##### Table of Contents



FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

|           |  |                                                                     
|---------- |  | --------------------------------------------------------------------
|(Mark One) |  |                                                                     
|           |  |                                                                     
|x          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES 
|           |  | EXCHANGE
ACT OF 1934                                                
|           |  |                                                                     
|           |  | For the quarterly period ended June 30, 2003                        
|           |  |                                                                     
|           |  | OR                                                                  
|           |  |                                                                     
|o          |  | 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
incorporation or organization) |  | (I.R.S. Employer
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 August 1, 2003, there were 12,872,835 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                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO 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 6. Exhibits and Reports on Form 8-K.                                                    
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 31                   
|EXHIBIT 32                   



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
FORM 10-Q

INDEX

|                                                                                                       |  |      |    | 
|------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                       |  | Page
|                                                                                                       |  |     
|Part
IFinancial Information                                                                           |  |      |    | 
|Item 1. Financial Statements (unaudited)                                                               |  |      |    | 
|Condensed Consolidated Balance Sheets at June 30, 2003 and September 30, 2002                          |  |      | 3  | 
|Condensed Consolidated Statements of Income for the three and nine months ended
June 30, 2003 and 2002 |  |      | 4  | 
|Condensed Consolidated Statements of Cash Flows for the nine months ended
June 30, 2003 and 2002       |  |      | 5  | 
|Notes to Condensed Consolidated Financial Statements                                                   |  |      | 6  | 
|Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations          |  |      | 13 | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                     |  |      | 24 | 
|Item 4. Controls and Procedures                                                                        |  |      | 25 | 
|Part IIOther Information                                                                              |  |      |    | 
|Item 6. Exhibits and Reports on Form 8-K                                                               |  |      | 25 | 
|Signatures                                                                                             |  |      | 26 | 

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##### Table of Contents






Part I. Financial Information




Item 1. Financial Statements




CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

|                                     |                                           |                                            |        |        |         |          |        |               |         |  |  | 
|------------------------------------ | ----------------------------------------- | ------------------------------------------ | ------ | ------ | ------- | -------- | ------ | ------------- | ------- |  |  | 
|                                     |                                           |                                            |        |        |         | June 30, |        | September 30,
|                                     |                                           |                                            |        |        |         | 2003     |        | 2002         
|                                     |                                           |                                            |        |        |         |          |        |              
|ASSETS                               |                                           |                                            |        |        |         |          |        |              
|Current Assets:                      |                                           |                                            |        |        |         |          |        |              
|                                     | Cash and cash equivalents                 |                                            | $      | 20,960 |         |          | $      | 12,575        |        
|                                     | Short-term investments                    |                                            |        | 13,244 |         |          |        | 22,790        |        
|                                     | Accounts receivable, net                  |                                            |        | 8,935  |         |          |        | 11,009        |        
|                                     | Inventories                               |                                            |        | 2,653  |         |          |        | 3,869         |        
|                                     | Deferred income taxes                     |                                            |        | 882    |         |          |        | 1,214         |        
|                                     | Prepaid expenses and other current assets |                                            |        | 1,772  |         |          |        | 1,563         |        
|                                     | Assets of discontinued operations         |                                            |        |       |         |          |        | 2,636         |        
|                                     |                                           |                                            |        |        |         |          |        |               |        
|                                     |                                           | Total current assets                       |        |        | 48,446  |          |        |               | 55,656  | 
|Property and equipment, net          |                                           |                                            | 3,793  |        |         |          | 3,874  |              
|Goodwill                             |                                           |                                            | 49,833 |        |         |          | 49,833 |              
|Other intangible assets, net         |                                           |                                            | 6,349  |        |         |          | 7,315  |              
|Other assets                         |                                           |                                            | 1,175  |        |         |          | 1,172  |              
|                                     |                                           |                                            |        |        |         |          |        |               |        
|                                     |                                           | Total assets                               |        | $      | 109,596 |          |        | $             | 117,850 | 
|                                     |                                           |                                            |        |        |         |          |        |               |        
|LIABILITIES AND STOCKHOLDERS EQUITY |                                           |                                            |        |        |         |          |        |              
|Current Liabilities:                 |                                           |                                            |        |        |         |          |        |              
|                                     | Accounts payable                          |                                            | $      | 654    |         |          | $      | 2,594         |        
|                                     | Accrued liabilities                       |                                            |        | 11,219 |         |          |        | 18,829        |        
|                                     | Deferred revenue                          |                                            |        | 5,135  |         |          |        | 4,492         |        
|                                     | Liabilities of discontinued operations    |                                            |        |       |         |          |        | 889           |        
|                                     |                                           |                                            |        |        |         |          |        |               |        
|                                     |                                           | Total current liabilities                  |        |        | 17,008  |          |        |               | 26,804  | 
|Convertible notes payable            |                                           |                                            | 17,775 |        |         |          | 18,081 |              
|                                     |                                           |                                            |        |        |         |          |        |               |        
|                                     |                                           | Total liabilities                          |        |        | 34,783  |          |        |               | 44,885  | 
|                                     |                                           |                                            |        |        |         |          |        |               |        
|Stockholders Equity:                |                                           |                                            |        |        |         |          |        |              
|                                     | Common stock                              |                                            |        | 13     |         |          |        | 13            |        
|                                     | Additional paid-in capital                |                                            |        | 20,903 |         |          |        | 22,625        |        
|                                     | Deferred stock-based compensation         |                                            |        | (84    | )       |          |        | (111          | )      
|                                     | Treasury stock                            |                                            |        |       |         |          |        | (300          | )      
|                                     | Accumulated other comprehensive income    |                                            |        | 285    |         |          |        | 182           |        
|                                     | Retained earnings                         |                                            |        | 53,696 |         |          |        | 50,556        |        
|                                     |                                           |                                            |        |        |         |          |        |               |        
|                                     |                                           | Total stockholders equity                 |        |        | 74,813  |          |        |               | 72,965  | 
|                                     |                                           |                                            |        |        |         |          |        |               |        
|                                     |                                           | Total liabilities and stockholders equity |        | $      | 109,596 |          |        | $             | 117,850 | 
|                                     |                                           |                                            |        |        |         |          |        |               |        

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

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

|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |        | 
|----------------------------------------- | -------------------------- | ------------------------ | ------ | ------------------ | ------ | ----------------- | ----- | ------ | ----- | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                          |                            |                          |        | Three months ended |        | Nine months ended
|                                          |                            |                          |        | June 30,           |        | June 30,         
|                                          |                            |                          |        | 2003               |        | 2002              |       | 2003   |       | 2002
|                                          |                            |                          |        |                    |        |                   |       |        |       |     
|Revenues:                                 |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |       
|                                          | Products                   |                          | $      | 8,344              |        |                   | $     | 6,623  |       |      | $      | 27,842 |        |   | $      | 26,722 |       
|                                          | Services                   |                          |        | 2,253              |        |                   |       | 1,400  |       |      |        | 7,176  |        |   |        | 4,311  |       
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|                                          |                            | Total revenues           |        |                    | 10,597 |                   |       |        | 8,023 |      |        |        | 35,018 |   |        |        | 31,033 | 
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|Cost of revenues:                         |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |       
|                                          | Products                   |                          |        | 1,113              |        |                   |       | 532    |       |      |        | 4,282  |        |   |        | 1,949  |       
|                                          | Services                   |                          |        | 669                |        |                   |       | 233    |       |      |        | 2,127  |        |   |        | 771    |       
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|                                          |                            | Total cost of revenues   |        |                    | 1,782  |                   |       |        | 765   |      |        |        | 6,409  |   |        |        | 2,720  | 
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|Gross profit                              |                            |                          | 8,815  |                    |        |                   | 7,258 |        |       |      | 28,609 |        |        |   | 28,313 |       
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|Operating expenses:                       |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |       
|                                          | Research and development   |                          |        | 3,349              |        |                   |       | 1,774  |       |      |        | 10,412 |        |   |        | 5,219  |       
|                                          | Sales and marketing        |                          |        | 3,571              |        |                   |       | 2,656  |       |      |        | 10,901 |        |   |        | 8,126  |       
|                                          | General and administrative |                          |        | 1,656              |        |                   |       | 705    |       |      |        | 5,562  |        |   |        | 3,520  |       
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|                                          |                            | Total operating expenses |        |                    | 8,576  |                   |       |        | 5,135 |      |        |        | 26,875 |   |        |        | 16,865 | 
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|Operating income                          |                            |                          | 239    |                    |        |                   | 2,123 |        |       |      | 1,734  |        |        |   | 11,448 |       
|Interest income, net                      |                            |                          | 94     |                    |        |                   | 346   |        |       |      | 330    |        |        |   | 1,102  |       
|Other income (expense), net               |                            |                          | (68    | )                  |        |                   | 134   |        |       |      | 672    |        |        |   | (100   | )     
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|Income before income taxes                |                            |                          | 265    |                    |        |                   | 2,603 |        |       |      | 2,736  |        |        |   | 12,450 |       
|Provision for (benefit from) income taxes |                            |                          | (1,096 | )                  |        |                   | 729   |        |       |      | (404   | )      |        |   | 3,487  |       
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|Net income                                |                            | $                        | 1,361  |                    |        | $                 | 1,874 |        |       | $    | 3,140  |        |        | $ | 8,963  |       
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|Net income per share:                     |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |       
|                                          | Basic                      |                          | $      | 0.11               |        |                   | $     | 0.14   |       |      | $      | 0.24   |        |   | $      | 0.69   |       
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|                                          | Diluted                    |                          | $      | 0.10               |        |                   | $     | 0.14   |       |      | $      | 0.24   |        |   | $      | 0.67   |       
|                                          |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |        |       
|Shares used in per share calculation:     |                            |                          |        |                    |        |                   |       |        |       |      |        |        |        |   |        |       
|                                          | Basic                      |                          |        | 12,863             |        |                   |       | 13,050 |       |      |        | 12,971 |        |   |        | 13,033 |       
|                                          | Diluted                    |                          |        | 13,034             |        |                   |       | 13,381 |       |      |        | 13,119 |        |   |        | 13,375 |       

