 44 Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of Opinion No. 25. The Company
also complies with the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. Under APB Opinion No. 25,
compensation cost is recognized over the vesting period based on the
difference, if any, on the date of grant between the fair value of the
Companys stock and the amount an employee must pay to acquire the stock. To
date, the Company has not granted stock options to individuals who are not
employees or directors. The following table illustrates the effect on net income and net income
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation: Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except per share data)Net income, as reported, for basic
earnings per share
    
    $
    2,923
    
    
    $
    1,361
    
    
    $
    8,368
    
    
    $
    3,140Interest on convertible notes payable,
net of related tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income, for diluted earnings per share
    
    $
    2,923
    
    
    $
    1,361
    
    
    $
    8,368
    
    
    $
    3,140Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
    
    
    8
    
    
    
    6
    
    
    
    23
    
    
    
    18Deduct: Total stock-based employee
compensation expense determined under
fair-value-based method for all awards,
net of related tax effects
    
    
    (627
    )
    
    
    (556
    )
    
    
    (1,673
    )
    
    
    (1,608
    )Pro forma net income, for basic earnings
per share
    
    $
    2,304
    
    
    $
    811
    
    
    $
    6,718
    
    
    $
    1,550Pro forma net income, for diluted
earnings per share
    
    $
    2,304
    
    
    $
    811
    
    
    $
    6,718
    
    
    $
    1,550Net income per share:Basic, as reported
    
    $
    0.22
    
    
    $
    0.11
    
    
    $
    0.64
    
    
    $
    0.24Basic, pro forma
    
    $
    0.18
    
    
    $
    0.06
    
    
    $
    0.52
    
    
    $
    0.12Diluted, as reported
    
    $
    0.20
    
    
    $
    0.10
    
    
    $
    0.58
    
    
    $
    0.24Diluted, pro forma
    
    $
    0.16
    
    
    $
    0.06
    
    
    $
    0.46
    
    
    $
    0.12
 These pro forma amounts may not be representative of future years as
options vest over several years and additional awards are generally made each
year. 7




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NOTE 4BASIC AND DILUTED NET INCOME PER SHARE Basic net income per share is computed using the weighted average number
of common shares outstanding during the period. Diluted net income per share
includes the effect of dilutive potential common shares (options) issued during
the period using the treasury stock method. Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except per share data)Net income
    
    $
    2,923
    
    
    $
    1,361
    
    
    $
    8,368
    
    
    $
    3,140Interest on notes payable, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income, for diluted earnings per share
    
    $
    2,923
    
    
    $
    1,361
    
    
    $
    8,368
    
    
    $
    3,140Weighted average shares outstanding
    
    
    13,139
    
    
    
    12,863
    
    
    
    13,014
    
    
    
    12,971Dilutive options
    
    
    362
    
    
    
    171
    
    
    
    368
    
    
    
    148Convertible notes payable
    
    
    1,081
    
    
    
    
    
    
    
    1,081
    
    
    
    Weighted average shares assuming dilution
    
    
    14,582
    
    
    
    13,034
    
    
    
    14,463
    
    
    
    13,119Net income per share:Basic
    
    $
    0.22
    
    
    $
    0.11
    
    
    $
    0.64
    
    
    $
    0.24Diluted
    
    $
    0.20
    
    
    $
    0.10
    
    
    $
    0.58
    
    
    $
    0.24
 Diluted net income per share does not include the effect of the following
anti-dilutive common equivalent shares: Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Common stock options
    
    
    462
    
    
    
    1,342
    
    
    
    532
    
    
    
    1,438Convertible notes payable
    
    
    
    
    
    
    1,081
    
    
    
    
    
    
    
    1,081
 8




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NOTE 5GOODWILL AND INTANGIBLE ASSETS The Company adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), effective October 1, 2002. As of October
1, 2002, goodwill will no longer be amortized but will be tested annually on an
enterprise basis at September 30th for impairment in accordance with the
requirements of SFAS No. 142. The Company performed its annual impairment test
on September 30, 2003, indicating no impairment of goodwill. Between October 1,
2003 and June 30, 2004, there were no changes to the Companys goodwill balance
of $49.4 million. Intangible assets subject to amortization consist of purchased technology,
trade names and customer relationships that are being amortized over a period
of seven years, non-compete agreements that are being amortized over a period
of eight years, and a backlog that was amortized over a period of nine months,
as follows (in thousands): As of September 30, 2003
    
    As of June 30, 2004Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountPurchased Technology
    
    $
    4,800
    
    
    $
    (743
    )
    
    $
    4,057
    
    
    $
    4,800
    
    
    $
    (1,257
    )
    
    $
    3,543Trade names
    
    
    1,000
    
    
    
    (155
    )
    
    
    845
    
    
    
    1,000
    
    
    
    (262
    )
    
    
    738Customer relationships
    
    
    1,000
    
    
    
    (155
    )
    
    
    845
    
    
    
    1,000
    
    
    
    (262
    )
    
    
    738Non-compete agreements
    
    
    400
    
    
    
    (54
    )
    
    
    346
    
    
    
    400
    
    
    
    (92
    )
    
    
    308System backlog
    
    
    400
    
    
    
    (400
    )
    
    
    
    
    
    
    400
    
    
    
    (400
    )
    
    
    Total
    
    $
    7,600
    
    
    $
    (1,507
    )
    
    $
    6,093
    
    
    $
    7,600
    
    
    $
    (2,273
    )
    
    $
    5,327
 The estimated future amortization expense of purchased intangible assets
as of June 30, 2004 was as follows: AmountFiscal Year
    
    (in millions)2004
(remainder)
    
    $
    0.22005
    
    
    1.02006
    
    
    1.02007
    
    
    1.02008
    
    
    1.0Thereafter
    
    
    1.1Total
    
    $
    5.3
 NOTE 6WARRANTY ACCRUAL The activity in the warranty accrual included the following (in thousands): Nine months EndedJune 30,
    
    June 30,2004
    
    2003Beginning Balance
    
    $
    60
    
    
    $
    600Settlements made during the period
    
    
    (53
    )
    
    
    (105
    )Accruals for warranties issued during
the period
    
    
    58
    
    
    
    105Ending balance
    
    $
    65
    
    
    $
    600
 9




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NOTE 7COMPREHENSIVE INCOME The components of comprehensive income, net of tax, are as follows: Three months ended
    
    Nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Net income
    
    $
    2,923
    
    
    $
    1,361
    
    
    $
    8,368
    
    
    $
    3,140Currency translation adjustment
    
    
    (86
    )
    
    
    (103
    )
    
    
    99
    
    
    
    101Unrealized gains (losses) on investments
    
    
    (13
    )
    
    
    4
    
    
    
    (16
    )
    
    
    2Comprehensive income
    
    $
    2,824
    
    
    $
    1,262
    
    
    $
    8,451
    
    
    $
    3,243
 NOTE 8INVENTORIES June 30,
    
    September 30,2004
    
    2003(in thousands)Raw materials
    
    $
    2,648
    
    
    $
    2,092Work-in-process
    
    
    61
    
    
    
    140Finished goods
    
    
    184
    
    
    
