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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C. 20549




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Form 10-K

(Mark One)


|  |  |                                                                                                                                                                           
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended September 30, 2002                             
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period
    from                to                .

Commission File Number: 0-24701



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Catapult Communications Corporation

(Exact name of Registrant as specified in its
charter)


|                               |  |                                                   
|------------------------------ |  | --------------------------------------------------
|Nevada(State of Incorporation) |  | 77-0086010(IRS Employer Identification
    Number)

160 South Whisman Road, Mountain View,
California 94041

(Address of principal executive offices,
including zip code)


Registrants telephone number, including
area code:

(650) 960-1025


Securities Registered Pursuant to
Section 12(b) of the Act: None

Securities Registered Pursuant to
Section 12(g) of the Act: Common Stock, $0.001 par
value

Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ     No o

Indicate by a check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.     Yes þ     No o

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

As of October 31, 2002, 13,055,836 shares of
the Registrants common stock, $0.001 par value, were
outstanding. The aggregate market value of the voting stock held
by non-affiliates of the Registrant (based upon the closing
price of the Registrants common stock on October 31,
2002 of $12.94 per share) was approximately $86,716,414. Shares
of common stock held by each executive officer and director of
the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference
from the definitive proxy statement for the Annual Meeting of
Stockholders scheduled to be held on January 21, 2003.









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TABLE OF CONTENTS



|             |                                                                                                       |  |  |  |  |  |  | 
|------------ | ----------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | Item 1. Business                                                                                     
|             | Item 2. Properties                                                                                   
|             | Item 3. Legal Proceedings                                                                            
|             | Item 4. Submission of Matters to a Vote of Security Holders                                          
|PART II     
|             | Item 5. Market For the Registrants Common Equity and Related Stockholder Matters                    
|GLOSSARY    
|             | Item 6. Selected Financial Data                                                                      
|             | Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations          
|             | Item 7A. Quantitative and Qualitative Disclosure About Market Risks                                  
|             | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                  
|             | CATAPULT COMMUNICATIONS CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|             | Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure         
|PART III    
|             | Item 10. Directors and Executive Officers of the Registrant                                          
|             | Item 11. Executive Compensation                                                                      
|             | Item 12. Security Ownership of Certain Beneficial Owners and Management                              
|             | Item 13. Certain Relationships and Related Transactions                                              
|             | Item 14. Controls and Procedures                                                                     
|PART IV     
|             | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                            
|SIGNATURES  
|EXHIBIT 4.1 
|EXHIBIT 4.2 
|EXHIBIT 10.8
|EXHIBIT 10.9
|EXHIBIT 21.1
|EXHIBIT 23.1
|EXHIBIT 99.1



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TABLE OF CONTENTS

|         |  |                                                                                          |  |  |    | 
|-------- |  | ---------------------------------------------------------------------------------------- |  |  | -- | 
|PART I   |  |                                                                                          |  |  |    | 
|ITEM 1.  |  | BUSINESS                                                                                 |  |  | 1  | 
|ITEM 2.  |  | PROPERTIES                                                                               |  |  | 10 | 
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                        |  |  | 10 | 
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                  |  |  | 10 | 
|        
|PART II  |  |                                                                                          |  |  |    | 
|ITEM 5.  |  | MARKET FOR THE REGISTRANTS COMMON EQUITY
    AND RELATED STOCKHOLDER MATTERS            |  |  | 10 | 
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                                  |  |  | 12 | 
|ITEM 7.  |  | MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS  |  |  | 14 | 
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
    MARKET RISKS                           |  |  | 26 | 
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                              |  |  | 27 | 
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE |  |  | 49 | 
|        
|PART III |  |                                                                                          |  |  |    | 
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                       |  |  | 49 | 
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                   |  |  | 49 | 
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT                       |  |  | 49 | 
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                           |  |  | 49 | 
|ITEM 14. |  | CONTROLS AND PROCEDURES                                                                  |  |  | 49 | 
|        
|PART IV  |  |                                                                                          |  |  |    | 
|ITEM 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
    REPORTS ON FORM 8-K                     |  |  | 50 | 



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FORWARD-LOOKING STATEMENTS

THIS REPORT ON FORM 10-K CONTAINS STATEMENTS
THAT ARE NOT HISTORICAL FACTS BUT ARE FORWARD-LOOKING STATEMENTS
RELATING TO SUCH MATTERS AS ANTICIPATED FINANCIAL PERFORMANCE,
BUSINESS PROSPECTS, TECHNOLOGICAL DEVELOPMENTS, NEW PRODUCTS,
THE INTEGRATION OF THE BUSINESS ACQUIRED DURING THE PREVIOUS
FISCAL YEAR AND SIMILAR MATTERS. 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
STOCKHOLDERS OF CATAPULT SHOULD CAREFULLY REVIEW THE CAUTIONARY
STATEMENTS SET FORTH IN THIS REPORT ON FORM 10-K, INCLUDING
THOSE SET FORTH UNDER THE CAPTION FACTORS THAT MAY AFFECT
FUTURE RESULTS.

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 FROM TIME TO TIME BY
OR ON BEHALF OF THE COMPANY.




PART I




Item 1.     Business

The Company

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 and MGTS
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
Company markets its products through both a direct sales force
and distributors to industry leaders such as Alcatel, Cisco
Systems, Inc., Fujitsu Limited, LM Ericsson, Evolium SAS, Lucent
Technologies, Inc. (Lucent), Motorola, Inc.
(Motorola), NEC Corporation (NEC),
Nippon Telephone and Telegraph (NTT), Nokia
Corporation, Nortel Networks Limited (Nortel), NTT
DoCoMo, Inc. (NTT DoCoMo) and Siemens AG.

Acquisition of the Network Diagnostics
Business from Tekelec

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 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 and
$4.3 million in transaction costs which have been
capitalized and added to the purchase price for accounting
purposes. Based on an independent valuation, a fair value of
$18.1 million has been assigned to the notes. The total
purchase price is subject to a net working capital adjustment
pursuant to the terms of the Asset Purchase Agreement following
the completion of a closing date balance sheet audit. NDBs
principal product is the MGTS digital telecommunications test
system, which is similar to the Companys DCT test systems.

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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. 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 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 Company, its Irish subsidiary and Tekelec
also entered into certain intellectual property license
agreements which are described under the caption
Intellectual Property in this Item.

The parties also entered into a Transitional
Services Agreement pursuant to which Tekelec is providing
manufacturing, sales support, marketing, IT, engineering, human
resources, finance and accounting and customer support services
to the Company for a period of up to two years after closing of
the acquisition (six months in the case of manufacturing
services). The Company also entered into a six-month interim
sublease with Tekelec for the facilities currently occupied by
NDB in Morrisville, North Carolina.

Further information on the transaction is
provided by the Companys Report on form 8-K dated
September 6, 2002, as amended.

The DCT and MGTS Products

The DCT and MGTS 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. The Companys emphasis is on complex,
high-level and emerging protocols, including Third Generation
Cellular (3G), IP Telephony (Voice over IP or VoIP), General
Packet Radio Service (GPRS), Asynchronous Transfer Mode (ATM),
Signaling System #7 (SS7), Intelligent Network (IN), V5,
Integrated Services Digital Network (ISDN), Global Systems for
Mobile Communications (GSM), Interim Standard 41 (IS-41),
Code Division Multiple Access (CDMA), X.25 and Frame Relay(1).
The Companys extensive technical know-how and proprietary
software development tools enable the Company to implement new
protocols and protocol variants rapidly in response to customer
needs. With their extensive libraries of software protocol
modules, large selection of physical interfaces and versatile
platforms, the DCT and MGTS products are easily configured to
support a wide variety of digital testing functions, thereby
reducing a customers need for multiple test systems. In
addition, the DCT and MGTS systems multi-protocol,
multi-user capabilities allow multiple testing operations to be
performed simultaneously, helping the Companys customers
to accelerate their product development cycles.

DCT and MGTS systems consist of advanced
proprietary software and hardware running on third-party
UNIX-based workstations. When acquiring a system, customers
typically license one or more software modules and purchase
hardware and ongoing software support. Customers may upgrade
their systems by purchasing additional software protocol modules
and hardware to meet future testing needs. Customers have the
option to purchase a third-party workstation from the Company or
to provide a workstation to the Company for configuration.
Prices for DCT and MGTS systems vary widely depending upon the
overall system configuration, including the number and type of
software protocol modules and the number of physical interfaces
required by the customer. A DCT or MGTS system sale typically
ranges in price from approximately $50,000 to over $250,000.



| |             
| | ------------
| | Applications

The principal applications of the DCT and MGTS
products are simulation, load and stress testing, feature
verification, conformance testing and monitoring.





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1Please refer to Glossary on page 11.


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Simulation.DCT and
MGTS systems are used to simulate one or more network devices,
emulating their actions and responses. By simulating various
network devices, such as digital switches, wireless base
stations, network access nodes and network databases, the
Companys products assist engineers to cost-effectively
develop equipment that will be compatible with the networks
within which they will be deployed. This helps ensure that
equipment will interoperate reliably, thereby reducing costly
failures after installation.

Load and Stress
Testing.DCT and MGTS systems are used
to verify that a device under test can successfully handle its
designed traffic capacity and that its performance will degrade
gradually, rather than fail completely, when stressed beyond its
specifications. Distributed interface processing enables the DCT
and MGTS systems to initiate and maintain high traffic volumes.

Feature
Verification.DCT and MGTS systems are
used to perform feature verification by simulating one or more
network devices and testing a wide variety of possible scenarios
to verify that the device under test handles all features
specified by the protocol. The user is able to initiate multiple
simultaneous calls across one or many links, create correct call
scenarios, send messages out of sequence to verify error
response mechanisms and use the systems traffic channel
facilities to verify a voice or data path.

Conformance Testing.DCT and MGTS systems are used to verify that network devices
conform to industry standards. Conformance test suites are used
to validate the implementation of new features and the
functionality of existing features against a standardized set of
predefined criteria.

Monitoring.DCT and
MGTS systems are used in development laboratories to monitor
network links and store network activity information for future
analysis, typically without affecting network traffic. By
collecting and analyzing traffic, DCT and MGTS systems help
ensure that the links have been brought into service and that
the devices connected by the links are functioning properly. DCT
and MGTS systems can also provide notice of network device
failure, set traps and triggers, count
error messages and filter packets by address or selected field
criteria. DCT and MGTS systems can simultaneously monitor
multiple links, each of which may be using different protocols.



| |                      
| | ---------------------
| | DCT and MGTS Software

DCT and MGTS test systems run under a UNIX
operating system and consist of proprietary general test
operating systems and extensive libraries of test modules for a
large number of protocols and variants, enabling the systems to
be configured for many different test applications. Test modules
are developed in accordance with telecom industry standard
specifications and include protocol encoders and decoders, state
machines, validation tests and conformance test suites. The
Company has also introduced pre-programmed applications to
perform load generation and network entity simulation.

The DCT and MGTS systems include a number of
productivity tools. On the DCT system, customers may choose to
program their tests by using Catapults graphical user
interface, CATTgen, or by writing their own code using the
Companys Digital Communication Programming Language, a
fully featured, optimized communications language. DCT customers
can also choose to integrate their own libraries of test
subroutines written in industry standard programming languages
such as C or C++. On the MGTS system, customers may implement
their tests using Catapults Protocol Adaptable State
Machine (PASM). PASM allows the user to construct
custom tests in a non-programming graphical environment. The
MGTS product line also provides Quick Start
applications to characterize system performance, aid in training
new users and provide a starting point for developing test
applications.

DCT and MGTS
Hardware

The DCT and MGTS products employ modular hardware
architectures that support a wide variety of proprietary
physical interfaces connecting the systems to devices under
test. Both products utilize SUN Microsystems workstations and
peripherals.

The DCT system can support up to 26 PowerPCI
co-processor cards, which are installed in the workstation and
up to two expansion chassis. The DCT2000 family of PowerPCI
cards includes Primary Rate, E1/E2, ATM Optical/ UTP, Ethernet,
Serial, ISDN, Basic Rate and Japanese CII. In addition, the

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DCT2000 supports a number of auxiliary cards that
are installed in a separate VME chassis. Auxiliary cards include
a VOX card to add voice channel testing capabilities, a TimeSlot
Interchange (TSI) card that supports individual dynamic or
static channel selection, a Subscriber Line Interface Card
(SLIC) that converts two-wire analog subscriber line interfaces
to four-wire handset interfaces and a converter for CMI, a
Japanese physical interface.


The MGTS system is based on a
distributed-processor architecture with one central controller
and up to 256 distributed link processors. The MGTS i3000 uses a
high-speed bus architecture based on the PCI2 and CompactPCI3
bus standards and supports a family of Line Interface Cards that
are installed in rack-mount bays. The MGTS family of Line
Interface Cards includes E1/ T1 HDLC, E1/ T1 ATM, ATM SONET/
SDH, Ethernet, DS1 (channelized and unchannelized), JT2 (for
Japan), Serial, B-Channel, DSP board and Auxiliary Timing.

Customers

The Companys customers in the United States
and Canada are primarily telecommunications equipment
manufacturers. The Companys customer base also includes
network operators outside North America.

Revenues from the Companys top five
customers represented approximately 58%, 68% and 64% of total
revenues in fiscal 2000, 2001 and 2002 respectively. In fiscal
2002, sales to Nortel, NEC and NTT DoCoMo accounted for
approximately 24%, 14%, and 12% of total revenues, respectively.
In fiscal 2001, sales to NEC, Nortel, Motorola and Lucent
accounted for approximately 16%, 16%, 15% and 11% of total
revenues, respectively. In fiscal 2000, sales to NTT DoCoMo and
Motorola accounted for approximately 23% and 12% of total
revenues, respectively. Separate engineering groups of the same
customer at different locations generally make independent
decisions to purchase the Companys products. For example,
several divisions of one major customer have independently
installed DCT systems at multiple locations in the United States
as well as in Ireland, the United Kingdom, Israel, India and
China.

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.

Sales and Marketing

The Company markets its products and services
through its direct sales force, a majority of whom have
technical degrees. As of September 30, 2002, the
Companys direct sales force consisted of 29 employees.
This direct sales force is supported by applications
engineering, administrative and marketing personnel. The sales
and marketing staff is located in North America, Japan, and
Europe. In addition, the Company sells its MGTS products through
distributors in Europe, the Middle East and South America.

The Companys sales strategy is to focus on
the functional groups related to the customers product
development cycle, including research and development, network
integration and final test. Sales to a new customer have often
led to sales at other facilities of the customer, as often a
customer performs development at multiple sites in order to
adapt its telecommunications equipment to local requirements and
standards. The Company intends to continue to leverage its
existing customer base not only for follow-on and upgrade sales
but also to gain access to new customers. For example, because
users of similar test systems can benefit from sharing test
scripts and results, an initial sale can facilitate a subsequent
sale to other equipment manufacturers and network operators.

The Company has implemented a number of marketing
initiatives to support the sales of its products and services.
These efforts are intended to inform customers of the
capabilities and benefits of the Companys advanced
software-based test systems. Marketing programs include direct
mail, on-site customer seminars,

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limited participation in industry trade shows,
technology conferences and forums, and dissemination of
information concerning products through the Companys
website.


Customers generally purchase on an as-needed
basis, and none of the Companys customers has entered into
agreements that require minimum purchases. The Companys
products generally are shipped within 15 to 30 days after
orders are received. 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 and shipped
in that quarter.

A customers decision to purchase the
Companys products typically involves a significant
technical evaluation, internal procedural delays associated with
large capital expenditure approvals and testing, and with
acceptance of new systems that affect key operations. For these
and other reasons, the sales cycle associated with the
Companys products is typically lengthy and subject to a
number of significant risks over which the Company has little or
no control. Historically, the period between initial customer
contact and purchase of the Companys products has
typically ranged from two to nine months, with sales to new
customers (including new divisions within existing customers) at
the upper end of this range. Because of the lengthy sales cycle
and the relatively small number and large size of
customers orders, if revenues forecast from a specific
customer for a particular quarter are not realized in that
quarter, the Companys operating results for that quarter
could be materially adversely affected.

International Sales

International sales outside North America
constituted approximately 68%, 69% and 80% of the Companys
total revenues in fiscal 2000, 2001 and 2002, respectively. 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 and distribution channels. The Company has
sales staff outside the United States located in offices in
Ireland, Japan, the United Kingdom, Germany, France, Finland and
Canada, and plans to open new offices internationally from time
to time.

DCT and MGTS Product Line Support

Due to the complexity of its customers
testing needs, the Company offers its customers support and
training from highly skilled technical personnel. As of
September 30, 2002, the Company had 53 applications
engineers worldwide who provide full-time technical assistance
and development support to the Companys customers. The
Company provides ongoing training, generally at the
customers site, and technical assistance from all of its
offices. Support is generally offered during normal business
hours applicable to each office. The Company also offers product
warranties for various lengths of time, depending on the product
and the country of purchase or operation.

The Company provides periodic software releases
that contain new features, new protocol variants and other
improvements. Each new software release is carefully designed
not only to enhance performance and flexibility, but also to
maximize compatibility with the Companys earlier software
releases, enabling the DCT and MGTS systems to continue to be
used as customer needs and applications evolve. As part of its
ongoing software support, the Company may also develop protocol
variants at the request of its customers.

Product Development

The Companys development efforts are
directed at improving the capability, performance and ease of
use of the DCT and MGTS systems. The Company intends to continue
to devote a large portion of its engineering resources to the
enhancement of its suite of software protocol modules in order
to meet current and projected customer requirements. The Company
also intends to continue to develop and enhance its proprietary
internal tools and techniques for supporting new protocols in
the DCT and MGTS systems.

The Company is continually seeking to make the
DCT and MGTS systems easier to use in order to expand its market
to include a broader range of users. In order to run test
scenarios, particularly on advanced telecom systems, users may
need to create customized test scripts, a process that may
require significant technical expertise. To assist this process,
the Company plans to continue the expansion and refinement of its

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GUI and other script development tools. In
addition, the Company will continue to support a number of test
suites specified by telecommunications standards bodies, such as
ITU-T (International), ETSI (European) and EIA-TIA (North
American).


Most of the Companys hardware development
program is directed towards designing protocol coprocessors and
associated physical interfaces. The Company has initiated these
projects to increase the performance and capabilities of the DCT
and MGTS systems and expand the range of devices to which the
DCT and MGTS systems can be directly connected for testing
purposes.

Research and product development expenses were
approximately $3.0 million, $4.9 million and
$7.5 million in fiscal 2000, 2001 and 2002, respectively.
In addition, in fiscal 2002 the Company recorded a
$1.4 million in-process research and development expense in
connection with the purchase of NDB. The Companys policy
is to evaluate software development projects for technological
feasibility to determine if they meet capitalization
requirements. To date, all software development costs have been
expensed as research and development expenses as incurred. As of
September 30, 2002, 103 of the Companys engineers
were engaged in or provided support to research and development.

Manufacturing

The Companys manufacturing operations
consist of the procurement and inspection of components, final
assembly, quality control tests and packaging. Workstations that
host the Companys products are either purchased by
customers directly or purchased by the Company on behalf of its
customers. Printed circuit boards, chassis and most of the other
major components used in the Companys products are
sub-assembled to the Companys specifications by
independent contractors. The sub-assembled components are then
delivered to the Companys facilities for final assembly,
quality control and testing against product specifications and
product configuration, including installation of the
Companys software and proprietary hardware. The Company
believes that its use of independent contractors for
sub-assembly combined with in-house final assembly improves
production planning, increases efficiency, reduces costs and
improves quality.

The Company has a computerized manufacturing
inventory control system that is integrated with its financial
bookkeeping system. This manufacturing control system monitors
purchasing, inventory control and production.

For the six month period ending February 28,
2003, the Company has sub-contracted manufacturing of MGTS
hardware components to Tekelec. By the end of this period, the
Company expects that manufacturing of MGTS hardware will be
relocated to the Companys Mountain View, California
location.*

Competition

The market for telecommunications test systems is
characterized by intense competition. The Company believes that
the principal competitive factors affecting its market include
availability of a broad range of protocols and protocol
variants, system performance, length of operating history and
industry experience, product reliability, ease of use, quality
of service and support, status as an independent vendor and
price/performance. In addition, the Company believes that
potential customers consider other factors, such as the number
of protocols required and whether the test system vendor sells
competing telecommunications products. The Company believes that
it competes favorably with respect to these factors.

The Company believes its principal competitors
are Artiza Networks (Artiza), Acterna Corporation
(Acterna), Agilent Technologies, Inc.
(Agilent), INET, Inc. (INET), Spirent
plc (Spirent), NetHawk Oyj (NetHawk) and
Tektronix, Inc. (Tektronix). Many of the
Companys existing and potential competitors are large
domestic and international companies that have substantially
greater financial, manufacturing, technological, marketing,
sales, distribution and other resources, larger installed
customer bases, greater name recognition and longer-standing
customer relationships than the Company. Accordingly, such
competitors or potential competitors may be able to respond more
quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development,
promotion and sales of their products than the Company. The
Company believes that the market for high-end

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testing systems is fragmented geographically. For
example, INET and Tektronix are the Companys primary
competitors in North America, while its primary competitors in
Europe are Tektronix, Acterna, Spirent and NetHawk. The
Companys primary competitor in Japan is Artiza . The
Company also faces competition from several relatively small
companies.


