Catapult Communications Corporation, 9/30/2003

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.

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.

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.

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

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 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.

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.

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 test systems run under a UNIX^TM or Linux^TM 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 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.

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.

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.

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

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 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.

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.

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.

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.

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

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

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

In connection with the acquisition of Tekelec’s Network Diagnostics Business, the Company and Tekelec entered into license agreements with respect to certain technology and intellectual property that was used by Tekelec in NDB’s business but was not transferred outright to the Company. Under these agreements, Tekelec granted to the Company and its Irish subsidiary perpetual, royalty-free, worldwide (except as to the United States for the subsidiary) licenses to exploit the subject technology and intellectual property. These licenses are exclusive to the Company and its subsidiary for eight years from the date of the acquisition for products used in protocol analysis or simulating, diagnosing, analyzing or testing communications networks, or

which are otherwise similar to the MGTS products, excluding products similar to Tekelec’s Sentinel product (the “Catapult Field”). However, during the first five years, the Company and its subsidiary may not use the licensed technology and intellectual property for products for signaling or network infrastructure, packet telephony networks, network maintenance, surveillance and revenue assurance, and planning, management and call routing and control tools for contact center environments, including products similar to Tekelec’s Sentinel product (the “Tekelec Field”). The Company also granted to Tekelec a perpetual royalty-free, worldwide license back to the technology and intellectual property that was transferred outright by Tekelec to the Company. This license is exclusive to Tekelec for five years within the Tekelec Field, and Tekelec may not use the licensed technology and intellectual property within the Catapult Field for eight years.

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.

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.

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

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.

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.

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.

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.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2003.

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:

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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

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 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 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 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 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.*

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.

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 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 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 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.

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.

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.

Total revenues increased by less than 1% from $39.9 million in fiscal 2001 to $40.0 million in fiscal 2002. Product revenues decreased by approximately 2% from $34.7 million in fiscal 2001 to $34.0 million in fiscal

2002, reflecting decreased shipments of the Company’s DCT product. Services revenues increased by approximately 16% from $5.2 million in fiscal 2001 to $6.1 million in fiscal 2002 due to the increase in the number of systems under maintenance and to the inclusion of one month of revenues from MGTS services in fiscal 2002.

Cost of 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 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 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 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.

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 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 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.

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.

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.

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:

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.*

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.

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 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.

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.

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.

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.

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.

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.

The Company’s success will depend on continued growth in the market for telecommunications test systems and services and the continued commercial acceptance of the Company’s products as a solution to

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

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.

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.

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

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

The telecommunications industry is characterized by a relatively high level of litigation based on allegations of infringement of proprietary rights. While to date, the Company has not been subject to claims of infringement or misappropriation of intellectual property by third parties, there can be no assurance that third parties will not assert infringement claims against the Company, that any such assertion of infringement will not result in litigation or that the Company would prevail in such litigation. Furthermore, any such claims, with or without merit, could result in substantial cost to the Company and diversion of its personnel, require the Company to develop new technology or require the Company to enter into royalty or licensing arrangements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to

the Company or at all. Because the Company does not rely on patents to protect its technology, the Company will not be able to offer a license for patented technology in connection with any settlement of patent infringement lawsuits. In the event of a successful claim of infringement or misappropriation against the Company and failure or inability of the Company to develop non-infringing technology or license the infringed, misappropriated or similar technology at a reasonable cost, the Company’s business, financial condition and results of operations would be materially adversely affected. In addition, the Company indemnifies its customers against claimed infringement of patents, trademarks, copyrights and other proprietary rights of third parties. Any requirement for the Company to indemnify a customer could have a material adverse effect on the Company’s business, financial condition and results of operations.

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.

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.

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.*

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.

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.

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

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.

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.

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.

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.

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 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

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.

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.

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.

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.

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.

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:

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

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, 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.

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.

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.

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.

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.

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.

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.

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.

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:

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

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

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

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

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.

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:

The amount of $1.4 million allocated to purchased in-process research and development was charged to operating expenses upon acquisition. This amount represented two NDB research and development projects in process as of August 30, 2002, the date of the acquisition of NDB. The value of these projects was determined

by an independent appraiser using established valuation techniques and was expensed because technological feasibility had not been established and no future alternative uses existed as of the date of acquisition.

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.

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):

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

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:

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.

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.

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.

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

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

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.