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

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

|                                                             |                                                                                   |                                                   |                                                     |        |                   |        |         |         |     |         |  
|------------------------------------------------------------ | --------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------- | ------ | ----------------- | ------ | ------- | ------- | --- | ------- | -
|                                                             |                                                                                   |                                                   |                                                     |        | Nine months ended
|                                                             |                                                                                   |                                                   |                                                     |        | June 30,         
|                                                             |                                                                                   |                                                   |                                                     |        | 2003              |        | 2002   
|                                                             |                                                                                   |                                                   |                                                     |        |                   |        |        
|Cash flows from operating activities:                        |                                                                                   |                                                   |                                                     |        |                   |        |         |        
|                                                             | Net income                                                                        |                                                   | $                                                   | 3,140  |                   |        | $       | 8,963   |    
|                                                             | Adjustments to reconcile net income to net cash provided by operating
activities: |                                                   |                                                     |        |                   |        |         |         |    
|                                                             |                                                                                   | Depreciation and amortization                     |                                                     |        | 1,259             |        |         |         | 557 |        
|                                                             |                                                                                   | Amortization of deferred stock-based compensation |                                                     |        | 27                |        |         |         | 24  |        
|                                                             |                                                                                   | Gain on sale of short-term investments            |                                                     |        |                  |        |         |         | (5  | )      
|                                                             |                                                                                   | Amortization of intangible assets                 |                                                     |        | 966               |        |         |         |    |        
|                                                             |                                                                                   | Deferred income taxes                             |                                                     |        | 332               |        |         |         |    |        
|                                                             |                                                                                   | Loss on sale of property and equipment            |                                                     |        |                  |        |         |         | 22  |        
|                                                             |                                                                                   | Amortization of premium on note payable           |                                                     |        | (306              | )      |         |         |    |        
|                                                             |                                                                                   | Change in assets and liabilities:                 |                                                     |        |                   |        |         |         |     |        
|                                                             |                                                                                   |                                                   | Accounts receivable                                 |        |                   | 2,074  |         |         |     | 1,893   |  
|                                                             |                                                                                   |                                                   | Inventories                                         |        |                   | 1,216  |         |         |     | (12     | )
|                                                             |                                                                                   |                                                   | Prepaid expenses and other current assets           |        |                   | (209   | )       |         |     | (983    | )
|                                                             |                                                                                   |                                                   | Assets of discontinued operations                   |        |                   | 2,636  |         |         |     |        |  
|                                                             |                                                                                   |                                                   | Other assets                                        |        |                   | (3     | )       |         |     | 26      |  
|                                                             |                                                                                   |                                                   | Accounts payable                                    |        |                   | (1,940 | )       |         |     | (186    | )
|                                                             |                                                                                   |                                                   | Accrued liabilities                                 |        |                   | (7,610 | )       |         |     | 2,383   |  
|                                                             |                                                                                   |                                                   | Deferred revenue                                    |        |                   | 643    |         |         |     | 303     |  
|                                                             |                                                                                   |                                                   | Liabilities of discontinued operations              |        |                   | (889   | )       |         |     |        |  
|                                                             |                                                                                   |                                                   |                                                     |        |                   |        |         |         |    
|                                                             |                                                                                   |                                                   | Net cash provided by operating activities           |        |                   | 1,336  |         |         |     | 12,985  |  
|                                                             |                                                                                   |                                                   |                                                     |        |                   |        |         |         |    
|Cash flows from investing activities:                        |                                                                                   |                                                   |                                                     |        |                   |        |         |        
|                                                             | Sales (purchases) of investments, net                                             |                                                   |                                                     | 9,548  |                   |        |         | (28,835 | )  
|                                                             | Purchases of property and equipment                                               |                                                   |                                                     | (1,178 | )                 |        |         | (424    | )  
|                                                             |                                                                                   |                                                   |                                                     |        |                   |        |         |         |    
|                                                             |                                                                                   |                                                   | Net cash provided by (used in) investing activities |        |                   | 8,370  |         |         |     | (29,259 | )
|                                                             |                                                                                   |                                                   |                                                     |        |                   |        |         |         |    
|Cash flows from financing activities:                        |                                                                                   |                                                   |                                                     |        |                   |        |         |        
|                                                             | Repurchase of common stock                                                        |                                                   |                                                     | (1,761 | )                 |        |         |        |    
|                                                             | Proceeds from issuance of common stock                                            |                                                   |                                                     | 339    |                   |        |         | 710     |    
|                                                             |                                                                                   |                                                   |                                                     |        |                   |        |         |         |    
|                                                             |                                                                                   |                                                   | Net cash provided by (used in) financing activities |        |                   | (1,422 | )       |         |     | 710     |  
|                                                             |                                                                                   |                                                   |                                                     |        |                   |        |         |         |    
|Effect of exchange rate changes on cash and cash equivalents |                                                                                   |                                                   | 101                                                 |        |                   |        | 31      |        
|                                                             |                                                                                   |                                                   |                                                     |        |                   |        |         |         |    
|Increase (decrease) in cash and cash equivalents             |                                                                                   |                                                   | 8,385                                               |        |                   |        | (15,533 | )      
|Cash and cash equivalents, beginning of period               |                                                                                   |                                                   | 12,575                                              |        |                   |        | 44,202  |        
|                                                             |                                                                                   |                                                   |                                                     |        |                   |        |         |         |    
|Cash and cash equivalents, end of period                     |                                                                                   | $                                                 | 20,960                                              |        |                   | $      | 28,669  |        
|                                                             |                                                                                   |                                                   |                                                     |        |                   |        |         |         |    

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

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CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 an 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
$4.3 million and a net working capital adjustment in the estimated amount of
$3.4 million. The amount of this adjustment has not yet been agreed to or paid
and the amounts included in these condensed consolidated financial statements
relating to the purchase price and the assets and liabilities acquired are
preliminary estimates subject to the final determination of the net working
capital adjustment.

The accompanying unaudited interim condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. 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 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, 2002, and filed with the Securities and Exchange Commission on
December 20, 2002. The unaudited condensed consolidated financial statements as
of June 30, 2003, and for the three and nine months ended June 30, 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, 2002 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  SIGNIFICANT ACCOUNTING POLICIES

In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). This Statement requires that a
liability for costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company adopted SFAS No. 146 in the
three months ended March 31, 2003 and its adoption did not have a material
effect on the Companys financial position or

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results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantors fiscal
year-end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of this standard did not have a material effect on the Companys
financial position or results of operations.

