##### 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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number 0-24701
 CATAPULT COMMUNICATIONS CORPORATION
  Nevada
    
    77-0086010(State or other jurisdiction of 
Incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 160 South Whisman Road
Mountain View, California 94041
 (650) 960-1025
  þ o
  o þ o
  o þ




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##### 



CATAPULT COMMUNICATIONS CORPORATION
  
 FORM 10-Q
 INDEX
 PagePart IFinancial InformationItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets as of March 31, 2007 and September 30, 2006
    
    
    1Unaudited Condensed Consolidated Statements of Operations for the three and six months ended March 31,
2007 and 2006
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2007
and 2006
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    19Part IIOther InformationItem 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 6. Exhibits
    
    
    27Signature
    
    
    27EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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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 30,2007
    
    
    2006(In thousands, except shareand par value data)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    29,375
    
    
    $
    22,462Short-term investments
    
    
    37,876
    
    
    
    47,672Accounts receivable, net of allowances of $16 and $15 as of
March 31, 2007 and September 30, 2006, respectively
    
    
    8,598
    
    
    
    9,696Inventories
    
    
    3,522
    
    
    
    3,484Deferred tax assets
    
    
    121
    
    
    
    91Prepaid expenses and other current assets
    
    
    1,677
    
    
    
    1,586Total current assets
    
    
    81,169
    
    
    
    84,991Property and equipment, net
    
    
    1,828
    
    
    
    1,912Goodwill
    
    
    49,394
    
    
    
    49,394Other intangibles, net
    
    
    180
    
    
    
    216Deferred tax assets, long-term
    
    
    993
    
    
    
    20Other assets
    
    
    2,079
    
    
    
    274Total assets
    
    $
    135,643
    
    
    $
    136,807LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    879
    
    
    $
    874Accrued liabilities
    
    
    4,314
    
    
    
    3,718Deferred revenue
    
    
    7,959
    
    
    
    7,703Total current liabilities
    
    
    13,152
    
    
    
    12,295Deferred revenue, long-term
    
    
    294
    
    
    
    256Deferred taxes and other liabilities, long-term
    
    
    3,771
    
    
    
    2,524Total liabilities
    
    
    17,217
    
    
    
    15,075Stockholders Equity:Common stock, $0.001 par value, 40,000,000 shares authorized; 13,929,335 and
14,438,206 issued and outstanding as of March 31, 2007 and September 30, 2006,
respectively
    
    
    14
    
    
    
    14Additional paid-in capital
    
    
    49,308
    
    
    
    50,450Accumulated other comprehensive income
    
    
    862
    
    
    
    687Retained earnings
    
    
    68,242
    
    
    
    70,581Total stockholders equity
    
    
    118,426
    
    
    
    121,732Total liabilities and stockholders equity
    
    $
    135,643
    
    
    $
    136,807
  1




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CATAPULT COMMUNICATIONS CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per share amounts)Revenues:Products
    
    $
    6,069
    
    
    $
    6,914
    
    
    $
    12,625
    
    
    $
    15,448Services
    
    
    3,524
    
    
    
    3,749
    
    
    
    7,535
    
    
    
    7,317Total revenues
    
    
    9,593
    
    
    
    10,663
    
    
    
    20,160
    
    
    
    22,765Cost of revenues:Products
    
    
    1,290
    
    
    
    1,245
    
    
    
    2,418
    
    
    
    2,433Services
    
    
    748
    
    
    
    956
    
    
    
    1,602
    
    
    
    2,018Amortization of purchased technology
    
    
    12
    
    
    
    172
    
    
    
    24
    
    
    
    343Total cost of revenues
    
    
    2,050
    
    
    
    2,373
    
    
    
    4,044
    
    
    
    4,794Gross profit
    
    
    7,543
    
    
    
    8,290
    
    
    
    16,116
    
    
    
    17,971Operating expenses:Research and development
    
    
    3,270
    
    
    
    3,433
    
    
    
    6,285
    
    
    
    6,515Sales and marketing
    
    
    3,941
    
    
    
    4,154
    
    
    
    8,232
    
    
    
    8,782General and administrative
    
    
    2,194
    
    
    
    2,321
    
    
    
    4,478
    
    
    
