CATAPULT COMMUNICATIONS CORP - 10-Q Quarterly Report

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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-24701

CATAPULT COMMUNICATIONS CORPORATION

(Exact name of Registrant as specified in its charter)


Nevada (State or other jurisdiction of incorporation or organization)		77-0086010 (I.R.S. Employer Identification Number)

160 South Whisman Road
Mountain View, California 94041

(650) 960-1025

(Address, including zip code, and telephone number, including
area code, of principal executive offices)

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

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

As of May 2, 2003, there were 12,868,531 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.

TABLE OF CONTENTS


Part I. Financial Information
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II. Other Information
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K.
EXHIBIT 10.15
EXHIBIT 99.1

CATAPULT COMMUNICATIONS CORPORATION
FORM 10-Q

INDEX


		Page

Part I—Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at March 31, 2003 and September 30, 2002		3
Condensed Consolidated Statements of Income for the three and six months ended March 31, 2003 and 2002		4
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2003 and 2002		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		24
Part II—Other Information
Item 4. Submission of Matters to a Vote of Security Holders		25
Item 5. Other Information		25
Item 6. Exhibits and Reports on Form 8-K		26
Signatures		26

Part I. Financial Information

Item 1. Financial Statements

CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
(unaudited)


			March 31,			September 30,
			2003			2002

ASSETS
Current Assets:
	Cash and cash equivalents		$	14,299		$	12,575
	Short-term investments			17,453			22,790
	Accounts receivable, net			10,612			11,009
	Inventories			3,472			3,869
	Deferred income taxes			882			1,214
	Prepaid expenses and other current assets			1,874			1,563
	Assets of discontinued operations			—			2,636

		Total current assets		48,592			55,656
Property and equipment, net				4,078			3,874
Goodwill				49,833			49,833
Other intangibles, net				6,604			7,315
Other assets				1,206			1,172

		Total assets	$	110,313		$	117,850

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable		$	1,271		$	2,594
	Accrued liabilities			13,051			18,829
	Deferred revenue			4,727			4,492
	Liabilities of discontinued operations			—			889

		Total current liabilities		19,049			26,804
Convertible notes payable				17,877			18,081

		Total liabilities		36,926			44,885

Stockholders’ Equity:
	Common stock			13			13
	Additional paid-in capital			20,748			22,625
	Deferred stock-based compensation			(93	)		(111	)
	Treasury stock			—			(300	)
	Accumulated other comprehensive income			384			182
	Retained earnings			52,335			50,556

		Total stockholders’ equity		73,387			72,965

		Total liabilities and stockholders’ equity	$	110,313		$	117,850

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

CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)
(unaudited)


			For the three						For the six
			months ended						months ended
			March 31,						March 31,
			2003			2002			2003		2002

Revenues:
	Products		$	11,513		$	10,573		$	19,498	$	20,099
	Services			2,523			1,554			4,923		2,911

		Total revenues		14,036			12,127			24,421		23,010

Cost of revenues:
	Products			1,792			803			3,169		1,417
	Services			761			275			1,458		538

		Total cost of revenues		2,553			1,078			4,627		1,955

Gross profit				11,483			11,049			19,794		21,055

Operating expenses:
	Research and development			3,695			1,807			7,063		3,445
	Sales and marketing			3,808			2,696			7,330		5,470
	General and administrative			1,722			1,636			3,906		2,815

		Total operating expenses		9,225			6,139			18,299		11,730

Operating income				2,258			4,910			1,495		9,325
Interest income, net				212			323			411		756
Other income (expense), net				(153	)		(56	)		565		(234	)

Income before income taxes				2,317			5,177			2,471		9,847
Provision for income taxes				649			1,450			692		2,758

Net income			$	1,668		$	3,727		$	1,779	$	7,089

Net income per share:
	Basic		$	0.13		$	0.29		$	0.14	$	0.54

	Diluted		$	0.13		$	0.28		$	0.13	$	0.53

Shares used in per share calculation:
	Basic			12,984			13,044			13,068		13,026
	Diluted			13,112			13,393			13,203		13,373

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

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


				Six months ended
				March 31,
				2003			2002

Cash flows from operating activities:
	Net income			$	1,779		$	7,089
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
			Depreciation and amortization		817			380
			Amortization of deferred stock-based compensation		18			15
			Loss on sale of short-term investments		—			4
			Amortization of acquisition related intangibles		711			—
			Deferred income taxes		332			—
			Amortization of premium on note payable		(204	)		—
			Change in current assets and liabilities:
			Accounts receivable		397			(3,041	)
			Inventories		397			92
			Prepaid expenses and other current assets		(311	)		(536	)
			Assets of discontinued operations		2,636			—
			Other assets		(34	)		39
			Accounts payable		(1,323	)		(212	)
			Accrued liabilities		(5,778	)		2,598
			Deferred revenue		235			400
			Liabilities of discontinued operations		(889	)		—

			Net cash provided by (used in) operating activities		(1,217	)		6,828

Cash flows from investing activities:
		Sales (purchases) of investments, net			5,335			(26,664	)
		Purchases of property and equipment			(1,021	)		(226	)

			Net cash provided by (used in) investing activities		4,314			(26,890	)

Cash flows from financing activities:
		Repurchase of common stock			(1,761	)		—
		Proceeds from issuance of common stock			184			531

			Net cash provided by (used in) financing activities		(1,577	)		531

Effect of exchange rate changes on cash and cash equivalents.					204			(91	)

Increase (decrease) in cash and cash equivalents					1,724			(19,622	)
Cash and cash equivalents, beginning of period					12,575			44,202

Cash and cash equivalents, end of period				$	14,299		$	24,580

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

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

NOTE 1—THE COMPANY AND BASIS OF PRESENTATION

Catapult Communications Corporation (the “Company”) designs, develops, manufactures, markets and supports an advanced software-based test system offering an integrated suite of testing applications for the global telecommunications industry. The Company’s advanced test systems assist its customers in the design, integration, installation and acceptance testing of a broad range of digital telecommunications equipment and services. The Company was founded in 1986 and has been incorporated in Nevada since June 19, 1998. The Company has operations in the United States, Canada, the United Kingdom and Europe, Australia and Japan. The Company conducts its business within one industry segment.

