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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 SECURITIES
|    |  | EXCHANGE ACT OF 1934                                               

For the quarterly period ended December 31, 2003

OR

|     |  |                                                                     
|---- |  | --------------------------------------------------------------------
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
|     |  | EXCHANGE ACT OF 1934                                                

Commission file number 0-24701

CATAPULT COMMUNICATIONS CORPORATION

(Exact name of Registrant as specified in its charter)


|                                |  |                       
|------------------------------- |  | ----------------------
|Nevada                          |  | 77-0086010            
|(State or other jurisdiction of |  | (I.R.S. Employer      
|incorporation 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 [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

As of January 30, 2004, there were 12,916,462 shares of the Registrants
Common Stock, $0.001 par value, outstanding.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                                |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|                              |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|Part II. Other Information   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32                   



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CATAPULT COMMUNICATIONS CORPORATION
FORM 10-Q

INDEX

|                                                                                                                |  |      |    | 
|--------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                |  | Page
|                                                                                                                |  |     
|Part IFinancial Information                                                                                    |  |      |    | 
|Item 1. Financial Statements                                                                                    |  |      |    | 
|Unaudited Condensed Consolidated Balance Sheets at December 31, 2003
and September 30, 2003                     |  |      | 3  | 
|Unaudited Condensed Consolidated Statements of Income for the three months ended
December 31, 2003 and 2002     |  |      | 4  | 
|Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended
December 31, 2003 and 2002 |  |      | 5  | 
|Notes to Unaudited Condensed Consolidated Financial Statements                                                  |  |      | 6  | 
|Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations                   |  |      | 12 | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                              |  |      | 25 | 
|Item 4. Controls and Procedures                                                                                 |  |      | 25 | 
|Part IIOther Information                                                                                       |  |      |    | 
|Item 1. Legal Proceedings                                                                                       |  |      | 26 | 
|Item 5. Other Information                                                                                       |  |      | 26 | 
|Item 6. Exhibits and Reports on Form 8-K                                                                        |  |      | 26 | 
|Signatures                                                                                                      |  |      | 27 | 

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##### Table of Contents






Part I. Financial Information




Item 1. Financial Statements




CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

|                             |                                           |                                            |                                      |        |         |              |        |               |         |  |  | 
|---------------------------- | ----------------------------------------- | ------------------------------------------ | ------------------------------------ | ------ | ------- | ------------ | ------ | ------------- | ------- |  |  | 
|                             |                                           |                                            |                                      |        |         | December 31, |        | September 30,
|                             |                                           |                                            |                                      |        |         | 2003         |        | 2003         
|                             |                                           |                                            |                                      |        |         |              |        |              
|                             |                                           |                                            |                                      | ASSETS |         |              |        |               |         |  |  | 
|Current Assets:              |                                           |                                            |                                      |        |         |              |        |              
|                             | Cash and cash equivalents                 |                                            | $                                    | 13,385 |         |              | $      | 11,770        |        
|                             | Short-term investments                    |                                            |                                      | 19,609 |         |              |        | 18,901        |        
|                             | Accounts receivable, net                  |                                            |                                      | 9,446  |         |              |        | 10,598        |        
|                             | Inventories                               |                                            |                                      | 3,039  |         |              |        | 2,325         |        
|                             | Deferred income taxes                     |                                            |                                      | 2,407  |         |              |        | 2,407         |        
|                             | Prepaid expenses and other current assets |                                            |                                      | 690    |         |              |        | 1,096         |        
|                             |                                           |                                            |                                      |        |         |              |        |               |        
|                             |                                           | Total current assets                       |                                      |        | 48,576  |              |        |               | 47,097  | 
|Property and equipment, net  |                                           |                                            | 3,072                                |        |         |              | 3,384  |              
|Goodwill                     |                                           |                                            | 49,394                               |        |         |              | 49,394 |              
|Other intangible assets, net |                                           |                                            | 5,838                                |        |         |              | 6,093  |              
|Other assets                 |                                           |                                            | 1,124                                |        |         |              | 1,121  |              
|                             |                                           |                                            |                                      |        |         |              |        |               |        
|                             |                                           | Total assets                               |                                      | $      | 108,004 |              |        | $             | 107,089 | 
|                             |                                           |                                            |                                      |        |         |              |        |               |        
|                             |                                           |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |        |         |              |        |               |         |  | 
|Current Liabilities:         |                                           |                                            |                                      |        |         |              |        |              
|                             | Accounts payable                          |                                            | $                                    | 1,250  |         |              | $      | 1,216         |        
|                             | Accrued liabilities                       |                                            |                                      | 5,948  |         |              |        | 6,002         |        
|                             | Deferred revenue                          |                                            |                                      | 5,341  |         |              |        | 5,576         |        
|                             | Convertible notes payable                 |                                            |                                      | 17,572 |         |              |        | 17,674        |        
|                             |                                           |                                            |                                      |        |         |              |        |               |        
|                             |                                           | Total current liabilities                  |                                      |        | 30,111  |              |        |               | 30,468  | 
|                             |                                           |                                            |                                      |        |         |              |        |               |        
|Stockholders Equity:        |                                           |                                            |                                      |        |         |              |        |              
|                             | Common stock                              |                                            |                                      | 13     |         |              |        | 13            |        
|                             | Additional paid-in capital                |                                            |                                      | 21,439 |         |              |        | 21,187        |        
|                             | Deferred stock-based compensation         |                                            |                                      | (66    | )       |              |        | (75           | )      
|                             | Accumulated other comprehensive income    |                                            |                                      | 671    |         |              |        | 575           |        
|                             | Retained earnings                         |                                            |                                      | 55,836 |         |              |        | 54,921        |        
|                             |                                           |                                            |                                      |        |         |              |        |               |        
|                             |                                           | Total stockholders equity                 |                                      |        | 77,893  |              |        |               | 76,621  | 
|                             |                                           |                                            |                                      |        |         |              |        |               |        
|                             |                                           | Total liabilities and stockholders equity |                                      | $      | 108,004 |              |        | $             | 107,089 | 
|                             |                                           |                                            |                                      |        |         |              |        |               |        