The following table represents the activity in Warranty Accrual for the
nine months ended June 30, 2003 (in thousands):

|                              |                                                  |   |     |      |  
|----------------------------- | ------------------------------------------------ | - | --- | ---- | -
|Balance at September 30, 2002 |                                                  | $ | 600 |     
|                              | Settlements made during the period               |   |     | (105 | )
|                              | Accruals for warranties issued during the period |   |     | 105  |  
|                              |                                                  |   |     |     
|Balance at June 30, 2003      |                                                  | $ | 600 |     
|                              |                                                  |   |     |     

In December 2002, the FASB issued 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 (in thousands):

|                                                                                                                                            |                      |   |                    |      |                   |   |       |      |      |   |        |      |  |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | - | ------------------ | ---- | ----------------- | - | ----- | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                            |                      |   | Three months ended |      | Nine months ended
|                                                                                                                                            |                      |   | June 30,           |      | June 30,         
|                                                                                                                                            |                      |   | 2003               |      | 2002              |   | 2003  |      | 2002
|                                                                                                                                            |                      |   |                    |      |                   |   |       |      |     
|Net income, as reported                                                                                                                     |                      | $ | 1,361              |      |                   | $ | 1,874 |      |      | $ | 3,140  |      |  | $ | 8,963  |     
|Add: Stock-based
employee compensation
expense included in
reported net income,
net of related tax
effects                                  |                      |   | 5                  |      |                   |   | 6     |      |      |   | 15     |      |  |   | 16     |     
|Deduct: Total
stock-based employee
compensation expense
determined under
fair-value-based
method for all awards,
net of related tax
effects |                      |   | (491               | )    |                   |   | (392  | )    |      |   | (1,425 | )    |  |   | (1,182 | )   
|                                                                                                                                            |                      |   |                    |      |                   |   |       |      |      |   |        |      |  |   |        |     
|Pro forma net income                                                                                                                        |                      | $ | 875                |      |                   | $ | 1,488 |      |      | $ | 1,730  |      |  | $ | 7,797  |     
|                                                                                                                                            |                      |   |                    |      |                   |   |       |      |      |   |        |      |  |   |        |     
|Earnings per share:                                                                                                                         |                      |   |                    |      |                   |   |       |      |      |   |        |      |  |   |        |     
|                                                                                                                                            | Basic, as reported   |   | $                  | 0.11 |                   |   | $     | 0.14 |      |   | $      | 0.24 |  |   | $      | 0.69 | 
|                                                                                                                                            |                      |   |                    |      |                   |   |       |      |      |   |        |      |  |   |        |     
|                                                                                                                                            | Basic, pro forma     |   | $                  | 0.07 |                   |   | $     | 0.11 |      |   | $      | 0.13 |  |   | $      | 0.60 | 
|                                                                                                                                            |                      |   |                    |      |                   |   |       |      |      |   |        |      |  |   |        |     
|                                                                                                                                            | Diluted, as reported |   | $                  | 0.10 |                   |   | $     | 0.14 |      |   | $      | 0.24 |  |   | $      | 0.67 | 
|                                                                                                                                            |                      |   |                    |      |                   |   |       |      |      |   |        |      |  |   |        |     
|                                                                                                                                            | Diluted, pro forma   |   | $                  | 0.07 |                   |   | $     | 0.11 |      |   | $      | 0.13 |  |   | $      | 0.58 | 
|                                                                                                                                            |                      |   |                    |      |                   |   |       |      |      |   |        |      |  |   |        |     

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 |      | Nine months ended
|                        |  | June 30,           |      | June 30,         
|                        |  | 2003               |      | 2002              |  | 2003      |      | 2002     
|                        |  |                    |      |                   |  |           |      |          
|Dividend yield          |  |                    | 0.0  | %                 |  |           | 0.0  | %         |  |  | 0.0         | % |  |  | 0.0  | %
|Expected life of option |  | 3.5 years          |      | 2.8 years         |  | 3.5 years |      | 2.8 years
|Risk-free interest rate |  |                    | 2.56 | %                 |  |           | 3.67 | %         |  |  | 2.56%- 2.92 | % |  |  | 3.67 | %
|Expected volatility     |  |                    | 75   | %                 |  |           | 75   | %         |  |  | 75          | % |  |  | 75   | %

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 addresses certain financial instruments that, under previous
guidance, could be accounted for as equity, but now must be classified as
liabilities in statements of financial position. These financial instruments
include: 1) mandatorily redeemable financial instruments, 2) obligations to
repurchase the issuers equity shares by transferring assets, and 3)
obligations to issue a variable number of shares. SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. The implementation of SFAS No. 150 is not expected to have
a material effect on the Companys consolidated financial statements.

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NOTE 3BASIC AND DILUTED EARNINGS PER SHARE

Basic earnings per share are computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share include
the effect of dilutive potential common shares (options) issued during the
period using the treasury stock method.

|                                                                                          |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|----------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                                                                          |  | Three months ended                    |        | Nine months ended
|                                                                                          |  | June 30,                              |        | June 30,         
|                                                                                          |  | 2003                                  |        | 2002              |  | 2003 |        | 2002
|                                                                                          |  |                                       |        |                   |  |      |        |     
|                                                                                          |  | (in thousands, except per share data)
|Net income                                                                                |  | $                                     | 1,361  |                   |  | $    | 1,874  |      |  | $ | 3,140  |  |  | $ | 8,963  | 
|                                                                                          |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|Weighted average shares outstanding                                                       |  |                                       | 12,863 |                   |  |      | 13,050 |      |  |   | 12,971 |  |  |   | 13,033 | 
|Dilutive options                                                                          |  |                                       | 171    |                   |  |      | 331    |      |  |   | 148    |  |  |   | 342    | 
|                                                                                          |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|Weighted average shares assuming dilution                                                 |  |                                       | 13,034 |                   |  |      | 13,381 |      |  |   | 13,119 |  |  |   | 13,375 | 
|                                                                                          |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|Earnings per share:                                                                       |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|Basic                                                                                     |  | $                                     | 0.11   |                   |  | $    | 0.14   |      |  | $ | 0.24   |  |  | $ | 0.69   | 
|                                                                                          |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|Diluted                                                                                   |  | $                                     | 0.10   |                   |  | $    | 0.14   |      |  | $ | 0.24   |  |  | $ | 0.67   | 
|                                                                                          |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|Anti-dilutive common equivalent shares
excluded in calculating diluted earnings
per share |  |                                       | 1,341  |                   |  |      | 57     |      |  |   | 1,438  |  |  |   | 42     | 
|                                                                                          |  |                                       |        |                   |  |      |        |      |  |   |        |  |  |   |        | 

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 October 1, 2002, showing no impairment of goodwill. As such,
there was no write-down of the goodwill balance. Between October 1, 2002 and
June 30, 2003, there were no changes to the Company s goodwill balance of $49.8
million.

As required by SFAS No. 142, the results for the prior years quarter have
not been restated. Had SFAS No. 142 been adopted on October 1, 2001, the
Company would have reported no difference in its reported net income and net
income per share for the three and nine months ended June 30, 2002.

Intangible assets subject to amortization consist of technology and
non-compete agreements that are being amortized over a period of seven to eight
years. The components of intangible assets, excluding goodwill, are as follows
(in thousands):

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|                        |  |                     |       |                          |  |              |        |          |  |              |       |              |  |   |       |  |  |   |      |   |  |   |       | 
|----------------------- |  | ------------------- | ----- | ------------------------ |  | ------------ | ------ | -------- |  | ------------ | ----- | ------------ |  | - | ----- |  |  | - | ---- | - |  | - | ----- | 
|                        |  | As of June 30, 2003 |       | As of September 30, 2002
|                        |  | Gross               |       |                          |  |              |        |          |  |              |       | Gross        |  |   |       |  |  |   |      |  
|                        |  | Carrying            |       | Accumulated              |  | Net Carrying |        | Carrying |  | Accumulated  |       | Net Carrying
|                        |  | Amount              |       | Amortization             |  | Amount       |        | Amount   |  | Amortization |       | Amount      
|                        |  |                     |       |                          |  |              |        |          |  |              |       |             
|Purchased Technology    |  | $                   | 4,800 |                          |  | $            | (571   | )        |  | $            | 4,229 |              |  | $ | 4,800 |  |  | $ | (57  | ) |  | $ | 4,743 | 
|Other
Intangible assets |  |                     | 2,800 |                          |  |              | (680   | )        |  |              | 2,120 |              |  |   | 2,800 |  |  |   | (228 | ) |  |   | 2,572 | 
|                        |  |                     |       |                          |  |              |        |          |  |              |       |              |  |   |       |  |  |   |      |   |  |   |       | 
|Total                   |  | $                   | 7,600 |                          |  | $            | (1,251 | )        |  | $            | 6,349 |              |  | $ | 7,600 |  |  | $ | (285 | ) |  | $ | 7,315 | 
|                        |  |                     |       |                          |  |              |        |          |  |              |       |              |  |   |       |  |  |   |      |   |  |   |       | 