The Company also competes with the internal test
system groups of its customers and potential customers. Many of
the Companys existing and potential customers have the
technical capability and financial resources to produce their
own test systems and perform test services internally. These
systems and services would be competitive with the test systems
offered by the Company.

The Company expects competition to increase in
the future from existing competitors and from other companies
that may enter this market with solutions that may be less
costly or provide higher performance or offer more features than
the Companys solutions. Current and potential competitors
have established or may establish cooperative relationships
among themselves or with third parties to develop new test
solutions for internal use or for sale to third parties in the
Companys markets. Accordingly, it is possible that new
competitors may emerge and acquire significant market share.
Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which would have
a material adverse effect on the Companys business,
financial condition and results of operations.

Intellectual Property

The Company relies on a combination of trademark,
copyright and trade secret laws, as well as nondisclosure
agreements and other contractual restrictions, to establish and
protect its proprietary rights. The Company generally enters
into nondisclosure and invention assignment agreements with its
employees and consultants, and into nondisclosure agreements
with its customers and suppliers. To date, the Company has
generally not sought patent protection for its proprietary
technology. The Company believes that, historically, because of
the rapid pace of technological change in the telecommunications
test system market, patent protection has been a less
significant factor than the knowledge, ability and experience of
the Companys employees, the nature and frequency of
product enhancement and the quality of the Companys
support services. However, there can be no assurance that patent
protection will not become a more significant factor in the
Companys industry in the future. Likewise, there can be no
assurance that the measures the Company undertakes will be
adequate to protect its proprietary technology. To date, the
Company has federally registered certain of its trademarks or
copyrights. The Companys practice is to affix copyright
notices on software, hardware and product literature in order to
assert copyright protection for these works. There can be no
assurance that the lack of federal registration of all of the
Companys trademarks and copyrights would not have a
material adverse effect on the Companys intellectual
property rights in the future. Additionally, the Company may be
subject to further risks as it enters into transactions in
countries where intellectual property laws are unavailable, do
not provide adequate protection or are difficult to enforce.

In connection with the acquisition of
Tekelecs Network Diagnostics Business, the Company and
Tekelec entered into license agreements with respect to certain
technology and intellectual property that was used by Tekelec in
NDBs business but was not transferred outright to the
Company. Under these agreements, Tekelec granted to the Company
and its Irish subsidiary perpetual, royalty-free, worldwide
(except as to the United States for the subsidiary) licenses to
exploit the subject technology and intellectual property. These
licenses are exclusive to the Company and its subsidiary for
eight years from the date of the acquisition for products used
in protocol analysis or simulating, diagnosing, analyzing or
testing communications networks, or which are otherwise similar
to the MGTS products, excluding products similar to
Tekelecs Sentinel product (the Catapult
Field). However, during the first five years, the Company
and its subsidiary may not use the licensed technology and
intellectual property for products for signaling or network
infrastructure, packet telephony networks, network maintenance,
surveillance and revenue assurance, and planning, management and
call routing and control tools for contact center environments,
including products similar to Tekelecs Sentinel product
(the Tekelec Field). The Company also granted to
Tekelec a perpetual royalty-free, worldwide license back to the
technology and intellectual property that was transferred
outright by Tekelec to the Company. This license is exclusive to
Tekelec for five years within the Tekelec Field, and Tekelec may
not use the licensed technology and intellectual property within
the Catapult Field for eight years.

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Despite the Companys efforts to protect its
proprietary rights, unauthorized parties may attempt to
duplicate aspects of the Companys products or to obtain
and use information that the Company regards as proprietary.
There can be no assurance that the steps taken by the Company to
protect its proprietary technology will be adequate to prevent
misappropriation of such technology or that they will preclude
competitors from independently developing products with
functionality or features similar to the Companys
products. The failure of the Company to protect its proprietary
technology would have a material adverse effect on the
Companys business, financial condition and results of
operations.

While, to date, the Company has not been subject
to claims of infringement or misappropriation of intellectual
property of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company,
that any such assertion of infringement will not result in
litigation or that the Company would prevail in such litigation.
Furthermore, any such claims, with or without merit, could
result in substantial cost to the Company and diversion of its
personnel, require the Company to develop new technology or
require the Company to enter into royalty or licensing
arrangements. Such royalty or licensing agreements, if required,
may not be available on terms acceptable to the Company or at
all. Because the Company does not rely on patents to protect its
technology, the Company will not be able to offer a license for
patented technology in connection with any settlement of patent
infringement lawsuits. In the event of a successful claim of
infringement or misappropriation against the Company and failure
or inability of the Company to develop non-infringing technology
or license the infringed, misappropriated or similar technology
at a reasonable cost, the Companys business, financial
condition and results of operations would be materially
adversely affected. In addition, the Company indemnifies its
customers against claimed infringement of patents, trademarks,
copyrights and other proprietary rights of third parties. Any
requirement for the Company to indemnify a customer could have a
material adverse effect on the Companys business,
financial condition and results of operations.

Employees

As of September 30, 2002, the Company
employed 259 full-time employees, including 103 in research and
development, 53 in application engineering customer support, 58
in sales, 22 in marketing, 15 in administration and 8 in
manufacturing. Of these employees, 184 were employed in North
America where the Companys head office and the NDB office
are located, 39 were employed in the United Kingdom and Europe,
19 in Japan, and 17 in Australia. The Company is not subject to
any collective bargaining agreement and has not experienced any
work stoppages. The Company believes that its relations with its
employees are good.

Executive Officers of the Company

The following table sets forth certain
information, as of September 30, 2002, with respect to the
executive officers of the Company:

|                      |  |     |    |           |  |                                                  
|--------------------- |  | --- | -- | --------- |  | -------------------------------------------------
|Name                  |  | Age |    | Positions
|                      |  |     |    |          
|Richard A. Karp       |  |     | 58 |           |  | Chief Executive Officer and Chairman of the Board
|David Mayfield        |  |     | 53 |           |  | President and Chief Operating Officer            
|Chris Stephenson      |  |     | 51 |           |  | Vice President and Chief Financial Officer       
|Barry R. Hoglund      |  |     | 54 |           |  | Vice President of Sales                          
|Glenn Stewart         |  |     | 52 |           |  | Vice President of Engineering                    
|Guy R. Simpson        |  |     | 44 |           |  | Vice President of Customer Support               
|Barbara J. Fairhurst  |  |     | 54 |           |  | Vice President of Operations                     
|Terry Eastham         |  |     | 55 |           |  | Vice President of Marketing                      
|Kathy T. Omaye-Sosnow |  |     | 46 |           |  | Vice President of Human Resources                

Dr. Richard A. Karp founded the Company in
1985 and has served as Chief Executive Officer and Chairman of
the Board of the Company since inception. In May 2000,
Mr. Karp relinquished his title as President to David
Mayfield, the Companys Chief Operating Officer.
Dr. Karp holds a Ph.D. in computer

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science from Stanford University, an M.S. in
mathematics from the University of Wisconsin and a B.S. in
science from the California Institute of Technology.


Mr. David Mayfield joined the Company in May
2000 as its President and Chief Operating Officer. Prior to
joining the Company, Mr. Mayfield served as interim General
Manager at Scitex Digital Video, a manufacturer of non-linear
digital video editing systems. Prior to 1998, Mr. Mayfield
was Executive Vice President and General Manager of the Philips
DVS organization in Salt Lake City, UT, a manufacturer of
digital video systems. Mr. Mayfield holds a B.S. in
Electrical Engineering from California Polytechnic State
University and has completed selected courses towards MSEE at
the University of Santa Clara.

Mr. Chris Stephenson joined the Company in
July 2000 in a full-time consulting capacity and assumed the
role of Chief Financial Officer in February 2001 upon approval
of the required work visa. From 1985 to April 2000, he was Chief
Financial Officer of Telco Research Corporation Limited and its
predecessor, TSB International Inc., both telecommunications
management companies. He holds a B.A. and an M.A. from the
University of Toronto.

Mr. Barry R. Hoglund joined the Company in
1993 as Vice President of Sales. From 1992 to 1993, he was Vice
President of North American Sales and Service at Spectra-Physics
Lasers. Prior to that, he was employed for 17 years by
Watkins-Johnson Company, where his last position was Vice
President of Sales and Marketing. Mr. Hoglund received a
M.S. in Physics from the University of Illinois and a B.S. in
Physics from the University of Minnesota.

Mr. Glenn Stewart joined the Company in 1992
as Vice President of Engineering. Prior to joining the Company,
he was Director of Engineering at Tektronix/LP Com, a
manufacturer of telecommunications test products. Previously, he
spent nine years at Bell Northern Research as a manager of
development of telecommunications products and services.
Mr. Stewart holds an M.Sc. and a B.Sc. in Computer Science
from the University of Toronto.

Mr. Guy R. Simpson has served as Deputy
Chairman of Catapult Communications Ltd. (CCL), the
Companys UK subsidiary, since October 1996 and was
appointed Vice President of Applications Development of the
Company in May 1998 and Vice President of Customer Support in
October, 2002. Mr. Simpson joined the Company in 1989 and
has held a number of technical and management positions with the
Company and CCL since that time. Prior to joining the Company,
Mr. Simpson was employed for eight years by AT&T Bell
Laboratories, where he held a variety of engineering and
management positions in the area of advanced digital switching
systems. Mr. Simpson holds a B.Sc. degree in Computer
Science from Hatfield Polytechnic at the University of
Hertfordshire, United Kingdom.

Ms. Barbara J. Fairhurst joined the Company
in June 1995 as Director of Operations. From 1994 to 1995,
Ms. Fairhurst was Principal at BJF Consulting, a consulting
firm, where she developed business plans and implemented
operating systems. From 1990 to 1993, Ms. Fairhurst was
Corporate Vice President at Intersource Technologies, Inc., a
developer of lighting technology, where she was responsible for
operations and manufacturing. Prior to that time,
Ms. Fairhurst spent 10 years as President and Chief
Operating Officer of Sequential Circuits, a manufacturer of
electronic music equipment. Ms. Fairhurst holds a M.B.A.
from the Santa Clara University and a B.A. from San Jose State
University.

Mr. Terry Eastham joined the Company in 1999
as the companys first Vice President of Marketing. Prior
to joining the Company, he served as Chief Operating Officer for
Sherwood Networks, a manufacturer of network computers and
display terminals. Previously, he spent six years at Wyse
Technology, a manufacturer of display terminals, as Vice
President of Product Marketing and 17 years at
Hewlett-Packard Company where he held a variety of marketing and
sales development positions. Mr. Eastham holds both a
M.B.A. degree and a M.S. in Physics degree from Washington
University and a B.S. degree in Physics from Oklahoma State
University.

Ms. Kathy T. Omaye-Sosnow joined the Company
in 1997. Ms. Omaye-Sosnow was promoted to the position of
Vice President of Human Resources in November 2000. Prior to her
promotion, Ms. Omaye-Sosnow served as the Companys
Director of Human Resources since June 1999. Prior to that,
Ms. Omaye-Sosnow served as the Companys Manager of
Human Resources. Prior to joining the Company, she held a
variety of human resources positions, most recently as Manager
of Corporate Employment at McKesson

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HBOC Corporation, a pharmaceutical distributor
and health management corporation. Ms. Omaye-Sosnow holds a
B.S. degree in Human Resources from California State University,
Sacramento.







|        |           
|------- | ----------
|Item 2. | Properties

The Companys executive offices, product
development and primary support and production operations are
located in Mountain View, California, where the Company occupies
approximately 39,100 square feet pursuant to leases that
expire in 2005. The annual rent for the property is
approximately $370,000. In addition the Company has entered into
a lease in Morrisville, North Carolina for approximately
31,000 square feet for product development and support
space commencing February 2003 and expiring in 2008. The annual
rent for the property is approximately $270,000. Until
February 28, 2003, the Company is sub-letting approximately
45,000 square feet in Morrisville from Tekelec at a cost of
approximately $94,000 per month, including all associated
occupancy costs. The Company believes that these facilities will
be adequate for its planned purposes.*

In addition, the Company leases a total of
approximately 30,000 square feet of professional services office
space in the following 10 locations: Schaumburg, Illinois;
Dallas, Texas; Ottawa, Canada; Chippenham, England; Gilching,
Germany; Antony Cedex, France; Helsinki, Finland; Tokyo, Japan;
Yokosuka Research Park, Japan; and Melbourne, Australia.






Item 3.     Legal
Proceedings


A lawsuit was instituted in October 2002 against
the Company and one of its subsidiaries, Catapult Communications
International Limited, an Irish corporation, in the Antwerp
Commercial Court, Antwerp, Belgium, by Tucana Telecom NV, a
Belgian company (Tucana). Tucana has been a
distributor of products for Tekelec, the company from which NDB
was acquired in August 2002. The writ alleges that the
defendants improperly terminated an exclusive distribution
agreement with Tucana following the acquisition of NDB and seeks
damages of 12,461,000 euros plus costs. A preliminary hearing on
the matter has been scheduled for March 6, 2003 at which
time the Company expects that a trial date will be established.
The Company strongly believes that it properly terminated any
contract it had with Tucana and that Tucana is not entitled to
any damages in this matter. The Company intends to defend itself
vigorously. The Company 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.






Item
4.     Submission of Matters to a
Vote of Security Holders


No matters were submitted to a vote of security
holders during the fourth quarter of fiscal 2002.






PART II







|        |                                                                              
|------- | -----------------------------------------------------------------------------
|Item 5. | Market For the Registrants Common
    Equity and Related Stockholder Matters

The Companys common stock is quoted on the
Nasdaq National Market System (Nasdaq) under the
symbol CATT. The following table sets forth the
range of high and low closing sales prices for each fiscal
period indicated:

|                      |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|--------------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|                      |  |      |       |     
|                      |  | 2001 |       | 2002
|                      |  |      |       |     
|                      |  | High |       | Low  |  | High |       | Low
|                      |  |      |       |      |  |      |       |    
|First fiscal quarter  |  | $    | 18.63 |      |  | $    | 9.56  |     |  | $ | 29.75 |  |  | $ | 12.50 | 
|Second fiscal quarter |  | $    | 38.81 |      |  | $    | 15.13 |     |  | $ | 30.90 |  |  | $ | 16.50 | 
|Third fiscal quarter  |  | $    | 39.59 |      |  | $    | 16.78 |     |  | $ | 27.50 |  |  | $ | 14.27 | 
|Fourth fiscal quarter |  | $    | 23.50 |      |  | $    | 11.72 |     |  | $ | 15.80 |  |  | $ | 8.96  | 

The Company had approximately 51 stockholders of
record as of November 29, 2002. The Company has not
declared or paid any cash dividends on its common stock and
presently intends to retain its future earnings, if any, to fund
the development and growth of its business. Therefore, the
Company does not anticipate paying cash dividends in the
foreseeable future.

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GLOSSARY



|                                              |  |                                                                                                                                                                                                 
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3G                                            |  | Third generation digital cellular
    telecommunication.                                                                                                                                        
|                                             
|Asynchronous Transfer Mode (ATM)              |  | A cell-based network technology protocol that
    supports simultaneous transmission of data, voice and video
    typically at T-1 or higher speeds.                                            
|                                             
|Code Division Multiple Access (CDMA)          |  | A digital wireless technology that uses a
    modulation technique in which many channels are independently
    coded for transmission over a single wideband channel.                          
|                                             
|E-1                                           |  | A digital transmission link used by European
    carriers to transmit thirty-two 64 Kbps digital channels for
    voice or data.                                                                
|                                             
|Frame Relay                                   |  | An access standard that employs a form of packet
    switching to facilitate high-speed data communications.                                                                                    
|                                             
|Global System for Mobile Communications (GSM) |  | A digital wireless technology that is widely
    deployed in Europe and, increasingly, in other parts of the
    world.                                                                         
|                                             
|Graphical User Interface (GUI)                |  | A graphics-based computer interface that usually
    incorporates icons, pull-down menus and a mouse.                                                                                           
|                                             
|Intelligent Network (IN)                      |  | A network that allows functionality to be
    distributed flexibly to a variety of nodes on and off the
    network and allows that architecture to be modified to control
    network services.
|                                             
|Integrated Services Digital Network (ISDN)    |  | An international telecommunications standard for
    transmitting voice, data and video over digital lines at
    transmission speeds of up to 142 Kbps.                                        
|                                             
|Interim Standard 41 (IS-41)                   |  | A signaling protocol used in the North American
    cellular applications.                                                                                                                      
|                                             
|Protocol                                      |  | A specific set of rules, procedures or
    conventions governing the format, means and timing of
    transmissions between two devices.                                                         
|                                             
|Signaling System 7 (SS7)                      |  | A message-based protocol for exchanging signaling
    and control information between telephony network entities.                                                                               
|                                             
|T-1                                           |  | A point-to-point dedicated line with transmission
    speeds of up to 1.544 Mbps widely used for private networks and
    high-speed links to the Internet.                                     
|                                             
|V5                                            |  | A European standard protocol for the interface
    between the access network and the carrier switch principally
    for basic telephony.                                                       
|                                             
|Variant                                       |  | A specific implementation of a protocol,
    typically unique to a country or region.                                                                                                           
|                                             
|X.25                                          |  | A switched communications protocol that defines
    how data streams are to be assembled into packets, controlled,
    routed and protected as they cross a network.                            
|                                             
|Voice over IP (VoIP)                          |  | The transmission of voice signals over IP
    networks, primarily the Internet.                                                                                                                 

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Item
6.     Selected Financial
Data

The following selected financial data is
qualified by reference to and should be read in conjunction with
the Management Discussion and Analysis of Financial
Condition and Results of Operations section and the
Consolidated Financial Statements and Notes thereto included
elsewhere in this Report on Form 10-K.