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)

|                                      |                                      |                          |       |                    |        |      |       |        |        | 
|------------------------------------- | ------------------------------------ | ------------------------ | ----- | ------------------ | ------ | ---- | ----- | ------ | ------ | 
|                                      |                                      |                          |       | Three months ended
|                                      |                                      |                          |       | December 31,      
|                                      |                                      |                          |       | 2003               |        | 2002
|                                      |                                      |                          |       |                    |        |     
|Revenues:                             |                                      |                          |       |                    |        |      |       |       
|                                      | Products                             |                          | $     | 8,421              |        |      | $     | 7,985  |       
|                                      | Services                             |                          |       | 2,628              |        |      |       | 2,400  |       
|                                      |                                      |                          |       |                    |        |      |       |        |       
|                                      |                                      | Total revenues           |       |                    | 11,049 |      |       |        | 10,385 | 
|                                      |                                      |                          |       |                    |        |      |       |        |       
|Cost of revenues:                     |                                      |                          |       |                    |        |      |       |       
|                                      | Products                             |                          |       | 1,001              |        |      |       | 1,377  |       
|                                      | Services                             |                          |       | 720                |        |      |       | 697    |       
|                                      | Amortization of purchased technology |                          |       | 171                |        |      |       | 171    |       
|                                      |                                      |                          |       |                    |        |      |       |        |       
|                                      |                                      | Total cost of revenues   |       |                    | 1,892  |      |       |        | 2,245  | 
|                                      |                                      |                          |       |                    |        |      |       |        |       
|Gross profit                          |                                      |                          | 9,157 |                    |        |      | 8,140 |       
|                                      |                                      |                          |       |                    |        |      |       |        |       
|Operating expenses:                   |                                      |                          |       |                    |        |      |       |       
|                                      | Research and development             |                          |       | 2,652              |        |      |       | 3,368  |       
|                                      | Sales and marketing                  |                          |       | 3,950              |        |      |       | 3,522  |       
|                                      | General and administrative           |                          |       | 1,676              |        |      |       | 2,013  |       
|                                      |                                      |                          |       |                    |        |      |       |        |       
|                                      |                                      | Total operating expenses |       |                    | 8,278  |      |       |        | 8,903  | 
|                                      |                                      |                          |       |                    |        |      |       |        |       
|Income (loss) from operations         |                                      |                          | 879   |                    |        |      | (763  | )     
|Interest income                       |                                      |                          | 194   |                    |        |      | 199   |       
|Interest expense                      |                                      |                          | (88   | )                  |        |      | (88   | )     
|Other income                          |                                      |                          | 104   |                    |        |      | 806   |       
|                                      |                                      |                          |       |                    |        |      |       |        |       
|Income before income taxes            |                                      |                          | 1,089 |                    |        |      | 154   |       
|Provision for income taxes            |                                      |                          | 174   |                    |        |      | 43    |       
|                                      |                                      |                          |       |                    |        |      |       |        |       
|Net income                            |                                      | $                        | 915   |                    |        | $    | 111   |       
|                                      |                                      |                          |       |                    |        |      |       |        |       
|Net income per share:                 |                                      |                          |       |                    |        |      |       |       
|                                      | Basic                                |                          | $     | 0.07               |        |      | $     | 0.01   |       
|                                      |                                      |                          |       |                    |        |      |       |        |       
|                                      | Diluted                              |                          | $     | 0.07               |        |      | $     | 0.01   |       
|                                      |                                      |                          |       |                    |        |      |       |        |       
|Shares used in per share calculation: |                                      |                          |       |                    |        |      |       |       
|                                      | Basic                                |                          |       | 12,904             |        |      |       | 13,065 |       
|                                      | Diluted                              |                          |       | 13,196             |        |      |       | 13,214 |       

