##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    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
  Nevada
    
    77-0086010(State or other jurisdiction of
    
    (I.R.S. EmployerIncorporation or organization)
    
    Identification Number)
 160 South Whisman Road
Mountain View, California 94041
 (650) 960-1025
 
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




---



##### 



CATAPULT COMMUNICATIONS CORPORATION
 FORM 10-Q
 INDEX
 PagePart IFinancial InformationItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets at March 31, 2006 and September 30, 2005
    
    
    1Unaudited Condensed Consolidated Statements of Operations for the three and six months
ended March 31, 2006 and 2005
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended
March 31, 2006 and 2005
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21Part IIOther InformationItem 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 6. Exhibits
    
    
    30Signatures
    
    
    31EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  i




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 CATAPULT COMMUNICATIONS CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    September 30,2006
    
    
    2005(In thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    31,631
    
    
    $
    24,852Short-term investments
    
    
    39,857
    
    
    
    43,955Accounts receivable, net
    
    
    12,395
    
    
    
    14,724Inventories
    
    
    4,495
    
    
    
    3,104Deferred income taxes
    
    
    952
    
    
    
    603Prepaid expenses
    
    
    1,805
    
    
    
    1,401Total current assets
    
    
    91,135
    
    
    
    88,639Property and equipment, net
    
    
    1,921
    
    
    
    1,693Goodwill
    
    
    49,394
    
    
    
    49,394Other intangibles, net
    
    
    3,540
    
    
    
    4,051Other assets
    
    
    3,958
    
    
    
    3,983Total assets
    
    $
    149,948
    
    
    $
    147,760LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    967
    
    
    $
    1,547Accrued liabilities
    
    
    4,082
    
    
    
    5,508Deferred revenue
    
    
    10,997
    
    
    
    7,697Total current liabilities
    
    
    16,046
    
    
    
    14,752Deferred revenue, long-term portion
    
    
    371
    
    
    
    485Total liabilities
    
    
    16,417
    
    
    
    15,237Stockholders Equity:Common stock
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    50,652
    
    
    
    48,944Deferred stock-based compensation
    
    
    
    
    
    
    (3
    )Accumulated other comprehensive income
    
    
    530
    
    
    
    587Retained earnings
    
    
    82,334
    
    
    
    82,980Total stockholders equity
    
    
    133,531
    
    
    
    132,523Total liabilities and stockholders equity
    
    $
    149,948
    
    
    $
    147,760
  1




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share amounts)Revenues:Products
    
    $
    6,914
    
    
    $
    15,095
    
    
    $
    15,448
    
    
    $
    27,468Services
    
    
    3,749
    
    
    
    3,955
    
    
    
    7,317
    
    
    
    7,453Total revenues
    
    
    10,663
    
    
    
    19,050
    
    
    
    22,765
    
    
    
    34,921Cost of revenues:Products
    
    
    1,245
    
    
    
    1,429
    
    
    
    2,433
    
    
    
    2,671Services
    
    
    956
    
    
    
    852
    
    
    
    2,018
    
    
    
    1,673Amortization of purchased technology
    
    
    172
    
    
    
    172
    
    
    
    343
    
    
    
    343Total cost of revenues
    
    
    2,373
    
    
    
    2,453
    
    
    
    4,794
    
    
    
    4,687Gross profit
    
    
    8,290
    
    
    
    16,597
    
    
    
    17,971
    
    
    
    30,234Operating expenses:Research and development
    
    
    3,433
    
    
    
    3,211
    
    
    
    6,515
    
    
    
    6,182Sales and marketing
    
    
    4,154
    
    
    
    4,802
    
    
    
    8,782
    
    
    
    9,505General and administrative
    
    
    2,321
    
    
    
    2,026
    
    
    
    4,748
    
    
    
    3,932Total operating expenses
    
    
    9,908
    
    
    
    10,039
    
    
    
    20,045
    
    
    
    19,619Operating income (loss)
    
    
    (1,618
    )
    
    
    6,558
    
    
    
    (2,074
    )
    
    
    10,615Interest income
    
    
    620
    
    
    