|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |        |  
|---------------------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------------------- | ------ | ------ |  | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | -
|                                                                                               |                                               |                                      
|                                                                                               |                                               | Fiscal Year Ended September 30,      
|                                                                                               |                                               |                                      
|                                                                                               |                                               | 1998                                  |        | 1999   |  | 2000 |        | 2001   |  | 2002
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |     
|                                                                                               |                                               |                                      
|                                                                                               |                                               | (In thousands, except per share data)
|Consolidated Statements of Income
    Data:                                                    |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Revenues:                                                                                      |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                                               | Products                                      |                                       | $      | 15,833 |  |      | $      | 25,505 |  |      | $      | 22,045 |  |   | $      | 34,689 |  |   | $      | 33,988 |  
|                                                                                               | Services                                      |                                       |        | 2,373  |  |      |        | 3,450  |  |      |        | 5,001  |  |   |        | 5,197  |  |   |        | 6,051  |  
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                                               | Total revenues                                |                                       |        | 18,206 |  |      |        | 28,955 |  |      |        | 27,046 |  |   |        | 39,886 |  |   |        | 40,039 |  
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Cost of revenues:                                                                              |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                                               | Products                                      |                                       |        | 1,852  |  |      |        | 2,701  |  |      |        | 2,209  |  |   |        | 3,794  |  |   |        | 2,700  |  
|                                                                                               | Services                                      |                                       |        | 564    |  |      |        | 945    |  |      |        | 971    |  |   |        | 591    |  |   |        | 1,172  |  
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                                               | Total cost of revenues                        |                                       |        | 2,416  |  |      |        | 3,646  |  |      |        | 3,180  |  |   |        | 4,385  |  |   |        | 3,872  |  
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Gross profit                                                                                   |                                               |                                       | 15,790 |        |  |      | 25,309 |        |  |      | 23,866 |        |  |   | 35,501 |        |  |   | 36,167 |       
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Operating expenses:                                                                            |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                                               | Research and development                      |                                       |        | 2,001  |  |      |        | 2,777  |  |      |        | 3,037  |  |   |        | 4,938  |  |   |        | 7,520  |  
|                                                                                               | Sales and marketing                           |                                       |        | 3,242  |  |      |        | 5,623  |  |      |        | 9,427  |  |   |        | 10,673 |  |   |        | 10,714 |  
|                                                                                               | General and administrative                    |                                       |        | 2,188  |  |      |        | 2,485  |  |      |        | 3,703  |  |   |        | 5,369  |  |   |        | 4,956  |  
|                                                                                               | Offering costs                                |                                       |        | 769    |  |      |        |       |  |      |        |       |  |   |        |       |  |   |        |       |  
|                                                                                               | Purchased in-process research and development |                                       |        |       |  |      |        |       |  |      |        |       |  |   |        |       |  |   |        | 1,400  |  
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                                               | Total operating expenses                      |                                       |        | 8,200  |  |      |        | 10,885 |  |      |        | 16,167 |  |   |        | 20,980 |  |   |        | 24,590 |  
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Operating income                                                                               |                                               |                                       | 7,590  |        |  |      | 14,424 |        |  |      | 7,699  |        |  |   | 14,521 |        |  |   | 11,577 |       
|Interest income                                                                                |                                               |                                       | 594    |        |  |      | 1,294  |        |  |      | 2,674  |        |  |   | 2,919  |        |  |   | 1,427  |       
|Other income (expense), net                                                                    |                                               |                                       | (263   | )      |  |      | (107   | )      |  |      | 169    |        |  |   | (585   | )      |  |   | (219   | )     
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Income from continuing operations before income
    taxes                                      |                                               |                                       | 7,921  |        |  |      | 15,611 |        |  |      | 10,542 |        |  |   | 16,855 |        |  |   | 12,785 |       
|Provision for income taxes                                                                     |                                               |                                       | 3,396  |        |  |      | 6,706  |        |  |      | 3,976  |        |  |   | 5,810  |        |  |   | 3,580  |       
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Income from continuing operations                                                              |                                               |                                       | 4,525  |        |  |      | 8,905  |        |  |      | 6,566  |        |  |   | 11,045 |        |  |   | 9,205  |       
|Loss from discontinued operations, adjusted for
    applicable benefit for income taxes of $46 |                                               |                                       |       |        |  |      |       |        |  |      |       |        |  |   |       |        |  |   | (56    | )     
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Net income                                                                                     |                                               | $                                     | 4,525  |        |  | $    | 8,905  |        |  | $    | 6,566  |        |  | $ | 11,045 |        |  | $ | 9,149  |       
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Net income per share  basic:                                                                  |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                                               | Income from continuing operations             |                                       | $      | 0.44   |  |      | $      | 0.75   |  |      | $      | 0.51   |  |   | $      | 0.85   |  |   | $      | 0.71   |  
|                                                                                               | Loss from discontinued operations             |                                       |        |       |  |      |        |       |  |      |        |       |  |   |        |       |  |   |        | (0.00  | )
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Net income per share  basic:                                                                  |                                               | $                                     | 0.44   |        |  | $    | 0.75   |        |  | $    | 0.51   |        |  | $ | 0.85   |        |  | $ | 0.70   |       
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Net income per share  diluted:                                                                |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                                               | Income from continuing operations             |                                       | $      | 0.41   |  |      | $      | 0.73   |  |      | $      | 0.50   |  |   | $      | 0.83   |  |   | $      | 0.69   |  
|                                                                                               | Loss from discontinued operations             |                                       |        |       |  |      |        |       |  |      |        |       |  |   |        |       |  |   |        | (0.00  | )
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Net income per share  diluted:                                                                |                                               | $                                     | 0.41   |        |  | $    | 0.73   |        |  | $    | 0.50   |        |  | $ | 0.83   |        |  | $ | 0.69   |       
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Shares used in per share calculation:                                                          |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                                               | Basic                                         |                                       |        | 10,369 |  |      |        | 11,874 |  |      |        | 12,801 |  |   |        | 12,933 |  |   |        | 13,039 |  
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                                               | Diluted                                       |                                       |        | 10,940 |  |      |        | 12,217 |  |      |        | 13,123 |  |   |        | 13,276 |  |   |        | 13,313 |  
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       

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|                                                  |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |         | 
|------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                                  |  |               
|                                                  |  | September 30, 
|                                                  |  |               
|                                                  |  | 1998           |        | 1999 |  | 2000 |        | 2001 |  | 2002
|                                                  |  |                |        |      |  |      |        |      |  |     
|                                                  |  |               
|                                                  |  | (In thousands)
|Consolidated Balance Sheets Data:                 |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |         | 
|Cash, cash equivalents and short-term investments |  | $              | 15,229 |      |  | $    | 41,654 |      |  | $    | 48,637 |  |  | $ | 61,476 |  |  | $ | 35,365  | 
|Working capital                                   |  |                | 14,004 |      |  |      | 42,372 |      |  |      | 49,164 |  |  |   | 61,517 |  |  |   | 28,852  | 
|Total assets                                      |  |                | 19,495 |      |  |      | 50,667 |      |  |      | 59,343 |  |  |   | 72,833 |  |  |   | 117,850 | 
|Redeemable common stock                           |  |                | 5,000  |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |        | 
|Convertible notes payable                         |  |                |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   | 18,081  | 
|Total stockholders equity                        |  |                | 10,150 |      |  |      | 43,589 |      |  |      | 50,887 |  |  |   | 63,490 |  |  |   | 72,965  | 

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.

|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |       |  
|--------------------------------------------------------- | --------------------------------------------- | ---------------------------- | ---- | ----- | - | ---- | ---- | ----- | - |  | ---- | ----- | -
|                                                          |                                               |                             
|                                                          |                                               | Percentage of Total Revenues
|                                                          |                                               | Year Ended September 30,    
|                                                          |                                               |                             
|                                                          |                                               | 2000                         |      | 2001  |   | 2002
|                                                          |                                               |                              |      |       |   |     
|Revenues:                                                 |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                                                          | Products                                      |                              |      | 81.5  | % |      |      | 87.0  | % |  |      | 84.9  | %
|                                                          | Services                                      |                              |      | 18.5  |   |      |      | 13.0  |   |  |      | 15.1  |  
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                                                          | Total revenues                                |                              |      | 100.0 |   |      |      | 100.0 |   |  |      | 100.0 |  
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Cost of revenues:                                         |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                                                          | Products                                      |                              |      | 8.2   |   |      |      | 9.5   |   |  |      | 6.8   |  
|                                                          | Services                                      |                              |      | 3.6   |   |      |      | 1.5   |   |  |      | 2.9   |  
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                                                          | Total cost of revenues                        |                              |      | 11.8  |   |      |      | 11.0  |   |  |      | 9.7   |  
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Gross profit                                              |                                               |                              | 88.2 |       |   |      | 89.0 |       |   |  | 90.3 |      
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Operating expenses:                                       |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                                                          | Research and development                      |                              |      | 11.2  |   |      |      | 12.4  |   |  |      | 18.8  |  
|                                                          | Sales and marketing                           |                              |      | 34.8  |   |      |      | 26.8  |   |  |      | 26.8  |  
|                                                          | General and administrative                    |                              |      | 13.7  |   |      |      | 13.4  |   |  |      | 12.3  |  
|                                                          | Purchased in process research and development |                              |      |      |   |      |      |      |   |  |      | 3.5   |  
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                                                          | Total operating expenses                      |                              |      | 59.7  |   |      |      | 52.6  |   |  |      | 61.4  |  
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Operating income                                          |                                               |                              | 28.5 |       |   |      | 36.4 |       |   |  | 28.9 |      
|Interest income                                           |                                               |                              | 9.9  |       |   |      | 7.4  |       |   |  | 3.5  |      
|Other income (expense), net                               |                                               |                              | 0.6  |       |   |      | (1.5 | )     |   |  | (0.5 | )    
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Income from continuing operations before income
    taxes |                                               |                              | 39.0 |       |   |      | 42.3 |       |   |  | 31.9 |      
|Provision for income taxes                                |                                               |                              | 14.7 |       |   |      | 14.6 |       |   |  | 8.9  |      
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Income from continuing operations                         |                                               |                              | 24.3 |       |   |      | 27.7 |       |   |  | 23.0 |      
|Loss from discontinued operations                         |                                               |                              |     |       |   |      |     |       |   |  | (0.1 | )    
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Net income                                                |                                               |                              | 24.3 | %     |   |      | 27.7 | %     |   |  | 22.9 | %    
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Gross profit margin on products                           |                                               |                              | 90.0 | %     |   |      | 89.1 | %     |   |  | 92.1 | %    
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Gross profit margin on services                           |                                               |                              | 80.6 | %     |   |      | 88.6 | %     |   |  | 80.6 | %    
|                                                          |                                               |                              |      |       |   |      |      |       |   |  |      |      

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Item 7.     Management
Discussion and Analysis of Financial Condition and Results of
Operations

Overview

The Companys revenues are derived from
product sales, which include both licenses of the DCT and MGTS
system software and sales of DCT and MGTS hardware, and from
services, which include customer support under software support
contracts as well as installation and training. Prices for the
DCT and MGTS systems vary widely depending upon overall system
configuration, including the number and type of software
protocol modules and the number of physical interfaces required
by the customer. A DCT or MGTS system sale typically ranges in
price from approximately $50,000 to over $250,000. In addition
to the initial system purchase, customers also may upgrade their
systems by purchasing additional software protocol modules and
hardware. Customers have the option to purchase a third-party
workstation or PC from the Company or provide a workstation or
PC to the Company for configuration. Product sales are
recognized upon shipment or, if installation services are
purchased, when installation is complete, provided collection is
probable.

The Company offers product warranties for various
lengths of time, depending on the product and country of
purchase or operation. Customers may elect to purchase an annual
software support contract which includes both ongoing technical
support and any new software releases on a when-and-if available
basis during the term of the support contract. These software
releases may include updates for protocols already licensed by
the customer. Revenues from software support contracts are
recognized ratably over the contract period, which is generally
one year. New customers often purchase onsite training, which is
charged on a fixed-price basis and recognized when the training
is complete.

Significant Accounting Policies

The Company has identified the policies below as
critical to its business operations and the understanding of its
results of operations. The impact and any associated risks
related to these policies on its business operations is
discussed throughout Managements Discussion and Analysis
of Financial Condition and Results of Operations where such
policies affect the Companys reported and expected
financial results. For a detailed discussion on the application
of these and other accounting policies, see Note 1 of the Notes
to the Consolidated Financial Statements included below.

Revenue
Recognition

Sales of the Companys product arrangements
normally include hardware and software. Certain of the
Companys sales may also include installation. The Company
also offers training and maintenance services. The Company
recognizes revenue on system sales upon shipment or when
installation is complete, if installation services are
purchased, provided collection is probable. Training and
maintenance revenues are based on the Companys established
history of separate sales of training and maintenance. Revenues
allocated to training are recognized at the time the training is
complete. Revenues allocated to maintenance are recognized
ratably over the term of the maintenance contract.

Foreign
Currency Translations

Certain of the Companys foreign
subsidiaries use their respective local currencies as their
functional currencies because the majority of their revenues,
expenses, assets and liabilities are denominated in those local
currencies. In consolidation, assets and liabilities are
translated at period-end currency exchange rates and revenue and
expense items are translated at average currency exchange rates
prevailing during the period. Gains and losses from foreign
currency translation are recorded in accumulated other
comprehensive income, which is a separate component of
stockholders equity. Only gains and losses resulting from
foreign currency transactions are included in the consolidated
statement of income.

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 exchange rates
on foreign currency denominated sales made

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to foreign subsidiaries. The Company utilizes
foreign currency forward exchange contracts and options to hedge
against future movements in foreign exchange rates that affect
certain foreign currency denominated inter-company receivables.
The Company attempts to match the forward contracts with the
underlying receivables being hedged in terms of currency, amount
and maturity. The Company does not use derivative financial
instruments for speculative or trading purposes. The cost of
options and any gains or losses on forward contracts are
included in other income (expense).


Use of
estimates; allowance for doubtful accounts

The preparation of financial statements requires
the Company to make estimates and assumptions that affect the
reported amount of assets and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period. The Company specifically analyzes accounts receivable,
historical bad debt experience, customer concentration, customer
credit-worthiness, current economic trends and changes in
customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. The Companys accounts
receivable balance as of September 30, 2002 was
$11.0 million, net of allowance for doubtful accounts of
$38,000.

Accounting
for income taxes

As part of the process of preparing consolidated
financial statements, the Company is required to estimate income
taxes in each of the jurisdictions in which it operates. This
process involves estimating the Companys actual current
tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are
included within its consolidated balance sheet. The Company then
assesses the likelihood that its deferred tax assets will be
recovered from future taxable income and to the extent it
believes that recovery is not likely, establishes a valuation
allowance. To the extent that the Company establishes or
increases a valuation allowance in a period, the change is
included as an expense within the tax provision in the
consolidated statement of income.

Fiscal Years Ended September 30, 2001 and
2002

Revenues, cost of revenues and expenses for the
year ended September 30, 2002 include the results of the
continuing operations of NDB from August 30, 2002, the date
it was acquired by the Company as described in more detail on
page 1 above and exclude the results of the discontinued
distribution and consulting businesses engaged in by Tekelec
Limited in Japan as described in Note 4 of the Notes to the
Consolidated Financial Statements.

Revenues

Total revenues increased by less than 1% from
$39.9 million in fiscal 2001 to $40.0 million in
fiscal 2002. Product revenues decreased by approximately 2% from
$34.7 million in fiscal 2001 to $34.0 million in
fiscal 2002, reflecting decreased shipments of the
Companys DCT product. Services revenues increased by
approximately 16% from $5.2 million in fiscal 2001 to
$6.1 million in fiscal 2002 due to the increase in the
number of systems under maintenance and to the inclusion of one
month of revenues from MGTS services in fiscal 2002.

Cost of
Revenues

Cost of product revenues decreased by
approximately 29% from $3.8 million in fiscal 2001 to
$2.7 million in fiscal 2002. Gross margin on product
revenues increased from 89.1% in fiscal 2001 to 92.1% in fiscal
2002. This increase in gross profit margin occurred despite the
inclusion of one month of revenues from the lower margin MGTS
product in the latter year, and reflected lower cost of goods on
the hardware component of the Companys DCT2000 product.
The Company anticipates that gross profit margin will decrease
in future periods due to the inclusion of the higher cost MGTS
products in the entirety of those periods.

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Cost of services revenues increased by
approximately 98% from $591,000 in fiscal 2001 to
$1.2 million in fiscal 2002 due to increases in the number
of customer support personnel and the associated costs. Gross
margin on services revenues decreased from 88.6% in fiscal 2001
to 80.6% in fiscal 2002 as the cost of providing services
revenues, consisting primarily of compensation costs, grew more
than the associated revenues. Gross margin on services revenues
may also vary depending on the timing of system sales and
support contract renewals.

Research and
Development

Research and development expenses increased by
approximately 52% from $4.9 million in fiscal 2001 to
$7.5 million in fiscal 2002 due primarily to higher
compensation costs resulting from a significant increase in the
number of personnel engaged in research and development. This
increase in research and development personnel reflected both
the addition of 15 employees throughout fiscal 2002 and the
53 personnel who joined with the acquisition of NDB one
month prior to the end of fiscal 2002. As a percentage of total
revenues, research and development expenses increased from 12.4%
to 18.8% over the same period. The Company expects the absolute
annual level of research and development expenses to increase in
future periods as a result of the NDB acquisition.

Sales and
Marketing

Sales and marketing expenses remained unchanged
at $10.7 million from fiscal 2001 to fiscal 2002 as the
addition of one month of expenses related to NDB sales and
marketing expenses was offset by a 14% reduction in the number
of non-NDB personnel engaged in sales and marketing as well as
by a reduction in variable compensation expense. As a percentage
of total revenues, sales and marketing expenses remained
unchanged at 26.8% of revenues from fiscal 2001 to fiscal 2002.
The Company expects the absolute annual level of sales and
marketing expenses to increase in future periods as a result of
additional salary and amortization costs to be incurred as a
result of the NDB acquisition.

General and
Administrative

General and administrative expenses decreased by
approximately 8% from $5.4 million in fiscal 2001 to
$5.0 million in fiscal 2002. This decrease was due
primarily to decreases in performance related bonuses,
recruitment costs and legal fees. As a percentage of total
revenues, general and administrative expenses decreased from
13.4% to 12.3% over the same period. The Company expects the
absolute annual level of general and administrative expenses to
increase in future periods as a result of the NDB acquisition.

Purchased
In-process Research and Development

In fiscal 2002 $1.4 million in purchased
in-process research and development was charged to operating
expenses. This amount represented two NDB research and
development projects in process as of August 30, 2002, the
date of the acquisition of NDB. The value of these projects was
determined by an independent appraiser using established
valuation techniques and was expensed because technological
feasibility had not been established and no future alternative
uses existed as of the date of acquisition.

Interest
Income

Interest income decreased from $2.9 million
in fiscal 2001 to $1.4 million in fiscal 2002 due to lower
prevailing rates of return.

Other
Expense

Other expense decreased from $585,000 in fiscal
2001 to $219,000 in fiscal 2002 due to reduced foreign exchange
losses, including losses realized on forward contracts entered
into which were denominated in currencies other than the US
dollar, and to the absence in fiscal 2002 of a $0.2 million
loss incurred in fiscal 2001 on a sale of a marketable security.

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Income
taxes

The Companys effective tax rate decreased
from 34.5% in fiscal 2001 to 28.0% in fiscal 2002. This decrease
reflects an increase in the percentage of pre-tax income derived
from international operations by the Companys Irish
subsidiary, which is subject to a lower income tax rate than the
U.S. parent company.

Fiscal Years Ended September 30, 2000 and
2001

Revenues

Revenues increased by approximately 48% from
$27.0 million in fiscal 2000 to $39.9 million in
fiscal 2001. Product revenues increased by approximately 57%
from $22.0 million in fiscal 2000 to $34.7 million in
fiscal 2001 due to increased shipments of the Companys
DCT2000 product at higher average unit prices. Services revenues
increased by approximately 4% from $5.0 million in fiscal
2000 to $5.2 million in fiscal 2001. Services revenues
increased more slowly than product revenues due to attrition in
the maintenance base as older systems were replaced.

Cost of
Revenues

Cost of product revenues increased by
approximately 72% from $2.2 million in fiscal 2000 to
$3.8 million in fiscal 2001 due to increased shipments of
the Companys DCT2000 product. Gross margin on product
revenues decreased slightly from 90.0% in fiscal 2000 to 89.1%
in fiscal 2001.

Cost of services revenues decreased by
approximately 39% from $971,000 in fiscal 2000 to $591,000 in
fiscal 2001. Gross margin on services revenues increased from
80.6% in fiscal 2000 to 88.6% in fiscal 2001 as services
revenues grew more than the associated costs. Gross margin on
services revenues varies depending on the timing of system sales
and support contract renewals.

Research and
Development

Research and development expenses increased by
approximately 63% from $3.0 million in fiscal 2000 to
$4.9 million in fiscal 2001 due to higher compensation
costs resulting from a 72% increase in the number of
personnel engaged in research and development. As a percentage
of total revenues, research and development expenses increased
from 11.2% to 12.4% over the same period as expenses increased
with the increase in revenues.

Sales and
Marketing

Sales and marketing expenses increased by
approximately 13% from $9.4 million in fiscal 2000 to
$10.7 million in fiscal 2001 due to higher compensation
costs resulting from a 27% increase in the number of
personnel engaged in sales and marketing. As a percentage of
total revenues, sales and marketing expenses decreased
from 34.8% in fiscal 2000 to 26.8% in fiscal 2001.

General and
Administrative

General and administrative expenses increased by
approximately 45% from $3.7 million in fiscal 2000 to
$5.4 million in fiscal 2001. This increase was due to
increases in staffing levels, compensation expenses (including
executive bonuses and relocation costs), occupancy costs,
recruitment costs and legal and accounting fees. As a percentage
of total revenues, general and administrative expenses decreased
from 13.7% to 13.4% over the same period.

Interest
Income

Interest income increased from $2.7 million
in fiscal 2000 to $2.9 million in fiscal 2001 due to the
increase in funds invested and to higher prevailing rates of
return early in the fiscal year.

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Other Income
(expense)

Other income (expense) decreased from income
of $169,000 in fiscal 2000 to an expense of $585,000 in fiscal
2001 due primarily to foreign exchange losses, including losses
realized on forward contracts entered into which were
denominated in currencies other than the US dollar, and to
a loss on a sale of a marketable security.

Income
taxes

The Companys effective tax rate decreased
from 37.7% in fiscal 2000 to 34.5% in fiscal 2001. This decrease
reflects primarily the impact of the creation of an Irish
subsidiary for international distribution of the Companys
products.

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.

On August 30, 2002, the Company purchased
certain assets and assumed certain liabilities of the Network
Diagnostics Business (NDB) of Tekelec. The total
purchase price 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 and $4.3 million in transaction
costs which have been capitalized and added to the purchase
price for accounting purposes. Based on an independent
valuation, a fair value of $18.1 million has been assigned
to the notes. The total purchase price is subject to a net
working capital adjustment pursuant to the terms of the Asset
Purchase Agreement following the completion of a closing date
balance sheet audit. NDBs principal product is the MGTS
digital telecommunications test system, which is similar to the
Companys DCT test systems.

The Companys operating activities provided
cash of $7.3 million, $12.5 million and $16.1 million
in fiscal 2000, 2001 and 2002, respectively, principally from
net income in those periods and, in 2002, from an increase in
accrued liabilities. Investing activities, consisting primarily
of purchases and sales of short-term investments, additions to
property and equipment and the acquisition of NDB, used cash of
$11.2 million in fiscal 2000, provided cash of
$25.6 million in fiscal 2001 and used cash of
$48.1 million in fiscal 2002. Financing activities provided
cash of $230,000, $1.0 million and $723,000 in fiscal 2000,
2001 and 2002, respectively, from the exercise of stock options
and the sale of shares under the employee stock purchase plan.

