|UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K
|-----------------------------------------------------------------------------------

| | (MARK
ONE)
| | ----------

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

|For the fiscal year
ended September 30, 2001
|--------------------------------------------

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

|For the transition
period from _______ to _______.


Commission File Number:
0-24701


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

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

|160 South Whisman Road,
Mountain View, California 94041 
(Address of principal executive offices, including zip
code)


Registrants telephone
number, including area code: (650) 960-1025/Web Site (www.catapult.com)


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


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


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


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


As of October 31, 2001, 12,991,060
shares of the Registrants common stock, $0.001 par value, were outstanding. The
aggregate market value of the voting stock held by non-affiliates of the Registrant
(based upon the closing price of the Registrants common stock on October 31, 2001
of $22.65 per share) was approximately $144,730,057. Shares of common stock held by each
executive officer and director of the outstanding common stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.


DOCUMENTS
INCORPORATED BY REFERENCE


Part III incorporates
information by reference from the definitive proxy statement for the Annual
Meeting of Stockholders scheduled to be held on January 22, 2002.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Table of Contents
|-----------------

|         |  |                                                                                     
|-------- |  | ------------------------------------------------------------------------------------
|PART I   |  |                                                                                     
|ITEM 1.  |  | BUSINESS                                                                            
|         |  | The Company                                                                         
|         |  | The DCT Product Line                                                                
|         |  | Customers                                                                           
|         |  | Sales and Marketing                                                                 
|         |  | International Sales                                                                 
|         |  | DCT Product Line Support                                                            
|         |  | Product Development                                                                 
|         |  | Manufacturing                                                                       
|         |  | Competition                                                                         
|         |  | Intellectual Property                                                               
|         |  | Employees                                                                           
|         |  | Executive Officers of the Company                                                   
|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 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION                           
|         |  | AND RESULTS OF OPERATIONS                                                           
|         |  | Overview                                                                            
|         |  | Fiscal Years Ended September 30, 2000 and 2001                                      
|         |  | Fiscal Years Ended September 30, 1999 and 2000                                      
|         |  | Liquidity and Capital Resources                                                     
|         |  | Factors That May Affect Future Results                                              
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS                          
|         |  | Foreign Exchange Risk and Derivative Financial Instruments                          
|         |  | Interest Rate Risk                                                                  
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                         
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|PART III |  |                                                                                     
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                              
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV  |  |                                                                                     
|ITEM 14. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ONFORM 8-K                     

|i
|-

|FORWARD-LOOKING
STATEMENTS


THIS
REPORT ON FORM 10-K CONTAINS STATEMENTS THAT ARE NOT HISTORICAL FACTS BUT ARE
FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS AS ANTICIPATED FINANCIAL
PERFORMANCE, BUSINESS PROSPECTS, TECHNOLOGICAL DEVELOPMENTS, NEW PRODUCTS AND
SIMILAR MATTERS. SUCH STATEMENTS ARE GENERALLY IDENTIFIED BY THE USE OF
FORWARD-LOOKING WORDS AND PHRASES, SUCH AS INTENDED,
EXPECTS, ANTICIPATES AND IS (OR ARE) EXPECTED (OR
ANTICIPATED). THESE FORWARD-LOOKING STATEMENTS INCLUDE BUT ARE NOT LIMITED
TO THOSE IDENTIFIED IN THIS REPORT WITH AN ASTERISK (*) SYMBOL. ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS,
AND STOCKHOLDERS OF CATAPULT SHOULD CAREFULLY REVIEW THE CAUTIONARY STATEMENTS
SET FORTH IN THIS REPORT ON FORM 10-K, INCLUDING THOSE SET FORTH UNDER THE
CAPTION FACTORS THAT MAY AFFECT FUTURE RESULTS.


THE
COMPANY MAY FROM TIME TO TIME MAKE ADDITIONAL WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS, INCLUDING STATEMENTS CONTAINED IN THE COMPANYS FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION AND IN ITS REPORTS TO STOCKHOLDERS. THE
COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENTS THAT MAY BE
MADE FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY.


PART I


ITEM
1. BUSINESS


The Company


Catapult
Communications Corporation (Catapult, the Company or the
Registrant) designs, develops, manufactures, markets and supports an
advanced software-based test system offering an integrated suite of testing
applications for the global telecommunications industry. Catapults DCT
product line, a family of digital communications test systems, is 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 a direct sales force to industry leaders such as Alcatel, Cisco Systems,
Inc., Fujitsu Limited, LM Ericsson, Evolium SAS, Lucent Technologies, Inc.
(Lucent), Motorola, Inc. (Motorola), NEC Corporation
(NEC), Nippon Telephone and Telegraph (NTT), Nokia
Corporation, Nortel Networks Limited (Nortel), NTT DoCoMo, Inc.
(NTT DoCoMo), Siemens AG and Tellabs Inc.


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 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 its extensive library of software protocol modules, large selection of
physical interfaces and versatile platform, the DCT product line is 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 systems multi-protocol,
multi-user capability allows multiple testing operations to be performed
simultaneously, helping the Companys customers to accelerate their product
development cycles.


(1) Please refer to Glossary on page 22.


1
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The DCT
Product Line


DCT
systems consist of DCT2000 advanced software and hardware running on a
third-party UNIX-based workstation. In a system sale, 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 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 system sale typically ranges in price from approximately
$50,000 to over $250,000.


Applications


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


Simulation.
DCT systems simulate or act like 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 systems allow customers to verify that a device
under test can successfully handle its designed traffic capacity and that its
performance will degrade gradually, rather than fail completely, when stressed
beyond its specifications. Distributed interface processing and a
high-performance UNIX-based platform enable the DCT systems to initiate and
maintain high traffic volumes.


Feature
Verification.DCT systems 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 DCT systems traffic channel facilities to
verify a voice or data path.


Conformance
Testing.DCT systems test for conformance by enabling manufacturers and
network operators to verify that devices meet specified standards. Conformance
test suites validate the implementation of new features and the functionality of
existing features against a standardized set of predefined criteria.


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


DCT
Product Line Software


The
DCT product line software, based on a UNIX operating system, consists of protocol
encoders and decoders, protocol state machines, protocol validation tests and conformance
test suites. The DCT system includes support for a large number of protocols and
variants, enabling the DCT system to be configured for many different test applications.
The Companys customers can choose to program the DCT system using Catapults
graphical user interface (GUI) or by writing their own code using the Companys
Digital Communication Programming Language (DCPL), a fully featured optimized
communications language. In addition, the Company has introduced pre-programmed
applications to perform load generation and network entity simulation. Finally, customers
can also choose to integrate their own libraries of subroutines written in industry standard programming languages such as C or
C++.


2
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|DCT
Product Line Hardware


The
DCT product line employs modular hardware architecture that supports a wide
variety of physical interfaces that connect the DCT systems to the device under
test. The Company provides this flexibility through the DCT2000 PowerPCI
co-processor cards, which are inserted into the workstation or an expansion
chassis. The DCT system is hosted on a Sun Microsystems or compatible
workstation.


Using
up to two expansion chassis, a single workstation may also support multiple
PowerPCI cards, each of which in turn supports multiple signaling channels. The
Company offers PowerPCI cards for a variety of industry standard physical
interfaces, including Primary Rate E-1/T-1, ATM Optical/UTP, Ethernet, Serial
port, ISDN Basic Rate and Japanese CII.


The
Company also offers a number of auxiliary cards to increase the versatility of
the DCT systems. For example, the VOX card adds voice channel testing capability
on up to 64 channels of E-1 and T-1 links. The Timeslot Interchange (TSI) card
supports individual dynamic or static channel selection for up to 248 timeslots.
The Subscriber Line Interface Card (SLIC) converts two-wire analog subscriber
line interfaces to four-wire handset interfaces. The Company provides a
converter for CMI, the Japanese physical interface.


