|FORM
10-Q


UNITED
STATES>SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


(Mark One)
|--------------------------------------------------------------------------------------------------

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

|For the quarterly
period ended December 31, 2001


OR
|-----------------------------------------------------

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

|Commission file number
0-24701


CATAPULT COMMUNICATIONS
CORPORATION (Exact name of
Registrant as specified in its charter)
|---------------------------------------------------------------------------------------------------------------------------

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

|160 South Whisman Road
Mountain View, California 94041


(650) 960-1025


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




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


As of
January 31, 2002, there were 13,042,547 shares of the Registrants Common Stock,
$0.001 par value, outstanding.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CATAPULT
COMMUNICATIONS CORPORATIONFORM 10-Q


INDEX
|----------------------------------------------------

|Part IFinancial Information                                                      | Page |   
|--------------------------------------------------------------------------------- | ---- | --
|                                                                                 
|Item 1. Financial Statements (unaudited)                                          |      |   
|                                                                                 
|Condensed Consolidated Balance Sheets at December 31, 2001 and September 30, 2001 |      | 3 
|                                                                                 
|Condensed Consolidated Statements of Income for the three months ended            |     
|December 31, 2001 and 2000                                                        |      | 4 
|                                                                                 
|Condensed Consolidated Statements of Cash Flows for the three months ended        |     
|December 31, 2001 and 2000                                                        |      | 5 
|                                                                                 
|Notes to Condensed Consolidated Financial Statements                              |      | 6 
|                                                                                 
|Item 2.  Management's Discussion and Analysis of Financial Condition              |     
|and Results of Operations                                                         |      | 8 
|                                                                                 
|Item 3.  Quantitative and Qualitative Disclosures About Market Risk               |      | 14

## Part IIOther
Information

|                                                             | 
|------------------------------------------------------------ | 
|Item 1.  Legal Proceedings                                   | 
|                                                            
|Item 2.  Changes in Securities and Use of Proceeds           | 
|                                                            
|Item 3.  Defaults Upon Senior Securities                     | 
|                                                            
|Item 4.  Submission of Matters to a Vote of Security Holders | 
|                                                            
|Item 5.  Other Information                                   | 
|                                                            
|Item 6.  Exhibits and Reports on Form 8-K                    | 
|                                                            
|Signatures                                                   | 

|2
|-

|Part I. Financial Information


Item 1. Financial Statements


CATAPULT
COMMUNICATIONS CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except
share data) (unaudited)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           | December 31,2001 | September 30,2001
|------------------------------------------ | ---------------- | -----------------
|                                           |                  |                  
|                                           |                  |                  
|                                          
|ASSETS                                     |                  |                  
|                                          
|Current Assets:                            |                 
|Cash and cash equivalents                  |                  | $ 46,472         
|Short-term investments                     |                  | 16,392           
|Accounts receivable, net                   |                  | 8,817            
|Inventories                                |                  | 1,032            
|Deferred income taxes                      |                  | 628              
|Prepaid expenses and other current assets  |                  | 368              
|                                           |                  |                  
|Total current assets                       |                  | 73,709           
|Property and equipment, net                |                  | 1,418            
|Other assets                               |                  | 489              
|                                           |                  |                  
|Total assets                               |                  | $ 75,616         
|                                           |                  |                  
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY       |                 
|                                          
|Current Liabilities:                       |                 
|Accounts payable                           |                  | $      608       
|Accrued liabilities                        |                  | 5,829            
|Deferred revenue                           |                  | 1,927            
|                                           |                  |                  
|Total current liabilities                  |                  | 8,364            
|                                           |                  |                  
|Stockholders Equity:                      |                 
|Common stock                               |                  | 13               
|Additional paid-in capital                 |                  | 22,427           
|Deferred compensation                      |                  | (138             
|Treasury stock (50,000 shares at cost)     |                  | (300             
|Accumulated other comprehensive income     |                  | 481              
|Retained earnings                          |                  | 44,769           
|                                           |                  |                  
|Total stockholders equity                 |                  | 67,252           
|                                           |                  |                  
|Total liabilities and stockholders equity |                  | $ 75,616         
|                                           |                  |                  