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.

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

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.

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.

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.

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

As of September 30, 2003, the options outstanding and exercisable are presented below:

The weighted average exercise prices and fair values of options granted during 2001, 2002 and 2003 were as follows:

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.

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.

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.

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

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):

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.

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.

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.

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):

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


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

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.

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.

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.

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.

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.

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.

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.

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.

Incorporated by reference to the information under the caption “Certain Transactions” in the Registrant’s Proxy Statement.

Incorporated by reference to the information under the caption “Proposal Three — Ratification of Appointment of Independent Public Accountants” in the Registrant’s Proxy Statement.

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

Consolidated Financial Statements: See Index to Consolidated Financial Statements at Item 8 on page 32 of this report.

Financial Statement Schedule: See Index to Consolidated Financial Statements at Item 8 on page 32 of this report.

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):


*	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.

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.

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.


	By	/s/ RICHARD A. KARP



	Richard A. Karp
	Chief Executive Officer & Chairman of the Board

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:


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

EX-3.2 3 f94814orexv3w2.txt EXHIBIT 3.2 EXHIBIT 3.2 BYLAWS OF CATAPULT COMMUNICATIONS CORPORATION, A NEVADA CORPORATION As Amended Through November 20, 2003 Article 1 Corporate Offices 1.1 Principal Office The principal office of the corporation shall be located at 160 South Whisman Road Mountain View, CA 94041, unless and until otherwise decided by the Board of Directors, who may fix the location of the principal office of the corporation at any place within or outside the State of Nevada. If the principal office is located outside the State of Nevada and the corporation has one or more business offices in the State of Nevada, then the board of directors shall fix and designate a principal business office in the State of Nevada. 1.2 Other Offices The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. Article 2 Stockholders' Meetings All meetings of stockholders shall be held either at the principal office of the corporation or at any other place within or without the State of Nevada or the United States as the Board of Directors or any person authorized to call such meeting or meetings may designate. Article 3 Annual Meetings The annual meeting of the stockholders of the corporation shall be held on the fourth Tuesday of January in each year at 2:00 p.m., or on such other date and time designated by the Board of Directors. In the event that such annual meeting is omitted by oversight or otherwise on the date herein provided 1 for, the directors shall cause a meeting in lieu thereof to be held as soon thereafter as conveniently may be, and any business transacted or elections held at such meeting shall be as valid as if transacted or held at the annual meeting. Such subsequent meeting shall be called in the same manner as provided for the annual stockholders' meeting. Article 4 Special Meetings Except as otherwise provided by law, special meetings of the stockholders of this corporation shall be held whenever called by the president or by a majority of the Board of Directors or whenever one or more stockholders who are entitled to vote and who hold at least ten percent (10%) of the capital stock issued and outstanding shall make written application therefor to the secretary stating the time, place, and purpose of the meeting called for. Article 5 Notice 5.1 Notice of Stockholders' Meetings Notice of all stockholders' meetings stating the time and the place, and the objects for which such meetings are called, shall be given by the president or secretary or by any one or more stockholders entitled to call a special meeting of the stockholders or any such other person or persons as the Board may designate, by mail not less than ten (10), nor more than sixty (60) days prior to the date of the meeting, to each stockholder of record at his or her address as it appears on the stock books of the corporation, unless he or she shall have filed with the secretary of the corporation a written request that notice intended for him or her be mailed to some other address, in which case it shall be mailed to the address designated in such request. The person giving such notice shall make an affidavit in relation thereto. Any meeting of which all stockholders shall at any time waive or have waived notice in writing shall be a legal meeting for the transaction of business, notwithstanding that notice has not been given as hereinbefore provided. 