Customers


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


Revenues
from the Companys top four customers represented approximately 87%, 52%
and 58% of total revenues in fiscal 1999, 2000 and 2001, respectively. In fiscal
2001, sales to NEC, Nortel, Motorola and Lucent accounted for approximately 16%,
16%, 15% and 11% of total revenues, respectively. In fiscal 2000, sales to NTT
DoCoMo and Motorola accounted for approximately 23% and 12% of total revenues,
respectively. In fiscal 1999, sales to NTT, Motorola and NEC accounted for
approximately 58%, 14%, and 12% of total revenues, respectively. Separate
engineering groups of the same customer at different locations generally make
independent decisions to purchase the Companys products. For example,
several divisions of one major customer have independently installed DCT systems
at multiple locations in the United States as well as in Ireland, the United
Kingdom, Israel, India and China.


The
Company expects that it will continue to depend upon a relatively limited number
of customers for substantially all of its revenues in future periods, although
no customer is presently obligated either to purchase a specific amount of
products or to provide the Company with binding forecasts of purchases for any
period. The loss of a major customer or the reduction, delay or cancellation of
orders from one or more of the Companys significant customers could
materially adversely affect the Companys business, financial condition and
results of operations.


Sales and
Marketing


The
Company markets its products and services through its direct sales force, a
majority of whom have technical degrees. As of September 30, 2001, the
Companys direct sales force consisted of 18 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. To date, the Company has not entered into independent distributor
arrangements because of the high level of technical expertise and support
required by customers. Pursuant to a special agreement, one of the
Companys customers has the right to re-market the Companys test
systems as part of an integrated product sale.


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


3
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|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 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 longer end of this range. Because of the lengthy sales cycle and the
relatively small number and large size of customers orders, if revenues
forecast from a specific customer for a particular quarter are not realized in
that quarter, the Companys operating results for that quarter could be
materially adversely affected.


International
Sales


International
sales constituted approximately 78%, 68% and 68% of the Companys total
revenues in fiscal 1999, 2000 and 2001, 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. The Company has offices and sales staff outside the United
States located in Japan, the United Kingdom, Germany, France, Finland and Canada
and plans to open new offices internationally from time to time.


DCT Product
Line Support


Due
to the complexity of its customers testing needs, the Company offers its
customers support and training from highly skilled technical personnel. As of
September 30, 2001, the Company had 46 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 system to continue to be used as customer needs and applications evolve. As
part of its ongoing software support, the Company may also develop protocol
variants at the request of its customers.


Product
Development


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


4
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|The
Company is continually seeking to make the DCT systems easier to use in order to
expand its market to include a broad range of users. In order to run test
scenarios, particularly on advanced telecom systems, users may need to create
customized test scripts, a process that may require significant technical
expertise. To assist this process, the Company plans to continue the expansion
and refinement of its 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
system and expand the range of devices to which the DCT system can be directly
connected for testing purposes.


Research
and product development expenses were approximately $2.8 million, $3.0 million
and $4.9 million in fiscal 1999, 2000 and 2001, respectively. 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, 2001, 43 of the Companys
engineers were engaged in or provided support to research and development.


Manufacturing


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


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


Competition


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


The
Company believes its principal competitors are Artiza Networks (Artiza),
Acterna Corporation (Acterna), Agilent Technologies, Inc. (Agilent),
INET, Inc. (INET), Spirent plc (Spirent), Tekelec, Inc. (Tekelec)
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, Agilent, Tekelec, INET, and
Tektronix are the Companys primary competitors in North America, while its primary
competitors in Europe are Tekelec, Tektronix, Acterna and Spirent. The Companys
primary competitors in Japan are Artiza and Tekelec. The Company also faces competition
from several relatively small companies.


5
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|The
Company also competes with the internal test system groups of its customers and
potential customers. Many of the Companys existing and potential customers
have the technical capability and financial resources to produce their own test
systems and perform test services internally. These systems and services would
be competitive with the test systems offered by the Company.


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


Intellectual
Property


The
Company relies on a combination of trademark, copyright and trade secret laws,
as well as nondisclosure agreements and other contractual restrictions, to
establish and protect its proprietary rights. The Company generally enters into
nondisclosure and invention assignment agreements with its employees and
consultants, and into nondisclosure agreements with its customers and suppliers.
To date, the Company has 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 not federally
registered any 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 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.


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.


6
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|Employees


As
of September 30, 2001, the Company employed 154 full-time employees, including
43 in research and development, 46 in application engineering customer support,
34 in sales, 9 in marketing, 14 in administration and 8 in manufacturing. Of
these employees, 100 were employed in North America of whom 65 are at the
Mountain View, California headquarters, 32 were employed in the United Kingdom
and Europe, 18 in Japan, and 4 in Australia. The Company is not subject to any
collective bargaining agreement and has not experienced any work stoppages. The
Company believes that its relations with its employees are good.


Executive
Officers of the Company


The
following table sets forth certain information, as of September 30, 2001, with
respect to the executive officers of the Company:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Name                  | Age | Position
|--------------------- | --- | --------
|Richard A. Karp       |     | 57      
|David Mayfield        |     | 52      
|Chris Stephenson      |     | 50      
|Barry R. Hoglund      |     | 53      
|Glenn Stewart         |     | 51      
|Guy R. Simpson        |     | 43      
|Barbara J. Fairhurst  |     | 53      
|Terry Eastham         |     | 54      
|Kathy T. Omaye-Sosnow |     | 45      

|Dr.
Richard A. Karp founded the Company in 1985 and has served as Chief Executive Officer and
Chairman of the Board of the Company since inception. In May 2000, Mr. Karp relinquished
his title as President to David Mayfield, the Companys Chief Operating Officer. Dr. Karp
holds a Ph.D. in computer science from Stanford University, a M.S. in mathematics from
the University of Wisconsin and a B.S. in science from the California Institute of
Technology.


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


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


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


7
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


Mr.
Guy R. Simpson has served as Deputy Chairman of Catapult Communications Ltd. (CCL), the
Companys UK subsidiary, since October 1996 and was appointed Vice President of
Applications Development of the Company in May 1998. 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 of 1999.
Prior to that, Ms. Omaye-Sosnow served as the Companys Manager of Human Resources. Prior
to joining the Company, she held a variety of human resources positions, most recently as
Manager of Corporate Employment at McKesson HBOC Corporation, a pharmaceutical
distributor and health management corporation. Ms. Omaye-Sosnow holds a B.S. degree in
Human Resources from California State University, Sacramento.


ITEM 2.  PROPERTIES


The
Companys executive offices, product development and primary support and
production operations are located in Mountain View, California, where the
Company occupies approximately 29,250 square feet pursuant to leases that expire
in 2005. The annual rent for the property is approximately $305,000. The Company
believes that this facility will be adequate for its planned purposes.*


In
addition, the Company leases professional services office space in the following
locations with the following approximate square footage: 4,700 square feet in
Schaumburg, Illinois; 2,900 square feet in Dallas, Texas; 2,000 square feet in
Austin, Texas; 1,650 square feet in Raleigh, North Carolina,; 2,600 square feet
in Ottawa, Canada; 5,100 square feet in Chippenham, England; 1,200 square feet
in Landsberg, Germany; 1,000 square feet in Antony Cedex, France; 850 square
feet in Helsinki, Finland; 3,200 square feet in Tokyo, Japan; 500 square feet in
Yokosuka Research Park, Japan; and 6,500 square feet in Melbourne, Australia.


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

|ITEM 3.  LEGAL
PROCEEDINGS




The
Company is not subject to any material pending legal proceedings.



ITEM 4.  SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS



No
matters were submitted to a vote of security holders during the fourth quarter
of fiscal 2001.