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


3
|-----------------------------------------------------------------------------------------------------

|CATAPULT
COMMUNICATIONS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(in thousands, except
per share data) (unaudited)
|-------------------------------------------------------------------------------------------------------------------------------

|                                       | Three Months EndedDecember 31,
|-------------------------------------- | ------------------------------
|
|                                       |                               
|Revenues:                              |                               
|Product sales                          |                               
|Services                               |                               
|                                       |                               
|Total revenues                         |                               
|                                       |                               
|                                      
|Cost of revenues:                      |                               
|Product sales                          |                               
|Services                               |                               
|                                       |                               
|Total cost of revenues                 |                               
|                                       |                               
|                                      
|Gross profit                           |                               
|                                      
|Operating expenses                     |                               
|Research and development               |                               
|Sales and marketing                    |                               
|General and administrative (including  |                               
|stock-based compensation expense of $6 |                               
|and $15)                               |                               
|                                       |                               
|Total operating expenses               |                               
|                                       |                               
|                                      
|Operating income                       |                               
|                                      
|Interest income                        |                               
|Other expense                          |                               
|                                       |                               
|                                      
|Income before income taxes             |                               
|                                      
|Provision for income taxes             |                               
|                                       |                               
|                                      
|Net income                             |                               
|                                       |                               
|                                      
|Earnings per share:                    |                               
|Basic                                  |                               
|                                       |                               
|Diluted                                |                               
|                                       |                               
|                                      
|Shares used in per share calculation:  |                               
|Basic                                  |                               
|                                       |                               
|Diluted                                |                               
|                                       |                               

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


4
|-----------------------------------------------------------------------------------------------------

|CATAPULT COMMUNICATIONS
CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(in thousands)(unaudited)
|-------------------------------------------------------------------------------------------------------------

|                                                         | Three Months EndedDecember 31,
|-------------------------------------------------------- | ------------------------------
|
|                                                         |                               
|                                                         |                               
|Cash flows from operating activities:                    |                               
|Net income                                               |                               
|Adjustments to reconcile net income to net cash provided |                               
|by operating activities:                                 |                               
|Depreciation and amortization                            |                               
|Amortization of deferred stock compensation              |                               
|Change in current assets and liabilities:                |                               
|Accounts receivable                                      |                               
|Inventories                                              |                               
|Prepaid expenses and other current assets                |                               
|Other assets                                             |                               
|Accounts payable                                         |                               
|Accrued liabilities                                      |                               
|Deferred revenue                                         |                               
|                                                         |                               
|Net cash provided by operating activities                |                               
|                                                         |                               
|                                                        
|Cash flows from investing activities:                    |                               
|Sales (Purchases) of investments, net                    |                               
|Purchases of property and equipment                      |                               
|                                                         |                               
|Net cash provided (used) by investing activities         |                               
|                                                         |                               
|                                                        
|Cash flows from financing activities:                    |                               
|Proceeds from issuance of common stock                   |                               
|                                                         |                               
|Net cash provided by financing activities                |                               
|                                                         |                               
|                                                        
|Effect of exchange rate changes on cash                  |                               
|                                                         |                               
|Increase (decrease) in cash and cash equivalents         |                               
|                                                         |                               
|                                                        
|Cash and cash equivalents, beginning of period           |                               
|                                                         |                               
|                                                        
|Cash and cash equivalents, end of period                 |                               
|                                                         |                               

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


5
|-----------------------------------------------------------------------------------------------------

|CATAPULT
COMMUNICATIONS CORPORATIONNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)


NOTE 1THE COMPANY
AND BASIS OF PRESENTATION


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


The
accompanying unaudited interim financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. These condensed financial
statements should be read in conjunction with the audited financial statements and notes
thereto included in the Companys Report on Form 10-K for the year ended September
30, 2001, and filed with the Securities and Exchange Commission. The unaudited financial
statements as of December 31, 2001, and for the three months ended December 31, 2001 and
2000, reflect, in the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial information set forth
herein. The results of operations for the interim periods are not necessarily indicative
of the results to be expected for any subsequent interim period or for an entire year.
The September 30, 2001 balance sheet was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally accepted in
the United States of America.


