--------------------------------------------------------------------------------

                                  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, 2000

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

            For the transition period from __________ to __________.

                         Commission File Number: 0-24701

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

             Nevada                                      77-0086010
    (State of Incorporation)                (IRS Employer Identification Number)
    160 South Whisman Road,
Mountain View, California 94041
          (Address of principal executive offices, including zip code)

            Registrant's telephone number, including area code: (650)
            960-1025/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 November 30, 2000, 12,887,616 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 November 30, 2000 of $12.875 per
share) was approximately $71,101,106. 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
February 7, 2001.

--------------------------------------------------------------------------------
<PAGE>

                                Table of Contents
PART I    .....................................................................1
ITEM 1.   BUSINESS.............................................................1
          The Company..........................................................1
          The DCT Product Line.................................................2
          Customers............................................................3
          Sales and Marketing..................................................4
          International Sales..................................................4
          DCT Product Line Support.............................................5
          Product Development..................................................5
          Manufacturing........................................................5
          Competition..........................................................6
          Intellectual Property................................................6
          Employees............................................................7
          Executive Officers of the Company....................................7
ITEM 2.   PROPERTIES...........................................................9
ITEM 3.   LEGAL PROCEEDINGS....................................................9
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................9
PART II   .....................................................................9
ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS..................................................9
ITEM 6.   SELECTED FINANCIAL DATA.............................................10
ITEM 7.   MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS...........................................12
          Overview............................................................12
          Fiscal Years Ended September 30, 1999 and 2000......................12
          Fiscal Years Ended September 30, 1998 and 1999......................14
          Liquidity and Capital Resources.....................................15
          Factors That May Affect Future Results..............................15
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS..........22
          Foreign Exchange Risk and Derivative Financial Instruments..........22
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................25
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE............................................41
PART III  ....................................................................41
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................41
ITEM 11.  EXECUTIVE COMPENSATION..............................................42
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......42
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................42
PART IV   ....................................................................43
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....43


                                        i
<PAGE>

                           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(1), 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 Cable & Wireless Communications PLC, Cisco Systems,
Inc., Fujitsu Limited, LM Ericsson, Lucent Technologies, Inc. ("Lucent"),
Marconi Communications Ltd., Motorola Inc. ("Motorola"), NEC Corporation
("NEC"), Nippon Telephone and Telegraph ("NTT"), Northern Telecom Limited, NTT
DoCoMo, Inc. ("NTT DoCoMo") 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(2). 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

----------

1     The DCT product line consists of the DCT-S and DCT2000, introduced in
      November of 1999. The DCT2000 introduces PCI-bus architecture to the DCT
      product line. Emerging Third Generation Cellular technology is being
      implemented on the DCT2000 platform.
2     Please refer to Glossary on page 24.


                                       1
<PAGE>

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.

The DCT Product Line

      DCT systems consist of 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 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. The Company provides pre-packaged V5, ISDN and SS7
conformance test suites which assist in this testing.

      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(TM) 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


                                       2
<PAGE>

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++.

      DCT Product Line Hardware

      The DCT product line employs modular hardware architecture that supports a
wide variety of physical interfaces which connect the DCT systems to the device
under test. The Company provides this flexibility through both the DCT-S
protocol-independent MPI co-processor cards and 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.

      DCT-S Hardware. Using up to three expansion chassis, a single workstation
may also support multiple MPI cards, each supporting up to four signaling
channels. The Company offers MPI cards for a variety of physical interfaces,
including industry standards such as Primary Rate E-1, Primary Rate T-1, Serial
port card, ISDN Basic Rate (S/T), and Japanese CII.

      DCT-2000 Hardware. Using up to four expansion chassis, a single
workstation may also support multiple PowerPCI cards each supporting up to four
signaling channels. The Company does or will offer PowerPCI cards for a variety
of physical interfaces, including industry standards such as a Primary Rate E-1,
T-1 card, ATM Optical/UTP cards, ATM PDH DS3/E3 cards, Serial port card, ISDN
Basic Rate card, 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
72%, 87% and 52% of total revenues in fiscal 1998, 1999 and 2000, respectively.
The Company's largest customers have been Motorola, which accounted for
approximately 15% of total revenues in fiscal 1998, NTT, which accounted for
approximately 58% of total revenues in fiscal 1999 and NTT DoCoMo, which
accounted for approximately 23% of total revenues in fiscal 2000. The Company's
four largest customers in fiscal 2000 were NTT DoCoMo, Motorola, NEC and Nortel,
which accounted for approximately 23%, 12%, 9% and 8% of total revenues,
respectively. The Company's four largest customers in fiscal 1999 were NTT,
Motorola, NEC and Lucent, which accounted for approximately 58%, 14%, 12% and 3%
of total revenues, respectively. The Company's four largest customers in fiscal
1998 were NTT, NEC, Motorola and Lucent, which accounted for approximately 24%,
21%, 15% 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


                                       3
<PAGE>

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, 1998, 1999
and 2000, the Company's direct sales force consisted of 10, 15 and 30 employees,
respectively. The sales and marketing staff is located in North America, Japan,
and Europe. The Company does not anticipate entering into independent
distributor arrangements for the foreseeable future and intends to sell
exclusively through direct sales personnel 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.

      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 72%, 78% and 68% of the
Company's total revenues in fiscal 1998, 1999 and 2000, 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 and Canada and plans to open new offices internationally from
time to time.


                                       4
<PAGE>

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, 1998, 1999 and 2000, the Company had 16, 26 and 32 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 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.

      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 on its DCT-S product a number of test suites
specified by telecommunications standards bodies, such as ITU-T (International),
ETSI (European) and EIA-TIA (North American). The Company believes that
ease-of-use solutions will provide the opportunity to capture more revenues and
sell to a wider range of companies.*

      Most of the Company's hardware development program is directed towards
designing protocol co-processors 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 $2.0 million,
$2.8 million and $3.0 million in fiscal 1998, 1999 and 2000, 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, 1998, 1999 and 2000, 15, 24 and 25 of
the Company's engineers, respectively, 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


                                       5
<PAGE>

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 Able Communications
Inc. ("Able"), Acterna Corporation ("Acterna"), Agilent Technologies Inc.
("Agilent"), IFR Systems Inc. ("IFR"), INET, Inc. ("INET"), 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, Tektronix and Schlumberger are the Company's primary competitors
in North America, while its primary competitors in Europe are Agilent,
Tektronix, Wavetek, Schlumberger and IFR. The Company's primary competitors in
Japan are Able and Tekelec. The Company also faces competition from several
relatively small companies.

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

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


                                       6
<PAGE>

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.