PART II



ITEM 5.  MARKET FOR
THE REGISTRANTS COMMON EQUITY AND RELATED                STOCKHOLDER MATTERS



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

|                      | 2000 | 2001  
|--------------------- | ---- | ------
|
|First fiscal quarter  |      | $22.25
|Second fiscal quarter |      | $14.00
|Third fiscal quarter  |      | $11.75
|Fourth fiscal quarter |      | $19.88

|The
Company had approximately 53 stockholders of record as of September 30, 2001.
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 and, therefore does not anticipate paying cash
dividends in the foreseeable future.


9
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ITEM 6. SELECTED FINANCIAL DATA


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

|Consolidated Statements of Income Data: | Fiscal Year Ended September 30,
|--------------------------------------- | -------------------------------
|
|(in thousands, except per share data)  
|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              |                                
|Offering costs                          |                                
|                                        |                                
|Total operating expenses                |                                
|                                        |                                
|Operating income                        |                                
|Interest income                         |                                
|Other income (expense), net             |                                
|                                        |                                
|Income before taxes                     |                                
|Provision for taxes                     |                                
|                                        |                                
|Net income                              |                                
|                                        |                                
|Earnings per share:                     |                                
|Basic                                   |                                
|                                        |                                
|Diluted                                 |                                
|                                        |                                
|Shares used in per share calculation:   |                                
|Basic                                   |                                
|                                        |                                
|Diluted                                 |                                
|                                        |                                

|Consolidated Balance Sheet Data: | September 30,
|-------------------------------- | -------------
|
|(in thousands)                  
|Cash, cash equivalents and       |              
|short-term investments           |              
|Working capital                  |              
|Total assets                     |              
|Redeemable common stock          |              
|Total stockholders equity       |              

|10
|--

|Results of
Operations


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

|                              | Percentage of Total Revenues FiscalYear Ended September 30,
|----------------------------- | -----------------------------------------------------------
|
|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    |                                                            
|                              |                                                            
|Total operating expenses      |                                                            
|                              |                                                            
|Operating income              |                                                            
|Interest income               |                                                            
|Other income (expense), net   |                                                            
|                              |                                                            
|Income before taxes           |                                                            
|Provision for taxes           |                                                            
|                              |                                                            
|Net income                    |                                                            
|                              |                                                            
|Gross margin on product sales |                                                            
|                              |                                                            
|Gross margin on services      |                                                            
|                              |                                                            

|ITEM 7. |  | MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -----------------------------------------------------------------------------------

|Overview


The
Companys revenues are derived from product sales, which include both
licenses of the DCT system software and sales of hardware, and from services,
which include customer support under software support contracts as well as
installation and training. Prices for the DCT system 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
system sale typically ranges in price from approximately $50,000 to over
$250,000. In addition to the initial system purchase, customers also may upgrade
their systems by purchasing additional software protocol modules and hardware.
Customers have the option to purchase a third-party workstation from the Company
or provide a workstation to the Company for configuration. Product sales are
recognized upon shipment or, if installation services are purchased, when
installed, 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 typically purchase onsite training, which is charged on
a fixed-price basis and recognized as the service is performed.


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

|Fiscal Years
Ended September 30, 2000 and 2001


Revenues


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


Cost
of Revenues


Cost
of product sales increased by approximately 72% from $2.2 million in fiscal 2000
to $3.8 million in fiscal 2001. Gross margin on product sales decreased slightly
from 90.0% in fiscal 2000 to 89.1% in fiscal 2001.


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


Research
and Development


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


Sales
and Marketing


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


General
and Administrative


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


Interest
Income


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


Other
Income (expense)


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


Income
taxes


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


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

|Fiscal Years
Ended September 30, 1999 and 2000


Revenues


Revenues
decreased by approximately 7% from $29.0 million in fiscal 1999 to $27.0 million
in fiscal 2000. Over the same period, product sales decreased by approximately
14% from $25.5 million in fiscal 1999 to $22.0 million in fiscal 2000. The
decrease in product sales was primarily attributable to a decrease in system
sales to NTT DoCoMo of Japan, to which a particularly large sale was made in the
second quarter of fiscal 1999, but to which significantly reduced sales were
made in the first quarter of fiscal 2000. In the last three quarters of fiscal
2000, average system sale revenue from NTT DoCoMo recovered to a level 92%
higher than that of the first quarter. For the year as a whole, the decrease in
system sales to this customer was partially offset by an increase in system
sales to other domestic and international customers. Services revenue increased
by approximately 45% from $3.5 million in fiscal 1999 to $5.0 million in fiscal
2000. The increase in service revenue was primarily due to sales of software
support contracts associated with new system sales as well as increased success
in selling support to the Companys Japanese installed customer base.


Cost
of Revenues


Cost
of product sales decreased by approximately 18% from $2.7 million in fiscal 1999
to $2.2 million in fiscal 2000. Gross margin on product sales increased from
89.4% in fiscal 1999 to 90.0% in fiscal 2000. This increase was due primarily to
increased sales of higher margin proprietary hardware products, such as MPI
cards, in fiscal 2000. Cost of services increased by approximately 3% from
$945,000 in fiscal 1999 to $971,000 in fiscal 2000 due primarily to the cost of
engineering personnel additions. Gross margin on services increased from 72.6%
in fiscal 1999 to 80.6% in fiscal 2000 as services revenues grew more than the
associated costs. Gross margin on services varies depending on the timing of
system sales and support contract renewals.


Research
and Development


Research
and development expenses increased by approximately 9% from $2.8 million in
fiscal 1999 to $3.0 million in fiscal 2000 due primarily to increased spending
on salary and project costs. As a percentage of total revenues, research and
development expenses increased from 9.6% to 11.2% over the same period as
expenses increased while revenues decreased.


Sales
and Marketing


Sales
and marketing expenses increased by approximately 68% from $5.6 million in
fiscal 1999 to $9.4 million in fiscal 2000. As a percentage of total revenues,
sales and marketing expenses increased from 19.4% in fiscal 1999 to 34.8% in
fiscal 2000. The increases were due primarily to higher compensation and
occupancy costs resulting from the hiring of additional sales and applications
engineering sales support staff in the UK, Europe, Canada and the US, opening a
sales office in North Carolina and hiring additional marketing personnel.


General
and Administrative


General
and administrative expenses increased by approximately 49% from $2.5 million in
fiscal 1999 to $3.7 million in fiscal 2000. This increase was due primarily to
increases in staffing levels, bonuses and executive compensation cost, as well
as to incurring a full year of public company costs. As a percentage of total
revenues, general and administrative expenses increased from 8.6% to 13.7% over
the same period.


Interest
Income


Interest
income increased from $1.3 million in fiscal 1999 to $2.7 million in fiscal 2000
due to the increase in funds invested and to higher prevailing rates of return.


Other
Income (expense)


Other
income increased from an expense of $107,000 in fiscal 1999 to income of
$169,000 in fiscal 2000 due primarily to exchange gains as opposed to losses on
transactions denominated in foreign currencies.


13
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Income
taxes


The
Companys effective tax rate decreased from 43.0% in fiscal 1999 to 37.7%
in fiscal 2000. This decrease reflects primarily the reduction in corporate tax
rates in Japan over this period.


Liquidity and
Capital Resources


Historically,
the Company has financed its operations, including increases in accounts
receivable and capital equipment acquisitions, primarily through cash generated
from operations.


On
February 11, 1999, the Company consummated an initial public offering of
3,352,500 shares of its common stock at a price to the public of $10.00 per
share, of which 2,100,000 shares were issued and sold by the Company and
1,252,500 shares were sold by certain stockholders of the Company. The proceeds
to the Company from the offering, net of underwriter fees and other expenses,
were approximately $19.2 million.


The
Companys operating activities provided cash of $7.6 million, $7.3 million
and $12.5 million in fiscal 1999, 2000 and 2001, respectively, principally from
net income in those periods. Investing activities, consisting primarily of
purchases and sales of short-term investments and additions to property and
equipment, used cash of $33.5 million and $11.2 million and in fiscal 1999 and
2000, respectively, and provided cash of $25.5 million in fiscal 2001. Financing
activities provided cash of $19.0 million in fiscal 1999, primarily from the
proceeds of the Companys initial public offering, $230,000 in fiscal 2000
from the exercise of stock options and the purchase of shares under the employee
stock purchase plan and $1.0 million in fiscal 2001 from the exercise of stock
options and the purchase of shares under the employee stock purchase plan.