    289
    
    
    
    1,240
    
    
    
    513Other income (expense), net
    
    
    40
    
    
    
    (144
    )
    
    
    53
    
    
    
    (137
    )Income (loss) before income taxes
    
    
    (958
    )
    
    
    6,703
    
    
    
    (781
    )
    
    
    10,991Provision for (benefit from) income taxes
    
    
    (169
    )
    
    
    1,273
    
    
    
    (135
    )
    
    
    1,748Net income (loss)
    
    ($
    789
    )
    
    $
    5,430
    
    
    ($
    646
    )
    
    $
    9,243Net income (loss) per share  basic
    
    ($
    0.05
    )
    
    $
    0.37
    
    
    ($
    0.04
    )
    
    $
    0.63Net income (loss) per share  diluted
    
    ($
    0.05
    )
    
    $
    0.36
    
    
    ($
    0.04
    )
    
    $
    0.61Shares used in per share calculation:Basic
    
    
    14,784
    
    
    
    14,676
    
    
    
    14,763
    
    
    
    14,637Diluted
    
    
    14,784
    
    
    
    15,103
    
    
    
    14,763
    
    
    
    15,129
  2




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six months endedMarch 31,2006
    
    
    2005(In thousands)Cash flows from operating activities:Net income (loss) as reported
    
    $
    (646
    )
    
    $
    9,243Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of property and equipment
    
    
    477
    
    
    
    892Amortization of deferred stock-based compensation
    
    
    3
    
    
    
    18Amortization of purchased technology
    
    
    343
    
    
    
    343Amortization of other acquisition related intangibles
    
    
    168
    
    
    
    168Stock based compensation expenses
    
    
    1,054
    
    
    
    Provision for doubtful accounts
    
    
    
    
    
    
    40Deferred income taxes
    
    
    (351
    )
    
    
    62Total tax benefits related to stock based compensation
    
    
    80
    
    
    
    Excess tax benefits from stock options exercised
    
    
    (35
    )
    
    
    Change in assets and liabilities:Accounts receivable
    
    
    2,341
    
    
    
    (2,575
    )Inventories
    
    
    (1,405
    )
    
    
    (156
    )Prepaid expenses
    
    
    (419
    )
    
    
    146Other assets
    
    
    24
    
    
    
    23Accounts payable
    
    
    (572
    )
    
    
    (405
    )Accrued liabilities
    
    
    (1,403
    )
    
    
    338Deferred revenue
    
    
    3,185
    
    
    
    2,340Net cash provided by operating activities
    
    
    2,844
    
    
    
    10,477Cash flows from investing activities:Sale and maturities of short-term investments
    
    
    42,608
    
    
    
    20,341Purchase of short-term investments
    
    
    (38,471
    )
    
    
    (26,758
    )Purchase of property and equipment
    
    
    (719
    )
    
    
    (467
    )Net cash provided by (used in) investing activities
    
    
    3,418
    
    
    
    (6,884
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    576
    
    
    
    1,890Excess tax benefit from stock-based compensation
    
    
    35
    
    
    
    Net cash provided by financing activities
    
    
    611
    
    
    
    1,890Effect of exchange rate changes on cash and cash equivalents
    
    
    (94
    )
    
    
    152Net increase in cash and cash equivalents
    
    
    6,779
    
    
    
    5,635Cash and cash equivalents, beginning of period
    
    
    24,852
    
    
    
    20,108Cash and cash equivalents, end of period
    
    $
    31,631
    
    
    $
    25,743Unrealized gain (loss) on investments
    
    $
    40
    
    
    $
    (37
    )
  3




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1THE COMPANY AND BASIS OF PRESENTATION
   NOTE 2RECENT ACCOUNTING PRONOUNCEMENTS
 Transition Election to Accounting for the
Tax Effects of Share-Based Payment Awards. Share-Based Payment
 Classification of Options and Similar
Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a
Contingent Event. Share-Based Payment.
 NOTE 3  STOCK-BASED COMPENSATION
 Share-Based
Payment, Accounting
for Stock Issued to Employees Accounting for Stock-Based Compensation
 4