5.2 Advance Notice of Stockholder Nominees Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the discretion of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to 2 or mailed and received at the principal executive offices of the corporation not less than forty five (45) days prior to the date on which the corporation first mailed proxy materials for the prior years annual meeting; provided, however, that if the corporation's annual meeting of stockholders occurs on a date more than thirty (30) days earlier or later than the corporation's prior year's annual meeting, then the corporation's board of directors shall determine a date a reasonable period prior to the corporation's annual meeting of stockholders by which date the stockholder's notice must be delivered and publicize such date in a filing pursuant to the Securities Exchange Act of 1934, as amended, or via press release. Such publication shall occur at least ten (10) days prior to the deadline date for stockholder nominations set by the Board of Directors. Such stockholder's notice shall set forth (a) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required by law to be disclosed in solicitations of proxies for election of directors, and (v) such person's written consent to being named as a nominee and to serving as a director if elected; and (b) as to the stockholder giving the notice: (i) the name and address, as they appear on the corporation's books, of such stockholder, and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder, and (iii) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) relating to the nomination. At the request of the Board of Directors any person nominated by the Board for election as a director shall furnish to the secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section. The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he or she should so determine, he or she shall so declare at the meeting and the defective nomination shall be disregarded. 5.3 Advance Notice of Stockholder Business At the annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (a) as specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder. Business to be brought before an annual meeting by a stockholder shall not be considered properly brought if the stockholder has not given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than forty-five (45) days prior to the date on which the corporation first mailed proxy materials for the prior year's annual meeting; provided, however, that if the corporation's annual meeting of stockholders occurs on a date more than thirty (30) days earlier or later than the corporation's prior year's annual meeting, then the corporation's board of directors shall determine a date a reasonable period prior to the corporation's annual meeting of stockholders by which date the stockholder's notice must be delivered and 3 publicize such date in a filing pursuant to the Securities Exchange Act of 1934, as amended, or via press release. Such publication shall occur at least ten (10) days prior to the deadline date for stockholder proposals set by the Board of Directors. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address of the stockholder proposing such business, (iii) the class and number of shares of the corporation, which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business, and (v) any other information that is required by law to be provided by the stockholder in his or her capacity as a proponent of a stockholder proposal. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section. The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section, and, if he or she should so determine, he or she shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. Article 6 Waiver; Consent; Ratification 6.1 Waiver of Notice Whenever any notice whatsoever is required to be given by these Bylaws, or the Articles of Incorporation of this corporation, or any of the corporation laws of the State of Nevada, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent thereto. 6.2 No Consent of Stockholders In Lieu of Meeting No action which may be taken by the vote of stockholders at a meeting may be taken without a meeting by the written consent of stockholders. 6.3 Ratification and Approval of Actions at Special Meetings Whenever all persons entitled to vote at any meeting, whether of directors or stockholders, consent, either by a writing on the record of the meeting or filed with the secretary, or presence at such meeting and oral consent entered on the minutes, or taking part in the deliberations at such meeting without objection, the doings of such meeting shall be valid as if such meeting was regularly called and noticed. At such meeting any business may be transacted which is not excepted from the written consent or to the consideration of which no objection for want of notice is made at the time. If any meeting be irregular for want of notice or of consent, provided a quorum was present at such meeting, the proceedings of the meeting may be ratified and approved and rendered likewise valid 4 and the irregularity or defect therein waived by a writing signed by all parties having the right to vote at such meeting. Such consent or approval of stockholders or creditors may be by proxy or attorney, but all such proxies and powers of attorney must be in writing. Article 7 Quorum of Stockholders Except as hereinafter provided or otherwise provided by the Articles of Incorporation or bylaw, at any meeting of the stockholders, the holders of a majority of the stock issued, outstanding and entitled to vote thereat, represented by stockholders in person or by proxy, shall constitute a quorum. When a quorum is present at any meeting, a majority vote of the shares present shall decide any question brought before such meeting, unless the question is one upon which by express provision of law or of the Articles of Incorporation or of these Bylaws a larger or different vote is required, in which case such express provision shall govern and control the decision of such question. Article 8 Proxy and Voting Stockholders of record may vote at any meeting either in person or by proxy or proxies appointed by a signed and executed instrument in writing, or by telegram, cablegram, or other means of electronic transmission or copy thereof, provided that the validity of such transmission can be determined by reference to information set forth thereon. Such instrument or transmission shall be filed with the secretary of the meeting before being voted. In the event that any such instrument or transmission shall designate two or more persons to act as proxies, a majority of such persons present at the meeting, or, if only one shall be present, then that one, shall have and may exercise all of the powers conferred by such instrument or transmission upon all of the persons so designated unless such instrument or transmission shall otherwise provide. No proxy shall be valid after the expiration of six (6) months from the date of its execution unless coupled with an interest, or unless the person executing it specifies therein the length of time for which it is to continue in force, which in no case shall exceed seven (7) years from the date of its execution. Subject to the above, any proxy duly executed is not revoked and continues in full force and effect until an instrument revoking it or a duly executed proxy bearing a later date is filed with the secretary of the corporation. 