The estimated future amortization expense of purchased intangible assets
as of June 30, 2003 was as follows:

|            |  |               |     | 
|----------- |  | ------------- | --- | 
|            |  | Amount       
|Fiscal Year |  | (in millions)
|            |  |              
|2003        |  | $             | 0.2 | 
|2004        |  |               | 1.0 | 
|2005        |  |               | 1.0 | 
|2006        |  |               | 1.0 | 
|2007        |  |               | 1.0 | 
|Thereafter  |  |               | 2.1 | 
|            |  |               |     | 
|Total       |  | $             | 6.3 | 
|            |  |               |     | 

NOTE 5  DISCONTINUED OPERATIONS

Effective September 30, 2002, the Company discontinued the distribution
and consulting businesses engaged in by Tekelec Limited in Japan. As at June
30, 2003, the assets of the discontinued operations have been realized and the
liabilities paid. The pre-tax loss attributable to discontinued operations was
incurred and recognized in September 2002.

NOTE 6  RESTRUCTURING OF ACQUIRED BUSINESS

Prior
to the effective date of the acquisition of NDB described in Note 1,
the Company developed a formal plan to restructure NDB by reducing the staff
complement of the acquired business by 66 employees, or approximately 39%, and
by closing the Tokyo office of Tekelec Limited due to redundancy with the
Companys previously established Tokyo office. A summary of the movements in
the restructuring accrual is as follows (in millions):

|                              |  |                    |     |               |  |               |     |  |  |   |     | 
|----------------------------- |  | ------------------ | --- | ------------- |  | ------------- | --- |  |  | - | --- | 
|                              |  | Accrual as at      |     | Paid through  |  | Balance at   
|Restructuring costs           |  | September 30, 2002 |     | June 30, 2003 |  | June 30, 2003
|                              |  |                    |     |               |  |              
|Redundancy compensation costs |  | $                  | 1.2 |               |  | $             | 1.1 |  |  | $ | 0.1 | 
|Occupancy costs               |  |                    | 0.3 |               |  |               | 0.3 |  |  |   | 0.0 | 
|Professional costs            |  |                    | 0.2 |               |  |               | 0.2 |  |  |   | 0.0 | 
|                              |  |                    |     |               |  |               |     |  |  |   |     | 
|Totals                        |  | $                  | 1.7 |               |  | $             | 1.6 |  |  | $ | 0.1 | 
|                              |  |                    |     |               |  |               |     |  |  |   |     | 

Payment of the balance as of June 30, 2003 is expected to be completed by
September 30, 2003.

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NOTE 7 COMPREHENSIVE INCOME

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

|                                         |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |       |  
|---------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | -
|                                         |  | Three months ended |       | Nine months ended
|                                         |  | June 30,           |       | June 30,         
|                                         |  | 2003               |       | 2002              |  | 2003 |       | 2002
|                                         |  |                    |       |                   |  |      |       |     
|Net income                               |  | $                  | 1,361 |                   |  | $    | 1,874 |      |  | $ | 3,140 |  |  | $ | 8,963 |  
|Currency translation adjustment          |  |                    | (103  | )                 |  |      | 123   |      |  |   | 101   |  |  |   | 31    |  
|Unrealized gains (losses) on investments |  |                    | 4     |                   |  |      | 119   |      |  |   | 2     |  |  |   | (49   | )
|                                         |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |       |  
|Comprehensive income                     |  | $                  | 1,262 |                   |  | $    | 2,116 |      |  | $ | 3,243 |  |  | $ | 8,945 |  
|                                         |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |       |  

NOTE 8INVENTORIES

|                |  |                |       |               |  |   |       | 
|--------------- |  | -------------- | ----- | ------------- |  | - | ----- | 
|                |  | June 30,       |       | September 30,
|                |  | 2003           |       | 2002         
|                |  |                |       |              
|                |  | (In thousands)
|Raw materials   |  | $              | 2,144 |               |  | $ | 3,371 | 
|Work-in-process |  |                |      |               |  |   | 21    | 
|Finished goods  |  |                | 509   |               |  |   | 477   | 
|                |  |                |       |               |  |   |       | 
|                |  | $              | 2,653 |               |  | $ | 3,869 | 
|                |  |                |       |               |  |   |       | 

NOTE 9  CONVERTIBLE NOTES PAYABLE

In connection with the acquisition of NDB described in Note 1, the
Companys Irish subsidiary issued two convertible notes to Tekelec in the
principal amounts of $10.0 million and $7.3 million, respectively. These notes
have been guaranteed by the Company, bear interest at 2% and are due and
payable on or before August 30, 2004. The notes are convertible at the option
of the holder into 1,081,250 shares of the Companys common stock (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, as determined by an independent valuation,
was $18.1 million, which has been recorded in the balance sheet. The 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
and $306,000 was recorded in the three and nine months ended June 30, 2003,
respectively.

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 10  REPURCHASE OF COMMON STOCK

In December 1999, the Companys Board of Directors authorized a stock
repurchase program of up to 2,000,000 shares of its common stock. Depending on
market conditions and other factors, repurchases can be made from time to time
in the open market and in negotiated transactions, including block
transactions, and this program may be discontinued at any time. In the nine
months ended June 30, 2003, the Company repurchased 257,400 shares at a cost of
approximately $1.8 million. The shares repurchased were restored to

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the status
of authorized but unissued. In addition, $300,000 in treasury stock previously
repurchased were
restored to the status of authorized but unissued. In the nine months ended
June 30, 2002, the Company repurchased no shares. As at June 30, 2003, the
Company is authorized to repurchase an additional 1,742,600 shares of its
common stock under the stock repurchase program.

NOTE 11  INCOME TAXES

The Companys provision for income taxes consists of federal, state and
international taxes. The Company recorded a tax benefit of $1.1 million and
$404,000 in the three and nine months ended June 30, 2003, respectively. The
Company recorded a provision of $729,000 and $3.5 million in the three months
and nine months ended June 30, 2002, respectively. The benefit recorded in the
three and nine months ended June 30, 2003 is due to a change in the mix of
income between domestic and international operations and to adjustments to the
Companys transfer pricing.

NOTE 12  SEGMENT REPORTING

The Company is organized to operate and service a single industry segment:
the design, development, manufacture, marketing and support of advanced
software-based test systems globally.

The Companys principal geographical areas of operations, revenues and net
income for the nine months ended June 30, 2003 and 2002 and long-lived assets
by region at June 30, 2003 and September 30, 2002 were as follows (in
thousands):

|                                        |  |         |        |         |  |       |        |       |  |              |        |  |  |   |        | 
|--------------------------------------- |  | ------- | ------ | ------- |  | ----- | ------ | ----- |  | ------------ | ------ |  |  | - | ------ | 
|                                        |  |         |        |         |  | UK,   |        |       |  |              |        |  |  |  
|                                        |  | North   |        | Europe  |  |       |        |       |  | Consolidated
|                                        |  | America |        | & Other |  | Japan |        | Total
|                                        |  |         |        |         |  |       |        |      
|Nine months Ended June 30, 2003         |  |         |        |         |  |       |        |       |  |              |        |  |  |   |        | 
|Revenues from unaffiliated customers    |  | $       | 12,400 |         |  | $     | 9,494  |       |  | $            | 13,124 |  |  | $ | 35,018 | 
|Net income (loss)                       |  |         | 214    |         |  |       | 2,484  |       |  |              | 442    |  |  |   | 3,140  | 
|Long-Lived Assets at June 30, 2003      |  | $       | 38,604 |         |  | $     | 22,023 |       |  | $            | 331    |  |  | $ | 60,958 | 
|Nine months Ended June 30, 2002         |  |         |        |         |  |       |        |       |  |              |        |  |  |   |        | 
|Revenues from unaffiliated customers    |  | $       | 4,257  |         |  | $     | 13,851 |       |  | $            | 12,925 |  |  | $ | 31,033 | 
|Net income (loss)                       |  |         | (941   | )       |  |       | 9,620  |       |  |              | 284    |  |  |   | 8,963  | 
|Long-Lived Assets at September 30, 2002 |  | $       | 39,765 |         |  | $     | 21,335 |       |  | $            | 331    |  |  | $ | 61,431 | 

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 13  CONTINGENCIES

A lawsuit was instituted in October 2002 against the Company and one of
its subsidiaries, Catapult Communications International Limited, an Irish
corporation, in the Antwerp Commercial Court, Antwerp, Belgium, by Tucana
Telecom NV, a Belgian company (Tucana). Tucana has been a distributor of
products for Tekelec, the company from which the Network Diagnostics Business
was acquired in August 2002. The writ alleges that the defendants improperly
terminated an exclusive distribution agreement with Tucana following the
acquisition of the Network Diagnostics Business and seeks damages of 12,461,000
euros plus costs. A trial date of January 16, 2004 has been established. The
Company believes the allegations to be

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without merit and would defend itself
vigorously in the event that Tucana proceeds with the lawsuit during
this period. The Company anticipates that it would 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 and hence has not
recorded a liability.