As
of September 30, 2001, the Company had working capital of $61.5 million, cash
and cash equivalents of $44.2 million and short-term investments of $17.3
million. As of September 30, 2001, the Company had no bank indebtedness and no
long-term commitments other than operating lease obligations. The Company
expects that capital expenditures will total approximately $600,000 in fiscal
2002.*


The
Company believes that cash and cash equivalents and short-term investments
together with 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


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


Fluctuations
in Quarterly Operating Results; Lengthy Sales Cycle


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


14
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


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


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


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


Dependence
on Limited Number of Customers


The
Companys customer base is highly concentrated, and a relatively small
number of companies have accounted for substantially all of the Companys
revenues to date. In the fiscal year ended September 30, 2001, the
Companys top four customers represented approximately 58% 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.


Stock
Market Fluctuations


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


Competitive
Market for Technical and Sales Personnel


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


15
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Risk
Associated with International Operations


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


Management
of Growth


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


Dependence
on Customer Outsourcing of Test Systems


The
Companys success will depend on continued growth in the market for
telecommunications test systems and services and the continued commercial acceptance of
the Companys products as a solution to address the testing requirements of
telecommunications equipment manufacturers and network operators. While most 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, 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.


16
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Competitive
Market


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


Dependence
on Rapidly Evolving Telecommunications Industry


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


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


Dependence
on Key Personnel


The
Companys future growth and success depends to a significant extent upon
the continuing services of its executive officers and other key employees. The
Company does not have long-term employment agreements or non-competition
agreements with any of its employees. Competition for qualified management and
other high-level telecommunications industry personnel is intense, and there can
be no assurance that the Company will be successful in attracting and retaining
such personnel. The loss of services of any key employees would have a material
adverse effect on the Companys business, financial condition and results
of operations. The Company maintains, and is the beneficiary of, a key person
life insurance policy in the amount of $2 million with respect to Dr. Richard A.
Karp, the Companys Chief Executive Officer and Chairman of the Board.


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


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


17
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


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


Dependence
on Sole and Single Source Suppliers


The
Company purchases many key components, including certain microprocessors,
workstations, bus interface and other chips, connectors and other hardware, from
the sole supplier of a particular component. For other components, even though
multiple vendors may exist, the Company may purchase components from only a
single source. The Company does not have any long-term supply agreements with
these vendors to ensure uninterrupted supply of these components. In the event
of a reduction or interruption in the supply of a key component, a significant
amount of time could be required to qualify alternative suppliers and receive an
adequate flow of replacement components. Reconfiguration of the Companys
products to adapt to new components may also be required and could entail
substantial time and expense. In addition, the process of manufacturing certain
of these components is extremely complex, and the Companys reliance on the
suppliers of these components exposes the Company to potential production
difficulties and quality variations, which could negatively affect cost and
timely delivery of the Companys products. The Company has from time to
time in the past experienced supply problems as a result of the financial or
operational difficulties of its suppliers, shortages and discontinuations
resulting from component obsolescence. Although the Company, to date, has not
experienced material delays in product deliveries to its customers resulting
from such supply problems, there can be no assurance that supply problems will
not recur or, if such problems do recur, that satisfactory solutions would be
found. Any prolonged inability to obtain adequate amounts of fully functional
components or any other circumstances that would require the Company to seek
alternative sources of supply could have a material adverse effect on the
Companys relationship with its customers as well as on its business,
financial condition and results of operations.


Dependence
on Third-Party Manufacturers


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


18
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Risk
of Product Defects


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


Product
Liability


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


Product
Concentration


To
date, substantially all of the Companys revenues have been attributable to
sales of the DCT family of products and related services. The Company currently
expects the DCT family of products and related services to account for
substantially all of its revenues for the foreseeable future.* As a result,
factors adversely affecting the pricing of or demand for DCT 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 family of products. There can be no assurance that
the Company will continue to be successful in developing and marketing the DCT
family of products and related services.


Effective
Control By Principal Stockholder


As of
September 30, 2001, Dr. Richard A. Karp beneficially owned 6,087,877 shares or
approximately 47% of the Companys common stock outstanding on such date, which includes
2,286,875 shares beneficially owned as of such date by Ms. Nancy H. Karp. Dr. Karp has
voting control through a voting trust, but not dispositive power, with respect to the
shares beneficially owned by Ms. Karp. As a result, Dr. Karp has 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.



19
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Limited
Protection of Proprietary Rights; Enforcement of Rights


The
Companys success and its ability to compete effectively are dependent in part upon
its proprietary technology. The Company relies on a combination of trademark, copyright
and trade secret laws, as well as nondisclosure agreements and other contractual
restrictions, to establish and protect its proprietary rights. To date, the Company has
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 not federally registered any 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 the
Companys trademarks and copyrights would not have a material adverse effect on the
Companys intellectual property rights in the future. Additionally, the Company may
be subject to further risks as it enters into transactions in countries where
intellectual property laws are unavailable, do not provide adequate protection or are
difficult to enforce. Despite the Companys efforts to protect its proprietary
rights, unauthorized parties may attempt to duplicate aspects of the Companys
products or to obtain and use information that the Company regards as proprietary. There
can be no assurance that the steps taken by the Company to protect its proprietary
technology will be adequate to prevent misappropriation of such technology or that they
will preclude competitors from independently developing products with functionality or
features similar to the Companys products. The failure of the Company to protect
its proprietary technology would have a material adverse effect on the Companys
business, financial condition and results of operations.


Risks
of Third-Party Claims of Infringement


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


Risks
Relating to Potential Acquisitions


As
part of its business strategy, the Company may make acquisitions of, or
significant investments in, companies, products or technologies that it believes
are complementary, although no such acquisitions or investments are currently
pending. 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 any such 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.


20
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Product
Development Risks


The
Companys future success will depend in part on its ability to anticipate
and respond to changing industry standards and customer requirements by
enhancing its existing products and services and by developing and introducing,
on a timely and cost-effective basis, new products, features and services that
address the needs of its customer base. There can be no assurance that the
Company will be successful in identifying, developing and marketing new
products, product enhancements and related services that respond to
technological change or evolving industry standards or that adequately meet new
market demands.


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


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


ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS


Foreign
Exchange Risk and Derivative Financial Instruments


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


At
September 30, 2001, the Company had forward exchange contracts and options
maturing in fiscal 2002 to sell approximately $6.7 million 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, 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 currency fluctuations
and believes that any such losses would not be material.*


Interest Rate
Risk


The
Companys exposure to market risk for changes in interest rates relates
primarily to its short-term investment portfolio. As of September 30, 2001,
short-term investments consisted of available-for-sale securities, including
those classified as cash equivalents, of $57.1 million (see Note 2.
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, 2001, the decline in the fair
value of the portfolio would not be material to our financial position.