5 Article 9 Board of Directors The Board of Directors shall be chosen by ballot at the annual meeting of the stockholders or at any meeting held in place thereof as provided by law. The authorized number of directors of this corporation shall be six (6). Subject to any limitation set forth in the provisions of the Articles of Incorporation, the Board of Directors may, by resolution adopted, increase or decrease the number of the directors of this corporation, provided that no such reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Each director shall serve until the next annual meeting of the stockholders and until his or her successor is duly elected and qualified. Directors need not be stockholders in the corporation. Directors shall be over the age of eighteen (18). Article 10 Powers of Directors In the management and control of the property, business, and affairs of the corporation, the Board of Directors is hereby vested with all the powers possessed by the corporation itself, so far as this delegation of authority is not inconsistent with the Nevada General Corporation Law, with the Articles of Incorporation of the corporation, or with these Bylaws. The Board of Directors may fix the compensation of directors for services in any capacity. Article 11 Meetings and Consents 11.1 Meetings Regular meetings of the Board of Directors shall be held at such places and at such times as the Board by vote may determine, and if so determined no notice thereof need be given. Special meetings of the Board of Directors may be held at any time or place, whenever called by the president, a vice-president, the treasurer, the secretary, an assistant secretary or two directors, notice thereof being given to each director by the secretary or an assistant secretary or an officer calling the meeting, or at any time without formal notice provided all the directors are present or those not present shall waive or have waived notice thereof. Notice of special meetings, stating the time and place thereof, shall be given by mailing the same to each director at his or her residence or business address at least four (4) days before the meeting, or by delivering the same to him or her personally or telegraphing the same to him or her at his or her residence or business address not later than forty-eight (48) hours before the time at which the meeting is to be held, unless, in case of emergency, the chairman of the Board of Directors or the president shall prescribe a shorter notice to be given personally or by telegraphing each director at his or 6 her residence or business address. 11.2 Telephonic/Electronic Meetings Members of the Board of Directors or the governing body of the corporation, or of any committee designated by such Board or body, may participate in a meeting of such Board, body, or committee by means of a conference telephone network, or a similar communications method by which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this subsection constitutes presence in person at such meeting. 11.3 Consent to Action Any action required or permitted to be taken at any meeting of the Board, body or committee may be taken without a meeting if, before or after such action, a written consent thereto is signed by all members of the Board, body, or committee. Such written consent shall be filed with the minutes of the proceedings of the Board, body, or committee. Article 12 Quorum of Directors Unless the Articles of Incorporation or these Bylaws provide for a different proportion, a majority of members of the Board of Directors of the corporation, at a meeting duly assembled, shall constitute a quorum for the transaction of business. When a quorum is present at any meeting, the act of directors holding a majority of the voting power of the directors present shall be the act of the Board of Directors. Article 13 Limitations of Power The enumeration of the powers and duties of the directors in these Bylaws shall not be construed to exclude all or any powers and duties, except insofar as the same are expressly prohibited or restricted by the provisions of these Bylaws or the Articles of Incorporation. The directors may exercise all other powers and perform all such duties as may be granted by the Nevada General Corporation Law and as do not conflict with the provisions of these Bylaws or the Articles of Incorporation. Article 14 Committees 14.1 Committees of Directors 7 The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, and each committee shall have as a member at least one (1) director and such other natural persons as the Board of Directors may select. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in these Bylaws of the corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the Articles of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 78.195 and Section 78.1955 of the Nevada General Corporation Law, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement or plan of merger, consolidation or share exchange under the Nevada General Corporation Law, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the Bylaws of the corporation; and, unless the Board resolution establishing the committee, the Bylaws or the Articles of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, or to authorize the issuance of stock. 14.2 Committee Minutes Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 14.3 Meetings and Action of Committees Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of these Bylaws applicable to the full Board of Directors, with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that (i) the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, and (ii) special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules not inconsistent with the provisions of these Bylaws for the government of any committee. 