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                             |                                                                                   |                                        |                                                   |                                                     |      |                    |        |      |       |      |        |  
|------------------------------------------------------------ | --------------------------------------------------------------------------------- | -------------------------------------- | ------------------------------------------------- | --------------------------------------------------- | ---- | ------------------ | ------ | ---- | ----- | ---- | ------ | -
|                                                             |                                                                                   |                                        |                                                   |                                                     |      | Three months ended
|                                                             |                                                                                   |                                        |                                                   |                                                     |      | December 31,      
|                                                             |                                                                                   |                                        |                                                   |                                                     |      | 2003               |        | 2002
|                                                             |                                                                                   |                                        |                                                   |                                                     |      |                    |        |     
|Cash flows from operating activities:                        |                                                                                   |                                        |                                                   |                                                     |      |                    |        |     
|                                                             | Net income                                                                        |                                        | $                                                 | 915                                                 |      |                    | $      | 111  |      
|                                                             | Adjustments to reconcile net income to net cash provided by operating activities: |                                        |                                                   |                                                     |      |                    |        |      |      
|                                                             |                                                                                   |                                        | Depreciation and amortization                     |                                                     |      | 442                |        |      |       | 433  |       
|                                                             |                                                                                   |                                        | Amortization of deferred stock-based compensation |                                                     |      | 9                  |        |      |       | 9    |       
|                                                             |                                                                                   |                                        | Amortization of intangible assets                 |                                                     |      | 255                |        |      |       | 456  |       
|                                                             |                                                                                   |                                        | Deferred income taxes                             |                                                     |      |                   |        |      |       | (8   | )     
|                                                             |                                                                                   |                                        | Amortization of premium on note payable           |                                                     |      | (102               | )      |      |       | (102 | )     
|                                                             |                                                                                   |                                        | Change in assets and liabilities:                 |                                                     |      |                    |        |      |       |      |       
|                                                             |                                                                                   |                                        |                                                   | Accounts receivable                                 |      |                    | 1,118  |      |       |      | 10     |  
|                                                             |                                                                                   |                                        |                                                   | Inventories                                         |      |                    | (691   | )    |       |      | 266    |  
|                                                             |                                                                                   |                                        |                                                   | Prepaid expenses and other current assets           |      |                    | 435    |      |       |      | 241    |  
|                                                             |                                                                                   |                                        |                                                   | Assets of discontinued operations                   |      |                    |       |      |       |      | 2,553  |  
|                                                             |                                                                                   |                                        |                                                   | Other assets                                        |      |                    | 1      |      |       |      | (566   | )
|                                                             |                                                                                   |                                        |                                                   | Accounts payable                                    |      |                    | (6     | )    |       |      | (1,710 | )
|                                                             |                                                                                   |                                        |                                                   | Accrued liabilities                                 |      |                    | (92    | )    |       |      | (5,334 | )
|                                                             |                                                                                   |                                        |                                                   | Deferred revenue                                    |      |                    | (236   | )    |       |      | 666    |  
|                                                             |                                                                                   |                                        |                                                   | Liabilities of discontinued operations              |      |                    |       |      |       |      | (721   | )
|                                                             |                                                                                   |                                        |                                                   |                                                     |      |                    |        |      |      
|                                                             |                                                                                   |                                        |                                                   | Net cash provided by (used in) operating activities |      |                    | 2,048  |      |       |      | (3,696 | )
|                                                             |                                                                                   |                                        |                                                   |                                                     |      |                    |        |      |      
|Cash flows from investing activities:                        |                                                                                   |                                        |                                                   |                                                     |      |                    |        |     
|                                                             |                                                                                   | Sales (purchases) of investments, net  |                                                   |                                                     | (714 | )                  |        |      | 6,678 |     
|                                                             |                                                                                   | Purchases of property and equipment    |                                                   |                                                     | (106 | )                  |        |      | (316  | )   
|                                                             |                                                                                   |                                        |                                                   |                                                     |      |                    |        |      |      
|                                                             |                                                                                   |                                        |                                                   | Net cash provided by (used in) investing activities |      |                    | (820   | )    |       |      | 6,362  |  
|                                                             |                                                                                   |                                        |                                                   |                                                     |      |                    |        |      |      
|Cash flows from financing activities:                        |                                                                                   |                                        |                                                   |                                                     |      |                    |        |     
|                                                             |                                                                                   | Proceeds from issuance of common stock |                                                   |                                                     | 252  |                    |        |      | 153   |     
|                                                             |                                                                                   |                                        |                                                   |                                                     |      |                    |        |      |      
|                                                             |                                                                                   |                                        |                                                   | Net cash provided by financing activities           |      |                    | 252    |      |       |      | 153    |  
|                                                             |                                                                                   |                                        |                                                   |                                                     |      |                    |        |      |      
|Effect of exchange rate changes on cash and cash equivalents |                                                                                   |                                        | 135                                               |                                                     |      |                    | 277    |     
|                                                             |                                                                                   |                                        |                                                   |                                                     |      |                    |        |      |      
|Increase in cash and cash equivalents                        |                                                                                   |                                        | 1,615                                             |                                                     |      |                    | 3,096  |     
|Cash and cash equivalents, beginning of period               |                                                                                   |                                        | 11,770                                            |                                                     |      |                    | 12,575 |     
|                                                             |                                                                                   |                                        |                                                   |                                                     |      |                    |        |      |      
|Cash and cash equivalents, end of period                     |                                                                                   | $                                      | 13,385                                            |                                                     |      | $                  | 15,671 |     
|                                                             |                                                                                   |                                        |                                                   |                                                     |      |                    |        |      |      

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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.

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 Securities and Exchange Commission
on December 5, 2003. The unaudited condensed consolidated financial statements
as of December 31, 2003, and for the three months ended December 31, 2003 and
2002, 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 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
also requires that disclosures of the pro forma effect of using the fair value
method of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
transition and annual disclosure requirements of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. The interim disclosure
requirements are effective for interim periods commencing after December 15,
2002.

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The following table illustrates the effect on net income and net income
per share if the Company applied the fair value recognition provisions of SFAS
No. 148 to stock-based employee compensation:

|                                                                                                                                            |                      |   |                                       |      |      |   |      |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | - | ------------------------------------- | ---- | ---- | - | ---- | ----- | -
|                                                                                                                                            |                      |   | Three months ended                   
|                                                                                                                                            |                      |   | December 31,                         
|                                                                                                                                            |                      |   | 2003                                  |      | 2002
|                                                                                                                                            |                      |   |                                       |      |     
|                                                                                                                                            |                      |   | (in thousands, except per share data)
|Net income, as reported                                                                                                                     |                      | $ | 915                                   |      |      | $ | 111  |      
|Add: Stock-based employee
compensation expense included in
reported net income, net of
related tax effects                                  |                      |   | 5                                     |      |      |   | 5    |      
|Deduct: Total stock-based
employee compensation expense
determined under fair-value-based
method for all awards, net of
related tax effects |                      |   | (393                                  | )    |      |   | (482 | )    
|                                                                                                                                            |                      |   |                                       |      |      |   |      |      
|Pro forma net income (loss)                                                                                                                 |                      | $ | 527                                   |      |      | $ | (366 | )    
|                                                                                                                                            |                      |   |                                       |      |      |   |      |      
|Net income (loss) per share:                                                                                                                |                      |   |                                       |      |      |   |      |      
|                                                                                                                                            | Basic, as reported   |   | $                                     | 0.07 |      |   | $    | 0.01  |  
|                                                                                                                                            |                      |   |                                       |      |      |   |      |      
|                                                                                                                                            | Basic, pro forma     |   | $                                     | 0.04 |      |   | $    | (0.03 | )
|                                                                                                                                            |                      |   |                                       |      |      |   |      |      
|                                                                                                                                            | Diluted, as reported |   | $                                     | 0.07 |      |   | $    | 0.01  |  
|                                                                                                                                            |                      |   |                                       |      |      |   |      |      
|                                                                                                                                            | Diluted, pro forma   |   | $                                     | 0.04 |      |   | $    | (0.03 | )
|                                                                                                                                            |                      |   |                                       |      |      |   |      |      