Employees

      As of September 30, 2000, the Company employed 113 full-time employees,
including 25 in research and development, 32 in application engineering customer
support, 30 in sales, eight in marketing, twelve in administration and six in
manufacturing. Of these employees, 80 were employed in North America of which 52
are at the Mountain View, California headquarters, 19 were employed in the
United Kingdom and Europe and 14 in Japan. 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,
2000, with respect to the executive officers of the Company:

Name                      Age                             Positions
----                      ---                             ---------
Richard A. Karp........... 56  Chief Executive Officer and Chairman of the Board
David Mayfield............ 51  President and Chief Operating Officer
Chris Stephenson.......... 49  See biographical information below


                                       7
<PAGE>

Barry R. Hoglund.......... 52  Vice President of Sales
Glenn Stewart............. 50  Vice President of Engineering
Guy R. Simpson............ 42  Vice President of Application Development
Barbara J. Fairhurst...... 52  Vice President of Operations
Terry Eastham............. 53  Vice President of Marketing
Kathy T. Omaye-Sosnow..... 44  Vice President of Human Resources

      Dr. Richard A. Karp founded the Company in 1985 and has served as Chief
Executive Officer and Chairman of the Board of the Company since inception. In
May 2000, Mr. Karp relinquished his title as President to David Mayfield, the
Company's Chief Operating Officer. Prior to founding Catapult in 1985, Dr. Karp
was Vice President of Software Development for Tri-Data, Inc., a supplier of
protocol conversion equipment, from 1982 to 1985. Previously, he was a founder
and Vice President of Software of Sequoia Systems, a fault-tolerant computer
systems manufacturer. Dr. Karp has also served as an independent software
consultant, and he spent five years as a systems programmer and project leader
at Burroughs Corporation. 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 with a view to assuming the role of Chief Financial Officer
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. Prior to 1985, Mr. Stephenson held commercial banking,
lending and loan management positions with the Canadian Imperial Bank of
Commerce, a chartered bank. 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.

      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. 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. From October
1996 to April 1998, Mr. Simpson was the Director of Field Test Systems for the
Company. From July 1994 to September 1996, Mr. Simpson was Managing Director of
CCL. From July 1992 to June 1994, he was Secretary of CCL. 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., 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


                                       8
<PAGE>

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 as Vice
President of Product Marketing and 17 years at Hewlett-Packard Co. 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. Prior to that, she was employed with Delta Dental Plan
of California, a dental insurance firm in California, where she held various
human resources positions. 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 2002 and 2003 and may be extended at the Company's option to 2005. The annual
rent for the property is approximately $285,000. 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; 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 and 3,200 square feet in Tokyo, Japan.

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 2000.

                                     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 beginning on
February 11, 1999 when the Company's common stock began trading on Nasdaq:

                                   1999                           2000
                                   ----                           ----
                           High             Low           High             Low
                           ----             ---           ----             ---
First fiscal quarter         --              --          $20.81          $  8.44
Second fiscal quarter     $15.15          $ 9.94         $13.56          $  9.28
Third fiscal quarter      $30.69          $12.75         $11.25          $  7.13
Fourth fiscal quarter     $27.19          $13.75         $19.38          $  8.63


                                       9
<PAGE>

      The Company had approximately 50 stockholders of record as of September
30, 2000. 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.

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.

<TABLE>
<CAPTION>
Consolidated Statements of Income Data:             Fiscal Year Ended September 30,
                                        --------------------------------------------------------
                                          1996        1997        1998        1999        2000
                                        --------    --------    --------    --------    --------
                                                 (in thousands, except per share data)
<S>                                     <C>         <C>         <C>         <C>         <C>
Revenues:
   Product Sales ....................   $  7,690    $ 11,519    $ 15,833    $ 25,505    $ 22,045
   Services .........................      1,562       1,833       2,373       3,450       5,001
                                        --------    --------    --------    --------    --------
   Total revenues ...................      9,252      13,352      18,206      28,955      27,046
                                        --------    --------    --------    --------    --------

Cost of revenues:
   Product sales ....................      1,103       1,576       1,852       2,701       2,209
   Services .........................        246         344         564         945         971
                                        --------    --------    --------    --------    --------
   Total cost of revenues ...........      1,349       1,920       2,416       3,646       3,180
                                        --------    --------    --------    --------    --------
   Gross profit .....................      7,903      11,432      15,790      25,309      23,866
                                        --------    --------    --------    --------    --------
Operating expenses:
   Research and development .........        908       1,419       2,001       2,777       3,037
   Sales and marketing ..............      1,881       2,550       3,242       5,623       9,427
   General and administrative .......      1,384       2,063       2,188       2,485       3,703
   Offering costs ...................         --          --         769          --          --
                                        --------    --------    --------    --------    --------
   Total operating expenses .........      4,173       6,032       8,200      10,885      16,167
                                        --------    --------    --------    --------    --------
Operating income ....................      3,730       5,400       7,590      14,424       7,699
   Interest income ..................        269         380         594       1,294       2,674
   Other income (expense) ...........       (209)         (6)       (263)       (107)        169
                                        --------    --------    --------    --------    --------
   Income before taxes ..............      3,790       5,774       7,921      15,611      10,542
   Provision for taxes ..............      1,502       2,436       3,396       6,706       3,976
                                        --------    --------    --------    --------    --------
   Net income .......................   $  2,288    $  3,338    $  4,525    $  8,905       6,566
                                        ========    ========    ========    ========    ========

Earnings per share:
   Basic ............................   $   0.24    $   0.35    $   0.44    $   0.75    $   0.51
                                        ========    ========    ========    ========    ========
   Diluted ..........................   $   0.22    $   0.31    $   0.41    $   0.73    $   0.50
                                        ========    ========    ========    ========    ========

Shares used in per share calculation:
   Basic ............................      9,621       9,630      10,369      11,874      12,801
                                        ========    ========    ========    ========    ========
   Diluted ..........................     10,301      10,605      10,940      12,217      13,123
                                        ========    ========    ========    ========    ========
</TABLE>


                                       10
<PAGE>

<TABLE>
<CAPTION>
Consolidated Balance Sheet Data:                    Fiscal Year Ended September 30,
                                        --------------------------------------------------------
                                          1996        1997        1998        1999        2000
                                        --------    --------    --------    --------    --------
                                                             (in thousands)
<S>                                     <C>         <C>         <C>         <C>         <C>
Cash, cash equivalents and short-term
investments .........................   $  7,171    $ 10,672    $ 15,229    $ 41,654    $ 48,637
Working capital .....................      6,496       9,698      14,006      42,372      49,164
Total assets ........................      9,542      14,035      19,495      50,667      59,343
Redeemable common stock .............         --          --       5,000          --          --
Total stockholders' equity ..........   $  6,832    $ 10,170    $ 10,150    $ 43,589    $ 50,887
</TABLE>

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
                                                          Fiscal Year Ended
                                                            September 30,
                                                    ---------------------------
                                                     1998       1999       2000
                                                    -----      -----      -----
Revenues:
      Product Sales ............................     87.0%      88.0%      81.5%
      Services .................................     13.0       12.0       18.5
                                                    -----      -----      -----
      Total revenues ...........................    100.0      100.0      100.0
                                                    -----      -----      -----