Revenue Recognition


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


NOTE 2 RECENTLY
ISSUED ACCOUNTING STANDARDS


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 management of 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
accounting for its operations.


6
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 3BASIC AND
DILUTED EARNINGS PER SHARE


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

|                                          | Three Months EndedDecember 31,       
|----------------------------------------- | -------------------------------------
|
|                                          |                                      
|                                          | (in thousands, except per share data)
|                                          |                                      
|Net income                                |                                      
|                                          |                                      
|                                         
|Weighted average shares outstanding       |                                      
|Dilutive options                          |                                      
|                                          |                                      
|Weighted average shares assuming dilution |                                      
|                                          |                                      
|                                         
|Earnings per share:                       |                                      
|Basic                                     |                                      
|                                          |                                      
|Diluted                                   |                                      
|                                          |                                      
|                                         
|Antidilutive common equivalent shares     |                                      
|excluded in calculating diluted earnings  |                                      
|per share                                 |                                      
|                                          |                                      
|                                          |                                      

|NOTE 4COMPREHENSIVE
INCOME


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

|                                      | Three Months EndedDecember 31,
|------------------------------------- | ------------------------------
|
|                                      |                               
|                                      |                               
|                                      |                               
|Net income                            |                               
|Currency translation adjustment       |                               
|Unrealized gain (loss) on investments |                               
|                                      |                               
|Comprehensive income                  |                               
|                                      |                               

## NOTE 5INVENTORIES (in
thousands)

|                | December 31,2001 | September 30,2001
|--------------- | ---------------- | -----------------
|                |                  |                  
|                |                  | (in thousands)   
|                |                  |                  
|Raw Materials   |                  | $   953          
|Work-in-process |                  | 22               
|Finished goods  |                  | 57               
|                |                  |                  
|                |                  | $1,032           
|                |                  |                  
|                |                 

|7
|-

|NOTE 6 SEGMENT
REPORTING


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


The
Companys principal geographical areas of operations, sales, income and assets by
region for the current and previous three month periods ended December 31 were as follows
(in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | NorthAmerica | UK & Europe | Japan | ConsolidatedTotal
|----------------------------------------- | ------------ | ----------- | ----- | -----------------
|                                          |              |             |       |                  
|Three Months Ended December 31, 2001      |              |             |       |                  
|Sales to unaffiliated customers           |              | $      926  |       | $   5,013        
|Net income (loss)                         |              | (548        | )     | 3,836            
|                                         
|Identifiable Assets at December 31, 2001  |              | $ 62,291    |       | $ 12,506         
|                                         
|Three Months Ended December 31, 2000      |             
|Sales to unaffiliated customers           |              | $   4,364   |       | $   1,067        
|Net income (loss)                         |              | 3,008       |       | (160             
|                                         
|Identifiable Assets at September 30, 2001 |              | $ 59,263    |       | $ 11,085         

|The
result of operations by geographic region includes significant sales principally from the
United States to the Companys foreign locations at agreed upon transfer prices.


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


The
following discussion and analysis should be read in conjunction with Selected
Consolidated Financial Dataand the Companys Consolidated Financial Statements
and Notes thereto included in the Companys Annual Report on Form 10-K for 2001.


Forward-looking
Statements


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


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


Overview


The
Company designs, develops, manufactures, markets and supports an advanced software-based
test system offering an integrated suite of testing applications for the global
telecommunications industry. The Companys family of digital communication test
systems is designed to enable equipment manufacturers and network operators to deliver complex
digital telecommunications equipment and services more quickly and cost-effectively. The
DCT product line performs a variety of test functions, including simulation, load and
stress testing, feature verification, conformance testing and monitoring. The Company
maintains an extensive library of software modules that support a large number of
protocols and variants. The DCT system consists of advanced software and hardware running
on a third-party UNIX-based workstation. In addition, the Company offers customer support
under software support contracts, as well as installation and training services.



