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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


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,
    2003                                            
|          
|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

Catapult Communications Corporation


(Exact name of Registrant as specified in its
charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Nevada                   |  | 77-0086010                          
|(State of Incorporation) |  | (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.     o

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

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 March 31,
2003 of $6.35 per share) was approximately $40,133,327. 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.

As of November 14, 2003, 12,912,563 shares
of the Registrants common stock, $0.001 par value, were
outstanding.

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 13, 2004.



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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            
|              | Item 6. Selected Financial Data                                                              
|              | Item 7. Managements 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                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|              | Item 9A. Controls and Procedures                                                             
|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. Principal Accountant Fees and Services                                              
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 3.2  
|EXHIBIT 10.4 
|EXHIBIT 14   
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 31   
|EXHIBIT 32   



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TABLE OF CONTENTS

|         |  |                                                                                           |  |  |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  |  | -- | 
|PART I  
|Item 1.  |  | Business                                                                                  |  |  | 2  | 
|Item 2.  |  | Properties                                                                                |  |  | 11 | 
|Item 3.  |  | Legal Proceedings                                                                         |  |  | 11 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |  | 12 | 
|PART II 
|Item 5.  |  | Market for the Registrants Common Equity
    and Related Stockholder Matters             |  |  | 12 | 
|Item 6.  |  | Selected Financial Data                                                                   |  |  | 14 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |  | 17 | 
|Item 7A. |  | Quantitative and Qualitative Disclosure About
    Market Risks                            |  |  | 30 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                               |  |  | 32 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |  | 57 | 
|Item 9A. |  | Controls and Procedures                                                                   |  |  | 57 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                        |  |  | 58 | 
|Item 11. |  | Executive Compensation                                                                    |  |  | 58 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |  | 58 | 
|Item 13. |  | Certain Relationships and Related Transactions                                            |  |  | 58 | 
|Item 14. |  | Principal Accountant Fees and Services                                                    |  |  | 58 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |  |  | 59 | 

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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, MGTS and LANCE
products are digital communications test systems designed to
enable equipment manufacturers and network operators to deliver
complex digital telecommunications equipment and services more
quickly and cost-effectively, while helping to ensure
interoperability and reliability. The Companys advanced
software and hardware assist customers in the design,
integration, installation and acceptance testing of a broad
range of digital telecommunications equipment and services. The
Company markets its products through both a direct sales force
and distributors to industry leaders such as AT&T Wireless
Services, Inc., Alcatel, Bellsouth Corporation, Cisco Systems,
Inc., Fujitsu Limited, LM Ericsson, Evolium SAS, Lucent
Technologies, Inc. (Lucent), Motorola, Inc.
(Motorola), NEC Corporation (NEC),
Nextel Communications, Inc., Nippon Telephone and Telegraph
(NTT), Nokia Corporation, Nortel Networks Limited
(Nortel), NTT DoCoMo, Inc. (NTT DoCoMo)
and Siemens AG.

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, Japan and Australia. The Company completed its initial
public offering in 1999 and acquired the Network Diagnostics
Business (NDB) from Tekelec in 2002.

The Company is subject to the informational
requirements of the Securities Exchange Act of 1934 (the
Exchange Act) and hence files periodic reports, proxy statements
and other information with the Securities and Exchange
Commission (the SEC). Such reports, proxy statements and other
information may be obtained by visiting the Public Reference
Room of the SEC at 450 Fifth Street, NW, Washington, DC
20549 or by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet site

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(http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding
issuers that file electronically.


Financial and other information can also be
obtained at the Companys web site, www.catapult.com, where
the Company makes available, free of charge, copies of its
annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after filing such material electronically
or otherwise furnishing it to the SEC.

The DCT, MGTS and LANCE Products

The Companys telecommunications test system
product line consists of three products: the DCT system,
originally introduced by the Company in 1985 and since
extensively enhanced; the MGTS system, acquired in connection
with the acquisition of NDB, and the LANCE system, introduced by
the Company in fiscal 2003.

The DCT, MGTS and LANCE products perform a
variety of test functions, including feature verification,
conformance testing, simulation, load and stress 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, MGTS and LANCE 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
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; LANCE systems run on Linux-based
personal computers. 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,
MGTS and LANCE 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 and a LANCE
system sale from approximately $40,000 to $100,000.



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

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

Feature
Verification.DCT, MGTS and LANCE
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.





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(1) Please refer to Glossary on page 13.


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Conformance Testing.DCT, MGTS and LANCE systems are used to verify that network
devices conform to industry standards. Because industry
standards for protocols are constantly changing, the Company
regularly develops new protocol test modules and updates
existing protocol test modules so that customers can validate
the implementation of new features and the functionality of
existing features against those standards.

Simulation.DCT,
MGTS and LANCE 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. The scalable architectures of the DCT and MGTS
combined with the newly introduced m5000 platform described
below significantly improve the Companys ability to
address its customers growing need to generate and
maintain high traffic volumes for load testing.

Monitoring.DCT,
MGTS and LANCE 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, MGTS and LANCE systems
help ensure that the links have been brought into service and
that the devices connected by the links are functioning
properly. DCT, MGTS and LANCE 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, MGTS and LANCE systems
can simultaneously monitor multiple links, each of which may be
using different protocols.



| |                             
| | ----------------------------
| | DCT, MGTS and LANCE Software

DCT, MGTS and LANCE test systems run under a
UNIXTM or LinuxTM operating system and
consist of proprietary general test applications, specialized
programming languages and tools, graphical user interfaces and
extensive libraries of proprietary 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 may include protocol encoders and decoders,
state machines, validation tests and conformance test suites.

DCT, MGTS and LANCE systems include a number of
productivity tools. With the DCT and LANCE systems, 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++. With 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 DCT and MGTS products also provide Quick
Start applications to characterize system performance, aid
in training new users and provide a starting point for
developing test applications.



| |                             
| | ----------------------------
| | DCT, MGTS and LANCE Hardware

DCT, MGTS and LANCE products employ modular
hardware architectures that support a wide variety of
proprietary physical interfaces connecting the systems to
devices under test. DCT and MGTS products utilize SUN
Microsystems workstations and peripherals; LANCE products use
industry standard personal computers and peripherals.

With the introduction of the m5000 platform
described below, the DCT system can support up to 26 PowerPCI
co-processor cards, up to 72 m5000-OC3/12 Computing Interface
cards or a combination of PowerPCI and m5000-OC3/12 cards, which
are installed in the workstation and up to four expansion
chassis. The DCT2000 family of PowerPCI cards includes Primary
Rate, E1/E2, ATM Optical/UTP, Ethernet, Serial, ISDN, Basic Rate
and Japanese CII.

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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.

The newly introduced m5000 hardware platform has
increased the capabilities of the DCT and MGTS test systems to
address the telecom industrys need for higher load test
performance. Designed especially for 3G/ATM load test
applications, the new platform is a significant performance
upgrade for both the DCT2000 and the MGTS i3000 digital
communication test systems. Intended to be the first of a next
generation family of high-performance products, the m5000 is
based on industry standard CompactPCI specifications. A
serial-mesh backplane architecture supports up to 18 interface
cards and provides the advantages of scalability, data traffic
management and computing resource flexibility. The m5000
platform currently supports a new Catapult-designed m5000-OC3/12
computing interface card that employs two IBM PowerPC RISC
processors to provide high capacity computing power.

The LANCE system provides a single user
entry-level test system that supports one of the DCT2000 family
of PowerPCI co-processor cards installed in the PC. All test
applications developed on LANCE can also be run on the DCT2000.

Customers

The Companys worldwide customer base
includes both telecommunications equipment manufacturers and
network operators.

Revenues from the Companys top five
customers represented approximately 68%, 64% and 50% of total
revenues in fiscal 2001, 2002 and 2003 respectively. In fiscal
2003, sales to NTT DoCoMo, Nortel and NEC accounted for
approximately 13%, 12%, and 10% of total revenues, 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. 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, 2003, the
Companys direct sales force consisted of 25 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 additional sales at other facilities of that customer,
because 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

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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, 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 69%, 80% and 62% of the Companys
total revenues in fiscal 2001, 2002 and 2003 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
Japan, the United Kingdom, Germany, France, Finland and Canada,
and plans to open new offices internationally from time to time.

Information with respect to the Companys
revenues, income and identifiable long-lived assets by principal
geographic area of operations is set forth in Note 14 of
the Notes to Consolidated Financial Statements in Item 8 of
this report.

Product 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, 2003, the Company had 52 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, MGTS and LANCE 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.

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Product Development

The Companys development efforts are
directed at improving the capability, performance and ease of
use of the DCT, MGTS and LANCE 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, MGTS and LANCE systems.

The Company is continually seeking to make the
DCT, MGTS and LANCE 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 telecommunications 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 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, MGTS and LANCE systems and expand the range of devices to
which these systems can be directly connected for testing
purposes.

Research and product development expenses were
approximately $4.9 million, $7.5 million and
$13.5 million in fiscal 2001, 2002 and 2003 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, 2003, 76 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 and
PCs 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
accounting system. This manufacturing control system monitors
purchasing, inventory control and production.

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.

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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 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, results of operations and cash flows.

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

8



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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.


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, 2003, the Company
employed 222 full-time employees, including 76 in research and
development, 52 in application engineering customer support, 48
in sales, 13 in marketing, 20 in administration and 13 in
manufacturing. Of these employees, 153 were employed in North
America, where the Companys head office and NDB office are
located, 35 were employed in the United Kingdom and Europe, 19
in Japan, and 15 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.

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##### Table of Contents



Executive Officers of the Company

The following table sets forth certain
information, as of September 30, 2003, with respect to the
executive officers of the Company:

|                      |  |     |    |           |  |                                                               
|--------------------- |  | --- | -- | --------- |  | --------------------------------------------------------------
|Name                  |  | Age |    | Positions
|                      |  |     |    |          
|Richard A. Karp       |  |     | 59 |           |  | Chief Executive Officer and Chairman of the Board             
|David Mayfield        |  |     | 54 |           |  | President and Chief Operating Officer                         
|Glenn Stewart         |  |     | 53 |           |  | Vice President of Engineering and Chief
    Technology Officer
|Chris Stephenson      |  |     | 52 |           |  | Vice President, Chief Financial Officer and
    Secretary     
|Sean Kelly            |  |     | 52 |           |  | Vice President of Sales                                       
|Adam Fowler           |  |     | 41 |           |  | Vice President of Advanced Development                        
|Guy R. Simpson        |  |     | 45 |           |  | Vice President of Customer Support                            
|Barbara J. Fairhurst  |  |     | 55 |           |  | Vice President of Operations                                  
|Terry Eastham         |  |     | 56 |           |  | Vice President of Marketing                                   
|Kathy T. Omaye-Sosnow |  |     | 47 |           |  | 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,
Dr. Karp relinquished his title as President to David
Mayfield, the Companys Chief Operating Officer.
Dr. Karp holds a Ph.D. in computer 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. Glenn Stewart joined the Company in 1992
as Vice President of Engineering and was promoted to the
position of Chief Technology Officer in January 2003. 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. 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. Sean Kelly joined the Company in July
2003 as Vice President of Sales. From 1980 to 2002,
Mr. Kelly held progressively more senior product
management, marketing and sales management positions with
Hewlett-Packard Company, most recently that of General
Manager  Worldwide Business Customer
Sales  Industry Standard Servers, PCs, Printers.
Mr. Kelly holds a B.S. in Mathematics from the
U.S. Naval Academy.

Mr. Adam Fowler joined the Company in August
2002 in connection with the Companys acquisition of the
Network Diagnostics Business from Tekelec and was promoted to
the position of Vice President of Advanced Development in
January 2003. From 1998 to 2002, Mr. Fowler held
progressively more senior development management positions with
Tekelec, most recently that of Assistant Vice President of
Engineering with responsibility for the MGTS product line. Prior
to 1998, he was employed by Nortel, Inc. for 14 years,
where his last position was Senior Manager, Product Development
and Verification. Mr. Fowler holds a B.S.E. in Electrical
Engineering from Duke University.

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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 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 $390,000. In addition the Company leases
approximately 31,000 square feet in Morrisville, North
Carolina for product development and support operations,
expiring in 2008. The annual rent for the property is
approximately $260,000. 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 11 locations: Schaumburg, Illinois;
Dallas, Texas; Ottawa, Canada; Chippenham, England; Gilching,
Germany; Antony Cedex, France; Sollentuna, Sweden; 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 had been a
distributor of products for Tekelec, the company from which NDB
was acquired in August 2002. The writ alleges that the
defendants improperly terminated an exclusive distribution
agreement with Tucana following the acquisition of NDB and seeks
damages of 12,461,000 euros plus costs. A trial date on the
matter has been scheduled for January 16, 2004. The Company
strongly believes that it properly terminated any contract it
had with Tucana and that

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Tucana is not entitled to any damages in this
matter. The Company intends to defend itself vigorously. The
Company may be able to seek indemnification from Tekelec for any
damages assessed against it in this matter under the terms of
the Asset Purchase Agreement it entered into with Tekelec,
although there is no assurance that such indemnification would
be available.







|        |                                                        
|------- | -------------------------------------------------------
|Item 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 2003.