    4,748Total operating expenses
    
    
    9,405
    
    
    
    9,908
    
    
    
    18,995
    
    
    
    20,045Operating loss
    
    
    (1,862
    )
    
    
    (1,618
    )
    
    
    (2,879
    )
    
    
    (2,074
    )Interest income
    
    
    840
    
    
    
    620
    
    
    
    1,647
    
    
    
    1,240Other income, net (Note 13)
    
    
    1,835
    
    
    
    40
    
    
    
    1,828
    
    
    
    53Income (loss) before income taxes
    
    
    813
    
    
    
    (958
    )
    
    
    596
    
    
    
    (781
    )Provision for (benefit from) income taxes
    
    
    749
    
    
    
    (169
    )
    
    
    976
    
    
    
    (135
    )Net income (loss)
    
    $
    64
    
    
    $
    (789
    )
    
    $
    (380
    )
    
    $
    (646
    )Net income (loss) per share  basic
    
    $
    0.00
    
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.04
    )Net income (loss) per share  diluted
    
    $
    0.00
    
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.04
    )Shares used in per share calculation:Basic
    
    
    13,970
    
    
    
    14,784
    
    
    
    14,037
    
    
    
    14,763Diluted
    
    
    14,025
    
    
    
    14,784
    
    
    
    14,037
    
    
    
    14,763
  2




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CATAPULT COMMUNICATIONS CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six months endedMarch 31,2007
    
    
    2006(In thousands)Cash flows from operating activities:Net loss as reported
    
    $
    (380
    )
    
    $
    (646
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization of property and equipment
    
    
    432
    
    
    
    477Amortization of purchased technology
    
    
    24
    
    
    
    343Amortization of other acquisition related intangibles
    
    
    12
    
    
    
    168Amortization of deferred stock-based compensation
    
    
    
    
    
    
    3Provision for doubtful accounts
    
    
    1
    
    
    
    Deferred income taxes
    
    
    250
    
    
    
    (351
    )Stock based compensation expenses
    
    
    1,370
    
    
    
    1,054Excess tax benefits from stock options exercised
    
    
    
    
    
    
    (35
    )Total tax benefits related to stock based compensation
    
    
    
    
    
    
    80Gain on disposal of fixed assets
    
    
    (15
    )
    
    
    Change in assets and liabilities:Accounts receivable
    
    
    1,097
    
    
    
    2,341Inventories
    
    
    (37
    )
    
    
    (1,405
    )Prepaid expenses and other current assets
    
    
    (84
    )
    
    
    (419
    )Other assets
    
    
    (1,805
    )
    
    
    24Accounts payable
    
    
    (10
    )
    
    
    (583
    )Accrued liabilities
    
    
    567
    
    
    
    (1,403
    )Deferred revenue
    
    
    294
    
    
    
    3,185Net cash provided by operating activities
    
    
    1,716
    
    
    
    2,833Cash flows from investing activities:Sale and maturities of short-term investments
    
    
    55,683
    
    
    
    44,888Purchase of short-term investments
    
    
    (45,888
    )
    
    
    (48,926
    )Purchase of property and equipment
    
    
    (354
    )
    
    
    (708
    )Proceeds from sale of property and equipment
    
    
    60
    
    
    
    Net cash provided by (used in) investing activities
    
    
    9,501
    
    
    
    (4,746
    )Cash flows from financing activities:Repurchase of common stock
    
    
    (4,482
    )
    
    
    Proceeds from exercise of stock options
    
    
    10
    
    
    
    576Excess tax benefit from stock options exercised
    
    
    
    
    
    
    35Net cash provided by (used in) financing activities
    
    
    (4,472
    )
    
    
    611Effect of exchange rate changes on cash and cash equivalents
    
    
    168
    
    
    
    (94
    )Net increase (decrease) in cash and cash equivalents
    
    
    6,913
    
    
    
    (1,396
    )Cash and cash equivalents, beginning of period
    
    
    22,462
    
    
    
    18,952Cash and cash equivalents, end of period
    
    $
    29,375
    
    
    $
    17,556Supplemental disclosure of cash flow information:Unrealized gain (loss) on investments
    
    $
    (2
    )
    
    $
    40Cash paid for income taxes
    
    
    193
    
    
    