Cost of revenues:
      Product sales ............................     10.2        9.3        8.2
      Services .................................      3.1        3.3        3.6
                                                    -----      -----      -----
      Total cost of revenues ...................     13.3       12.6       11.8
                                                    -----      -----      -----
      Gross profit .............................     86.7       87.4       88.2
                                                    -----      -----      -----
Operating expenses:
      Research and development .................     11.0        9.6       11.2
      Sales and marketing ......................     17.8       19.4       34.8
      General and administrative ...............     12.0        8.6       13.7
      Offering costs ...........................      4.2         --         --
                                                    -----      -----      -----
      Total operating expenses .................     45.0       37.6       59.7
                                                    -----      -----      -----

Operating income ...............................     41.7       49.8       28.5
      Interest income ..........................      3.3        4.5        9.9
      Other income (expense) ...................     (1.5)      (0.4)       0.6
                                                    -----      -----      -----
      Income before taxes ......................     43.5       53.9       39.0
      Provision for taxes ......................     18.6       23.2       14.7
                                                    -----      -----      -----
      Net income ...............................     24.9%      30.8%      24.3%
                                                    =====      =====      =====
Gross margin on product sales ..................     88.3%      89.4%      90.0%
                                                    =====      =====      =====
Gross margin on services .......................     76.2%      73.0%      80.6%
                                                    =====      =====      =====


                                       11
<PAGE>

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 includes 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 installation provided that no significant vendor obligations
remain and collection is considered 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
include protocol variants for protocols already purchased 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.

      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.

      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.

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


                                       12
<PAGE>

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.

      Investment Income

      Investment 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.

      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.


                                       13
<PAGE>

Fiscal Years Ended September 30, 1998 and 1999

      Revenues

      Revenues increased by approximately 59% from $18.2 million in fiscal 1998
to $29.0 million in fiscal 1999. Over the same period, product sales increased
by approximately 61% from $15.8 million in fiscal 1998 to $25.5 million in
fiscal 1999. Services revenue increased by approximately 46% from $2.4 million
in fiscal 1998 to $3.5 million in fiscal 1999. The increase in product sales was
primarily attributable to increased system sales to international customers,
including a large sale in the second quarter to NTT DoCoMo of Japan, and
domestic customers as well as increased sales of the Company's MPI cards. The
increase in service revenue was primarily due to sales of software support
contracts associated with new system sales as well as contract renewals.
Services revenue will vary depending in part on the relative contributions of
each sales region. In Japan, the Company has historically received lower
services revenue in proportion to its product sales, principally due to market
factors affecting the pricing of such services.

      Cost of Revenues

      Cost of product sales increased by approximately 42% from $1.9 million for
fiscal 1998 to $2.7 million in fiscal 1999. Gross margin on product sales
increased from 88.3% for fiscal 1998 to 89.4% in fiscal 1999. This increase was
due primarily to a significantly higher proportion of higher margin sales in
Japan and increased sales of higher margin proprietary products, such as MPI
cards, in fiscal 1999. Cost of services increased by approximately 68% from
$564,000 for fiscal 1998 to $945,000 for fiscal 1999 due primarily to increased
cost of engineering personnel additions. Gross margin on services decreased from
76.2% for fiscal 1998 to 73.0% for fiscal 1999 as the Company added application
and other engineers to service the increased sales to customers.

      Research and Development

      Research and development expenses increased by approximately 39% from $2.0
million for fiscal 1998 to $2.8 million in 1999. As a percentage of total
revenues, research and development expenses decreased slightly from 11.0% to
9.6% over the same period. The increase in expenses was due primarily to
increased spending on projects and increases in the cost to recruit and retain
software and application engineering personnel. The decrease in expenses as a
percentage of sales was due primarily to revenue growth at a higher rate than
R&D expense growth.

      Sales and Marketing

      Sales and marketing expenses increased by approximately 73% from $3.2
million for fiscal 1998 to $5.6 million in fiscal 1999. As a percentage of total
revenues, sales and marketing expenses increased from 17.8% for fiscal 1998 to
19.4% in fiscal 1999. The increases were due primarily to higher compensation
and occupancy cost resulting from the hiring of additional sales staff in the
UK, Europe, Canada and the US, expansion of Japanese sales office, opening a
sales office in Texas and hiring a Vice President of Marketing along with
additional marketing personnel.

      General and Administrative

      General and administrative expenses increased by approximately 14% from
$2.2 million for fiscal 1998 to $2.5 million in fiscal 1999. This increase in
was due primarily to an increased in bonuses and executive compensation cost and
public company cost. As a percentage of total revenues, general and
administrative expenses decreased from 12.0% to 8.6% over the same period.

      Investment Income

      Investment income increased from $594,000 for fiscal 1998 to $1,294,000 in
fiscal 1999 due to the investment of cash balances and the proceeds from the
initial public offering.


                                       14
<PAGE>

      Other Income (expense)

      Other expense decreased from $263,000 for fiscal 1998 to $107,000 in
fiscal 1999 due primarily to lower exchange losses and hedging cost related to
transactions denominated in foreign currencies.

      Income taxes

      The Company's effective tax rate was 42.9% in fiscal 1998 and fiscal 1999.
The effective tax rate primarily reflected the higher percentage of revenues
derived by the Company from international operations in fiscal 1999,
particularly its operations in Japan, which has an overall higher corporate tax
rate than the US.

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 $4.8 million, $7.6
million and $7.3 million in fiscal 1998, 1999 and 2000, respectively,
principally from net income in those periods. The use of cash in the Company's
operations for fiscal 1998, 1999 and 2000 was primarily attributable to a
significant increase in accounts receivable due to increased sales, offset in
part by increases in accrued liabilities and deferred revenue. Investing
activities, consisting primarily of purchases and sale of short-term investments
and additions to property and equipment, used cash of $562,000, $33.5 million
and $11.2 million in fiscal 1998, 1999 and 2000, respectively. Financing
activities provided cash of $212,000 in fiscal 1998 from the exercise of stock
options, $19.0 million in fiscal 1999, primarily from the proceeds of the
Company's initial public offering, and $230,000 in fiscal 2000 from the exercise
of stock options and the purchase of shares under the employee stock purchase
plan.

      As of September 30, 2000, the Company had working capital of $49.2
million, cash and cash equivalents of $5.2 million and short-term investments of
$43.4 million. As of September 30, 2000, 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 $500,000 in fiscal
2001.

      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,


                                       15
<PAGE>

its customers, competitors or suppliers, (x) costs associated with developing
and introducing new products, (xi) product life cycles, (xii) changes in the
level of operating expenses relative to revenues, (xiii) software defects and
other product quality problems, (xiv) customer order deferrals in anticipation
of new products, (xv) delays in purchasing decisions or customer orders due to
customer consolidation, (xvi) supply interruptions, (xvii) changes in the
regulatory environment and (xviii) changes in global or regional economic
conditions or in the telecommunications industry.