The fair value of each option is estimated on the date of grant using a
type of Black-Scholes option-pricing model with the assumptions set out in the
table below.

|                        |  |                    |      |           |  |  |      |  
|----------------------- |  | ------------------ | ---- | --------- |  |  | ---- | -
|                        |  | Three months ended
|                        |  | December 31,      
|                        |  | 2003               |      | 2002     
|                        |  |                    |      |          
|Dividend yield          |  |                    | 0.0  | %         |  |  | 0.0  | %
|Expected life of option |  | 3.3 years          |      | 3.2 years
|Risk-free interest rate |  |                    | 3.32 | %         |  |  | 2.92 | %
|Expected volatility     |  |                    | 104  | %         |  |  | 75   | %

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.

NOTE 3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.

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|                                          |  |                                       |        |      |  |   |        | 
|----------------------------------------- |  | ------------------------------------- | ------ | ---- |  | - | ------ | 
|                                          |  | Three months ended                   
|                                          |  | December 31,                         
|                                          |  | 2003                                  |        | 2002
|                                          |  |                                       |        |     
|                                          |  | (in thousands, except per share data)
|Net income                                |  | $                                     | 915    |      |  | $ | 111    | 
|                                          |  |                                       |        |      |  |   |        | 
|Weighted average shares outstanding       |  |                                       | 12,904 |      |  |   | 13,065 | 
|Dilutive options                          |  |                                       | 292    |      |  |   | 149    | 
|                                          |  |                                       |        |      |  |   |        | 
|Weighted average shares assuming dilution |  |                                       | 13,196 |      |  |   | 13,214 | 
|                                          |  |                                       |        |      |  |   |        | 
|Net income per share:                     |  |                                       |        |      |  |   |        | 
|Basic                                     |  | $                                     | 0.07   |      |  | $ | 0.01   | 
|                                          |  |                                       |        |      |  |   |        | 
|Diluted                                   |  | $                                     | 0.07   |      |  | $ | 0.01   | 
|                                          |  |                                       |        |      |  |   |        | 

Diluted net income per share does not include the effect of the following
anti-dilutive common equivalent shares:

|                          |  |                    |       |      |  |  |       | 
|------------------------- |  | ------------------ | ----- | ---- |  |  | ----- | 
|                          |  | Three months ended
|                          |  | December 31,      
|                          |  | 2003               |       | 2002
|                          |  |                    |       |     
|Common stock options      |  |                    | 769   |      |  |  | 1,346 | 
|                          |  |                    |       |      |  |  |       | 
|Convertible notes payable |  |                    | 1,081 |      |  |  | 1,081 | 
|                          |  |                    |       |      |  |  |       | 

NOTE 4GOODWILL AND INTANGIBLE ASSETS

In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 provides
specific criteria for determining which intangible assets acquired in a
business combination should be reported separately from goodwill. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB No. 17, Intangible Assets. SFAS No. 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. This pronouncement also requires that intangible
assets with estimable useful lives be amortized over their respective estimated
useful lives and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets
to be Disposed of.

The Company adopted the provisions of SFAS No.142 effective October 1,
2002. As of October 1, 2002, approximately $49.8 million of goodwill will no
longer be amortized but will be tested annually 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. As
such, there was no write-down of the goodwill balance. Between October 1, 2003
and December 31, 2003, there were no changes to the Companys goodwill balance
of $49.4 million.

8



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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 six months,
as follows (in thousands):

|                       |  |                          |       |                         |  |          |        |          |  |              |       |          |  |   |       |     |  |   |        |   |  |   |       | 
|---------------------- |  | ------------------------ | ----- | ----------------------- |  | -------- | ------ | -------- |  | ------------ | ----- | -------- |  | - | ----- | --- |  | - | ------ | - |  | - | ----- | 
|                       |  | As of September 30, 2003 |       | As of December 31, 2003
|                       |  | Gross                    |       |                         |  |          |        | Net      |  | Gross        |       |          |  |   |       | Net
|                       |  | Carrying                 |       | Accumulated             |  | Carrying |        | Carrying |  | Accumulated  |       | Carrying
|                       |  | Amount                   |       | Amortization            |  | Amount   |        | Amount   |  | Amortization |       | Amount  
|                       |  |                          |       |                         |  |          |        |          |  |              |       |         
|Purchased Technology   |  | $                        | 4,800 |                         |  | $        | (743   | )        |  | $            | 4,057 |          |  | $ | 4,800 |     |  | $ | (914   | ) |  | $ | 3,886 | 
|Trade names            |  |                          | 1,000 |                         |  |          | (155   | )        |  |              | 845   |          |  |   | 1,000 |     |  |   | (191   | ) |  |   | 809   | 
|Customer relationships |  |                          | 1,000 |                         |  |          | (155   | )        |  |              | 845   |          |  |   | 1,000 |     |  |   | (191   | ) |  |   | 809   | 
|Non-compete agreements |  |                          | 400   |                         |  |          | (54    | )        |  |              | 346   |          |  |   | 400   |     |  |   | (66    | ) |  |   | 334   | 
|System backlog         |  |                          | 400   |                         |  |          | (400   | )        |  |              |      |          |  |   | 400   |     |  |   | (400   | ) |  |   |      | 
|                       |  |                          |       |                         |  |          |        |          |  |              |       |          |  |   |       |     |  |   |        |   |  |   |       | 
|Total                  |  | $                        | 7,600 |                         |  | $        | (1,507 | )        |  | $            | 6,093 |          |  | $ | 7,600 |     |  | $ | (1,762 | ) |  | $ | 5,838 | 
|                       |  |                          |       |                         |  |          |        |          |  |              |       |          |  |   |       |     |  |   |        |   |  |   |       | 