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##### Table of Contents



Periods prior to the adoption of SFAS 123(R)
  Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2005
    
    
    2005(In thousands, except per share amounts)Net income, as reported for basic and diluted earnings per share
    
    $
    5,430
    
    
    $
    9,243Add: Stock-based employee compensation expense included in reported
net income, net of related tax effects
    
    
    7
    
    
    
    15Deduct: Total stock-based employee compensation expense determined
under fair-value based method for all awards, net of related tax
effects
    
    
    (612
    )
    
    
    (1,290
    )Pro forma net income
    
    $
    4,825
    
    
    $
    7,968Net income per share:Basic net income per share as reported
    
    $
    0.37
    
    
    $
    0.63Basic net income per share pro forma
    
    $
    0.33
    
    
    $
    0.54Diluted net income per share as reported
    
    $
    0.36
    
    
    $
    0.61Diluted net income per share pro forma
    
    $
    0.32
    
    
    $
    0.53
 Adoption of SFAS 123(R)
  Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2006
    
    
    2006(In thousands)Stock-Based Compensation Expense:Cost of sales  products
    
    $
    19
    
    
    $
    41Cost of sales  services
    
    
    34
    
    
    
    72Research and development
    
    
    118
    
    
    
    250Selling and marketing expense
    
    
    118
    
    
    
    276General and administrative expense
    
    
    191
    
    
    
    415Total stock-based compensation expense
    
    
    480
    
    
    
    1,054Tax effect on stock-based compensation expenses
    
    
    (155
    )
    
    
    (347
    )Net effect on net income
    
    $
    325
    
    
    $
    707
 5




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##### Table of Contents



Valuation Assumptions
  Employee Stock Option Plans
    
    Employee Stock Purchase PlanThree months ended
    
    Six months ended
    
    Three months ended
    
    Six months endedMarch 31,
    
    March 31,
    
    March 31,
    
    March 31,2006
    
    2005
    
    2006
    
    2005
    
    2006*
    
    2005
    
    2006*
    
    2005Expected life of
option
    
    
    5.42
    years
    
    
    2.68
    years
    
    
    5.42
    years
    
    
    2.67
    years
    

    

    
    
    0.5
    years
    

    

    
    
    0.5
    yearsExpected volatility
    
    
    66.0
    %
    
    
    80.9
    %
    
    
    66.0
    %
    
    
    81.8
    %
    

    

    
    
    47.0
    %
    

    

    
    
    47.0
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    

    

    
    
    0.0
    %
    

    

    
    
    0.0
    %Risk-free interest rate
    
    
    4.47
    %
    
    
    3.56
    %
    
    
    4.50
    %
    
    
    3.39
    %
    

    

    
    
    2.48
    %
    

    

    
    
    2.48
    %
 
 *
    
    The company terminated its ESPP plan effective November 1, 2005. Expected life of option
 Expected Volatility
 Expected Dividend
 Risk-Free Interest Rate
 Stock Option Plans
   6




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##### Table of Contents



Number of
    
    
    Weighted
    
    
    Weighted Average
    
    
    AggregateOptions
    
    
    Average
    
    
    Remaining
    
    
    IntrinsicOutstanding
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Value(Years)
    
    
    (In thousands)Balance at September 30, 2005
    
    
    1,956,029
    
    
    $
    15.56Options granted
    
    
    73,501
    
    
    $
    15.47Options exercised
    
    
    (57,476
    )
    
    $
    6.57Options canceled, forfeited or expired
    
    
    (22,059
    )
    
    $
    17.42Balance, March 31, 2006
    
    
    1,949,995
    
    
    $
    15.80
    
    
    
    6.7
    
    
    $
    2,461Vested or expected to vest, March 31, 2006
    
    
    1,901,105
    
    
    $
    15.84
    
    
    
    6.7
    
    
    $
    2,449Ending exercisable, March 31, 2006
    
    
    1,519,324
    
    
    $
    16.53
    
    
    
    6.2
    
    
    $
    1,838
   Employee Stock Purchase Plan
  NOTE 4  BASIC AND DILUTED NET INCOME PER SHARE
 Earnings per Share
 7