    93$
    2,893
    
    
    $
    2,325
 NOTE 9CONVERTIBLE NOTES PAYABLE In connection with the acquisition of NDB described in Note 1, the
Companys Irish subsidiary issued two convertible notes to Tekelec in the
principal amounts of $10.0 million and $7.3 million, respectively. These notes
have been guaranteed by the Company, bear interest at 2% and are due and
payable on or before August 30, 2004. The notes are convertible at the option
of the holder into 1,081,250 shares of the Companys common stock between
August 30, 2003 and the maturity date. Under a letter agreement the Company
entered into with Tekelec on March 18, 2004, in certain circumstances Tekelec
may extend the maturity date of the notes to September 30, 2004. The Company
also granted Tekelec certain rights to require the Company to register with the
Securities and Exchange Commission for resale by Tekelec any common stock
acquired by Tekelec upon conversion of the notes. The fair value of the notes at the date they were issued was $18.1
million. The valuation premium of $0.8 million is being amortized to interest
expense, net over the term of the notes using the effective interest method and a
credit to interest expense of $102,000 and $306,000 were recorded in each of the
three-month periods and nine-month periods ended June 30, 2004 and 2003. On the maturity date of the $10.0 million note, the Company is entitled to
pay the principal balance in any combination of cash and/or common stock,
provided that the number of shares of common stock shall be calculated at a value of 82.5% of the fair market
value of the stock, determined pursuant to a formula set forth in the note. NOTE 10REPURCHASE OF COMMON STOCK In December 1999, the Companys Board of Directors authorized a stock
repurchase program of up to 2,000,000 shares of its common stock. Depending on
market conditions and other factors, repurchases can be made from time to time
in the open market and in negotiated transactions, including block
transactions, and this program may be discontinued at any time. Through
September 30, 2003, the Company had repurchased a total of 257,400 shares at a
cost of approximately $1.8 million. In the nine months ended June 30, 2004, the
Company repurchased no shares. As of June 30, 2004, the Company is authorized
to repurchase an additional 1,742,600 shares of its common stock under the
stock repurchase program. 10




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##### Table of Contents



NOTE 11INCOME TAXES The Companys provision for (benefit from) income taxes consists of
federal, state and international taxes. The Company recorded a tax provision of
$476,000 and a tax benefit of $1.1 million in the three months ended June 30,
2004 and June 30, 2003, respectively and a tax provision of $1.4 million and a
tax benefit of $404,000 in the nine months ended June 30, 2004 and June 30,
2003, respectively. These provisions (benefits) are included in the taxes
payable component of accrued liabilities. The reductions in the provision rates
recorded in both the three and nine months ended June 30, 2004 are due to a
change in the mix of projected taxable annual income between domestic and
international operations. NOTE 12SEGMENT REPORTING The Company is organized to operate and service a single industry segment:
the design, development, manufacture, marketing and support of advanced
software-based test systems globally. The Companys principal geographical areas of operations, revenues by
customer location and net income by legal entity location for the nine months
ended June 30, 2004 and 2003 and long-lived assets by legal entity at June 30,
2004 and September 30, 2003 were as follows (in thousands): North
    
    
    
    
    
    
    
    
    
    Rest of
    
    ConsolidatedAmerica
    
    Europe
    
    Japan
    
    World
    
    TotalNine months Ended June 30, 2004Revenues
    
    $
    14,068
    
    
    $
    10,655
    
    
    $
    16,616
    
    
    $
    1,272
    
    
    $
    42,611Net income (loss)
    
    
    (196
    )
    
    
    8,275
    
    
    
    289
    
    
    
    
    
    
    
    8,368As at June 30, 2004Goodwill
    
    
    22,896
    
    
    
    26,498
    
    
    
    
    
    
    
    
    
    
    
    49,394Long-Lived Assets
    
    
    4,806
    
    
    
    3,354
    
    
    
    307
    
    
    
    
    
    
    
    8,467Nine months Ended June 30, 2003Revenues
    
    $
    12,400
    
    
    $
    7,463
    
    
    $
    13,124
    
    
    $
    2031
    
    
    $
    35,018Net income
    
    
    214
    
    
    
    2,484
    
    
    
    442
    
    
    
    
    
    
    
    3,140As at September 30, 2003Goodwill
    
    
    22,896
    
    
    
    26,498
    
    
    
    
    
    
    
    
    
    
    
    49,394Long-Lived Assets
    
    
    5,849
    
    
    
    3,753
    
    
    
    286
    
    
    
    
    
    
    
    9,888
 NOTE 13CONTINGENCIES A lawsuit was instituted in October 2002 against the Company and one of
its subsidiaries, Catapult Communications International Limited, an Irish
corporation, in the Antwerp Commercial Court, Antwerp, Belgium, by Tucana
Telecom NV, a Belgian company (Tucana). Tucana had been a distributor of
products for Tekelec, the company from which NDB was acquired in August 2002.
The writ alleges that the defendants improperly terminated an exclusive
distribution agreement with Tucana following the acquisition of NDB and seeks
damages of 12,461,000 euros plus costs. A hearing before the Antwerp Commercial
Court was fixed on January 16, 2004. However, at Tucanas request, the case was
not argued on that date, and the hearing has therefore been adjourned. The
Company believes that it properly terminated any contract it had with Tucana
and that Tucana is not entitled to any damages in this matter. The Company
intends to defend itself vigorously. The Company may be able to seek
indemnification from Tekelec for any damages assessed against it in this matter
under the terms of the Asset Purchase Agreement it entered into with Tekelec,
although there is no assurance that such indemnification would be
available. The Company estimates that no loss will result from this
lawsuit and accordingly, has not made any provision for loss. 11




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Item 2. 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 thereto included in our Annual Report onForm 10-Kfor the
year ended September 30, 2003, filed on December 5, 2003. Forward-looking Statements Some of the statements in this report and the documents incorporated
herein by reference constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These statements relate to
future events or our future financial performance and involve known and unknown
risks, uncertainties and other factors that may cause our businesss or our
industrys actual results, levels of activity, performance or achievements to
be materially different from those expressed or implied by any forward-looking
statements. Such statements include, in particular, statements about our plans,
strategies, prospects, changes and trends in our business and the markets in
which we operate as described in this report. In some cases, you can identify
forward-looking statements by terminology such as may, will, could,
would, should, expect, plan, anticipate, intend, believe,
estimate, forecast, predict, propose, potential or continue or the
negative of those terms or other comparable terminology. These statements are
only predictions. These forward-looking statements include but are not limited to those
identified in this report with an asterisk (*) symbol. Actual results may
differ materially from those discussed in such forward-looking statements, and
you should carefully review the cautionary statements set forth in this report
onForm 10-Q, including those set forth under the caption Risk Factors and
those set forth in our Annual Report onForm 10-Kfor the year ended September
30, 2003, filed on December 5, 2003 and in our registration statement on Form
S-3, filed on February 9, 2004. We may from time to time make additional written and oral forward-looking
statements, including statements contained in our filings with the Securities
and Exchange Commission and in our reports to stockholders. We do not undertake
to update any forward-looking statements that may be made in thisForm 10-Qor
from time to time on our behalf. Overview Our Business and Products Catapult Communications Corporation (we, Catapult, the Company or
the Registrant) designs, develops, manufactures, markets and supports
advanced software-based test systems offering integrated suites of testing
applications for the global telecommunications industry. Our product line
currently consists of the DCT system, originally introduced in 1985 and since
extensively enhanced, and the MGTS system, acquired in connection with the
acquisition of the Network Diagnostic Business (NDB) from Tekelec in August,
2002. These products are digital communications test systems designed to enable
equipment manufacturers and network operators to deliver complex digital
telecommunications equipment and services more quickly and cost-effectively,
while helping to ensure interoperability and reliability. Our advanced software
and hardware assist customers in the design, integration, installation and
acceptance testing of a broad range of digital telecommunications equipment and
services. The DCT and MGTS products perform a variety of test functions,
including simulation, load and stress testing, feature verification,
conformance testing and monitoring. Our newly introduced m5000 hardware
platform has increased the capabilities of the DCT and MGTS test systems to
address the telecommunications industrys need for a higher load test
performance. Our recently announced Chameleon protocol analyzer will broaden
the range of products we offer within our product line upon its release, which
is expected in the quarter ending September 30, 2004.* We maintain an extensive
library of software modules that support a large number of industry standard
protocols and variants thereon. In support of our products, we offer
maintenance services under software support contracts, as well as installation
and training services. 12