8 Article 15 Officers The officers of this corporation shall include, without limitation, a president, a secretary, and a treasurer. The Board of Directors, in its discretion, may elect a chairman of the Board of Directors, who, when present, shall preside at all meetings of the Board of Directors, and who shall have such other powers as the Board shall prescribe. The officers of the corporation shall be elected by the Board of Directors after its election by the stockholders, and a meeting may be held without notice for this purpose immediately after the annual meeting of the stockholders and at the same place. Any person may hold two or more offices at once. Article 16 Eligibility of Officers The chairman of the Board of Directors need not be a stockholder. The president, secretary, treasurer, and such other officers as may be elected or appointed need not be stockholders or directors of the corporation. Any person may hold more than one office, provided the duties thereof can be consistently performed by the same person. Article 17 Additional Officers and Agents The Board of Directors, at its discretion, may appoint one or more vice presidents, assistant secretaries, assistant treasurers, and such other officers or agents as it may deem advisable, and prescribe the duties thereof. Article 18 Chief Executive Officer The chief executive officer shall be the president of the corporation and, when present, shall preside at all meetings of the stockholders and, unless a chairman of the Board of Directors has been elected and is present, shall preside at meetings of the Board of Directors. The president, unless some other person is specifically authorized by vote of the Board of Directors, shall sign all certificates of stock, bonds, deeds, mortgages, extension agreements, modification of mortgage agreements, leases, and contracts of the corporation. He or she shall perform all of the duties commonly incident to his or her office and shall perform such other duties as the Board of Directors shall designate. 9 Article 19 Chief Financial Officer The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. He or she shall perform all of the duties commonly incident to his or her office and such other duties as the Board of Directors shall designate. The books of account shall at all reasonable times be open to inspection by any director. Article 20 Secretary The secretary shall keep accurate minutes of all meetings of the stockholders and the Board of Directors, and shall perform all the duties commonly incident to his or her office, and shall perform such other duties and have such other powers as the Board of Directors shall designate. The secretary shall have power, together with the president, to sign certificates of stock of the corporation. In his or her absence at the meeting an assistant secretary or a secretary pro tempore shall perform his or her duties. Article 21 Treasurer The treasurer, subject to the order of the Board of Directors, shall have the care and custody of the money, funds, valuable papers, and documents of the corporation (other than his or her own bond, if any, which shall be in the custody of the president), and shall have and exercise, under the supervision of the Board of Directors, all the powers and duties commonly incident to his or her office, and shall give bond in such form and with such sureties as shall be required by the Board of Directors. He or she shall deposit all funds of the corporation in such bank or banks, trust company or trust companies, or with such firm or firms, doing a banking business, as the directors shall designate. He or she may endorse for deposit or collection all checks and notes payable to the corporation or to its order, may accept drafts on behalf of the corporation, and together with the president may sign certificates of stock. He or she shall keep accurate books of account of the corporation's transactions which shall be the property of the corporation, and, together with all property in his or her possession, shall be subject at all times to the inspection and control of the Board of Directors. All checks, drafts, notes, or other obligations for the payment of money shall be signed by such officer or officers or agent or agents as the Board of Directors shall by general or special resolution direct. The Board of Directors may also in its discretion require, by general or special resolutions, that checks, drafts, notes, and other obligations for the payment of money shall be countersigned or registered 10 as a condition to their validity by such officer or officers or agent or agents as shall be directed in such resolution. Article 22 Resignations and Removals Any director or officer of the corporation may resign at any time by giving written notice to the corporation, to the Board of Directors, or to the chairman of the Board, or to the president, or to the secretary of the corporation. Any such resignation shall take effect at the time specified therein, or, if the time be not specified therein, upon its acceptance by the Board of Directors. Any director may be removed from office by the vote of stockholders representing not less than two-thirds (2/3) of the issued and outstanding capital stock entitled to voting power. Article 23 Vacancies Vacancies in the Board of Directors, including those caused by an increase in the number of directors, may be filled by a majority of the remaining directors, though less than a quorum. Vacancies in the Board of Directors may be filled for the unexpired term by the stockholders at a meeting called for that purpose, unless such vacancy shall have been filled by the directors. Vacancies resulting from an increase in the number of directors may be filled in the same manner. Article 24 Certificates of Stock Every stockholder shall be entitled to a certificate or certificates of the capital stock of the corporation in such form as may be prescribed by the Board of Directors, duly numbered and sealed with the corporate seal of the corporation and setting forth the number and kind of shares. Such certificates shall be signed by the president and by the treasurer or an assistant treasurer or the secretary or an assistant secretary. Article 25 Transfer of Stock Unless further limited by the Articles of Incorporation, shares of stock may be transferred by delivery of the certificate accompanied either by an assignment in writing on the back of the certificate or 11 by a written power of attorney to sell, assign, and transfer the same on the books of the corporation, signed by the person appearing by the certificate to be the owner of the shares represented thereby, together with all necessary federal and state transfer tax stamps affixed and shall be transferable on the books of the corporation upon surrender thereof so assigned or endorsed. The person registered on the books of the corporation as the owner of any shares of stock shall be entitled to all the rights of ownership with respect to such shares. It shall be the duty of every stockholder to notify the corporation of his or her post office address. Article 26 Indemnity 26.1 Indemnification of Officers and Directors in Advance The corporation shall, to the maximum extent and in the manner permitted by Section 78.7502 of the Nevada General Corporation Law, indemnify each of its directors and officers against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation. For purposes of this Article, an "officer" or "director" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. The corporation shall, to the maximum extent permitted by Section 78.7502 of the Nevada General Corporation Law, indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation against expenses, including amounts paid in settlement and attorneys' fees. The corporation shall pay the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he or she is not entitled to be indemnified by the corporation. 