    634Non-cash investing activities:Purchase of property and equipment on account
    
    $
    12
    
    
    $
    11
  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
   Significant Accounting Policies
  NOTE 2RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109
 Fair Value Measurements.
 Financial Statements  Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
 4




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The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment
of FASB Statement No. 115
 NOTE 3  STOCK-BASED COMPENSATION
 Share-Based Payment,
 Stock-based Compensation Expense
  Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Stock-Based Compensation Expense:Cost of sales  products
    
    $
    28
    
    
    $
    19
    
    
    $
    63
    
    
    $
    41Cost of sales  services
    
    
    51
    
    
    
    34
    
    
    
    117
    
    
    
    72Research and development expense
    
    
    177
    
    
    
    118
    
    
    
    324
    
    
    
    250Selling and marketing expense
    
    
    142
    
    
    
    118
    
    
    
    314
    
    
    
    276General and administrative expense
    
    
    244
    
    
    
    191
    
    
    
    552
    
    
    
    415Total stock-based compensation expense
    
    
    642
    
    
    
    480
    
    
    
    1,370
    
    
    
    1,054Tax effect on stock-based compensation expenses
    
    
    (4
    )
    
    
    (155
    )
    
    
    (9
    )
    
    
    (347
    )Net effect on net income
    
    $
    638
    
    
    $
    325
    
    
    $
    1,361
    
    
    $
    707Net effect on basic net income (loss) per share
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.05Net effect on diluted net income (loss) per share
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.05
 5




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##### Table of Contents



General Option Information
  WeightedAverageNumber of
    
    
    Weighted
    
    
    RemainingOptions
    
    
    Average
    
    
    Contractual
    
    
    AggregateOutstanding
    
    
    Exercise Price
    
    
    Term
    
    
    Intrinsic Value(years)
    
    
    (in thousands)Balance at October 1, 2006
    
    
    2,334,867
    
    
    $
    15.14
    
    
    
    6.95
    
    
    $
    569Granted
    
    
    139,021
    
    
    
    8.70Exercised
    
    
    (2,580
    )
    
    
    3.69Canceled, forfeited or expired
    
    
    (174,919
    )
    
    
    17.04Balance, March 31, 2007
    
    
    2,296,389
    
    
    $
    14.62
    
    
    
    6.43
    
    
    $
    1,001Vested or expected to vest, March 31, 2007
    
    
    2,215,323
    
    
    $
    14.71
    
    
    
    6.43
    
    
    $
    972Exercisable, March 31, 2007
    
    
    1,641,941
    
    
    $
    15.53
    
    
    
    5.49
    
    
    $
    836
   Three months ended
    
    Six months endedMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Weighted
average exercise
price
    
    $
    8.64
    
    
    $
    11.79
    
    
    $
    8.70
    
    
    $
    15.47Weighted average
fair value
    
    $
    4.41
    
    
    $
    7.19
    
    
    $
    4.61
    
    
    $
    9.36
  Valuation Assumptions
  Employee Stock Option PlansThree months ended
    
    Six months endedMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Expected life of
option
    
    4.12 years
    
    5.42 years
    
    4.48 years
    
    5.42 yearsExpected volatility
    
    
    61.2
    %
    
    
    66.0
    %
    
    
    61.6
    %
    
    
    66.0
    %Dividend
yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest
rate
    
    
    4.82
    %
    
    
    4.47
    %
    
    
    4.60
    %
    
    
    4.50
    %
 Expected life of option
 6




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Expected Volatility
 Expected Dividend
 Risk-Free Interest Rate
 NOTE 4  BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
 Earnings per Share
 Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per share amounts)Net income (loss), as
reported for basic and diluted
earnings per
share
    
    $
    64
    
    
    $
    (789
    )
    
    $
    (380
    )
    
    $
    (646
    )Weighted average shares
outstanding
    
    
    13,970
    
    
    
    14,784
    
    
    
    14,037
    
    
    
    14,763Dilutive
options
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares assuming
dilution
    
    
    14,025
    
    
    
    14,784
    
    
    
    14,037
    
    
    
    14,763Net income (loss) per share:Basic
    
    $
    0.00
    
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.04
    )Diluted
    
    $
    0.00
    
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.04
    )
  Three months ended
    