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:

|                      |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|--------------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|                      |  |      |       |     
|                      |  | 2002 |       | 2003
|                      |  |      |       |     
|                      |  | High |       | Low  |  | High |       | Low
|                      |  |      |       |      |  |      |       |    
|First fiscal quarter  |  | $    | 29.75 |      |  | $    | 12.50 |     |  | $ | 13.07 |  |  | $ | 8.01  | 
|Second fiscal quarter |  | $    | 30.90 |      |  | $    | 16.50 |     |  | $ | 12.85 |  |  | $ | 6.08  | 
|Third fiscal quarter  |  | $    | 27.50 |      |  | $    | 14.27 |     |  | $ | 13.51 |  |  | $ | 5.74  | 
|Fourth fiscal quarter |  | $    | 15.80 |      |  | $    | 8.96  |     |  | $ | 14.96 |  |  | $ | 10.12 | 

The Company had approximately
51 stockholders of record as of November 14, 2003. 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,      
|                                                                                               |                                               |                                      
|Consolidated Statements of Income Data:                                                        |                                               | 1999                                  |        | 2000   |  | 2001 |        | 2002   |  | 2003
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |     
|                                                                                               |                                               |                                      
|                                                                                               |                                               | (In thousands, except per share data)
|Revenues:                                                                                      |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|                                                                                               | Products                                      |                                       | $      | 25,505 |  |      | $      | 22,045 |  |      | $      | 34,689 |  |   | $      | 33,988 |   |   | $      | 35,344 | 
|                                                                                               | Services                                      |                                       |        | 3,450  |  |      |        | 5,001  |  |      |        | 5,197  |  |   |        | 6,051  |   |   |        | 9,880  | 
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|                                                                                               | Total revenues                                |                                       |        | 28,955 |  |      |        | 27,046 |  |      |        | 39,886 |  |   |        | 40,039 |   |   |        | 45,224 | 
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|Cost of revenues:                                                                              |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|                                                                                               | Products                                      |                                       |        | 2,701  |  |      |        | 2,209  |  |      |        | 3,794  |  |   |        | 2,700  |   |   |        | 5,652  | 
|                                                                                               | Services                                      |                                       |        | 945    |  |      |        | 971    |  |      |        | 591    |  |   |        | 1,172  |   |   |        | 2,825  | 
|                                                                                               | Amortization of purchased technology          |                                       |        |       |  |      |        |       |  |      |        |       |  |   |        | 57     |   |   |        | 686    | 
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|                                                                                               | Total cost of revenues                        |                                       |        | 3,646  |  |      |        | 3,180  |  |      |        | 4,385  |  |   |        | 3,929  |   |   |        | 9,163  | 
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|Gross profit                                                                                   |                                               |                                       | 25,309 |        |  |      | 23,866 |        |  |      | 35,501 |        |  |   | 36,110 |        |   |   | 36,061 |       
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|Operating expenses:                                                                            |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|                                                                                               | Research and development                      |                                       |        | 2,777  |  |      |        | 3,037  |  |      |        | 4,938  |  |   |        | 7,520  |   |   |        | 13,519 | 
|                                                                                               | Sales and marketing                           |                                       |        | 5,623  |  |      |        | 9,427  |  |      |        | 10,673 |  |   |        | 10,714 |   |   |        | 14,506 | 
|                                                                                               | General and administrative                    |                                       |        | 2,485  |  |      |        | 3,703  |  |      |        | 5,369  |  |   |        | 4,899  |   |   |        | 6,679  | 
|                                                                                               | Restructuring costs                           |                                       |        |       |  |      |        |       |  |      |        |       |  |   |        |       |   |   |        | 730    | 
|                                                                                               | Purchased in-process research and development |                                       |        |       |  |      |        |       |  |      |        |       |  |   |        | 1,400  |   |   |        |       | 
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|                                                                                               | Total operating expenses                      |                                       |        | 10,885 |  |      |        | 16,167 |  |      |        | 20,980 |  |   |        | 24,533 |   |   |        | 35,434 | 
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|Operating income                                                                               |                                               |                                       | 14,424 |        |  |      | 7,699  |        |  |      | 14,521 |        |  |   | 11,577 |        |   |   | 627    |       
|Interest income                                                                                |                                               |                                       | 1,294  |        |  |      | 2,674  |        |  |      | 2,919  |        |  |   | 1,456  |        |   |   | 786    |       
|Interest expense                                                                               |                                               |                                       |       |        |  |      |       |        |  |      |       |        |  |   | (29    | )      |   |   | (350   | )     
|Other income (expense), net                                                                    |                                               |                                       | (107   | )      |  |      | 169    |        |  |      | (585   | )      |  |   | (219   | )      |   |   | 1,216  |       
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|Income from continuing operations before income
    taxes                                      |                                               |                                       | 15,611 |        |  |      | 10,542 |        |  |      | 16,855 |        |  |   | 12,785 |        |   |   | 2,279  |       
|Provision for (benefit from) income taxes                                                      |                                               |                                       | 6,706  |        |  |      | 3,976  |        |  |      | 5,810  |        |  |   | 3,580  |        |   |   | (2,086 | )     
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|Income from continuing operations                                                              |                                               |                                       | 8,905  |        |  |      | 6,566  |        |  |      | 11,045 |        |  |   | 9,205  |        |   |   | 4,365  |       
|Loss from discontinued operations, adjusted for
    applicable benefit for income taxes of $46 |                                               |                                       |       |        |  |      |       |        |  |      |       |        |  |   | (56    | )      |   |   |       |       
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|Net income                                                                                     |                                               | $                                     | 8,905  |        |  | $    | 6,566  |        |  | $    | 11,045 |        |  | $ | 9,149  |        |   | $ | 4,365  |       
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|Net income per share  basic                                                                   |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|                                                                                               | Income from continuing operations             |                                       | $      | 0.75   |  |      | $      | 0.51   |  |      | $      | 0.85   |  |   | $      | 0.71   |   |   | $      | 0.34   | 
|                                                                                               | Loss from discontinued operations             |                                       |        |       |  |      |        |       |  |      |        |       |  |   |        | (0.00  | ) |   |        |       | 
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       
|Net income per share  basic                                                                   |                                               | $                                     | 0.75   |        |  | $    | 0.51   |        |  | $    | 0.85   |        |  | $ | 0.70   |        |   | $ | 0.34   |       
|                                                                                               |                                               |                                       |        |        |  |      |        |        |  |      |        |        |  |   |        |        |   |   |        |       

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|                                        |                                   |                                       |      |        |  |      |      |        |  |      |      |        |  |   |      |        |   |   |      |        | 
|--------------------------------------- | --------------------------------- | ------------------------------------- | ---- | ------ |  | ---- | ---- | ------ |  | ---- | ---- | ------ |  | - | ---- | ------ | - | - | ---- | ------ | 
|                                        |                                   |                                      
|                                        |                                   | Fiscal Year Ended September 30,      
|                                        |                                   |                                      
|Consolidated Statements of Income Data: |                                   | 1999                                  |      | 2000   |  | 2001 |      | 2002   |  | 2003
|                                        |                                   |                                       |      |        |  |      |      |        |  |     
|                                        |                                   |                                      
|                                        |                                   | (In thousands, except per share data)
|Net income per share  diluted          |                                   |                                       |      |        |  |      |      |        |  |      |      |        |  |   |      |        |   |   |      |       
|                                        | Income from continuing operations |                                       | $    | 0.73   |  |      | $    | 0.50   |  |      | $    | 0.83   |  |   | $    | 0.69   |   |   | $    | 0.33   | 
|                                        | Loss from discontinued operations |                                       |      |       |  |      |      |       |  |      |      |       |  |   |      | (0.00  | ) |   |      |       | 
|                                        |                                   |                                       |      |        |  |      |      |        |  |      |      |        |  |   |      |        |   |   |      |       
|Net income per share  diluted          |                                   | $                                     | 0.73 |        |  | $    | 0.50 |        |  | $    | 0.83 |        |  | $ | 0.69 |        |   | $ | 0.33 |       
|                                        |                                   |                                       |      |        |  |      |      |        |  |      |      |        |  |   |      |        |   |   |      |       
|Shares used in per share calculation:   |                                   |                                       |      |        |  |      |      |        |  |      |      |        |  |   |      |        |   |   |      |       
|                                        | Basic                             |                                       |      | 11,874 |  |      |      | 12,801 |  |      |      | 12,933 |  |   |      | 13,039 |   |   |      | 12,948 | 
|                                        |                                   |                                       |      |        |  |      |      |        |  |      |      |        |  |   |      |        |   |   |      |       
|                                        | Diluted                           |                                       |      | 12,217 |  |      |      | 13,123 |  |      |      | 13,276 |  |   |      | 13,313 |   |   |      | 13,113 | 
|                                        |                                   |                                       |      |        |  |      |      |        |  |      |      |        |  |   |      |        |   |   |      |       

|                                                  |  |                |        |      |  |      |        |      |  |      |        |  |  |   |         |  |  |   |         | 
|------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- |  |  | - | ------- | 
|                                                  |  |               
|                                                  |  | September 30, 
|                                                  |  |               
|Consolidated Balance Sheets Data:                 |  | 1999           |        | 2000 |  | 2001 |        | 2002 |  | 2003
|                                                  |  |                |        |      |  |      |        |      |  |     
|                                                  |  |               
|                                                  |  | (In thousands)
|Cash, cash equivalents and short-term investments |  | $              | 41,654 |      |  | $    | 48,637 |      |  | $    | 61,476 |  |  | $ | 35,365  |  |  | $ | 30,671  | 
|Working capital                                   |  |                | 42,372 |      |  |      | 49,164 |      |  |      | 61,517 |  |  |   | 28,852  |  |  |   | 16,629  | 
|Total assets                                      |  |                | 50,667 |      |  |      | 59,343 |      |  |      | 72,833 |  |  |   | 117,850 |  |  |   | 107,089 | 
|Convertible notes payable                         |  |                |       |      |  |      |       |      |  |      |       |  |  |   | 18,081  |  |  |   | 17,674  | 
|Total stockholders equity                        |  |                | 43,589 |      |  |      | 50,887 |      |  |      | 63,490 |  |  |   | 72,965  |  |  |   | 76,621  | 

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,    
|                    |                                               |                             
|                    |                                               | 2001                         |      | 2002  |   | 2003
|                    |                                               |                              |      |       |   |     
|Revenues:           |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                    | Products                                      |                              |      | 87.0  | % |      |      | 84.9  | % |  |      | 78.2  | %
|                    | Services                                      |                              |      | 13.0  |   |      |      | 15.1  |   |  |      | 21.8  |  
|                    |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                    | Total revenues                                |                              |      | 100.0 |   |      |      | 100.0 |   |  |      | 100.0 |  
|                    |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Cost of revenues:   |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                    | Products                                      |                              |      | 9.5   |   |      |      | 6.8   |   |  |      | 12.5  |  
|                    | Services                                      |                              |      | 1.5   |   |      |      | 2.9   |   |  |      | 6.2   |  
|                    | Amortization of purchased technology          |                              |      |      |   |      |      | 0.1   |   |  |      | 1.5   |  
|                    |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                    | Total cost of revenues                        |                              |      | 11.0  |   |      |      | 9.8   |   |  |      | 20.2  |  
|                    |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Gross profit        |                                               |                              | 89.0 |       |   |      | 90.2 |       |   |  | 79.8 |      
|                    |                                               |                              |      |       |   |      |      |       |   |  |      |      
|Operating expenses: |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                    | Research and development                      |                              |      | 12.4  |   |      |      | 18.8  |   |  |      | 29.9  |  
|                    | Sales and marketing                           |                              |      | 26.8  |   |      |      | 26.8  |   |  |      | 32.1  |  
|                    | General and administrative                    |                              |      | 13.4  |   |      |      | 12.2  |   |  |      | 14.8  |  
|                    | Restructuring costs                           |                              |      |      |   |      |      |      |   |  |      | 1.6   |  
|                    | Purchased in process research and development |                              |      |      |   |      |      | 3.5   |   |  |      |      |  
|                    |                                               |                              |      |       |   |      |      |       |   |  |      |      
|                    | Total operating expenses                      |                              |      | 52.6  |   |      |      | 61.3  |   |  |      | 78.4  |  
|                    |                                               |                              |      |       |   |      |      |       |   |  |      |      

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|                                                          |  |                              |      |      |  |      |      |   |  |  |      |  
|--------------------------------------------------------- |  | ---------------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                          |  |                             
|                                                          |  | Percentage of Total Revenues
|                                                          |  | Year Ended September 30,    
|                                                          |  |                             
|                                                          |  | 2001                         |      | 2002 |  | 2003
|                                                          |  |                              |      |      |  |     
|Operating income                                          |  |                              | 36.4 |      |  |      | 28.9 |   |  |  | 1.4  |  
|Interest income                                           |  |                              | 7.4  |      |  |      | 3.6  |   |  |  | 1.7  |  
|Interest expense                                          |  |                              |     |      |  |      | (0.1 | ) |  |  | (0.7 | )
|Other income (expense), net                               |  |                              | (1.5 | )    |  |      | (0.5 | ) |  |  | 2.6  |  
|                                                          |  |                              |      |      |  |      |      |   |  |  |      |  
|Income from continuing operations before income
    taxes |  |                              | 42.3 |      |  |      | 31.9 |   |  |  | 5.0  |  
|Provision for (benefit from) income taxes                 |  |                              | 14.6 |      |  |      | 8.9  |   |  |  | (4.7 | )
|                                                          |  |                              |      |      |  |      |      |   |  |  |      |  
|Income from continuing operations                         |  |                              | 27.7 |      |  |      | 23.0 |   |  |  | 9.7  |  
|Loss from discontinued operations                         |  |                              |     |      |  |      | (0.1 | ) |  |  |     |  
|                                                          |  |                              |      |      |  |      |      |   |  |  |      |  
|Net income                                                |  |                              | 27.7 | %    |  |      | 22.9 | % |  |  | 9.7  | %
|                                                          |  |                              |      |      |  |      |      |   |  |  |      |  
|Gross profit margin on products                           |  |                              | 89.1 | %    |  |      | 92.1 | % |  |  | 84.0 | %
|                                                          |  |                              |      |      |  |      |      |   |  |  |      |  
|Gross profit margin on services                           |  |                              | 88.6 | %    |  |      | 80.6 | % |  |  | 71.4 | %
|                                                          |  |                              |      |      |  |      |      |   |  |  |      |  

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements 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, MGTS and
LANCE system software and sales of DCT, MGTS and LANCE hardware,
and from services, which include customer support under hardware
and software support contracts as well as installation and
training. Prices for the DCT, MGTS and LANCE 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 and a LANCE system sale from approximately
$40,000 to $100,000. 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.

Critical Accounting Policies

The Company has identified the accounting
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 future 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.

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 persuasive evidence of an arrangement
exists, the fee is fixed or determinable and collection of the
resulting receivable is probable. Training and maintenance
revenues are based on the Companys established history of
charging separate fees 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
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 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).

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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, 2003 was
$10.6 million, net of allowance for doubtful accounts of
$0.3 million.

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.

Goodwill and
Long Lived Assets

Effective October 1, 2002, the Company
adopted the provisions of Statement of Financial Accounting
Standard (SFAS) No. 142, Goodwill and
Other Intangible Assets, which requires, among other
things, the discontinuance of goodwill amortization and an
annual impairment test. The Company performed its most recent
annual impairment test on September 30, 2003, showing no
impairment of goodwill, and will continue to perform this test
annually using the methodology described in Note 1 of the
Notes to Consolidated Financial Statements in Item 8 of
this report.

SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their
respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to be
Disposed of. For assets to be held and used, including
acquired intangibles, the Company initiates a review whenever
events or changes in circumstances indicate that the carrying
value of a long-lived asset may not be recoverable.
Recoverability of an asset is measured by comparing its carrying
value to the future undiscounted cash flows that the asset is
expected to generate. Any impairment is measured by the amount
by which the carrying value exceeds the projected discounted
future operating cash flows. Assets to be disposed of and that
the Company has committed to a plan to dispose of, whether
through sale or abandonment, are reported at the lower of
carrying value or fair value less costs to sell.

Fiscal Years Ended September 30, 2002 and
2003

Revenues, cost of revenues and operating expenses
for the year ended September 30, 2003 include a full
12 months of the results of the continuing operations of
NDB. The corresponding figures for the year ended
September 30, 2002 include one month of the results of the
continuing operations of NDB from August 30, 2002, the date
it was acquired by the Company, and exclude the results of the
discontinued distribution and consulting businesses engaged in
by Tekelec Limited in Japan as described in Note 5 of the Notes
to the Consolidated Financial Statements.