The estimated future amortization expense of purchased intangible assets
as of December 31, 2003 was as follows:

|            |  |               |     | 
|----------- |  | ------------- | --- | 
|            |  | Amount       
|Fiscal Year |  | (in millions)
|            |  |              
|2004        |  | $             | 0.7 | 
|2005        |  |               | 1.0 | 
|2006        |  |               | 1.0 | 
|2007        |  |               | 1.0 | 
|2008        |  |               | 1.0 | 
|Thereafter  |  |               | 1.1 | 
|            |  |               |     | 
|Total       |  | $             | 5.8 | 
|            |  |               |     | 

NOTE 5WARRANTY ACCRUAL

The following table represents the activity in warranty accrual for the
three months ended December 31, 2003 (in thousands):

|                              |                                                  |   |    |     |  
|----------------------------- | ------------------------------------------------ | - | -- | --- | -
|Balance at September 30, 2003 |                                                  | $ | 60 |    
|                              | Settlements made during the period               |   |    | (17 | )
|                              | Accruals for warranties issued during the period |   |    | 25  |  
|                              |                                                  |   |    |    
|Balance at December 31, 2003  |                                                  | $ | 68 |    
|                              |                                                  |   |    |    

NOTE 6COMPREHENSIVE INCOME

The components of comprehensive income, net of tax, are as follows:

|                                         |  |                    |       |      |  |   |     | 
|---------------------------------------- |  | ------------------ | ----- | ---- |  | - | --- | 
|                                         |  | Three months ended
|                                         |  | December 31,      
|                                         |  | 2003               |       | 2002
|                                         |  |                    |       |     
|                                         |  | (in thousands)    
|Net income                               |  | $                  | 915   |      |  | $ | 111 | 
|Currency translation adjustment          |  |                    | 103   |      |  |   | 258 | 
|Unrealized gains (losses) on investments |  |                    | (7    | )    |  |   | 19  | 
|                                         |  |                    |       |      |  |   |     | 
|Comprehensive income                     |  | $                  | 1,011 |      |  | $ | 388 | 
|                                         |  |                    |       |      |  |   |     | 

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NOTE 7INVENTORIES

|                |  |                |       |               |  |   |       | 
|--------------- |  | -------------- | ----- | ------------- |  | - | ----- | 
|                |  | December 31,   |       | September 30,
|                |  | 2003           |       | 2003         
|                |  |                |       |              
|                |  | (in thousands)
|Raw materials   |  | $              | 2,569 |               |  | $ | 2,092 | 
|Work-in-process |  |                | 382   |               |  |   | 140   | 
|Finished goods  |  |                | 88    |               |  |   | 93    | 
|                |  |                |       |               |  |   |       | 
|                |  | $              | 3,039 |               |  | $ | 2,325 | 
|                |  |                |       |               |  |   |       | 

NOTE 8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 (subject to
adjustment for certain events) between August 30, 2003 and the maturity date.
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, as determined by
an independent valuation, was $18.1 million. The valuation premium of $0.8
million is being amortized to interest income over the term of the notes using
the effective interest method and a credit to interest income of $102,000 was
recorded in each of the three month periods ended December 31, 2003 and 2002.

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 common stock shall be 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 9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 three months ended December 31,
2003, the Company repurchased no shares. As at December 31, 2003, the Company
is authorized to repurchase an additional 1,742,600 shares of its common stock
under the stock repurchase program.

NOTE 10INCOME TAXES

The Companys provision for income taxes consists of federal, state and
international taxes. The Company recorded a tax provision of $174,000 and
$43,000 in the three months ended December 31, 2003 and December 31, 2002,
respectively. The reduction in the provision rate recorded in the three months
ended December 31, 2003 is due to a change in the mix of income between
domestic and international operations.

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NOTE 11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 and net
income for the three months ended December 31, 2003 and 2002 and long-lived
assets by region at December 31, 2003 and September 30, 2003 were as follows
(in thousands):

|                                     |  |         |        |        |  |       |        |       |  |       |       |         |  |              |    |  |  |   |        | 
|------------------------------------ |  | ------- | ------ | ------ |  | ----- | ------ | ----- |  | ----- | ----- | ------- |  | ------------ | -- |  |  | - | ------ | 
|                                     |  | North   |        |        |  |       |        |       |  |       |       | Rest of |  | Consolidated
|                                     |  | America |        | Europe |  | Japan |        | World |  | Total
|                                     |  |         |        |        |  |       |        |       |  |      
|Three months Ended December 31, 2003 |  |         |        |        |  |       |        |       |  |       |       |         |  |              |    |  |  |   |        | 
|Revenues from unaffiliated customers |  | $       | 4,224  |        |  | $     | 3,210  |       |  | $     | 3,545 |         |  | $            | 70 |  |  | $ | 11,049 | 
|Net income (loss)                    |  |         | (161   | )      |  |       | 994    |       |  |       | 82    |         |  |              |   |  |  |   | 915    | 
|As at December 31, 2003              |  |         |        |        |  |       |        |       |  |       |       |         |  |              |    |  |  |   |        | 
|Goodwill                             |  |         | 22,896 |        |  |       | 26,498 |       |  |       |      |         |  |              |   |  |  |   | 49,394 | 
|Long-Lived Assets                    |  |         | 5,423  |        |  |       | 3,622  |       |  |       | 279   |         |  |              |   |  |  |   | 9,324  | 
|Three months Ended December 31, 2002 |  |         |        |        |  |       |        |       |  |       |       |         |  |              |    |  |  |   |        | 
|Revenues from unaffiliated customers |  | $       | 5,917  |        |  | $     | 2,397  |       |  | $     | 2,032 |         |  | $            | 39 |  |  | $ | 10,385 | 
|Net income (loss)                    |  |         | 532    |        |  |       | (645   | )     |  |       | 224   |         |  |              |   |  |  |   | 111    | 
|As at September 30, 2003             |  |         |        |        |  |       |        |       |  |       |       |         |  |              |    |  |  |   |        | 
|Goodwill                             |  |         | 22,896 |        |  |       | 26,498 |       |  |       |      |         |  |              |   |  |  |   | 49,394 | 
|Long-Lived Assets                    |  |         | 5,849  |        |  |       | 3,753  |       |  |       | 286   |         |  |              |   |  |  |   | 9,888  | 