As of September 30, 2002, the Company had
working capital of $28.9 million, cash and cash equivalents of
$12.6 million and short-term investments of
$22.8 million. As of September 30, 2002, 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                          |  |       | 4.3  |                        |  |       | 1.1 |       |  |         | 2.3  |  |  |   | 0.7 |  |  |   | 0.2 | 
|                                          |  |       |      |                        |  |       |     |       |  |         |      |  |  |   |     |  |  |   |     | 
|Total contractual cash obligations        |  | $     | 21.6 |                        |  | $     | 1.1 |       |  | $       | 19.6 |  |  | $ | 0.7 |  |  | $ | 0.2 | 
|                                          |  |       |      |                        |  |       |     |       |  |         |      |  |  |   |     |  |  |   |     | 

The Company expects that capital expenditures
will total approximately $1.2 million in fiscal 2003.*

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.*
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.

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Audit Committee Approval of Non-audit
Services

In accord with Section 10A(i)(2) of the
Securities Exchange Act of 1934, as added by Section 202 of
the Sarbanes-Oxley Act of 2002, the Company is responsible for
disclosing non-audit services approved by the Companys
Audit Committee to be performed by the Companys
independent accountants. Non-audit services are services other
than those provided in connection with an audit or a review of
the financial statements of the Company. During the three months
ended September 30, 2002, the Audit Committee approved
engagements of PricewaterhouseCoopers LLP, the Companys
independent accountants, for the following non-audit services:
(1) tax services; and (2) services in connection with
the Companys acquisition of NDB.

Factors That May Affect Future
Results

The risk factors set forth below and elsewhere in
this Annual Report on Form 10-K are important factors that
may affect future results and that could cause actual results to
differ materially from those projected in forward-looking
statements that may be made by the Company from time to time.



| |                                                                     
| | --------------------------------------------------------------------
| | 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 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.

The Companys expectations for future
revenues are predicated, to a large extent, on the recruitment
and hiring of a significant number of employees, particularly
experienced sales and technical personnel. Failure to hire, or
delays in hiring, sufficient sales and technical personnel could
have a material adverse effect on the Companys results of
operations for any period.

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 revenue,
a decline in revenue 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

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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 fiscal year ended September 30, 2002, the
Companys top five customers represented approximately 64%
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.



| |                                   
| | ----------------------------------
| | 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 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.



| |                          
| | -------------------------
| | Stock Market Fluctuations

In recent years, the stock market in general and
the market for technology stocks in particular, including the
Companys common stock, have experienced extreme price
fluctuations. The market price of the Companys common
stock may be significantly affected by various factors such as
quarterly variations in the Companys operating results,
changes in revenue growth rates for the Company as a whole or
for specific geographic areas or products, changes in earning
estimates by market analysts, the announcements of new products
or product enhancements by the Company or its competitors,
speculation in the press or analyst community and general market
conditions or market conditions specific to particular
industries. There can be no assurance that the market price of
the Companys common stock will not experience significant
fluctuations in the future.

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| |                                                         
| | --------------------------------------------------------
| | Competitive Market for Technical and Sales
    Personnel

The Companys success depends in part on its
ability to attract, hire, train, retain and motivate qualified
technical and sales personnel with appropriate levels of
managerial and technical capabilities. The Company believes that
a significant level of expertise is required to develop and
market the Companys products and services effectively. The
Company has in the past experienced, and expects to continue to
experience, difficulty in recruiting qualified technical and
sales personnel. The Company believes that the pool of potential
applicants with the requisite expertise is very limited.
Recruiting qualified personnel is an intensely competitive and
time-consuming process. The Company competes for such personnel
with a number of other companies, many of which have
substantially greater resources than the Company. Such
competition has also resulted in demands for increased
compensation from qualified applicants, and the Company may not
be able to compete effectively for such personnel with companies
that provide more attractive compensation arrangements. There
can be no assurance that the Company will be successful in
attracting and retaining the technical and sales personnel it
requires to conduct and expand its operations successfully on a
timely basis. The failure to attract, hire, train, retain and
motivate qualified technical and sales personnel in the future
would have a material adverse effect on the Companys
business, financial condition and results of operations.



| |                                                  
| | -------------------------------------------------
| | Risk Associated with International
    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. During the last three
fiscal years, a significant portion of the Companys sales
has been to customers in Japan. If economic conditions in Japan
remain weak, 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.

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 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.



| |                     
| | --------------------
| | Management of Growth

The Companys growth has placed, and is
expected to continue to place, significant demands on its
management, administrative and operational resources. To manage
expansion effectively, the Company needs to continue to develop
and improve its operational and financial systems, sales and
marketing capabilities and expand, train, retain, manage and
motivate its employee base. Some of the Companys senior
management have not previously managed a business of the
Companys size, and these individuals have limited
experience managing a public company. There can be no assurance
that the Companys systems, procedures or controls will be
adequate to support the Companys operations or that the
Companys management will be able to successfully exploit
future market opportunities or successfully manage the
Companys relationships with customers and other third
parties. There can be no assurance that the Company will
continue to grow or, if it does, that the Company will
effectively manage such growth. Any failure to manage growth
would have a material adverse effect on the Companys
business, financial condition and results of operations.

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| |                                                       
| | ------------------------------------------------------
| | Dependence on Customer Outsourcing of Test
    Systems

The Companys success will depend on
continued growth in the market for telecommunications test
systems and services and the continued commercial acceptance of
the Companys products as a solution to address the testing
requirements of telecommunications equipment manufacturers and
network operators. While most of the Companys present and
potential customers have the technical capability and financial
resources to produce their own test systems and perform test
services internally, to date, many have chosen to outsource a
substantial proportion of their test system and service
requirements. There can be no assurance that the Companys
customers will continue, or that new customers will choose, to
outsource any of their test systems and service requirements or
that the Companys products and services will be widely
adopted. If the market for telecommunications test systems and
services, or the demand for outsourcing, declines or fails to
grow, or if the Companys products and services are not
widely adopted as a telecommunications test solution, the
Companys business, financial condition and results of
operations would be materially adversely affected.

Competitive
Market

The market for the Companys products is
highly competitive. Many of the Companys competitors are
better known and have substantially greater financial,
technological, production and marketing resources than the
Company. While the Company believes that the price/performance
characteristics of its products are competitive, price
competition in the markets for the Companys products is
intense. Any material reduction in the price of the
Companys products without corresponding decreases in
manufacturing costs and increases in unit volume would
negatively affect gross margins, which could in turn have a
material adverse effect on the Companys business,
financial condition and results of operations. Increased
competition for the Companys products that results in
lower product sales could also adversely impact the
Companys upgrade sales. The Companys ability to
maintain its competitive position will depend upon, among other
factors, its success in anticipating industry trends, investing
in product research and development, developing new products
with improved price/performance characteristics and effectively
managing the introduction of new products into targeted markets.

Dependence on
Rapidly Evolving Telecommunications Industry

The Companys future success is dependent
upon the continued growth of the telecommunications industry.
The global telecommunications industry is evolving rapidly, and
it is difficult to predict its potential growth rate or future
trends in technology development. 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.

Dependence on
Key Personnel

The Companys future growth and success
depends to a significant extent upon the continuing services of
its executive officers and other key employees. The Company does
not have long-term employment agreements or non-competition
agreements with any of its employees. Competition for qualified
management and other high-level telecommunications industry
personnel is intense, and there can be no assurance that the

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Company will be successful in attracting and
retaining such personnel. The loss of services of any key
employees would have a material adverse effect on the
Companys business, financial condition and results of
operations. The Company maintains, and is the beneficiary of, a
key person life insurance policy in the amount of $800,000 with
respect to Dr. Richard A. Karp, the Companys Chief
Executive Officer and Chairman of the Board.




| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | 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 operating system. 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
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.

Dependence on
Sole and Single Source Suppliers

The Company purchases many key components,
including certain microprocessors, workstations, bus interface
and other chips, connectors and other hardware, from the sole
supplier of a particular component. For other components, even
though multiple vendors may exist, the Company may purchase
components from only a single source. The Company does not have
any long-term supply agreements with these vendors to ensure
uninterrupted supply of these components. In the event of a
reduction or interruption in the supply of a key component, a
significant amount of time could be required to qualify
alternative suppliers and receive an adequate flow of
replacement components. Reconfiguration of the Companys
products to adapt to new components may also be required and
could entail substantial time and expense. In addition, the
process of manufacturing certain of these components is
extremely complex, and the Companys reliance on the
suppliers of these components exposes the Company to potential
production difficulties and quality variations, which could
negatively affect cost and timely delivery of the Companys
products. The Company has from time to

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time in the past experienced supply problems as a
result of the financial or operational difficulties of its
suppliers, shortages and discontinuations resulting from
component obsolescence. Although the Company, to date, has not
experienced material delays in product deliveries to its
customers resulting from such supply problems, there can be no
assurance that supply problems will not recur or, if such
problems do recur, that satisfactory solutions would be found.
Any prolonged inability to obtain adequate amounts of fully
functional components or any other circumstances that would
require the Company to seek alternative sources of supply could
have a material adverse effect on the Companys
relationship with its customers as well as on its business,
financial condition and results of operations.


Dependence on
Third-Party Manufacturers

The Company relies on a limited number of
independent manufacturers, some of which are small, privately
held companies, to provide certain assembly services to the
Companys specifications. The Company does not have any
long-term supply agreements with any third-party manufacturer.
In the event of a reduction or interruption in assembly services
to the Company, the Companys business, financial condition
and results of operations would be materially adversely affected
until the Company was able to establish sufficient assembly
services supply from alternative sources. There can be no
assurance that alternative manufacturing sources will be able to
meet the Companys future requirements or that existing or
alternative sources will continue to be available to the Company
at favorable prices.

Risk of
Product Defects

Products as complex as those offered by the
Company may contain undetected errors or bugs,
particularly when first introduced or when new versions are
released. There can be no assurance that errors will not be
found in future releases of the Companys software or that
any such errors will not generate adverse publicity, impair the
market acceptance of these products, create customer concerns or
adversely affect operating results due to product returns, the
costs of generating corrective releases or otherwise.

Product
Liability

The Companys license agreements with its
customers typically contain provisions designed to limit the
Companys exposure to potential product liability claims.
However, it is possible that the limitation of liability
provisions contained in the Companys license agreements
may not be effective under the laws of certain jurisdictions,
particularly since the Company sells a majority of its products
internationally. Although the Company has not experienced any
product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and
there can be no assurance that the Company will not be subject
to such claims in the future. A successful product liability
claim brought against the Company could have a material adverse
effect upon the Companys business, financial condition and
results of operations. The Company does not maintain product
liability insurance. There can be no assurance that the failure
to maintain product liability insurance, in the event of the
successful assertion against the Company of one or a series of
large uninsured claims, would not have a material adverse effect
on the Companys business, financial condition and results
of operations.

Product
Concentration

To date, substantially all of the Companys
revenues have been attributable to sales of the DCT family of
products and related services. With the recent acquisition of
NDB, the Company has expanded its product line to include the
similar MGTS products, and currently expects the DCT and MGTS
families of products and related services to account for
substantially all of its revenues for the foreseeable future.*
As a result, factors adversely affecting the pricing of or
demand for DCT and MGTS products, such as competition or
technological change, could have a material adverse effect on
the Companys business, financial condition and results of
operations. The Companys future financial performance will
depend, in significant part, on the successful development,
introduction and customer acceptance of new and enhanced
versions of the DCT and MGTS families of products. There can be
no assurance that the Company will continue to be successful in
developing and marketing the DCT and MGTS families of products
and related services.

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Effective
Control By Principal Stockholder

As of September 30, 2002, Dr. Richard
A. Karp beneficially owned 5,873,430 shares or approximately 45%
of the Companys common stock outstanding on such date,
which includes 2,196,875 shares beneficially owned as of such
date by Ms. Nancy H. Karp. Dr. Karp has voting control
through a voting trust, but not dispositive power, with respect
to the shares beneficially owned by Ms. Karp. As a result,
Dr. Karp may have the ability to effectively control
matters requiring approval by the stockholders of the Company,
including the election of directors. Such a concentration of
ownership may have the effect of delaying or preventing a change
in control of the Company.

Limited
Protection of Proprietary Rights; Enforcement of
Rights

The Companys success and its ability to
compete effectively are dependent in part upon its proprietary
technology. The Company relies on a combination of trademark,
copyright and trade secret laws, as well as nondisclosure
agreements and other contractual restrictions, to establish and
protect its proprietary rights. To date, the Company has
generally not sought patent protection for its proprietary
technology. There can be no assurance that patent protection
will not become a more significant factor in the Companys
industry in the future. Likewise, there can be no assurance that
the measures the Company undertakes will be adequate to protect
its proprietary technology. To date, the Company has federally
registered certain of its trademarks or copyrights. The
Companys practice is to affix copyright notices on
software, hardware and product literature in order to assert
copyright protection for these works. There can be no assurance
that the lack of federal registration of all of the
Companys trademarks and copyrights would not have a
material adverse effect on the Companys intellectual
property rights in the future. Additionally, the Company may be
subject to further risks as it enters into transactions in
countries where intellectual property laws are unavailable, do
not provide adequate protection or are difficult to enforce.
Despite the Companys efforts to protect its proprietary
rights, unauthorized parties may attempt to duplicate aspects of
the Companys products or to obtain and use information
that the Company regards as proprietary. There can be no
assurance that the steps taken by the Company to protect its
proprietary technology will be adequate to prevent
misappropriation of such technology or that they will preclude
competitors from independently developing products with
functionality or features similar to the Companys
products. The failure of the Company to protect its proprietary
technology would have a material adverse effect on the
Companys business, financial condition and results of
operations.



| |                                                
| | -----------------------------------------------
| | Risks of Third-Party Claims of
    Infringement

The telecommunications industry is characterized
by a relatively high level of litigation based on allegations of
infringement of proprietary rights. While to date, the Company
has not been subject to claims of infringement or
misappropriation of intellectual property by third parties,
there can be no assurance that third parties will not assert
infringement claims against the Company, that any such assertion
of infringement will not result in litigation or that the
Company would prevail in such litigation. Furthermore, any such
claims, with or without merit, could result in substantial cost
to the Company and diversion of its personnel, require the
Company to develop new technology or require the Company to
enter into royalty or licensing arrangements. Such royalty or
licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. Because the Company does
not rely on patents to protect its technology, the Company will
not be able to offer a license for patented technology in
connection with any settlement of patent infringement lawsuits.
In the event of a successful claim of infringement or
misappropriation against the Company and failure or inability of
the Company to develop non-infringing technology or license the
infringed, misappropriated or similar technology at a reasonable
cost, the Companys business, financial condition and
results of operations would be materially adversely affected. In
addition, the Company indemnifies its customers against claimed
infringement of patents, trademarks, copyrights and other
proprietary rights of third parties. Any requirement for the
Company to indemnify a customer could have a material adverse
effect on the Companys business, financial condition and
results of operations.

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| |                          
| | -------------------------
| | Product Development Risks

The Companys future success will depend in
part on its ability to anticipate and respond to changing
industry standards and customer requirements 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.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Anti-Takeover Effect of Nevada Law and
    Charter and Bylaw Provisions; Availability of Preferred Stock
    for Issuance

Nevada law and the Companys Articles of
Incorporation and Bylaws contain provisions that could
discourage a proxy contest or make more difficult the
acquisition of a substantial block of the Companys common
stock. In addition, the Board of Directors is authorized to
issue, without stockholder approval, up to 5,000,000 shares of
preferred stock with voting, conversion and other rights and
preferences that may be superior to those of the common stock
and that could adversely affect the voting power or other rights
of the holders of common stock. The issuance of preferred stock
or rights to purchase preferred stock could be used to
discourage an unsolicited acquisition proposal.




Item 7A.     Quantitative
and Qualitative Disclosure About Market Risks

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 hedge against future movements in foreign exchange rates that
affect certain foreign currency denominated inter-company
receivables. The Company attempts to match the forward contracts
with the underlying receivables being hedged 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
exposures hedged, 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 hedged all risk associated with its sales denominated in
foreign currencies, and there can be no assurance that the
Companys hedging activities, if any, will be successful.

At September 30, 2002, the Company had
forward exchange contracts maturing in fiscal 2003 to sell
approximately $17,000 in Japanese Yen designed to hedge against
future movements in foreign exchange rates. The fair market
value of these contracts and options at September 30, 2002
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 currency fluctuations and believes
that any such losses would not be material.*

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 September 30, 2002, short-term
investments consisted of available-for-sale securities,
including those classified as cash equivalents, of
$27.9 million (see Note 5. Balance Sheet
Components in the Notes to Consolidated Financial
Statements). 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 September 30, 2002, the
decline in the fair value of the portfolio would not be material
to the Companys financial position.

26



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##### Table of Contents






ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




CATAPULT COMMUNICATIONS CORPORATION

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

AND SUPPLEMENTARY DATA


|                                          |                                                                                                                                                                  |      |  |    | 
|----------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                          |                                                                                                                                                                  | Page
|                                          |                                                                                                                                                                  |     
|Consolidated Financial Statements:        |                                                                                                                                                                  |      |  |   
|                                          | Report of Independent Accountants                                                                                                                                |      |  | 28 | 
|                                          | Consolidated Balance Sheets at September 30,
    2001 and 2002                                                                                                   |      |  | 29 | 
|                                          | Consolidated Statements of Income for each of the
    three years in the period ended September 30, 2002                                                         |      |  | 30 | 
|                                          | Consolidated Statements of Stockholders
    Equity for each of the three years in the period ended
    September 30, 2002                                       |      |  | 31 | 
|                                          | Consolidated Statements of Cash Flows for each of
    the three years in the period ended September 30, 2002                                                     |      |  | 32 | 
|                                          | Notes to Consolidated Financial Statements                                                                                                                       |      |  | 33 | 
|Financial Statement Schedules:            |                                                                                                                                                                  |      |  |   
|                                          | All schedules are omitted because they are not
    applicable or the required information is shown in the
    consolidated financial statements or notes thereto |      |  |    | 
|Supplementary Financial Data (unaudited): |                                                                                                                                                                  |      |  |   
|                                          | Quarterly Financial Data for the two years ended
    September 30, 2001 and 2002                                                                                 |      |  | 47 | 

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##### Table of Contents



Report of Independent Accountants

To the Board of Directors and Stockholders of

Catapult Communications Corporation


In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of Catapult
Communications Corporation and its subsidiaries at
September 30, 2001 and 2002, and the results of their
operations and their cash flows for each of the three years in
the period ended September 30, 2002, in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Companys management; our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.



| |                               
| | ------------------------------
| | /s/ PRICEWATERHOUSECOOPERS LLP
| |                               

San Jose, California

October 31, 2002


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CATAPULT COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                        |                                            |       |        |        |  |        |        |         | 
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------ | ------ |  | ------ | ------ | ------- | 
|                                         |                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                        | September 30,                             
|                                         |                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                        | 2001                                       |       | 2002  
|                                         |                                                                                                                                                                        |                                            |       |       
|                                         |                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                        | (In thousands, except                     
|                                         |                                                                                                                                                                        | share and per                             
|                                         |                                                                                                                                                                        | share data)                               
|ASSETS                                  
|Current Assets:                          |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|                                         | Cash and cash equivalents                                                                                                                                              |                                            | $     | 44,202 |        |  | $      | 12,575 |        
|                                         | Short-term investments                                                                                                                                                 |                                            |       | 17,274 |        |  |        | 22,790 |        
|                                         | Accounts receivable, net of allowances of $73 and
    $38                                                                                                              |                                            |       | 7,234  |        |  |        | 11,009 |        
|                                         | Inventories                                                                                                                                                            |                                            |       | 1,124  |        |  |        | 3,869  |        
|                                         | Deferred income taxes                                                                                                                                                  |                                            |       | 628    |        |  |        | 1,214  |        
|                                         | Prepaid expenses                                                                                                                                                       |                                            |       | 398    |        |  |        | 1,563  |        
|                                         | Assets of discontinued operations                                                                                                                                      |                                            |       |       |        |  |        | 2,636  |        
|                                         |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|                                         |                                                                                                                                                                        | Total current assets                       |       |        | 70,860 |  |        |        | 55,656  | 
|Property and equipment, net              |                                                                                                                                                                        |                                            | 1,430 |        |        |  | 3,874  |       
|Goodwill and other intangibles, net      |                                                                                                                                                                        |                                            |      |        |        |  | 57,148 |       
|Other assets                             |                                                                                                                                                                        |                                            | 543   |        |        |  | 1,172  |       
|                                         |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|                                         |                                                                                                                                                                        | Total assets                               |       | $      | 72,833 |  |        | $      | 117,850 | 
|                                         |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current Liabilities:                     |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|                                         | Accounts payable                                                                                                                                                       |                                            | $     | 1,107  |        |  | $      | 2,594  |        
|                                         | Accrued liabilities                                                                                                                                                    |                                            |       | 6,027  |        |  |        | 18,829 |        
|                                         | Deferred revenue                                                                                                                                                       |                                            |       | 2,209  |        |  |        | 4,492  |        
|                                         | Liabilities of discontinued operations                                                                                                                                 |                                            |       |       |        |  |        | 889    |        
|                                         |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|                                         |                                                                                                                                                                        | Total current liabilities                  |       |        | 9,343  |  |        |        | 26,804  | 
|Convertible notes payable                |                                                                                                                                                                        |                                            |      |        |        |  | 18,081 |       
|                                         |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|                                         |                                                                                                                                                                        | Total liabilities                          |       |        | 9,343  |  |        |        | 44,885  | 
|                                         |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|Commitments and contingencies (Note 10)  |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|Stockholders Equity:                    |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|                                         | Preferred stock, $0.001 par value, 5,000,000
    shares authorized; none issued and outstanding                                                                        |                                            |       |       |        |  |        |       |        
|                                         | Common stock, $0.001 par value, 40,000,000 shares
    authorized; 12,990,960 and 13,055,273 issued and outstanding as
    at September 30, 2001 and 2002, respectively |                                            |       | 13     |        |  |        | 13     |        
|                                         | Additional paid-in capital                                                                                                                                             |                                            |       | 21,758 |        |  |        | 22,625 |        
|                                         | Deferred stock-based compensation                                                                                                                                      |                                            |       |       |        |  |        | (111   | )      
|                                         | Accumulated other comprehensive income                                                                                                                                 |                                            |       | 612    |        |  |        | 182    |        
|                                         | Treasury stock, 50,000 shares at cost                                                                                                                                  |                                            |       | (300   | )      |  |        | (300   | )      
|                                         | Retained earnings                                                                                                                                                      |                                            |       | 41,407 |        |  |        | 50,556 |        
|                                         |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|                                         |                                                                                                                                                                        | Total stockholders equity                 |       |        | 63,490 |  |        |        | 72,965  | 
|                                         |                                                                                                                                                                        |                                            |       |        |        |  |        |       
|                                         |                                                                                                                                                                        | Total liabilities and stockholders equity |       | $      | 72,833 |  |        | $      | 117,850 | 
|                                         |                                                                                                                                                                        |                                            |       |        |        |  |        |       