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##### Table of Contents



Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share amounts)Net income (loss), as reported for basic
and diluted earnings per share
    
    $
    (789
    )
    
    $
    5,430
    
    
    $
    (646
    )
    
    $
    9,243Weighted average shares outstanding
    
    
    14,784
    
    
    
    14,676
    
    
    
    14,763
    
    
    
    14,637Dilutive options
    
    
    0
    
    
    
    427
    
    
    
    0
    
    
    
    492Weighted average shares assuming
dilution
    
    
    14,784
    
    
    
    15,103
    
    
    
    14,763
    
    
    
    15,129Net income (loss) per share:Basic
    
    $
    (0.05
    )
    
    $
    0.37
    
    
    $
    (0.04
    )
    
    $
    0.63Diluted
    
    $
    (0.05
    )
    
    $
    0.36
    
    
    $
    (0.04
    )
    
    $
    0.61
  Three months ended
    
    Six months endedMarch 31,
    
    March 31,2006
    
    2005
    
    2006
    
    2005(In thousands)Common stock
options
    
    
    1,943
    
    
    
    300
    
    
    
    1,926
    
    
    
    228
 NOTE 5  INVENTORIES
  March 31,
    
    
    September 30,2006
    
    
    2005(In thousands)Inventories:Raw materials
    
    $
    3,736
    
    
    $
    2,600Work-in-process
    
    
    324
    
    
    
    231Finished goods
    
    
    435
    
    
    
    273$
    4,495
    
    
    $
    3,104
 NOTE 6  GOODWILL AND INTANGIBLE ASSETS
   8




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##### Table of Contents



As of March 31, 2006
    
    
    As of September 30, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    Amount(In thousands)Purchased technology
    
    $
    4,800
    
    
    $
    (2,457
    )
    
    $
    2,343
    
    
    $
    4,800
    
    
    $
    (2,115
    )
    
    $
    2,685Trade names
    
    
    1,000
    
    
    
    (512
    )
    
    
    488
    
    
    
    1,000
    
    
    
    (440
    )
    
    
    560Customer relationships
    
    
    1,000
    
    
    
    (512
    )
    
    
    488
    
    
    
    1,000
    
    
    
    (440
    )
    
    
    560Non-compete agreement
    
    
    400
    
    
    
    (179
    )
    
    
    221
    
    
    
    400
    
    
    
    (154
    )
    
    
    246System backlog
    
    
    400
    
    
    
    (400
    )
    
    
    
    
    
    
    400
    
    
    
    (400
    )
    
    
    Total
    
    $
    7,600
    
    
    $
    (4,060
    )
    
    $
    3,540
    
    
    $
    7,600
    
    
    $
    (3,549
    )
    
    $
    4,051
  EstimatedAmortizationFiscal Year
    
    Expense(In thousands)2006 (remaining 6 months)
    
    $
    5112007
    
    
    1,0222008
    
    
    1,021Thereafter
    
    
    986Total
    
    $
    3,540
 NOTE 7  WARRANTY ACCRUAL
  2006
    
    
    2005(In thousands)Balances at beginning of year
    
    $
    74
    
    
    $
    69Utilized
    
    
    (27
    )
    
    
    (41
    )Charged (reduction) to cost and expenses
    
    
    14
    
    
    
    48Balances at end of quarter
    
    $
    61
    
    
    $
    76
 NOTE 8  INCOME TAXES
  9




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##### Table of Contents



NOTE 9  COMPREHENSIVE INCOME
  Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net income, as reported
    
    $
    (789
    )
    
    $
    5,430
    
    
    $
    (646
    )
    
    $
    9,243Currency translation adjustment
    
    
    15
    
    
    
    (59
    )
    
    
    (97
    )
    
    
    124Unrealized gains (losses) on investments
    
    
    7
    
    
    
    (21
    )
    
    
    40
    
    
    
    (37
    )Comprehensive income
    
    $
    (767
    )
    
    $
    5,350
    
    
    $
    (703
    )
    