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##### Table of Contents



Conditions and Trends in Our Industry After several years of relatively rapid growth, the global
telecommunications industry experienced a severe and well-publicized
contraction beginning in 2001. By 2002, our customers began cutting their
research and development budgets that fund the majority of our revenues. As a
result, beginning in the second quarter of calendar 2002, we faced challenging
conditions in our telecommunications test business. In the last nine months, there has been increasing evidence, also
well-publicized, that the overall decline in the telecommunications industry
has ended, and that at least the beginnings of a recovery are in evidence. In
the nine months ended June 30, 2004, as a result of increased demand in all our
major regions, North America, Europe and Japan, we have seen a 22% increase in
revenue in comparison with the same period in fiscal 2003. Over the same
period, as a result of our successful integration of NDB and the steps we have
taken to reduce our cost of goods and operating expenses, our nine-month net
income has increased by 266%. Summary of Our Financial Performance in the Third Quarter of Fiscal 2004 Our financial performance in the three months ended June 30, 2004, as
measured by both revenue and net income, improved significantly over our
performance in the same period in the previous year: revenues increased by 35%
to $14.3 million and net income by 115% to $2.9 million. The increase in net
income occurred despite providing for the payment of $0.5
million in income tax at a rate of 14% in comparison with a benefit of $1.1
million last fiscal year. Three major factors contributed to this improvement:  
    
    In North America and Europe, we saw strong revenue increases
of 80% and 75% respectively.
    
    We saw an improvement of three percentage points in overall
gross profit margin due to two factors: our product mix was
weighted more heavily to higher margin product; and our services
revenues increased at a higher rate than the cost of those revenues.
    
    We limited the increase in our operating expenses to 6%, well
below the 35% increase in revenues. Increased variable compensation
related to above-target performance together with the increased cost
of overseas employees resulting from higher exchange rates
outweighed the effects of a 15% staff reduction undertaken in the
fourth quarter of fiscal 2003. As usual, our results in the third fiscal quarter were not as strong as in
the second fiscal quarter, as seasonally low demand in Japan in our third
quarter followed high budget surplus purchasing by our Japanese customers in
our second quarter ahead of their March 31 fiscal year end. During the third fiscal quarter, our cash and short-term investments
increased by $8.3 million, of which $7.9 million was provided by operating
activities. Critical Accounting Policies and Estimates There have been no material changes to our critical accounting policies
and estimates as disclosed in our Annual Report on Form 10-K for the year ended
September 30, 2003. 13




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Results of Operations The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our condensed consolidated statements of
income to total revenues. For the three months ended
    
    For the nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Products
    
    
    78.7
    %
    
    
    78.7
    %
    
    
    78.9
    %
    
    
    79.5
    %Services
    
    
    21.3
    
    
    
    21.3
    
    
    
    21.1
    
    
    
    20.5Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenues:Products
    
    
    8.3
    
    
    
    10.5
    
    
    
    8.8
    
    
    
    12.2Services
    
    
    5.5
    
    
    
    6.3
    
    
    
    5.7
    
    
    
    6.1Amortization of purchased
technology
    
    
    1.2
    
    
    
    1.6
    
    
    
    1.2
    
    
    
    1.5Total cost of revenues
    
    
    15.0
    
    
    
    18.4
    
    
    
    15.7
    
    
    
    19.8Gross profit
    
    
    85.0
    
    
    
    81.6
    
    
    
    84.3
    
    
    
    80.2Operating expenses:Research and development
    
    
    20.8
    
    
    
    31.6
    
    
    
    20.4
    
    
    
    29.7Sales and marketing
    
    
    29.6
    
    
    
    33.7
    
    
    
    30.2
    
    
    
    31.1General and administrative
    
    
    11.7
    
    
    
    14.0
    
    
    
    12.0
    
    
    
    14.4Total operating expenses
    
    
    62.1
    
    
    
    79.3
    
    
    
    62.6
    
    
    
    75.2Income from operations
    
    
    22.9
    
    
    
    2.3
    
    
    
    21.7
    
    
    
    5.0Interest income, net
    
    
    0.8
    
    
    
    0.9
    
    
    
    0.8
    
    
    
    1.0Other income (expense)
    
    
    (0.0
    )
    
    
    (0.7
    )
    
    
    0.3
    
    
    
    1.8Income before income taxes
    
    
    23.7
    
    
    
    2.5
    
    
    
    22.8
    
    
    
    7.8Provision for (benefit from)
income taxes
    
    
    3.3
    
    
    
    (10.3
    )
    
    
    3.2
    
    
    
    (1.2
    )Net income
    
    
    20.4
    %
    
    
    12.8
    %
    
    
    19.6
    %
    
    
    9.0
    %Gross margin on product sales
    
    
    89.4
    %
    
    
    86.7
    %
    
    
    88.8
    %
    
    
    84.6
    %Gross margin on services
    
    
    74.2
    %
    
    
    70.3
    %
    
    
    73.1
    %
    
    
    70.4
    %
 Comparison of the Three-Month Periods Ended June 30, 2004 and 2003 Revenues Our revenues increased by approximately 35% from $10.6 million for the
three months ended June 30, 2003 to $14.3 million for the three months ended
June 30, 2004. Over the same period, product revenues increased by
approximately 35% from $8.3 million to $11.3 million. The $3.0 million increase
in product revenues was attributable to two factors: increased sales of our DCT
and MGTS test systems in North America and Europe accounted for $2.9 million;
and more favorable exchange rates on those overseas product revenues
denominated in foreign currencies, particularly an 8% increase in the average
value of the Japanese yen, in which all our revenues in Japan are denominated,
accounted for $0.1 million. Services revenues increased approximately 36% from
$2.3 million to $3.1 million. The $0.8 million increase in services revenues
was attributable to two factors: the increase in maintenance service contracts
related to the installed base of DCT and MGTS test systems accounted for $0.7
million and more favorable exchange rates on those revenues denominated in
foreign currencies, particularly the Japanese yen, accounted for $0.1 million. 14