      The Company's revenues in any period generally have been, and are likely
to continue to be, derived from relatively small numbers of sales and service
transactions with relatively high average revenues per order. Therefore, the
loss of any orders or delays in closing such transactions could have a more
significant impact on the Company's quarterly revenues and results of operations
than on those of companies with relatively high volumes of sales or low revenues
per order. See "Dependence on Limited Number of Customers" below. The Company's
products generally are shipped within 15 to 30 days after orders are received
and revenues are recognized upon installation of the products, provided no
significant vendor obligations remain and collection of the related receivable
is deemed probable. As a result, the Company generally does not have a
significant backlog of orders, and revenues in any quarter are substantially
dependent on orders booked, shipped and installed in that quarter.

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

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

      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, 2000, the Company's top
four customers represented approximately 52% 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


                                       16
<PAGE>

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.

      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. In addition,
although the Company cannot predict the potential consequences to the Company's
business of the adoption of the Euro as a common currency in Europe, the
transition to the Euro presents a number of risks, including increased
competition from European firms as a result of pricing transparency. 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


                                       17
<PAGE>

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.

      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 result in
lower product sales could also adversely impact the Company's upgrades 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 has 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.

      While the Company's operations are not directly regulated, the Company's
existing and potential customers are subject to a variety of United States and
foreign governmental regulations. Such regulations may adversely affect the
telecommunications industry, limit the number of potential customers for the
Company's products and services or otherwise have a material adverse effect on
the Company's business, financial condition and results of operations. Recently
enacted legislation deregulating the telecommunications industry, including the
Telecommunications Act of 1996 (the "Telecommunications Act"), has caused
significant changes in the telecommunications industry, including the entrance
of new competitors and possible industry consolidation, which could in turn
affect demand for the Company's telecommunications test solutions or otherwise
have a material adverse effect on the Company's business, financial condition
and results of operations. Currently, the Federal Communications Commission
("FCC") and state authorities are implementing the provisions of the
Telecommunications Act, and several of the decisions by the FCC and state
authorities are being challenged in court. Therefore, the Company cannot at


                                       18
<PAGE>

this time predict the extent to which such legislation and related litigation
will affect the Company's current and potential customers or ultimately affect
the Company's business, financial condition and results of operations.

      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.

      The Company's test systems currently operate only on the UNIX operating
system. The Company's current and prospective customers may require other
operating systems to be used in their telecommunications test systems, such as
Windows 95, Windows 98 or Windows NT or may require the integration of other
industry standards. There can be no assurance that the Company would be able to
successfully adapt its products to such operating systems on a timely or
cost-effective basis, if at all. The failure of the Company to respond to
rapidly changing technologies and to develop and introduce new products and
services in a timely manner would have a material adverse effect on the
Company's business, financial condition and results of operations.

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


                                       19
<PAGE>

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.

      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.


                                       20
<PAGE>

      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.

      Control By Principal Stockholder

      As of November 30, 2000, Dr. Richard A. Karp beneficially owned 6,716,875
shares or approximately 52% of the Company's common stock outstanding on such
date, which includes 2,661,875 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 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.

      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


                                       21
<PAGE>

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.

      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


                                       22
<PAGE>

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, 2000, the Company had forward exchange contracts maturing
in fiscal 2001 to sell approximately $1.2 million in Japanese Yen and $1.0
million in Pounds Sterling designed to hedge against future movements in foreign
exchange rates. The fair market value of these contracts at September 30, 2000
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.*


                                       23
<PAGE>

GLOSSARY

3G                                  Third generation digital cellular
                                    telecommunication.

Asynchronous Transfer Mode          A cell-based network technology protocol
(ATM)                               that supports simultaneous transmission of
                                    data, voice and video typically at T-1 or
                                    higher speeds.

Code Division Multiple Access       A digital wireless technology that uses a
(CDMA)                              modulation technique in which many channels
                                    are independently coded for transmission
                                    over a single wideband channel.

E-1                                 A digital transmission link used by European
                                    carriers to transmit thirty-two 64 Kbps
                                    digital channels for voice or data.

Frame Relay                         An access standard which employs a form of
                                    packet switching to facilitate high-speed
                                    data communications.

Global System for Mobile            A digital wireless technology that is widely
Communications (GSM)                deployed in Europe and, increasingly, in
                                    other parts of the world.

Graphical User Interface (GUI)      A graphics-based computer interface that
                                    usually incorporates icons, pull-down menus
                                    and a mouse.

Intelligent Network (IN)            A network that allows functionality to be
                                    distributed flexibly to a variety of nodes
                                    on and off the network and allows that
                                    architecture to be modified to control
                                    network services.

Integrated Services Digital         An international telecommunications standard
Network (ISDN)                      for transmitting voice, data and video over
                                    digital lines at transmission speeds of up
                                    to 142 Kbps.

IS-41 (Interim Standard 41)         A signaling protocol used in the North
                                    American cellular applications.

Personal Communication              A digital cellular communication service
Service (PCS)                       offered by some North American operators.

Personal Digital Cellular (PDC)     A digital cellular communication service
                                    used in Japan.

Protocol                            A specific set of rules, procedures or
                                    conventions governing the format, means and
                                    timing of transmissions between two devices.

System Signalling 7 (SS7)           A message-based protocol for exchanging
                                    signaling and control information between
                                    telephony network entities.

T-1                                 A point-to-point dedicated line with
                                    transmission speeds of up to 1.544 Mbps
                                    widely used for private networks and
                                    high-speed links to the Internet.

V5                                  A European standard protocol for the
                                    interface between the access network and the
                                    carrier switch principally for basic
                                    telephony.

Variant                             A specific implementation of a protocol,
                                    typically unique to a country or region.

X.25                                A switched communications protocol that
                                    defines how data streams are to be assembled
                                    into packets, controlled, routed and
                                    protected as they cross a network.

Voice over IP (VoIP)                The transmission of voice signals over IP
                                    networks, primarily the Internet.


                                       24
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       CATAPULT COMMUNICATIONS CORPORATION
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----
Financial Statements:
      Report of Independent Accountants....................................   26
      Consolidated Balance Sheets at September 30, 1999 and 2000...........   27
      Consolidated Statements of Income for each of the three years
           in the period ended September 30, 2000..........................   28
      Consolidated Statements of Stockholders' Equity for each of the
           three years in the period ended September 30, 2000..............   29
      Consolidated Statements of Cash Flows for each of the three years
           in the period ended September 30, 2000..........................   30
      Notes to Consolidated Financial Statements...........................   31

All schedules are omitted because they are not applicable or the required
      information is shown in the consolidated financial statements or notes
      thereto.