    $
    9,330
 NOTE 10  REPURCHASE OF COMMON STOCK
  NOTE 11  GEOGRAPHICAL INFORMATION
 Disclosures About Segments of an Enterprise and
Related Information
   North
    
    UK, Europe,
    
    
    
    
    
    Rest of
    
    ConsolidatedAmerica
    
    Other
    
    Japan
    
    World
    
    Total(In thousands)Six months ended March 31, 2006Revenues from unaffiliated customers
    
    $
    7,194
    
    
    $
    7,066
    
    
    $
    5,654
    
    
    $
    2,851
    
    
    $
    22,765Six months ended March 31, 2005Revenues from unaffiliated customers
    
    $
    10,473
    
    
    $
    9,524
    
    
    $
    11,604
    
    
    $
    3,320
    
    
    $
    34,921As of March 31,
2006Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    
    
    
    
    
    
    
    
    $
    49,394Long-lived assets
    
    
    952
    
    
    
    687
    
    
    $
    242
    
    
    $
    40
    
    
    
    1,921As of September 30, 2005Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    
    
    
    
    
    
    
    
    $
    49,394Long-lived assets
    
    
    950
    
    
    
    479
    
    
    $
    264
    
    
    
    
    
    
    
    1,693
   10




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##### Table of Contents



NOTE 12  CUSTOMER INFORMATION
  Percentage of Accounts Receivable as of
    
    Percentage of RevenuesThree months ended
    
    Six months endedMarch 31,
    
    September 30,
    
    March 31,
    
    March 31,2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005Customer A
    
    
    13
    %
    
    
    <10
    %
    
    
    11
    %
    
    
    <10
    %
    
    
    11
    %
    
    
    <10
    %Customer B
    
    
    14
    %
    
    
    <10
    %
    
    
    13
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %Customer C
    
    
    <10
    %
    
    
    14
    %
    
    
    <10
    %
    
    
    15
    %
    
    
    <10
    %
    
    
    16
    %Customer D
    
    
    <10
    %
    
    
    13
    %
    
    
    10
    %
    
    
    11
    %
    
    
    <10
    %
    
    
    <10
    %Customer E
    
    
    17
    %
    
    
    20
    %
    
    
    12
    %
    
    
    12
    %
    
    
    <10
    %
    
    
    <10
    %Customer F
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    13
    %
    
    
    <10
    %Customer G
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    18
    %
    
    
    <10
    %
    
    
    12
    %
 NOTE 13  CONTINGENCIES
   Accounting for Contingencies
 11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read in conjunction with Selected Financial
Data and our Consolidated Financial Statements and Notes thereto included in our Annual Report on
Form 10-K for the year ended September 30, 2005, as filed with the Securities and Exchange
Commission on December 14, 2005.
 Forward-looking Statements
 This Quarterly Report on Form 10-Q contains statements that are not historical facts but are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and relate to such
matters as anticipated financial performance and involve known and unknown risks, uncertainties and
other factors that may cause our business or our industrys actual results, levels of activity,
performance or achievements to be materially different from those expressed or implied by any
forward-looking statements. Such statements include, in particular, statements about our plans,
strategies, prospects, changes and trends in our business and the markets in which we operate as
described in this Quarterly Report on Form 10-Q . In some cases, you can identify forward-looking
statements by terminology such as may, will, could, would, should, expect, plan,
anticipate, intend, believe, estimate, forecast, predict, propose, potential or
continue or the negative of those terms or other comparable terminology. These statements are
only predictions.
 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 you should carefully review the cautionary statements set
forth in this Quarterly Report on Form 10-Q , including those set forth under the caption Risk
Factors in Item 1A of Part II of this report and those set forth in our Annual Report on Form 10-K
for the year ended September 30, 2005, as filed on December 14, 2005. We caution the reader,
however, that these factors may not be exhaustive.
 We may from time to time make additional written and oral forward-looking statements,
including statements contained in our filings with the Securities and Exchange Commission and in
our reports to stockholders. We do not undertake to update any forward-looking statements that may
be made in this Form 10-Q or from time to time by us or on our behalf.
 Overview
 Our Business and Products
    