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Cost of Revenues Cost of product revenues consists of the costs of board assembly by
independent contractors, purchased components, payroll and benefits for
personnel in product testing, purchasing, shipping and inventory management, as
well as supplies, media and freight. Cost of product revenues increased
approximately 10% from $2.0 million for the three months ended June 30, 2003 to
$2.2 million for the three months ended June 30, 2004 and gross profit margin
on product revenues increased from 87% to 89% due principally to a product mix
that was weighted more heavily to higher margin products. Cost of services revenues consists primarily of the costs of payroll and
benefits for customer support, installation and training personnel. Cost of
services revenues increased by approximately 18% from $669,000 for the three
months ended June 30, 2003 to $787,000 for the three months ended June 30,
2004, reflecting an increase of one employee together with an increase in
variable compensation related to above-target performance. Gross profit margin
on services revenues increased from 70% to 74% as services revenues increased
at a higher rate than the cost of those revenues. Amortization of purchased technology related to the NDB acquisition
remained unchanged at $171,000 in the three months ended June 30, 2004 compared
with the same period the previous year. Research and Development Research and development expenses consist primarily of the costs of
payroll and benefits for engineers, materials, equipment and consulting
services. To date, all internal software development costs have been charged to
research and development expenses as incurred. Research and development
expenses decreased by approximately 11% from $3.3 million for the three months
ended June 30, 2003 to $3.0 million for the three months ended June 30, 2004
due primarily to four factors: a decrease of approximately $1.0 million due to
a reduction of 29%, or 30 employees, in the number of research and development
personnel largely as a result of the staff reduction undertaken in the fourth
quarter of fiscal 2003; increases in salary and variable compensation totaling
$0.4 million; increases in new product development and testing costs of $0.2
million and an exchange rate driven increase of $0.1 million due to average
increases of 11% in the Australian dollar and 12% in the British pound against
the US dollar. As a percentage of total revenues, research and development
expenses decreased from 32% to 21% over the same period. We expect quarterly
research and development expenses to remain relatively constant for the
remainder of the current fiscal year.* Sales and Marketing Sales and marketing expenses consist primarily of the costs of payroll,
benefits, commissions and bonuses, occupancy costs, travel and promotional
expenses, such as product brochures and trade show costs. Sales and marketing
expenses increased by approximately 19% from $3.6 million for the three months
ended June 30, 2003 to $4.2 million for the three months ended June 30, 2004
due primarily to three factors: a $0.8 million increase in variable
compensation related to above-target performance; a decrease of approximately
$0.6 million due to a reduction of 12%, or 12 employees, in the number of sales
and marketing personnel largely as a result of the staff reduction undertaken
in the fourth quarter of fiscal 2003; and an exchange rate driven increase of
$0.2 million due to average increases of 8% in the Japanese yen, 12% in the
British pound and 6% in the Euro against the US dollar. As a percentage of
total revenues, sales and marketing expenses decreased from 34% to 30% over the
same period. We expect quarterly sales and marketing expenses to remain
relatively constant for the remainder of the current fiscal year.* General and Administrative General and administrative expenses include costs associated with our
general corporate and risk management, public reporting, employee recruitment
and retention, investor relations and finance functions, as well as
amortization of certain intangible assets acquired with NDB. General and
administrative expenses increased approximately 13% from $1.5 million for the
three months ended June 30, 2003 to $1.7 million for the three months ended
June 30, 2004, reflecting primarily an increase of $0.15 million in variable 15




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compensation related to above-target performance. As a percentage of total
revenues, general and administrative expenses decreased from 14% to 12% over
the same period. We expect quarterly general and administrative expenses to
remain relatively constant for the remainder of the current fiscal year.* Provision for (benefit from) income taxes Provision for income taxes consists of federal, state and international
income taxes. We recorded a tax provision of $476,000, or 14% of pre-tax
income, for the three months ended June 30, 2004, compared with a tax benefit
of $1.1 million for the three months ended June 30, 2003. The tax rate in the
current period reflects the projected annual mix of taxable income between
domestic and international operations, while the benefit recorded in the prior
period was due to a change in the mix of income between domestic and
international operations and to adjustments to our transfer pricing. Our future
tax rate will vary depending in part on the relative pre-tax income
contribution from our domestic and foreign operations.* Comparison of the Nine-Month Periods Ended June 30, 2004 and 2003 Revenues Our revenues increased by approximately 22% from $35.0 million for the
nine months ended June 30, 2003 to $42.6 million for the nine months ended June
30, 2004. Over the same period, product revenues increased by approximately 21%
from $27.8 million to $33.6 million. The $5.8 million increase in product
revenues was attributable to two factors: increased sales of our DCT and MGTS
test systems in North America and Europe accounted for $4.4 million; and more
favorable exchange rates on those overseas product revenues denominated in
foreign currencies, particularly an 11% increase in the average value of the
Japanese yen, in which all our revenues in Japan are denominated, accounted for
$1.4 million. Services revenues increased approximately 25% from $7.2 million
to $9.0 million. The $1.8 million increase in services revenues was
attributable to two factors: the increase in maintenance service contracts
related to the installed base of DCT and MGTS test systems accounted for $1.6
million and more favorable exchange rates on those revenues denominated in
foreign currencies, particularly the Japanese yen, accounted for $0.2 million. Cost of Revenues Cost of product revenues consists of the costs of board assembly by
independent contractors, purchased components, payroll and benefits for
personnel in product testing, purchasing, shipping and inventory management, as
well as supplies, media and freight. Cost of product revenues decreased
approximately 12% from $4.3 million for the nine months ended June 30, 2003 to
$3.8 million for the nine months ended June 30, 2004 and gross profit margin on
product revenues increased from 85% to 89% due principally to four factors: a
net reduction in manufacturing expenses of approximately $550,000 as the
transitional manufacturing fees that we paid to Tekelec in connection with the
acquisition of NDB in 2003 were replaced with lower internal costs; a product
mix that was weighted more heavily to higher margin products; more favorable
exchange rates on foreign currency revenues in relation to cost of goods
incurred primarily in dollars; and the absolute increase in revenues in
relation to that portion of cost of goods that is relatively insensitive to
volume. Cost of services revenues consists primarily of the costs of payroll and
benefits for customer support, installation and training personnel. Cost of
services revenues increased by approximately 14% from $2.1 million for the nine
months ended June 30, 2003 to $2.4 million for the nine months ended June 30,
2004, due primarily to an increase of $0.2 million in variable compensation
related to above-target performance. Gross profit margin on services revenues
increased from 70% to 73% as services revenues increased more than the cost of
those revenues. Amortization of purchased technology related to the NDB acquisition
remained unchanged at $514,000 in the nine months ended June 30, 2004 compared
with the same period the previous year. 16




