##### Table of Contents



FORM 10-Q
 UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2005
 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 at December 31, 2005 and September 30, 2005
    
    
    1Unaudited Condensed Consolidated Statements of Income for the three months ended December 31,
2005 and 2004
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended
December 31, 2005 and 2004
    
    
    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
    
    
    19Item 4. Controls and Procedures
    
    
    19Part IIOther InformationItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 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
 December 31,
    
    
    September 30,2005
    
    
    2005(In thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    23,469
    
    
    $
    24,852Short-term investments
    
    
    48,159
    
    
    
    43,955Accounts receivable, net
    
    
    12,600
    
    
    
    14,724Inventories
    
    
    4,187
    
    
    
    3,104Deferred income taxes
    
    
    801
    
    
    
    603Prepaid expenses
    
    
    893
    
    
    
    1,401Total current assets
    
    
    90,109
    
    
    
    88,639Property and equipment, net
    
    
    1,696
    
    
    
    1,693Goodwill
    
    
    49,394
    
    
    
    49,394Other intangibles, net
    
    
    3,795
    
    
    
    4,051Other assets
    
    
    3,952
    
    
    
    3,983Total assets
    
    $
    148,946
    
    
    $
    147,760LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,633
    
    
    $
    1,547Accrued liabilities
    
    
    4,686
    
    
    
    5,508Deferred revenue
    
    
    8,502
    
    
    
    7,697Total current liabilities
    
    
    14,821
    
    
    
    14,752Deferred revenue, long-term portion
    
    
    403
    
    
    
    485Total liabilities
    
    
    15,224
    
    
    
    15,237Stockholders Equity:Common stock
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    50,075
    
    
    
    48,944Deferred stock-based compensation
    
    
    
    
    
    
    (3
    )Accumulated other comprehensive income
    
    
    507
    
    
    
    587Retained earnings
    
    
    83,125
    
    
    
    82,980Total stockholders equity
    
    
    133,722
    
    
    
    132,523Total liabilities and stockholders equity
    
    $
    148,946
    
    
    $
    147,760
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CATAPULT COMMUNICATIONS CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Three months endedDecember 31,2005
    
    
    2004(In thousands, exceptper share amounts)Revenues:Products
    
    $
    8,534
    
    
    $
    12,373Services
    
    
    3,568
    
    
    
    3,498Total revenues
    
    
    12,102
    
    
    
    15,871Cost of revenues:Products
    
    
    1,188
    
    
    
    1,242Services
    
    
    1,062
    
    
    
    821Amortization of purchased technology
    
    
    171
    
    
    
    171Total cost of revenues
    
    
    2,421
    
    
    
    2,234Gross profit
    
    
    9,681
    
    
    
    13,637Operating expenses:Research and development
    
    
    3,083
    
    
    
    2,971Sales and marketing
    
    
    4,627
    
    
    
    4,703General and administrative
    
    
    2,427
    
    
    
    1,906Total operating expenses
    
    
    10,137
    
    
    
    9,580Operating income (loss)
    
    
    (456
    )
    
    
    4,057Interest income
    
    
    620
    
    
    
    224Other income, net
    
    
    13
    
    
    
    7Income before income taxes
    
    
    177
    
    
    
    4,288Provision for income taxes
    
    
    34
    
    
    
    475Net income
    
    $
    143
    
    
    $
    3,813Net income
per share  basic
    
    $
    0.01
    
    
    $
    0.26Net income
per share  diluted
    
    $
    0.01
    
    
    $
    0.25Shares used in per share calculation:Basic
    
    
    14,743
    
    
    
    14,600Diluted
    
    
    15,006
    
    
    
    15,147
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CATAPULT COMMUNICATIONS CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three months endedDecember 31,2005
    
    
    2004(In thousands)Cash flows from operating activities:Net income as reported
    
    $
    143
    
    
    $
    3,813Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization of property and equipment
    
    
    212
    
    
    
    446Stock based compensation expenses
    
    
    574
    
    
    
    3⁄4Excess tax benefits from stock options exercised
    
    
    (34
    )
    
    
    3⁄4Total tax benefits related to stock based compensation
    
    
    79
    
    
    
    3⁄4Amortization of deferred stock-based compensation
    
    
    3
    
    
    
    9Amortization of purchased technology
    
    
    171
    
    
    
    171Amortization of other acquisition related intangibles
    
    
    84
    
    
    
    84Deferred income taxes
    
    
    (201
    )
    
    
    62Change in assets and liabilities:Accounts receivable
    
    
    2,137
    
    
    
    (4,728
    )Inventories
    
    
    (1,099
    )
    
    
    (201
    )Prepaid expenses
    
    
    490
    
    
    
    418Other assets
    
    
    30
    
    
    
    1Accounts payable
    
    
    96
    
    
    