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

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CATAPULT COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |        |  
|---------------------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | -
|                                                                                               |                                               |                         
|                                                                                               |                                               | Year Ended September 30,
|                                                                                               |                                               |                         
|                                                                                               |                                               | 2000                     |        | 2001   |  | 2002
|                                                                                               |                                               |                          |        |        |  |     
|                                                                                               |                                               |                         
|                                                                                               |                                               | (In thousands, except   
|                                                                                               |                                               | per share data)         
|Revenues:                                                                                      |                                               |                          |        |        |  |      |        |        |  |   |        |       
|                                                                                               | Products                                      |                          | $      | 22,045 |  |      | $      | 34,689 |  |   | $      | 33,988 |  
|                                                                                               | Services                                      |                          |        | 5,001  |  |      |        | 5,197  |  |   |        | 6,051  |  
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|                                                                                               | Total revenues                                |                          |        | 27,046 |  |      |        | 39,886 |  |   |        | 40,039 |  
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Cost of revenues:                                                                              |                                               |                          |        |        |  |      |        |        |  |   |        |       
|                                                                                               | Products                                      |                          |        | 2,209  |  |      |        | 3,794  |  |   |        | 2,700  |  
|                                                                                               | Services                                      |                          |        | 971    |  |      |        | 591    |  |   |        | 1,172  |  
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|                                                                                               | Total cost of revenues                        |                          |        | 3,180  |  |      |        | 4,385  |  |   |        | 3,872  |  
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Gross profit                                                                                   |                                               |                          | 23,866 |        |  |      | 35,501 |        |  |   | 36,167 |       
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Operating expenses:                                                                            |                                               |                          |        |        |  |      |        |        |  |   |        |       
|                                                                                               | Research and development                      |                          |        | 3,037  |  |      |        | 4,938  |  |   |        | 7,520  |  
|                                                                                               | Sales and marketing                           |                          |        | 9,427  |  |      |        | 10,673 |  |   |        | 10,714 |  
|                                                                                               | General and administrative                    |                          |        | 3,703  |  |      |        | 5,369  |  |   |        | 4,956  |  
|                                                                                               | Purchased in-process research and development |                          |        |       |  |      |        |       |  |   |        | 1,400  |  
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|                                                                                               | Total operating expenses                      |                          |        | 16,167 |  |      |        | 20,980 |  |   |        | 24,590 |  
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Operating income                                                                               |                                               |                          | 7,699  |        |  |      | 14,521 |        |  |   | 11,577 |       
|Interest income                                                                                |                                               |                          | 2,674  |        |  |      | 2,919  |        |  |   | 1,427  |       
|Other income (expense), net                                                                    |                                               |                          | 169    |        |  |      | (585   | )      |  |   | (219   | )     
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Income from continuing operations before income
    taxes                                      |                                               |                          | 10,542 |        |  |      | 16,855 |        |  |   | 12,785 |       
|Provision for income taxes                                                                     |                                               |                          | 3,976  |        |  |      | 5,810  |        |  |   | 3,580  |       
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Net income from continuing operations                                                          |                                               |                          | 6,566  |        |  |      | 11,045 |        |  |   | 9,205  |       
|Loss from discontinued operations, adjusted for
    applicable benefit for income taxes of $46 |                                               |                          |       |        |  |      |       |        |  |   | (56    | )     
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Net income                                                                                     |                                               | $                        | 6,566  |        |  | $    | 11,045 |        |  | $ | 9,149  |       
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Net income per share  basic:                                                                  |                                               |                          |        |        |  |      |        |        |  |   |        |       
|                                                                                               | Income from continuing operations             |                          | $      | 0.51   |  |      | $      | 0.85   |  |   | $      | 0.71   |  
|                                                                                               | Loss from discontinued operations             |                          |        |       |  |      |        |       |  |   |        | (0.00  | )
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Net income per share  basic:                                                                  |                                               | $                        | 0.51   |        |  | $    | 0.85   |        |  | $ | 0.70   |       
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Net income per share  diluted:                                                                |                                               |                          |        |        |  |      |        |        |  |   |        |       
|                                                                                               | Income from continuing operations             |                          | $      | 0.50   |  |      | $      | 0.83   |  |   | $      | 0.69   |  
|                                                                                               | Loss from discontinued operations             |                          |        |       |  |      |        |       |  |   |        | (0.00  | )
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Net income per share  diluted:                                                                |                                               | $                        | 0.50   |        |  | $    | 0.83   |        |  | $ | 0.69   |       
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|Shares used in per share calculation:                                                          |                                               |                          |        |        |  |      |        |        |  |   |        |       
|                                                                                               | Basic                                         |                          |        | 12,801 |  |      |        | 12,933 |  |   |        | 13,039 |  
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       
|                                                                                               | Diluted                                       |                          |        | 13,123 |  |      |        | 13,276 |  |   |        | 13,313 |  
|                                                                                               |                                               |                          |        |        |  |      |        |        |  |   |        |       

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

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CATAPULT COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                  |  |                                   |            |            |  |             |    |              |  |               |        |               |  |               |      |               |  |        |        |  |  |   |      |   |  |    |      |   |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | --------------------------------- | ---------- | ---------- |  | ----------- | -- | ------------ |  | ------------- | ------ | ------------- |  | ------------- | ---- | ------------- |  | ------ | ------ |  |  | - | ---- | - |  | -- | ---- | - |  | - | ------ | - |  | - | ------ | -
|                                                  |  |                                   |            |            |  |             |    |              |  | Accumulated   |        |               |  |               |      |              
|                                                  |  | Common Stock                      |            | Additional |  | Stock-based |    |              |  | Other         |        |               |  | Total         |      |              
|                                                  |  |                                   |            | Paid-in    |  | Deferred    |    | Retained     |  | Comprehensive |        | Treasury      |  | Stockholders |      | Comprehensive
|                                                  |  | Shares                            |            | Amount     |  | Capital     |    | Compensation |  | Earnings      |        | Income (loss) |  | Stock         |      | Equity        |  | Income
|                                                  |  |                                   |            |            |  |             |    |              |  |               |        |               |  |               |      |               |  |       
|                                                  |  |                                  
|                                                  |  | (In thousands, except share data)
|Balance at September 30, 1999                     |  |                                   | 12,689,394 |            |  | $           | 13 |              |  | $             | 20,040 |               |  | ($            | 132  | )             |  | $      | 23,796 |  |  | $ | 172  |   |  | ($ | 300  | ) |  | $ | 43,589 |   |  | $ | 9,084  |  
|                                                  |  |                                   |            |            |  |             |    |              |  |               |        |               |  |               |      |               |  |        |        |  |  |   |      |   |  |    |      |   |  |   |        |   |  |   |        |  
|Issuance of common stock                          |  |                                   | 158,583    |            |  |             |   |              |  |               | 230    |               |  |               |     |               |  |        |       |  |  |   |     |   |  |    |     |   |  |   | 230    |   |  |   |        |  
|Amortization of deferred stock compensation       |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               | 72   |               |  |        |       |  |  |   |     |   |  |    |     |   |  |   | 72     |   |  |   |        |  
|Currency translation adjustment                   |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               |     |               |  |        |       |  |  |   | 395  |   |  |    |     |   |  |   | 395    |   |  | $ | 395    |  
|Unrealized gain on investments                    |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               |     |               |  |        |       |  |  |   | 35   |   |  |    |     |   |  |   | 35     |   |  |   | 35     |  
|Net income                                        |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               |     |               |  |        | 6,566  |  |  |   |     |   |  |    |     |   |  |   | 6,566  |   |  |   | 6,566  |  
|                                                  |  |                                   |            |            |  |             |    |              |  |               |        |               |  |               |      |               |  |        |        |  |  |   |      |   |  |    |      |   |  |   |        |   |  |   |        |  
|Balances at September 30, 2000                    |  |                                   | 12,847,977 |            |  |             | 13 |              |  |               | 20,270 |               |  |               | (60  | )             |  |        | 30,362 |  |  |   | 602  |   |  |    | (300 | ) |  |   | 50,887 |   |  | $ | 6,996  |  
|                                                  |  |                                   |            |            |  |             |    |              |  |               |        |               |  |               |      |               |  |        |        |  |  |   |      |   |  |    |      |   |  |   |        |   |  |   |        |  
|Issuance of common stock                          |  |                                   | 142,983    |            |  |             |   |              |  |               | 969    |               |  |               |     |               |  |        |       |  |  |   |     |   |  |    |     |   |  |   | 969    |   |  |   |        |  
|Amortization of deferred stock compensation       |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               | 60   |               |  |        |       |  |  |   |     |   |  |    |     |   |  |   | 60     |   |  |   |        |  
|Currency translation adjustment                   |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               |     |               |  |        |       |  |  |   | (43  | ) |  |    |     |   |  |   | (43    | ) |  | $ | (43    | )
|Unrealized gain on investments                    |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               |     |               |  |        |       |  |  |   | 53   |   |  |    |     |   |  |   | 53     |   |  |   | 53     |  
|Net income                                        |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               |     |               |  |        | 11,045 |  |  |   |     |   |  |    |     |   |  |   | 11,045 |   |  |   | 11,045 |  
|                                                  |  |                                   |            |            |  |             |    |              |  |               |        |               |  |               |      |               |  |        |        |  |  |   |      |   |  |    |      |   |  |   |        |   |  |   |        |  
|Balances at September 30, 2001                    |  |                                   | 12,990,960 |            |  |             | 13 |              |  |               | 21,758 |               |  |               |     |               |  |        | 41,407 |  |  |   | 612  |   |  |    | (300 | ) |  |   | 63,490 |   |  | $ | 11,055 |  
|                                                  |  |                                   |            |            |  |             |    |              |  |               |        |               |  |               |      |               |  |        |        |  |  |   |      |   |  |    |      |   |  |   |        |   |  |   |        |  
|Issuance of common stock                          |  |                                   | 64,313     |            |  |             |   |              |  |               | 723    |               |  |               |     |               |  |        |       |  |  |   |     |   |  |    |     |   |  |   | 723    |   |  |   |        |  
|Deferred stock- based compensation                |  |                                   |           |            |  |             |    |              |  |               | 144    |               |  |               | (144 | )             |  |        |        |  |  |   |      |   |  |    |      |   |  |   |       |   |  |   |        |  
|Amortization of deferred stock-based compensation |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               | 33   |               |  |        |       |  |  |   |     |   |  |    |     |   |  |   | 33     |   |  |   |        |  
|Currency translation adjustment                   |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               |     |               |  |        |       |  |  |   | (353 | ) |  |    |     |   |  |   | (353   | ) |  | $ | 353    |  
|Unrealized loss on investments                    |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               |     |               |  |        |       |  |  |   | (77  | ) |  |    |     |   |  |   | (77    | ) |  |   | (77    | )
|Net income                                        |  |                                   |           |            |  |             |   |              |  |               |       |               |  |               |     |               |  |        | 9,149  |  |  |   |     |   |  |    |     |   |  |   | 9,149  |   |  |   | 9,149  |  
|                                                  |  |                                   |            |            |  |             |    |              |  |               |        |               |  |               |      |               |  |        |        |  |  |   |      |   |  |    |      |   |  |   |        |   |  |   |        |  
|Balances at September 30, 2002                    |  |                                   | 13,055,273 |            |  | $           | 13 |              |  | $             | 22,625 |               |  | $             | (111 | )             |  | $      | 50,556 |  |  | $ | 182  |   |  | $  | (300 | ) |  | $ | 72,965 |   |  | $ | 9,078  |  
|                                                  |  |                                   |            |            |  |             |    |              |  |               |        |               |  |               |      |               |  |        |        |  |  |   |      |   |  |    |      |   |  |   |        |   |  |   |        |  

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

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CATAPULT COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |         |       |        |         |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------- | ---------------------------------------------------- | ---- | ---- | ------- | ------- | --- | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                                            |                                                                                       |                                                                     
|                                                                            |                                                                                       | Year Ended September 30,                                            
|                                                                            |                                                                                       |                                                                     
|                                                                            |                                                                                       | 2000                                                                 |                                        | 2001                                                 |      | 2002
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |     
|                                                                            |                                                                                       |                                                                     
|                                                                            |                                                                                       | (In thousands)                                                      
|Cash flows from operating activities:                                       |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|                                                                            | Net income                                                                            |                                                                      | $                                      | 6,566                                                |      |      | $       | 11,045  |     |        | $       | 9,149   |      
|                                                                            | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |         |      
|                                                                            |                                                                                       | Depreciation and amortization                                        |                                        |                                                      | 468  |      |         |         | 731 |        |         |         | 807   |       
|                                                                            |                                                                                       | Amortization of deferred stock compensation                          |                                        |                                                      | 72   |      |         |         | 60  |        |         |         | 33    |       
|                                                                            |                                                                                       | Purchased in-process research and development                        |                                        |                                                      |     |      |         |         |    |        |         |         | 1,400 |       
|                                                                            |                                                                                       | Amortization of acquisition related intangibles                      |                                        |                                                      |     |      |         |         |    |        |         |         | 285   |       
|                                                                            |                                                                                       | Deferred income taxes                                                |                                        |                                                      | (373 | )    |         |         | 635 |        |         |         | (586  | )     
|                                                                            |                                                                                       | Loss (gain) on sale of property and equipment                        |                                        |                                                      |     |      |         |         | (7  | )      |         |         | 68    |       
|                                                                            |                                                                                       | Tax benefit from exercise of stock options                           |                                        |                                                      |     |      |         |         | 519 |        |         |         |      |       
|                                                                            |                                                                                       | Amortization of convertible note premium                             |                                        |                                                      |     |      |         |         |    |        |         |         | (34   | )     
|                                                                            |                                                                                       | Change in assets and liabilities (net of effect
    of acquisition): |                                        |                                                      |      |      |         |         |     |        |         |         |       |       
|                                                                            |                                                                                       |                                                                      | Accounts receivable                    |                                                      |      | 222  |         |         |     | (1,604 | )       |         |       | 689    |        
|                                                                            |                                                                                       |                                                                      | Inventories                            |                                                      |      | (694 | )       |         |     | 275    |         |         |       | 344    |        
|                                                                            |                                                                                       |                                                                      | Prepaid expenses                       |                                                      |      | (342 | )       |         |     | 293    |         |         |       | 116    |        
|                                                                            |                                                                                       |                                                                      | Assets of discontinued operations      |                                                      |      |     |         |         |     |       |         |         |       | (2,636 | )      
|                                                                            |                                                                                       |                                                                      | Other assets                           |                                                      |      | 25   |         |         |     | (349   | )       |         |       | (202   | )      
|                                                                            |                                                                                       |                                                                      | Accounts payable                       |                                                      |      | 418  |         |         |     | 245    |         |         |       | 684    |        
|                                                                            |                                                                                       |                                                                      | Accrued liabilities                    |                                                      |      | 953  |         |         |     | 292    |         |         |       | 4,958  |        
|                                                                            |                                                                                       |                                                                      | Deferred revenue                       |                                                      |      | 7    |         |         |     | 350    |         |         |       | 162    |        
|                                                                            |                                                                                       |                                                                      | Liabilities of discontinued operations |                                                      |      |     |         |         |     |       |         |         |       | 889    |        
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|                                                                            |                                                                                       |                                                                      |                                        | Net cash provided by operating activities            |      |      | 7,322   |         |     |        | 12,485  |         |       |        | 16,126  |  
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|Cash flows from investing activities:                                       |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|                                                                            | Sale and maturities of short-term investments                                         |                                                                      |                                        | 84,449                                               |      |      |         | 109,259 |     |        |         | 90,200  |      
|                                                                            | Purchase of short-term investments                                                    |                                                                      |                                        | (94,683                                              | )    |      |         | (83,043 | )   |        |         | (95,792 | )    
|                                                                            | Acquisition, net of cash acquired                                                     |                                                                      |                                        |                                                     |      |      |         |        |     |        |         | (41,942 | )    
|                                                                            | Purchase of property and equipment, net                                               |                                                                      |                                        | (999                                                 | )    |      |         | (625    | )   |        |         | (589    | )    
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|                                                                            |                                                                                       |                                                                      |                                        | Net cash provided (used) by investing
    activities |      |      | (11,233 | )       |     |        | 25,591  |         |       |        | (48,123 | )
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|Cash flows from financing activities:                                       |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|                                                                            | Proceeds from issuance of common stock                                                |                                                                      |                                        | 230                                                  |      |      |         | 969     |     |        |         | 723     |      
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|                                                                            |                                                                                       |                                                                      |                                        | Net cash provided by financing activities            |      |      | 230     |         |     |        | 969     |         |       |        | 723     |  
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|Effect of exchange rate changes on cash and cash
    equivalents            |                                                                                       |                                                                      | 395                                    |                                                      |      |      | (43     | )       |     |        | (353    | )      
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|Net increase (decrease) in cash and cash
    equivalents                    |                                                                                       |                                                                      | (3,286                                 | )                                                    |      |      | 39,002  |         |     |        | (31,627 | )      
|Cash and cash equivalents, beginning of year                                |                                                                                       |                                                                      | 8,486                                  |                                                      |      |      | 5,200   |         |     |        | 44,202  |        
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|Cash and cash equivalents, end of year                                      |                                                                                       | $                                                                    | 5,200                                  |                                                      |      | $    | 44,202  |         |     | $      | 12,575  |        
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|Supplemental disclosures of cash flow information:                          |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|                                                                            | Income taxes paid                                                                     |                                                                      | $                                      | 2,246                                                |      |      | $       | 5,307   |     |        | $       | 3,510   |      
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|Supplemental disclosure of non cash investing and
    financing activities: |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        
|                                                                            | Convertible note issued for acquisition                                               |                                                                      | $                                      |                                                     |      |      | $       |        |     |        | $       | 18,115  |      
|                                                                            |                                                                                       |                                                                      |                                        |                                                      |      |      |         |         |     |        |         |        

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

32



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1  The Company and
Summary of Significant Accounting Policies

The Company

The Company designs, develops, manufactures,
markets and supports an advanced software-based test system
offering an integrated suite 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
incorporated in California in October 1985, reincorporated in
Nevada in 1998, and has operations in the United States, Canada,
the United Kingdom, Europe and Japan. The Company conducts its
business within one industry segment.

Basis of Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries,
Catapult Communications Limited, Catapult Communications K.K.,
Catapult Communications International Limited, Tekelec Limited
(from the August 30, 2002 date it was acquired by the
Company) and ISDN Technologies, Ltd. All significant
inter-company accounts and transactions have been eliminated in
consolidation.

Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Cash and Cash Equivalents

The Company maintains its cash in bank deposit
accounts at financial institutions in the United States, Japan,
the United Kingdom, Ireland and Canada.

Cash equivalents are investments with an original
maturity of 90 days or less. This type of investment
consists principally of U.S. treasury securities, commercial
paper and money market instruments.