Revenues

Total revenues increased by 13% from
$40.0 million in fiscal 2002 to $45.2 million in
fiscal 2003. Despite the additional MGTS revenues resulting from
the NDB acquisition, product revenues increased by only
approximately 4% from $34.0 million in fiscal 2002 to
$35.3 million in fiscal 2003, due to prevailing market

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##### Table of Contents



weakness that negatively affected shipments of
both DCT and MGTS products. Services revenues increased by
approximately 63% from $6.1 million in fiscal 2002 to
$9.9 million in fiscal 2003 due to the increase in the
number of systems under maintenance, primarily as a result of
the NDB acquisition.


Cost of
Revenues

Cost of product revenues increased by
approximately 109% from $2.7 million in fiscal 2002 to
$5.7 million in fiscal 2003. Gross margin on product
revenues decreased from 92.1% in fiscal 2002 to 84.0% in fiscal
2003. Both the increase in cost of product revenues and the
decrease in gross margin on product revenues reflected two
factors: first, the higher cost of goods on the more hardware
intensive MGTS product in comparison with the DCT product; and
second, the additional manufacturing costs incurred on MGTS
product during the six month period ended February 28, 2003
when this product was manufactured for the Company by Tekelec
under a Transitional Services Agreement.

Cost of services revenues increased by
approximately 141% from $1.2 million in fiscal 2002 to
$2.8 million in fiscal 2003 as a result of a corresponding
increase in the costs of customer support personnel due to the
NDB acquisition. Gross margin on services revenues decreased
from 80.6% in fiscal 2002 to 71.4% in fiscal 2003 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.

Amortization of purchased technology increased
from $57,000 in fiscal 2002 to $686,000 in fiscal 2003
reflecting a full 12 months of amortization in the latter
year in comparison with a single month in the former.

Research and
Development

Research and development expenses increased by
approximately 80% from $7.5 million in fiscal 2002 to
$13.5 million in fiscal 2003 due to a corresponding
increase in compensation and other costs associated with NDB
research and development activities. As a percentage of total
revenues, research and development expenses increased from 18.8%
in fiscal 2002 to 29.9% in fiscal 2003. The Company expects the
absolute annual level of research and development expenses to
decrease by approximately 20% in fiscal 2004 as a result of
reductions made during fiscal 2003 in the number of employees
and contractors engaged in research and development activities.*

Sales and
Marketing

Sales and marketing expenses increased by
approximately 35% from $10.7 million in fiscal 2002 to
$14.5 million in fiscal 2003 as a result of two factors: an
increase of approximately $3.2 million in compensation and
other associated costs due to an increase in the number of
personnel engaged in sales and marketing activities as a result
of the NDB acquisition, and an increase of approximately
$550,000 in the cost of sales and marketing activities outside
the United States due to an increase in the values of the
foreign currencies in which this cost is incurred. As a
percentage of total revenues, sales and marketing expenses
increased from 26.8% of revenues in fiscal 2002 to 32.1% in
fiscal 2003.

General and
Administrative

General and administrative expenses increased by
approximately 36% from $4.9 million in fiscal 2002 to
$6.7 million in fiscal 2003. This increase was due to four
factors: an increase of $850,000 in facilities costs due
primarily to the NDB acquisition; an increase of $155,000 in
compensation costs due to an increase in the number of personnel
engaged in the performance of general and administrative
activities; an increase of $470,000 in premiums for general
liability, directors and officers and workers compensation
insurance; and an increase of $336,000 in non-cash amortization
of acquisition related intangibles. As a percentage of total
revenues, general and administrative expenses increased from
12.2% to 14.8% over the same period. The Company expects the
absolute annual level of general and administrative expenses to
increase by up to approximately 5% in fiscal 2004 due to
increased regulatory compliance costs.*

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Restructuring
Costs

A restructuring charge of $730,000 was recorded
in the fourth quarter of fiscal 2003 related to costs associated
with the involuntary termination of 39 employees, including 25
in research and development, 10 in sales and marketing, 3 in the
customer service component of services cost of goods and 1 in
the manufacturing component of product cost of goods. The
terminations represented 15% of the Companys
pre-termination workforce. No restructuring charge was recorded
in fiscal 2002.



| |                                                  
| | -------------------------------------------------
| | 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. There was no expense
recorded in fiscal 2003 for purchased in-process research and
development.



| |                
| | ---------------
| | Interest Income

Interest income decreased from $1.5 million
in fiscal 2002 to $786,000 in fiscal 2003 due to lower cash and
short term investment balances resulting from the
$42.5 million paid on closing of the NDB acquisition and
lower prevailing rates of return, partially offset by
amortization of $407,000 of the convertible note valuation
premium in fiscal 2003 in comparison with $34,000 in fiscal 2002.



| |                 
| | ----------------
| | Interest Expense

Interest expense increased from $29,000 in fiscal
2002 to $350,000 in fiscal 2003 due to a corresponding increase
in interest accrued on the convertible notes payable.



| |                            
| | ---------------------------
| | Other Income (Expense), net

Other income improved from an expense of $219,000
in fiscal 2002 to income of $1.2 million in fiscal 2003 due
to two factors: foreign exchange gains recorded in fiscal 2003
in contrast with the foreign exchange losses in fiscal 2002 and
the receipt in fiscal 2003 of a Japanese consumption tax refund
in the amount of approximately $695,000.



| |             
| | ------------
| | Income Taxes

The Company recorded a benefit from income taxes
of $2.1 million in fiscal 2003 as a result of three
factors: the identification of approximately $830,000 in
additional taxes recoverable from a previous period; a reduction
of approximately $970,000 in the estimated tax payable at the
end of the fiscal year as a result of the likely favorable
outcome of a tax audit of the Companys Japanese
subsidiary; and the recognition of approximately $775,000 in
future tax benefits of foreign tax credits created in the
liquidation of the Japanese subsidiary acquired from Tekelec. As
a result, the Companys effective tax rate changed from a
provision of 28% in fiscal 2002 to a benefit of 92% in fiscal
2003.

Fiscal Years Ended September 30, 2001 and
2002

Revenues, cost of revenues and operating 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 and exclude the results
of the discontinued distribution and consulting businesses
engaged in by Tekelec Limited in Japan as described in
Note 5 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

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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.

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.

Amortization of purchased technology in the
amount of $57,000 was recorded in fiscal 2003, reflecting one
month of amortization of the NDB technology. No amortization of
purchased technology was recorded in fiscal 2002.



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



| |                    
| | -------------------
| | 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 and
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.



| |                           
| | --------------------------
| | General and Administrative

General and administrative expenses decreased by
approximately 9% from $5.4 million in fiscal 2001 to
$4.9 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 12.2% over the same period.



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

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| |                
| | ---------------
| | Interest Income

Interest income decreased from $2.9 million
in fiscal 2001 to $1.5 million in fiscal 2002 due to lower
prevailing rates of return.



| |                 
| | ----------------
| | Interest Expense

Interest expense of $29,000 was recorded in
fiscal 2002 reflecting interest accrued on the convertible notes
payable. No interest expense was recorded in fiscal 2001.



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



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

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 in
early 1999. The proceeds to the Company from the offering, net
of underwriter fees and other expenses, were approximately
$19.2 million.

The Companys purchase of NDB was
additionally financed through the issuance of two convertible
notes in the aggregate principal amount of $17.3 million.
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 of August 30, 2004. If not converted by
the holder, the Company is entitled to pay the principal and
accrued interest on one of the notes in the principal amount of
$10.0 million in cash or, in whole or in part, by issuing
its common stock at a value of 82.5% of the fair market value of
the stock determined by a formula set forth in the note.

The Companys operating activities provided
cash of $12.5 million, $12.4 million and
$3.6 million in fiscal 2001, 2002 and 2003, respectively.
In fiscal 2001, the major component of cash from operating
activities was net income. In 2002, cash generated by net income
was further increased by $1.2 million in changes in working
capital components, including an increase in accrued liabilities
in that amount, and by adjustments to net cash provided by
operating activities of $2.0 million in non-cash charges
for depreciation, amortization, purchased in process research
and development and deferred income taxes. In 2003, cash
generated by net income was reduced by changes in working
capital components, the largest of which was a $4.9 million
reduction in accrued liabilities.

The Companys primary source of operating
cash flow is the collection of accounts receivable from its
customers and the timing of payments to its vendors and service
providers. The Company measures the effectiveness of its
collections efforts by an analysis of average accounts
receivable days outstanding (days outstanding).
Collections of accounts receivable and related days outstanding
will fluctuate in future periods due to the timing and amount of
its future revenues, payment terms extended to its customers and
the effectiveness of its collection efforts.

Investing activities, consisting primarily of
purchases and sales of short-term investments, additions to
property and equipment and the acquisition of NDB, provided cash
of $25.6 million in fiscal 2001 and used cash of
$44.4 million and $3.4 million in fiscal 2002 and
2003, respectively.

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Financing activities provided cash of
$1.0 million and $723,000 in fiscal 2001 and 2002,
respectively, from the exercise of stock options and the sale of
shares under the employee stock purchase plan. Financing
activities used cash of $1.2 million in fiscal 2003 as the
value of common stock repurchased exceeded the value issued.

As of September 30, 2003, the Company had
working capital of $16.6 million, cash and cash equivalents
of $11.8 million and short-term investments of
$18.9 million. As of September 30, 2003, the Company
had the following contractual obligations, in millions:

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

The Company expects that capital expenditures
will total approximately $1.0 million in fiscal 2004.*

The Company believes that inflation has not had a
material impact on its liquidity or cash requirements.

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. 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 requirements for at least the next 12 months,
including the repayment of the convertible notes payable in the
event that they are not converted.*

Factors That May Affect Future
Results

The risk factors set forth below and elsewhere in
this 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

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


Due to the relatively fixed nature of most of the
Companys costs, including personnel and facilities costs,
and because operating expenses are based on anticipated 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 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, 2003, the
Companys top five customers represented approximately 50%
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.

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



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



| |                                                       
| | ------------------------------------------------------
| | 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

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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
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

26



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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 Sun UNIX and the Linux operating systems. The
Companys current and prospective customers may require
other operating systems, such as Windows 2000 or
Windows XP, to be used in their telecommunications test
systems or may require the integration of other industry
standards. There can be no assurance that the Company would be
able to successfully adapt its products to such operating
systems on a timely or cost-effective basis, if at all. The
failure of the Company to respond to rapidly changing
technologies and to develop and introduce new products and
services in a timely manner would have a material adverse effect
on the Companys business, financial condition and results
of operations.

The Companys success will depend in part on
whether a large number of telecommunications equipment
manufacturers and network operators purchase the Companys
products and services. Because the telecommunications market is
rapidly evolving, it is difficult to predict the future success
of products and services in this market. The customers in this
market use products from a number of competing suppliers for
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 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

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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 acquisition of NDB late
in fiscal 2002, the Company expanded its product line to include
the similar MGTS products, and in fiscal 2003 it introduced the
LANCE product. The Company currently expects the DCT and MGTS
families of products and related services to account for the
majority of its revenues for the foreseeable future.* As a
result, factors adversely affecting the pricing of or demand for
DCT, MGTS and LANCE 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, MGTS and LANCE 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, 2003, Dr. Richard
A. Karp beneficially owned 5,736,010 shares or approximately 45%
of the Companys common stock outstanding on such date,
which includes 2,084,547 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.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Shares Eligible for Future Sale; Potential
    Adverse Effect on Market Price

Sales of substantial numbers of shares of Common
Stock by the Companys major stockholders in the public
market could adversely affect the market price for the Common
Stock. As of September 30, 2003, Richard A. Karp, the Chief
Executive Officer and Chairman of the Board of the Company,
beneficially owned 5,736,010 shares of Common Stock, which
included 2,084,547 shares beneficially owned as of such date by
Ms. Nancy H. Karp. These shares are eligible for resale
into the public market within the restrictions imposed by
Rule 144 under the Securities Act of 1933. In addition, as
a result of the acquisition of NDB from Tekelec in 2002 in which
Tekelec received notes that are convertible into Common Stock,
Tekelec has the right to acquire 1,081, 250 shares of Common
Stock. Tekelec also has certain contractual rights to require
the Company to register such shares with the Securities and
Exchange Commission for resale into the public market.



| |                                                                    
| | -------------------------------------------------------------------
| | 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

29



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##### Table of Contents



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.




| |                          
| | -------------------------
| | 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, 2003, the Company had
forward exchange contracts maturing in fiscal 2004 to sell
approximately $140,000 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, 2003
was not material.

The Company has evaluated the potential near-term
losses in future earnings, fair values and cash flows from
reasonably possible near-term currency fluctuations and believes
that any such losses would not be material.*

30



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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, 2003, short-term
investments consisted of available-for-sale securities,
including those classified as cash equivalents, of
$23.8 million (see Note 8. 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, 2003, the
decline in the fair value of the portfolio would not be material
to the Companys financial position.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

CATAPULT COMMUNICATIONS CORPORATION

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

AND SUPPLEMENTARY DATA


|                                          |                                                                                                                                                                   |      |  |    | 
|----------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                          |                                                                                                                                                                   | Page
|                                          |                                                                                                                                                                   |     
|Consolidated Financial Statements:        |                                                                                                                                                                   |      |  |   
|                                          | Report of Independent Auditors                                                                                                                                    |      |  | 33 | 
|                                          | Consolidated Balance Sheets at September 30,
    2002 and 2003                                                                                                    |      |  | 34 | 
|                                          | Consolidated Statements of Income for each of the
    three years in the period ended September 30, 2003                                                          |      |  | 35 | 
|                                          | Consolidated Statements of Stockholders
    Equity for each of the three years in the period ended
    September 30, 2003                                        |      |  | 36 | 
|                                          | Consolidated Statements of Cash Flows for each of
    the three years in the period ended September 30, 2003                                                      |      |  | 37 | 
|                                          | Notes to Consolidated Financial Statements                                                                                                                        |      |  | 38 | 
|                                         
|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 each of the years
    ended September 30, 2002 and 2003                                                                              |      |  | 57 | 

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REPORT OF INDEPENDENT AUDITORS

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, 2002 and 2003, and the results of their
operations and their cash flows for each of the three years in
the period ended September 30, 2003, 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