On August 30, 2002, the Company purchased certain assets and assumed certain liabilities of the Network Diagnostics Business (“NDB”) of Tekelec. The assets acquired included the shares of Tekelec’s Japanese subsidiary, Tekelec Limited. The total purchase price of $69.4 million consisted of a cash payment of $42.5 million, two 2% convertible subordinated notes in the aggregate principal amount of $17.3 million maturing on August 30, 2004, an independent valuation premium of $0.8 million ascribed to the convertible notes payable, transaction costs of $4.3 million and a net working capital adjustment in the estimated amount of $4.5 million pursuant to the terms of the Asset Purchase Agreement payable following the completion of a closing date balance sheet audit. The amount of this adjustment has not yet been agreed to or paid and the amounts included in these condensed consolidated financial statements relating to the purchase price and the assets and liabilities acquired are preliminary estimates subject to the net working capital adjustment.

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2002, and filed with the Securities and Exchange Commission. The unaudited financial statements as of March 31, 2003, and for the three and six months ended March 31, 2003 and 2002, reflect, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information set forth herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for any subsequent interim period or for an entire year. The September 30, 2002 balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

The Company has identified the policies below as critical to its business operations and the understanding of its results of operations. The impact and any associated risks related to these policies on its business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect the Company’s reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K.

Revenue Recognition

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

Foreign Currency Translations

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

Foreign Exchange Risk and Derivative Financial Instruments

The Company’s foreign subsidiaries operate and sell the Company’s products in various global markets. As a result, the Company is exposed to changes in exchange rates on foreign currency denominated sales made to foreign subsidiaries. The Company utilizes foreign currency forward exchange contracts and options to mitigate the risk of future movements in foreign exchange rates that affect certain foreign currency denominated inter-company receivables. The Company attempts to match the forward contracts with specific underlying receivables in terms of currency, amount and maturity. The Company does not use derivative financial instruments for speculative or trading purposes.

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.

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 must then assess 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, it must establish a valuation allowance. To the extent it establishes a valuation allowance or increases this allowance in a period, it must include an expense within the tax provision in the statement of operations.

Recent Accounting Pronouncements

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

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

The following table represents the activity in Warranty Accrual for the six months ended March 31, 2003 (in thousands):


Balance at September 30, 2002		$	600
	Settlements made during the period		(88	)
	Accruals for warranties issued during the period		88

Balance at March 31, 2003		$	600

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

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


		Three months ended						Six months ended
		March 31,						March 31,
		2003			2002			2003			2002

Net income, as reported		$	1,668		$	3,727		$	1,779		$	7,089
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			5			6			10			10
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects			(452	)		(407	)		(934	)		(790	)

Pro forma net income		$	1,221		$	3,326		$	855		$	6,309

Earnings per share:
	Basic, as reported	$	0.13		$	0.29		$	0.14		$	0.54

	Basic, pro forma	$	0.09		$	0.25		$	0.07		$	0.48

	Diluted, as reported	$	0.13		$	0.28		$	0.13		$	0.53

	Diluted, pro forma	$	0.09		$	0.25		$	0.06		$	0.47

NOTE 3—BASIC AND DILUTED EARNINGS PER SHARE

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


	Three months ended				Six months ended
	March 31,				March 31,
	2003		2002		2003		2002

	(in thousands, except per share data)
Net income	$	1,668	$	3,727	$	1,779	$	7,089

Weighted average shares outstanding		12,984		13,044		13,068		13,026
Dilutive options		128		349		135		347

Weighted average shares assuming dilution		13,112		13,393		13,203		13,373

Earnings per share:
Basic	$	0.13	$	0.29	$	0.14	$	0.54

Diluted	$	0.13	$	0.28	$	0.13	$	0.53

Anti-dilutive common equivalent shares excluded in calculating diluted earnings per share		1,332		32		1,253		38

NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS

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

The Company adopted the provisions of SFAS No.142 effective October 1, 2002. As of October 1, 2002, approximately $49.8 million of goodwill will no longer be amortized but will be tested annually for impairment in accordance with the requirements of SFAS No. 142. The Company performed its annual impairment test on October 1, 2002, showing no impairment of goodwill. As such, there was no write-down of the goodwill balance. Between October 1, 2002 and March 31, 2003, there were no changes to the Company s goodwill balance of $49.8 million.

As required by SFAS No. 142, the results for the prior year’s quarter have not been restated. Had SFAS No. 142 been adopted on October 1, 2001, the Company would have reported no difference in its reported net income and net income per share for the six months ended March 31, 2002.

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


	As of March 31, 2003						As of September 30, 2002
	Gross						Gross
	Carrying		Accumulated		Net Carrying		Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount

Purchased Technology	$	4,800	$	400	$	4,400	$	4,800	$	57	$	4,743
Other Intangibles		2,800		596		2,204		2,800		228		2,572

Total	$	7,600	$	996	$	6,604	$	7,600	$	285	$	7,315

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


	Amount
Fiscal Year	(in millions)

2003	$	0.5
2004		1.0
2005		1.0
2006		1.0
2007		1.0
Thereafter		2.1

Total	$	6.6

NOTE 5 - DISCONTINUED OPERATIONS

Effective September 30, 2002, the Company discontinued the distribution and consulting businesses engaged in by Tekelec Limited in Japan. As at March 31, 2003, the assets of the discontinued operations have been realized and the liabilities paid. The pre-tax loss attributable to discontinued operations was incurred and recognized in September 2002.