The results of operations by geographic region include significant sales
principally from the United States to the Companys foreign locations at agreed
upon transfer prices.

NOTE 12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.

NOTE 13SUBSEQUENT EVENT

On February 9, 2004, the Company filed a shelf registration statement
with the Securities and Exchange Commission under which it may engage in a
future financing.

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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 on Form 10-K for the
year ended September 30, 2003, filed on December 5, 2003.

Forward-looking Statements

Some of the statements in this prospectus and the documents incorporated
herein by reference constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and 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 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 prospectus, the documents incorporated herein by reference
and any supplement to this prospectus. 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
on Form 10-Q, including those set forth under the caption Risk Factorsand
those set forth in our Annual Report on Form 10-K for the year ended September
30, 2003, filed on December 5, 2003 and 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 this Form 10-Q or
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 DCT, MGTS and
LANCE 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, MGTS and LANCE 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. We maintain an extensive library of software modules that support
a large number of industry standard protocols and variants thereon. In
addition, we offer customer support under software support contracts, as well
as installation and training services.

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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, since the second quarter of calendar 2002, we have faced challenging
conditions in our telecommunications test business.

In the last three months, there have been preliminary indications, also
well-publicized, that the overall decline in the telecommunications industry
may have ended, and that at least the beginnings of a recovery may be in
evidence. We believe that we are seeing improved revenue potential in our
business, although caution is still appropriate: our European region remains
weak and at least some of the improvement can be attributed to weakness in the
US dollar, which benefits an export-oriented company such as Catapult.* We
believe that our successful integration of NDB and the steps we have taken to
reduce our cost of goods and operating expenses have positioned us to benefit
from any recovery that may occur in the telecommunications industry,
particularly any recovery in research and development spending by our
customers.*

Summary of Our Financial Performance in the First Quarter of Fiscal 2004

Our financial performance in the three months ended December 31, 2003, as
measured by operating income, improved significantly over our performance in
the same period in the previous year, primarily due to the following factors:



| |  |  | a 6% improvement in revenue as the Companys three major
regions, North America, Europe and Japan, all exceeded internal
revenue targets and we saw more favorable foreign exchange rates;                                                                                                                                                                                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an improvement of five percentage points in gross profit
margin due to two factors: a net reduction in manufacturing expenses
of approximately $0.3 million as the transitional manufacturing fees
that we paid to Tekelec in connection with the acquisition of NDB in
2002 were replaced with lower internal costs; and a product mix that
was weighted more heavily to higher margin product.
|
| |  |  | a reduction of $0.7 million in operating expenses resulting
from the 15% staff reduction undertaken in the fourth quarter of
fiscal 2003.                                                                                                                                                                                                                                                       

As a result of these factors, we recorded an operating profit of $0.9
million in the three months ended December 31, 2003 in comparison with an
operating loss of $0.8 million in the same period the previous year.

Our net income increased to $0.9 million in the three months ended
December 31, 2003 from $0.1 million in the same period the previous year. The
increase in net income was less than the improvement in operating income due to
a $0.7 million decrease in other income that reflected the absence in the three
months ended December 31, 2003 of a Japanese consumption tax refund in the
amount of $0.7 million received in the same period in the previous year.

Our cash and short-term investments increased by $2.3 million during the
three months ended December 31, 2003, primarily due to cash generated by
operating activities as discussed in more detail below.

Critical Accounting Policies

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.