8
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Results of Operations


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

|                              | Three Months EndedDecember 31,
|----------------------------- | ------------------------------
|
|                              |                               
|Revenues:                     |                               
|Product sales                 |                               
|Services                      |                               
|                              |                               
|Total revenues                |                               
|                              |                               
|Cost of revenues:             |                               
|Product sales                 |                               
|Services                      |                               
|                              |                               
|Total cost of revenues        |                               
|                              |                               
|Gross margin                  |                               
|Operating expenses:           |                               
|Research and development      |                               
|Sales and marketing           |                               
|General and administrative    |                               
|                              |                               
|Total operating expenses      |                               
|                              |                               
|Operating income              |                               
|Interest income               |                               
|Other expense                 |                               
|                              |                               
|Income before taxes           |                               
|Provision for taxes           |                               
|                              |                               
|Net income                    |                               
|                              |                               
|                             
|Gross margin on product sales |                               
|Gross margin on services      |                               

|9
|-

|Comparison of the Three
Month Periods Ended December 31, 2001 and 2000


Revenues


Revenues
increased by approximately 12% from $9.7 million for the three months ended December 31,
2000 to $10.9 million for the three months ended December 31, 2001. Over the same period,
product sales increased by approximately 14% from $8.4 million to $9.5 million. Services
revenue remained at approximately $1.4 million. The increase in product sales was
primarily attributable to the results generated from the Companys increased focus
on test systems for the third generation (3G) digital cellular market.


Cost
of Revenues


Cost
of product sales consists of the costs of board assembly by independent contractors,
purchased components, payroll and benefits for personnel in product testing, purchasing,
shipping and inventory management, as well as supplies, media and freight. Cost of
services consists primarily of the costs of payroll and benefits for customer support,
installation and training personnel. Cost of sales increased approximately 6% from
$829,000 for the three months ended December 31, 2000 to $877,000 for the three months
ended December 31, 2001. Over the same period, the cost of product sales decreased by
approximately 10%. Gross margin for product sales increased from 92% to 94% over this
same period due to a more favorable product mix. Cost of services increased by
approximately 75% from $150,000 for the three months ended December 31, 2000 to $263,000
for the three months ended December 31, 2001 due to an increase in customer service
personnel. Over the same period, gross margin on services decreased from 89% to 81%.


Research
and Development


Research
and development expenses consist primarily of the costs of payroll and benefits for
engineers, materials, equipment and consulting services. To date, all software
development costs have been charged to research and development expenses as incurred.
Research and development expenses increased by approximately 67% from $979,000 for the
three months ended December 31, 2000 to $1.6 million for the three months ended December
31, 2001. As a percentage of total revenues, research and development expenses increased
from 10% to 15% over the same period. The increase in absolute dollars was due primarily
to an increase in personnel in the engineering group. The Company expects that research
and development expenses will increase in absolute dollars for the foreseeable future as
the Company intends to continue to invest in product development.*


Sales
and Marketing


Sales
and marketing expenses consist primarily of the costs of payroll, benefits, commissions
and bonuses, occupancy costs, travel and promotional expenses, such as product brochures
and trade show costs. Sales and marketing expenses increased by approximately 10% from
$2.5 million for the three months ended December 31, 2000 to $2.8 million for the three
months ended December 31, 2001. As a percentage of total revenues, sales and marketing
expenses was at 26% for the three months ended December 31, 2000 and 2001. The increase
of $249,000 was due primarily to an increase in sales and marketing personnel resulting
in increased salary, commissions, and bonuses, increased travel expenses, and the
expansion of the Companys sales and support offices. The Company expects that sales
and marketing expenses will increase in absolute dollars for the foreseeable future as
the Company intends to continue to invest in its sales and marketing capabilities.*


General
and Administrative


General
and administrative expenses include costs associated with the Companys general and
risk management, meeting public company reporting requirements, employee recruitment and
retention, investor relations and finance functions.
General and administrative expenses were $1.2 million for the three months ended December
31, 2000 and 2001. As a percentage of total revenues, general and administrative expenses
decreased from 13% to 11% over the same period.



10
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Interest
Income


Interest
income consists primarily of interest earned on cash and cash equivalents and short-term
investments. Interest income decreased from $775,000 for the three months ended December
31, 2000 to $433,000 for the three months ended December 31, 2001. Although the Company
had higher invested balances during the three months ended December 31, 2001 compared to
the three months ended December 31, 2000, the decrease in prevailing interest rates
significantly reduced earnings on the Companys investments.