NOTE 14  SUBSEQUENT EVENTS

On July 22, 2003, the Company announced that it will lay off 15% of the
total workforce in the three months ending September 30, 2003. As a result of
this reduction, the Company expects to recognize a restructuring charge of
approximately $750,000 in the three months ending September 30, 2003.




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 the Companys Consolidated Financial
Statements and Notes thereto included in the Companys Annual Report on Form
10-K for the year ended September 30, 2002, filed on December 20, 2002.

Forward-looking Statements

The following discussion contains statements that are not historical facts
but are forward-looking statements. Such statements are generally identified by
the use of forward-looking words and phrases, such as intended, expects,
anticipates and is (or are) expected (or anticipated). 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 the Companys
stockholders should carefully review the cautionary statements set forth in
this report on Form 10-Q, including those set forth under the caption Factors
That May Affect Future Resultsand those set forth in the Companys Annual
Report on form 10-K for the year ended September 30,2002, filed on December 20,
2002.

The Company may from time to time make additional written and oral
forward-looking statements, including statements contained in the Companys
filings with the Securities and Exchange Commission and in its reports to
stockholders. The Company does not undertake to update any forward-looking
statements that may be made in this Form 10-Q or from time to time on behalf of
the Company.

Overview

Catapult Communications Corporation (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. Catapults 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. The Companys
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. The Company
maintains an extensive library of software modules that support a large number
of industry standard protocols and variants thereon. In addition, the Company
offers customer support under software support contracts, as well as
installation and training services.

Critical Accounting Policies

There have been no material changes to the Companys critical accounting
policies and estimates as disclosed in its Annual Report on Form 10-K for the
year ended September 30, 2002.

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Results of Operations

The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Companys consolidated statements of
income to total revenues.

|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |       | 
|----------------------------------------- | -------------------------- | ------------------------ | ----- | -------------------------- | ----- | ------------------------- | ---- | ---- | ----- | ---- | ---- | ---- | ----- |  | ---- | ---- | ----- | 
|                                          |                            |                          |       | For the three months ended |       | For the nine months ended
|                                          |                            |                          |       | June 30,                   |       | June 30,                 
|                                          |                            |                          |       | 2003                       |       | 2002                      |      | 2003 |       | 2002
|                                          |                            |                          |       |                            |       |                           |      |      |       |     
|Revenues:                                 |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |     
|                                          | Products                   |                          |       | 78.7                       | %     |                           |      | 82.6 | %     |      |      | 79.5 | %     |  |      | 86.1 | %    
|                                          | Services                   |                          |       | 21.3                       |       |                           |      | 17.4 |       |      |      | 20.5 |       |  |      | 13.9 |      
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|                                          |                            | Total revenues           |       |                            | 100.0 |                           |      |      | 100.0 |      |      |      | 100.0 |  |      |      | 100.0 | 
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|Cost of revenues:                         |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |     
|                                          | Products                   |                          |       | 10.5                       |       |                           |      | 6.6  |       |      |      | 12.2 |       |  |      | 6.3  |      
|                                          | Services                   |                          |       | 6.3                        |       |                           |      | 2.9  |       |      |      | 6.1  |       |  |      | 2.5  |      
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|                                          |                            | Total cost of revenues   |       |                            | 16.8  |                           |      |      | 9.5   |      |      |      | 18.3  |  |      |      | 8.8   | 
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|Gross profit                              |                            |                          | 83.2  |                            |       |                           | 90.5 |      |       |      | 81.7 |      |       |  | 91.2 |     
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|Operating expenses:                       |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |     
|                                          | Research and development   |                          |       | 31.6                       |       |                           |      | 22.1 |       |      |      | 29.7 |       |  |      | 16.8 |      
|                                          | Sales and marketing        |                          |       | 33.7                       |       |                           |      | 33.1 |       |      |      | 31.1 |       |  |      | 26.2 |      
|                                          | General and administrative |                          |       | 15.6                       |       |                           |      | 8.8  |       |      |      | 15.9 |       |  |      | 11.3 |      
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|                                          |                            | Total operating expenses |       |                            | 80.9  |                           |      |      | 64.0  |      |      |      | 76.7  |  |      |      | 54.3  | 
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|Operating income                          |                            |                          | 2.3   |                            |       |                           | 26.5 |      |       |      | 5.0  |      |       |  | 36.9 |     
|Interest income, net                      |                            |                          | 0.9   |                            |       |                           | 4.3  |      |       |      | 0.9  |      |       |  | 3.6  |     
|Other income (expense), net               |                            |                          | (0.7  | )                          |       |                           | 1.6  |      |       |      | 1.9  |      |       |  | (0.4 | )   
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|Income before income taxes                |                            |                          | 2.5   |                            |       |                           | 32.4 |      |       |      | 7.8  |      |       |  | 40.1 |     
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|Provision for (benefit from) income taxes |                            |                          | (10.3 | )                          |       |                           | 9.0  |      |       |      | (1.2 | )    |       |  | 11.2 |     
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|Net income                                |                            |                          | 12.8  | %                          |       |                           | 23.4 | %    |       |      | 9.0  | %    |       |  | 28.9 | %   
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|Gross margin on product sales             |                            |                          | 86.7  | %                          |       |                           | 92.0 | %    |       |      | 84.6 | %    |       |  | 92.7 | %   
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      
|Gross margin on services                  |                            |                          | 70.3  | %                          |       |                           | 83.4 | %    |       |      | 70.4 | %    |       |  | 82.1 | %   
|                                          |                            |                          |       |                            |       |                           |      |      |       |      |      |      |       |  |      |      |      

Comparison of the Three-Month Periods Ended June 30, 2003 and 2002

Revenues, cost of revenues and expenses for the three months ended June
30, 2003 include the results of the continuing operations of NDB, which was
acquired by the Company on August 30, 2002 as described in more detail in Note
1 to the Condensed Consolidated Financial Statements. The results of
operations for the three months ended June 30, 2002 do not include NDB, because
the acquisition occurred subsequent to that period.

Revenues

Revenues increased by approximately 32% from $8.0 million for the three
months ended June 30, 2002 to $10.6 million for the three months ended June 30,
2003. Over the same period, product revenues

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increased by approximately 26% from $6.6 million to $8.3 million. The increase
in product revenues was attributable to the presence in the latter period of
revenues from the Companys MGTS products acquired with NDB and partially
offset by the reduced demand for the Companys DCT test systems due to
reductions in research and development spending on the part of most of its
major customers. Services revenues increased approximately 61% from $1.4
million to $2.3 million. The increase in services revenues was due to the
addition of the service revenue stream from the MGTS installed base acquired
with NDB.

Cost of Revenues

Cost of product revenues consists of the costs of board assembly by
independent contractors, purchased components, payroll and benefits for
personnel in product testing, purchasing, shipping and inventory management, as
well as supplies, media and freight. Cost of product revenues increased
approximately 109% from $532,000 for the three months ended June 30, 2002 to
$1.1 million for the three months ended June 30, 2003 and gross margin on
product revenues decreased from 92% to 87% due to the inclusion of MGTS
product, which has lower margins than the Companys DCT 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 177% from $233,000 for the three
months ended June 30, 2002 to $669,000 for the three months ended June 30, 2003
and gross margin on services revenues decreased from 83% to 70% due to a 120%
increase in the number of customer service personnel as a result of the NDB
acquisition.