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Research and Development Research and development expenses consist primarily of the costs of
payroll and benefits for engineers, materials, equipment and consulting
services. To date, all internal software development costs have been charged to
research and development expenses as incurred. Research and development
expenses decreased by approximately 17% from $10.4 million for the nine months
ended June 30, 2003 to $8.7 million for the nine months ended June 30, 2004,
due to four factors: a decrease of approximately $2.9 million due to a
reduction of 28%, or 29 employees, in the number of research and development
personnel largely as a result of the staff reduction undertaken in the fourth
quarter of fiscal 2003; increases in salary and in variable compensation
related to above-target performance totaling $0.7 million; increases in new
product development and testing costs of $0.3 million; and an exchange rate
driven increase of $0.3 million due to average increases of 22% in the
Australian dollar and 12% in the British pound against the US dollar. As a
percentage of total revenues, research and development expenses decreased from
30% to 20% over the same period. Sales and Marketing Sales and marketing expenses consist primarily of the costs of payroll,
benefits, commissions and bonuses, occupancy costs, travel and promotional
expenses, such as product brochures and trade show costs. Sales and marketing
expenses increased by approximately 18% from $10.9 million for the nine months
ended June 30, 2003 to $12.8 million for the nine months ended June 30, 2004
due to four factors: a $2.7 million increase in variable compensation related
to above-target performance; a $0.3 million increase in salary levels; a
decrease of approximately $1.9 million due to a reduction of 13%, or 14
employees, in the number of sales and marketing personnel largely as a result
of the staff reduction undertaken in the fourth quarter of fiscal 2003; and an
exchange rate driven increase of $0.6 million due to average increases of 11%
in the Japanese yen, 12% in the British pound and 14% in the Euro against the
US dollar. As a percentage of total revenues, sales and marketing expenses
decreased from 31% to 30% over the same period. General and Administrative General and administrative expenses include costs associated with our
general corporate and risk management, public reporting, employee recruitment
and retention, investor relations and finance functions, as well as
amortization of certain intangible assets acquired with NDB. General and
administrative expenses increased approximately 2% from $5.0 million for the
nine months ended June 30, 2003 to $5.1 million for the nine months ended June
30, 2004, due primarily to a decrease of $0.4 million in transitional
acquisition-related expenses that were complete by June 30, 2003 and an
increase of $0.5 million in variable compensation related to above-target
performance. As a percentage of total revenues, general and administrative
expenses decreased from 14% to 12% over the same period. Other Income Other income represents primarily gains from fluctuations in exchange
rates on transactions denominated in foreign currencies and income from
miscellaneous refunds. Other income decreased by $509,000 from $670,000 for the
nine months ended June 30, 2003 to $161,000 for the nine months ended June 30,
2004, reflecting the absence in the latter period of a Japanese consumption tax
refund in the amount of $695,000 received in the same period in the previous
year partially offset by stronger exchange gains in the latter period,
primarily on the Japanese yen. Provision for (benefit from) income taxes Provision for income taxes consists of federal, state and international
income taxes. We recorded a tax provision of $1.4 million, or 14% of pre-tax
income, for the nine months ended June 30, 2004, compared with a tax benefit of
$0.4 million for the nine months ended June 30, 2003. The tax rate in the
current period reflects the projected annual mix of taxable income between
domestic and international operations, while the benefit recorded in the prior
period was due to a change in the mix of income between domestic and
international operations and to adjustments to our transfer pricing. 17




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Liquidity and Capital Resources Historically, we have financed our operations primarily through cash
generated from operations and from the proceeds of our initial public offering
completed in 1999. The proceeds to us from the offering, net of underwriter
fees and other expenses, were approximately $19.2 million. In addition, we financed our purchase of NDB in part through the issuance
of two convertible notes in the aggregate principal amount of $17.3 million
maturing August 30, 2004. The convertible notes were issued by our Irish
subsidiary and are guaranteed by us. The notes are convertible at the option of
the holder into an aggregate of 1,081,250 shares of our common stock (subject
to adjustment for certain events) between August 30, 2003 and the maturity
date. Under a letter agreement we entered into with Tekelec on March 18, 2004,
in certain circumstances Tekelec may extend the maturity date to September 30,
2004. If one of the notes, in the principal amount of $10.0 million, is not
converted by the holder, we are entitled to pay the principal and accrued
interest on that note in cash or, in whole or in part, by issuing our common
stock at a value of 82.5% of the fair market value of the stock determined by a
formula set forth in the note. Our cash and short-term investment balances as
at June 30, 2004 exceeded the aggregate principal amount of the notes by $29.2
million. Our operating activities provided cash of $14.1 million in the nine month
period ended June 30, 2004. Net income contributed $8.4 million, adjustments
for non-cash items including depreciation, amortization and provision for
doubtful accounts contributed $1.9 million, and net changes in current assets
and liabilities contributed $3.8 million. Our non-cash depreciation and
amortization charges were higher than historical levels as a result of assets
acquired with NDB. The fixed assets acquired are being depreciated over a three
year period ending August 31, 2005 and the technology and other intangible
assets acquired are being amortized over seven or eight year periods ending
August 2009 or 2010. As a result, we expect that non-cash charges will continue
to be a positive adjustment in reconciling net income to net cash provided by
operating activities over these periods.* Our primary source of operating cash flow is the collection of accounts
receivable from our customers. We measure the effectiveness of our collection
efforts by an analysis of the number of average days sales represented by
accounts receivable days outstanding (days sales outstanding). As at June
30, 2004 we had 53 days sales outstanding, below the 76 days sales average
over the seven fiscal quarters then ended. This improvement in days sales
outstanding was due a majority of quarterly billings during the first half of
the quarter ended June 30, 2004 compared with a majority of billings on average
in the second halves of the preceding quarters. Collections of accounts
receivable and related days sales outstanding will fluctuate in future periods
due to variations in the timing and amount of our future revenues, the payment
terms extended to our customers and the effectiveness of our collection
efforts. Investing activities, consisting of net purchases of short-term
investments and additions to property and equipment, used $4.0 million of cash
in the nine months ended June 30, 2004. Cash provided by financing activities for the nine months ended June 30,
2004 of $2.3 million was attributable to the exercise of employee stock options
and the purchase of shares under the employee stock purchase plan.
Approximately half of the options exercised were due to expire within nine
months of June 30, 2004. 18




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As of June 30, 2004, we had working capital of $28.8 million, cash and
cash equivalents of $24.3 million and short-term investments of $22.2 million.
As of June 30, 2004, we had the following contractual obligations, in millions: Payments Due by PeriodLess Than
    
    1-3
    
    4-5
    
    AfterContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsPrincipal and interest payable under
convertible notes
    
    $
    18.0
    
    
    $
    18.0
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating leases
    
    
    4.4
    
    
    
    0.5
    
    
    
    1.9
    
    
    
    1.6
    
    
    