    (385
    )Accrued liabilities
    
    
    (789
    )
    
    
    158Deferred revenue
    
    
    723
    
    
    
    3,023Net cash provided by operating activities
    
    
    2,619
    
    
    
    2,871Cash flows from investing activities:Sale and maturities of short-term investments
    
    
    16,242
    
    
    
    6,856Purchase of short-term investments
    
    
    (20,413
    )
    
    
    (8,658
    )Purchase of property and equipment
    
    
    (234
    )
    
    
    (155
    )Net cash used in investing activities
    
    
    (4,405
    )
    
    
    (1,957
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    479
    
    
    
    1,389Excess tax benefit from stock-based compensation
    
    
    34
    
    
    
    3⁄4Net cash provided by financing activities
    
    
    513
    
    
    
    1,389Effect of exchange rate changes on cash and cash equivalents
    
    
    (110
    )
    
    
    219Net increase (decrease) in cash and cash equivalents
    
    
    (1,383
    )
    
    
    2,522Cash and cash equivalents, beginning of period
    
    
    24,852
    
    
    
    20,108Cash and cash equivalents, end of period
    
    $
    23,469
    
    
    $
    22,630Unrealized gain (loss) on investments
    
    $
    33
    
    
    $
    (16
    )
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CATAPULT COMMUNICATIONS CORPORATION
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1THE COMPANY AND BASIS OF PRESENTATION
   Reclassification of Short-Term Investments
    Accounting for Certain
Investments in Debt and Equity Securities.
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NOTE 2RECENT ACCOUNTING PRONOUNCEMENTS
 Transition Election to Accounting for the
Tax Effects of Share-Based Payment Awards. Share-Based Payment
 NOTE 3  STOCK-BASED COMPENSATION
 Share-Based
Payment, Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation
  Stock-based Compensation Expense
  5




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Three months endedDecember 31, 2005(in thousands)Stock-based Compensation Expense:Cost of
sales  products
    
    $
    22Cost of
sales  services
    
    
    38Research and development
    
    
    132Selling and marketing expense
    
    
    158General and administrative expense
    
    
    224Total stock-based compensation expense
    
    
    574Tax effect on stock-based compensation expenses
    
    
    (192
    )Net effect on net income
    
    $
    382
 Valuation Assumptions
 Expected life of option
 Expected Volatility
 Expected Dividend
 Risk-Free Interest Rate
  Employee Stock Option Plans
    
    Employee Stock Purchase PlanThree months ended
    
    Three months endedDecember 31,
    
    December 31,2005
    
    2004
    

2005*
    
    2004Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Expected life of option
    
    5.4 years
    
    2.67 years
    
    
    
    
    
    0.5 yearsRisk-free interest rate
    
    
    4.51
    %
    
    
    3.08
    %
    
    
    
    
    
    
    1.68
    %Expected volatility
    
    
    88.5
    %
    
    
    83.4
    %
    
    
    
    
    
    
    58.5
    %* The Company terminated its ESPP plan effective
November 1, 2005.
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Three months endedDecember 31, 2004(In thousands, exceptper share amounts)Net income, as
reported for basic and
diluted earnings per
share
    
    $
    3,813Add: Stock-based employee
compensation expense
included in reported net
income, net of related tax
effects
    
    
    8Deduct: Total stock-based
employee compensation
expense determined under
fair-value based method for
all awards, net of related
tax
effects
    
    
    (678
    )Pro forma net
income
    
    $
    3,143Net income per share:Basic net income per
share as
reported
    
    $
    0.26Basic net income per
share pro
forma
    
    $
    0.22Diluted net income per
share as
reported
    
    $
    0.25Diluted net income per
share pro
forma
    
    $
    0.21
 Stock Option Plans
   WeightedAverageNumber of
    
    
    
    
    
    
    Remaining
    
    
    AggregateOptions
    
    
    Weighted Average
    
    
    Contractual
    
    
    Intrinsic ValueOutstanding
    
    
    Exercise Price
    
    
    Term (years)
    
    
    (in thousands)Balance at September 30, 2005
    
    
    1,956,029
    
    
    $
    15.56Options granted
    
    
    53,562
    
    
    $
    16.80Options exercised
    
    
    (28,405
    )
    
    $
    9.93Options canceled or expired
    
    
    (8,852
    )
    
    $
    16.23Balance, December 31, 2005
    
    
    1,972,334
    
    
    $
    15.67
    
    
    
    6.9
    
    
    $
    3,898Exercisable, December 31, 2005
    
    
    1,463,193
    
    
    $
    16.40
    
    
    
    7.1
    
    
    $
    2,715
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Employee Stock Purchase Plan
  NOTE 4  BASIC AND DILUTED NET INCOME PER SHARE
 Earnings per
Share
 Three months endedDecember 31,2005
    