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##### Table of Contents



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
|                              |                                      |                          |      | December 31,              
|                              |                                      |                          |      | 2003                       |       | 2002
|                              |                                      |                          |      |                            |       |     
|Revenues:                     |                                      |                          |      |                            |       |      |      |     
|                              | Products                             |                          |      | 76.2                       | %     |      |      | 76.9 | %    
|                              | Services                             |                          |      | 23.8                       |       |      |      | 23.1 |      
|                              |                                      |                          |      |                            |       |      |      |     
|                              |                                      | Total revenues           |      |                            | 100.0 |      |      |      | 100.0 | 
|                              |                                      |                          |      |                            |       |      |      |     
|Cost of revenues:             |                                      |                          |      |                            |       |      |      |     
|                              | Products                             |                          |      | 9.1                        |       |      |      | 13.3 |      
|                              | Services                             |                          |      | 6.5                        |       |      |      | 6.7  |      
|                              | Amortization of purchased technology |                          |      | 1.5                        |       |      |      | 1.6  |      
|                              |                                      |                          |      |                            |       |      |      |     
|                              |                                      | Total cost of revenues   |      |                            | 17.1  |      |      |      | 21.6  | 
|                              |                                      |                          |      |                            |       |      |      |     
|Gross profit                  |                                      |                          | 82.9 |                            |       |      | 78.4 |     
|                              |                                      |                          |      |                            |       |      |      |     
|Operating expenses:           |                                      |                          |      |                            |       |      |      |     
|                              | Research and development             |                          |      | 24.0                       |       |      |      | 32.4 |      
|                              | Sales and marketing                  |                          |      | 35.7                       |       |      |      | 33.9 |      
|                              | General and administrative           |                          |      | 15.2                       |       |      |      | 19.4 |      
|                              |                                      |                          |      |                            |       |      |      |     
|                              |                                      | Total operating expenses |      |                            | 74.9  |      |      |      | 85.7  | 
|                              |                                      |                          |      |                            |       |      |      |     
|Income (loss) from operations |                                      |                          | 8.0  |                            |       |      | (7.3 | )   
|Interest income               |                                      |                          | 1.8  |                            |       |      | 1.9  |     
|Interest expense              |                                      |                          | (0.8 | )                          |       |      | (0.8 | )   
|Other income                  |                                      |                          | 0.9  |                            |       |      | 7.7  |     
|                              |                                      |                          |      |                            |       |      |      |     
|Income before income taxes    |                                      |                          | 9.9  |                            |       |      | 1.5  |     
|                              |                                      |                          |      |                            |       |      |      |     
|Provision for income taxes    |                                      |                          | 1.6  |                            |       |      | 0.4  |     
|                              |                                      |                          |      |                            |       |      |      |     
|Net income                    |                                      |                          | 8.3  | %                          |       |      | 1.1  | %   
|                              |                                      |                          |      |                            |       |      |      |     
|Gross margin on product sales |                                      |                          | 88.1 | %                          |       |      | 82.8 | %   
|                              |                                      |                          |      |                            |       |      |      |     
|Gross margin on services      |                                      |                          | 72.6 | %                          |       |      | 71.0 | %   
|                              |                                      |                          |      |                            |       |      |      |     

Comparison of the Three-Month Periods Ended December 31, 2003 and 2002

Revenues

Our revenues increased by approximately 6% from $10.4 million for the
three months ended December 31, 2002 to $11.0 million for the three months
ended December 31, 2003. Over the same period, product revenues increased by
approximately 5% from $8.0 million to $8.4 million. The increase in product
revenues was attributable to increased overseas sales of our DCT and MGTS test
systems at more favorable exchange rates on those revenues denominated in
foreign currencies, particularly the Japanese yen, in which all our revenues in
Japan are denominated. Services revenues increased approximately 10% from $2.4
million to $2.6 million. The increase in services revenues was due to the
increase in the installed base of DCT and MGTS test systems.

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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 decreased
approximately 27% from $1.4 million for the three months ended December 31,
2002 to $1.0 million for the three months ended December 31, 2003 and gross
profit margin on product revenues increased from 83% to 88% due principally to
two factors: a net reduction in manufacturing expenses of approximately
$320,000 as the transitional manufacturing fees that we paid to Tekelec in
connection with the acquisition of NDB in 2002 were replaced with lower
internal costs; and 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 3% from $697,000 for the three
months ended December 31, 2002 to $720,000 for the three months ended December
31, 2003, reflecting increases in salary and variable compensation, partially
offset by a 5% reduction in staff. Gross profit margin on services revenues
increased from 71% 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 $171,000 in the three months ended December 31, 2003
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 software development costs have been charged to research
and development expenses as incurred. Research and development expenses
decreased by approximately 21% from $3.4 million for the three months ended
December 31, 2002 to $2.7 million for the three months ended December 31, 2003
reflecting a 26% decrease in the number of research and development personnel
as a result of the staff reduction undertaken in the fourth quarter of fiscal
2003, partially offset by increases in salary and variable compensation. As a
percentage of total revenues, research and development expenses decreased from
32% to 24% 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 12% from $3.5 million for the three months
ended December 31, 2002 to $4.0 million for the three months ended December 31,
2003, reflecting increases in salary and variable compensation, partially offset
by a 13% reduction in staff. As a percentage of total revenues, sales and
marketing expenses increased from 34% to 36% over the same period. We expect
sales and marketing expenses in each of the remaining quarters of the current
fiscal year to be approximately 5% higher than in the first quarter. *

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 decreased approximately 17% from $2.0 million for the
three months ended December 31, 2002 to $1.7

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million for the three months ended December 31, 2003, reflecting a 5% decrease
in the number of administrative personnel and a reduction of $200,000 in
amortization expense. As a percentage of total revenues, general and
administrative expenses decreased from 19% to 15% over the same period. We
expect general and administrative expenses in each of the remaining quarters of
the current fiscal year to be up to approximately 5% higher than in the first
quarter due to increased regulatory compliance costs. *

Other Income

Other income represents primarily gains and losses from fluctuations in
exchange rates on transactions denominated in foreign currencies and income
from miscellaneous refunds. Other income decreased by $702,000 from $806,000
for the three months ended December 31, 2002 to $104,000 for the three months
ended December 31, 2003, reflecting the absence in 2003 of a Japanese
consumption tax refund in the amount of $695,000 received in the same period in
the previous year.

Provision for income taxes

Provision for income taxes consists of federal, state and international
income taxes. We recorded a tax provision of $174,000, or 16% of pre-tax
income, in the three months ended December 31, 2003, compared with a provision
of $43,000, or 28% of pre-tax income, for the three months ended December 31,
2002. The reduction in the tax rate is due to a change in the mix of income
between domestic and international operations. Our future tax rate will vary
depending in part on the relative pre-tax income contribution from our domestic
and foreign operations. *

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. 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 December 31, 2003 exceeded the aggregate principal amount of the notes by
$15.7 million.