    0.4Total contractual cash obligations
    
    $
    22.4
    
    
    $
    18.5
    
    
    $
    1.9
    
    
    $
    1.6
    
    
    $
    0.4
 We expect that capital expenditures, representing primarily purchases of
computer equipment and leasehold improvements, for the fiscal year ending
September 30, 2004 will total approximately $900,000.* We believe that inflation has not had a material impact on our liquidity
or cash requirements. We may require additional funds to support our working capital
requirements or for other purposes. There can be no assurance that additional
financing will be available or that, if available, such financing will be
obtainable on terms favorable to us or our stockholders. We have recently filed
a shelf registration statement with the Securities and Exchange Commission
under which we may engage in a future financing. In light of improving telecom
industry fundamentals and our present expense structure, we believe that cash
and cash equivalents, short-term investments and funds generated from
operations will continue to provide us with sufficient funds to finance our
operations and the payment of our contractual cash obligations, including the
repayment of the convertible notes payable in the event that they are not
converted, for at least the next 12 months.* Risk Factors The risks described below are not the only ones we face. Additional risks
not presently known to us or that we currently believe are immaterial may also
impair our business operations. Our quarterly operating results may fluctuate significantly, and this may
result in volatility in the market price of our common stock. We have experienced, and anticipate that we will continue to experience,
significant fluctuations in quarterly revenues and operating results. Our
revenues and operating results are relatively difficult to forecast for a
number of reasons, including:  
    
    the variable size and timing of individual purchases by our
customers;  
    
    seasonal factors that may affect capital spending by
customers, such as the varying fiscal year ends of customers and the
reduction in business during the summer months, particularly in
Europe;  
    
    the relatively long sales cycles for our products;  
    
    competitive conditions in our markets;  
    
    exchange rate fluctuations;  
    
    the timing of the introduction and market acceptance of new
products or product enhancements by us and by our customers,
competitors and suppliers;  
    
    costs associated with developing and introducing new products;  
    
    product life cycles; 19




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
    
    changes in the level of operating expenses relative to revenues;  
    
    product defects and other quality problems;  
    
    customer order deferrals in anticipation of new products;  
    
    supply interruptions;  
    
    changes in global or regional economic conditions or in the
telecommunications industry;  
    
    delays in purchasing decisions or customer orders due to
customer consolidation;  
    
    the ability to hire sales and technical personnel;  
    
    changes in the mix of products sold; and  
    
    changes in the regulatory environment. Our revenues in any period generally have been, and may continue to be,
derived from relatively small numbers of sales and service transactions with
relatively high average revenues per order. Therefore, the loss of any orders
or delays in closing such transactions could have a more significant impact on
our quarterly revenues and results of operations than on those of companies
with relatively high volumes of sales or low revenues per order. Our products
generally are shipped within 15 to 45 days after orders are received. As a
result, we generally do not have a significant backlog of orders, and revenues
in any quarter are substantially dependent on orders booked, shipped and
installed in that quarter. Most of our costs, including personnel and facilities costs, are
relatively fixed; and our operating expenses are based on anticipated revenue.
As a result, a decline in revenue from even a limited number of transactions,
failure to achieve expected revenue in any quarter or unanticipated variations
in the timing of recognition of specific revenues can cause significant
variations in our quarterly operating results and could result in losses. We
believe, therefore, that period-to-period comparisons of our operating results
should not be relied upon as an indication of future performance. Due to the factors described above, as well as other unanticipated
factors, it is possible that in some future quarter our results of operations
could fail to meet the expectations of public market analysts or investors. If
this occurs, the price of our common stock may fall. Historically, our revenues have been dependent upon a few significant
customers, the loss of one or more of which could significantly reduce our
revenues. Our customer base is highly concentrated, and a relatively small number of
companies have accounted for substantially all of our revenues to date. In our
fiscal year ended September 30, 2003, our top five customers represented
approximately 50% of total revenues. In the nine months ended June 30, 2004,
our top five customers represented approximately 56% of total revenues. The
greater concentration during the nine-month period reflects seasonal
concentration of revenues in Japan where we have fewer and larger customers,
rather than a trend toward increased concentration. We expect that we will
continue to depend upon a relatively limited number of customers for
substantially all of our revenues in future periods, although no customer is
presently obligated either to purchase a specific amount of products or to
provide us with binding forecasts of purchases for any period. If we were to
lose a significant customer or if a significant customer were to reduce, delay
or cancel its orders, our operating results could be seriously harmed. Our business is dependent on our customers outsourcing their telecommunications
testing needs, and our business could be harmed if the market for outsourced
testing solutions declines or fails to grow. Our success will depend on continued growth in the market for
telecommunications test systems and services and the continued commercial
acceptance of our products as a solution to address the testing 20




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requirements of telecommunications equipment manufacturers and network
operators. While most of our present and potential customers have the technical
capability and financial resources to produce their own test systems and
perform test services internally, to date, many have chosen to outsource a
substantial proportion of their test system and service requirements. Our
customers may not continue, and potential new customers may not choose, to
outsource any of their test systems and service requirements. If the market for
telecommunications test systems and services, or the demand for outsourcing,
declines or fails to grow, or if our products and services are not widely
adopted as a telecommunications test solution, our business, financial
condition and operating results could be seriously harmed. If we do not effectively manage our growth, our business and operating results
could be adversely affected. Our growth has placed, and is expected to continue to place, significant
demands on our management, administrative and operational resources. To manage
expansion effectively, we need to continue to develop and improve our
operational and financial systems, sales and marketing capabilities and expand,
train, retain, manage and motivate our employee base. Our systems, procedures
or controls may not be adequate to support our operations and our management
may not be able to successfully exploit future market opportunities or
successfully manage our relationships with customers and other third parties.
We may not continue to grow and, if we do, we may not effectively manage such
growth. Any failure to manage growth could have an adverse effect on our
business, financial condition and results of operations. We face foreign business, political and economic risks because a significant
portion of our sales is to customers outside the United States. We derive a significant percentage of our revenues from customers outside
of North America, and we maintain operations in six other countries.
International sales and operations are subject to inherent risks, including:  
    
    longer customer payment cycles;  
    
    greater difficulty in accounts receivable collection;  
    
    difficulties in staffing and managing foreign operations;  
    
    changes in regulatory requirements or in economic or trade policy;  
    
    costs related to localizing products for foreign countries;  
    
    potentially weaker protection for intellectual property in certain foreign countries;  
    
    the burden of complying with a wide variety of foreign laws
and practices, tariffs and other trade barriers; and  
    
    potentially adverse tax consequences, including restrictions
on repatriation of earnings. During the last three fiscal years, a significant portion of our
international sales has been to customers in Japan. If economic conditions in
Japan deteriorate, our business, financial condition and results of operations
could be materially adversely affected. In addition to our existing overseas
operations, we have opened an office in China in 2004. An inability to obtain
necessary regulatory approvals in foreign markets on a timely basis could also
have an adverse effect on our business, financial condition and results of
operations. A significant portion of our sales, including all our sales in Japan, is
denominated in local currencies. Although we currently engage in hedging
transactions with respect to receivables resulting from some inter-company
sales, we may not continue to do so and our hedging activities may not be
successful. Fluctuations in foreign currency exchange rates may contribute to
fluctuations in our operating results. For example, changes in foreign currency
exchange rates could adversely affect the revenues, net income, earnings per
share and cash flow of our operations in affected markets. Similarly, such
fluctuations may cause us to raise prices, 21