November 19, 2003


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CATAPULT COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                        |                                            |        |        |         |  |        |        |         | 
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------ | ------- |  | ------ | ------ | ------- | 
|                                         |                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                        | September 30,                             
|                                         |                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                        | 2002                                       |        | 2003  
|                                         |                                                                                                                                                                        |                                            |        |       
|                                         |                                                                                                                                                                        |                                           
|                                         |                                                                                                                                                                        | (In thousands, except                     
|                                         |                                                                                                                                                                        | share and per share data)                 
|ASSETS                                  
|Current Assets:                          |                                                                                                                                                                        |                                            |        |        |         |  |        |       
|                                         | Cash and cash equivalents                                                                                                                                              |                                            | $      | 12,575 |         |  | $      | 11,770 |        
|                                         | Short-term investments                                                                                                                                                 |                                            |        | 22,790 |         |  |        | 18,901 |        
|                                         | Accounts receivable, net of allowances of $38 and
    $320                                                                                                             |                                            |        | 11,009 |         |  |        | 10,598 |        
|                                         | Inventories                                                                                                                                                            |                                            |        | 3,869  |         |  |        | 2,325  |        
|                                         | Deferred income taxes                                                                                                                                                  |                                            |        | 1,214  |         |  |        | 2,407  |        
|                                         | Prepaid expenses                                                                                                                                                       |                                            |        | 1,563  |         |  |        | 1,096  |        
|                                         | Assets of discontinued operations                                                                                                                                      |                                            |        | 2,636  |         |  |        |       |        
|                                         |                                                                                                                                                                        |                                            |        |        |         |  |        |       
|                                         |                                                                                                                                                                        | Total current assets                       |        |        | 55,656  |  |        |        | 47,097  | 
|Property and equipment, net              |                                                                                                                                                                        |                                            | 3,874  |        |         |  | 3,384  |       
|Goodwill                                 |                                                                                                                                                                        |                                            | 49,833 |        |         |  | 49,394 |       
|Other intangibles, net                   |                                                                                                                                                                        |                                            | 7,315  |        |         |  | 6,093  |       
|Other assets                             |                                                                                                                                                                        |                                            | 1,172  |        |         |  | 1,121  |       
|                                         |                                                                                                                                                                        |                                            |        |        |         |  |        |       
|                                         |                                                                                                                                                                        | Total assets                               |        | $      | 117,850 |  |        | $      | 107,089 | 
|                                         |                                                                                                                                                                        |                                            |        |        |         |  |        |       
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current Liabilities:                     |                                                                                                                                                                        |                                            |        |        |         |  |        |       
|                                         | Accounts payable                                                                                                                                                       |                                            | $      | 2,594  |         |  | $      | 1,216  |        
|                                         | Accrued liabilities                                                                                                                                                    |                                            |        | 18,829 |         |  |        | 6,002  |        
|                                         | Deferred revenue                                                                                                                                                       |                                            |        | 4,492  |         |  |        | 5,576  |        
|                                         | Convertible notes payable                                                                                                                                              |                                            |        |       |         |  |        | 17,674 |        
|                                         | Liabilities of discontinued operations                                                                                                                                 |                                            |        | 889    |         |  |        |       |        
|                                         |                                                                                                                                                                        |                                            |        |        |         |  |        |       
|                                         |                                                                                                                                                                        | Total current liabilities                  |        |        | 26,804  |  |        |        | 30,468  | 
|Convertible notes payable                |                                                                                                                                                                        |                                            | 18,081 |        |         |  |       |       
|                                         |                                                                                                                                                                        |                                            |        |        |         |  |        |       
|                                         |                                                                                                                                                                        | Total liabilities                          |        |        | 44,885  |  |        |        | 30,468  | 
|                                         |                                                                                                                                                                        |                                            |        |        |         |  |        |       
|Commitments and contingencies (Note 13)  |                                                                                                                                                                        |                                            |        |        |         |  |        |       
|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; 13,055,273 and 12,886,545 issued and outstanding as
    at September 30, 2002 and 2003, respectively |                                            |        | 13     |         |  |        | 13     |        
|                                         | Additional paid-in capital                                                                                                                                             |                                            |        | 22,625 |         |  |        | 21,187 |        
|                                         | Deferred stock-based compensation                                                                                                                                      |                                            |        | (111   | )       |  |        | (75    | )      
|                                         | Accumulated other comprehensive income                                                                                                                                 |                                            |        | 182    |         |  |        | 575    |        
|                                         | Treasury stock, 50,000 shares at cost as of
    September 30, 2002                                                                                                     |                                            |        | (300   | )       |  |        |       |        
|                                         | Retained earnings                                                                                                                                                      |                                            |        | 50,556 |         |  |        | 54,921 |        
|                                         |                                                                                                                                                                        |                                            |        |        |         |  |        |       
|                                         |                                                                                                                                                                        | Total stockholders equity                 |        |        | 72,965  |  |        |        | 76,621  | 
|                                         |                                                                                                                                                                        |                                            |        |        |         |  |        |       
|                                         |                                                                                                                                                                        | Total liabilities and stockholders equity |        | $      | 117,850 |  |        | $      | 107,089 | 
|                                         |                                                                                                                                                                        |                                            |        |        |         |  |        |       

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,
|                                                                                               |                                               |                         
|                                                                                               |                                               | 2001                     |        | 2002   |  | 2003
|                                                                                               |                                               |                          |        |        |  |     
|                                                                                               |                                               |                         
|                                                                                               |                                               | (In thousands,          
|                                                                                               |                                               | except per share data)  
|Revenues:                                                                                      |                                               |                          |        |        |  |      |        |        |   |   |        |       
|                                                                                               | Products                                      |                          | $      | 34,689 |  |      | $      | 33,988 |   |   | $      | 35,344 | 
|                                                                                               | Services                                      |                          |        | 5,197  |  |      |        | 6,051  |   |   |        | 9,880  | 
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|                                                                                               | Total revenues                                |                          |        | 39,886 |  |      |        | 40,039 |   |   |        | 45,224 | 
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Cost of revenues:                                                                              |                                               |                          |        |        |  |      |        |        |   |   |        |       
|                                                                                               | Products                                      |                          |        | 3,794  |  |      |        | 2,700  |   |   |        | 5,652  | 
|                                                                                               | Services                                      |                          |        | 591    |  |      |        | 1,172  |   |   |        | 2,825  | 
|                                                                                               | Amortization of purchased technology          |                          |        |       |  |      |        | 57     |   |   |        | 686    | 
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|                                                                                               | Total cost of revenues                        |                          |        | 4,385  |  |      |        | 3,929  |   |   |        | 9,163  | 
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Gross profit                                                                                   |                                               |                          | 35,501 |        |  |      | 36,110 |        |   |   | 36,061 |       
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Operating expenses:                                                                            |                                               |                          |        |        |  |      |        |        |   |   |        |       
|                                                                                               | Research and development                      |                          |        | 4,938  |  |      |        | 7,520  |   |   |        | 13,519 | 
|                                                                                               | Sales and marketing                           |                          |        | 10,673 |  |      |        | 10,714 |   |   |        | 14,506 | 
|                                                                                               | General and administrative                    |                          |        | 5,369  |  |      |        | 4,899  |   |   |        | 6,679  | 
|                                                                                               | Restructuring costs                           |                          |        |       |  |      |        |       |   |   |        | 730    | 
|                                                                                               | Purchased in-process research and development |                          |        |       |  |      |        | 1,400  |   |   |        |       | 
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|                                                                                               | Total operating expenses                      |                          |        | 20,980 |  |      |        | 24,533 |   |   |        | 35,434 | 
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Operating income                                                                               |                                               |                          | 14,521 |        |  |      | 11,577 |        |   |   | 627    |       
|Interest income                                                                                |                                               |                          | 2,919  |        |  |      | 1,456  |        |   |   | 786    |       
|Interest expense                                                                               |                                               |                          |       |        |  |      | (29    | )      |   |   | (350   | )     
|Other income (expense), net                                                                    |                                               |                          | (585   | )      |  |      | (219   | )      |   |   | 1,216  |       
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Income from continuing operations before income
    taxes                                      |                                               |                          | 16,855 |        |  |      | 12,785 |        |   |   | 2,279  |       
|Provision for (benefit from) income taxes                                                      |                                               |                          | 5,810  |        |  |      | 3,580  |        |   |   | (2,086 | )     
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Net income from continuing operations                                                          |                                               |                          | 11,045 |        |  |      | 9,205  |        |   |   | 4,365  |       
|Loss from discontinued operations, adjusted for
    applicable benefit for income taxes of $46 |                                               |                          |       |        |  |      | (56    | )      |   |   |       |       
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Net income                                                                                     |                                               | $                        | 11,045 |        |  | $    | 9,149  |        |   | $ | 4,365  |       
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Net income per share  basic                                                                   |                                               |                          |        |        |  |      |        |        |   |   |        |       
|                                                                                               | Income from continuing operations             |                          | $      | 0.85   |  |      | $      | 0.71   |   |   | $      | 0.34   | 
|                                                                                               | Loss from discontinued operations             |                          |        |       |  |      |        | (0.00  | ) |   |        |       | 
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Net income per share  basic                                                                   |                                               | $                        | 0.85   |        |  | $    | 0.70   |        |   | $ | 0.34   |       
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Net income per share  diluted                                                                 |                                               |                          |        |        |  |      |        |        |   |   |        |       
|                                                                                               | Income from continuing operations             |                          | $      | 0.83   |  |      | $      | 0.69   |   |   | $      | 0.33   | 
|                                                                                               | Loss from discontinued operations             |                          |        |       |  |      |        | (0.00  | ) |   |        |       | 
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Net income per share  diluted                                                                 |                                               | $                        | 0.83   |        |  | $    | 0.69   |        |   | $ | 0.33   |       
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|Shares used in per share calculation:                                                          |                                               |                          |        |        |  |      |        |        |   |   |        |       
|                                                                                               | Basic                                         |                          |        | 12,933 |  |      |        | 13,039 |   |   |        | 12,948 | 
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       
|                                                                                               | Diluted                                       |                          |        | 13,276 |  |      |        | 13,313 |   |   |        | 13,113 | 
|                                                                                               |                                               |                          |        |        |  |      |        |        |   |   |        |       

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 |  | Deferred    |    | Other         |  |               |        |          |  | Total         |      |              
|                                                  |  |                                   |            | Paid-in    |  | Stock-based |    | Comprehensive |  | Treasury      |        | Retained |  | Stockholders |      | Comprehensive
|                                                  |  | Shares                            |            | Amount     |  | Capital     |    | Compensation  |  | Income (Loss) |        | Stock    |  | Earnings      |      | Equity        |  | Income
|                                                  |  |                                   |            |            |  |             |    |               |  |               |        |          |  |               |      |               |  |       
|                                                  |  |                                  
|                                                  |  | (In thousands, except share data)
|Balances at September 30, 2000                    |  |                                   | 12,847,977 |            |  | $           | 13 |               |  | $             | 20,270 |          |  | $             | (60  | )             |  | $      | 602  |   |  | $ | (300 | ) |  | $ | 30,362 |  |  |   | 50,887 |   |  | $ | 6,996  |  
|                                                  |  |                                   |            |            |  |             |    |               |  |               |        |          |  |               |      |               |  |        |      |   |  |   |      |   |  |   |        |  |  |   |        |   |  |   |        |  
|Issuance of common stock                          |  |                                   | 142,983    |            |  |             |   |               |  |               | 969    |          |  |               |     |               |  |        |     |   |  |   |      |   |  |   |       |  |  |   | 969    |   |  |   |        |  
|Tax benefit from employee stock transactions      |  |                                   |           |            |  |             |   |               |  |               | 519    |          |  |               |     |               |  |        |     |   |  |   |      |   |  |   |       |  |  |   | 519    |   |  |   |        |  
|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 |          |  |               |     |               |  |        | 612  |   |  |   | (300 | ) |  |   | 41,407 |  |  |   | 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 | )             |  |        | 182  |   |  |   | (300 | ) |  |   | 50,556 |  |  |   | 72,965 |   |  | $ | 8,719  |  
|                                                  |  |                                   |            |            |  |             |    |               |  |               |        |          |  |               |      |               |  |        |      |   |  |   |      |   |  |   |        |  |  |   |        |   |  |   |        |  
|Issuance of common stock                          |  |                                   | 88,672     |            |  |             |   |               |  |               | 530    |          |  |               |     |               |  |        |     |   |  |   |      |   |  |   |       |  |  |   | 530    |   |  |   |        |  
|Tax benefit from employee stock transactions      |  |                                   |           |            |  |             |   |               |  |               | 92     |          |  |               |     |               |  |        |     |   |  |   |     |   |  |   |       |  |  |   | 92     |   |  |   |        |  
|Cancellation of treasury stock                    |  |                                   |           |            |  |             |   |               |  |               | (300   | )        |  |               |     |               |  |        |     |   |  |   | 300  |   |  |   |       |  |  |   |       |   |  |   |        |  
|Repurchase of common stock                        |  |                                   | (257,400   | )          |  |             |    |               |  |               | (1,760 | )        |  |               |      |               |  |        |      |   |  |   |      |   |  |   |        |  |  |   | (1,760 | ) |  |   |        |  
|Amortization of deferred stock-based compensation |  |                                   |           |            |  |             |   |               |  |               |       |          |  |               | 36   |               |  |        |     |   |  |   |      |   |  |   |       |  |  |   | 36     |   |  |   |        |  
|Currency translation adjustment                   |  |                                   |           |            |  |             |   |               |  |               |       |          |  |               |     |               |  |        | 399  |   |  |   |      |   |  |   |       |  |  |   | 399    |   |  | $ | 399    |  
|Unrealized loss on investments                    |  |                                   |           |            |  |             |   |               |  |               |       |          |  |               |     |               |  |        | (6   | ) |  |   |      |   |  |   |       |  |  |   | (6     | ) |  |   | (6     | )
|Net income                                        |  |                                   |           |            |  |             |   |               |  |               |       |          |  |               |     |               |  |        |     |   |  |   |      |   |  |   | 4,365  |  |  |   | 4,365  |   |  |   | 4,365  |  
|                                                  |  |                                   |            |            |  |             |    |               |  |               |        |          |  |               |      |               |  |        |      |   |  |   |      |   |  |   |        |  |  |   |        |   |  |   |        |  
|Balances at September 30, 2003                    |  |                                   | 12,886,545 |            |  | $           | 13 |               |  | $             | 21,187 |          |  | $             | (75  | )             |  | $      | 575  |   |  |   |      |   |  | $ | 54,921 |  |  | $ | 76,621 |   |  | $ | 4,758  |  
|                                                  |  |                                   |            |            |  |             |    |               |  |               |        |          |  |               |      |               |  |        |      |   |  |   |      |   |  |   |        |  |  |   |        |   |  |   |        |  