NOTE 6 - RESTRUCTURING OF ACQUIRED BUSINESS

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


	Accrual as at		Paid through		Balance at
Restructuring costs	September 30, 2002		March 31, 2003		March 31, 2003

Redundancy compensation costs	$	1.2	$	1.1	$	0.1
Occupancy costs		0.3		0.3		0.0
Professional costs		0.2		0.1		0.1

Totals	$	1.7	$	1.5	$	0.2

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

NOTE 7 —COMPREHENSIVE INCOME

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


	Three months ended						Six months ended
	March 31,						March 31,
	2003			2002			2003			2002

Net income	$	1,668		$	3,727		$	1,779		$	7,089
Currency translation adjustment		(54	)		2			204			(91	)
Unrealized loss on investment		(21	)		(129	)		(2	)		(167	)

Comprehensive income	$	1,593		$	3,600		$	1,981		$	6,831

NOTE 8—INVENTORIES


	March 31,		September 30,
	2003		2002

	(In thousands)
Raw materials	$	2,449	$	3,371
Work-in-process		238		21
Finished goods		785		477

	$	3,472	$	3,869

NOTE 9 – CONVERTIBLE NOTES PAYABLE

In connection with the acquisition of NDB described in Note 1, the Company’s Irish subsidiary issued two convertible notes to Tekelec in the principal amounts of $10.0 million and $7.3 million, respectively. These notes have been guaranteed by the Company, bear interest at 2% and are due and payable on or before

August 30, 2004. The notes are convertible at the option of the holder into 1,081,250 shares of the Company’s common stock (subject to adjustment for certain events) between August 30, 2003 and the maturity date. The Company also granted Tekelec certain rights to require the Company to register with the Securities and Exchange Commission for resale by Tekelec any common stock acquired by Tekelec upon conversion of the notes.

The fair value of the notes, as determined by an independent valuation, was $18.1 million, which has been recorded in the balance sheet. The premium of $0.8 million is being amortized to interest income over the term of the notes using the effective interest method and a credit to interest income of $102,000 was recorded in the three months ended March 31, 2003.

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

NOTE 10 – REPURCHASE OF COMMON STOCK

In December 1999, the Company’s Board of Directors authorized a stock repurchase program of up to 2,000,000 shares of its common stock. Depending on market conditions and other factors, repurchases can be made from time to time in the open market and in negotiated transactions, including block transactions, and this program may be discontinued at any time. In the three-month period ending March 31, 2003, the Company repurchased 257,400 shares at a cost of approximately $1.8 million. In the three-month period ended March 31, 2002, the Company repurchased no shares.

NOTE 11 - SEGMENT REPORTING

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

The Company’s principal geographical areas of operations, revenues and net income for the six month periods ended March 31, 2003 and 2002 and long-lived assets by region at March 31, 2003 and September 30, 2002 were as follows (in thousands):



				UK,
	North			Europe				Consolidated
	America			& Other		Japan		Total

Six months Ended March 31, 2003
Revenues from unaffiliated customers	$	8,421		$	5,647	$	10,353	$	24,421
Net income (loss)		(1,078	)		2,485		372		1,779
Long-Lived Assets at March 31, 2003	$	38,604		$	22,023	$	331	$	60,958
Six months Ended March 31, 2002
Revenues from unaffiliated customers	$	3,054		$	8,898	$	11,058	$	23,010
Net income (loss)		(965	)		7,812		242		7,089
Long-Lived Assets at September 30, 2002	$	39,765		$	21,335	$	331	$	61,431

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

NOTE 12 – CONTINGENCIES

A lawsuit was instituted in October 2002 against the Company and one of its subsidiaries, Catapult Communications International Limited, an Irish corporation, in the Antwerp Commercial Court, Antwerp, Belgium, by Tucana Telecom NV, a Belgian company (“Tucana”). Tucana has been a distributor of products for Tekelec, the company from which the Network Diagnostics Business was acquired in August 2002. The writ alleges that the defendants improperly terminated an exclusive distribution agreement with Tucana following the acquisition of the Network Diagnostics Business and seeks damages of 12,461,000 euros plus costs. A trial date has not yet been established. The Company believes the allegations to be without merit and would defend itself vigorously in the event that Tucana proceeds with the lawsuit during this period. The Company anticipates that it would seek indemnification from Tekelec for any damages assessed against it in this matter under the terms of the Asset Purchase Agreement it entered into with Tekelec and hence has not recorded a liability.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for 2002.

Forward-looking Statements

The following discussion contains statements that are not historical facts but are forward-looking statements. Such statements are generally identified by the use of forward-looking words and phrases, such as “intended,” “expects,” “anticipates” and “is (or are) expected (or anticipated).” These forward-looking statements include but are not limited to those identified in this report with an asterisk (*) symbol. Actual results may differ materially from those discussed in such forward-looking statements, and the Company’s stockholders should carefully review the cautionary statements set forth in this report on Form 10-Q, including those set forth under the caption “Factors That May Affect Future Results.”

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

Overview

Catapult Communications Corporation (“Catapult,” the “Company” or the “Registrant”) designs, develops, manufactures, markets and supports advanced software-based test systems offering integrated suites of testing applications for the global telecommunications industry. Catapult’s DCT, MGTS and Lance products are digital communications test systems designed to enable equipment manufacturers and network operators to deliver complex digital telecommunications equipment and services more quickly and cost-effectively, while helping to ensure interoperability and reliability. The Company’s advanced software and hardware assist customers in the design, integration, installation and acceptance testing of a broad range of digital telecommunications equipment and services. The DCT, MGTS and Lance products perform a variety of test functions, including simulation, load and stress testing, feature verification, conformance testing and monitoring. The Company maintains an extensive library of software modules that support a large number of industry standard protocols and variants thereon. In addition, the Company offers customer support under software support contracts, as well as installation and training services.