Supplementary Financial Data (unaudited):

      Quarterly Financial Data for the two years ended September 30,
           1999 and 2000 ..................................................   41


                                       25
<PAGE>

                        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, 1999 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.


/S/ PRICEWATERHOUSECOOPERS LLP

San Jose, California
November 7, 2000


                                       26
<PAGE>

                       CATAPULT COMMUNICATIONS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                     September 30,
                                                                                  --------------------
                                                                                    1999        2000
                                                                                  --------    --------
<S>                                                                               <C>         <C>
                                           ASSETS
Current Assets:
   Cash and cash equivalents ..................................................   $  8,486    $  5,200
   Short-term investments .....................................................     33,168      43,437
   Accounts receivable, net of allowances of $86 and $83 ......................      5,852       5,630
   Inventories, net ...........................................................        705       1,399
   Deferred income taxes ......................................................        890       1,263
   Prepaid expenses ...........................................................        349         691
                                                                                  --------    --------
      Total current assets ....................................................     49,450      57,620
Property and equipment, net ...................................................        998       1,529
Other assets ..................................................................        219         194
                                                                                  --------    --------
      Total assets ............................................................   $ 50,667      59,343
                                                                                  ========    ========

            LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Accounts payable ...........................................................   $    444    $    862
   Accrued liabilities ........................................................      4,782       5,735
   Deferred revenue ...........................................................      1,852       1,859
                                                                                  --------    --------
      Total current liabilities ...............................................      7,078       8,456
                                                                                  --------    --------
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; 12,689,394 and
   12,847,977 issued and outstanding as at September 30, 1999 and 2000,
   respectively ...............................................................         13          13
   Additional paid-in capital .................................................     20,040      20,270
   Deferred compensation ......................................................       (132)        (60)
   Retained earnings ..........................................................     23,796      30,362
   Accumulated other comprehensive income .....................................        172         602
   Treasury stock, 50,000 shares at cost ......................................       (300)       (300)
                                                                                  --------    --------
      Total stockholders' equity ..............................................     43,589      50,887
                                                                                  --------    --------
      Total liabilities and stockholders' equity ..............................   $ 50,667    $ 59,343
                                                                                  ========    ========
</TABLE>

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


                                       27
<PAGE>

                       CATAPULT COMMUNICATIONS CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                  Year Ended September 30,
                                        --------------------------------------------
                                            1998            1999            2000
                                        ------------    ------------    ------------
<S>                                     <C>             <C>             <C>
Revenues:
      Product sales .................   $     15,833    $     25,505    $     22,045
      Services ......................          2,373           3,450           5,001
                                        ------------    ------------    ------------
      Total revenues ................         18,206          28,955          27,046
                                        ------------    ------------    ------------
Cost of revenues:
      Product sales .................          1,852           2,701           2,209
      Services ......................            564             945             971
                                        ------------    ------------    ------------
      Total cost of revenues ........          2,416           3,646           3,180
                                        ------------    ------------    ------------
Gross profit ........................         15,790          25,309          23,866
                                        ------------    ------------    ------------
Operating expenses:
      Research and development ......          2,001           2,777           3,037
      Sales and marketing ...........          3,242           5,623           9,427
      General and administrative ....          2,188           2,485           3,703
      Offering costs ................            769              --              --
                                        ------------    ------------    ------------
      Total operating expenses ......          8,200          10,885          16,167
                                        ------------    ------------    ------------
Operating income ....................          7,590          14,424           7,699
Interest income .....................            594           1,294           2,674
Other expense, net ..................           (263)           (107)            169
                                        ------------    ------------    ------------
Income before income taxes ..........          7,921          15,611          10,542
                                        ------------    ------------    ------------
Provision for income taxes ..........          3,396           6,706           3,976
                                        ------------    ------------    ------------
Net income ..........................   $      4,525    $      8,905           6,566
                                        ============    ============    ============
Earnings per share:
      Basic .........................   $       0.44    $       0.75    $       0.51
                                        ============    ============    ============
      Diluted .......................   $       0.41    $       0.73    $       0.50
                                        ============    ============    ============
Shares used in per share calculation:
      Basic .........................     10,369,000      11,874,000      12,801,000
                                        ============    ============    ============
      Diluted .......................     10,940,000      12,217,000      13,123,000
                                        ============    ============    ============
</TABLE>

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


                                       28
<PAGE>

                       CATAPULT COMMUNICATIONS CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                           Accumulated
                                                                                              Other
                                                                Addi-                        Compre-              Total
                                                                tional Deferred              hensive              Stock-   Compre-
                                              Common Stock     Paid in  Compen-   Retained    Income   Treasury  holders   hensive
                                           Shares    Amount    Capital   sation   Earnings    (loss)    Stock     Equity    Income
                                         -----------------------------------------------------------------------------------------

                                         -----------------------------------------------------------------------------------------
<S>                                       <C>           <C>    <C>         <C>     <C>        <C>       <C>      <C>        <C>
Balance at September 30, 1997 ........     9,629,443     10        264     (196)    10,166     (74)        --     10,170
Issuance of common stock .............       862,874      1        211       --         --      --         --        212        --
Deferred stock compensation ..........            --     --        589     (589)        --      --         --         --        --
Amortization of deferred stock
      compensation ...................            --     --         --      176         --      --         --        176        --
Redeemable common stock ..............      (500,000)    (1)    (1,064)      --     (3,935)     --         --     (5,000)       --
Currency translation adjustment ......            --     --         --       --         --      67         --         67    $   67
Net income ...........................            --     --         --       --      4,525      --         --      4,525     4,525
                                         -----------------------------------------------------------------------------------------
Balance at September 30, 1998 ........     9,992,317     10         --     (609)    10,756      (7)        --     10,150    $4,592
                                                                                                                            ======
Issuance of common stock from initial
      public offering ................     2,100,000      3     19,154       --         --      --         --     19,157        --
Redeemable common stock ..............       500,000     --      1,065       --      3,935      --         --      5,000        --
Issuance of common stock from exercise
      of stock options ...............       147,077     --        130       --         --      --         --        130        --
Purchase of treasury stock ...........       (50,000)    --         --       --         --      --       (300)      (300)       --
Amortization of deferred stock
      compensation ...................            --     --       (309)     477         --      --         --        168        --
Currency translation adjustment ......            --     --         --       --         --     179         --        179    $  179
Tax benefit from exercise of stock
      options ........................            --     --         --       --        200      --         --        200        --
Net income ...........................            --     --         --       --      8,905      --         --      8,905     8,905
                                         -----------------------------------------------------------------------------------------
Balance at September 30, 1999 ........    12,689,394     13     20,040     (132)    23,796     172       (300)    43,589    $9,084
                                                                                                                            ======
Issuance of common stock .............       158,583     --        230       --         --      --         --        230        --
Amortization of deferred stock
      compensation ...................            --     --         --       72         --      --         --         72        --
Currency translation adjustment ......            --     --         --       --         --     395         --        395    $  395
Unrealized gain on investments .......            --     --         --       --         --      35         --         35        35
Net income ...........................            --     --         --       --      6,566      --         --      6,566     6,566
                                         -----------------------------------------------------------------------------------------
Balance at September 30, 2000 ........    12,847,977    $13    $20,270     $(60)   $30,362    $602      $(300)   $50,887    $6,996
                                         =========================================================================================
</TABLE>