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which could affect demand for our products and services. In addition, if
exchange or price controls or other restrictions are imposed in countries in
which we do business, our business, financial condition and operating results
could be seriously harmed. We may not be able to achieve the anticipated benefits of any acquisitions we
may make of other companies, products or technologies. As part of our business strategy, we acquired Tekelecs Network
Diagnostics Business in 2002, and we may make further acquisitions of, or
significant investments in, companies, products or technologies that we believe
are complementary. Any such transactions would be accompanied by the
risks commonly encountered in
making acquisitions of companies, products and technologies. Such risks
include, among others:  
    
    difficulties associated with assimilating the personnel and operations of acquired companies;  
    
    potential disruption of our ongoing business;  
    
    distraction of management and other resources;  
    
    integration of personnel and technology of an acquired company;  
    
    difficulties in evaluating the technology of a potential target;  
    
    inability to motivate and retain new personnel;  
    
    maintenance of uniform standards, controls, procedures and policies; and  
    
    impairment of relationships with employees and clients as a
result of the integration of new management personnel. We have limited experience in assimilating acquired companies or product
lines into our operations. We may not be successful in overcoming these risks
or any other problems encountered in connection with any such future
acquisitions. Furthermore, any future acquisitions could result in the issuance
of dilutive equity securities, the incurrence of debt or contingent liabilities
or amortization expenses related to intangible assets, any of which could
seriously harm our business, financial condition and operating results or
decrease the value of our common stock. We face intense competition in our markets from more established test solutions
providers, and if we are unable to compete successfully we may not be able to
maintain or grow our business. The market for our products is highly competitive. A number of our
competitors are better known and have substantially greater financial,
technological, production and marketing resources than we do. While we believe
that the price/performance characteristics of our products are competitive,
competition in the markets for our products could force us to reduce prices.
Any material reduction in the price of our products without corresponding
decreases in manufacturing costs and increases in unit volume would negatively
affect our gross margins. Increased competition for our products that results
in lower product sales could also adversely impact our upgrade sales. Our
ability to maintain our competitive position will depend upon, among other
factors, our success in anticipating industry trends, investing in product
research and development, developing new products with improved
price/performance characteristics and effectively managing the introduction of
new products into targeted markets. Our success depends on the continued growth of the telecommunications industry
and increased use of our test solutions, and lack of growth in this industry
could harm our business. Our future success is dependent upon the continued growth of the
telecommunications industry. The global telecommunications industry is evolving
rapidly, and it is difficult to predict its potential growth rate or 22




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future trends in technology development. The deregulation, privatization and
economic globalization of the worldwide telecommunications market that have
resulted in increased competition and escalating demand for new technologies
and services may not continue in a manner favorable to us or our business
strategies. In addition, the growth in demand for Internet services and the
resulting need for high speed or enhanced telecommunications equipment may not
continue at its current rate or at all. Our future success depends upon the increased utilization of our test
solutions by network operators and telecommunications equipment manufacturers.
Industry-wide network equipment and infrastructure development driving the
demand for our products and services may be delayed or prevented by a variety
of factors, including cost, regulatory obstacles or the lack of or reduction in
consumer demand for advanced telecommunications products and services.
Telecommunications equipment manufacturers and network operators may not
develop new technology or enhance current technology. Further, any such new
technology or enhancements may not lead to greater demand for our products or
services. Our business could be harmed if we were to lose the services of one or more
members of our senior management team, or if we are unable to attract and
retain qualified personnel. Our future growth and success depends to a significant extent upon the
continuing services of our executive officers and other key employees. We do
not have long-term employment agreements or non-competition agreements with any
of our employees. Competition for qualified management and other high-level
telecommunications industry personnel is intense, and we may not be successful
in attracting and retaining qualified personnel. If we lose the services of any
key employees, we may not be able to manage our business successfully or
achieve our business objectives. Our success also depends on our ability to identify, attract and retain
qualified technical, sales, finance and management personnel. We have
experienced, and may continue to experience, difficulty in hiring and retaining
candidates with appropriate qualifications. If we do not succeed in hiring and
retaining candidates with appropriate qualifications, our revenues and product
development efforts could be harmed. Our ability to deliver products that meet customer demand is dependent on our
ability to meet new and changing requirements for telecommunications test
systems and services. The market for telecommunications test systems and services is subject to
rapid technological change, evolving industry standards, rapid changes in
customer requirements and frequent product and service introductions and
enhancements. Our future success will depend in part on our ability to
anticipate and respond to these changes by enhancing our existing products and
services and by developing and introducing, on a timely and cost-effective
basis, new products, features and services that address the needs of our
customer base. We may not be successful in identifying, developing and
marketing new products, product enhancements and related services that respond
to technological change or evolving industry standards or that adequately meet
new market demands. In addition, because of the rapid technological change
characteristic of the telecommunications industry, we may be required to
support legacy systems used by our customers. As a result, this may place
additional demands on our personnel and other resources and may require us to
maintain an inventory of otherwise obsolete components. Our test systems currently operate only on Sun Microsystemss Solaris and
the Linux operating systems. Our current and prospective customers may require
other operating systems, such as Windows 2000 or Windows XP, to be used in
their telecommunications test systems or may require the integration of other
industry standards. We may not be able to successfully adapt our products to
such operating systems on a timely or cost-effective basis, if at all. Our
failure to respond to rapidly changing technologies and to develop and
introduce new products and services in a timely manner could adversely affect
our operations and overall profitability. Our success will depend in part on whether a large number of
telecommunications equipment manufacturers and network operators purchase our
products and services. Because the telecommunications market is rapidly
evolving, it is difficult to predict the future success of products and
services in this market. The customers in this market use products from a
number of competing suppliers for various testing purposes, 23




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and there has not been broad adoption of the products of one company. Our
current or future products or services may not achieve widespread acceptance
among telecommunications equipment manufacturers, network operators or other
potential customers. In addition, our competitors may develop solutions that
could render our products obsolete or uncompetitive. In the event the
telecommunications industry does not broadly adopt our products or services or
does so less rapidly than we expect, or in the event our products are rendered
obsolete or uncompetitive by more advanced solutions, our business, financial
condition and operating results could be seriously harmed. Many of our suppliers are sole source or single source suppliers, and our
inability to obtain adequate amounts of components from these suppliers could
harm our business. We purchase many key components, including certain microprocessors,
workstations, bus interface and other chips, connectors and other hardware,
from the sole supplier of a particular component. For other components, even
though multiple vendors may exist, we may purchase components from only a
single source. We do not have any long-term supply agreements with these
vendors to ensure uninterrupted supply of these components. If our supply of a
key component is reduced or interrupted, we might require a significant amount
of time to qualify alternative suppliers and receive an adequate flow of
replacement components. We may also need to reconfigure our products to adapt
to new components, which could entail substantial time and expense. In
addition, the process of manufacturing certain of these components is extremely
complex, and our reliance on the suppliers of these components exposes us to
potential production difficulties and quality variations. These could
negatively affect cost and timely delivery of our products. We have in the past
experienced supply problems as a result of the financial or operational
difficulties of our suppliers, shortages and discontinuations resulting from
component obsolescence. Although to date we have not experienced material
delays in product deliveries to our customers resulting from supply problems,
such problems may recur or, if such problems do recur, we may not find
satisfactory solutions. If we are unable to obtain adequate amounts of fully
functional components or are otherwise required to seek alternative sources of
supply, our relationship with our customers and our results of operations could
be harmed. We depend on a limited number of independent manufacturers, which reduces our
ability to control our manufacturing process. We rely on a limited number of independent manufacturers, some of which
are small, privately held companies, to provide certain assembly services to
our specifications. We do not have any long-term supply agreements with any
third-party manufacturer. If our assembly services are reduced or interrupted,
our business, financial condition and results of operations could be adversely
affected until we are able to establish sufficient assembly services supply
from alternative sources. Alternative manufacturing sources may not be able to
meet our future requirements, and existing or alternative sources may not
continue to be available to us at favorable prices. The high level of complexity and integration of our products increases the risk
of latent defects, which could damage customer relationships and increase our
costs. Our complex products may contain undetected errors or bugs, particularly
when first introduced or when new versions are released. Errors may be found in
future releases of our software. In addition, any such errors may generate
adverse publicity, impair the market acceptance of these products, create
customer concerns or adversely affect operating results due to product returns,
the costs of generating corrective releases or otherwise. We face exposure to product liability claims, which if successful could harm
our business. Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. However,
it is possible that the limitation of liability provisions contained in our
license agreements may not be effective under the laws of certain
jurisdictions, particularly since we sell a majority of our products
internationally. Although we have not experienced any product liability claims
to date, our sale and support of products may entail the risk of such claims.
We may be subject to such claims in the future. A successful product liability
claim brought against us could have a material 24