21
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|GLOSSARY
|--------

|                                    | 
|----------------------------------- | 
|3G                                  | 
|                                   
|Asynchronous Transfer Mode          | 
|(ATM)                               | 
|                                   
|Code Division Multiple Access       | 
|(CDMA)                              | 
|                                    | 
|                                   
|E-1                                 | 
|                                    | 
|                                   
|Frame Relay                         | 
|                                    | 
|                                   
|Global System for Mobile            | 
|Communications (GSM)                | 
|                                   
|Graphical User Interface (GUI)      | 
|                                    | 
|                                   
|Intelligent Network (IN)            | 
|                                    | 
|                                    | 
|                                   
|Integrated Services Digital         | 
|Network (ISDN)                      | 
|                                    | 
|                                   
|IS-41 (Interim Standard 41)         | 
|                                   
|Personal Communication Service(PCS) | 
|                                    | 
|                                   
|Personal Digital Cellular (PDC)     | 
|                                   
|Protocal                            | 
|                                    | 
|                                   
|Signaling System 7 (SS7)            | 
|                                    | 
|                                   
|T-1                                 | 
|                                    | 
|                                   
|V5                                  | 
|                                    | 
|                                   
|Variant                             | 
|                                    | 
|                                   
|X.25                                | 
|                                   
|Voice over IP (VoIP)                | 
|                                    | 

|22
|--

|
|

|ITEM 8. |  | FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|------- |  | -------------------------------------------

|CATAPULT
COMMUNICATIONS CORPORATIONINDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|-----------------------------------------------------------------------------

|                                                                                         | Page
|---------------------------------------------------------------------------------------- | ----
|Consolidated Financial Statements:                                                       |     
|Report of Independent Accountants                                                        |     
|Consolidated Balance Sheets at September 30, 2000 and 2001                               |     
|Consolidated Statements of Income for each of the three years in the period ended        |     
|September 30, 2001                                                                       |     
|Consolidated Statements of Stockholders Equity for each of the three years in the       |     
|period ended September 30, 2001                                                          |     
|Consolidated Statements of Cash Flows for each of the three years in the period ended    |     
|September 30, 2001                                                                       |     
|Notes to Consolidated Financial Statements                                               |     
|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 theretom                         |     
|Supplementary Financial Data (unaudited):                                                |     
|Quarterly Financial Data for the two years ended September 30, 2000 and 2001             |     
|                                                                                         |     

|23
|--

|Report of Independent
Accountants



To the Board of Directors and
Stockholders of Catapult Communications Corporation


In
our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Catapult Communications Corporation and its subsidiaries at September 30, 2000
and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Companys management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.


/S/ PRICEWATERHOUSECOOPERS LLP


San Jose, CaliforniaOctober 29, 2001


24
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CATAPULT
COMMUNICATIONS CORPORATIONCONSOLIDATED BALANCE SHEETS(in thousands, except share and per
share data)
|-------------------------------------------------------------------------------------------------------------

|                                                                | September 30,
|--------------------------------------------------------------- | -------------
|
|ASSETS                                                          |              
|Current Assets:                                                 |              
|Cash and cash equivalents                                       |              
|Short-term investments                                          |              
|Accounts receivable, net of allowances of $83 and $73           |              
|Inventories, net                                                |              
|Deferred income taxes                                           |              
|Prepaid expenses                                                |              
|                                                                |              
|Total current assets                                            |              
|Property and equipment, net                                     |              
|Other assets                                                    |              
|                                                                |              
|Total assets                                                    |              
|                                                                |              
|LIABILITIES AND STOCKHOLDERS EQUITY                            |              
|Current Liabilities:                                            |              
|Accounts payable                                                |              
|Accrued liabilities                                             |              
|Deferred revenue                                                |              
|                                                                |              
|Total current liabilities                                       |              
|                                                                |              
|Commitments (Note 6)                                            |              
|Stockholders Equity:                                           |              
|Preferred stock, $0.001 par value, 5,000,000 shares authorized; |              
|none issued and outstanding                                     |              
|Common stock, $0.001 par value, 40,000,000 shares authorized;   |              
|12,847,977 and 12,990,960 issued and outstanding as at          |              
|September 30, 2000 and 2001, respectively                       |              
|Additional paid-in capital                                      |              
|Deferred compensation                                           |              
|Retained earnings                                               |              
|Accumulated other comprehensive income                          |              
|Treasury stock, 50,000 shares at cost                           |              
|                                                                |              
|Total stockholders equity                                      |              
|                                                                |              
|Total liabilities and stockholders equity                      |              
|                                                                |              
|                                                                |              

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


25
|--------------------------------------------------------------------------------------------

|CATAPULT
COMMUNICATIONS CORPORATIONCONSOLIDATED STATEMENTS OF INCOME(in thousands, except share
and per share data)
|-------------------------------------------------------------------------------------------------------------------

|                                      | Year Ended September 30,
|------------------------------------- | ------------------------
|
|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            |                         
|                                      |                         
|Total operating expenses              |                         
|                                      |                         
|Operating income                      |                         
|Interest income                       |                         
|Other income (expense), net           |                         
|                                      |                         
|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 consolidated financial statements.


26
|--------------------------------------------------------------------------------------------

|CATAPULT
COMMUNICATIONS CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY(in
thousands, except share data)
|-------------------------------------------------------------------------------------------------------------------

|                                | Common Stock | AdditionalPaid-in | DeferredCompen- | Retained | OtherCompre-hensiveIncome | Treasury   | TotalStock-holders | Compre-hensive
|------------------------------- | ------------ | ----------------- | --------------- | -------- | ------------------------- | ---------- | ------------------- | --------------
|
|Balance at September 30, 1998   |              | 9,992,317         |                 | $10      |                           | $         |                     | $(609         
|Issuance of common stock from   |             
|initial public offering         |              | 2,100,000         |                 | 3        |                           | 19,154     |                     |              
|Redeemable common stock         |              | 500,000           |                 |         |                           | 1,065      |                     |              
|Issuance of common stock from   |             
|exercise of stock options       |              | 147,077           |                 |         |                           | 130        |                     |              
|Purchase of treasury stock      |              | (50,000           | )               |         |                           |           |                     |              
|Amortization of deferred stock  |             
|compensation                    |              |                  |                 |         |                           | (309       | )                   | 477           
|Currency translation adjustment |              |                  |                 |         |                           |           |                     |              
|Tax benefit from exercise of    |             
|stock options                   |              |                  |                 |         |                           |           |                     |              
|Net income                      |              |                  |                 |         |                           |           |                     |              
|                                |              |                   |                 |          |                           |            |                     |               
|Balance at September 30, 1999   |              | 12,689,394        |                 | 13       |                           | 20,040     |                     | (132          
|                                |              |                   |                 |          |                           |            |                     |               
|Issuance of common stock        |              | 158,583           |                 |         |                           | 230        |                     |              
|Amortization of deferred stock  |             
|compensation                    |              |                  |                 |         |                           |           |                     | 72            
|Currency translation adjustment |              |                  |                 |         |                           |           |                     |              
|Unrealized gain on investments  |              |                  |                 |         |                           |           |                     |              
|Net income                      |              |                  |                 |         |                           |           |                     |              
|                                |              |                   |                 |          |                           |            |                     |               
|Balance at September 30, 2000   |              | 12,847,977        |                 | 13       |                           | 20,270     |                     | (60           
|                                |              |                   |                 |          |                           |            |                     |               
|Issuance of common stock        |              | 142,983           |                 |         |                           | 969        |                     |              
|Amortization of deferred        |             
|stock compensation              |              |                  |                 |         |                           |           |                     | 60            
|Currency translation adjustment |              |                  |                 |         |                           |           |                     |              
|Unrealized gain on investments  |              |                  |                 |         |                           |           |                     |              
|Tax benefit from exercise of    |             
|stock options                   |              |                  |                 |         |                           | 519        |                     |              
|Net income                      |              |                  |                 |         |                           |           |                     |              
|                                |              |                   |                 |          |                           |            |                     |               
|Balance at September 30, 2001   |              | 12,990,960        |                 | $13      |                           | $ 21,758   |                     | $            
|                                |              |                   |                 |          |                           |            |                     |               