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

36



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |       |         |        |        |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | ----- | ------- | ------ | ------- | ----- | ------- | ------ | ------ | -
|                                                                            |                                                                                       |                                                                     
|                                                                            |                                                                                       | Year Ended September 30,                                            
|                                                                            |                                                                                       |                                                                     
|                                                                            |                                                                                       | 2001                                                                 |                                        | 2002                                                    |         | 2003  
|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |       
|                                                                            |                                                                                       |                                                                     
|                                                                            |                                                                                       | (In thousands)                                                      
|Cash flows from operating activities:                                       |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|                                                                            | Net income                                                                            |                                                                      | $                                      | 11,045                                                  |         |        | $       | 9,149 |         |        | $       | 4,365 |        
|                                                                            | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |       |        
|                                                                            |                                                                                       | Depreciation and amortization of property and
    equipment          |                                        |                                                         | 731     |        |         |       | 807     |        |         |       | 1,659   |       
|                                                                            |                                                                                       | Amortization of deferred stock-based compensation                    |                                        |                                                         | 60      |        |         |       | 33      |        |         |       | 36      |       
|                                                                            |                                                                                       | Purchased in-process research and development                        |                                        |                                                         |        |        |         |       | 1,400   |        |         |       |        |       
|                                                                            |                                                                                       | Amortization of purchased technology                                 |                                        |                                                         |        |        |         |       | 57      |        |         |       | 686     |       
|                                                                            |                                                                                       | Amortization of other acquisition related
    intangibles            |                                        |                                                         |        |        |         |       | 228     |        |         |       | 536     |       
|                                                                            |                                                                                       | Provision for doubtful accounts                                      |                                        |                                                         | 110     |        |         |       | (35     | )      |         |       | 282     |       
|                                                                            |                                                                                       | Deferred income taxes                                                |                                        |                                                         | 635     |        |         |       | (586    | )      |         |       | (1,193  | )     
|                                                                            |                                                                                       | Loss (gain) on sale of property and equipment                        |                                        |                                                         | (7      | )      |         |       | 68      |        |         |       |        |       
|                                                                            |                                                                                       | Tax benefit from exercise of stock options                           |                                        |                                                         | 519     |        |         |       |        |        |         |       |        |       
|                                                                            |                                                                                       | Amortization of convertible note premium                             |                                        |                                                         |        |        |         |       | (34     | )      |         |       | (407    | )     
|                                                                            |                                                                                       | Change in assets and liabilities (net of effect
    of acquisition): |                                        |                                                         |         |        |         |       |         |        |         |       |         |       
|                                                                            |                                                                                       |                                                                      | Accounts receivable                    |                                                         |         | (1,714 | )       |       |         | 724    |         |       |         | (588   | )     
|                                                                            |                                                                                       |                                                                      | Inventories                            |                                                         |         | 275    |         |       |         | 344    |         |       |         | 1,047  |       
|                                                                            |                                                                                       |                                                                      | Prepaid expenses                       |                                                         |         | 293    |         |       |         | 116    |         |       |         | 314    |       
|                                                                            |                                                                                       |                                                                      | Assets of discontinued operations      |                                                         |         |       |         |       |         | (2,636 | )       |       |         | 2,636  |       
|                                                                            |                                                                                       |                                                                      | Other assets                           |                                                         |         | (349   | )       |       |         | (202   | )       |       |         | 51     |       
|                                                                            |                                                                                       |                                                                      | Accounts payable                       |                                                         |         | 245    |         |       |         | 684    |         |       |         | (1,113 | )     
|                                                                            |                                                                                       |                                                                      | Accrued liabilities                    |                                                         |         | 292    |         |       |         | 1,225  |         |       |         | (4,938 | )     
|                                                                            |                                                                                       |                                                                      | Deferred revenue                       |                                                         |         | 350    |         |       |         | 162    |         |       |         | 1,084  |       
|                                                                            |                                                                                       |                                                                      | Liabilities of discontinued operations |                                                         |         |       |         |       |         | 889    |         |       |         | (889   | )     
|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|                                                                            |                                                                                       |                                                                      |                                        | Net cash provided by operating activities               |         |        | 12,485  |       |         |        | 12,393  |       |         |        | 3,568  |  
|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|Cash flows from investing activities:                                       |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|                                                                            |                                                                                       | Sale and maturities of short-term investments                        |                                        |                                                         | 109,259 |        |         |       | 90,200  |        |         |       | 45,145  |       
|                                                                            |                                                                                       | Purchase of short-term investments                                   |                                        |                                                         | (83,043 | )      |         |       | (95,792 | )      |         |       | (41,262 | )     
|                                                                            |                                                                                       | Acquisition, net of cash acquired                                    |                                        |                                                         |        |        |         |       | (38,209 | )      |         |       | (5,976  | )     
|                                                                            |                                                                                       | Purchase of property and equipment, net                              |                                        |                                                         | (625    | )      |         |       | (589    | )      |         |       | (1,302  | )     
|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|                                                                            |                                                                                       |                                                                      |                                        | Net cash provided by (used in) investing
    activities |         |        | 25,591  |       |         |        | (44,390 | )     |         |        | (3,395 | )
|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|Cash flows from financing activities:                                       |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|                                                                            |                                                                                       | Repurchase of common stock                                           |                                        |                                                         |        |        |         |       |        |        |         |       | (1,760  | )     
|                                                                            |                                                                                       | Proceeds from issuance of common stock                               |                                        |                                                         | 969     |        |         |       | 723     |        |         |       | 530     |       
|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|                                                                            |                                                                                       |                                                                      |                                        | Net cash provided by financing activities               |         |        | 969     |       |         |        | 723     |       |         |        | (1,230 | )
|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|Effect of exchange rate changes on cash and cash
    equivalents            |                                                                                       |                                                                      | (43                                    | )                                                       |         |        | (353    | )     |         |        | 252     |      
|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|Net increase (decrease) in cash and cash
    equivalents                    |                                                                                       |                                                                      | 39,002                                 |                                                         |         |        | (31,627 | )     |         |        | (805    | )    
|Cash and cash equivalents, beginning of year                                |                                                                                       |                                                                      | 5,200                                  |                                                         |         |        | 44,202  |       |         |        | 12,575  |      
|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|Cash and cash equivalents, end of year                                      |                                                                                       | $                                                                    | 44,202                                 |                                                         |         | $      | 12,575  |       |         | $      | 11,770  |      
|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|Supplemental disclosures of cash flow information:                          |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|                                                                            |                                                                                       | Income taxes paid                                                    |                                        | $                                                       | 5,307   |        |         | $     | 3,510   |        |         | $     | 1,586   |       
|                                                                            |                                                                                       |                                                                      |                                        |                                                         |         |        |         |       |         |        |         |      
|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.

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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 advanced software-based test systems
offering integrated suites of testing applications for the
global telecommunications industry. The Companys advanced
test systems assist its customers in the design, integration,
installation and acceptance testing of a broad range of digital
telecommunications equipment and services. The Company was
incorporated in California in October 1985, was reincorporated
in Nevada in 1998, and has operations in the United States,
Canada, the United Kingdom, Europe and Japan. Management has
determined that the Company conducts its business within one
industry segment: the design, development, manufacture,
marketing and support of advanced software-based test systems
globally.

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.

Reclassifications

Certain reclassifications have been made to the
prior year financial statements in order to conform to the
current year presentation. These reclassifications did not
change the previously recorded stockholders equity, net
income or net income per share.

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 an
original maturity between 91 days and one year. The
Companys short-term investments are placed in portfolios
managed by three professional money management firms. At
September 30, 2003, 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, 2003, 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

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CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 installation services are
purchased, provided persuasive evidence of an arrangement
exists, the fee is fixed or determinable and collection of the
resulting receivable is probable. Training and maintenance
services revenues are based on the Companys established
history of charging separate fees 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
$335,000, $248,000 and gains of $411,000 in fiscal 2001, 2002
and 2003, 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, 2003, the Company had
forward exchange contracts and options maturing in fiscal 2004
to sell approximately $140,000 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, 2003 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.

39



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
five 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.

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

|           |  |               |    |      |  |      |    |   |  |  |    |  
|---------- |  | ------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|           |  |              
|           |  | Year Ended   
|           |  | September 30,
|           |  |              
|           |  | 2001          |    | 2002 |  | 2003
|           |  |               |    |      |  |     
|Customer A |  |               |   |      |  |      | 12 | % |  |  | 13 | %
|Customer B |  |               | 15 | %    |  |      |   |   |  |  |   |  
|Customer C |  |               | 16 | %    |  |      | 14 | % |  |  | 10 | %
|Customer D |  |               | 16 | %    |  |      | 24 | % |  |  | 12 | %
|Customer E |  |               | 11 | %    |  |      |   |   |  |  |   |  

At September 30, 2002, five customers
accounted for 17%, 14%, 11%, 10% and 10% of total accounts
receivable, respectively. At September 30, 2003, three
customers accounted for 26%, 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.

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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Goodwill

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standard (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 and an annual impairment
test. 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 only one reporting unit.

The Company adopted the provisions of SFAS
No. 142 effective October 1, 2002 and performed an
impairment review of its goodwill balance on that date. As of
September 30, 2003, approximately $49.4 million of
goodwill is not being amortized but is being tested annually for
impairment in accordance with the requirements of SFAS
No. 142. The impairment test performed by the Company
involves a two-step process as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Step 1: The Company compares the market value of
    its reporting unit to the carrying value, including goodwill of
    the unit. If the carrying value of the reporting unit, including
    goodwill, exceeds the units market value, the Company
    moves on to step 2. If the market value of the reporting
    unit exceeds the carrying value, no further work is performed
    and no impairment charge is necessary.                                                                                                                                                                 
|
| |  | Step 2: The Company performs an allocation of the
    market value of the reporting unit to its identifiable tangible
    and non-goodwill intangible assets and liabilities. This derives
    an implied fair value for the reporting units goodwill.
    The Company then compares the implied fair value of the
    reporting units goodwill with the carrying amount of the
    reporting units goodwill. If the carrying amount of the
    reporting units goodwill is greater than the implied fair
    value of its goodwill, an impairment charge is recognized for
    the excess.

Between October 1, 2002 and
September 30, 2003, the Companys goodwill balance
decreased by $0.4 million to $49.4 million as a result
of the finalization of the working capital adjustment related to
the NDB acquisition as described in Note 2. The Company
performed its most recent annual impairment test on
September 30, 2003, showing no impairment of goodwill. As
such, there was no write-down of the goodwill balance.

41



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Other Intangible Assets

Other intangible assets are presented at cost,
net of accumulated amortization. Amortization is calculated
using the straight-line method over estimated useful lives of
the assets, which are 7 years for purchased technology,
trade names and customer relationships and 8 years for
non-compete agreements.

Impairment of Long Lived Assets

Long-lived assets and certain identifiable
intangible assets are reviewed for impairment. For assets to be
held and used, including acquired intangibles, the Company
initiates a review whenever events or changes in circumstances
indicate that the carrying value of a long-lived asset may not
be recoverable. Recoverability of an asset is measured by
comparing its carrying value to the future undiscounted cash
flows that the asset is expected to generate. Any impairment is
measured by the amount by which the carrying value exceeds the
projected discounted future operating cash flows. Assets to be
disposed of and that the Company has committed to a plan to
dispose of, whether through sale or abandonment, are reported at
the lower of carrying value or fair value less costs to sell.

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 FASB Interpretation
No. 44 Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of Opinion
No. 25. The Company also complies with the disclosure
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation and SFAS No. 148,
Accounting for Stock-Based Compensation, Transition and
Disclosure. Under APB Opinion No. 25, compensation
cost is recognized over the vesting period based on the
difference, if any, on the date of grant between the fair value
of the Companys stock and the amount an employee must pay
to acquire the stock.

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.

|                        |  |                          |           |      |  |      |           |  |  |  |           | 
|----------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                        |  |                         
|                        |  | Year Ended September 30,
|                        |  |                         
|                        |  | 2001                     |           | 2002 |  | 2003
|                        |  |                          |           |      |  |     
|Dividend yield          |  |                          | 0.0%      |      |  |      | 0.0%      |  |  |  | 0.0%      | 
|Expected life of option |  |                          | 3.1 years |      |  |      | 2.8 years |  |  |  | 3.3 years | 
|Risk-free interest rate |  |                          | 4.92%     |      |  |      | 3.67%     |  |  |  | 2.83%     | 
|Expected volatility     |  |                          | 50.0%     |      |  |      | 75.0%     |  |  |  | 78.8%     | 

42



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 earnings per share for fiscal years
2001, 2002 and 2003 would have been as set forth in the table
below. 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.

|                                                                                                                                                    |  |                           |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                                    |  |                          
|                                                                                                                                                    |  | Year Ended September 30, 
|                                                                                                                                                    |  |                          
|                                                                                                                                                    |  | 2001                      |        | 2002 |  | 2003
|                                                                                                                                                    |  |                           |        |      |  |     
|                                                                                                                                                    |  |                          
|                                                                                                                                                    |  | (In thousands,           
|                                                                                                                                                    |  | except per share amounts)
|Net income  as reported                                                                                                                            |  | $                         | 11,045 |      |  | $    | 9,149  |   |  | $ | 4,365  |  
|Add: Stock-based employee compensation expense
    included in reported income, net of related tax effects                                          |  |                           | 37     |      |  |      | 20     |   |  |   | 20     |  
|Deduct: Total stock-based employee compensation
    expense determined under fair-value based method for all awards,
    net of related tax effects |  |                           | (1,003 | )    |  |      | (1,534 | ) |  |   | (1,959 | )
|                                                                                                                                                    |  |                           |        |      |  |      |        |   |  |   |        |  
|Net income  pro forma                                                                                                                              |  | $                         | 10,079 |      |  | $    | 7,635  |   |  | $ | 2,426  |  
|                                                                                                                                                    |  |                           |        |      |  |      |        |   |  |   |        |  
|Basic net income per share  as reported                                                                                                            |  | $                         | 0.85   |      |  | $    | 0.70   |   |  | $ | 0.34   |  
|                                                                                                                                                    |  |                           |        |      |  |      |        |   |  |   |        |  
|Basic net income per share  pro forma                                                                                                              |  | $                         | 0.78   |      |  | $    | 0.59   |   |  | $ | 0.19   |  
|                                                                                                                                                    |  |                           |        |      |  |      |        |   |  |   |        |  
|Diluted net income per share as reported                                                                                                            |  | $                         | 0.83   |      |  | $    | 0.69   |   |  | $ | 0.33   |  
|                                                                                                                                                    |  |                           |        |      |  |      |        |   |  |   |        |  
|Diluted net income per share pro forma                                                                                                              |  | $                         | 0.76   |      |  | $    | 0.57   |   |  | $ | 0.19   |  
|                                                                                                                                                    |  |                           |        |      |  |      |        |   |  |   |        |  

43



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,
|                                                 |  |                         
|                                                 |  | 2001                     |        | 2002 |  | 2003
|                                                 |  |                          |        |      |  |     
|                                                 |  |                         
|                                                 |  | (In thousands,          
|                                                 |  | except per share data)  
|Net income from continuing operations            |  | $                        | 11,045 |      |  | $    | 9,205  |   |  | $ | 4,365  | 
|Net loss from discontinued operations            |  |                          |       |      |  |      | (56    | ) |  |   |       | 
|                                                 |  |                          |        |      |  |      |        |   |  |   |        | 
|Net income                                       |  | $                        | 11,045 |      |  | $    | 9,149  |   |  | $ | 4,365  | 
|                                                 |  |                          |        |      |  |      |        |   |  |   |        | 
|Weighted average shares outstanding              |  |                          | 12,933 |      |  |      | 13,039 |   |  |   | 12,948 | 
|Dilutive common stock options                    |  |                          | 343    |      |  |      | 274    |   |  |   | 165    | 
|                                                 |  |                          |        |      |  |      |        |   |  |   |        | 
|Weighted average shares assuming dilution        |  |                          | 13,276 |      |  |      | 13,313 |   |  |   | 13,113 | 
|                                                 |  |                          |        |      |  |      |        |   |  |   |        | 
|Net income per share from continuing operations: |  |                          |        |      |  |      |        |   |  |   |        | 
|Basic                                            |  | $                        | 0.85   |      |  | $    | 0.71   |   |  | $ | 0.34   | 
|                                                 |  |                          |        |      |  |      |        |   |  |   |        | 
|Diluted                                          |  | $                        | 0.83   |      |  | $    | 0.69   |   |  | $ | 0.33   | 
|                                                 |  |                          |        |      |  |      |        |   |  |   |        | 
|Net loss per share from discontinued operations: |  |                          |        |      |  |      |        |   |  |   |        | 
|Basic                                            |  |                          |       |      |  | $    | (0.00  | ) |  |   |       | 
|                                                 |  |                          |        |      |  |      |        |   |  |   |        | 
|Diluted                                          |  |                          |       |      |  | $    | (0.00  | ) |  |   |       | 
|                                                 |  |                          |        |      |  |      |        |   |  |   |        | 
|Net income per share:                            |  |                          |        |      |  |      |        |   |  |   |        | 
|Basic                                            |  | $                        | 0.85   |      |  | $    | 0.70   |   |  | $ | 0.34   | 
|                                                 |  |                          |        |      |  |      |        |   |  |   |        | 
|Diluted                                          |  | $                        | 0.83   |      |  | $    | 0.69   |   |  | $ | 0.33   | 
|                                                 |  |                          |        |      |  |      |        |   |  |   |        | 

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

|                          |  |                          |        |      |  |      |           |  |  |  |           | 
|------------------------- |  | ------------------------ | ------ | ---- |  | ---- | --------- |  |  |  | --------- | 
|                          |  |                         
|                          |  | Year Ended September 30,
|                          |  |                         
|                          |  | 2001                     |        | 2002 |  | 2003
|                          |  |                          |        |      |  |     
|Common stock options      |  |                          | 17,000 |      |  |      | 242,000   |  |  |  | 1,453,000 | 
|Convertible notes payable |  |                          |       |      |  |      | 1,081,250 |  |  |  | 1,081,250 | 
|                          |  |                          |        |      |  |      |           |  |  |  |           | 

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.