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


                                       29
<PAGE>

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

<TABLE>
<CAPTION>
                                                                  Year ended September 30,
                                                              --------------------------------
                                                                1998        1999        2000
                                                              --------    --------    --------
<S>                                                           <C>         <C>         <C>
Cash flows from operating activities:
   Net income .............................................   $  4,525    $  8,905    $  6,566
   Adjustments to reconcile net income to net cash provided
   by operating activities:
      Depreciation and amortization .......................        226         393         468
      Amortization of deferred stock compensation .........        176         169          72
      Deferred income taxes ...............................        122        (512)       (373)
      Gain on sale of property and equipment ..............         --          (4)         --
      Change in assets and liabilities:
      Accounts receivable .................................     (1,115)     (3,845)        222
      Inventories .........................................       (191)        (93)       (694)
      Prepaid expenses ....................................        897        (254)       (342)
      Other assets ........................................       (308)        149          25
      Accounts payable ....................................        632        (338)        418
      Accrued liabilities .................................       (381)      2,443         953
      Deferred revenue ....................................        257         630           7
                                                              --------    --------    --------
      Net cash provided by operating activities ...........      4,840       7,643       7,322
                                                              --------    --------    --------
Cash flows from investing activities:
      Sale and maturities of short-term investments .......         --      17,844      84,449
      Purchase of short-term investments ..................         --     (50,886)    (94,718)
      Purchase of property and equipment, net .............       (562)       (510)       (999)
                                                              --------    --------    --------
      Net cash provided (used) by investing activities ....       (562)    (33,552)    (11,268)
                                                              --------    --------    --------
Cash flows from financing activities:
      Proceeds from public offering, net ..................         --      19,157          --
      Proceeds from issuance of common stock ..............        212         130         230
      Purchase of treasury stock ..........................         --        (300)         --
                                                              --------    --------    --------
      Net cash provided by financing activities ...........        212      18,987         230

Unrealized gain on investment .............................         --          --          35
Effect of exchange rate changes ...........................         67         179         395
                                                              --------    --------    --------
Net increase (decrease) in cash and cash equivalents ......      4,557      (6,743)     (3,286)
Cash and cash equivalents, beginning of year ..............     10,672      15,229       8,486
                                                              --------    --------    --------
Cash and cash equivalents, end of year ....................   $ 15,229    $  8,486       5,200
                                                              ========    ========    ========

Supplemental disclosures of cash flow information:
      Cash paid during the period for:
        Income taxes ......................................   $  2,400    $  4,033       2,246
                                                              ========    ========    ========
</TABLE>

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


                                       30
<PAGE>

                       CATAPULT COMMUNICATIONS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

      The Company designs, develops, manufactures, markets and supports 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. 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
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 two professional money management firms. At September 30, 2000, 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, 2000, 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.


                                       31
<PAGE>

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

      The functional currencies of the Company's foreign subsidiaries are the
respective local 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, 2000, the Company had forward exchange contracts maturing
in fiscal 2001 to sell approximately $1.2 million in Japanese Yen and $1.0
million in Pounds Sterling designed to hedge against future movements in foreign
exchange rates. The fair market value of the contracts at September 30, 2000 was
not material. The cost associated with foreign exchange contracts has been
included in other income (expense) and was not material to the Company's
operations.

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 three
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.


                                       32
<PAGE>

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

                                                   Year ended September 30,
                                              ----------------------------------
                                              1998           1999           2000
                                              ----           ----           ----
Customer A ........................            --             --             23%
Customer B ........................            15%            14%            12%
Customer C ........................            21%            12%            --
Customer D ........................            24%            58%            --
Customer E ........................            12%            --             --

      At September 30, 1999, four customers accounted for 26%, 19%, 19% and 11%
of total accounts receivable, respectively. At September 30, 2000, three
customers accounted for 32%, 15%, and 14% 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.

Stock-based Compensation

      The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees,"


                                       33
<PAGE>

("APB 25") and complies with the disclosure provisions of SFAS No. 123 ("SFAS
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:

<TABLE>
<CAPTION>
                                                    Year ended September 30,
                                            ---------------------------------------
                                                1998          1999          2000
                                            -----------   -----------   -----------
                                                (in thousands, except share and
                                                        per share data)
<S>                                          <C>           <C>           <C>
Net income ..............................        $4,525        $8,905        $6,566
                                            ===========   ===========   ===========
Weighted average shares outstanding .....    10,369,000    11,874,000    12,801,000
Dilutive options ........................       571,000       343,000       322,000
                                            -----------   -----------   -----------
Weighted average shares assuming dilution    10,940,000    12,217,000    13,123,000
                                            -----------   -----------   -----------
Earnings per share:
Basic ...................................         $0.44         $0.75         $0.51
Diluted .................................         $0.41         $0.73         $0.50
</TABLE>

Diluted earnings per share do not include the effect of the following
antidilutive common equivalent shares:

<TABLE>
<CAPTION>
                                                    Year ended September 30,
                                            ---------------------------------------
                                                1998          1999          2000
                                            -----------   -----------   -----------
<S>                                          <C>           <C>           <C>
Common stock options.....................            --            --       290,000
                                            ===========   ===========   ===========
</TABLE>

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."

Recently Issued Accounting Standards

      In June 1998, the FASB issued SFAS No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities," effective beginning in the first
quarter of 2000. SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires companies to recognize
all derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS 133 is effective
for fiscal years beginning after June 15, 2000 and cannot be applied
retroactively. The Company believes that the adoption of SFAS 133 will not have
a material effect on the consolidated financial statements.

      In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 must be adopted
by the Company for the fiscal quarter


                                       34
<PAGE>

beginning October 1, 2000. The Company believes that the adoption of SAB 101
will not have a material effect on the consolidated financial statements.

      In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of Opinion No. 25" for (a) the definition
of employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The Company adopted FIN 44
effective July 1, 2000, but certain conclusions cover specific events that occur
after either December 15, 1998, or January 12, 2000. The adoption of FIN 44 did
not have a material impact on the 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

<TABLE>
<CAPTION>
                                                        Year ended September 30,
                                                     1999                      2000
                                                              (in thousands)
Short-term investments:                        Cost      Market value     Cost     Market value
                                               ----      ------------     ----     ------------
<S>                                           <C>          <C>          <C>          <C>
  U.S. government corporations and agencies    $8,561       $8,564      $10,064      $10,071
  Commercial paper ........................    22,646       22,640       32,543       32,570
  State and municipal securities ..........     1,961        1,964          795          796
                                              -------      -------      -------      -------
                                              $33,168      $33,168      $43,402      $43,437
                                              =======      =======      =======      =======
</TABLE>

Gross unrealized gains on short-term investments were $0 and $35,000 as at
September 30, 1999 and 2000, respectively.