Critical Accounting Policies

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

Results of Operations

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


			For the three months ended						For the six months ended
			March 31,						March 31,

			2003			2002			2003			2002

Revenues:
	Products			82.2	%		87.2	%		79.8	%		87.3	%
	Services			18.0			12.8			20.2			12.7

		Total revenues		100.0			100.0			100.0			100.0
Cost of revenues:
	Products			12.8			6.6			12.9			6.2
	Services			5.4			2.3			6.0			2.3

		Total cost of revenues		18.2			8.9			18.9			8.5

Gross profit				81.8			91.1			81.1			91.5
Operating expenses:
	Research and development			26.3			14.9			29.0			15.0
	Sales and marketing			27.1			22.2			30.0			23.8
	General and administrative			12.3			13.5			16.0			12.2

		Total operating expenses		65.7			50.6			75.0			51.0

Operating income				16.1			40.5			6.1			40.5
Interest income, net				1.5			2.7			1.7			3.3
Other income (expense), net				(1.1	)		(0.5	)		2.3			(1.0	)

Income before income taxes				16.5			42.7			10.1			42.8

Provision for income taxes				4.6			12.0			2.8			12.0

Net income				11.9	%		30.7	%		7.3	%		30.8	%

Gross margin on product sales				84.4	%		92.4	%		83.7	%		92.9	%

Gross margin on services				69.8	%		82.3	%		70.4	%		81.5	%

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

Revenues, cost of revenues and expenses for the three months ended March 31, 2003 include the results of the continuing operations of NDB, which was acquired by the Company on August 30, 2002 as described in more detail in Note 1 to the Condensed Consolidated Financial Statements.

Revenues

Revenues increased by approximately 16% from $12.1 million for the three months ended March 31, 2002 to $14.0 million for the three months ended March 31, 2003. Over the same period, product revenues increased by approximately 9% from $10.6 million to $11.5 million. The increase in product revenues was attributable to increased fiscal year end budget surplus purchasing by the Company’s customers in Japan as well as to the presence in the latter period of revenues from the Company’s MGTS products acquired with NDB. Services revenues increased approximately 62% from $1.6 million to $2.5 million. The increase in services revenues was due to the addition of the service revenue stream from the MGTS installed base acquired with NDB.

Cost of Revenues

Cost of product revenues consists of the costs of board assembly by independent contractors, purchased components, payroll and benefits for personnel in product testing, purchasing, shipping and inventory management, as well as supplies, media and freight. In addition, in the three months ended March 31, 2003, cost of product revenues included fees paid to Tekelec for the manufacture of the MGTS products under a transitional services agreement that expired on February 28, 2003. Cost of product revenues increased approximately 123% from $803,000 for the three months ended March 31, 2002 to $1.8 million for the three months ended March 31, 2003 and gross margin on product revenues decreased from 92% to 84% due to the inclusion of MGTS product, which has lower margins than the Company’s DCT products, and to $323,000 in manufacturing fees paid under the transitional services agreement.

Cost of services revenues consists primarily of the costs of payroll and benefits for customer support, installation and training personnel. Cost of services revenues increased by approximately 177% from $275,000 for the three months ended March 31, 2002 to $761,000 for the three months ended March 31, 2003 and gross margin on services revenues decreased from 82% to 70% due to a 120% increase in the number of customer service personnel as a result of the NDB acquisition.

Research and Development

Research and development expenses consist primarily of the costs of payroll and benefits for engineers, materials, equipment and consulting services. To date, all software development costs have been charged to research and development expenses as incurred. Research and development expenses increased by approximately 105% from $1.8 million for the three months ended March 31, 2002 to $3.7 million for the three months ended March 31, 2003 due to a 102% increase in the number of research and development personnel as a result of the NDB acquisition. As a percentage of total revenues, research and development expenses increased from 15% to 26% over the same period. The Company expects quarterly research and development expenses to remain at approximately the same dollar level for the remainder of the fiscal year ending September 30, 2003 as they were in the three months ended March 31, 2003.*

Sales and Marketing

Sales and marketing expenses consist primarily of the costs of payroll, benefits, commissions and bonuses, occupancy costs, travel and promotional expenses, such as product brochures and trade show costs. Sales and marketing expenses increased by approximately 41% from $2.7 million for the three months ended March 31, 2002 to $3.8 million for the three months ended March 31, 2003 due primarily to a 30% increase in the number of sales and marketing personnel as a result of the NDB acquisition. As a percentage of total revenues, sales and marketing expenses increased from 22% to 27% over the same period. The Company expects quarterly sales and marketing expenses to remain at approximately the same dollar level for the remainder of the fiscal year ending September 30, 2003 as they were in the three months ended March 31, 2003.*

General and Administrative

General and administrative expenses include costs associated with the Company’s general and risk management, public reporting, employee recruitment and retention, investor relations and finance functions, as well as amortization of certain intangible assets acquired with NDB in 2003. General and administrative expenses increased approximately 5% from $1.6 million for the three months ended March 31, 2002 to $1.7 million for the three months ended March 31, 2003 due primarily to a 50% increase in the number of administrative personnel as a result of the NDB acquisition and to the inclusion of $255,000 in amortization expense. As a percentage of total revenues, general and administrative expenses decreased from 14% to 12% over the same period. The Company expects quarterly general and administrative expenses to decrease for the remainder of the fiscal year ending September 30, 2003 due to the elimination of transitional occupancy costs related to the NDB acquisition.*

Interest Income, net

Interest income, net consists of interest earned on cash and cash equivalents and short-term investments and amortization of the valuation premium attributed to the convertible notes payable, net of interest charges on those notes. Interest income decreased from $323,000 for the three months ended March 31, 2002 to $212,000 for the three months ended March 31, 2003. The decrease is due to a 51% reduction in cash and short-term investments as a result of the NDB acquisition and to a decrease in interest rates. The $102,000 in amortization of the valuation premium on the convertible notes payable was partially offset by $87,000 in interest payable on those notes.