26.2 Indemnification of Employees and Agents 12 The corporation shall have the power, to the maximum extent and in the manner permitted by Section 78.7502 of the Nevada General Corporation Law, to indemnify each of its employees and agents against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation. For purposes of this Article, an "employee" or "agent" of the corporation includes any person (i) who is or was an employee or agent of the corporation, (ii) is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. The corporation shall have the power, to the maximum extent and in the manner permitted by Section 78.7502 of the Nevada General Corporation Law, to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was an employee or agent of the corporation, or is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation against expenses, including amounts paid in settlement and attorneys' fees. 26.3 Indemnity Not Exclusive The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under the Articles of Incorporation, any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. 26.4 Indemnification for Successful Defense To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2 of Section 78.7502 of the Nevada General Corporation Law, or in defense of any claim, issue or matter therein, he or she must be indemnified by the corporation against expenses, including attorneys' fees, actually and reasonably incurred by him or her in connection with the defense. 26.5 Continuing Right to Indemnification The indemnification and advancement of expenses authorized in or ordered by a court pursuant to Section 78.751 of the Nevada General Corporation Law continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person. 26.6 Insurance and Other Financial Arrangements 13 The corporation shall have the power, to the maximum extent and in the manner permitted by Section 78.752 of the Nevada General Corporation Law, to purchase and maintain insurance or make other financial arrangements on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation for any liability asserted against him and liability and expenses incurred by him in his capacity as a director, officer, employee or agent, or arising out of his status as such, whether or not the corporation has the authority to indemnify him against such liability and expenses. Article 27 Transfer Books and Record Dates 27.1 Record Date for Notice and Voting The Board of Directors may prescribe a period not exceeding sixty (60) days before any meeting of the stockholders during which no transfer of stock on the books of the corporation may be made, or may fix a day not more than sixty (60) days before the holding of any such meeting as the day as of which stockholders entitled to notice of and to vote at such meetings must be determined. Only stockholders of record on that day are entitled to notice or to vote at such meeting. If the Board of Directors does not so fix a record date: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (2) the record date for determining stockholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. 27.2 Record Date for Purposes Other Than Notice and Voting For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any other lawful action (other than action by stockholders by written consent without a meeting), the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case 14 may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Nevada General Corporation Law. If the Board of Directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. Article 28 Loss of Certificates In case of loss, mutilation, or destruction of a certificate of stock, a duplicate certificate may be issued upon such terms as the Board of Directors shall prescribe. Article 29 Corporate Authority 29.1 Checks; Drafts; Evidences of Indebtedness From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 29.2 Corporate Contracts and Instruments; How Executed The board of directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Article 30 Amendments The Bylaws of the corporation, regardless of whether made by the stockholders or by the Board of Directors, may be amended, added to, or repealed by the stockholders of the issued and outstanding capital stock of this corporation, at any meeting of the stockholders, provided notice of the proposed change is given in the notice of meeting, or notice thereof is waived in writing. 15 Subject to the Bylaws, if any, adopted by the stockholders of the issued and outstanding capital stock of this corporation, the Board of Directors may amend, add to, or repeal the Bylaws of the corporation. 