    
    IP Multimedia Subsystem (IMS);
    
    Third and Fourth Generation Cellular (3G and 4G), including UMTS and cdma2000;
    
    General Packet Radio Service (GPRS);
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
    
    Global Systems for Mobile Communications (GSM);
    
    Code Division Multiple Access (CDMA);
    
    IP Telephony (Voice over IP or VoIP);
    
    Asynchronous Transfer Mode (ATM); and
    
    Signaling System #7 (SS7).
   Conditions and Trends in Our Industry
   Summary of Our Financial Performance in the Second Quarter of Fiscal 2006
   
    
    In Japan, revenues decreased by 51% or $4.3 million from
the second quarter of fiscal 2005, primarily due to competition from
test products developed by two of our Japanese OEM customers, both for their own internal
use and for sale to our major Japanese telecom operator customers. We expect this
competitive factor to continue to impact our Japanese revenues for at least the remainder
of our current fiscal year. Revenues in Japan were also impacted by an 11% decrease in the
value of the yen, in which all our revenues in Japan are denominated.
    
    In regions outside Japan, our revenues continued to be affected
adversely by engineering delays. In the second quarter we received a further $2.7 million in orders requiring
additional engineering work on which no revenue could be recognized, bringing the cumulative
total of orders in this category to
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##### Table of Contents



$5.2 million at quarter end. We expect to begin
recognizing revenue on these orders in the fourth quarter of our
current fiscal year. In addition, other customer orders that we would
have expected to receive in the absence of engineering delays were
delayed or issued to other vendors.
 
    
    Our overall gross profit margin decreased by nine percentage points due to increases in
hardware component costs, services demonstration equipment costs and manufacturing overhead
as percentages of the related revenues.
    
    In the second quarter of fiscal 2006, we recorded $0.5 million in pre-tax, non-cash,
stock-based compensation expense under the newly applicable accounting standard, SFAS
123(R), Share-Based Payment.Because we elected to adopt this standard under the modified
prospective transition method, we did not restate prior periods to include stock-based
compensation expense. Refer to Stock-Based Compensation in the Critical Accounting
Policies and Estimates section below.
  Critical Accounting Policies and Estimates
  Stock-Based Compensation
 Share-Based Payment
 Results of Operations
  14




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##### Table of Contents



Three months ended
    
    Six months endedMarch 31,
    
    March 31,2006
    
    2005
    
    2006
    
    2005Revenues:Products
    
    
    64.8
    %
    
    
    79.2
    %
    
    
    67.9
    %
    
    
    78.7
    %Services
    
    
    35.2
    
    
    
    20.8
    
    
    
    32.1
    
    
    
    21.3Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenues:Products
    
    
    11.7
    
    
    
    7.5
    
    
    
    10.7
    
    
    
    7.6Services
    
    
    9.0
    
    
    
    4.5
    
    
    
    8.9
    
    
    
    4.8Amortization of purchased technology
    
    
    1.6
    
    
    
    0.9
    
    
    
    1.5
    
    
    
    1.0Total cost of revenues
    
    
    22.3
    
    
    
    12.9
    
    
    
    21.1
    
    
    
    13.4Gross profit
    
    
    77.7
    
    
    
    87.1
    
    
    
    78.9
    
    
    
    86.6Operating expenses:Research and development
    
    
    32.2
    
    
    
    16.9
    
    
    
    28.6
    
    
    
    17.7Sales and marketing
    
    
    38.9
    
    
    
    25.2
    
    
    
    38.6
    
    
    
    27.2General and administrative
    
    
    21.8
    
    
    
    10.6
    
    
    
    20.8
    
    
    
    11.3Total operating expenses
    
    
    92.9
    
    
    
    52.7
    
    
    
    88.0
    
    
    
    56.2Operating income (loss)
    
    
    (15.2
    )
    
    
    34.4
    
    
    
    (9.1
    )
    
    
    30.4Interest income
    
    
    5.8
    
    
    
    1.5
    
    
    
    5.5
    
    
    