Other Income (Expense), net

Provision for income taxes

Provision for income tax consists of federal, state and international income taxes. The Company’s effective tax rate was 28.0% for the three months ended March 31, 2003 and 2002, respectively. The Company expects that its future tax rate may vary depending in part on the relative income contribution by its domestic and foreign operations.*

Comparison of the Six Month Periods Ended March 31, 2002 and 2003

Revenues, cost of revenues and expenses for the six months ended March 31, 2003 include the results of the continuing operations of NDB, which was acquired by the Company on August 30, 2003 as described in more detail in Note 1 to the Condensed Consolidated Financial Statements.

Revenues

Revenues increased by approximately 6% from $23.0 million for the six months ended March 31, 2002 to $24.4 million for the six months ended March 31, 2003. Over the same period, product revenues decreased by approximately 3% from $20.1 million to $19.5 million. The decrease in product revenues was attributable to reduced demand for the Company’s DCT test systems due to reductions in research and development spending on the part of most of its major customers, largely offset by the presence in the latter period of revenues from the Company’s MGTS products acquired with NDB. Services revenues increased

approximately 69% from $2.9 million to $4.9 million. The increase in services revenues was due to the addition of the service revenue stream from the MGTS installed base acquired with NDB.

Cost of Revenues

Cost of product revenues consists of the costs of board assembly by independent contractors, purchased components, payroll and benefits for personnel in product testing, purchasing, shipping and inventory management, as well as supplies, media and freight. In addition, in the six months ended March 31, 2003, cost of product revenues included fees paid to Tekelec for the manufacture of the MGTS products under a transitional services agreement that expired on February 28, 2003. Cost of product revenues increased approximately 124% from $1.4 million for the six months ended March 31, 2002 to $3.2 million for the six months ended March 31, 2003 and gross margin on product revenues decreased from 93% to 84% due to the inclusion of MGTS product, which has lower margins than the Company’s DCT products, and to $763,000 in manufacturing fees paid under the transitional services agreement.

Cost of services revenues consists primarily of the costs of payroll and benefits for customer support, installation and training personnel. Cost of services revenues increased by approximately 171% from $538,000 for the six months ended March 31, 2002 to $1.5 million for the six months ended March 31, 2003 and gross margin on services revenues decreased from 82% to 70% due to a 120% increase in the number of customer service personnel as a result of the NDB acquisition.

Research and Development

Research and development expenses consist primarily of the costs of payroll and benefits for engineers, materials, equipment and consulting services. To date, all software development costs have been charged to research and development expenses as incurred. Research and development expenses increased by approximately 105% from $3.4 million for the six months ended March 31, 2002 to $7.1 million for the six months ended March 31, 2003 due to a 102% increase in the number of research and development personnel as a result of the NDB acquisition. As a percentage of total revenues, research and development expenses increased from 15% to 29% over the same period.

Sales and Marketing

Sales and marketing expenses consist primarily of the costs of payroll, benefits, commissions and bonuses, occupancy costs, travel and promotional expenses, such as product brochures and trade show costs. Sales and marketing expenses increased by approximately 34% from $5.5 million for the six months ended March 31, 2002 to $7.3 million for the six months ended March 31, 2003 due primarily to a 30% increase in the number of sales and marketing personnel as a result of the NDB acquisition. As a percentage of total revenues, sales and marketing expenses increased from 24% to 30% over the same period.

General and Administrative

General and administrative expenses include costs associated with the Company’s general and risk management, public reporting, employee recruitment and retention, investor relations and finance functions, as well as amortization of intangible assets acquired with NDB in 2003. General and administrative expenses increased approximately 39% from $2.8 million for the six months ended March 31, 2002 to $3.9 million for the six months ended March 31, 2003 due primarily to a 50% increase in the number of administrative personnel as a result of the NDB acquisition and to the inclusion of $711,000 in amortization expense. As a percentage of total revenues, general and administrative expenses increased from 12% to 16% over the same period.

Interest Income, net

Interest income, net consists of interest earned on cash and cash equivalents and short-term investments and amortization of the valuation premium attributed to the convertible notes payable, net of interest charges on those notes. Interest income decreased from $756,000 for the six months ended March 31, 2002 to $411,000 for the six months ended March 31, 2003. The decrease is due to a reduction in cash and short-term investments as a result of the NDB acquisition and to a decrease in interest rates. The $204,000 in amortization of the valuation premium on the convertible notes payable more than offset the $174,000 in interest payable on those notes.

Other Income (Expense), net

Other income (expense), net primarily represents gains and losses from fluctuations in exchange rates on transactions denominated in foreign currencies and income from miscellaneous refunds. Other income increased by $766,000 from an expense of $234,000 for the six months ended March 31, 2002 to an income of $565,000 for the six months ended March 31, 2003 due to a Japanese consumption tax refund of approximately $695,000 recorded in the latter period and to the reduction in the latter period of foreign exchange losses recorded in the earlier period.