44



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                  |  |               |         |      |  |   |         | 
|------------------------------------------------- |  | ------------- | ------- | ---- |  | - | ------- | 
|                                                  |  |              
|                                                  |  | September 30,
|                                                  |  |              
|                                                  |  | 2002          |         | 2003
|                                                  |  |               |         |     
|Unrealized holding gain on short-term investments |  | $             | 11,000  |      |  | $ | 5,000   | 
|Foreign exchange translation adjustments          |  |               | 171,000 |      |  |   | 570,000 | 
|                                                  |  |               |         |      |  |   |         | 
|                                                  |  | $             | 182,000 |      |  | $ | 575,000 | 
|                                                  |  |               |         |      |  |   |         | 

Recently Issued Accounting Standards

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

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that a liability be recorded
in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about
the guarantees that an entity has issued, including a
reconciliation of changes in the entitys product warranty
liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The
disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after
December 15, 2002 and are addressed in Note 7 below.
The adoption of this standard did not have a material effect on
the Companys financial position or results of operations.

In November 2002, the EITF reached a consensus on
EITF No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF No. 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under
which the vendor will perform multiple revenue-generating
activities. EITF No. 00-21 is effective for the interim
periods beginning after June 15, 2003. The adoption of this
standard did not have a material effect on the Companys
financial position or results of operations.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based Compensation,
Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures
of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed
more prominently and in a tabular format. Additionally, SFAS
No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. The interim
disclosure requirements are effective for interim periods
commencing after December 15, 2002. The Company has adopted
this disclosure standard as required for the year ended
September 30, 2003.

In May 2003, the EITF reached a consensus on EITF
Issue No. 03-05, Applicability of AICPA Statement of
Position 97-2, Software Revenue Recognition, to
Non-Software Deliverables in Arrangement Containing
More-Than-Incidental Software. EITF No. 03-05
addresses the applicability of the Statement of

45



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Position No. 97-2 regarding software and
non-software deliverables in the multiple element arrangement,
giving consideration to whether the deliverables are essential
to the functionality of one another. EITF Issue No. 03-05
is effective for the interim periods, beginning after
August 13, 2003. The adoption of this standard is not
expected to have a material effect on the Companys
financial position or results of operations.

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
$68.3 million consisted of a cash payment of
$42.5 million on closing, a cash payment of
$3.3 million in settlement of a net working capital
adjustment in September 2003, 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, and transaction costs of $4.4 million.

In the finalization of the NDB purchase
accounting that occurred after the amount of the working capital
adjustment was agreed, the following adjustments were made to
amounts originally estimated: the total purchase price was
reduced by $1.2 million (reflecting a $1.3 million
reduction in the cash paid to Tekelec under the working capital
adjustment partially offset by an additional $32,000 in
transaction costs); and the value of net assets acquired was
reduced by $791,000 (reflecting a reduction of $423,000 in the
warranty liability assumed, the recognition of an additional
$551,000 in other liabilities assumed, a reduction of $497,000
in the net realizable value of inventory, a reversal of $560,000
in unused restructuring cost accruals and a reduction of
$726,000 in accounts receivable and other assets). As a result
of these adjustments, the goodwill resulting from the
transaction was reduced by $439,000.

NDBs principal product was the MGTS digital
telecommunications test system, which is similar to the
Companys DCT test systems. NDB operated 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 an independent valuation, the purchase
price has been allocated as follows:

|                                              |  |               |      | 
|--------------------------------------------- |  | ------------- | ---- | 
|Asset Category                                |  | Value        
|                                              |  |              
|                                              |  | (In millions)
|Net tangible assets                           |  | $             | 9.9  | 
|Purchased in-process research and development |  |               | 1.4  | 
|Intangible assets                             |  |               | 7.6  | 
|Goodwill                                      |  |               | 49.4 | 
|                                              |  |               |      | 
|Net assets acquired                           |  | $             | 68.3 | 
|                                              |  |               |      | 

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

46



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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.

|                                                                     |  |                       |        |      |  |   |        | 
|-------------------------------------------------------------------- |  | --------------------- | ------ | ---- |  | - | ------ | 
|                                                                     |  |                      
|                                                                     |  | Year Ended           
|                                                                     |  | September 30,        
|                                                                     |  |                      
|Pro Forma Information                                                |  | 2002                  |        | 2001
|                                                                     |  |                       |        |     
|                                                                     |  |                      
|                                                                     |  | (In thousands, except
|                                                                     |  | net income per share)
|                                                                     |  | (unaudited)          
|Revenue                                                              |  | $                     | 69,660 |      |  | $ | 86,276 | 
|Net income (loss)                                                    |  | $                     | (1,796 | )    |  | $ | 3,507  | 
|Net income (loss) per share from continuing
    operations  basic   |  | $                     | (0.14  | )    |  | $ | 0.27   | 
|Net income (loss) per share from continuing
    operations  diluted |  | $                     | (0.14  | )    |  | $ | 0.26   | 



|         |                               
|-------- | ------------------------------
|Note 3  | Goodwill and Intangible Assets

Between October 1, 2002 and
September 30, 2003, the Companys goodwill balance
decreased by $439,000 to $49.4 million as a result of the
finalization of the working capital adjustment related to the
NDB acquisition described in Note 2. The Company performed
its most recent annual impairment test on September 30,
2003 and determined that goodwill was not impaired. As such,
there was no write-down of the goodwill balance.

Intangible assets subject to amortization consist
of purchased technology, trade names and customer relationships
that are being amortized over a period of seven years,
non-compete agreements that are being amortized over a period of
eight years, and a backlog that was amortized over a period of
six months, as follows (in thousands):

|                       |  |                          |       |                          |  |          |      |          |  |              |       |          |  |   |       |  |  |   |        |   |  |   |       | 
|---------------------- |  | ------------------------ | ----- | ------------------------ |  | -------- | ---- | -------- |  | ------------ | ----- | -------- |  | - | ----- |  |  | - | ------ | - |  | - | ----- | 
|                       |  |                          |       |                         
|                       |  | As of September 30, 2002 |       | As of September 30, 2003
|                       |  |                          |       |                         
|                       |  | Gross                    |       |                          |  | Net      |      | Gross    |  |              |       | Net     
|                       |  | Carrying                 |       | Accumulated              |  | Carrying |      | Carrying |  | Accumulated  |       | Carrying
|                       |  | Amount                   |       | Amortization             |  | Amount   |      | Amount   |  | Amortization |       | Amount  
|                       |  |                          |       |                          |  |          |      |          |  |              |       |         
|Purchased technology   |  |                          | 4,800 |                          |  |          | (57  | )        |  |              | 4,743 |          |  |   | 4,800 |  |  |   | (743   | ) |  |   | 4,057 | 
|Trade names            |  |                          | 1,000 |                          |  |          | (12  | )        |  |              | 988   |          |  |   | 1,000 |  |  |   | (155   | ) |  |   | 845   | 
|Customer relationships |  |                          | 1,000 |                          |  |          | (12  | )        |  |              | 988   |          |  |   | 1,000 |  |  |   | (155   | ) |  |   | 845   | 
|Non-compete agreement  |  |                          | 400   |                          |  |          | (4   | )        |  |              | 396   |          |  |   | 400   |  |  |   | (54    | ) |  |   | 346   | 
|System backlog         |  |                          | 400   |                          |  |          | (200 | )        |  |              | 200   |          |  |   | 400   |  |  |   | (400   | ) |  |   |      | 
|                       |  |                          |       |                          |  |          |      |          |  |              |       |          |  |   |       |  |  |   |        |   |  |   |       | 
|Total                  |  | $                        | 7,600 |                          |  | $        | (285 | )        |  | $            | 7,315 |          |  | $ | 7,600 |  |  | $ | (1,507 | ) |  | $ | 6,093 | 
|                       |  |                          |       |                          |  |          |      |          |  |              |       |          |  |   |       |  |  |   |        |   |  |   |       | 

47



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|            |  |               |     | 
|----------- |  | ------------- | --- | 
|Fiscal Year |  | Amount       
|            |  |              
|            |  | (In millions)
|2004        |  | $             | 1.0 | 
|2005        |  |               | 1.0 | 
|2006        |  |               | 1.0 | 
|2007        |  |               | 1.0 | 
|2008        |  |               | 1.0 | 
|Thereafter  |  |               | 1.1 | 
|            |  |               |     | 
|Total       |  | $             | 6.1 | 
|            |  |               |     | 



|         |                                   
|-------- | ----------------------------------
|Note 4  | Restructuring of Acquired Business

Prior to the effective date of the acquisition of
NDB, 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 in the acquisition. In fiscal 2003, $560,000 of the
originally estimated redundancy costs was determined to be
surplus to actual requirements and was accordingly reversed. The
remaining costs were all paid by September 30, 2003 as
follows:

|                              |  |                    |     |                |  |                  |     |                    |  |   |     |  |  |   |   | 
|----------------------------- |  | ------------------ | --- | -------------- |  | ---------------- | --- | ------------------ |  | - | --- |  |  | - | - | 
|                              |  | Accrual as at      |     | Paid in Fiscal |  | Adjustments made |     | Balance at        
|Restructuring Costs           |  | September 30, 2002 |     | 2003           |  | in Fiscal 2003   |     | September 30, 2003
|                              |  |                    |     |                |  |                  |     |                   
|                              |  |                   
|                              |  | (In millions)     
|Redundancy compensation costs |  | $                  | 1.2 |                |  | $                | 0.6 |                    |  | $ | 0.6 |  |  | $ |  | 
|Occupancy costs               |  |                    | 0.3 |                |  |                  | 0.3 |                    |  |   |    |  |  |   |  | 
|Associated costs              |  |                    | 0.2 |                |  |                  | 0.2 |                    |  |   |    |  |  |   |  | 
|                              |  |                    |     |                |  |                  |     |                    |  |   |     |  |  |   |   | 
|Totals                        |  | $                  | 1.7 |                |  | $                | 1.1 |                    |  | $ | 0.6 |  |  | $ |  | 
|                              |  |                    |     |                |  |                  |     |                    |  |   |     |  |  |   |   | 



|         |                        
|-------- | -----------------------
|Note 5  | 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
attributable to discontinued operations in the amount of
$2.2 million has been excluded from the consolidated
statement of income for the year ended September 30, 2002.



|         |                     
|-------- | --------------------
|Note 6  | Restructuring Charge

A restructuring charge of $730,000 was recorded
and paid in the fourth quarter of fiscal 2003 related to costs
associated with the involuntary termination of 39 employees
including 25 in research and development, 10 in sales and
marketing, 3 in the customer service component of services cost
of goods and 1 in the manufacturing component of product cost of
goods. The terminations represented 15% of the Companys
pre-termination workforce. No restructuring charge was recorded
in fiscal 2002.

48



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |                            
|-------- | ---------------------------
|Note 7  | Other Income (Expense), Net

Other income in fiscal 2003 represented primarily
a Japanese consumption tax refund in the amount of approximately
$695,000 as well as foreign exchange gains in the amount of
approximately $411,000. Other expense in fiscal 2002 and 2001
represented primarily foreign exchange losses.



|         |                         
|-------- | ------------------------
|Note 8  | Balance Sheet Components

|                                                 |                                            |                       |        |              |  |      |        |              |        |   |        |        |  |   |        |        |        |  
|------------------------------------------------ | ------------------------------------------ | --------------------- | ------ | ------------ |  | ---- | ------ | ------------ | ------ | - | ------ | ------ |  | - | ------ | ------ | ------ | -
|                                                 |                                            |                      
|                                                 |                                            | September 30,        
|                                                 |                                            |                      
|                                                 |                                            |                       |        |             
|                                                 |                                            | 2002                  |        | 2003        
|                                                 |                                            |                       |        |             
|                                                 |                                            | Cost                  |        | Market Value |  | Cost |        | Market Value
|                                                 |                                            |                       |        |              |  |      |        |             
|                                                 |                                            |                      
|                                                 |                                            | (In thousands)       
|Short-term investments and cash
    equivalents: |                                            |                       |        |              |  |      |        |              |        |   |        |        |  |   |        |       
|                                                 | U.S. government, corporations and agencies |                       | $      | 4,359        |  |      | $      | 4,396        |        |   | $      |       |  |   | $      |       |       
|                                                 | Commercial paper                           |                       |        | 4,439        |  |      |        | 4,445        |        |   |        | 1,650  |  |   |        | 1,650  |       
|                                                 | State and municipal securities             |                       |        | 19,086       |  |      |        | 19,054       |        |   |        | 22,114 |  |   |        | 22,119 |       
|                                                 |                                            |                       |        |              |  |      |        |              |        |   |        |        |  |   |        |       
|                                                 |                                            | $                     | 27,884 |              |  | $    | 27,895 |              |        | $ | 23,764 |        |  | $ | 23,769 |       
|                                                 |                                            |                       |        |              |  |      |        |              |        |   |        |        |  |   |        |       
|                                                 |                                            | Less cash equivalents |        |              |  |      |        |              | (5,105 | ) |        |        |  |   |        |        | (4,868 | )
|                                                 |                                            |                       |        |              |  |      |        |              |        |   |        |        |  |   |        |       
|                                                 | Short-term investments                     |                       |        |              |  |      | $      | 22,790       |        |   |        |        |  |   | $      | 18,901 |       
|                                                 |                                            |                       |        |              |  |      |        |              |        |   |        |        |  |   |        |       