Short-Term Investments

Short-term investments are investments with
original maturity between 91 days and one year. The
Companys short-term investments are placed in portfolios
managed by four professional money management firms. At
September 30, 2002, the portfolios consisted primarily of
commercial paper, investment quality corporate bonds,
collateralized mortgage obligations, U.S. government agency
securities and money market funds.

At September 30, 2002, the Companys
short-term investments are classified as available for sale and
are carried at their estimated fair value in the accompanying
consolidated balance sheet. Unrealized gains and losses are
included in stockholders equity as a component of
accumulated other comprehensive income. Realized gains and
losses are reported in the consolidated statement of income.

Revenue Recognition

Sales of the Companys product arrangements
normally include hardware and software. Certain of the
Companys sales may also include installation. The Company
also offers training and maintenance services. The Company
recognizes revenue on system sales upon shipment or when
installation is complete, if

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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

installation services are purchased, provided
collection is probable. Training and maintenance services
revenues are based on the Companys established history of
separate fees charged for training and maintenance. Revenues
allocated to training are recognized at the time the training is
complete. Revenues allocated to maintenance are recognized
ratably over the term of the maintenance contract.

Foreign Currency Translations

Certain of the Companys foreign
subsidiaries use their respective local currencies as their
functional currencies. In consolidation, assets and liabilities
are translated at year-end currency exchange rates and revenue
and expense items are translated at average currency exchange
rates prevailing during the period. Gains and losses from
foreign currency translation are recorded in accumulated other
comprehensive income. Gains and losses resulting from foreign
currency transactions are included in other income (expense) in
the consolidated statements of income and amounted to losses of
$5,000, $335,000 and $248,000 in fiscal 2000, 2001 and 2002,
respectively.

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 fluctuations in foreign
currency exchange rates on foreign currency denominated sales
made to foreign subsidiaries. The Company utilizes foreign
currency forward exchange contracts and options to hedge against
future movements in foreign exchange rates that could affect
certain foreign currency denominated inter-company receivables.
The Company attempts to match the forward contracts with the
underlying receivables being hedged 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 generally offsets the related impact on the exposures
hedged, these financial instruments have not subjected the
Company to speculative risk that would otherwise result from
changes in currency exchange rates. Any gains and losses
realized on forward exchange contracts offset foreign exchange
transaction gains or losses for revaluation of foreign currency
denominated inter-company receivable balances which otherwise
would be charged to other income (expense).

At September 30, 2002, the Company had
forward exchange contracts and options maturing in fiscal 2003
to sell approximately $17,000 in Japanese Yen designed to hedge
against future movements in foreign exchange rates. The fair
market value of these contracts and options at
September 30, 2002 was not material.

Fair Value of Financial Instruments

The carrying value of the Companys
financial instruments including cash and cash equivalents,
accounts receivable and accounts payable approximate their fair
values due to their relatively short maturity. The fair value of
the convertible notes payable was determined by an independent
valuation and includes a premium over the principal amounts
payable.

Concentration of Credit Risk

Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash
and cash equivalents, short-term investments and accounts
receivable. Substantially all of the companys cash, cash
equivalents and short-term investments are managed or held by
seven financial institutions. The Companys accounts
receivable are derived from revenue earned from customers
located in Japan, North America, the United Kingdom and Europe.
The Company performs ongoing credit evaluations of its
customers financial condition and, generally, requires no
collateral from its customers. The Company maintains an
allowance for doubtful accounts based upon the expected
collection of its outstanding receivable balance.

34



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the revenues from
customers in excess of 10% of total revenues:

|           |  |               |    |      |  |      |    |   |  |  |    |  
|---------- |  | ------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|           |  |              
|           |  | Year Ended   
|           |  | September 30,
|           |  |              
|           |  | 2000          |    | 2001 |  | 2002
|           |  |               |    |      |  |     
|Customer A |  |               | 23 | %    |  |      |   |   |  |  | 12 | %
|Customer B |  |               | 12 | %    |  |      | 15 | % |  |  |   |  
|Customer C |  |               |   |      |  |      | 16 | % |  |  | 14 | %
|Customer D |  |               |   |      |  |      | 16 | % |  |  | 24 | %
|Customer E |  |               |   |      |  |      | 11 | % |  |  |   |  

At September 30, 2001, three customers
accounted for 28%, 23% and 19% of total accounts receivable,
respectively. At September 30, 2002, five customers
accounted for 17%, 14%, 11%, 10% and 10% of total accounts
receivable, respectively.

Inventories

Inventories are stated at the lower of cost or
market, using the first-in first-out (FIFO) method.

Capitalized Software Development
Costs

Software development costs not qualifying for
capitalization are included in research and development and are
expensed as incurred. After technological feasibility is
established, material software development costs are
capitalized. The capitalized cost is then amortized on a
straight-line basis over the greater of the estimated product
life or on the ratio of current revenues to total projected
product revenues. The Company defines technological feasibility
as the establishment of a working model, which typically occurs
upon completion of the first beta version. To date, the period
between achieving technological feasibility and the general
availability of such software has been short and software
development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any
software development costs.

Property and Equipment

Property and equipment, including leasehold
improvements, are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed
using the straight-line method over the shorter of the estimated
useful lives, generally four years, or the lease term of the
respective assets. When property and equipment are retired or
otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and the resulting
gain or loss is included in income.

Repairs and Maintenance

Repair and maintenance costs are expensed as
incurred.

Warranty

The Company provides a limited warranty for its
products. A provision for the estimated warranty cost is
recorded at the time revenue is recognized based on the
Companys historical experience.

Income Taxes

The Company accounts for income taxes under the
liability method, which requires recognition of deferred tax
assets and liabilities for the future tax consequences of
temporary differences between the tax bases of assets and
liabilities and their reported amounts. A valuation allowance is
provided against deferred

35



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

tax assets unless it is more likely than not that
they will be realized, either through the generation of future
taxable income or through carryback potential.

Stock-based Compensation

The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees, as interpreted by Financial Accounting
Standards Board (FASB) Interpretation No. 44
Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of Opinion No. 25.
The Company also complies with the disclosure provisions of
Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based
Compensation. Under APB Opinion No. 25, compensation
cost is recognized over the vesting period based on the
difference, if any, on the date of grant between the fair value
of the Companys stock and the amount an employee must pay
to acquire the stock.

Earnings per Share

The Company has presented earnings per share for
all periods in accordance with SFAS No. 128, Earnings
per Share. SFAS No. 128 requires the presentation of
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 share
equivalents (options) issued (using the treasury stock method).
The following is a reconciliation of the denominator used in
calculating basic and diluted earnings per share:

|                                             |  |                                                 |            |      |  |      |            |  |  |    |            |  
|-------------------------------------------- |  | ----------------------------------------------- | ---------- | ---- |  | ---- | ---------- |  |  | -- | ---------- | -
|                                             |  |                                                
|                                             |  | Year Ended September 30,                       
|                                             |  |                                                
|                                             |  | 2000                                            |            | 2001 |  | 2002
|                                             |  |                                                 |            |      |  |     
|                                             |  |                                                
|                                             |  | (In thousands, except share and per share data)
|Income from continuing operations            |  | $                                               | 6,566      |      |  | $    | 11,045     |  |  | $  | 9,205      |  
|Loss from discontinued operations            |  |                                                 |           |      |  |      |           |  |  |    | (56        | )
|                                             |  |                                                 |            |      |  |      |            |  |  |    |            |  
|Net income                                   |  | $                                               | 6,566      |      |  | $    | 11,045     |  |  | $  | 9,149      |  
|                                             |  |                                                 |            |      |  |      |            |  |  |    |            |  
|Weighted average shares outstanding          |  |                                                 | 12,801,000 |      |  |      | 12,933,000 |  |  |    | 13,039,000 |  
|Dilutive options                             |  |                                                 | 322,000    |      |  |      | 343,000    |  |  |    | 274,000    |  
|Weighted average shares assuming dilution    |  |                                                 | 13,123,000 |      |  |      | 13,276,000 |  |  |    | 13,313,000 |  
|                                             |  |                                                 |            |      |  |      |            |  |  |    |            |  
|Income per share from continuing operations: |  |                                                 |            |      |  |      |            |  |  |    |            |  
|Basic                                        |  | $                                               | 0.51       |      |  | $    | 0.85       |  |  | $  | 0.71       |  
|                                             |  |                                                 |            |      |  |      |            |  |  |    |            |  
|Diluted                                      |  | $                                               | 0.50       |      |  | $    | 0.83       |  |  | $  | 0.69       |  
|                                             |  |                                                 |            |      |  |      |            |  |  |    |            |  
|Loss per share from discontinued operations: |  |                                                 |            |      |  |      |            |  |  |    |            |  
|Basic                                        |  |                                                 |           |      |  |      |           |  |  | ($ | 0.00       | )
|                                             |  |                                                 |            |      |  |      |            |  |  |    |            |  
|Diluted                                      |  |                                                 |           |      |  |      |           |  |  | ($ | 0.00       | )
|                                             |  |                                                 |            |      |  |      |            |  |  |    |            |  
|Net income per share:                        |  |                                                 |            |      |  |      |            |  |  |    |            |  
|Basic                                        |  | $                                               | 0.51       |      |  | $    | 0.85       |  |  | $  | 0.70       |  
|                                             |  |                                                 |            |      |  |      |            |  |  |    |            |  
|Diluted                                      |  | $                                               | 0.50       |      |  | $    | 0.83       |  |  | $  | 0.69       |  
|                                             |  |                                                 |            |      |  |      |            |  |  |    |            |  

36



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Diluted earnings per share do not include the
effect of the following anti-dilutive common equivalent shares:

|                          |  |                          |         |      |  |      |        |  |  |  |           | 
|------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ |  |  |  | --------- | 
|                          |  |                         
|                          |  | Year Ended September 30,
|                          |  |                         
|                          |  | 2000                     |         | 2001 |  | 2002
|                          |  |                          |         |      |  |     
|Common stock options      |  |                          | 290,000 |      |  |      | 17,000 |  |  |  | 242,000   | 
|                          |  |                          |         |      |  |      |        |  |  |  |           | 
|Convertible notes payable |  |                          |        |      |  |      |       |  |  |  | 1,081,000 | 
|                          |  |                          |         |      |  |      |        |  |  |  |           | 

Comprehensive Income

As of October 1, 1998, the Company adopted
SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires separate reporting of comprehensive
income which is the change in equity of a business
enterprise during a period from transactions and other events
and circumstances from non-owner sources.

The accumulated balances for each component of
accumulated other comprehensive income are as follows:

|                                                  |  |               |         |      |  |   |         | 
|------------------------------------------------- |  | ------------- | ------- | ---- |  | - | ------- | 
|                                                  |  |              
|                                                  |  | September 30,
|                                                  |  |              
|                                                  |  | 2001          |         | 2002
|                                                  |  |               |         |     
|Unrealized holding gain on short-term investments |  | $             | 88,000  |      |  | $ | 11,000  | 
|Foreign exchange translation adjustments          |  |               | 524,000 |      |  |   | 171,000 | 
|                                                  |  |               |         |      |  |   |         | 
|                                                  |  | $             | 612,000 |      |  | $ | 182,000 | 
|                                                  |  |               |         |      |  |   |         | 

Recently Issued Accounting Standards

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of and certain provisions
of APB Opinion No. 30, Reporting Results of
Operations, Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. SFAS No. 144 requires that
long-lived assets to be disposed of by sale, including
discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS
No. 144 also broadens the reporting requirements of
discontinued operations to include all components of an entity
that have operations and cash flows that can be clearly
distinguished, operationally and for financial reporting
purposes, from the rest of the entity. The provisions of
SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 is not
expected to have a material impact on the Companys
financial statements.

In April 2002, the FASB issued SFAS No. 145,
Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS
No. 13, and Technical Corrections. The provisions of SFAS
No. 145 related to the rescission of SFAS No. 4 are
effective for fiscal years beginning after May 15, 2002.
Other provisions of SFAS No. 145 are effective for
financial statements issued on or after May 15, 2002 and
rescinds both SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and the amendment to SFAS No. 4,
SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. Through this rescission, SFAS
No. 145 eliminates the requirement that gains and losses
from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income
tax effect. The adoption of SFAS No. 145 is not expected to
have a material impact on the Companys financial
statements.

In July 2002, the FASB issued 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

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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

disposal activities and nullifies Emerging Issues
Task Force (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 adoption of SFAS No. 146 is not
expected to have a material impact on the Companys
financial statements.

In various areas, including revenue recognition,
accounting standards and practices continue to evolve. The
FASBs Emerging Issues Task Force continues to address
revenue related accounting issues. The Company believes it is in
compliance with all of the rules and related guidance, as they
currently exist. However, any changes to generally accepted
accounting principles in these areas could impact the
Companys future accounting for its operations.

Note 2  Business Combination: NDB
Acquisition

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
$69.4 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, an independent valuation 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 $4.5 million pursuant
to the terms of the Asset Purchase Agreement payable following
the completion of a closing date balance sheet audit. The amount
of this adjustment has not yet been agreed or paid and the
amounts included in these consolidated financial statements
relating to the purchase price and the assets acquired are
preliminary estimates subject to the net working capital
adjustment.

NDBs principal product is the MGTS digital
telecommunications test system, which is similar to the
Companys DCT test systems. NDB operates in the same market
segment as the Company, the development and manufacture of
advanced digital telecommunications test products. The Company
acquired NDB in order to enhance its position in the digital
telecommunications test market.

The consolidated financial statements include the
operating results of NDB from the date of acquisition.

Based upon a preliminary independent valuation,
the estimated purchase price has been allocated as follows:

|                                              |  |               |      | 
|--------------------------------------------- |  | ------------- | ---- | 
|Asset category                                |  | Value        
|                                              |  |              
|                                              |  | (In millions)
|Net tangible assets                           |  | $             | 10.6 | 
|Purchased in-process research and development |  |               | 1.4  | 
|Intangible assets                             |  |               | 7.6  | 
|Goodwill                                      |  |               | 49.8 | 
|                                              |  |               |      | 
|Net assets acquired                           |  | $             | 69.4 | 
|                                              |  |               |      | 

The amount of $1.4 million allocated to
purchased in-process research and development was charged to
operating expenses upon acquisition. This amount represented two
NDB research and development projects in process as of August
30, 2002, the date of the acquisition of NDB. The value of these
projects was determined by an independent appraiser using
established valuation techniques and was expensed because
technological feasibility had not been established and no future
alternative uses existed as of the date of acquisition.

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CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table presents details of the
purchased intangible assets:

|                                |  |               |     |                  |  |  |    | 
|------------------------------- |  | ------------- | --- | ---------------- |  |  | -- | 
|                                |  |               |     | Estimated Useful
|Intangible asset                |  | Amount        |     | Life (in months)
|                                |  |               |     |                 
|                                |  | (In millions) |     |                 
|Core technology and trade names |  | $             | 5.8 |                  |  |  | 84 | 
|Customer relationships          |  |               | 1.0 |                  |  |  | 84 | 
|Non-compete agreement           |  |               | 0.4 |                  |  |  | 96 | 
|Systems backlog                 |  |               | 0.4 |                  |  |  | 6  | 
|                                |  |               |     |                  |  |  |    | 
|Total                           |  | $             | 7.6 |                  |  |  |    | 
|                                |  |               |     |                  |  |  |    | 

The estimated future amortization expense of
purchased intangible assets as of September 30, 2002 is as
follows:

|                          |  |               |     | 
|------------------------- |  | ------------- | --- | 
|Year ending September 30, |  | Amount       
|                          |  |              
|                          |  | (In millions)
|2003                      |  | $             | 1.2 | 
|2004                      |  |               | 1.0 | 
|2005                      |  |               | 1.0 | 
|2006                      |  |               | 1.0 | 
|2007                      |  |               | 1.0 | 
|Thereafter                |  |               | 2.1 | 
|                          |  |               |     | 
|Total                     |  | $             | 7.3 | 
|                          |  |               |     | 

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets, which is effective for
fiscal years beginning after December 15, 2001. SFAS
No. 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes
provisions upon adoption for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously
reported goodwill and the testing for impairment of existing
goodwill and other intangibles. The standard also requires that
goodwill be allocated to a companys reporting units for
purposes of impairment testing. The Company has determined that
it has only one reporting unit. Of the total goodwill,
approximately $25 million is expected to be deductible for
tax purposes.

The Company will adopt the provisions of SFAS
No. 142 effective October 1, 2002, and will perform an
impairment review of its goodwill balance upon initial adoption.
The Company will continue to test for impairment on an annual
basis and on an interim basis if an event occurs or
circumstances change that would more likely than not reduce the
fair value of the Companys reporting unit below its
carrying amount.

The unaudited pro forma information set forth
below assumes the acquisition of NDB had occurred at the
beginning of fiscal 2001. The unaudited pro forma information is
presented for informational purposes only and is not necessarily
indicative of the future results of operations of the Company or
the results of operations that would have been achieved had the
acquisitions been consummated at that time.

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CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                 |  |                          |        |      |  |   |        | 
|---------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | - | ------ | 
|                                                                 |  |                         
|                                                                 |  | Year Ended September 30,
|                                                                 |  |                         
|Pro forma information                                            |  | 2002                     |        | 2001
|                                                                 |  |                          |        |     
|                                                                 |  |                         
|                                                                 |  | (In thousands, except   
|                                                                 |  | data per share)         
|Revenue                                                          |  | $                        | 69,660 |      |  | $ | 86,276 | 
|Income (loss) from continuing operations                         |  | $                        | (1,796 | )    |  | $ | 3,507  | 
|Income (loss) per share from continuing
    operations  basic   |  | $                        | (0.14  | )    |  | $ | 0.27   | 
|Income (loss) per share from continuing
    operations  diluted |  | $                        | (0.14  | )    |  | $ | 0.26   | 

Note 3  Restructuring of Acquired
Business

Prior to the effective date of the acquisition,
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. On completion of the
acquisition, the plan was communicated to the employee group as
a whole and the estimated costs were included in the liabilities
assumed on closing as follows.

|                              |  |                 |     |                    |  |                    |     |  |  |   |     | 
|----------------------------- |  | --------------- | --- | ------------------ |  | ------------------ | --- |  |  | - | --- | 
|                              |  | Accrual as at   |     | Paid through       |  | Balance at        
|Restructuring costs           |  | August 30, 2002 |     | September 30, 2002 |  | September 30, 2002
|                              |  |                 |     |                    |  |                   
|                              |  |                
|                              |  | (In millions)  
|Redundancy compensation costs |  | $               | 1.8 |                    |  | $                  | 0.6 |  |  | $ | 1.2 | 
|Occupancy costs               |  |                 | 0.3 |                    |  |                    |    |  |  |   | 0.3 | 
|Professional costs            |  |                 | 0.2 |                    |  |                    |    |  |  |   | 0.2 | 
|                              |  |                 |     |                    |  |                    |     |  |  |   |     | 
|Total                         |  | $               | 2.3 |                    |  | $                  | 0.6 |  |  | $ | 1.7 | 
|                              |  |                 |     |                    |  |                    |     |  |  |   |     | 

Payment of the balance as at September 30,
2002 is expected to be completed by March 31, 2003.

Note 4  Discontinued
Operations

Effective September 30, 2002, the Company
discontinued the distribution and consulting businesses engaged
in by Tekelec Limited in Japan. The results of operations and
the assets and liabilities of the discontinued operations are
segregated in the consolidated financial statements. The revenue
and pre-tax loss attributable to discontinued operations in the
amounts of $2.2 million and $0.1 million respectively
have been excluded from the consolidated statement of income.

NOTE 5  Balance Sheet
Components

|                                             |                       |                |        |              |  |      |        |              |   |   |        |  |  |   |        |        |  
|-------------------------------------------- | --------------------- | -------------- | ------ | ------------ |  | ---- | ------ | ------------ | - | - | ------ |  |  | - | ------ | ------ | -
|                                             |                       |               
|                                             |                       | September 30, 
|                                             |                       |               
|                                             |                       |                |        |             
|                                             |                       | 2001           |        | 2002        
|                                             |                       |                |        |             
|Short-term investments and cash equivalents: |                       | Cost           |        | Market value |  | Cost |        | Market value
|                                             |                       |                |        |              |  |      |        |             
|                                             |                       |               
|                                             |                       | (In thousands)
|U.S. government, corporations and agencies   |                       | $              | 10,823 |              |  | $    | 10,873 |              |   | $ | 4,359  |  |  | $ | 4,396  |       
|Commercial paper                             |                       |                | 27,953 |              |  |      | 27,991 |              |   |   | 4,439  |  |  |   | 4,445  |       
|State and municipal securities               |                       |                | 18,251 |              |  |      | 18,251 |              |   |   | 19,086 |  |  |   | 19,054 |       
|                                             |                       |                |        |              |  |      |        |              |   |   |        |  |  |   |        |       
|                                             |                       | $              | 57,027 |              |  | $    | 57,115 |              |   | $ | 27,884 |  |  | $ | 27,895 |       
|                                             |                       |                |        |              |  |      |        |              |   |   |        |  |  |   |        |       
|                                             | less cash equivalents |                |        |              |  |      |        | (39,841      | ) |   |        |  |  |   |        | (5,105 | )
|                                             |                       |                |        |              |  |      |        |              |   |   |        |  |  |   |        |       
|Short-term investments                       |                       |                |        |              |  | $    | 17,274 |              |   |   |        |  |  | $ | 22,790 |       
|                                             |                       |                |        |              |  |      |        |              |   |   |        |  |  |   |        |       

Unrealized gains on short-term investments were
$88,000 and $11,000 as at September 30, 2001 and 2002,
respectively.