    Six months endedMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006(In thousands)Common stock
options
    
    
    2,285
    
    
    
    1,943
    
    
    
    2,235
    
    
    
    1,926
 NOTE 5  INVENTORIES
  March 31,
    
    
    September 30,2007
    
    
    2006(In thousands)Inventories:Raw materials
    
    $
    2,983
    
    
    $
    2,860Work-in-process
    
    
    155
    
    
    
    241Finished goods
    
    
    384
    
    
    
    383$
    3,522
    
    
    $
    3,484
 7




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NOTE 6  GOODWILL AND INTANGIBLE ASSETS
   As of March 31, 2007
    
    
    As of September 30, 2006Gross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Net Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    Amount(In thousands)Purchased technology
    
    $
    4,800
    
    
    $
    (4,682
    )
    
    $
    118
    
    
    $
    4,800
    
    
    $
    (4,658
    )
    
    $
    142Trade names
    
    
    1,000
    
    
    
    (975
    )
    
    
    25
    
    
    
    1,000
    
    
    
    (970
    )
    
    
    30Customer relationships
    
    
    1,000
    
    
    
    (975
    )
    
    
    25
    
    
    
    1,000
    
    
    
    (970
    )
    
    
    30Non-compete agreement
    
    
    400
    
    
    
    (388
    )
    
    
    12
    
    
    
    400
    
    
    
    (386
    )
    
    
    14System backlog
    
    
    400
    
    
    
    (400
    )
    
    
    
    
    
    
    400
    
    
    
    (400
    )
    
    
    Total
    
    $
    7,600
    
    
    $
    (7,420
    )
    
    $
    180
    
    
    $
    7,600
    
    
    $
    (7,384
    )
    
    $
    216
  EstimatedAmortizationFiscal Year
    
    Expense(In thousands)2007 (remaining six months)
    
    $
    372008
    
    
    73Thereafter
    
    
    70Total
    
    $
    180
 NOTE 7  WARRANTY ACCRUAL
  2007
    
    
    2006(In thousands)Balances at beginning of period
    
    $
    
    
    
    $
    74Utilized
    
    
    
    
    
    
    (27
    )Charged (reduction) to cost and expenses
    
    
    
    
    
    
    14Balances at end of quarter
    
    $
    
    
    
    $
    61
 NOTE 8  INCOME TAXES
  8




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NOTE 9  STOCKHOLDERS EQUITY
 Comprehensive Income (loss)
  Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Net income (loss), as reported
    
    $
    64
    
    
    $
    (789
    )
    
    $
    (380
    )
    
    $
    (646
    )Currency translation adjustment
    
    
    49
    
    
    
    15
    
    
    
    177
    
    
    
    (97
    )Unrealized gains (losses) on
investments
    
    
    (1
    )
    
    
    7
    
    
    
    (2
    )
    
    
    40Comprehensive income (loss)
    
    $
    112
    
    
    $
    (767
    )
    
    $
    (205
    )
    
    $
    (703
    )
 Stock Option Plans
  Employee Stock Purchase Plan
  Repurchase of Common Stock
  NOTE 10  GEOGRAPHICAL INFORMATION
  9




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##### Table of Contents



North
    
    UK, Europe &
    
    
    
    
    
    
    
    
    
    ConsolidatedAmerica
    
    Middle East
    
    Japan
    
    Other
    
    Total(In thousands)Six months ended March 31, 2007Revenues from unaffiliated customers
    
    $
    5,256
    
    
    $
    5,984
    
    
    $
    5,746
    
    
    $
    3,174
    
    
    $
    20,160Six months ended March 31, 2006Revenues from unaffiliated customers
    
    $
    7,194
    
    
    $
    7,066
    
    
    $
    5,654
    
    
    $
    2,851
    
    
    $
    22,765As of March 31, 2007Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    $
    
    
    
    $
    
    
    
    $
    49,394Long-lived assets
    
    $
    1,039
    
    
    $
    433
    
    
    $
    241
    
    
    $
    115
    
    
    $
    1,828As of September 30, 2006Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    $
    
    
    
    $
    
    
    