Other
Income (Expense), net


Other
income (expense) primarily represents gains and losses from fluctuations in exchange
rates on transactions denominated in foreign currencies. Other expense increased from
$91,000 for the three months ended December 31, 2000 to $178,000 for the three months
ended December 31, 2001 due to foreign exchange losses, including losses realized on
forward contracts entered into which were denominated in currencies other than the US
dollar.


Provision
for income taxes


Provision
for income tax consists of federal, state and international income taxes. The Companys
effective tax rate was 35.0% for the three months ended December 31, 2000 and 28.0% for
the three months ended December 31, 2001. The decrease in the consolidated tax rate
reflects changes in the levels of pretax profits in the countries in which the Company
and its subsidiaries are registered together with changes in the tax rates in those
countries. The Company expects that its future tax rate may vary depending in part on the
relative income contribution by its domestic and foreign operations.


Liquidity
and Capital Resources


Historically,
the Company has financed its requirements, including increases in accounts receivable and
acquisitions of capital equipment, primarily through cash generated from operations, cash
proceeds from its initial public offering of common stock, investment earnings and the
sale of the Companys stock through the exercise of employee stock options and the
Employee Stock Purchase Plan.


The
Companys operating activities provided cash of $1.2 million and $5.4 million in the
three month periods ended December 31, 2001 and 2000, respectively. The cash provided by
the Companys operations for the three months ended December 31, 2001 was primarily
attributable to net income and partially offset by an increase in accounts receivable
that reflected primarily timing of invoicing. Investing activities, consisting primarily
of purchases and sales of short-term investments and to a lesser extent additions to
property and equipment, provided cash of $667,000 in the three months ended December 31,
2001 and used cash of $8.9 million in the three months ended December 31, 2000. Cash
flows from financing activities for the three months ended December 31, 2001 and 2000
were attributable to exercises of employee stock options and the purchase of shares under
the employee stock purchase plan in both periods.


As of
December 31, 2001, the Company had working capital of $65.3 million, cash and cash
equivalents of $46.5 million and short-term investments of $16.4 million. As of December
31, 2001, the Company had no bank indebtedness and no long-term commitments other than
operating lease obligations. The Company expects that capital expenditures during fiscal
2002 will remain at the fiscal 2001 levels with expenditures primarily in support of the
Companys research and development activities.*


11
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


Factors That May Affect
Future Results


Fluctuations
in Quarterly Operating Results; Lengthy Sales Cycle


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 installation of the
products, provided no significant vendor obligations remain and collection of the related
receivable is deemed probable. As a result, the Company generally does not have a
significant backlog of orders, and revenues in any quarter are substantially dependent on
orders booked, shipped and installed in that quarter.


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


Due to
the relatively fixed nature of most of the Companys costs, including personnel and
facilities costs, and because operating expenses are based on anticipated revenue, a
decline in revenue from even a limited number of transactions, failure to achieve
expected revenue in any fiscal quarter or unanticipated variations in the timing of
recognition of specific revenues can cause significant variations in operating results
from quarter to quarter and may in some future quarter result in losses or have a
material adverse effect on the Companys 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.


12
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


Dependence
on Limited Number of Customers


The
Companys customer base is highly concentrated, and a relatively small number of
companies have accounted for substantially all of the Companys revenues to date. In
the three months ended December 31, 2001, the Companys top four customers
represented approximately 69% of total revenues. The Company expects that it will
continue to depend upon a relatively limited number of customers for substantially all of
its revenues in future periods, although no customer is presently obligated either to
purchase a specific amount of products or to provide the Company with binding forecasts
of purchases for any period. The loss of a major customer or the reduction, delay or
cancellation of orders from one or more of the Companys significant customers could
materially adversely affect the Companys business, financial condition and results
of operations.