40



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CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                 |                                                                                      |                                         |       |        |      |   |        |        |     |  
|-------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------- | ----- | ------ | ---- | - | ------ | ------ | --- | -
|                                 |                                                                                      |                                        
|                                 |                                                                                      | September 30,                          
|                                 |                                                                                      |                                        
|                                 |                                                                                      | 2001                                    |       | 2002  
|                                 |                                                                                      |                                         |       |       
|                                 |                                                                                      |                                        
|                                 |                                                                                      | (In thousands)                         
|Inventories:                     |                                                                                      |                                         |       |        |      |   |        |       
|                                 | Raw materials                                                                        |                                         | $     | 1,074  |      |   | $      | 3,371  |    
|                                 | Work-in-process                                                                      |                                         |       | 6      |      |   |        | 21     |    
|                                 | Finished goods                                                                       |                                         |       | 44     |      |   |        | 477    |    
|                                 |                                                                                      |                                         |       |        |      |   |        |       
|                                 |                                                                                      | $                                       | 1,124 |        |      | $ | 3,869  |       
|                                 |                                                                                      |                                         |       |        |      |   |        |       
|Property and equipment:          |                                                                                      |                                         |       |        |      |   |        |       
|                                 | Equipment                                                                            |                                         | $     | 2,630  |      |   | $      | 5,572  |    
|                                 | Leasehold improvements                                                               |                                         |       | 1,045  |      |   |        | 1,148  |    
|                                 |                                                                                      |                                         |       |        |      |   |        |       
|                                 |                                                                                      |                                         | 3,675 |        |      |   | 6,720  |       
|                                 | Less accumulated depreciation and amortization                                       |                                         |       | (2,245 | )    |   |        | (2,846 | )  
|                                 |                                                                                      |                                         |       |        |      |   |        |       
|                                 |                                                                                      | $                                       | 1,430 |        |      | $ | 3,874  |       
|                                 |                                                                                      |                                         |       |        |      |   |        |       
|Accrued liabilities:             |                                                                                      |                                         |       |        |      |   |        |       
|                                 | Payroll and related expenses                                                         |                                         | $     | 1,911  |      |   | $      | 3,299  |    
|                                 | Income taxes payable                                                                 |                                         |       | 2,761  |      |   |        | 5,972  |    
|                                 | Acquisition related expenses, including estimated
    net working capital adjustment |                                         |       |       |      |   |        | 7,226  |    
|                                 | Other                                                                                |                                         |       | 1,355  |      |   |        | 2,331  |    
|                                 |                                                                                      |                                         |       |        |      |   |        |       
|                                 |                                                                                      | $                                       | 6,027 |        |      | $ | 18,828 |       
|                                 |                                                                                      |                                         |       |        |      |   |        |       
|Allowance for doubtful accounts: |                                                                                      |                                         |       |        |      |   |        |       
|                                 | Balance at beginning of year                                                         |                                         | $     | 83     |      |   | $      | 73     |    
|                                 |                                                                                      | Charged (credited) to cost and expenses |       |        | 125  |   |        |        | (35 | )
|                                 |                                                                                      | Write-off of bad debts                  |       |        | (135 | ) |        |        |    |  
|                                 |                                                                                      |                                         |       |        |      |   |        |       
|                                 | Balance at end of year                                                               |                                         | $     | 73     |      |   | $      | 38     |    
|                                 |                                                                                      |                                         |       |        |      |   |        |       

Note 6  Convertible Notes
Payable

In connection with the acquisition of NDB
described in Note 2, 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
on an effective interest method.

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.

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CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 7  Income Taxes

Consolidated income before income taxes includes
non-U.S. income of approximately $681,000, $7.7 million and
$10.1 million in fiscal 2000, 2001 and 2002, respectively.

The provision for income taxes consists of the
following:

|          |              |                          |       |       |   |      |       |       |  |   |        |        |  
|--------- | ------------ | ------------------------ | ----- | ----- | - | ---- | ----- | ----- |  | - | ------ | ------ | -
|          |              |                         
|          |              | Year Ended September 30,
|          |              |                         
|          |              | 2000                     |       | 2001  |   | 2002
|          |              |                          |       |       |   |     
|          |              |                         
|          |              | (In thousands)          
|Current:  |              |                          |       |       |   |      |       |       |  |   |        |       
|          | U.S. federal |                          | $     | 3,546 |   |      | $     | 3,269 |  |   | $      | 2,419  |  
|          | State        |                          |       | 516   |   |      |       | 503   |  |   |        | 190    |  
|          | Foreign      |                          |       | 260   |   |      |       | 1,676 |  |   |        | 2,047  |  
|          |              |                          |       |       |   |      |       |       |  |   |        |       
|          |              |                          | 4,322 |       |   |      | 5,448 |       |  |   | 4,656  |       
|          |              |                          |       |       |   |      |       |       |  |   |        |       
|Deferred: |              |                          |       |       |   |      |       |       |  |   |        |       
|          | U.S. federal |                          |       | (340  | ) |      |       | 308   |  |   |        | (1,001 | )
|          | State        |                          |       | (6    | ) |      |       | 54    |  |   |        | (75    | )
|          | Foreign      |                          |       |      |   |      |       |      |  |   |        |       |  
|          |              |                          |       |       |   |      |       |       |  |   |        |       
|          |              |                          | (346  | )     |   |      | 362   |       |  |   | (1,076 | )     
|          |              |                          |       |       |   |      |       |       |  |   |        |       
|          |              | $                        | 3,976 |       |   | $    | 5,810 |       |  | $ | 3,580  |       
|          |              |                          |       |       |   |      |       |       |  |   |        |       

A reconciliation of the U.S. federal income tax
rate to the Companys effective tax rate is as follows:

|                                    |  |               |    |      |  |      |    |   |  |  |    |  
|----------------------------------- |  | ------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                    |  |              
|                                    |  | Year Ended   
|                                    |  | September 30,
|                                    |  |              
|                                    |  | 2000          |    | 2001 |  | 2002
|                                    |  |               |    |      |  |     
|Tax at federal rate                 |  |               | 35 | %    |  |      | 35 | % |  |  | 34 | %
|State taxes, net of federal benefit |  |               | 3  |      |  |      | 3  |   |  |  |   |  
|Excess foreign tax rate             |  |               |   |      |  |      | (2 | ) |  |  | (5 | )
|Other                               |  |               |   |      |  |      | (2 | ) |  |  | (1 | )
|                                    |  |               |    |      |  |      |    |   |  |  |    |  
|                                    |  |               | 38 | %    |  |      | 34 | % |  |  | 28 | %
|                                    |  |               |    |      |  |      |    |   |  |  |    |  

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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred tax assets consist of the following:

|                                 |       |                |      |       |  |   |       |       | 
|-------------------------------- | ----- | -------------- | ---- | ----- |  | - | ----- | ----- | 
|                                 |       |               
|                                 |       | September 30, 
|                                 |       |               
|                                 |       | 2001           |      | 2002 
|                                 |       |                |      |      
|                                 |       |               
|                                 |       | (In thousands)
|Accruals and reserves            |       | $              | 715  |       |  | $ | 1,449 |      
|Foreign net operating losses     |       |                | 102  |       |  |   |      |      
|Current and deferred state taxes |       |                | 104  |       |  |   | 63    |      
|Foreign tax credit               |       |                |     |       |  |   | 255   |      
|Other                            |       |                | 82   |       |  |   | 210   |      
|                                 |       |                |      |       |  |   |       |      
|                                 | Total |                |      | 1,003 |  |   |       | 1,977 | 
|Valuation allowance              |       |                | (102 | )     |  |   |      |      
|                                 |       |                |      |       |  |   |       |      
|                                 |       |                | 901  |       |  |   | 1,977 |      
|Less: Non-current portion        |       |                | 273  |       |  |   | 763   |      
|                                 |       |                |      |       |  |   |       |      
|                                 |       | $              | 628  |       |  | $ | 1,214 |      
|                                 |       |                |      |       |  |   |       |      

The Company had foreign net operating losses of
$310,000 at September 30, 2001, which had a full valuation
allowance. These losses were fully utilized during the fiscal
year ended September 30, 2002.

U.S. income taxes and foreign withholding taxes
were not provided on a cumulative total of $12.7 million of
undistributed earnings for certain non-U.S. subsidiaries. The
Company intends to reinvest these earnings indefinitely in
operations outside the United States.

Note 8  Stockholders
Equity

Stock Option Plans

At September 30, 1997, 1,800,000 shares
and 154,500 shares of common stock had been reserved for
issuance to employees under the 1989 Incentive Stock Option Plan
(the 1989 Plan) and the UK Executive Share Option
Scheme (the UK Scheme), respectively. In June
1998, the Board of Directors adopted the 1998 Stock Plan (the
1998 Plan) which provided for the issuance of an
additional 1,800,000 stock options. The Board of Directors
has the authority to determine optionees, the number of shares,
the term of each option and the exercise price. Options under
the 1989 and 1998 Plans generally become exercisable at a rate
of  1/8th of the option shares six months after the option
grant date and then at a rate of  1/48th per month
thereafter. Options under the UK Scheme become exercisable at
the rate of  1/36th of the option shares per month
following twelve months after the option grant date. Options
will expire, if not exercised, upon the earlier of 10 years
from the date of grant or 30 days after termination as an
employee of the Company. The 1989 Plan and the UK Scheme
have been terminated as to future grants.

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CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information with respect to stock option activity
from September 30, 1999 through September 30, 2002 is
set forth below:

|                            |                   |             |           |                  |   |   |       |       | 
|--------------------------- | ----------------- | ----------- | --------- | ---------------- | - | - | ----- | ----- | 
|                            |                   | Number of   |           |                 
|                            |                   | Options     |           | Weighted Average
|                            |                   | Outstanding |           | Exercise Price  
|                            |                   |             |           |                 
|Balance, September 30, 1999 |                   |             | 708,952   |                  |   | $ | 6.68  |      
|                            | Options granted   |             |           | 270,037          |   |   | $     | 11.98 | 
|                            | Options exercised |             |           | (142,463         | ) |   | $     | 0.93  | 
|                            | Options canceled  |             |           | (18,266          | ) |   | $     | 9.09  | 
|                            |                   |             |           |                  |   |   |       |      
|Balance, September 30, 2000 |                   |             | 818,260   |                  |   | $ | 9.62  |      
|                            | Options granted   |             |           | 358,741          |   |   | $     | 16.98 | 
|                            | Options exercised |             |           | (124,339         | ) |   | $     | 6.06  | 
|                            | Options canceled  |             |           | (19,116          | ) |   | $     | 12.43 | 
|                            |                   |             |           |                  |   |   |       |      
|Balance, September 30, 2001 |                   |             | 1,033,546 |                  |   | $ | 12.39 |      
|                            | Options granted   |             |           | 263,640          |   |   | $     | 18.53 | 
|                            | Options exercised |             |           | (50,340          | ) |   | $     | 9.03  | 
|                            | Options canceled  |             |           | (18,204          | ) |   | $     | 18.84 | 
|                            |                   |             |           |                  |   |   |       |      
|Balance, September 30, 2002 |                   |             | 1,228,642 |                  |   | $ | 13.75 |      
|                            |                   |             |           |                  |   |   |       |      

As of September 30, 2002, 674,043 options
remained available for grant.

As of September 30, 2002, the options
outstanding and exercisable are presented below:

|                        |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 
|----------------------- |  | ------------------- | --------- | ------------------- |  | -------- | --- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                        |  |                     |           |                    
|                        |  | Options Outstanding |           | Options Exercisable
|                        |  |                     |           |                    
|                        |  |                     |           | Weighted            |  |          |     |            
|                        |  |                     |           | Average             |  | Weighted |     |             |  | Weighted
|                        |  |                     |           | Remaining           |  | Average  |     |             |  | Average 
|                        |  | Number              |           | Contractual         |  | Exercise |     | Number      |  | Exercise
|Range of Exercise Price |  | Outstanding         |           | Life                |  | Price    |     | Outstanding |  | Price   
|                        |  |                     |           |                     |  |          |     |             |  |         
|$ 0.23  $ 9.90         |  |                     | 229,043   |                     |  |          | 3.5 |             |  | $        | 1.36  |  |  |  | 226,025 |  |  | $ | 1.25  | 
|$ 9.91  $15.00         |  |                     | 216,394   |                     |  |          | 8.1 |             |  | $        | 11.17 |  |  |  | 74,405  |  |  | $ | 11.12 | 
|$15.63  $17.25         |  |                     | 258,234   |                     |  |          | 8.1 |             |  | $        | 15.72 |  |  |  | 102,456 |  |  | $ | 15.71 | 
|$17.44  $18.63         |  |                     | 237,526   |                     |  |          | 7.4 |             |  | $        | 17.69 |  |  |  | 143,379 |  |  | $ | 17.59 | 
|$19.21  $25.10         |  |                     | 287,445   |                     |  |          | 8.7 |             |  | $        | 20.55 |  |  |  | 84,284  |  |  | $ | 20.22 | 
|                        |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 
|$ 0.23  $25.10.        |  |                     | 1,228,642 |                     |  |          | 7.2 |             |  | $        | 13.75 |  |  |  | 630,549 |  |  | $ | 11.02 | 
|                        |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 

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.

|                        |  |      |           |      |  |      |           |  |  |  |           | 
|----------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                        |  | 2000 |           | 2001 |  | 2002
|                        |  |      |           |      |  |     
|Dividend yield          |  |      | 0.0%      |      |  |      | 0.0%      |  |  |  | 0.0%      | 
|Expected life of option |  |      | 5.0 years |      |  |      | 3.1 years |  |  |  | 2.8 years | 
|Risk-free interest rate |  |      | 5.90%     |      |  |      | 4.92%     |  |  |  | 3.67%     | 
|Expected volatility     |  |      | 50.0%     |      |  |      | 50.0%     |  |  |  | 75.0%     | 

44



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The weighted average exercise prices and fair
values of options granted during 2000, 2001 and 2002 were as
follows:

|                                     |  |                  |       |                  |  |   |      | 
|------------------------------------ |  | ---------------- | ----- | ---------------- |  | - | ---- | 
|                                     |  | Weighted Average |       | Weighted Average
|Year Ended September 30, 2000        |  | Exercise Price   |       | Fair Value      
|                                     |  |                  |       |                 
|Exercise price equal to market value |  | $                | 11.98 |                  |  | $ | 6.04 | 

|                                     |  |                  |       |                  |  |   |      | 
|------------------------------------ |  | ---------------- | ----- | ---------------- |  | - | ---- | 
|                                     |  | Weighted Average |       | Weighted Average
|Year Ended September 30, 2001        |  | Exercise Price   |       | Fair Value      
|                                     |  |                  |       |                 
|Exercise price equal to market value |  | $                | 16.98 |                  |  | $ | 6.48 | 

|                                      |  |                  |       |                  |  |   |       | 
|------------------------------------- |  | ---------------- | ----- | ---------------- |  | - | ----- | 
|                                      |  | Weighted Average |       | Weighted Average
|Year Ended September 30, 2002         |  | Exercise Price   |       | Fair Value      
|                                      |  |                  |       |                 
|Exercise price equal to market value  |  | $                | 17.51 |                  |  | $ | 8.23  | 
|Exercise price less than market value |  | $                | 19.32 |                  |  | $ | 10.51 | 
|All options granted                   |  | $                | 18.53 |                  |  | $ | 9.52  | 

Had compensation cost been determined based on
the fair value at the grant dates for the awards under these
plans using the Black-Scholes model prescribed by SFAS
No. 123, the Companys pro forma net income and pro
forma basic and diluted net income per share for fiscal 2000
would have been $6,082,000, or $0.48 per share and $0.46 per
share, respectively and for fiscal 2001 would have been
$10,079,000, or $0.78 per share and $0.76 per share,
respectively and for fiscal 2002 would have been $7,635,000 or
$0.59 per share and $0.57 per share, respectively. Such pro
forma disclosures may not be representative of future
compensation cost because options vest over several years and
additional grants are made each year.

Employee Stock Purchase Plan

In June 1998, the Company adopted the 1998
Employee Stock Purchase Plan (the Purchase Plan). A
total of 750,000 shares of common stock have been reserved for
issuance under the Purchase Plan. The Purchase Plan permits
eligible employees to purchase common stock through payroll
deductions of up to 7% of an employees total compensation.
The price of the common stock will generally be 85% of the lower
of the fair market value at the beginning of the offering period
or the end of the relevant purchase period. The maximum number
of shares a participant may purchase during a single offering
period is 300 shares. A total of 16,120 shares, 18,644 shares
and 13,973 shares were issued under the Purchase Plan in the
years ended September 30, 2000, 2001 and 2002, respectively.

Note 9  Profit-Sharing and 401-K
Plans

The Company maintains a qualified profit-sharing
plan for eligible employees. Contributions to the profit-sharing
plan are discretionary and are determined by the Board of
Directors. There were no contributions to the plan for the years
ended September 30, 2000, 2001 and 2002.

The Company operates a 401-K plan for its
employees and since fiscal 1999 has matched employee
contributions to a certain level. Total contributions by the
Company to the 401-K plan in the years ended September 30,
2000, 2001 and 2002 were $67,000, $76,000 and $106,000,
respectively.

Note 10  Commitments and
Contingencies

The Company leases its facility in Mountain View,
California under non-cancelable operating lease agreements that
expire in 2005. The lease agreements provide for minimum annual
rent of approximately $370,000. Under these agreements, the
Company pays certain shared operating expenses of the facility.
The agreements provide for rent increases at scheduled
intervals. In addition the Company has entered into a lease in
Morrisville, North Carolina for approximately 31,000 square feet
for product development and support

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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

space commencing February 2003 and expiring in
2008. The Company leases other facilities in Illinois, Texas,
North Carolina, Canada, Japan, the United Kingdom, France,
Finland and Germany under leases with the longest term expiring
in 2009.

Rent expense for all facilities for the years
ended September 30, 2000, 2001 and 2002 was approximately
$641,000, $816,000 and $1.0 million, respectively.

Future minimum annual rental payments under
non-cancelable operating leases as of September 30, 2002
are as follows (in thousands):

|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Year ending September 30, |  |   |       | 
|2003                      |  | $ | 1,056 | 
|2004                      |  |   | 1,034 | 
|2005                      |  |   | 681   | 
|2006                      |  |   | 542   | 
|2007                      |  |   | 549   | 
|Thereafter                |  |   | 457   | 
|                          |  |   |       | 
|                          |  | $ | 4,319 | 
|                          |  |   |       | 

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 NDB
was acquired in August 2002. The writ alleges that the
defendants improperly terminated an exclusive distribution
agreement with Tucana following the acquisition of NDB and seeks
damages of 12,461,000 euros plus costs. A preliminary hearing on
the matter has been scheduled for March 6, 2003 at which
time the Company expects that a trial date will be established.
The Company strongly believes that it properly terminated any
contract it had with Tucana and that Tucana is not entitled to
any damages in this matter. The Company intends to defend itself
vigorously. The Company 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 provided for any
loss in its consolidated financial statements.

Note 11  Segment
Reporting

In June 1997, the FASB issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related
Information. The statement requires the Company to report
certain financial information about operating segments. It also
requires that the Company report certain information about its
services, the geographic areas in which it operates and its
major customers. The method specified in SFAS No. 131 for
determining what information to report is referred to as the
management approach. The management approach is
based on the way that management organizes the segments within
the enterprise for making operating decisions and assessing
performance.

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.