Provision for income taxes

Provision for income tax consists of federal, state and international income taxes. The Company’s effective tax rate was 28.0% for the six months ended March 31, 2003 and 2002, respectively. The Company expects that its future tax rate may vary depending in part on the relative income contribution by its domestic and foreign operations.*

Liquidity and Capital Resources

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

The Company’s purchase of NDB was additionally financed through the issuance of two convertible notes in the aggregate principal amount of $17.3 million. 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 used cash of $1.2 million in the six month period ended March 31, 2003 and provided cash of $6.8 million in the six month period ended March 31, 2002. The cash used by the Company’s operations in the six months ended March 31, 2003 was attributable to decreases in accounts payable, accrued liabilities and an increase in prepaid expenses totaling $7.4 million, partially offset by net income of $1.8 million, a realization of $1.8 million on the assets of discontinued operations net of liabilities paid, decreases of $397,000 in accounts receivable and inventories, and to the recognition of $1.7 million in non-cash expenses for depreciation, amortization and deferred income tax. The cash provided by the Company’s operations in the six months ended March 31, 2002 million was primarily attributable to net income of $7.1 million and increased accrued liabilities and deferred revenue totaling $3.0 million and partially offset by an increase in accounts receivable of $3.0 million. To the extent that these non-cash items

increase or decrease and positively or negatively impact the Company’s future operating results, there will be no corresponding impact on its cash flows.

The Company’s primary source of operating cash flow is the collection of accounts receivable from its customers and the timing of payments to its vendors and service providers. The Company measures the effectiveness of its collections efforts by an analysis of average accounts receivable days outstanding (“days 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 and to a lesser extent additions to property and equipment, provided cash of $4.3 million in the six months ended March 31, 2003 compared to a use of cash of $26.9 million in the six months ended March 31, 2002.

Cash flows used by financing activities for the six months ended March 31, 2003 were attributable to the repurchase of 257,400 shares of the Company’s stock under its stock repurchase program at a cost of $1.8 million, and partially offset by the exercises of employee stock options and the purchase of shares under the employee stock purchase plan of $184,000. Cash flows from financing activities for the six months ended March 31, 2002 were attributable to exercises of employee stock options and the purchase of shares under the employee stock purchase plan of $531,000. The Company may continue to use cash to buy back shares of its common stock in the future.

As of March 31, 2003, the Company had working capital of $29.5 million, cash and cash equivalents of $14.3 million, short-term investments of $17.5 million and no bank indebtedness. As of March 31, 2003, the Company had the following contractual obligations, in millions:


	Payments Due by Period
			Less Than		1-3		4-5		After
Contractual Obligations	Total		1 Year		Years		Years		5 Years

Principal payable under convertible notes	$	17.3	$	–	$	17.3	$	–	$	–
Operating leases		3.9		1.1		2.3		0.4		0.1

Total contractual cash obligations	$	21.2	$	1.1	$	19.6	$	0.4	$	0.1

The Company expects that capital expenditures will total approximately $1.5 million in fiscal 2003.*

The Company believes that cash and cash equivalents, short-term investments and funds generated from operations will provide the Company with sufficient funds to finance its operations for at least the next 12 months.* The Company may require additional funds to support its working capital requirements or for other purposes. There can be no assurance that additional financing will be available or that, if available, such financing will be obtainable on terms favorable to the Company or its stockholders.

Recent Accounting Pronouncements

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

of 2003 and its adoption did not have a material effect on the Company’s financial position or results of operations.

The following table represents the activity in Warranty Accrual for the six months ended March 31, 2003 (in thousands):


Balance at September 30, 2002		$	600
	Settlements made during the period		(88	)
	Accruals for warranties issued during the period		88

Balance at March 31, 2003		$	600

Factors That May Affect Future Results

Fluctuations in Quarterly Operating Results; Lengthy Sales Cycle

The Company has experienced, and anticipates that it will continue to experience, significant fluctuations in quarterly revenues and operating results. The Company’s revenues and operating results are relatively difficult to forecast for a number of reasons, including (i) the variable size and timing of individual purchases by customers, (ii) seasonal factors that may affect capital spending by customers, such as the varying fiscal year ends of customers and the reduction in business during the summer months, particularly in Europe, (iii) the relatively long sales cycles for the Company’s products, (iv) the timing of hiring sales and technical personnel, (v) changes in timing and amount of sales incentive compensation, (vi) competitive conditions in the Company’s markets, (vii) exchange rate fluctuations, (viii) changes in the mix of products sold, (ix) the timing of the introduction and market acceptance of new products or product enhancements by the Company, its customers, competitors or suppliers, (x) costs associated with developing and introducing new products, (xi) product life cycles, (xii) changes in the level of operating expenses relative to revenues, (xiii) software defects and other product quality problems, (xiv) customer order deferrals in anticipation of new products, (xv) delays in purchasing decisions or customer orders due to customer consolidation, (xvi) supply interruptions, (xvii) changes in the regulatory environment and (xviii) changes in global or regional economic conditions or in the telecommunications industry.

The Company’s revenues in any period generally have been, and are likely to continue to be, derived from relatively small numbers of sales and service transactions with relatively high average revenues per order. Therefore, the loss of any orders or delays in closing such transactions could have a more significant impact on the Company’s quarterly revenues and results of operations than on those of companies with relatively high volumes of sales or low revenues per order. See “Dependence on Limited Number of Customers” below. The Company’s products generally are shipped within 15 to 30 days after orders are received and revenues are recognized upon shipment or, if installation services are purchased, when installed, provided collection is probable. As a result, the Company generally does not have a significant backlog of orders, and revenues in any quarter are substantially dependent on orders booked, shipped and installed in that quarter.

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

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

Dependence on Limited Number of Customers

The Company’s customer base is highly concentrated, and a relatively small number of companies have accounted for substantially all of the Company’s revenues to date. In the fiscal year ended September 30, 2002, the Company’s top five customers represented approximately 64% of total revenues. The Company expects that it will continue to depend upon a relatively limited number of customers for substantially all of its revenues in future periods, although no customer is presently obligated either to purchase a specific amount of products or to provide the Company with binding forecasts of purchases for any period. The loss of a major customer or the reduction, delay or cancellation of orders from one or more of the Company’s significant customers could materially adversely affect the Company’s business, financial condition and results of operations.