    1.5Other income (expense), net
    
    
    0.4
    
    
    
    (0.7
    )
    
    
    0.2
    
    
    
    (0.4
    )Income (loss) before income taxes
    
    
    (9.0
    )
    
    
    35.2
    
    
    
    (3.4
    )
    
    
    31.5Provision for (benefit from) income
taxes
    
    
    (1.6
    )
    
    
    6.7
    
    
    
    (0.6
    )
    
    
    5.0Net income (loss)
    
    
    (7.4
    %)
    
    
    28.5
    %
    
    
    (2.8
    %)
    
    
    26.5
    %Gross margin on products
    
    
    82.0
    %
    
    
    90.5
    %
    
    
    84.3
    %
    
    
    90.3
    %Gross margin on services
    
    
    74.5
    %
    
    
    78.5
    %
    
    
    72.4
    %
    
    
    77.6
    %
  Comparison of the Three-Month Periods Ended March 31, 2006 and 2005
 Revenues
   
    
    North American revenues decreased by 27% to $2.9 million from $3.9 million;
    
    European revenues decreased by 31% to $3.2 million from $4.6 million;
    
    Japanese revenues decreased by 51% to $4.1 million from $8.4 million; and
    
    Rest of World revenues decreased by 77% to $0.5 million from $2.1 million.
  15




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Cost of Revenues
     Research
and Development
  
    
    an increase of 6%, or five employees, in the number of employees engaged in research
and development, and
    
    the inclusion of $0.1 million in non-cash stock option expenses.
  Sales and Marketing
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
    
    a decrease of $0.5 million in variable compensation due to below-target order levels;
    
    an exchange rate driven decrease of $0.2 million due to average decreases of 11% in the
Japanese yen, 7% in the British pound and 8% in the Euro against the dollar.
   General and Administrative
  Interest income
  Provision for (benefit from) income taxes
  Comparison of the Six-Month Periods Ended March 31, 2006 and 2005
 Revenues
   
    
    North American revenues decreased by 31% to $7.2 million from $10.5 million;
    
    European revenues decreased by 26% to $7.1 million from $9.5 million;
    
    Japanese revenues decreased by 51% to $5.7 million from $11.6 million; and
    
    Rest of World revenues decreased by 14% to $2.9 million from $3.3 million.
 17




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Cost of Revenues
     Research and Development
  Sales and Marketing
  18




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##### Table of Contents




    
    a decrease of $1.1 million in variable compensation due to below-target order levels;
    
    an exchange rate driven decrease of $0.3 million due to average decreases of 10% in the
Japanese yen, 7% in the British pound and 8% in the Euro against the dollar.
   General and Administrative
  Interest income
  Provision for (benefit from) income taxes
  Liquidity and Capital Resources
    19




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Payments Due by PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 Years(In millions)Operating leases
    
    $
    3.2
    
    
    $
    1.1
    
    
    $
    1.6
    
    
    $
    0.5
    
    
    
    Unconditional purchase obligations
    
    $
    0.5
    
    
    $
    0.5
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    3.7
    
    
    $
    1.6
    
    
    $
    1.6
    
    
    $
    0.5
    
    
    
    
  Recent Accounting Pronouncements
  20




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Exchange Risk and Derivative Financial Instruments
    Interest Rate Risk
  
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
  21




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##### Table of Contents



Changes in internal control over financial reporting
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Risks Related to Our Business
 Our quarterly operating results may fluctuate significantly, and this may result in volatility in
the market price of our common stock.
  
    
    the variable size and timing of individual purchases by our customers;
    
    absence of long-term customer purchase contracts;
    