Unrealized gains on short-term investments were
$11,000 and $5,000 as at September 30, 2002 and 2003,
respectively.

|                        |                                                |                |       |        |   |   |       |        |  
|----------------------- | ---------------------------------------------- | -------------- | ----- | ------ | - | - | ----- | ------ | -
|                        |                                                |               
|                        |                                                | September 30, 
|                        |                                                |               
|                        |                                                | 2002           |       | 2003  
|                        |                                                |                |       |       
|                        |                                                |               
|                        |                                                | (In thousands)
|Inventories:            |                                                |                |       |        |   |   |       |       
|                        | Raw materials                                  |                | $     | 3,371  |   |   | $     | 2,092  |  
|                        | Work-in-process                                |                |       | 21     |   |   |       | 140    |  
|                        | Finished goods                                 |                |       | 477    |   |   |       | 93     |  
|                        |                                                |                |       |        |   |   |       |       
|                        |                                                | $              | 3,869 |        |   | $ | 2,325 |       
|                        |                                                |                |       |        |   |   |       |       
|Property and equipment: |                                                |                |       |        |   |   |       |       
|                        | Equipment                                      |                | $     | 5,572  |   |   | $     | 6,062  |  
|                        | Leasehold improvements                         |                |       | 1,148  |   |   |       | 1,859  |  
|                        |                                                |                |       |        |   |   |       |       
|                        |                                                |                | 6,720 |        |   |   | 7,921 |       
|                        | Less accumulated depreciation and amortization |                |       | (2,846 | ) |   |       | (4,537 | )
|                        |                                                |                |       |        |   |   |       |       
|                        |                                                | $              | 3,874 |        |   | $ | 3,384 |       
|                        |                                                |                |       |        |   |   |       |       

|                                 |                              |                                         |   |      |      |      |   |    |     |   |   |     |     | 
|-------------------------------- | ---------------------------- | --------------------------------------- | - | ---- | ---- | ---- | - | -- | --- | - | - | --- | --- | 
|                                 |                              |                                        
|                                 |                              | September 30,                          
|                                 |                              |                                        
|                                 |                              | 2001                                    |   | 2002 |      | 2003
|                                 |                              |                                         |   |      |      |     
|Allowance for doubtful accounts: |                              |                                         |   |      |      |      |   |    |     |   |   |    
|                                 | Balance at beginning of year |                                         | $ | 83   |      |      | $ | 73 |     |   | $ | 38  |    
|                                 |                              | Charged (credited) to cost and expenses |   |      | 110  |      |   |    | (35 | ) |   |     | 282 | 
|                                 |                              | Write-off of doubtful accounts          |   |      | (120 | )    |   |    |    |   |   |     |    | 
|                                 |                              |                                         |   |      |      |      |   |    |     |   |   |    
|                                 | Balance at end of year       |                                         | $ | 73   |      |      | $ | 38 |     |   | $ | 320 |    
|                                 |                              |                                         |   |      |      |      |   |    |     |   |   |    

49



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                     |                                                                                      |                |        |       |  |   |       |       | 
|-------------------- | ------------------------------------------------------------------------------------ | -------------- | ------ | ----- |  | - | ----- | ----- | 
|                     |                                                                                      |               
|                     |                                                                                      | September 30, 
|                     |                                                                                      |               
|                     |                                                                                      | 2002           |        | 2003 
|                     |                                                                                      |                |        |      
|                     |                                                                                      |               
|                     |                                                                                      | (In thousands)
|Accrued liabilities: |                                                                                      |                |        |       |  |   |       |      
|                     | Payroll and related expenses                                                         |                | $      | 3,299 |  |   | $     | 1,688 | 
|                     | Income taxes payable                                                                 |                |        | 5,972 |  |   |       | 2,258 | 
|                     | Other taxes payable                                                                  |                |        | 323   |  |   |       | 838   | 
|                     | Acquisition related expenses, including estimated
    net working capital adjustment |                |        | 7,226 |  |   |       |      | 
|                     | Other                                                                                |                |        | 2,009 |  |   |       | 1,218 | 
|                     |                                                                                      |                |        |       |  |   |       |      
|                     |                                                                                      | $              | 18,829 |       |  | $ | 6,002 |      
|                     |                                                                                      |                |        |       |  |   |       |      

The following table represents the activity in
Warranty Accrual for the year ended September 30, 2003 (in
thousands):

|                              |                                                          |   |     |      |  
|----------------------------- | -------------------------------------------------------- | - | --- | ---- | -
|Balance at September 30, 2002 |                                                          | $ | 600 |     
|                              | Settlements made during the period                       |   |     | (126 | )
|                              | Adjustment to goodwill for acquired warranty
    accrual |   |     | (423 | )
|                              | Accruals for warranties issued during the period         |   |     | 9    |  
|                              |                                                          |   |     |     
|Balance at September 30, 2003 |                                                          | $ | 60  |     
|                              |                                                          |   |     |     



|         |                          
|-------- | -------------------------
|Note 9  | 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. As at September 30, 2003, Tekelec had not
converted any of the notes. 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. The resultant amounts credited
to interest income were $34,000 and $407,000 in 2002 and 2003,
respectively.

On the maturity date of the $10.0 million
note, the Company is entitled to pay the principal balance in
any combination of cash and/or common stock, provided that the
common stock shall be at a value of 82.5% of the fair market
value of the stock, determined pursuant to a formula set forth
in the note.



|          |             
|--------- | ------------
|Note 10  | Income Taxes

Consolidated income before income taxes includes
non-U.S. income of approximately $7.7 million,
$10.8 million and $4.3 million in fiscal 2001, 2002
and 2003, respectively.

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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The provision for income taxes consists of the
following:

|          |              |                          |       |       |  |      |        |        |   |   |        |        |  
|--------- | ------------ | ------------------------ | ----- | ----- |  | ---- | ------ | ------ | - | - | ------ | ------ | -
|          |              |                         
|          |              | Year Ended September 30,
|          |              |                         
|          |              | 2001                     |       | 2002  |  | 2003
|          |              |                          |       |       |  |     
|          |              |                         
|          |              | (In thousands)          
|Current:  |              |                          |       |       |  |      |        |        |   |   |        |       
|          | U.S. federal |                          | $     | 3,269 |  |      | $      | 2,419  |   |   | $      | (1,212 | )
|          | State        |                          |       | 503   |  |      |        | 190    |   |   |        | 30     |  
|          | Foreign      |                          |       | 1,676 |  |      |        | 2,047  |   |   |        | 978    |  
|          |              |                          |       |       |  |      |        |        |   |   |        |       
|          |              |                          | 5,448 |       |  |      | 4,656  |        |   |   | (204   | )     
|          |              |                          |       |       |  |      |        |        |   |   |        |       
|Deferred: |              |                          |       |       |  |      |        |        |   |   |        |       
|          | U.S. federal |                          |       | 308   |  |      |        | (1,001 | ) |   |        | (1,677 | )
|          | State        |                          |       | 54    |  |      |        | (75    | ) |   |        | (205   | )
|          |              |                          |       |       |  |      |        |        |   |   |        |       
|          |              |                          | 362   |       |  |      | (1,076 | )      |   |   | (1,882 | )     
|          |              |                          |       |       |  |      |        |        |   |   |        |       
|          |              | $                        | 5,810 |       |  | $    | 3,580  |        |   | $ | (2,086 | )     
|          |              |                          |       |       |  |      |        |        |   |   |        |       

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

|                                    |  |               |    |      |  |      |    |   |  |  |     |   
|----------------------------------- |  | ------------- | -- | ---- |  | ---- | -- | - |  |  | --- | --
|                                    |  |              
|                                    |  | Year Ended   
|                                    |  | September 30,
|                                    |  |              
|                                    |  | 2001          |    | 2002 |  | 2003
|                                    |  |               |    |      |  |     
|Tax at federal rate                 |  |               | 35 | %    |  |      | 34 | % |  |  | 34  | % 
|State taxes, net of federal benefit |  |               | 3  |      |  |      |   |   |  |  | (8  | ) 
|Excess foreign tax rate             |  |               | (2 | )    |  |      | (3 | ) |  |  | (42 | ) 
|Foreign tax credit                  |  |               |   |      |  |      | (2 | ) |  |  | (45 | ) 
|Research credit                     |  |               |   |      |  |      | (2 | ) |  |  | (25 | ) 
|Other                               |  |               | (2 | )    |  |      | 1  |   |  |  | (6  | ) 
|                                    |  |               |    |      |  |      |    |   |  |  |     |   
|                                    |  |               | 34 | %    |  |      | 28 | % |  |  | (92 | )%
|                                    |  |               |    |      |  |      |    |   |  |  |     |   

The Companys effective tax rate in fiscal
2003 was impacted by three factors: the identification of
approximately $830,000 in additional taxes recoverable from a
previous period; a reduction of approximately $970,000 in the
estimated tax payable at the end of the fiscal year as a result
of the likely favorable outcome of a tax audit of the
Companys Japanese subsidiary; and the recognition of
approximately $775,000 in future tax benefits of foreign tax
credits created in the liquidation of the Japanese subsidiary
acquired from Tekelec. As a result, the Companys effective
tax rate decreased from 28% in fiscal 2002 to a benefit of 92%
in fiscal 2003.

51



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CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net deferred tax assets consist of the following:

|                      |                                  |                          |       |      |       |   |       |     |       |  
|--------------------- | -------------------------------- | ------------------------ | ----- | ---- | ----- | - | ----- | --- | ----- | -
|                      |                                  |                         
|                      |                                  | September 30,           
|                      |                                  |                         
|                      |                                  | 2002                     |       | 2003
|                      |                                  |                          |       |     
|                      |                                  |                         
|                      |                                  | (In thousands)          
|Accruals and reserves |                                  | $                        | 1,449 |      |       | $ | 1,837 |    
|                      | Foreign net operating losses     |                          |       |     |       |   |       | 13  |      
|                      | Current and deferred state taxes |                          |       | 63   |       |   |       | 10  |      
|                      | Research credit                  |                          |       |     |       |   |       | 687 |      
|                      | Foreign tax credit               |                          |       | 255  |       |   |       | 587 |      
|                      | Other                            |                          |       | 210  |       |   |       |    |      
|                      |                                  |                          |       |      |       |   |       |    
|                      |                                  | Deferred tax assets      |       |      | 1,977 |   |       |     | 3,134 |  
|                      |                                  | Deferred tax liabilities |       |      |      |   |       |     | (18   | )
|                      |                                  |                          |       |      |       |   |       |    
|                      |                                  | Net deferred tax assets  |       |      | 1,977 |   |       |     | 3,116 |  
|                      |                                  |                          |       |      |       |   |       |    
|                      | Less: Non-current portion        |                          |       | 763  |       |   |       | 709 |      
|                      |                                  |                          |       |      |       |   |       |    
|                      |                                  | $                        | 1,214 |      |       | $ | 2,407 |    
|                      |                                  |                          |       |      |       |   |       |    

As of September 30, 2003, U.S. income taxes
and foreign withholding taxes were not provided for on a
cumulative total of $11.2 million of undistributed earnings
for certain non-U.S. subsidiaries. The Company intends to
reinvest these earnings indefinitely in operations outside the
United States.

As of September 30, 2003, the Company had
federal and state tax credit carryforwards for income tax
purposes of $1.2 million and $116,000, respectively. If not
utilized, the federal credits will expire in fiscal years 2008
through 2023 and the state tax credit carryforwards will expire
in fiscal year 2008.



|          |                     
|--------- | --------------------
|Note 11  | 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 options to
purchase an additional 1,800,000 shares. At the January 2003
Annual Meeting, stockholders approved an increase of 1,000,000
shares to the 1998 Plan. 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 total options granted 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 total options granted per month
commencing 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 were
terminated as to future grants in 1998 effective with the
adoption of the 1998 Plan.

52



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information with respect to stock option activity
from September 30, 2000 through September 30, 2003 is
set forth below:

|                            |                   |             |           |                  |   |   |       |       | 
|--------------------------- | ----------------- | ----------- | --------- | ---------------- | - | - | ----- | ----- | 
|                            |                   | Number of   |           | Weighted        
|                            |                   | Options     |           | Average Exercise
|                            |                   | Outstanding |           | Price           
|                            |                   |             |           |                 
|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 |      
|                            | Options granted   |             |           | 777,466          |   |   | $     | 10.08 | 
|                            | Options exercised |             |           | (55,577          | ) |   | $     | 4.27  | 
|                            | Options canceled  |             |           | (164,738         | ) |   | $     | 12.81 | 
|                            |                   |             |           |                  |   |   |       |      
|Balance, September 30, 2003 |                   |             | 1,785,793 |                  |   | $ | 12.54 |      
|                            |                   |             |           |                  |   |   |       |      

As of September 30, 2003, 1,061,252 options
remained available for grant.

As of September 30, 2003, 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 - $ 5.80         |  |                     | 421,380   |                     |  |          | 6.6 |             |  | $        | 3.76  |  |  |  | 162,436 |  |  | $ | 0.52  | 
|$ 6.00 - $12.14         |  |                     | 475,067   |                     |  |          | 8.2 |             |  | $        | 11.39 |  |  |  | 189,371 |  |  | $ | 10.56 | 
|$12.70 - $15.63         |  |                     | 362,057   |                     |  |          | 7.7 |             |  | $        | 14.63 |  |  |  | 194,760 |  |  | $ | 15.24 | 
|$15.88 - $19.21         |  |                     | 387,460   |                     |  |          | 7.0 |             |  | $        | 18.20 |  |  |  | 279,753 |  |  | $ | 17.96 | 
|$19.25 - $25.10         |  |                     | 139,829   |                     |  |          | 7.3 |             |  | $        | 21.74 |  |  |  | 90,404  |  |  | $ | 21.27 | 
|                        |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 
|$ 0.23 - $25.10         |  |                     | 1,785,793 |                     |  |          | 7.4 |             |  | $        | 12.54 |  |  |  | 916,724 |  |  | $ | 13.11 | 
|                        |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 

53



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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 2001, 2002 and 2003 were as
follows:

|                                      |  |                  |       |                  |  |   |       | 
|------------------------------------- |  | ---------------- | ----- | ---------------- |  | - | ----- | 
|                                      |  | Weighted Average |       | Weighted Average
|                                      |  | Exercise Price   |       | Fair Value      
|                                      |  |                  |       |                 
|Year Ended September 30, 2001         |  |                  |       |                  |  |   |       | 
|Exercise price equal to market value  |  | $                | 16.98 |                  |  | $ | 6.48  | 
|Year Ended September 30, 2002         |  |                  |       |                  |  |   |       | 
|Exercise price equal to market value  |  | $                | 17.51 |                  |  | $ | 8.23  | 
|Exercise price less then market value |  | $                | 19.32 |                  |  | $ | 10.51 | 
|All options granted                   |  | $                | 18.53 |                  |  | $ | 9.52  | 
|Year Ended September 30, 2003         |  |                  |       |                  |  |   |       | 
|Exercise price equal to market value  |  | $                | 10.08 |                  |  | $ | 5.45  | 

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 18,644 shares, 13,973
shares and 33,095 shares were issued under the Purchase Plan in
the years ended September 30, 2001, 2002 and 2003,
respectively.