16 EX-10.4 4 f94814orexv10w4.txt EXHIBIT 10.4 EXHIBIT 10.4 CATAPULT COMMUNICATIONS CORPORATION 1998 STOCK PLAN (As Amended and Restated October 28, 2003) 1. Purposes of the Plan. The purposes of this Stock Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees, Directors and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Change in Control" means the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than (A) a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity, (B) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company or (C) Richard A. or Nancy H. Karp, becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company's assets; or (iii) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan. (g) "Common Stock" means the common stock of the Company. (h) "Company" means Catapult Communication Corporation, a Nevada corporation. (i) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity. (j) "Director" means a member of the Board. (k) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (l) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: -2- (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (o) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (q) "Notice of Grant" means a written or electronic notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. (r) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" means a stock option granted pursuant to the Plan. (t) "Option Agreement" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (u) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (v) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (w) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (x) "Plan" means this 1998 Stock Plan. -3- (y) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan. (z) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (bb) "Section 16(b)" means Section 16(b) of the Exchange Act. (cc) "Service Provider" means an Employee, Director or Consultant. (dd) "Share" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (ee) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (ff) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 2,800,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. -4- (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (vii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (viii) to modify or amend each Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; provided, however, that no modification or amendment may reduce the exercise price of an Option or Stock Purchase Right after it has been granted (except for adjustments made pursuant to Section 13), unless approved by the Company's stockholders; (ix) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be -5- withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (x) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xi) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) On the date grants of Options under the Plan are required to comply with Section 162(m) of the Code, the following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 225,000 Shares. (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 225,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. -6- (iv) If an Option is canceled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the canceled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 15 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option Agreement, provided, however, that in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a transaction described in Section 424(a) of the Code and the regulations promulgated thereunder (i.e., a merger, consolidation, acquisition of property or stock, separation, reorganization, liquidation, a distribution (excluding ordinary dividends) or change in the terms or number of outstanding Shares of the Company, or a change in the name of the Company). (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. -7- (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted to Officers and Directors hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be -8- issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for thirty (30) days following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. -9- (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Non-Transferability of Options and Stock Purchase Rights. Unless determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale, or Change in Control (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and -10- Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen -11- by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. (d) Additional Vesting for Certain Directors Upon Change in Control. Unless the Option shall have become fully exercisable pursuant to Sections 13(b) or 13(c) of the Plan, in the event of a Change in Control each outstanding option granted to a Director who is not an Employee shall become vested and exercisable as to an additional number of Shares equal to the number of Shares which had become vested and exercisable immediately prior to the Change in Control; provided, however, that in no event shall the Option become vested and exercisable pursuant to this provision for a number of Shares greater in the aggregate than the number of Shares subject to the Option. The Administrator shall notify the Director in writing or electronically not less than fifteen (15) days prior to the Change in Control that the vesting of the Option shall accelerate and the Director shall be entitled to exercise the Option as to the additional Shares concurrently with the Change in Control. 14. Date of Grant. The date of grant of an Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall (i) impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company or (ii) permit the reduction of the exercise price of an Option or Stock Purchase Right after it has been granted (except for adjustments made pursuant to Section 13), unless approved by the Company's stockholders. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 16. Conditions Upon Issuance of Shares. -12- (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 17. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. -13- EX-14 5 f94814orexv14.txt EXHIBIT 14 EXHIBIT 14 CATAPULT COMMUNICATIONS CORPORATION CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS (as adopted by the Board of Directors on October 28, 2003) I. INTRODUCTION AND PURPOSE This Code of Ethics for Principal Executive and Senior Financial Officers (the "Code") helps maintain the standards of business conduct of Catapult Communications Corporation (the "Company") and is intended to address the matters set forth in Section 406 of the Sarbanes-Oxley Act of 2002 and the related rules of the Securities and Exchange Commission (the "SEC"). The purpose of the Code is to deter wrongdoing and promote ethical conduct. The matters covered in this Code are of the utmost importance to the Company, our stockholders and our business partners, and are essential to our ability to conduct our business in accordance with our stated values. II. APPLICATION The Code is applicable to the following persons, referred to as Officers: - Our principal executive officer, - Our principal financial officer, - Our principal accounting officer or controller, and - Persons performing similar functions, as determined by the Company's Audit Committee. III. ETHICAL CONDUCT It is the policy of the Company that each Officer: - Act honestly and ethically. - Avoid whenever possible actual or apparent conflicts of interest between personal and professional relationships. - Ethically