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
increased by approximately 89% from $1.8 million for the three months ended
June 30, 2002 to $3.3 million for the three months ended June 30, 2003 due to a
102% increase in the number of research and development personnel as a result
of the NDB acquisition. As a percentage of total revenues, research and
development expenses increased from 22% to 32% over the same period. The
Company expects quarterly research and development expenses to decrease by
approximately 10% for the three months ending September 30, 2003 as compared
with the three months ended June 30, 2003 due to the staff reductions made in
July 2003. *

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 34% from $2.7 million for the three months
ended June 30, 2002 to $3.6 million for the three months ended June 30, 2003
due primarily to a 30% increase in the number of sales and marketing personnel
as a result of the NDB acquisition. As a percentage of total revenues, sales
and marketing expenses increased from 33% to 34% over the same period.

General and Administrative

General and administrative expenses include costs associated with the
Companys general 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 in 2003. General
and administrative expenses increased approximately 135% from $705,000 for the
three months ended June 30, 2002 to $1.7 million for the three months ended
June 30, 2003 due primarily to a 50% increase in the number of administrative
personnel as a result of the NDB acquisition and to the inclusion of $255,000
in amortization expense. In addition, general and administrative expenses in
the three months ended June 30, 2002 were

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reduced by reversal of a provision for legal settlement and a reduction in
accrued performance bonuses. As a percentage of total revenues, general and
administrative expenses increased from 9% to 16% over the same period.

Interest Income (Expense), net

Interest income (expense), net, consists of interest earned on cash and
cash equivalents and short-term investments and amortization of the valuation
premium attributed to the convertible notes payable, net of interest charges on
those notes. Interest income decreased from $346,000 for the three months ended
June 30, 2002 to $94,000 for the three months ended June 30, 2003. The decrease
is due to a 51% reduction in cash and short-term investments as a result of the
NDB acquisition and to a decrease in interest rates. Amortization of the
valuation premium on the convertible notes payable of approximately $102,000
was partially offset by $87,000 in interest payable on those notes.

Other Income (Expense), net

Other income (expense), net, primarily represents gains and losses from
fluctuations in exchange rates on transactions denominated in foreign
currencies and income from miscellaneous refunds. Other income decreased by
$202,000 from income of $134,000 for the three months ended June 30, 2002 to
expense of $68,000 for the three months ended June 30, 2003.

Provision for (benefit from) income taxes

Provision for (benefit from) income taxes consists of federal, state and
international income taxes. The Company recorded a tax benefit of $1.1 million
in the three months ended June 30, 2003, compared with a provision of $729,000
for the three months ended June 30, 2002. The benefit recorded in the three
months ended June 30, 2003 is due to a change in the mix of income between
domestic and international operations and to adjustments to the Companys
transfer pricing. The Companys future tax rate may vary depending in part on
the relative income contribution by its domestic and foreign operations. *

Comparison of the Nine-Month Periods Ended June 30, 2002 and 2003

Revenues, cost of revenues and expenses for the nine months ended June 30,
2003 include the results of the continuing operations of NDB, which was
acquired by the Company on August 30, 2002 as described in more detail in Note
1 to the Condensed Consolidated Financial Statements. The results of
operations for the nine months ended June 30, 2002 do not include NDB, because
the acquisition occurred subsequent to that period.

Revenues

Revenues increased by approximately 13% from $31.0 million for the nine
months ended June 30, 2002 to $35.0 million for the nine months ended June 30,
2003. Over the same period, product revenues increased by approximately 4% from
$26.7 million to $27.8 million. The increase in product revenues was
attributable to the presence in the latter period of revenues from the
Companys MGTS products acquired with NDB and partially offset by the reduced
demand for the Companys DCT test systems due to reductions in research and
development spending on the part of most of its major customers. Services
revenues also increased approximately 66% from $4.3 million to $7.2 million
over the same period. The increase in services revenues was due to the addition
of the service revenue stream from the MGTS installed base acquired with NDB.

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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. In addition, in the nine months ended June
30, 2003, cost of product revenues included fees paid to Tekelec for the
manufacture of the MGTS products under a transitional services agreement that
expired on February 28, 2003. Cost of product revenues increased approximately
120% from $1.9 million for the nine months ended June 30, 2002 to $4.3 million
for the nine months ended June 30, 2003 and gross margin on product revenues
decreased from 93% to 85% due to the inclusion of MGTS product, which has lower
margins than the Companys DCT products, and to $763,000 in manufacturing fees
paid under the transitional services agreement, which expired in February 2003.

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 176% from $771,000 for the nine
months ended June 30, 2002 to $2.1 million for the nine months ended June 30,
2003 and gross margin on services revenues decreased from 82% to 70% due to a
120% increase in the number of customer service personnel as a result of the
NDB acquisition.

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
increased by approximately 100% from $5.2 million for the nine months ended
June 30, 2002 to $10.4 million for the nine months ended June 30, 2003 due to a
102% increase in the number of research and development personnel as a result
of the NDB acquisition. As a percentage of total revenues, research and
development expenses increased from 17% to 30% over the same period.

Sales and Marketing

Sales and marketing expenses consist primarily of the costs of payroll,
benefits, commissions and bonuses, occupancy costs, travel and promotional
expenses, such as product brochures and trade show costs. Sales and marketing
expenses increased by approximately 34% from $8.1 million for the nine months
ended June 30, 2002 to $10.9 million for the nine months ended June 30, 2003
due primarily to a 30% increase in the number of sales and marketing personnel
as a result of the NDB acquisition. As a percentage of total revenues, sales
and marketing expenses increased from 26% to 31% over the same period.

General and Administrative

General and administrative expenses include costs associated with the
Companys general and risk management, public reporting, employee recruitment
and retention, investor relations and finance functions, as well as
amortization of intangible assets acquired with NDB in 2003. General and
administrative expenses increased approximately 58% from $3.5 million for the
nine months ended June 30, 2002 to $5.6 million for the nine months ended June
30, 2003 due primarily to a 50% increase in the number of administrative
personnel as a result of the NDB acquisition and to the inclusion of $966,000
in amortization expense. As a percentage of total revenues, general and
administrative expenses increased from 11% to 16% over the same period.

Interest Income, net

Interest income, net, consists of interest earned on cash and cash
equivalents and short-term investments and amortization of the valuation
premium attributed to the convertible notes payable, net of

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interest charges on those notes. Interest income decreased from $1.1 million
for the nine months ended June 30, 2002 to $330,000 for the nine months ended
June 30, 2003. The decrease is due to a reduction in cash and short-term
investments as a result of the NDB acquisition and to a decrease in interest
rates. The $306,000 in amortization of the valuation premium on the convertible
notes payable more than offset the $264,000 in interest payable on those notes.

Other Income (Expense), net

Other income (expense), net, primarily represents gains and losses from
fluctuations in exchange rates on transactions denominated in foreign
currencies and income from miscellaneous refunds. Other income increased by
$772,000 from an expense of $100,000 for the nine months ended June 30, 2002 to
an income of $672,000 for the nine months ended June 30, 2003 due to a Japanese
consumption tax refund of approximately $695,000 recorded in the latter period,
partially offset by foreign exchange losses.

Provision for (benefit from) income taxes

Provision for (benefit from) income taxes consists of federal, state and
international income taxes. The Company recorded a tax benefit of $404,000 in
the nine months ended June 30, 2003, compared with a provision of $3.5 million
for the nine months ended June 30, 2002. The benefit recorded in the nine
months ended June 30, 2003 is due to a change in the mix of income between
domestic and international operations and to adjustments to the Companys
transfer pricing. The Companys future tax rate may vary depending in part on
the relative income contribution by its domestic and foreign operations. *

Liquidity and Capital Resources

Historically, the Company has financed its operations primarily through
cash generated from operations and from the proceeds of its initial public
offering completed on February 11, 1999. The proceeds to the Company from the
offering, net of underwriter fees and other expenses, were approximately $19.2
million.

The Companys purchase of NDB was additionally financed 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 the
Companys Irish subsidiary and are guaranteed by the Company. The notes are
convertible at the option of the holder into an aggregate of 1,081,250 shares
of the Companys common stock (subject to adjustment for certain events)
between August 30, 2003 and the maturity date. If not converted by the holder,
the Company is entitled to pay the principal and accrued interest on one of the
notes in the principal amount of $10.0 million in cash or, in whole or in part,
by issuing its 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. The Companys cash and
short term investment balances as at June 30, 2003 exceeded the aggregate
principal amount of the notes by $16.9 million.