    
    2004(In thousands, exceptper share amounts)Net income, as reported for basic and diluted earnings per share
    
    $
    143
    
    
    $
    3,813Weighted average shares outstanding
    
    
    14,743
    
    
    
    14,600Dilutive options
    
    
    263
    
    
    
    547Weighted average shares assuming dilution
    
    
    15,006
    
    
    
    15,147Net income per share:Basic
    
    $
    0.01
    
    
    $
    0.26Diluted
    
    $
    0.01
    
    
    $
    0.25
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Three months endedDecember 31,2005
    
    
    2004(in thousands)Common stock
options
    
    
    932
    
    
    
    17
 NOTE 5  INVENTORIES
  December 31,
    
    
    September 30,2005
    
    
    2005(In thousands)Inventories:Raw materials
    
    $
    3,293
    
    
    $
    2,600Work-in-process
    
    
    533
    
    
    
    231Finished goods
    
    
    361
    
    
    
    273$
    4,187
    
    
    $
    3,104
 NOTE 6  GOODWILL AND INTANGIBLE ASSETS
   As of December 31, 2005
    
    
    As of September 30, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    Amount(In thousands)Purchased technology
    
    $
    4,800
    
    
    $
    (2,286
    )
    
    $
    2,514
    
    
    $
    4,800
    
    
    $
    (2,115
    )
    
    $
    2,685Trade names
    
    
    1,000
    
    
    
    (476
    )
    
    
    524
    
    
    
    1,000
    
    
    
    (440
    )
    
    
    560Customer relationships
    
    
    1,000
    
    
    
    (476
    )
    
    
    524
    
    
    
    1,000
    
    
    
    (440
    )
    
    
    560Non-compete agreement
    
    
    400
    
    
    
    (167
    )
    
    
    233
    
    
    
    400
    
    
    
    (154
    )
    
    
    246System backlog
    
    
    400
    
    
    
    (400
    )
    
    
    
    
    
    
    400
    
    
    
    (400
    )
    
    
    Total
    
    $
    7,600
    
    
    $
    (3,805
    )
    
    $
    3,795
    
    
    $
    7,600
    
    
    $
    (3,549
    )
    
    $
    4,051
 9




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EstimatedAmortizationFiscal Year
    
    Expense(In thousands)2006 (remaining 9 months)
    
    $
    7662007
    
    
    1,0222008
    
    
    1,0212009
    
    
    986Total
    
    $
    3,795
 NOTE 7  WARRANTY ACCRUAL
  2005
    
    
    2004(In thousands)Balances at beginning of year
    
    $
    74
    
    
    $
    69Utilized
    
    
    (7
    )
    
    
    (18
    )Charged (reduction) to cost and expenses
    
    
    (3
    )
    
    
    33Balances at end of quarter
    
    $
    64
    
    
    $
    84
 NOTE 8  INCOME TAXES
  NOTE 9  COMPREHENSIVE INCOME
  Three months endedDecember 31,2005
    
    
    2004(in thousands)Net income, as reported
    
    $
    143
    
    
    $
    3,813Currency translation adjustment
    
    
    (112
    )
    
    
    183Unrealized gains (losses) on investments
    
    
    33
    
    
    
    (16
    )Comprehensive income
    
    $
    64
    
    
    $
    3,980
 NOTE 10  REPURCHASE OF COMMON STOCK
  10




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NOTE 11  GEOGRAPHICAL INFORMATION
 Disclosures About Segments of an Enterprise and
Related Information
   North
    
    
    
    
    
    
    
    
    
    Rest of
    
    
    ConsolidatedAmerica
    
    

Europe
    
    
    Japan
    
    
    World
    
    
    Total(In thousands)Three months ended December 31, 2005Revenues from unaffiliated customers
    
    $
    4,325
    
    
    $
    3,853
    
    
    $
    1,557
    
    
    $
    2,367
    
    
    $
    12,102Three months ended December 31, 2004Revenues from unaffiliated customers
    
    $
    6,531
    
    
    $
    4,892
    
    
    $
    3,243
    
    
    $
    1,205
    
    
    $
    15,871As of December 31, 2005Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    
    
    
    
    
    
    
    
    $
    49,394Long-lived assets
    
    
    851
    
    
    
    588
    
    
    $
    257
    
    
    
    
    
    
    
    1,696As of September 30, 2005Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    
    
    
    
    
    
    
    
    $
    49,394Long-lived assets
    
    
    950
    
    
    
    479
    
    
    $
    264
    
    
    
    
    
    
    