                                                       Year ended September 30,
                                                       ------------------------
                                                           1999         2000
                                                         -------      -------
                                                            (in thousands)
Inventories:
   Raw materials ...................................        $554        1,223
   Work-in-process .................................          79           93
   Finished goods ..................................          72           83
                                                         -------      -------
                                                            $705        1,399
                                                         =======      =======
Property and equipment:
   Equipment .......................................      $1,789        2,324
   Leasehold improvements ..........................         456        1,045
                                                         -------      -------
                                                           2,245        3,369
   Less accumulated depreciation and amortization ..      (1,247)      (1,840)
                                                         -------      -------
                                                            $998        1,529
                                                         =======      =======
Accrued liabilities:
   Payroll and related expenses ....................      $1,402       $1,992
   Income taxes ....................................       2,388        2,870
   Other ...........................................         992          873
                                                         -------      -------
                                                          $4,782       $5,735
                                                         =======      =======


                                       35
<PAGE>

NOTE 3 - INCOME TAXES

      Consolidated income before income taxes includes non-U.S. income of
approximately $1,723,000, $227,000 and $681,000 in fiscal 1998, 1999 and 2000,
respectively.

      The provision for income taxes consists of the following:

                                                     Year ended September 30,
                                                -------------------------------
                                                 1998        1999        2000
                                                -------     -------     -------
                                                         (in thousands)
            Current:
               U.S. federal .................    $1,853      $6,024      $3,446
               State ........................       490         793         516
               Foreign ......................       931         401         260
                                                -------     -------     -------
                                                  3,274       7,218       4,322
                                                -------     -------     -------
            Deferred:
               U.S. federal .................       230        (282)       (340)
               State ........................        --         (80)         (6)
               Foreign ......................      (108)       (150)         --
                                                -------     -------     -------
                                                    122        (512)       (346)
                                                -------     -------     -------
                                                 $3,396      $6,706      $3,976
                                                =======     =======     =======

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

                                                     Year ended September 30,
                                                -------------------------------
                                                 1998        1999        2000
                                                -------     -------     -------
            Tax at federal rate..............        34%         35%         35%
            State taxes, net of federal benefit       5           5           3
            Excess foreign tax rate..........         3           1           0
            Other ...........................         1           2           0
                                                -------     -------     -------
                                                     43%         43%         38%
                                                =======     =======     =======

Deferred tax assets consist of the following:

                                                          September 30,
                                                -------------------------------
                                                  1999                    2000
                                                -------                 -------
                                                         (in thousands)
            Accruals and reserves............      $852                    $928
            Foreign net operating losses.....       186                     262
            Other ...........................        64                     335
                                                -------                 -------
                 Total.......................     1,102                   1,525
            Valuation allowance..............      (186)                   (262)
                                                -------                 -------
                                                    916                   1,263
            Less: Non-current portion .......        26                      --
                                                -------                 -------
                                                   $890                  $1,263
                                                =======                 =======

      The company had foreign net operating losses of $599,352 at September 30,
1999 and $794,177 at September 30, 2000. A full valuation allowance was recorded
against the foreign net operating losses.


                                       36
<PAGE>

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.

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.

      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 are being amortized
over a period of four years from the date of option issuance. Amortization of
deferred compensation expense related to these options of approximately
$176,000, $169,000 and $72,000 was included in general and administrative
expenses in the years ended September 30, 1998, 1999 and 2000, respectively.

      Information with respect to stock option activity from September 30, 1997
through September 30, 2000 is set forth below:


                                       37
<PAGE>

                                           Number of Options    Weighted Average
                                              Outstanding        Exercise Price
                                           -----------------    ----------------
Balance, September 30, 1997 .............      1,358,100            $ 0.39
   Options granted ......................        206,100              2.01
   Options exercised ....................       (862,874)             0.25
   Options canceled .....................           (876)             1.12

                                               ---------
Balance, September 30, 1998 .............        700,450              1.04
   Options granted ......................        273,014             16.14
   Options exercised ....................       (147,077)             0.88
   Options canceled .....................       (117,435)             2.31
                                               ---------
Balance, September 30, 1999 .............        708,952              6.68
   Options granted ......................        270,037             11.98
   Options exercised ....................       (142,463)              .93
   Options canceled .....................        (18,266)             9.09
                                               ---------
Balance, September 30, 2000 .............        818,260              9.62
                                               =========

      As of September 30, 2000, 1,710,446 options remained available for grant.

      As of September 30, 2000, the options outstanding and exercisable are
presented below:

<TABLE>
<CAPTION>
                                             Options Outstanding                           Options Exercisable
                                            at September 30, 2000                         at September 30, 2000
                                  -----------------------------------------------   ---------------------------------
                                                    Weighted
                                                     Average
                                                    Remaining         Weighted                            Weighted
                                    Number         Contractual        Average          Number             Average
Range of Exercise Price           Outstanding         Life         Exercise Price   Outstanding        Exercise Price
-------------------------------   -----------      -----------     --------------   -----------       ---------------
<S>                                 <C>               <C>               <C>             <C>                  <C>
$0.00 - $2.07..................     281,676           5.2                 .65           260,952                .70
$2.08 - $4.14..................       3,251           7.5               11.38             1,562               5.00
$4.15 - $6.22..................      34,112           8.1               12.84            14,798               6.00
$8.31 - $10.38.................     109,825           9.5                9.91                 -                  -
$10.39 - $12.45................      98,960           9.6               11.38             5,437              11.38
$12.46 - $14.53................      39,692           9.4               12.84             5,496              12.83
$14.54 - $16.60................      20,494           8.6               15.80             1,890              15.82
$16.61 - $18.68................     180,286           8.9               17.54            48,732              17.49
$18.69 - $20.76................      49,964           8.9               20.14            17,690              20.27
                                  ---------                                         -----------
                                    818,260                              9.62           356,557               4.63
                                  =========                                         ===========
</TABLE>

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. During the fiscal years ended September 30, 1999 and 2000 after the
Company's initial public offering, the weighted average method was used. For
year ended September 30, 1998, the minimum value method was used.