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


27
|--------------------------------------------------------------------------------------------

|CATAPULT
COMMUNICATIONS CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|---------------------------------------------------------------------------------------

|                                                         | Year ended September 30,
|-------------------------------------------------------- | ------------------------
|
|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              |                         
|Deferred income taxes                                    |                         
|Gain on sale of property and equipment                   |                         
|Tax benefit from exercise of stock options               |                         
|Change in assets and liabilities:                        |                         
|Accounts receivable                                      |                         
|Inventories                                              |                         
|Prepaid expenses                                         |                         
|Other assets                                             |                         
|Accounts payable                                         |                         
|Accrued liabilities                                      |                         
|Deferred revenue                                         |                         
|                                                         |                         
|Net cash provided by operating activities                |                         
|                                                         |                         
|Cash flows from investing activities:                    |                         
|Sale and maturities of short-term investments            |                         
|Purchase of short-term investments                       |                         
|Purchase of property and equipment, net                  |                         
|                                                         |                         
|Net cash provided (used) by investing activities         |                         
|                                                         |                         
|Cash flows from financing activities:                    |                         
|Proceeds from public offering, net                       |                         
|Proceeds from issuance of common stock                   |                         
|Purchase of treasury stock                               |                         
|                                                         |                         
|Net cash provided by financing activities                |                         
|Effect of exchange rate changes                          |                         
|                                                         |                         
|Net increase (decrease) in cash and cash equivalents     |                         
|Cash and cash equivalents, beginning of year             |                         
|                                                         |                         
|Cash and cash equivalents, end of year                   |                         
|                                                         |                         
|Supplemental disclosures of cash flow information:       |                         
|Cash paid during the period for:                         |                         
|Income taxes                                             |                         
|                                                         |                         
|                                                         |                         

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


28
|--------------------------------------------------------------------------------------------

|CATAPULT
COMMUNICATIONS CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE
1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


The Company


The
Company designs, develops, manufactures, markets and supports an advanced
software-based test system offering an integrated suite of testing applications
for the global telecommunications industry. The Companys advanced test
systems assist its customers in the design, integration, installation and
acceptance testing of a broad range of digital telecommunications equipment and
services. The Company was incorporated in California in October 1985 and has
operations in the United States, Canada, the United Kingdom, Europe and Japan.
The Company conducts its business within one industry segment.


Reincorporation
in Nevada and Recapitalization


On
June 19, 1998, the Company reincorporated in Nevada. In connection with the
reincorporation, the Company authorized 45,000,000 shares of capital stock,
consisting of 40,000,000 shares of common stock, $0.001 par value, and 5,000,000
shares of undesignated preferred stock, $0.001 par value. In addition,
stockholders of the California corporation received three shares of common stock
of the Nevada corporation for every two shares of common stock of the California
corporation. All share and per share amounts have been restated to give
retroactive effect to the changes in authorized shares and par values, and the
three-for-two stock exchange.


Basis of
Consolidation


The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Catapult Communications Limited, Catapult
Communications K.K., Catapult Communications International Limited and ISDN
Technologies, Ltd. All significant inter-company accounts and transactions have
been eliminated in consolidation.


Use of
Estimates


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


Cash and Cash
Equivalents


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


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


Short-Term
Investments


Short-term
investments are investments with original maturity between 91 days and one year.
The Companys short-term investments are placed in portfolios managed by
three professional money management firms. At September 30, 2001, 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, 2001, 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.


29
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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. Revenues allocated to training are
recognized at the time the training is complete. Revenues allocated to
maintenance are recognized ratably over the term of the maintenance contract.


Foreign
Currency Translations


Certain
of the Companys foreign subsidiaries use their respective local currencies
as their functional currencies. In consolidation, assets and liabilities are
translated at year-end currency exchange rates and revenue and expense items are
translated at average currency exchange rates prevailing during the period.
Gains and losses from foreign currency translation are accumulated as a separate
component of stockholders equity. Gains and losses resulting from foreign
currency transactions are included in the consolidated statement of income.


Derivative
Financial Instruments


The
Companys foreign subsidiaries operate and sell the Companys products
in various global markets. As a result, the Company is exposed to fluctuations
in foreign currency exchange rates on foreign currency denominated sales made to
foreign subsidiaries. The Company utilizes foreign currency forward exchange
contracts and options to hedge against future movements in foreign exchange
rates that could affect certain foreign currency denominated inter-company
receivables. The Company attempts to match the forward contracts with the
underlying receivables being hedged in terms of currency, amount and maturity.
The Company does not use derivative financial instruments for speculative or
trading purposes. Because the impact of movements in currency exchange rates on
forward contracts 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. Realized gains
and losses 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, 2001, the Company had forward exchange contracts and options
maturing in fiscal 2002 to sell approximately $6.7 million 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, 2001 was not
material.


Fair Value


The
carrying value of the Companys financial instruments including cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their fair values due to their relatively short maturity.


Concentration
of Credit Risk


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


30
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|           | Year ended September 30,
|---------- | ------------------------
|
|Customer A |                         
|Customer B |                         
|Customer C |                         
|Customer D |                         
|Customer E |                         
|Customer F |                         
|           |                         

|At
September 30, 2000, three customers accounted for 32%, 15%, and 14% of total
accounts receivable, respectively. At September 30, 2001, three customers
accounted for 28%, 23%, and 19% of total accounts receivable, respectively.


Inventories


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


Capitalized
Software Development Costs


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


Property and
Equipment


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


Repairs and
Maintenance


Repair
and maintenance costs are expensed as incurred.


Warranty


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


Income Taxes


The
Company accounts for income taxes under the liability method, which requires
recognition of deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. A valuation allowance is provided
against deferred tax assets unless it is more likely than not that they will be
realized, either through the generation of future taxable income or through
carryback potential.


31
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Stock-based
Compensation


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


Earnings per
Share


The
Company has presented earnings per share for all periods in accordance with SFAS
No. 128 (SFAS 128), Earnings per Share. SFAS 128
requires the presentation of basic and diluted earnings per share. Basic
earnings per share are computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share include the
effect of dilutive potential common share equivalents (options) issued (using
the treasury stock method). The following is a reconciliation of the denominator
used in calculating basic and diluted earnings per share:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Year ended September 30,                       
|----------------------------------------- | -----------------------------------------------
|
|                                          | (in thousands, except share and per share data)
|                                         
|Net income                                |                                                
|                                          |                                                
|Weighted average shares outstanding       |                                                
|Dilutive options                          |                                                
|                                          |                                                
|Weighted average shares assuming dilution |                                                
|                                          |                                                
|Earnings per share:                       |                                                
|Basic                                     |                                                
|Diluted                                   |                                                

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

|                     | Year ended September 30,
|-------------------- | ------------------------
|
|Common stock options |                         
|                     |                         
|                     |                         

|Comprehensive
Income


As
of October 1, 1998, the Company adopted SFAS No. 130 (SFAS 130),
Reporting Comprehensive Income. SFAS 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:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | Year ended September 30,
|---------------------------------------- | ------------------------
|
|Unrealized holding gain on investments   |                         
|Foreign exchange translation adjustments |                         
|                                         |                         
|                                         |                         
|                                         |                         

|32
|--

|Recently
Issued Accounting Standards


In
July 2001, the FASB issued Statement of Financial Accounting Standards No. 141
(SFAS 141), Business Combinations which supersedes APB
Opinion No. 16, Business Combinations. SFAS 141 requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. In addition, SFAS 141
establishes specific criteria for the recognition of intangible assets
separately from goodwill and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. The provisions of SFAS 141
have been adopted as of July 1, 2001.


In
July 2001, the FASB also issued Statement of Financial Accounting Standards No.
142 (SFAS 142), Goodwill and Other Intangible Assets,
which is effective for fiscal years beginning after December 15, 2001. Certain
provisions shall also be applied to acquisitions initiated subsequent to June
30, 2001. SFAS 142 supersedes APB Opinion No. 17 Intangible Assets
and requires, among other things, the discontinuance of amortization related to
goodwill and indefinite lived intangible assets. Theses assets will then be
subject to an impairment test at least annually. 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 and the reclassification of certain intangibles out of
previously reported goodwill. The adoption of SFAS 142 is not expected to have a
material impact on the Companys financial statements.


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


In
various areas, including revenue recognition, accounting standards and practices
continue to evolve. The FASBs Emerging Issues Task Force continues to
address revenue related accounting issues. The 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 future accounting for
its operations.