Repurchase of Common Stock

In December 1999, the Companys Board of
Directors authorized a stock repurchase program of up to
2,000,000 shares of its common stock. Depending on market
conditions and other factors, repurchases can be made from time
to time in the open market and in negotiated transactions,
including block transactions, and this program may be
discontinued at any time. In the year ended September 30,
2003, the Company repurchased 257,400 shares at a cost of
approximately $1.8 million. The shares repurchased were
restored to the status of authorized but unissued. In addition,
$300,000 in treasury stock previously repurchased were restored
to the status of authorized but unissued. In the years ended
September 30, 2001 and 2002, the Company repurchased no
shares. As at September 30, 2003, the Company is authorized
to repurchase an additional 1,742,600 shares of its common stock
under the stock repurchase program.

Note 12  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, 2001, 2002 and 2003.

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,
2001, 2002 and 2003 were $76,000, $106,000 and $217,000,
respectively.

Note 13  Commitments and
Contingencies

The Company leases its facility in Mountain View,
California under non-cancelable operating lease agreements for
approximately 39,000 square feet that expire in 2005. The
lease agreements provide for

54



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CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

minimum annual rent of approximately $390,000.
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 space commencing February 2003 and expiring in 2008.
The Company leases other facilities in Illinois, Texas, Canada,
Japan, Australia, the United Kingdom, France, Sweden, Finland
and Germany under leases with the longest term expiring in 2009.

Rent expense for all facilities for the years
ended September 30, 2001, 2002 and 2003 was approximately
$816,000, $1.0 million and $1.6 million, respectively.

Future minimum annual rental payments under
non-cancelable operating leases as of September 30, 2003
are as follows (in thousands):

|                               |  |   |       | 
|------------------------------ |  | - | ----- | 
|Year ending September 30, 2004 |  | $ | 1,203 | 
|2005                           |  |   | 713   | 
|2006                           |  |   | 392   | 
|2007                           |  |   | 399   | 
|2008                           |  |   | 307   | 
|Thereafter                     |  |   | 76    | 
|                               |  |   |       | 
|                               |  | $ | 3,090 | 
|                               |  |   |       | 

A lawsuit was instituted in October 2002 against
the Company and one of its subsidiaries, Catapult Communications
International Limited, an Irish corporation, in the Antwerp
Commercial Court, Antwerp, Belgium, by Tucana Telecom NV, a
Belgian company (Tucana). Tucana had been a
distributor of products for Tekelec, the company from which NDB
was acquired in August 2002. The writ alleges that the
defendants improperly terminated an exclusive distribution
agreement with Tucana following the acquisition of NDB and seeks
damages of 12,461,000 euros plus costs. A trial date on the
matter has been scheduled for January 16, 2004. 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 may be able to seek indemnification from Tekelec for
any damages assessed against it in this matter under the terms
of the Asset Purchase Agreement it entered into with Tekelec,
although there is no assurance that such indemnification would
be available.

Indemnifications

The Company provides general indemnification
provisions in its license agreements. In these agreements, the
Company generally states that it will defend or settle, at its
own expense, any claim against the customer by a third party
asserting a patent, copyright, trademark, trade secret or
proprietary right violation related to any products that the
Company has licensed to the customer. The Company agrees to
indemnify its customers against any loss, expense or liability,
including reasonable attorneys fees, from any damages
alleged against the customer by a third party in its course of
using products sold by the Company.

The Companys Articles of Incorporation
provide that the Company shall indemnify to the fullest extent
permitted by Nevada law any person made a party to an action or
proceeding by reason of the fact such person was a director,
officer, employee or agent of the Company. The Companys
Bylaws also obligate the Company to indemnify directors and
officers to the fullest extent permitted by law, as do the terms
of indemnification agreements that the Company has entered into
with its directors and officers. The indemnification covers any
expenses and liabilities reasonably incurred in connection with
the investigation, defense, settlement or appeal of legal
proceedings.

55



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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has not received any claims under
these indemnifications and does not know of any instances in
which such a claim may be brought against the Company in the
future.

Note 14  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.

The Companys revenues, income 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, 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                    |  |         | 1,398  |            |  |       | 374    |              |  |   | 201    |  |  |   | 1,973  | 
|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  | 
|Goodwill                             |  |         | 23,335 |            |  |       | 26,498 |              |  |   |       |  |  |   | 49,833 | 
|Long-lived assets                    |  |         | 7,177  |            |  |       | 4,090  |              |  |   | 331    |  |  |   | 11,598 | 
|Year ended September 30, 2003        |  |         |        |            |  |       |        |              |  |   |        |  |  |   |        | 
|Revenues from unaffiliated customers |  | $       | 17,399 |            |  | $     | 12,203 |              |  | $ | 15,622 |  |  | $ | 45,224 | 
|Net income                           |  |         | 791    |            |  |       | 2,889  |              |  |   | 685    |  |  |   | 4,365  | 
|Goodwill                             |  |         | 22,896 |            |  |       | 26,498 |              |  |   |       |  |  |   | 49,394 | 
|Long-lived assets                    |  |         | 5,849  |            |  |       | 3,753  |              |  |   | 286    |  |  |   | 9,888  | 

Revenues are segmented based on the location of
the customer and exclude all inter-company sales.

56



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##### Table of Contents



SUPPLEMENTARY FINANCIAL DATA

Quarterly Financial Data (unaudited)

Consolidated Statements of Income
Data:


|                      |         |                                       |        |          |  |          |        |           |  |   |       |      |  |   |       |      | 
|--------------------- | ------- | ------------------------------------- | ------ | -------- |  | -------- | ------ | --------- |  | - | ----- | ---- |  | - | ----- | ---- | 
|                      |         |                                      
|                      |         | Quarter Ended                        
|                      |         |                                      
|                      |         | Dec. 31,                              |        | Mar. 31, |  | June 30, |        | Sept. 30,
|                      |         | 2001                                  |        | 2002     |  | 2002     |        | 2002     
|                      |         |                                       |        |          |  |          |        |          
|                      |         |                                      
|                      |         | (In thousands, except per share data)
|Revenues              |         | $                                     | 10,883 |          |  | $        | 12,127 |           |  | $ | 8,023 |      |  | $ | 9,006 |     
|Gross profit          |         |                                       | 10,006 |          |  |          | 11,049 |           |  |   | 7,258 |      |  |   | 7,797 |     
|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 | 

|                        |         |          |        |          |  |          |        |           |  |   |        |      |  |   |        |      | 
|----------------------- | ------- | -------- | ------ | -------- |  | -------- | ------ | --------- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                        |         | Dec. 31, |        | Mar. 31, |  | June 30, |        | Sept. 30,
|                        |         | 2002     |        | 2003     |  | 2003     |        | 2003     
|                        |         |          |        |          |  |          |        |          
|Revenues                |         | $        | 10,385 |          |  | $        | 14,036 |           |  | $ | 10,597 |      |  | $ | 10,206 |     
|Gross profit            |         |          | 8,140  |          |  |          | 11,311 |           |  |   | 8,644  |      |  |   | 7,966  |     
|Operating income (loss) |         |          | (763   | )        |  |          | 2,258  |           |  |   | 239    |      |  |   | (1,107 | )   
|Net income              |         | $        | 111    |          |  | $        | 1,668  |           |  | $ | 1,361  |      |  | $ | 1,225  |     
|Net income per share:   |         |          |        |          |  |          |        |           |  |   |        |      |  |   |        |     
|                        | Basic   |          | $      | 0.01     |  |          | $      | 0.13      |  |   | $      | 0.11 |  |   | $      | 0.10 | 
|                        | Diluted |          | $      | 0.01     |  |          | $      | 0.13      |  |   | $      | 0.10 |  |   | $      | 0.09 | 



---



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






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Not applicable.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

(a) Evaluation of disclosure controls and
procedures.

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

(b) Changes in internal controls over
financial reporting.

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

57



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##### Table of Contents






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 13, 2004, 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.

Audit Committee Financial Expert

The Registrants Board of Directors has
determined that there is currently no Audit Committee Financial
Expert (as that term is defined in applicable rules of the
Securities and Exchange Commission) serving on its audit
committee. The Board of Directors has not identified a suitable
candidate for this position.

Code of Ethics

The Registrant has adopted a Code of Ethics for
Principal Executive and Senior Financial Officers, a copy of
which is filed as Exhibit 14 to this Report on
Form 10-K.






|         |                       
|-------- | ----------------------
|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 headings Security Ownership of Principal
Stockholders and Management and Executive
Compensation  Equity Compensation Plan
Information 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. | Principal Accountant Fees and
    Services

Incorporated by reference to the information
under the caption Proposal Three  Ratification
of Appointment of Independent Public Accountants in the
Registrants Proxy Statement.

58



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##### Table of Contents






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 32
of this report.

2.     Financial
Statement Schedules

Financial Statement Schedule: See Index to
Consolidated Financial Statements at Item 8 on page 32
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 Registrants Quarterly Report on
    Form 10-Q dated August 14, 2002.                        
|        | 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, as amended through
    November 20, 2003.                                                                                                                                                                                                 
|        | 4.1   |             |  | 2% Convertible Subordinated Note Due 2004 issued
    by Catapult Communications International Limited in the amount
    of $10,000,000  incorporated by reference to
    Exhibit 4.1 to Registrants Annual Report on
    Form 10-K dated December 19, 2003.   
|        | 4.2   |             |  | 2% Convertible Subordinated Note Due 2004 issued
    by Catapult Communications International Limited in the amount
    of $7,300,000 000  incorporated by reference to
    Exhibit 4.2 to Registrants Annual Report on
    Form 10-K dated December 19, 2003.
|        | 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 Registrants Form 10-K dated
    December 17, 2001.                                                                                                        
|        | 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, as amended October 28, 2003
    (related agreements are incorporated by reference to
    Exhibit 10.5 to Registrants Form 10-Q dated
    May 15, 2003.)                                                                                       
|        | 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 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.                                                                  

59



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                   
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.7  |             |  | Lease for office space located at
    800 Perimeter Park Drive, Morrisville, NC 27560 
    incorporated by reference to Exhibit 10.9 to
    Registrants Form 10-K dated December 20, 2002.                                      
|        | 10.8  |             |  | Form of Software Support Agreement 
    incorporated by reference to Exhibit 10.9 to Registration
    Statement No. 333-56627.                                                                                                   
|        | 10.9  |             |  | Lease for office space located at 190 South
    Whisman Road, Building G, Mountain View, CA 
    incorporated by reference to Exhibit 10.8 to
    Registrants Form 10-K dated December 20, 2002.                                
|        | 10.10 |             |  | 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.                     
|        | 10.11 |             |  | 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.
|        | 10.12 |             |  | 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).                                                                                                                          
|        | 14    |             |  | Code of Ethics for Principal Executive and Senior
    Financial Officers.                                                                                                                                                         
|        | 21.1  |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                   
|        | 23.1  |             |  | Consent of PricewaterhouseCoopers LLP,
    Independent Auditors.                                                                                                                                                                  
|        | 24.1  |             |  | Power of Attorney. Contained in the signature
    page of this Annual Report on Form 10-K.                                                                                                                                        
|        | 31    |             |  | Certifications of Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.                                       
|        | 32    |             |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                        



---



|  |                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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

The following report on Form 8-K was filed
by the Registrant during the quarter ended September 30,
2003:



| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     On July 24,
    2003, the Company filed a Current Report on Form 8-K/A to
    furnish a press release containing forward-looking statements
    issued by the Company on that date.

60



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##### Table of Contents






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 5, 2003

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. KARPRichard A. Karp                       |  | Chief Executive Officer,
    Chairman of the Board
    (Principal Executive Officer)   |  | December 5, 2003
|                                                        
|/s/ CHRISTOPHER A. STEPHENSON(Christopher A. Stephenson) |  | Chief Financial Officer
    (Principal Financial and
    Principal Accounting Officer) |  | December 5, 2003
|                                                        
|/s/ CHARLES L. WAGGONER(Charles L. Waggoner)             |  | Director                                                                               |  | December 5, 2003
|                                                        
|/s/ JOHN M. SCANDALIOS(John M. Scandalios)               |  | Director                                                                               |  | December 5, 2003
|                                                        
|/s/ NANCY H. KARP(Nancy H. Karp)                         |  | Director                                                                               |  | December 5, 2003
|                                                        
|/s/ HENRY P. MASSEY, JR(Henry P. Massey, Jr.)            |  | Director                                                                               |  | December 5, 2003
|                                                        
|/s/ PETER CROSS(Peter Cross)                             |  | Director                                                                               |  | December 5, 2003

61



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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 Registrants Quarterly Report on
    Form 10-Q dated August 14, 2002.                        
|        | 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, as amended through
    November 20, 2003.                                                                                                                                                                                                 
|        | 4.1   |             |  | 2% Convertible Subordinated Note Due 2004 issued
    by Catapult Communications International Limited in the amount
    of $10,000,000  incorporated by reference to
    Exhibit 4.1 to Registrants Annual Report on
    Form 10-K dated December 19, 2003.   
|        | 4.2   |             |  | 2% Convertible Subordinated Note Due 2004 issued
    by Catapult Communications International Limited in the amount
    of $7,300,000 000  incorporated by reference to
    Exhibit 4.2 to Registrants Annual Report on
    Form 10-K dated December 19, 2003.
|        | 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 Registrants Form 10-K dated
    December 17, 2001.                                                                                                        
|        | 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, as amended October 28, 2003
    (related agreements are incorporated by reference to
    Exhibit 10.5 to Registrants Form 10-Q dated
    May 15, 2003.)                                                                                       
|        | 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 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.                                                                  
|        | 10.7  |             |  | Lease for office space located at
    800 Perimeter park Drive, Morrisville, NC 27560 
    incorporated by reference to Exhibit 10.9 to
    Registrants Form 10-K dated December 20, 2002. .                                                                  
|        | 10.8  |             |  | Form of Software Support Agreement 
    incorporated by reference to Exhibit 10.9 to Registration
    Statement No. 333-56627.                                                                                                                                 
|        | 10.9  |             |  | Lease for office space located at 190 South
    Whisman Road, Building G, Mountain View, CA 
    incorporated by reference to Exhibit 10.8 to
    Registrants Form 10-K dated December 20, 2002.                                                              
|        | 10.10 |             |  | 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.                                                   
|        | 10.11 |             |  | 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.                              
|        | 10.12 |             |  | 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).                                                                                                                                                        
|        | 14    |             |  | Code of Ethics for Principal Executive and Senior
    Financial Officers.                                                                                                                                                                                       
|        | 21.1  |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                 
|        | 23.1  |             |  | Consent of PricewaterhouseCoopers LLP,
    Independent Auditors.                                                                                                                                                                                                



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##### Table of Contents



|        |      |             |  |                                                                                                                                                                                            
|------- | ---- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 24.1 |             |  | Power of Attorney. Contained in the signature
    page of this Annual Report on Form 10-K.                                                                                                 
|        | 31   |             |  | Certifications of Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.
|        | 32   |             |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002. 



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