Risks
Associated with International Sales and Operations


Company
revenues from international customers were approximately 91% during the three months
ended December 31, 2001. The Company expects that international sales will continue to
account for a significant portion of its revenues in future periods.* The Company sells
its products worldwide through its direct sales force. The Company has international
offices located in Japan, Canada, the United Kingdom, Germany, France, Finland, and
Australia and plans to add offices, staff and resources worldwide from time to time.
International sales and operations are subject to inherent risks, including difficulties
in staffing and managing foreign operations, longer customer payment cycles, greater
difficulty in accounts receivable collection, changes in regulatory requirements or in
economic or trade policy, costs related to localizing products for foreign countries,
potentially weaker protection for intellectual property in certain foreign countries, the
burden of complying with a wide variety of foreign laws and practices, tariffs and other
trade barriers, and potentially adverse tax consequences, including restrictions on
repatriation of earnings. During the last two fiscal years and during the three months
ended December 31, 2001 a significant portion of the Companys sales has been to
customers in Japan. If economic conditions in Japan deteriorate to a significant extent,
the Companys business, financial condition and results of operations could be
materially adversely affected. An inability to obtain necessary regulatory approvals in
foreign markets on a timely basis could also have a material adverse effect on the Companys
business, financial condition and results of operations.


Most
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.


13
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|Rapid
Technological Change; Uncertainty of Acceptance of the Companys Products and Services


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


The
Companys test systems currently operate only on the UNIX operating system. The
Companys current and prospective customers may require other operating systems to
be used in their telecommunications test systems, such as Windows 2000 or Windows XP 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 network operators, telecommunications equipment
manufacturers or other potential customers or that solutions developed by competitors
will not render the Companys products obsolete or uncompetitive. In the event the
telecommunications industry does not broadly adopt the Companys products or
services or does so less rapidly than expected by the Company, or in the event the Companys
products are rendered obsolete or uncompetitive by more advanced solutions, the Companys
business, financial condition and results of operations would be materially adversely
affected.


Item 3. Quantitative and
Qualitative Disclosures About Market Risk


Foreign
Exchange Risk and Derivative Financial Instruments


The
Companys foreign subsidiaries operate and sell the Companys products in
various global markets. As a result, the Company is exposed to changes in interest rates
and foreign currency exchange rates on foreign currency denominated sales made to foreign
subsidiaries. The Company utilizes foreign currency forward exchange contracts and
options to 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.



14
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|At
December 31, 2001 the Company had forward exchange contracts maturing in fiscal 2002 to
sell approximately $0.7 million in Japanese Yen and options maturing in fiscal 2002 to
sell $2.2 million in Japanese Yen. The fair market value of the contracts and options at
December 31, 2001 was not material.


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


Additional
factors that could affect future operating results or the price of the Common Stock are
set forth under the caption Factors That May Affect Future Resultsin the
Companys Annual Report on Form 10-K for 2001.


Part II. Other
Information
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 1. |  | Legal Proceedings
|------- |  | -----------------

The
Company is not currently aware of any legal proceedings or claims that the Company
believes are likely to have a material adverse effect on the Companys financial
position, results of operation or cash flows. From time to time we have been and expect
to continue to be, subject to legal proceedings and claims by third parties in the
ordinary course of business, including claims of alleged infringement of third party
trademarks and other intellectual property rights against our licensees or us. Third
party claims, like these, even if not meritorious, could result in the expenditure of
significant financial and managerial resources and could materially affect our business,
financial condition, results of operations and cash flows.

|Item 2. |  | Changes in Securities and Use of Proceeds
|------- |  | -----------------------------------------

| | Inapplicable
| | ------------

|Item 3. |  | Defaults Upon Senior Securities
|------- |  | -------------------------------

| | Inapplicable
| | ------------

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

| | Inapplicable
| | ------------

|Item 5. |  | Other Information
|------- |  | -----------------

| | Inapplicable
| | ------------

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

| |  | (a) |  | Exhibits.
| |  | --- |  | ---------

| | Inapplicable
| | ------------

| |  | (b) |  | Reports
on Form 8-K.
| |  | --- |  | --------------------

| | No
reports on Form 8-K were filed during the quarter for which this report on Form 10-Q is
filed.
| | -------------------------------------------------------------------------------------------------

|15
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|SIGNATURES


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

|February 13, 2002 |  | CATAPULT COMMUNICATIONS CORPORATIONBy: /s/ Chris Stephenson
Chris StephensonVice  President  and  Chief  Financial Officer(Principal Financial Officer)
|----------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|16
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