The Companys operating activities provided cash of $1.3 million in the
nine-month period ended June 30, 2003 and $13.0 million in the nine-month
period ended June 30, 2002. The cash provided by the Companys operations in
the nine months ended June 30, 2003 was primarily attributable to net income of
$3.1 million, a realization of $1.7 million on the assets of discontinued
operations net of liabilities paid, decreases of $3.3 million in accounts
receivable and inventories, and to the recognition of $2.3 million in non-cash
items for depreciation, amortization and deferred income tax, partially offset
by decreases in accounts payable, accrued liabilities and an increase in
prepaid expenses totaling $9.8 million. The cash provided by the Companys
operations in the nine months ended June 30, 2002 was primarily attributable to
net income of $9.0 million, a decrease in accounts receivable of $1.9 million
and increases in accrued liabilities and deferred

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revenue totaling $2.7 million and partially offset by an increase in prepaid
expenses of $1.0 million. To the extent that non-cash items increase or
decrease and positively or negatively impact the Companys future operating
results, there will be no corresponding impact on its cash flows.

The Companys primary source of operating cash flow is the collection of
accounts receivable from its customers and the timing of payments to its
vendors and service providers. The Company measures the effectiveness of its
collections efforts by an analysis of average accounts receivable days
outstanding (days sales outstanding). As at June 30, 2003 the Company had 77
days sales oustanding, slightly above the 75 day average over the preceding
eight fiscal quarters due to rear-end loaded billings in the three months ended
June 30, 2003. Collections of accounts receivable and related days sales
outstanding will fluctuate in future periods due to the timing and amount of
the Companys future revenues, payment terms extended to its customers and the
effectiveness of its collection efforts.

Investing activities, consisting primarily of purchases and sales of
short-term investments and to a lesser extent additions to property and
equipment, provided cash of $8.4 million in the nine months ended June 30, 2003
compared to a use of cash of $29.3 million in the nine months ended June 30,
2002. As at June 30, 2003, the Company had no material capital expenditure
commitments, and the Company expects that capital expenditures for the three
months ending September 30, 2003 will total approximately $300,000.*

Cash used by financing activities for the nine months ended June 30, 2003
of $1.4 million was attributable to the repurchase of 257,400 shares of the
Companys stock under its stock repurchase program at a cost of $1.8 million,
partially offset by the exercise of employee stock options and the purchase of
shares under the employee stock purchase plan of $339,000. Cash provided by
financing activities for the nine months ended June 30, 2002 of
$710,000 was
attributable to the exercise of employee stock options and the purchase of
shares under the employee stock purchase plan. The Company may continue to use
cash to buy back shares of its common stock in the future.

As of June 30, 2003, the Company had working capital of $31.4 million,
cash and cash equivalents of $21.0 million, short-term investments of $13.2
million and no bank indebtedness. As of June 30, 2003, the Company 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 payable under convertible notes |  | $     | 17.3 |        |  | $                      |    |       |  | $       | 17.3 |       |  | $ |    |  |  | $ |    | 
|Operating leases                          |  |       | 3.9  |        |  |                        | 1.1 |       |  |         | 2.3  |       |  |   | 0.4 |  |  |   | 0.1 | 
|                                          |  |       |      |        |  |                        |     |       |  |         |      |       |  |   |     |  |  |   |     | 
|Total contractual cash obligations        |  | $     | 21.2 |        |  | $                      | 1.1 |       |  | $       | 19.6 |       |  | $ | 0.4 |  |  | $ | 0.1 | 
|                                          |  |       |      |        |  |                        |     |       |  |         |      |       |  |   |     |  |  |   |     | 

The Company believes that cash and cash equivalents, short-term
investments and funds generated from operations will provide the Company with
sufficient funds to finance its operations for at least the next 12 months and
to repay the convertible notes on maturity in the event the holder does not
exercise its conversion option.* The Company may require additional funds to
support its 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 the Company or its
stockholders.

Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). This Statement requires

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that a liability for costs associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company adopted SFAS
No. 146 in the three months ended March 31, 2003 and its adoption did not have
a material effect on the Companys financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantors fiscal
year-end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of this standard did not have a material effect on the Companys
financial position or results of operations.

The following table represents the activity in Warranty Accrual for the
nine months ended June 30, 2003 (in thousands):

|                              |                                                  |   |     |      |  
|----------------------------- | ------------------------------------------------ | - | --- | ---- | -
|Balance at September 30, 2002 |                                                  | $ | 600 |     
|                              | Settlements made during the period               |   |     | (105 | )
|                              | Accruals for warranties issued during the period |   |     | 105  |  
|                              |                                                  |   |     |     
|Balance at June 30, 2003      |                                                  | $ | 600 |     
|                              |                                                  |   |     |     

In December 2002, the FASB issued 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. The Company has adopted this disclosure standard as required for the
three months ended June 30, 2003.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 addresses certain financial instruments that, under previous
guidance, could be accounted for as equity, but now must be classified as
liabilities in statements of financial position. These financial instruments
include: 1) mandatorily redeemable financial instruments, 2) obligations to
repurchase the issuers equity shares by transferring assets, and 3)
obligations to issue a variable number of shares. SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. The implementation of SFAS No. 150 is not expected to have
a material effect on our consolidated financial statements.

Factors That May Affect Future Results

Fluctuations in Quarterly Operating Results; Lengthy Sales Cycle

The Company has experienced, and anticipates that it will continue to
experience, significant fluctuations in quarterly revenues and operating
results. The Companys revenues and operating results are relatively difficult
to forecast for a number of reasons, including (i) the variable size and timing
of individual purchases by customers, (ii) seasonal factors that may affect
capital spending by customers, such as the

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varying fiscal year ends of customers and the reduction in business during
the summer months, particularly in Europe, (iii) the relatively long sales
cycles for the Companys products, (iv) the timing of hiring sales and
technical personnel, (v) changes in timing and amount of sales incentive
compensation, (vi) competitive conditions in the Companys markets, (vii)
exchange rate fluctuations, (viii) changes in the mix of products sold, (ix)
the timing of the introduction and market acceptance of new products or product
enhancements by the Company, its customers, competitors or suppliers, (x) costs
associated with developing and introducing new products, (xi) product life
cycles, (xii) changes in the level of operating expenses relative to revenues,
(xiii) software defects and other product quality problems, (xiv) customer
order deferrals in anticipation of new products, (xv) delays in purchasing
decisions or customer orders due to customer consolidation, (xvi) supply
interruptions, (xvii) changes in the regulatory environment and (xviii) changes
in global or regional economic conditions or in the telecommunications
industry.

The Companys revenues in any period generally have been, and are likely
to 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 the Companys quarterly revenues and results of
operations than on those of companies with relatively high volumes of sales or
low revenues per order. See Dependence on Limited Number of Customers below.
The Companys products generally are shipped within 15 to 30 days after orders
are received and revenues are recognized upon shipment or, if installation
services are purchased, when installed, provided collection is probable. As a
result, the Company generally does not have a significant backlog of orders,
and revenues in any quarter are substantially dependent on orders booked,
shipped and installed in that quarter.

Due to the relatively fixed nature of most of the Companys costs,
including personnel and facilities costs, and because operating expenses are
based on anticipated revenues, a decline in revenues from even a limited number
of transactions, failure to achieve expected revenue in any fiscal quarter or
unanticipated variations in the timing of recognition of specific revenues can
cause significant variations in operating results from quarter to quarter and
may in some future quarter result in losses or have a material adverse effect
on the Companys business, financial condition and results of operations. The
Company believes, therefore, that period-to-period comparisons of its operating
results should not be relied upon as an indication of future performance.

For all of the foregoing factors, as well as other unanticipated factors,
it is possible that in some future quarter, the Companys results of operations
could fail to meet the expectations of public market analysts or investors. In
such event, or in the event that adverse conditions prevail or are perceived to
prevail generally or with respect to the Companys business, the price of the
Companys common stock will likely be materially adversely affected.

Dependence on Limited Number of Customers

The Companys customer base is highly concentrated, and a relatively small
number of companies have accounted for substantially all of the Companys
revenues to date. In the nine months ended June 30, 2003, the Companys top
five customers represented approximately 49% of total revenues. The Company
expects that it will continue to depend upon a relatively limited number of
customers for substantially all of its revenues in future periods, although no
customer is presently obligated either to purchase a specific amount of
products or to provide the Company with binding forecasts of purchases for any
period. The loss of a major customer or the reduction, delay or cancellation of
orders from one or more of the Companys significant customers could materially
adversely affect the Companys business, financial condition and results of
operations.