address any conflicts that do arise, which shall include disclosure of any transaction or relationship that reasonably could be expected to give rise to a conflict of interest to the Company's general counsel. - Obtain prior approval from the Company's Audit Committee before entering into any material transaction or relationship involving any actual or potential conflict of interest. - Provide full, fair, accurate, timely and understandable disclosure in the Company's public communications, including reports and documents that the Company files with, or submits to, the SEC. - Comply with applicable governmental laws, rules and regulations. - Report promptly any conduct that the Officer believes to be a violation of the Code to the Company's general counsel. It is against the Company's policy to retaliate in any way against an Officer for good faith reporting of violations of this Code. IV. ACCOUNTABILITY Actual violations of this Code, including failures to report potential violations by others, can lead to disciplinary action at the Company's discretion, up to and including termination. V. WAIVER AND AMENDMENT We are committed to reviewing and updating our policies and procedures as necessary from time to time. Therefore, this Code is subject to modification. Any amendment or waiver of any provision of this Code must be approved in writing by the Company's Board of Directors or Audit Committee and promptly disclosed pursuant to applicable laws and regulations. -2- VI. ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I have received and read the Company's Code of Ethics for Principal Executive and Senior Financial Officers (the "Code"). I understand the standards and policies contained in the Code and understand that there may be additional policies or laws specific to my job. I further agree to comply with the Code. If I have questions concerning the meaning or application of the Code, any Company policies, or the legal and regulatory requirements applicable to my job, I know I can consult the general counsel, knowing that my questions or reports will be maintained in confidence. - ---------------------------------- Officer Name - ---------------------------------- Signature - ---------------------------------- Date -3- EX-21.1 6 f94814orexv21w1.txt EXHIBIT 21.1 EXHIBIT 21.1 CATAPULT COMMUNICATIONS CORPORATION LIST OF SUBSIDIARIES Catapult Communications Limited a U.K. corporation Catapult Communications K.K. a Japanese corporation Tekelec Limited a Japanese corporation Catapult Communications International Limited an Irish corporation EX-23.1 7 f94814orexv23w1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-107863) of Catapult Communications Corporation of our report dated November 19, 2003 relating to the financial statements, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, California December 5, 2003 EX-31 8 f94814orexv31.txt EXHIBIT 31 Exhibit 31 CERTIFICATION I, Richard A. Karp, certify that: 1. I have reviewed this annual report on Form 10-K of Catapult Communications Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 5, 2003 /s/ RICHARD A. KARP -------------------------------- (Richard A. Karp) Chief Executive Officer and Chairman of the Board Exhibit 31 CERTIFICATION I, Christopher A. Stephenson, certify that: 1. I have reviewed this annual report on Form 10-K of Catapult Communications Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 5, 2003 /s/ CHRISTOPHER A. STEPHENSON ------------------------------------ (Christopher A. Stephenson) Chief Financial Officer EX-32 9 f94814orexv32.txt EXHIBIT 32 Exhibit 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 I, Richard A. Karp, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Catapult Communications Corporation on Form 10-K for the fiscal year ended September 30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Catapult Communications Corporation. By: /s/ RICHARD A. KARP ----------------------------------- Name: Richard A. Karp Title: Chief Executive Officer I, Christopher A. Stephenson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Catapult Communications Corporation on Form 10-K for the fiscal year ended September 30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Catapult Communications Corporation. By: /s/ CHRISTOPHER A. STEPHENSON ----------------------------------- Name: Christopher A. Stephenson Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----


(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


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


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


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



	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


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


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


Item 5.	*Market for the Registrant’s Common Equity and Related Stockholder Matters*


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.



		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



	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



		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


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



			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


	*Fluctuations in Quarterly Operating Results; Lengthy Sales Cycle*


Item 1.	*Business*


	*Applications*


Item 2.	*Properties*


Item 3.	*Legal Proceedings*


	*Dependence on Rapidly Evolving Telecommunications Industry*


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


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


	*Limited Protection of Proprietary Rights; Enforcement of Rights*


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


Item 7A.	*Quantitative and Qualitative Disclosure About Market Risks*


Item 8.	*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


												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


Note 1 —	The Company and Summary of Significant Accounting Policies



	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	%		—			—


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



	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



	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


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


	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	$	—


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


		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



	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


	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