    1,693
   NOTE 12  CUSTOMER INFORMATION
  11




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Percentage of Accounts
    
    Percentage of RevenuesReceivable as of
    
    For the three months endedDecember 31,
    
    September 30,
    
    December 31,
    
    December 31,2005
    
    2005
    
    2005
    
    2004Customer A
    
    
    19
    %
    
    
    < 10
    %
    
    
    11
    %
    
    
    <10
    %Customer B
    
    
    < 10
    %
    
    
    14
    %
    
    
    <10
    %
    
    
    17
    %Customer C
    
    
    < 10
    %
    
    
    13
    %
    
    
    <10
    %
    
    
    <10
    %Customer D
    
    
    12
    %
    
    
    20
    %
    
    
    <10
    %
    
    
    <10
    %Customer E
    
    
    12
    %
    
    
    <10
    %
    
    
    20
    %
    
    
    13
    %Customer F
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    10
    %
 NOTE 13  CONTINGENCIES
   Accounting for Contingencies
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  12




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Forward-looking Statements
    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);
    
    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).
  13




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Conditions and Trends in Our Industry
   Summary of Our Financial Performance in the First Quarter of Fiscal 2006
   
    
    In Japan, revenues decreased by 52% or $1.7 million, 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 a 10% decrease in the value of the yen, in which
all our revenues in Japan are denominated.
    
    In regions outside Japan, we were unable to recognize $2.5 million in revenue due to
engineering delays resulting from the length of time and level of resources required to
complete our common hardware platform.
    
    Our overall gross profit margin decreased by six percentage points due to increases in
hardware component costs and services demonstration equipment costs as a percentage of the
related revenues.
    
    In the first quarter of fiscal 2006, we recorded $0.6 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
  14




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Stock-Based Compensation
 Share-Based Payment
 Results of Operations
  For the three monthsended December 312005
    
    
    2004Revenues:Products
    
    
    70.5
    %
    
    
    78.0
    %Services
    
    
    29.5
    
    
    
    22.0Total revenues
    
    
    100.0
    
    
    
    100.0Cost of revenues:Products
    
    
    9.8
    
    
    
    7.8Services
    
    
    8.8
    
    
    
    5.2Amortization of purchased technology
    
    
    1.4
    
    
    
    1.1Total cost of revenues
    
    
    20.0
    
    
    
    14.1Gross profit
    
    
    80.0
    
    
    
    85.9Operating expenses:Research and development
    
    
    25.5
    
    
    
    18.7Sales and marketing
    
    
    38.2
    
    
    
    29.6General and administrative
    
    
    20.1
    
    
    
    12.0Total operating expenses
    
    
    83.8
    
    
    
    60.3Operating income (loss)
    
    
    (3.8
    )
    
    
    25.6Interest income
    
    
    5.2
    
    
    
    1.4Other income, net
    
    
    0.1
    
    
    
    Income before income taxes
    
    
    1.5
    
    
    
    27.0Provision for income taxes
    
    
    0.3
    
    
    
    3.0Net income
    
    
    1.2
    %
    
    
    24.0
    %Gross profit margin on products
products
    
    
    86.1
    %
    
    
    90.0
    %Gross profit margin on services
    
    
    70.2
    %
    
    
    76.5
    %
  Comparison of the Three-Month Periods Ended December 31, 2005 and 2004
 Revenues
  15




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
    
    North American revenues decreased by 34% from $6.5 million to $4.3 million;
    
    European revenues decreased by 21% from $4.9 million to $3.9 million;
    
    Japanese revenues decreased by 52% from $3.2 million to $1.6 million; and
    
    Rest of World revenues increased by 96% from $1.2 million to $2.4 million.
   Cost of Revenues
     Research and Development
  16




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Sales and Marketing
  
    
    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 10% in the
Japanese yen, 6% in the British pound and 8% in the Euro against the dollar.
   General and Administrative
  Interest income
  Provision for income taxes
  Liquidity and Capital Resources
   17




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Payments Due by PeriodLess Than
    
    
    2-3
    
    
    4-5
    
    
    AfterContractual Obligations
    

    Total
    
    
    1 Year
    
    
    Years
    
    

    Years
    
    
    5 Years(In millions)Operating leases
    
    $
    3.5
    
    
    $
    1.2
    
    
    $
    1.7
    
    
    $
    0.6
    
    
    
    Unconditional purchase obligations
    
    $
    0.7
    
    
    $
    0.7
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    4.2
    
    
    $
    1.9
    
    
    $
    1.7
    
    
    $
    0.6
    
    
    
    
   Recent Accounting Pronouncements
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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.
  Changes in internal control over financial reporting.
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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;
    
    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.
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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.
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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.
  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.
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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.
   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.
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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.
  We depend on a limited number of independent manufacturers, which reduces our ability to control
our manufacturing process.
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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.
  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.
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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.
  
    
    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.
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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.
  
 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: February 9, 2006
    
    
    
    By: /s/ Christopher A. StephensonChristopher A. Stephenson
Vice President and Chief Financial Officer
(Principal Financial Officer)
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Exhibit Index
 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.