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adverse effect upon our business, financial condition and results of
operations. If we fail to maintain adequate product liability insurance and if
we were to lose a large uninsured claim, then such a loss could significantly
harm our business, financial condition and operating results. Our success is dependent on our ability to protect our intellectual property,
and our failure to protect our intellectual property could have a significant
adverse impact on our business. Our success and ability to compete effectively are dependent in part upon
our proprietary technology. We rely on a combination of trademark, copyright
and trade secret laws, as well as nondisclosure agreements and other
contractual restrictions, to establish and protect our proprietary rights. To
date, we have generally not sought patent protection for our proprietary
technology. Patent protection may become more significant in our industry in
the future. Likewise, the measures we undertake may not be adequate to protect
our proprietary technology. To date, we have federally registered certain of
our trademarks or copyrights. Our practice is to affix copyright notices on
software, hardware and product literature in order to assert copyright
protection for these works. The lack of federal registration of all of our
trademarks and copyrights may have an adverse effect on our intellectual
property rights in the future. Additionally, we may be subject to further risks
as we enter into transactions in countries where intellectual property laws are
unavailable, do not provide adequate protection or are difficult to enforce.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to duplicate aspects of our products or to obtain and use information
that we regard as proprietary. Our steps to protect our proprietary technology
may not be adequate to prevent misappropriation of such technology, and may not
preclude competitors from independently developing products with functionality
or features similar to our products. If we fail to protect our proprietary
technology, our business, financial condition and results of operations could
be harmed significantly. We could become subject to litigation regarding intellectual property, which
could divert management attention, be costly to defend and prevent us from
using or selling the challenged technology. The telecommunications industry is characterized by a relatively high
level of litigation based on allegations of infringement of proprietary rights.
While to date we have not been subject to claims of infringement or
misappropriation of intellectual property by third parties, third parties may
assert infringement claims against us. In addition, an assertion of
infringement may result in litigation in which we may not prevail. Furthermore,
any such claims, with or without merit, could result in substantial cost to us
and diversion of our personnel. In addition, infringement claims may require us
to develop new technology or require us to enter into royalty or licensing
arrangements. These royalty or licensing agreements, if required, may not be
available on terms acceptable to us. Because we do not rely on patents to
protect our technology, we will not be able to offer a license for patented
technology in connection with any settlement of patent infringement lawsuits.
If a claim of infringement or misappropriation against us were successful and
we fail or are unable to develop non-infringing technology or license any
infringed, misappropriated or similar technology at a reasonable cost, our
business, financial condition and results of operations would be adversely
affected. In addition, we indemnify our customers against claimed infringement
of patents, trademarks, copyrights and other proprietary rights of third
parties. Any requirement for us to indemnify a customer may significantly harm
our business, financial condition and operating results. Our success depends on the timely development and introduction of new products. Our future success will depend in part on our ability to anticipate and
respond to changing industry standards and customer requirements by enhancing
our existing products and services. We may need to develop and introduce, on a
timely and cost-effective basis, new products, features and services that
address the needs of our customer base. We may not be successful in
identifying, developing and marketing new products, product enhancements and
related services that respond to technological change or evolving industry
standards or that adequately meet new market demands. 25




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Item 3. Quantitative and Qualitative Disclosures About Market Risk Foreign Exchange Risk and Derivative Financial Instruments Our foreign subsidiaries operate and sell our products in various global
markets. As a result, we are exposed to changes in interest rates and foreign
currency exchange rates on foreign currency denominated sales made to foreign
subsidiaries. We utilize foreign currency forward exchange contracts and
options to mitigate the risk of future movements in foreign exchange rates that
affect certain foreign currency denominated inter-company receivables. We
attempt to match the forward contracts with specific underlying receivables in
terms of currency, amount and maturity. We do not use derivative financial
instruments for speculative or trading purposes. Because the impact of
movements in currency exchange rates on forward contracts offsets the related
impact on the associated exposures, these financial instruments do not subject
us to speculative risk that would otherwise result from changes in currency
exchange rates. Realized gains and losses on forward exchange contracts offset
foreign exchange transaction gains or losses from revaluation of foreign
currency denominated receivable balances which otherwise would be
charged to other income (expense). To date, we have not fully mitigated all
risk associated with our revenues and resulting accounts receivable denominated in foreign currencies, and there can
be no assurance that our foreign exchange risk management activities, if any,
will be successful. At June 30, 2004 we had no forward exchange contracts maturing in fiscal
2004. We have evaluated the potential near-term losses in future earnings, fair
values and cash flows from reasonably possible near-term changes in market
rates or prices and believe that any such losses would not be material.* Interest Rate Risk Our exposure to market risk for changes in interest rates relates
primarily to our short-term investment portfolio. As of June 30, 2004,
short-term investments consisted of available-for-sale securities of $18.9
million. These fixed income marketable securities included corporate bonds and
government securities, all of which are of high investment grade. They are
subject to interest rate risk and will decline in value if the market interest
rates increase. If the market interest rates were to increase immediately and
uniformly by 10% from levels as of June 30, 2004, the decline in the fair value
of the portfolio would not be material to our financial position. 
 Item 4. Controls and Procedures Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. 26




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Part II. Other Information 
 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 31.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 (b) Reports on Form 8-K.  We filed the following reports on Form 8-K during the quarter
ended June 30, 2004:1.
    
    On April 15, 2004, we filed a Current Report on
Form 8-K to furnish a press release dated April 15, 2004
announcing our results of operations for the quarter ended
March 31, 2004. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, we have
duly caused this report to be signed on our behalf by the undersigned thereunto
duly authorized. CATAPULT COMMUNICATIONS CORPORATIONDate: July 30, 2004
    
    By: /s/ Christopher A. Stephenson(Christopher A. Stephenson)Vice President and Chief Financial Officer(Principal Financial Officer)
 27




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EXHIBIT INDEX 31.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002