Risks Relating to Acquisitions

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

such future acquisitions. Furthermore, future acquisitions by the Company could result in the issuance of dilutive equity securities, the incurrence of debt or contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could have a material adverse effect on the Company’s business, financial condition and results of operation or on the market price of the Company’s common stock.

Risk Associated with International Operations

Company revenues from international customers were approximately 66% during the six months ended March 31, 2003. The Company expects that international sales will continue to account for a significant portion of its revenues in future periods.* The Company sells its products worldwide through its direct sales force. The Company has international offices located in Japan, Canada, the United Kingdom, Germany, France, Finland, and Australia and plans to add offices, staff and resources worldwide from time to time. International sales and operations are subject to inherent risks, including difficulties in staffing and managing foreign operations, longer customer payment cycles, greater difficulty in accounts receivable collection, changes in regulatory requirements or in economic or trade policy, costs related to localizing products for foreign countries, potentially weaker protection for intellectual property in certain foreign countries, the burden of complying with a wide variety of foreign laws and practices, tariffs and other trade barriers, and potentially adverse tax consequences, including restrictions on repatriation of earnings. During the last two fiscal years and during the six months ended March 31, 2003, a significant portion of the Company’s sales has been to customers in Japan and Europe. If economic conditions in Japan or Europe deteriorate to a significant extent, the Company’s business, financial condition and results of operations could be materially adversely affected. An inability to obtain necessary regulatory approvals in foreign markets on a timely basis could also have a material adverse effect on the Company’s business, financial condition and results of operations.

International sales and operations are subject to inherent risks, including difficulties in staffing and managing foreign operations, longer customer payment cycles, greater difficulty in accounts receivable collection, changes in regulatory requirements or in economic or trade policy, costs related to localizing products for foreign countries, potentially weaker protection for intellectual property in certain foreign countries, the burden of complying with a wide variety of foreign laws and practices, tariffs and other trade barriers and potentially adverse tax consequences, including restrictions on repatriation of earnings.

Many of the Company’s international sales, including its sales in Japan, are denominated in local currencies. Although the Company currently engages in hedging transactions with respect to certain receivables resulting from certain inter-company sales, there can be no assurance that the Company will continue to do so or that its hedging activities will be successful. Fluctuations in foreign currency exchange rates may contribute to fluctuations in the Company’s operating results. For example, changes in foreign currency exchange rates could adversely affect the revenues, net income, earnings per share and cash flow of the Company’s operations in affected markets. Similarly, such fluctuations may cause the Company to raise prices, which could affect demand for the Company’s products and services. In addition, if exchange or price controls or other restrictions are imposed in countries in which the Company does business, the Company’s business, financial condition and results of operations would be materially adversely affected.

Dependence on Rapidly Evolving Telecommunications Industry

The Company’s future success is dependent upon the long-term growth of the telecommunications industry. The global telecommunications industry is evolving rapidly, and it is difficult to predict its potential growth rate or future trends in technology development. There can be no assurance that the deregulation, privatization and economic globalization of the worldwide telecommunications market that have resulted in increased competition and escalating demand for new technologies and services will continue in a manner favorable to the Company or its business strategies. In addition, there can be no assurance that the growth in demand for Internet services and the resulting need for high speed or enhanced telecommunications equipment will continue at its current rate or at all.

The Company’s future success is dependent upon the increased utilization of its test solutions by network operators and telecommunications equipment manufacturers. Industry-wide network equipment and infrastructure development driving the demand for the Company’s products and services may be delayed or prevented by a variety of factors, including cost, regulatory obstacles or the lack of or reduction in consumer demand for advanced telecommunications products and services. There can be no assurance that telecommunications equipment manufacturers and network operators will develop new technology or enhance current technology or, if developed, that such new technology or enhancements will create demand for the Company’s products or services.

Rapid Technological Change; Uncertainty of Acceptance of the Company’s Products and Services

The market for telecommunications test systems and services is subject to rapid technological change, evolving industry standards, rapid changes in customer requirements and frequent product and service introductions and enhancements. The Company’s future success will depend in part on its ability to anticipate and respond to these changes by enhancing its existing products and services and by developing and introducing, on a timely and cost-effective basis, new products, features and services that address the needs of its customer base. There can be no assurance that the Company will be successful in identifying, developing and marketing new products, product enhancements and related services that respond to technological change or evolving industry standards or that adequately meet new market demands. In addition, because of the rapid technological change characteristic of the telecommunications industry, the Company may be required to support legacy systems used by its customers, which may place additional demands on the Company’s personnel and other resources and may require the Company to maintain an inventory of otherwise obsolete components.

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

The Company’s success will depend in part on whether a large number of telecommunications equipment manufacturers and network operators purchase the Company’s products and services. Because the telecommunications market is rapidly evolving, it is difficult to predict the future success of products and services in this market. The customers in this market use products from a number of competing suppliers for various testing purposes, and there has not been broad adoption of the products of one company. There can be no assurance that the Company’s current or future products or services will achieve widespread acceptance among telecommunications equipment manufacturers, network operators or other potential customers or that solutions developed by competitors will not render the Company’s products obsolete or uncompetitive. In the event the telecommunications industry does not broadly adopt the Company’s products or services or does so less rapidly than expected by the Company, or in the event the Company’s products are rendered obsolete or uncompetitive by more advanced solutions, the Company’s business, financial condition and results of operations would be materially adversely affected.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk and Derivative Financial Instruments

The Company’s foreign subsidiaries operate and sell the Company’s products in various global markets. As a result, the Company is exposed to changes in interest rates and foreign currency exchange rates

on foreign currency denominated sales made to foreign subsidiaries. The Company utilizes foreign currency forward exchange contracts and options to mitigate the risk of future movements in foreign exchange rates that affect certain foreign currency denominated inter-company receivables. The Company attempts to match the forward contracts with specific underlying receivables in terms of currency, amount and maturity. The Company does not use derivative financial instruments for speculative or trading purposes. Because the impact of movements in currency exchange rates on forward contracts offsets the related impact on the associated exposures, these financial instruments do not subject the Company to speculative risk that would otherwise result from changes in currency exchange rates. Realized gains and losses on forward exchange contracts offset foreign exchange transaction gains or losses from revaluation of foreign currency denominated inter-company receivable balances which otherwise would be charged to other income (expense). To date, the Company has not fully mitigated all risk associated with its sales denominated in foreign currencies, and there can be no assurance that the Company’s foreign exchange risk management activities, if any, will be successful.