    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;
    
    the relatively long sales cycles for our products;
    
    competitive conditions in our markets;
    
    exchange rate fluctuations;
    
    the timing of the introduction and market acceptance of new products or product
enhancements by us and by our customers, competitors and suppliers;
    
    costs associated with developing and introducing new products;
    
    product life cycles;
    
    changes in the level of operating expenses relative to revenues;
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##### Table of Contents




    
    product defects and other quality problems;
    
    customer order deferrals in anticipation of new products;
    
    supply interruptions;
    
    changes in global or regional economic conditions or in the telecommunications industry;
    
    delays in purchasing decisions or customer orders due to customer consolidation;
    
    the ability to hire sales and technical personnel;
    
    changes in the mix of products sold;
    
    variability in stock-based compensation expense and the associated impact on our
effective tax rate; and
    
    changes in the regulatory environment.
    Our ability to deliver products that meet customer demand is dependent on our ability to meet new
and changing requirements for telecommunications test systems and services.
   Ô Ô Ô
  23




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##### Table of Contents



Our success depends on the timely development and introduction of new products.
  Historically, our revenues have been dependent upon a few significant customers, the loss of one
or more of which could significantly reduce our revenues.
  Our business is dependent on our customers outsourcing their telecommunications testing needs, and
our business could be harmed if the market for outsourced testing solutions declines or fails to
grow.
  If we do not effectively manage our growth, our business and operating results could be adversely
affected.
  24




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##### Table of Contents



We face foreign business, political and economic risks because a significant portion of our sales
is to customers outside the United States.
  
    
    longer customer payment cycles;
    
    greater difficulty in accounts receivable collection;
    
    difficulties in staffing and managing foreign operations;
    
    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.
  We face intense competition in our markets from more established test solutions providers, and if
we are unable to compete successfully we may not be able to maintain or grow our business.
  Our success depends on the continued growth of the telecommunications industry and increased use
of our test solutions, and lack of growth in this industry could harm our business.
   25




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Our business could be harmed if we were to lose the services of one or more members of our
senior management team, or if we are unable to attract and retain qualified personnel.
   We may not be able to achieve the anticipated benefits of any acquisitions we may make of other
companies, products or technologies.
  
    
    difficulties associated with assimilating the personnel and operations of acquired companies;
    
    potential disruption of our ongoing business;
    
    distraction of management and other resources;
    
    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;
    
    maintenance of uniform standards, controls, procedures and policies; and
    
    impairment of relationships with employees and clients as a result of the integration
of new management personnel.
  Many of our suppliers are sole source or single source suppliers, and our inability to obtain
adequate amounts of components from these suppliers could harm our business.
  26




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##### Table of Contents



We depend on a limited number of independent manufacturers, which reduces our ability to control
our manufacturing process.
  The high level of complexity and integration of our products increases the risk of latent defects,
which could damage customer relationships and increase our costs.
  We face exposure to product liability claims, which if successful could harm our business.
  Our success is dependent on our ability to protect our intellectual property, and our failure to
protect our intellectual property could have a significant adverse impact on our business.
  27




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##### Table of Contents



We could become subject to litigation regarding intellectual property, which could divert
management attention, be costly to defend and prevent us from using or selling the challenged
technology.
  Environmental laws and regulations subject us to a number of risks and could result in significant
liabilities and costs.
   Risks Related to Our Stock
 Our stock has been, and likely will continue to be, subject to substantial price and volume
fluctuations due to a number of factors, many of which will be beyond our control.
  28




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##### Table of Contents




    
    quarterly variations in our operating results;
    
    changes in our revenue growth rates 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 us or our competitors;
    
    speculation in the press or analyst community; and
    
    general market conditions or market conditions specific to particular industries.
  If we are unable to determine and demonstrate that we maintain effective internal control over
financial reporting, this may cause investors to lose confidence in our reported financial
information and the price of our stock could drop significantly.
  Sales of substantial amounts of our common stock by our major stockholders and others could
adversely affect the market price of our common stock.
  Our principal stockholder could prevent or delay a change in control.
  Provisions in our charter documents and Nevada law could prevent or delay a change in the control
of our company and may reduce the market price of our common stock.
  29




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
             
 Item 6. Exhibits
 31.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 30




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##### Table of Contents



SIGNATURE
  CATAPULT COMMUNICATIONS CORPORATIONDate: May 9, 2006
    
    
    
    By: /s/
    
    Christopher A. StephensonChristopher A. StephensonVice President and Chief Financial Officer(Principal Financial Officer)
 31




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description of Exhibit31.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.