    $
    49,394Long-lived assets
    
    $
    1,153
    
    
    $
    394
    
    
    $
    244
    
    
    $
    121
    
    
    $
    1,912
   NOTE 11  CUSTOMER INFORMATION
  Percentage of RevenuesPercentage of Accounts Receivable as of
    
    Three months ended
    
    Six months endedMarch 31,
    
    September 30,
    
    March 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006
    
    2007
    
    2006Customer A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    %
    
    
    
    
    
    
    11
    %Customer B
    
    
    
    
    
    
    10
    %
    
    
    11
    %
    
    
    13
    %
    
    
    
    
    
    
    Customer C
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    %
    
    
    
    
    
    
    Customer D
    
    
    
    
    
    
    38
    %
    
    
    12
    %
    
    
    12
    %
    
    
    15
    %
    
    
    Customer E
    
    
    11
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    %Customer F
    
    
    16
    %
    
    
    
    
    
    
    14
    %
    
    
    
    
    
    
    10
    %
    
    
    Customer G
    
    
    10
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 NOTE 12  CONTINGENCIES
  10




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Accounting for Contingencies
 NOTE 13  LEGAL SETTLEMENT
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Forward-looking Statements
    Overview
 Our Business and Products
 ® ®
 11




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
    
    design and feature verification;
    
    conformance testing;
    
    interoperability testing;
    
    load and stress testing; and
    
    monitoring and analysis.
   
    
    WiMAX;
    
    IP Multimedia Subsystem (IMS);
    
    Third and Fourth Generation Cellular (3G and 4G), including UMTS and cdma2000;
    
    General Packet Radio Service (GPRS);
    
    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
  12




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##### Table of Contents



Summary of Our Financial Performance in the Second Quarter of Fiscal 2007
   Critical Accounting Policies and Estimates
  Results of Operations
  Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Products
    
    
    63.3
    %
    
    
    64.8
    %
    
    
    62.6
    %
    
    
    67.9
    %Services
    
    
    36.7
    
    
    
    35.2
    
    
    
    37.4
    
    
    
    32.1Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenues:Products
    
    
    13.5
    
    
    
    11.7
    
    
    
    12.0
    
    
    
    10.7Services
    
    
    7.8
    
    
    
    9.0
    
    
    
    8.0
    
    
    
    8.9Amortization of purchased technology
    
    
    0.1
    
    
    
    1.6
    
    
    
    0.1
    
    
    
    1.5Total cost of revenues
    
    
    21.4
    
    
    
    22.3
    
    
    
    20.1
    
    
    
    21.1Gross profit
    
    
    78.6
    
    
    
    77.7
    
    
    
    79.9
    
    
    
    78.9Operating expenses:Research and development
    
    
    34.1
    
    
    
    32.2
    
    
    
    31.2
    
    
    
    28.6Sales and marketing
    
    
    41.1
    
    
    
    38.9
    
    
    
    40.8
    
    
    
    38.6General and administrative
    
    
    22.8
    
    
    
    21.8
    
    
    
    22.2
    
    
    
    20.8Total operating expenses
    
    
    98.0
    
    
    
    92.9
    
    
    
    94.2
    
    
    
    88.0Operating loss
    
    
    (19.4
    )
    
    
    (15.2
    )
    
    
    (14.3
    )
    
    
    (9.1
    )Interest income
    
    
    8.8
    
    
    
    5.8
    
    
    
    8.2
    
    
    
    5.5Other income, net
    
    
    19.1
    
    
    
    0.4
    
    
    
    9.1
    
    
    
    0.2Income (loss) before income taxes
    
    
    8.5
    
    
    
    (9.0
    )
    
    
    3.0
    
    
    
    (3.4
    )Provision for (benefit from) income taxes
    
    
    7.8
    
    
    
    (1.6
    )
    
    
    4.9
    
    
    
    0.6Net income (loss)
    
    
    0.7
    %
    
    
    (7.4
    %)
    
    
    (1.9
    )%
    
    
    (2.8
    %)Gross profit margin on products
products
    
    
    78.7
    %
    
    
    82.0
    %
    
    
    80.9
    %
    
    
    84.3
    %Gross profit margin on services
    
    
    78.8
    %
    
    
    74.5
    %
    
    
    78.7
    %
    
    
    72.4
    %
  13




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Comparison of the Three-Month Periods Ended March 31, 2007 and 2006
 Revenues
   