At March 31, 2003 the Company had forward exchange contracts maturing in fiscal 2003 to sell approximately $5.1 million in Japanese Yen. The fair market value of these contracts at March 31, 2003 was not material.

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

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

Interest Rate Risk

The Company’s exposure to market risk for changes in interest rates relates primarily to its short-term investment portfolio. As of March 31, 2003, short-term investments consisted of available-for-sale securities of $17.5 million. These fixed income marketable securities included corporate bonds and government securities, all of which are of high investment grade. They are subject to interest rate risk and will decline in value if the market interest rates increase. If the market interest rates were to increase immediately and uniformly by 10% from levels as of March 31, 2003, the decline in the fair value of the portfolio would not be material to the Company’s financial position.

Item 4. Controls and Procedures

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the Company has evaluated its disclosure controls and procedures within 90 days prior to the filing date of this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are adequate and effective. There have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of management’s evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

The Company intends to review and evaluate the design and effectiveness of its disclosure controls and procedures on an ongoing basis, to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The Company’s goal is to ensure that its senior management has timely access to all material financial and non-financial information concerning its business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to significantly modify our disclosure controls and

procedures.

Part II. Other Information

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

The Company held its Annual Meeting of Stockholders on January 21, 2003. Out of 13,070,513 shares of Common Stock entitled to vote at such meeting, there were present in person or by proxy 12,248,520 shares. At the Annual Meeting, the stockholders of Catapult Communications Corporation approved the following matters:

(a) The elections of Richard A. Karp, Nancy H. Karp, Henry P. Massey, Jr., John Scandalios and Charles Waggoner, as directors of Catapult Communications Corporation for the ensuing year and until their successors are elected. The vote for the nominated directors was as follows:

Richard A. Karp, 10,923,508 votes cast for and 1,325,012 votes withheld;
Nancy H. Karp, 11,654,470 votes cast for and 594,050 votes withheld;
Henry P. Massey, Jr., 11,579,272 votes cast for and 669,248 votes withheld;
John Scandalios, 11,681,314 votes cast for and 567,206 votes withheld;
Charles Waggoner, 11,681,314 votes cast for and 567,206 votes withheld.

(b) To amend the Company’s 1998 Stock Plan to increase the shares reserved for issuance thereunder by 1,000,000 shares of Common Stock.

9,610,624 votes were cast for and 1,598,392 votes were cast against with 11,863 votes abstaining and 1,027,641 broker non-votes.

(c) The ratification of the appointment of PricewaterhouseCoopers LLP as independent public accountants of the Company for the fiscal year ending September 30, 2003.

12,033,932 votes were cast for and 213,752 votes were cast against with 836 votes abstaining.

Item 5. Other Information

A current member of the Audit Committee of the Board of Directors of the Registrant, Ms. Nancy H. Karp, is not considered independent under rules of the Nasdaq Stock Market due to the fact that she served as Secretary of the corporation within the past three years (her service in that capacity ended in October 2002) and also was a consultant to the corporation within the past three years. Additionally, although these factors do not affect her independence under current rules, Ms. Karp was a founder of the corporation, served as Treasurer for a period of years and is the former spouse of the Richard A. Karp, the Chairman and Chief Executive Officer of the corporation. However, pursuant to applicable Nasdaq rules, the Registrant’s board of directors has determined that exceptional and limited circumstances exist that warrant Ms. Karp’s continued membership on the Audit Committee despite her lack of independence. The Board of Directors has determined that Ms. Karp’s membership on the Audit Committee is required by the best interests of the corporation and its shareholders because of her abilities and background, her familiarity with the Registrant, the lack of availability of other independent directors to serve on the Audit Committee and the fact that failure to continue her service on the Committee under the permitted exception would jeopardize the continued listing of the Registrant’s Common Stock on the Nasdaq National Market.

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


(a)	Exhibits

	10.15	1998 Stock Plan as Amended January 21, 2003

	99.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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

CATAPULT COMMUNICATIONS CORPORATION


Date: May 14, 2003		By: /s/ Christopher A. Stephenson

		Christopher A. Stephenson Vice President and Chief Financial Officer (Principal Financial Officer)

I, Richard A. Karp, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Catapult Communications Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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

Date: May 14, 2003


	/s/ Richard A. Karp

	(Richard A. Karp) Chief Executive Officer and Chairman of the Board

I, Christopher A. Stephenson, certify that:

Date: May 14, 2003


	/s/ Christopher A. Stephenson

	(Christopher A. Stephenson) Chief Financial Officer

EXHIBIT INDEX


10.15		1998 Stock Plan as Amended January 21,2003

99.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Reports on Form 8-K

On April 17, 2003, the Company filed a Current Report on Form 8-K to furnish its press release dated April 17, 2003 announcing the Registrant’s results of operations for the quarter ended March 31, 2003.

1.		I have reviewed this quarterly report on Form 10-Q of Catapult Communications Corporation;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

		a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

		b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

		c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

		a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

		b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and