NOTE
2BALANCE SHEET COMPONENTS
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           | Year ended September 30,
|------------------------------------------ | ------------------------
|
|
|
|U.S. government, corporations and agencies |                         
|Commercial paper                           |                         
|State and municipal securities             |                         
|                                           |                         
|                                           |                         
|                                           |                         

|33
|--

|At
September 30, 2001, investments with maturities less than 3 months, totaling
approximately $39.8 million, have been classified as cash equivalents.
Unrealized gains on short-term investments were $35,000 and $88,000 as at
September 30, 2000 and 2001, respectively.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | Year ended September 30,
|---------------------------------------------- | ------------------------
|
|
|Inventories:                                   |                         
|Raw materials                                  |                         
|Work-in-process                                |                         
|Finished goods                                 |                         
|                                               |                         
|                                               |                         
|                                               |                         
|Property and equipment:                        |                         
|Equipment                                      |                         
|Leasehold improvements                         |                         
|                                               |                         
|                                               |                         
|Less accumulated depreciation and amortization |                         
|                                               |                         
|                                               |                         
|                                               |                         
|Accrued liabilities:                           |                         
|Payroll and related expenses                   |                         
|Income taxes payable                           |                         
|Other                                          |                         
|                                               |                         
|                                               |                         
|                                               |                         
|                                               |                         

|NOTE 3INCOME TAXES


Consolidated
income before income taxes includes non-U.S. income of approximately $227,000, $681,000
and $7.7 million in fiscal 1999, 2000 and 2001, respectively.


The
provision for income taxes consists of the following:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|             | Year ended September 30,
|------------ | ------------------------
|
|
|Current:     |                         
|U.S. federal |                         
|State        |                         
|Foreign      |                         
|             |                         
|             |                         
|             |                         
|Deferred:    |                         
|U.S. federal |                         
|State        |                         
|Foreign      |                         
|             |                         
|             |                         
|             |                         
|             |                         
|             |                         

|34
|--

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

|                                    | Year ended September 30,
|----------------------------------- | ------------------------
|
|Tax at federal rate                 |                         
|State taxes, net of federal benefit |                         
|Excess foreign tax rate             |                         
|Other                               |                         
|                                    |                         
|                                    |                         
|                                    |                         

|Deferred
tax assets consist of the following:
|---------------------------------------------

|                                 | Year ended September 30,
|-------------------------------- | ------------------------
|
|
|Accruals and reserves            |                         
|Foreign net operating losses     |                         
|Current and deferred state taxes |                         
|Other                            |                         
|                                 |                         
|Total                            |                         
|Valuation allowance              |                         
|                                 |                         
|                                 |                         
|Less: Non-current portion        |                         
|                                 |                         
|                                 |                         
|                                 |                         
|                                 |                         

|The
company had foreign net operating losses of $790,000 at September 30, 2000 and
$310,000 at September 30, 2001. A full valuation allowance was recorded against
the foreign net operating losses.


U.S.
income taxes and foreign withholding taxes were not provided for on a cumulative total of
$4.6 million of undistributed earnings for certain non-U.S. subsidiaries. The Company
intends to reinvest these earnings indefinitely in operations outside the United States.


NOTE
4STOCKHOLDERS EQUITY


Redeemable
Securities


In
connection with the settlement on June 10, 1998 of claims by an officer and
director for compensation for past services rendered to the Company, the Company
agreed that, if it did not complete its planned initial public offering by
December 31, 1998, it would repurchase common stock held by this individual at a
rate of up to 50,000 shares per annum, in quarterly installments of up to 12,500
shares, beginning on March 31, 1999, until the earliest of certain events,
including the cumulative receipt of $5 million by the individual from sales of
the individuals stock, an initial public offering of stock by the Company,
an acquisition of the Company or 12 years from March 31, 1999. The repurchase
price was the fair market value of the shares as determined by the Board of
Directors.


As
a result of this agreement, 500,000 shares of common stock with a fair market
value of $5 million, based on the assumed fair market value at the date of the
agreement of $10 per share, are reflected as redeemable securities beginning as
of the date of this settlement. As a result of the Companys initial public
offering, such shares are no longer redeemable and have been reclassified as
equity.


35
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Initial Public
Offering


On
February 11, 1999, the Company consummated an initial public offering of
3,352,500 shares of its common stock at a price to the public of $10.00 per
share, of which 2,100,000 shares were issued and sold by the Company and
1,252,500 shares were sold by certain stockholders of the Company. The proceeds,
net of fees and other expenses, to the Company from the offering were
approximately $19.2 million. During the quarter ended September 30, 1998, the
Company expensed $769,000 of costs related to its delayed public offering.


Stock Option
Plans


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


In
the years ended September 30, 1997 and 1998, the Company recorded deferred
compensation expense of approximately $216,000 and $589,000, respectively,
related to the issuance of stock options at prices subsequently determined to be
below fair market value. These expenses were amortized over a period of four
years from the date of option issuance.


Information
with respect to stock option activity from September 30, 1998 through September
30, 2001 is set forth below:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            | Number ofOptionsOutstanding | Weighted AverageExercise Price
|--------------------------- | --------------------------- | ------------------------------
|Balance, September 30, 1998 |                             | 700,450                       
|Options granted             |                             | 273,014                       
|Options exercised           |                             | (147,077                      
|Options canceled            |                             | (117,435                      
|                            |                             |                               
|Balance, September 30, 1999 |                             | 708,952                       
|Options granted             |                             | 270,037                       
|Options exercised           |                             | (142,463                      
|Options canceled            |                             | (18,266                       
|                            |                             |                               
|Balance, September 30, 2000 |                             | 818,260                       
|Options granted             |                             | 358,741                       
|Options exercised           |                             | (124,339                      
|Options canceled            |                             | (19,116                       
|                            |                             |                               
|Balance, September 30, 2001 |                             | 1,033,546                     
|                            |                             |                               
|                            |                            

|As
of September 30, 2001, 919,479 options remained available for grant.


36
|----------------------------------------------------------------------------

|As of
September 30, 2001, the options outstanding and exercisable are presented below:
|--------------------------------------------------------------------------------------

|                 | Options Outstandingat September 30, 2001 | Options Exercisableat September 30, 2001
|---------------- | ---------------------------------------- | ----------------------------------------
|
|$ 0.23 -  $ 1.27 |                                          | 209,700                                 
|$ 2.40 -  $12.75 |                                          | 225,707                                 
|$13.13 - $15.63  |                                          | 251,587                                 
|$15.88 - $18.63  |                                          | 259,727                                 
|$19.25 - $25.10  |                                          | 86,825                                  
|                 |                                          |                                         
|                 |                                          | 1,033,546                               
|                 |                                          |                                         

|Fair Value
Disclosures


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

|                        | 1999 | 2000      | 2001
|----------------------- | ---- | --------- | ----
|Dividend yield          |      | 0.0%      |     
|Expected life of option |      | 5.0 years |     
|Risk-free interest rate |      | 5.50%     |     
|Expected volatility     |      | 50.0%     |     

|The
weighted average fair values of options granted during 1999, 2000 and 2001 were
as follows:
|-----------------------------------------------------------------------------------------------

|Year Ended September 30, 1999        | Weighted AverageExercise Price |        | Weighted AverageFair Value |       
|------------------------------------ | ------------------------------ | ------ | -------------------------- | ------
|Exercise price equal to market value |                                | $16.14 |                            | $12.87

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

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

|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 1999 would have been $8,670,000, or $0.73 per
share and $0.70 per share, respectively and for fiscal 2000 would have been
$6,082,000, or $0.48 per share and $0.46 per share, respectively and for fiscal
2001 would have been $10,079,000 or $0.78 per share and $0.76, respectively.
Such pro forma disclosures may not be representative of future compensation cost
because options vest over several years and additional grants are made each
year.