    
    North American revenues decreased by 19% to $2.3 million from $2.9 million;
    
    European revenues decreased by 27% to $2.3 million from $3.2 million;
    
    Japanese revenues decreased by 13% to $3.6 million from $4.1 million; and
    
    Rest of World revenues increased by 179% to $1.3 million from $0.5 million.
  Cost of Revenues
     Research and Development
  Sales and Marketing
  14




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General and Administrative
  Interest income
  Other income, net
  Provision for (benefit from) income taxes
  Comparison of the Six-Month Periods Ended March 31, 2007 and 2006
 Revenues
   
    
    North American revenues decreased by 27% to $5.3 million from $7.2 million;
    
    European revenues decreased by 15% to $6.0 million from $7.1 million;
    
    Japanese revenues remained substantially unchanged at $5.7 million; and
    
    Rest of World revenues increased by 11% to $3.2 million from $2.9 million.
 15




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Cost of Revenues
     Research and Development
  Sales and Marketing
  General and Administrative
  Interest income
  16




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Other income, net
  Provision for (benefit from) income taxes
  Liquidity and Capital Resources
       17




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##### Table of Contents



Payments Due by PeriodLess Than
    
    
    2-3
    
    
    4-5
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 Years(In millions)Operating leases
    
    $
    3.1
    
    
    $
    1.6
    
    
    $
    1.3
    
    
    $
    0.2
    
    
    $
    Unconditional purchase obligations
    
    
    0.2
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    3.3
    
    
    $
    1.8
    
    
    $
    1.3
    
    
    $
    0.2
    
    
    $
    
   Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Exchange Risk and Derivative Financial Instruments
    Interest Rate Risk
  18




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Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
   Changes in internal control over financial reporting.
  
    
    The Companys Chief Financial Officer performs a detailed quarterly review to confirm
that the Companys accounting for its cash, cash equivalents and short-term investments is
in accordance with the requirements of generally accepted accounting principles in the
United States.
   
 Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  19




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##### Table of Contents



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, including delays
in customer purchasing decisions or orders due to customer consolidation;
    
    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;
    
    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;
    
    asset impairment, valuation allowance and restructuring charges;
    
    changes in our tax rate;
    
    adverse results from current or future litigation;
    
    changes in the mix of products sold; and
    
    changes in the regulatory environment.
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##### Table of Contents



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
  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 as a result of competition or industry consolidation 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.
  21




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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.
   22




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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;
    
    impairment of goodwill or other long-lived assets acquired due to a failure to generate
the levels of cash flow anticipated at the acquisition date; and
    
    impairment of relationships with employees and clients as a result of the integration
of new management personnel.
  The inability to successfully defend claims from taxing authorities could adversely affect our
operating results and financial position.
  We are a defendant in a lawsuit with a distributor in Belgium, and an adverse result in this
matter could require us to pay significant damages.
  23




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##### Table of Contents



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.
  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.
  24




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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.
  25




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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.
  26




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Repurchases of Common StockTotal Number of
    
    Maximum NumberTotal
    
    
    
    
    
    Shares Purchased
    
    of Shares that MayNumber
    
    Average
    
    as Part of Publicly
    
    Yet Be Purchasedof Shares
    
    Price Paid
    
    Announced
    
    Under the PlansPurchased
    
    Per Share (1)
    
    Plans or Programs
    
    Or ProgramsJanuary 1, 2007 - January 31, 2007
    
    
    14,816
    
    
    $
    9.46
    
    
    
    14,816
    
    
    
    1,921,715February 1, 2007  February 28, 2007
    
    
    79,517
    
    
    $
    9.17
    
    
    
    79,517
    
    
    
    1,842,198March 1, 2007 - March 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total for the Quarter
    
    
    94,333
    
    
    $
    9.22
    
    
    
    94,333
    
    
    
    1,842,198
 
 (1)
    
    Average price paid per share includes brokerage commission  
 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.
 
 SIGNATURE
  CATAPULT COMMUNICATIONS CORPORATIONDate: May 10, 2007
    
    
    
    By:
    
    /s/ Christopher A. StephensonChristopher A. StephensonVice President and Chief Financial Officer(Principal Financial Officer)
 27