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Risks Relating to Acquisitions

As part of its business strategy, the Company acquired NDB on August 30,
2002 and may make further acquisitions of, or significant investments in,
companies, products or technologies that it believes are complementary,
although no such acquisitions or investments are currently pending. The NDB
acquisition and any such future transactions would be accompanied by the risks
commonly encountered in making acquisitions of companies, products and
technologies. Such risks include, among others, the difficulties associated
with assimilating the personnel and operations of acquired companies, the
potential disruption of the Companys ongoing business, the distraction of
management and other resources, the 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, the maintenance of
uniform standards, controls, procedures and policies and the impairment of
relationships with employees and clients as a result of the integration of new
management personnel. The Company has no previous experience in assimilating
acquired companies or product lines into its operations. There can be no
assurance that the Company will be successful in overcoming these risks or any
other problems encountered in connection with the NDB acquisition or any such
future acquisitions. Furthermore, future acquisitions by the Company 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 have a material adverse effect on the
Companys business, financial condition and results of operation or on the
market price of the Companys common stock.

Risk Associated with International Operations

Company revenues from international customers were approximately 65%
during the nine months ended June 30, 2003. The Company expects that
international sales will continue to account for a significant portion of its
revenues in future periods.* The Company sells its products worldwide through
its direct sales force. The Company has international offices located in Japan,
Canada, the United Kingdom, Germany, France, Finland, and Australia and plans
to add offices, staff and resources worldwide from time to time. International
sales and operations are subject to inherent risks, including difficulties in
staffing and managing foreign operations, longer customer payment cycles,
greater difficulty in accounts receivable collection, 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 two fiscal years and during the nine months ended
June 30, 2003, a significant portion of the Companys sales has been to
customers in Japan and Europe. If economic conditions in Japan or Europe
deteriorate to a significant extent, the Companys business, financial
condition and results of operations could be materially adversely affected. An
inability to obtain necessary regulatory approvals in foreign markets on a
timely basis could also have a material adverse effect on the Companys
business, financial condition and results of operations.

International sales and operations are subject to inherent risks,
including difficulties in staffing and managing foreign operations, longer
customer payment cycles, greater difficulty in accounts receivable collection,
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.

Many of the Companys international sales, including its sales in Japan,
are denominated in local currencies. Although the Company currently engages in
hedging transactions with respect to certain receivables resulting from certain
inter-company sales, there can be no assurance that the Company will continue
to do so or that its hedging activities will be successful. Fluctuations in
foreign currency exchange rates may contribute to fluctuations in the Companys
operating results. For example, changes in foreign currency exchange rates
could adversely affect the revenues, net income, earnings per share and cash
flow of

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the Companys operations in affected markets. Similarly, such fluctuations
may cause the Company to raise prices, which could affect demand for the
Companys products and services. In addition, if exchange or price controls or
other restrictions are imposed in countries in which the Company does business,
the Companys business, financial condition and results of operations would be
materially adversely affected.

Dependence on Rapidly Evolving Telecommunications Industry

The Companys future success is dependent upon the long-term 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. There can be no assurance that 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 will continue in a manner
favorable to the Company or its business strategies. In addition, there can be
no assurance that the growth in demand for Internet services and the resulting
need for high speed or enhanced telecommunications equipment will continue at
its current rate or at all.

The Companys future success is dependent upon the increased utilization
of its test solutions by network operators and telecommunications equipment
manufacturers. Industry-wide network equipment and infrastructure development
driving the demand for the Companys 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. There can be no assurance that telecommunications
equipment manufacturers and network operators will develop new technology or
enhance current technology or, if developed, that such new technology or
enhancements will create demand for the Companys products or services.

Rapid Technological Change; Uncertainty of Acceptance of the Companys Products
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. The Companys future success will depend in part on its ability
to anticipate and respond to these changes by enhancing its 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 its
customer base. There can be no assurance that the Company will 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, the Company may be required to support legacy systems used by its
customers, which may place additional demands on the Companys personnel and
other resources and may require the Company to maintain an inventory of
otherwise obsolete components.

The Companys test systems currently operate only on the UNIX and Linux
operating systems. The Companys 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. There can be no assurance that the Company would be able to
successfully adapt its products to such operating systems on a timely or
cost-effective basis, if at all. The failure of the Company to respond to
rapidly changing technologies and to develop and introduce new products and
services in a timely manner would have a material adverse effect on the
Companys business, financial condition and results of operations.

The Companys success will depend in part on whether a large number of
telecommunications equipment manufacturers and network operators purchase the
Companys 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

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various testing purposes, and there has not been broad adoption of the
products of one company. There can be no assurance that the Companys current
or future products or services will achieve widespread acceptance among
telecommunications equipment manufacturers, network operators or other
potential customers or that solutions developed by competitors will not render
the Companys products obsolete or uncompetitive. In the event the
telecommunications industry does not broadly adopt the Companys products or
services or does so less rapidly than expected by the Company, or in the event
the Companys products are rendered obsolete or uncompetitive by more advanced
solutions, the Companys business, financial condition and results of
operations would be materially adversely affected.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk and Derivative Financial Instruments

The Companys foreign subsidiaries operate and sell the Companys products
in various global markets. As a result, the Company is exposed to changes in
interest rates and foreign currency exchange rates on foreign currency
denominated sales made to foreign subsidiaries. The Company utilizes 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. The Company attempts to match the
forward contracts with specific underlying receivables in terms of currency,
amount and maturity. The Company does 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 the Company 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, the Company has not fully mitigated all
risk associated with its sales denominated in foreign currencies, and there can
be no assurance that the Companys foreign exchange risk management activities,
if any, will be successful.

At June 30, 2003 the Company had forward exchange contracts maturing in
fiscal 2003 to sell approximately $3.8 million in Japanese Yen. The fair market
value of these contracts at June 30, 2003 was not material.

The Company has 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 believes that any such losses would not be
material.*

Additional factors that could affect future operating results or the price
of the Common Stock are set forth under the caption Factors That May Affect
Future Results in the Companys Annual Report on Form 10-K for 2002.

Interest Rate Risk

The Companys exposure to market risk for changes in interest rates
relates primarily to its short-term investment portfolio. As of June 30, 2003,
short-term investments consisted of available-for-sale securities of $13.2
million. These fixed income marketable securities included corporate bonds and
government securities, all of which are of high investment grade. They are
subject to interest rate risk and will decline in value if the market interest
rates increase. If the market interest rates were to increase immediately and
uniformly by 10% from levels as of June 30, 2003, the decline in the fair value
of the portfolio would not be material to the Companys financial position.

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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

The Companys management evaluated, with the participation of its Chief
Executive Officer and its Chief Financial Officer, the effectiveness of its
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on this evaluation, the Companys Chief
Executive Officer and its Chief Financial Officer have concluded that the
Companys disclosure controls and procedures are effective to ensure that
information the Company is required to disclose in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.

Changes in internal control over financial reporting.

There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.




Part II. Other Information




Item 6. Exhibits and Reports on Form 8-K.

|    |  |                                                                                                                                                                                                                  |  |                                                                                                                                                                               
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Exhibits                                                                                                                                                                                                         |  |                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                  |  |                                                                                                                                                                               
|    |  | 31                                                                                                                                                                                                               |  | Certifications of Chief Executive Officer and 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 
|    |  |                                                                                                                                                                                                                  |  |                                                                                                                                                                               
|(b) |  | Reports on Form 8-K                                                                                                                                                                                             
|    |  |                                                                                                                                                                                                                  |  |                                                                                                                                                                               
|    |  | On April 17, 2003, the Company filed a Current Report on Form 8-K
to furnish its press release dated April 17, 2003 announcing the
Registrants results of operations for the three months ended March
31, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                      |  |                                                                                                   
|--------------------- |  | --------------------------------------------------------------------------------------------------
|                      |  | CATAPULT COMMUNICATIONS CORPORATION                                                               
|                      |  |                                                                                                   
|Date: August 12, 2003 |  | By: /s/ CHRISTOPHER A. STEPHENSON                                                                 
|                      |  | Christopher A. Stephenson
Vice President and Chief Financial Officer
(Principal Financial Officer)

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EXHIBIT INDEX

|   |  |                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31 |  | Certifications of Chief Executive Officer and 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