Our operating activities provided cash of $2.0 million in the three months
period ended December 31, 2003, primarily due to net income of $915,000 and to
a decrease of $1.1 million in accounts receivable as discussed in the following
paragraph. An increase in inventory of $691,000 was effectively offset by the
recognition of $697,000 in non-cash items for depreciation and amortization.
Our non-cash depreciation and amortization charges were increased over
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 are being amortized over seven
or eight year periods ending August 2009 or 2010. As a result, 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 and the timing of payments to our vendors and
service providers. We measure the effectiveness of our collections efforts by
an analysis of average accounts receivable days outstanding (days sales
outstanding).

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As at December 31, 2003 we had 78 days sales outstanding, slightly below the 82
day average over the preceding eight fiscal quarters due to less quarter-end
loaded billings in the three months ended December 31, 2003. Collections of
accounts receivable and related days sales outstanding will fluctuate in future
periods due to the timing and amount of our future revenues, payment terms
extended to our customers and the effectiveness of our collection efforts.

Investing activities, consisting primarily of purchases and sales of
short-term investments and to a lesser extent additions to property and
equipment, used $820,000 of cash in the three months ended December 31, 2003.

Cash provided by financing activities for the three months ended December
31, 2003 of $252,000 was attributable to the exercise of employee stock options
and the purchase of shares under the employee stock purchase plan.

As of December 31, 2003, we had working capital of $18.5 million, cash and
cash equivalents of $13.4 million and short-term investments of $19.6 million.
As of December 31, 2003, we had the following contractual obligations, in
millions:

|                                                       |  |                        |      |        |  |           |      |       |  |         |     |       |  |   |     |  |  |   |     | 
|------------------------------------------------------ |  | ---------------------- | ---- | ------ |  | --------- | ---- | ----- |  | ------- | --- | ----- |  | - | --- |  |  | - | --- | 
|                                                       |  | Payments Due by Period
|                                                       |  |                        |      |        |  | Less Than |      | 1-3   |  | 4-5     |     | After
|Contractual Obligations                                |  | Total                  |      | 1 Year |  | Years     |      | Years |  | 5 Years
|                                                       |  |                        |      |        |  |           |      |       |  |        
|Principal and interest payable under
convertible notes |  | $                      | 18.0 |        |  | $         | 18.0 |       |  | $       |    |       |  | $ |    |  |  | $ |    | 
|Operating leases                                       |  |                        | 3.1  |        |  |           | 1.2  |       |  |         | 1.1 |       |  |   | 0.7 |  |  |   | 0.1 | 
|                                                       |  |                        |      |        |  |           |      |       |  |         |     |       |  |   |     |  |  |   |     | 
|Total contractual cash obligations                     |  | $                      | 21.1 |        |  | $         | 19.2 |       |  | $       | 1.1 |       |  | $ | 0.7 |  |  | $ | 0.1 | 
|                                                       |  |                        |      |        |  |           |      |       |  |         |     |       |  |   |     |  |  |   |     | 

We expect that capital expenditures for the fiscal year ending September
30, 2004 will total approximately $1.0 million.*

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.*

Recent Accounting Pronouncements

In December 2003, the SEC issued 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 our financial position, cash flows or results of operations.

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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;                                                                                                                                                                             
|
| |  |  | 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

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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. 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 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.

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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 remain weak, our business, financial condition and results of operations
could be materially adversely affected. In addition to our existing overseas
operations, we expect to open 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, 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. Currently, no such acquisitions or investments are pending.
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;                                                

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| |  |  | 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 goodwill and other 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.

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 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.

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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, 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.

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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 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.

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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.

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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 inter-company receivable balances which otherwise would be
charged to other income (expense). To date, we have not fully mitigated all
risk associated with our sales denominated in foreign currencies, and there can
be no assurance that our foreign exchange risk management activities, if any,
will be successful.

At December 31, 2003 we had forward exchange contracts maturing in fiscal
2004 to sell approximately $1.25 million in Japanese Yen. The fair market value
of these contracts at December 31, 2003 was not material.

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.*

Additional factors that could affect future operating results or the price
of our Common Stock are set forth under the caption Factors That May Affect
Future Results in our Annual Report on Form 10-K for 2003.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates
primarily to our short-term investment portfolio. As of December 31, 2003,
short-term investments consisted of available-for-sale securities of $19.6
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 December 31, 2003, 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.

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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.




Part II. Other Information




Item 1. Legal Proceedings

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.




Item 5. Other Information

Effective January 29, 2004 the members of the Audit Committee of our Board
of Directors are John M. Scandalios, Chairman, Charles L. Waggoner and Peter
Cross, all of whom we believe are independent under rules of The Nasdaq Stock
Market.




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 2002                            
|     |  |                                                                                                                                                                              
|31.2 |  | 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 2002                            
|     |  |                                                                                                                                                                              
|32   |  | 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

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



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | We filed the following reports on Form 8-K during the quarter
ended December 31, 2003:



| | 1. |  | On October 7, 2003, we filed a Current Report on
Form 8-K to furnish a press release dated October 6, 2003,
announcing a revision to our estimated results of operations
for the quarter ended September 30, 2003.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | On October 30, 2003, we filed a Current Report on
Form 8-K to furnish a press release dated October 30, 2003 announcing our results of operations for the quarter
ended September 30, 2003.                       




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 CORPORATION       
|                            |  |                                           
|Date: February 12, 2004 By: |  | /s/ Christopher A. Stephenson             
|                            |  |                                           
|                            |  | Christopher A. Stephenson                 
|                            |  | Vice President and Chief Financial Officer
|                            |  | (Principal Financial Officer)             

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EXHIBIT INDEX

|          |  |                                                                                                                                                                              
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 2002                            
|          |  |                                                                                                                                                                              
|31.2      |  | 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 2002                            
|          |  |                                                                                                                                                                              
|32        |  | 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