46



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CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys revenues, net income (loss)
and identifiable long-lived assets by principal geographical
area of operations were as follows (in thousands):

|                                     |  |         |        |            |  |       |        |              |  |   |        |  |  |   |        | 
|------------------------------------ |  | ------- | ------ | ---------- |  | ----- | ------ | ------------ |  | - | ------ |  |  | - | ------ | 
|                                     |  | North   |        | UK, Europe |  |       |        | Consolidated
|                                     |  | America |        | & Other    |  | Japan |        | Total       
|                                     |  |         |        |            |  |       |        |             
|Year ended September 30, 2000        |  |         |        |            |  |       |        |              |  |   |        |  |  |   |        | 
|Revenues from unaffiliated customers |  | $       | 8,761  |            |  | $     | 4,885  |              |  | $ | 13,400 |  |  | $ | 27,046 | 
|Net income (loss)                    |  |         | 6,354  |            |  |       | (207   | )            |  |   | 419    |  |  |   | 6,566  | 
|Long-lived assets                    |  |         | 1,214  |            |  |       | 233    |              |  |   | 82     |  |  |   | 1,529  | 
|Year ended September 30, 2001        |  |         |        |            |  |       |        |              |  |   |        |  |  |   |        | 
|Revenues from unaffiliated customers |  | $       | 12,380 |            |  | $     | 9,519  |              |  | $ | 17,987 |  |  | $ | 39,886 | 
|Net income                           |  |         | 5,091  |            |  |       | 4,952  |              |  |   | 1,002  |  |  |   | 11,045 | 
|Long-lived assets                    |  |         | 988    |            |  |       | 334    |              |  |   | 108    |  |  |   | 1,430  | 
|Year ended September 30, 2002        |  |         |        |            |  |       |        |              |  |   |        |  |  |   |        | 
|Revenues from unaffiliated customers |  | $       | 7,849  |            |  | $     | 16,733 |              |  | $ | 15,457 |  |  | $ | 40,039 | 
|Net income                           |  |         | 367    |            |  |       | 8,627  |              |  |   | 155    |  |  |   | 9,149  | 
|Long-lived assets                    |  |         | 3,224  |            |  |       | 402    |              |  |   | 248    |  |  |   | 3,874  | 

The result of operations by geographic region
includes significant sales from the United States to the
Companys foreign locations at agreed upon transfer prices.
Transfers to other geographic regions from the United States for
the years ended September 30, 2000, 2001 and 2002 were
$13.0 million, $15.8 million and $15.9 million,
respectively.

Supplementary Financial Data

Quarterly Financial Data (unaudited) 
 Consolidated Statements of Income Data:

|                      |         |                                       |       |          |  |          |        |           |  |   |       |      |  |   |       |      | 
|--------------------- | ------- | ------------------------------------- | ----- | -------- |  | -------- | ------ | --------- |  | - | ----- | ---- |  | - | ----- | ---- | 
|                      |         |                                      
|                      |         | Quarter Ended                        
|                      |         |                                      
|                      |         | Dec. 31,                              |       | Mar. 31, |  | June 30, |        | Sept. 30,
|                      |         | 2000                                  |       | 2001     |  | 2001     |        | 2001     
|                      |         |                                       |       |          |  |          |        |          
|                      |         |                                      
|                      |         | (In thousands, except per share data)
|Revenues              |         | $                                     | 9,735 |          |  | $        | 10,741 |           |  | $ | 9,527 |      |  | $ | 9,883 |     
|Gross profit          |         |                                       | 8,906 |          |  |          | 9,496  |           |  |   | 8,292 |      |  |   | 8,807 |     
|Operating income      |         |                                       | 4,165 |          |  |          | 4,049  |           |  |   | 3,096 |      |  |   | 3,211 |     
|Net income            |         | $                                     | 3,152 |          |  | $        | 2,943  |           |  | $ | 2,456 |      |  | $ | 2,494 |     
|Net income per share: |         |                                       |       |          |  |          |        |           |  |   |       |      |  |   |       |     
|                      | Basic   |                                       | $     | 0.24     |  |          | $      | 0.23      |  |   | $     | 0.19 |  |   | $     | 0.19 | 
|                      | Diluted |                                       | $     | 0.24     |  |          | $      | 0.22      |  |   | $     | 0.18 |  |   | $     | 0.19 | 

47



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CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                      |         |          |        |          |  |          |        |           |  |   |       |      |  |   |       |      | 
|--------------------- | ------- | -------- | ------ | -------- |  | -------- | ------ | --------- |  | - | ----- | ---- |  | - | ----- | ---- | 
|                      |         | Dec. 31, |        | Mar. 31, |  | June 30, |        | Sept. 30,
|                      |         | 2001     |        | 2002     |  | 2002     |        | 2002     
|                      |         |          |        |          |  |          |        |          
|Revenues              |         | $        | 10,883 |          |  | $        | 12,127 |           |  | $ | 8,023 |      |  | $ | 9,006 |     
|Gross profit          |         |          | 10,006 |          |  |          | 11,049 |           |  |   | 7,258 |      |  |   | 7,854 |     
|Operating income      |         |          | 4,415  |          |  |          | 4,910  |           |  |   | 2,123 |      |  |   | 129   |     
|Net income(1)         |         | $        | 3,362  |          |  | $        | 3,727  |           |  | $ | 1,874 |      |  | $ | 186   |     
|Net income per share: |         |          |        |          |  |          |        |           |  |   |       |      |  |   |       |     
|                      | Basic   |          | $      | 0.26     |  |          | $      | 0.29      |  |   | $     | 0.14 |  |   | $     | 0.01 | 
|                      | Diluted |          | $      | 0.25     |  |          | $      | 0.28      |  |   | $     | 0.14 |  |   | $     | 0.01 | 



---



|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes loss from discontinued operations of
    $56, net of income tax benefit of $46, in the quarter ended
    September 30, 2002.

48



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##### Table of Contents






Item 9.     Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.




PART III

Certain information required by Part III is
omitted from this Annual Report on Form 10-K because the
Registrant will file a definitive proxy statement within one
hundred twenty (120) days after the end of its fiscal year
pursuant to Regulation 14A (the Proxy
Statement) for its Annual Meeting of Stockholders
currently scheduled for January 21, 2003, and the
information included in the Proxy Statement is incorporated
herein by reference.




Item 10.     Directors
and Executive Officers of the Registrant

Information regarding the directors of the
Company is incorporated by reference to the information under
the heading Election of Directors in the
Registrants Proxy Statement.

Information regarding the executive officers of
the Company is incorporated by reference to the section of
Part I of this Annual Report on Form 10-K entitled
Item 1  Business  Executive
Officers of the Company.

Information regarding compliance with
Section 16 of the Securities Exchange Act of 1934, as
amended, is incorporated by reference to the information under
the heading Section 16(a) Beneficial Ownership
Reporting Compliance in the Registrants Proxy
Statement.




Item 11.     Executive
Compensation

Information regarding the compensation of
executive officers and directors of the Company is incorporated
by reference from the information under the headings
Executive Compensation and Certain
Transactions in the Registrants Proxy Statement.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

Incorporated by reference to the information
under the heading Security Ownership of Principal
Stockholders and Management in the Registrants Proxy
Statement.




Item 13.     Certain
Relationships and Related Transactions

Incorporated by reference to the information
under the caption Certain Transactions in the
Registrants Proxy Statement.




Item 14.     Controls
and Procedures

(a) Evaluation of disclosure controls and
procedures.

Our Chief Executive Officer and our Chief
Financial Officer, after evaluating our disclosure
controls and procedures (as defined in Securities Exchange
Act of 1934 (the Exchange Act) Rules 13a-14(c)
and 15-d-14(c)) as of a date (the Evaluation Date)
within 90 days before the filing date of this Annual Report
on Form 10-K, have concluded that as of the Evaluation
Date, our disclosure controls and procedures are effective to
ensure that information we are required to disclose in reports
that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
The Companys management, including the Chief Executive
Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures will prevent all error and
fraud. Because of inherent limitations in any system of
disclosure controls and procedures, no evaluation of controls
can provide absolute assurance that all instances of error or
fraud, if any, within the Company may be detected.

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##### Table of Contents



(b) Changes in internal controls.

Subsequent to the Evaluation Date, there were no
significant changes in our internal controls or in other factors
that could significantly affect our disclosure controls and
procedures, nor were there any significant deficiencies or
material weaknesses in our internal controls. As a result, no
corrective actions were required or undertaken.




PART IV




Item
15.     Exhibits, Financial
Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as
part of this Annual Report on Form 10-K:

1.     Financial
Statements

Consolidated Financial Statements: See Index
to Consolidated Financial Statements at Item 8 on page 27
of this report.

2.     Financial
Statement Schedules

Financial Statement Schedule: See Index to
Consolidated Financial Statements at Item 8 on page 27
of this report.

3.     Exhibits

The following exhibits are incorporated herein by
reference or are filed with this reports as indicated below
(numbered in accordance with Item 601 of
Regulation S-K):

|        |       |             |  |                                                                                                                                                                                                                    
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 2.1   |             |  | Asset Purchase Agreement dated July 15, 2002
    between the Company and Tekelec, a California
    corporation  incorporated by reference to
    Exhibit 2.2.1 to Registration Statement No. 333-56627            
|        | 3.1   |             |  | Articles of Incorporation of
    Registrant  incorporated by reference to
    Exhibit 3.1 to Registration Statement No. 333-56627                                                                                 
|        | 3.2   |             |  | Bylaws of Registrant  incorporated by
    reference to Exhibit 3.2 to Registration Statement
    No. 333-56627.                                                                                                   
|        | 4.1   |             |  | 2% Convertible Subordinated Note Due 2004 issued
    by Catapult Communications International Limited in the amount
    of $10,000,000.                                                                            
|        | 4.2   |             |  | 2% Convertible Subordinated Note Due 2004 issued
    by Catapult Communications International Limited in the amount
    of $7,300,000.                                                                             
|        | 4.3   |             |  | Subordinated Guaranty dated July 15, 2002
    between the Company and Tekelec, a California
    corporation  incorporated by reference to
    Exhibit 2.2.6 to Registrants Form 10-Q dated
    August 14, 2002.  
|        | 9.1   |             |  | Voting Trust Agreement dated June 8, 1998
    between Nancy Hood Karp, Richard A. Karp, the Registrant
    and a depositary  incorporated by reference to
    Exhibit 9.1 to Registration Statement No. 333-56627.
|        | 10.1  |             |  | Forms of Indemnification Agreement entered into
    by Registrant with each of its directors and executive
    officers  incorporated by reference to
    Exhibit 10.1 to Registration Statement No. 333-56627.   
|        | 10.2* |             |  | 1989 Stock Option Plan and related
    agreements  incorporated by reference to
    Exhibit 10.3 to Registration Statement No. 333-56627.                                                                         
|        | 10.3* |             |  | UK Executive Share Option Scheme and related
    agreements  incorporated by reference to
    Exhibit 10.4 to Registration Statement No. 333-56627.                                                               

50



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                   
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.4* |             |  | 1998 Stock Plan and related
    agreements  incorporated by reference to Exhibit 10.5
    to Registration Statement No. 333-56627.                                                                                               
|        | 10.5* |             |  | 1998 Employee Stock Purchase Plan and related
    agreements  incorporated by reference to
    Exhibit 10.6 to Registration Statement No. 333-56627.                                                                             
|        | 10.6  |             |  | Lease for office space located at 160 South
    Whisman Road, Mountain View, CA  incorporated by
    reference to Exhibit 10.8 to Registration Statement
    No. 333-56627.                                                      
|        | 10.7  |             |  | Lease for office space located at 160 and
    190 South Whisman Road, Mountain View, CA 
    incorporated by reference to Exhibit 10.8 to
    Registrants Form 10-K dated December 17, 2001.                                    
|        | 10.8  |             |  | Lease for office space located at 190 South
    Whisman, Building G, Mountain View, CA.                                                                                                                                           
|        | 10.9  |             |  | Lease for office space located at
    800 Perimeter Park Drive, Morrisville, NC 27560.                                                                                                                                            
|        | 10.10 |             |  | Form of Software Support Agreement 
    incorporated by reference to Exhibit 10.9 to Registration
    Statement No. 333-56627.                                                                                                   
|        | 10.11 |             |  | Transitional Services Agreement dated
    July 15, 2002 between the Company and Tekelec, a California
    corporation  incorporated by reference to
    Exhibit 2.2.2 to Registrants Form 10-Q dated
    August 14, 2002.       
|        | 10.12 |             |  | License Agreement dated July 15, 2002
    between the Company and Tekelec, a California
    corporation  incorporated by reference to
    Exhibit 2.2.3 to Registrants Form 10-Q dated
    August 14, 2002.                     
|        | 10.13 |             |  | International Rights License Agreement dated
    July 15, 2002 between the Company and Tekelec, a California
    corporation  incorporated by reference to
    Exhibit 2.2.4 to Registrants Form 10-Q dated
    August 14, 2002.
|        | 10.14 |             |  | Registration Rights Agreement dated July 15,
    2002 between the Company and Tekelec, a California
    corporation  incorporated by reference to
    Exhibit 2.2.5 to Registrants Form 10-Q dated
    August 14, 2002.         
|        | 11.1  |             |  | Calculation of Earnings per Common Share
    (contained in Note 1 of the Notes to Financial Statements).                                                                                                                          
|        | 21.1  |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                   
|        | 23.1  |             |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants                                                                                                                                                                
|        | 24.1  |             |  | Power of Attorney. Contained in the signature
    page of this Annual Report on Form 10-K.                                                                                                                                        
|        | 99.1  |             |  | 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.                                        



---



|  |                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Represents a management contract or compensatory
    plan, contract or arrangement in which any director or any of
    the named executives participates.

The Company will mail a copy of any exhibit
listed above for a nominal fee to any stockholder upon written
request.

(b) Reports on Form 8-K

1.     On July 16,
2002, the Company filed a Current Report on Form 8-K to
report, under Item 5, the Companys agreement to
acquire the Network Diagnostics Business of Tekelec.

2.     On
September 6, 2002, the Company filed a Current Report on
Form 8-K to report, under Item 5, the completion of
the Companys acquisition of the Network Diagnostics
Business of Tekelec.

3.     On
November 13, 2002, the Company filed an Amended Current
Report on Form 8-K/A to report, under Item 2, the
Companys acquisition of the assets of the Network
Diagnostics Business of Tekelec and, under Item 7,
financial statements of the business acquired and pro forma
financial information.

4.     On
November 19, 2002, the Company filed an Amended Report on
Form 8-K/A to correct, under Item 7, pro forma
financial information, and to include, as an exhibit, Consent of
Independent Accountants.

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                                                    
| | ---------------------------------------------------
| | CATAPULT COMMUNICATIONS CORPORATION                
|
| | BY: /s/ RICHARD A. KARP                            
| |                                                    
| | Richard A. Karp                                    
| | Chief Executive Officer & Chairman of
    the Board

Date: December 19, 2002

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Richard A. Karp, his attorney-in-fact, with the power of
Substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the
same, with Exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact, or
substitute or substitutes may do, or cause to be done, by virtue
hereof.

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

|                                                         |  |                                                                                    |  |                   |  | 
|-------------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ----------------- |  | 
|                                                         |  |                                                                                    |  |                  
|Signature                                                |  | Title                                                                              |  | Date             
|                                                         |  |                                                                                    |  |                  
|                                                        
|/s/ RICHARD A. KARP(Richard A. Karp)                     |  | Chief Executive Officer, Chairman of the Board
    (Principal Executive Officer)   |  | December 19, 2002
|                                                        
|/s/ CHRISTOPHER A. STEPHENSON(Christopher A. Stephenson) |  | Chief Financial Officer (Principal Financial and
    Principal Accounting Officer) |  | December 19, 2002
|                                                        
|/s/ CHARLES L. WAGGONER(Charles L. Waggoner)             |  | Director                                                                           |  | December 19, 2002
|                                                        
|/s/ JOHN M. SCANDALIOS(John M. Scandalios)               |  | Director                                                                           |  | December 19, 2002
|                                                        
|/s/ NANCY H. KARP(Nancy H. Karp)                         |  | Director                                                                           |  | December 19, 2002
|                                                        
|/s/ HENRY P. MASSEY, JR.(Henry P. Massey, Jr.)           |  | Director                                                                           |  | December 19, 2002

52



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##### Table of Contents



I, Richard A. Karp, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Catapult Communications Corporation;                                                                                                                                                                                                                                                 
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

Date: December 19, 2002



| |                                                      
| | -----------------------------------------------------
| | /s/ RICHARD A. KARP                                  
| |                                                      
| | (Richard A. Karp)                                    
| | Chief Executive Officer and Chairman of the
    Board

53



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##### Table of Contents



I, Christopher A. Stephenson, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Catapult Communications Corporation;                                                                                                                                                                                                                                                 
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

Date: December 19, 2002



| |                              
| | -----------------------------
| | /s/ CHRISTOPHER A. STEPHENSON
| |                              
| | (Christopher A. Stephenson)  
| | Chief Financial Officer      

54



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##### Table of Contents



EXHIBIT INDEX

|        |       |             |  |                                                                                                                                                                                                                                   
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 2.1   |             |  | Asset Purchase Agreement dated July 15, 2002
    between the Company and Tekelec, a California
    corporation  incorporated by reference to
    Exhibit 2.2.1 to Registration Statement No. 333-56627                           
|        | 3.1   |             |  | Articles of Incorporation of
    Registrant  incorporated by reference to
    Exhibit 3.1 to Registration Statement No. 333-56627                                                                                                
|        | 3.2   |             |  | Bylaws of Registrant  incorporated by
    reference to Exhibit 3.2 to Registration Statement
    No. 333-56627.                                                                                                                  
|        | 4.1   |             |  | 2% Convertible Subordinated Note Due 2004 issued
    by Catapult Communications International Limited in the amount
    of $10,000,000.                                                                                           
|        | 4.2   |             |  | 2% Convertible Subordinated Note Due 2004 issued
    by Catapult Communications International Limited in the amount
    of $7,300,000.                                                                                            
|        | 4.3   |             |  | Subordinated Guaranty dated July 15, 2002
    between the Company and Tekelec, a California
    corporation  incorporated by reference to
    Exhibit 2.2.6 to Registrants Form 10-Q dated
    August 14, 2002..                
|        | 9.1   |             |  | Voting Trust Agreement dated June 8, 1998
    between Nancy Hood Karp, Richard A. Karp, the Registrant
    and a depositary  incorporated by reference to
    Exhibit 9.1 to Registration Statement No. 333-56627.               
|        | 10.1  |             |  | Forms of Indemnification Agreement entered into
    by Registrant with each of its directors and executive
    officers  incorporated by reference to
    Exhibit 10.1 to Registration Statement No. 333-56627.                  
|        | 10.2* |             |  | 1989 Stock Option Plan and related
    agreements  incorporated by reference to
    Exhibit 10.3 to Registration Statement No. 333-56627.                                                                                        
|        | 10.3* |             |  | UK Executive Share Option Scheme and related
    agreements  incorporated by reference to
    Exhibit 10.4 to Registration Statement No. 333-56627.                                                                              
|        | 10.4* |             |  | 1998 Stock Plan and related
    agreements  incorporated by reference to
    Exhibit 10.5 to Registration Statement No. 333-56627.                                                                                               
|        | 10.5* |             |  | 1998 Employee Stock Purchase Plan and related
    agreements  incorporated by reference to
    Exhibit 10.6 to Registration Statement No. 333-56627.                                                                             
|        | 10.6  |             |  | Lease for office space located at 160 South
    Whisman Road, Mountain View, CA  incorporated by
    reference to Exhibit 10.8 to Registration Statement
    No. 333-56627.                                                      
|        | 10.7  |             |  | Lease for office space located at 160 and
    190 South Whisman Road, Mountain View, CA 
    incorporated by reference to Exhibit 10.8 to
    Registrants Form 10-K dated December 17, 2001.                                    
|        | 10.8  |             |  | Lease for office space located at 190 South
    Whisman, Building G, Mountain View, CA.                                                                                                                                           
|        | 10.9  |             |  | Lease for office space located at
    800 Perimeter Park Drive, Morrisville, NC 27560.                                                                                                                                            
|        | 10.10 |             |  | Form of Software Support Agreement 
    incorporated by reference to Exhibit 10.9 to Registration
    Statement No. 333-56627.                                                                                                   
|        | 10.11 |             |  | Transitional Services Agreement dated
    July 15, 2002 between the Company and Tekelec, a California
    corporation  incorporated by reference to
    Exhibit 2.2.2 to Registrants Form 10-Q dated
    August 14, 2002.       
|        | 10.12 |             |  | License Agreement dated July 15, 2002
    between the Company and Tekelec, a California
    corporation  incorporated by reference to
    Exhibit 2.2.3 to Registrants Form 10-Q dated
    August 14, 2002.                     
|        | 10.13 |             |  | International Rights License Agreement dated
    July 15, 2002 between the Company and Tekelec, a California
    corporation  incorporated by reference to Exhibit
    2.2.4 to Registrants Form 10-Q dated August 14,
    2002.
|        | 10.14 |             |  | Registration Rights Agreement dated July 15,
    2002 between the Company and Tekelec, a California
    corporation  incorporated by reference to
    Exhibit 2.2.5 to Registrants Form 10-Q dated
    August 14, 2002.         

55



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##### Table of Contents



|        |      |             |  |                                                                                                                                                                                          
|------- | ---- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 11.1 |             |  | Calculation of Earnings per Common Share
    (contained in Note 1 of the Notes to Financial Statements).                                                                                 
|        | 21.1 |             |  | Subsidiaries of the Registrant.                                                                                                                                                          
|        | 23.1 |             |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants                                                                                                                       
|        | 24.1 |             |  | Power of Attorney. Contained in the signature
    page of this Annual Report on Form 10-K.                                                                                               
|        | 99.1 |             |  | 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



---



|  |                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Represents a management contract or compensatory
    plan, contract or arrangement in which any director or any of
    the named executives participates.

56