37
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Employee Stock
Purchase Plan


In
June 1998, the Company adopted the 1998 Employee Stock Purchase Plan (the
Purchase Plan). A total of 750,000 shares of common stock have been
reserved for issuance under the Purchase Plan. The Purchase Plan permits
eligible employees to purchase common stock through payroll deductions of up to
7% of an employees total compensation. The price of the common stock will
generally be 85% of the lower of the fair market value at the beginning of the
offering period or the end of the relevant purchase period. The maximum number
of shares a participant may purchase during a single offering period is 300
shares. A total of 16,120 shares and 18,644 shares were issued under the
Purchase Plan in the years ended September 30, 2000 and 2001, respectively. No
shares were issued under the Purchase Plan in the year ended September 30, 1999.


NOTE
5PROFIT-SHARING AND 401-K PLANS


The
Company maintains a qualified profit-sharing plan for eligible employees.
Contributions to the profit-sharing plan are discretionary and are determined by
the Board of Directors. There were no contributions to the plan for the years
ended September 30, 1999, 2000 and 2001.


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, 1999, 2000 and 2001
were $42,000, $67,000 and $76,000, respectively.


NOTE
6COMMITMENTS


The
Company leases its facility in Mountain View, California under non-cancelable
operating lease agreements that expire in 2005. The lease agreements provide for
minimum annual rent of $305,000. Under these agreements, the Company pays
certain shared operating expenses of the facility. The agreements provide for
rent increases at scheduled intervals. The Company recognizes rent expense on a
straight-line basis over the lease period. The Company leases other facilities
in Illinois, Texas, North Carolina, Canada, Japan, the United Kingdom, France,
Finland and Germany under leases with the longest term expiring in 2009.


Rent
expense for all facilities for the years ended September 30, 1999, 2000 and 2001
was approximately $426,000, $641,000 and $816,000, respectively.


Future
minimum annual rental payments under non-cancelable operating leases as of
September 30, 2001 are as follows (in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|           | 
|---------- | 
|2002       | 
|2003       | 
|2004       | 
|2005       | 
|2006       | 
|Thereafter | 
|           | 
|           | 
|           | 

|NOTE
7SEGMENT REPORTING


In
June 1997, the FASB issued SFAS No. 131 (SFAS 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 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.


38
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
Companys principal geographical area of operations, sales, income and
assets by region for each fiscal year end were as follows (in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------

|                                | NorthAmerica | UK &Europe | Japan | ConsolidatedTotal
|------------------------------- | ------------ | ---------- | ----- | -----------------
|1999                            |              |            |       |                  
|                                |              |            |       |                  
|Sales to unaffiliated customers |              | $  6,383   |       | $   3,024        
|Net income                      |              | 8,929      |       | (287             
|Identifiable assets             |              | 42,423     |       | 2,185            
|                               
|2000                            |              |            |      
|                                |              |            |       |                  
|Sales to unaffiliated customers |              | 8,761      |       | 4,885            
|Net income                      |              | 6,354      |       | (207             
|Identifiable assets             |              | 51,258     |       | 4,760            
|                               
|2001                            |              |            |      
|                                |              |            |       |                  
|Sales to unaffiliated customers |              | 12,380     |       | 9,519            
|Net income                      |              | 5,091      |       | 4,952            
|Identifiable assets             |              | 59,263     |       | 11,085           
|                                |             

|The
result of operations by geographic region includes significant sales from the
United States to the Companys foreign locations at agreed upon transfer
prices. Transfers to other geographic regions from the United States for the
years ended September 30, 1999, 2000 and 2001 were $15.6 million, $13.0 million
and $15.8 million, respectively.


Supplementary
Financial Data


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

|                    | Quarter Ended
|------------------- | -------------
|
|
|Revenues            |              
|Gross profit        |              
|Operating income    |              
|Net income          |              
|Earnings per share: |              
|Basic               |              
|Diluted             |              

|                    | Dec. 31,2000 | Mar. 31,2001 | June 30,2001 | Sept. 30,2001
|------------------- | ------------ | ------------ | ------------ | -------------
|Revenues            |              | $9,735       |              | $10,741      
|Gross profit        |              | 8,906        |              | 9,496        
|Operating income    |              | 4,165        |              | 4,049        
|Net income          |              | $3,152       |              | $  2,943     
|Earnings per share: |             
|Basic               |              | $  0.24      |              | $    0.23    
|Diluted             |              | $  0.24      |              | $    0.22    

|39
|--

|ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND                FINANCIAL DISCLOSURE


Not
applicable.


PART III


Certain
information required by Part III is omitted from this Annual Report on Form 10-K
because the Registrant will file a definitive proxy statement within one hundred
twenty (120) days after the end of its fiscal year pursuant to Regulation 14A
(the Proxy Statement) for its Annual Meeting of Stockholders
currently scheduled for January 22, 2002, and the information included in the
Proxy Statement is incorporated herein by reference.


ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


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


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


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


ITEM
11. EXECUTIVE COMPENSATION


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


ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


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


ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


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


PART IV


ITEM
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K


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

|1. |  | Financial
Statements
|-- |  | --------------------

|Consolidated
Financial Statements: See Index to Consolidated Financial Statements at Item 8 on page 23
of this report.
|----------------------------------------------------------------------------------------------------------------------

|2. |  | Financial
Statement Schedules
|-- |  | -----------------------------

|Financial
Statement Schedule: See Index to Consolidated Financial Statements at Item 8 on page 23
of this report.


40
|----------------------------------------------------------------------------------------------------------------------

|
|

|3. |  | Exhibits
|-- |  | --------

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

|ExhibitNumber | Description
|------------- | -----------
|2.1 (1)       |            
|              |            
|3.1 (1)       |            
|3.2 (1)       |            
|9.1 (1)       |            
|10.1          |            
|10.3 (2)      |            
|10.4 (1)(2)   |            
|10.5 (2)      |            
|10.6 (1)(2)   |            
|10.8          |            
|10.9 (1)      |            
|11.1          |            
|              |            
|21.1          |            
|23.1          |            
|24.1          |            

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


(b) Reports on Form 8-K


No
report on Report Form 8-K was filed during the last quarter of the fiscal year
ended September 30, 2001.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) |  | Incorporated
by reference to exhibits filed in response to Item 16(a), Exhibits, of the
Registrants Registration Statement on Form S-1, as amended (File No. 333-56627),
which was declared effective on February 10, 1999.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Represents
a management contract or compensatory plan, contract or arrangement in which any director
or any of the named executives participates.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|41
|--

|SIGNATURES


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

|Date: December 14, 2001 | CATAPULT COMMUNICATIONS CORPORATIONBy: /s/ RICHARD A. KARPRichard A. Karp       Chief Executive Officer & Chairman of the Board
|----------------------- | -------------------------------------------------------------------------------------------------------------------------------

|POWER OF
ATTORNEY


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


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

|Signature                                                                | Title                                                                        | Date             
|------------------------------------------------------------------------ | ---------------------------------------------------------------------------- | -----------------
|                                                                        
|/S/  RICHARD A. KARP
(Richard A. Karp)                    | Chief Executive Officer,Chairman of the Board(Principal Executive Officer)   | December 14, 2001
|                                                                        
|/S/ CHRISTOPHER A. STEPHENSON
(Christopher A. Stephenson) | Chief Financial Officer(Principal Financial and PrincipalAccounting Officer) | December 14, 2001
|                                                                        
|/S/ CHARLES L. WAGGONER
(Charles L. Waggoner)             | Director                                                                     | December 14, 2001
|                                                                        
|/S/ JOHN M. SCANDALIOS
(John M. Scandalios)               | Director                                                                     | December 14, 2001
|                                                                        
|/S/ NANCY H. KARP
(Nancy H. Karp)                         | Director                                                                     | December 14, 2001
|                                                                        
|/S/ HENRY P. MASSEY JR.
(Henry P. Massey Jr.)             | Director                                                                     | December 14, 2001

|42
|--