                            1998                 1999                2000
                            ----                 ----                ----
Dividend yield              0.0%                 0.0%                 0.0%
Expected life of option     5.0 years            5.0 years            5.0 years
Risk-free interest rate     5.6%                 5.5%                 5.9 %
Expected volatility         0.0%                50.0%                50.0%


                                       38
<PAGE>

      The weighted average fair values of options granted during 1998, 1999 and
2000 were as follows:

Year Ended September 30, 1998              Weighted Average     Weighted Average
-----------------------------               Exercise Price         Fair Value
                                            --------------         ----------
Exercise price equal to market value.......      $7.51                $1.50
Exercise price less than market value......       1.39                 3.46

Year Ended September 30, 1999              Weighted Average     Weighted Average
-----------------------------               Exercise Price         Fair Value
                                            --------------         ----------
Exercise price equal to market value.......     $16.14               $12.87

Year Ended September 30, 2000              Weighted Average     Weighted Average
-----------------------------               Exercise Price         Fair Value
                                            --------------         ----------
Exercise price equal to market value.......     $11.98                $6.04

      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 net income would not have been materially
different in fiscal 1998. 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, $0.73
per share and $0.70 per share, respectively and for fiscal 2000 would have been
$6,082,000, $0.48 per share and $0.46 per share, 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.


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 200
shares.

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, 1998, 1999 and 2000.

      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, 1998, 1999 and
2000 were $--, $42,038 and $67,326, respectively.

NOTE 6 - COMMITMENTS

      The Company leases its facility in Mountain View, California under
non-cancelable operating lease agreements that expire in 2002 and 2003 and may
be extended at the Company's option to 2005. The lease agreements provide for
minimum annual rent of $285,000. 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
and Germany under leases with the longest term expiring in 2009.

      Rent expense for all facilities for the years ended September 30, 1998,
1999 and 2000 was approximately $287,000, $426,000 and $641,000, respectively.


                                       39
<PAGE>

      Future minimum annual rental payments under non-cancelable operating
leases as of September 30, 2000 are as follows (in thousands):

                  2001 ..............        669
                  2002 ..............        516
                  2003 ..............        295
                  2004 ..............        118
                  2005 ..............         89
                  Thereafter.........        327
                                       ----------
                                          $2,014
                                       ==========

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.

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

                                          United    UK &            Consolidated
                                          States    Europe    Japan    Total
                                          ------    ------    ------   -------
1998
----
Sales to unaffiliated customers .......   $5,020    $3,649    $9,537   $18,206
Net income ............................    3,626       400       499     4,525
Identifiable assets ...................   14,905     1,447     3,143    19,495

1999
----
Sales to unaffiliated customers .......   $6,383    $3,024   $19,548   $28,955
Net income ............................    8,929      (287)      263     8,905
Identifiable assets ...................   42,423     2,185     6,059    50,667

2000
----
Sales to unaffiliated customers .......    8,761     4,885    13,400    27,046
Net income ............................    6,354      (207)      419     6,566
Identifiable assets ...................   51,258     4,760     3,325    59,343

      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, 1998, 1999 and 2000 were $9.6 million, $15.6
million and $13.0 million, respectively.


                                       40
<PAGE>

                          Supplementary Financial Data

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

                                                Quarter Ended
                                ------------------------------------------------
                                     (in thousands, except per share data)
                                ------------------------------------------------
                                Dec. 31,     Mar. 31,     June 30,     Sept. 30,
                                  1998         1999         1999         1999
                                 ------       ------       ------       ------
Revenues                         $5,229       $9,752       $6,707       $7,267
Gross profit ...............      4,429        8,762        5,962        6,156
Operating income ...........      2,105        5,982        2,982        3,355
Net income .................     $1,191       $3,584       $1,959       $2,171
Earnings per share:
   Basic ...................      $0.11        $0.31        $0.16        $0.17
   Diluted .................      $0.11        $0.30        $0.15        $0.17

                                Dec. 31,     Mar. 31,     June 30,     Sept. 30,
                                  1999         2000         2000         2000
                                 ------       ------       ------       ------
Revenues                         $4,984       $6,691       $7,507       $7,864
Gross profit ...............      4,212        6,002        6,666        6,986
Operating income ...........        910        1,984        2,552        2,253
Net income .................       $817       $1,601       $2,074       $2,074
Earnings per share:
   Basic ...................      $0.06        $0.13        $0.16        $0.16
   Diluted .................      $0.06        $0.12        $0.16        $0.16

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 February 7, 2001, 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.


                                       41
<PAGE>

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.


                                       42
<PAGE>

                                     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 25 of this report.

2. Financial Statement Schedules

      Financial Statement Schedule: See Index to Consolidated Financial
Statements at Item 8 on page 25 of this report.

3. Exhibits

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

   Exhibit
   Number                                Description
   ------                                -----------
2.1(1)            Agreement and Plan of Merger dated June 10, 1998 between
                  Catapult Communications Corporation, a California corporation,
                  and Registrant.
3.1(1)            Articles of Incorporation of Registrant.
3.2               Bylaws of Registrant.
9.1(1)            Voting Trust Agreement dated June 8, 1998 between Nancy Hood
                  Karp, Richard A. Karp, the Registrant and a depositary.
10.1(1)           Form of Indemnification Agreement entered into by Registrant
                  with each of its directors and executive officers.
10.3(1)(2)        1989 Stock Option Plan and related agreements.
10.4(1)(2)        UK Executive Share Option Scheme and related agreements.
10.5(1)(2)        1998 Stock Plan and related agreements.
10.6(1)(2)        1998 Employee Stock Purchase Plan and related agreements.
10.8(1)           Lease for office space located at 160 Whisman Road, Mountain
                  View, CA.
10.9(1)           Form of Software Support Agreement.
10.11(1)(2)       Consulting and Non-Competition Agreement dated June 9, 1998
                  between Nancy Hood Karp and Registrant.
11.1(1)           Calculation of Earnings per Common Share (contained in Note 1
                  of the Notes to Financial Statements).
21.1(1)           Subsidiaries of the Registrant.
23.1              Consent of PricewaterhouseCoopers LLP, Independent Accountants
27.1              Financial Data Schedule

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, 2000.

----------

(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,
      2000.
(2)   Represents a management contract or compensatory plan, contract or
      arrangement in which any director or any of the named executives
      participates.


                                       43
<PAGE>

                                   SIGNATURES

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

                              CATAPULT COMMUNICATIONS CORPORATION


Date: December 21, 2000       By:                     /s/  RICHARD A. KARP
                                 -----------------------------------------------
                                 Richard A. Karp
                                 Chief Executive Officer & Chairman of the Board

      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        Chief Executive Officer,           December 21, 2000
-----------------------    Chairman of the Board and Acting
(Richard A. Karp)          Chief Financial Officer (Principal
                           Executive Officer, Principal
                           Financial and Principal Accounting
                           Officer)


/s/ CHARLES L. WAGGONER    Director                           December 20, 2000
-----------------------
(Charles L. Waggoner)


/s/ JOHN M. SCANDALIOS     Director                           December 20, 2000
-----------------------
(John M. Scandalios)


/s/ NANCY H. KARP          Director                           December 20, 2000
-----------------------
(Nancy H. Karp)


                                       44