##### Table of Contents



FORM 10-Q
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 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
(State or other jurisdiction of
Incorporation or organization)
    
    77-0086010
(I.R.S. Employer
Identification Number)
 160 South Whisman Road
Mountain View, California 94041
 (650) 960-1025
 
 þ o
 þ o




---



##### Table of Contents



CATAPULT
COMMUNICATIONS CORPORATION
 FORM 10-Q
 INDEX
 PagePart IFinancial InformationItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets at June 30, 2005
and September 30, 2004
    
    
    3Unaudited Condensed Consolidated Statements of Income for the three months and
nine months ended June 30, 2005 and 2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended
June 30, 2005 and 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30Part IIOther InformationItem 1. Legal Proceedings
    
    
    30Item 5. Other information
    
    
    30Item 6. Exhibits
    
    
    31Signatures
    
    
    31EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
 2




---



##### Table of Contents



Part
I. Financial Information
 
 Item 1. Financial Statements
 CATAPULT COMMUNICATIONS CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    September 30,2005
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    27,436
    
    
    $
    20,108Short-term investments
    
    
    39,775
    
    
    
    32,562Accounts receivable, net
    
    
    13,905
    
    
    
    10,110Inventories
    
    
    2,578
    
    
    
    2,380Deferred income taxes
    
    
    984
    
    
    
    985Prepaid expenses and other current assets
    
    
    1,514
    
    
    
    1,638Total current assets
    
    
    86,192
    
    
    
    67,783Property and equipment, net
    
    
    1,967
    
    
    
    2,640Goodwill
    
    
    49,394
    
    
    
    49,394Other intangible assets, net
    
    
    4,306
    
    
    
    5,072Other assets
    
    
    3,301
    
    
    
    3,382Total assets
    
    $
    145,160
    
    
    $
    128,271LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,234
    
    
    $
    1,061Accrued liabilities
    
    
    6,018
    
    
    
    5,987Deferred revenue
    
    
    7,979
    
    
    
    5,388Total current liabilities
    
    
    15,231
    
    
    
    12,436Deferred revenue long term portion
    
    
    389
    
    
    
    70Total liabilities
    
    
    15,620
    
    
    
    12,506Stockholders Equity:Common stock
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    48,425
    
    
    
    46,297Deferred stock-based compensation
    
    
    (12
    )
    
    
    (39
    )Accumulated other comprehensive income
    
    
    654
    
    
    
    660Retained earnings
    
    
    80,458
    
    
    
    68,832Total stockholders equity
    
    
    129,540
    
    
    
    115,765Total liabilities and stockholders equity
    
    $
    145,160
    
    
    $
    128,271
  3




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenues:Products
    
    $
    10,873
    
    
    $
    11,267
    
    
    $
    38,341
    
    
    $
    33,619Services
    
    
    3,403
    
    
    
    3,053
    
    
    
    10,856
    
    
    
    8,992Total revenues
    
    
    14,276
    
    
    
    14,320
    
    
    
    49,197
    
    
    
    42,611Cost of revenues:Products
    
    
    1,236
    
    
    
    1,196
    
    
    
    3,907
    
    
    
    3,762Services
    
    
    923
    
    
    
    787
    
    
    
    2,596
    
    
    
    2,418Amortization of purchased technology
    
    
    171
    
    
    
    171
    
    
    
    514
    
    
    
    514Total cost of revenues
    
    
    2,330
    
    
    
    2,154
    
    
    
    7,017
    
    
    
    6,694Gross profit
    
    
    11,946
    
    
    
    12,166
    
    
    
    42,180
    
    
    
    35,917Operating expenses:Research and development
    
    
    3,224
    
    
    
    2,973
    
    
    
    9,406
    
    
    
    8,693Sales and marketing
    
    
    4,431
    
    
    
    4,234
    
    
    
    13,936
    
    
    
    12,845General and administrative
    
    
    1,946
    
    
    
    1,676
    
    
    
    5,878
    
    
    
    5,131Total operating expenses
    
    
    9,601
    
    
    
    8,883
    
    
    
    29,220
    
    
    
    26,669Operating income
    
    
    2,345
    
    
    
    3,283
    
    
    
    12,960
    
    
    
    9,248Interest income
    
    
    409
    
    
    
    204
    
    
    
    922
    
    
    
    583Interest expense
    
    
    
    
    
    
    (87
    )
    
    
    
    
    
    
    (262
    )Other income (expense), net
    
    
    16
    
    
    
    (1
    )
    
    
    (121
    )
    
    
    161Income before income taxes
    
    
    2,770
    
    
    
    3,399
    
    
    
    13,761
    
    
    
    9,730Provision for income taxes
    
    
    387
    
    
    
    476
    
    
    
    2,135
    
    
    
    1,362Net income
    
    $
    2,383
    
    
    $
    2,923
    
    
    $
    11,626
    
    
    $
    8,368Net income per share:Basic
    
    $
    0.16
    
    
    $
    0.22
    
    
    $
    0.79
    
    
    $
    0.64Diluted
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.77
    
    
    $
    0.58Shares used in per share calculation:Basic
    
    
    14,712
    
    
    
    13,139
    
    
    
    14,662
    
    
    
    13,014Diluted
    
    
    14,971
    
    
    
    14,582
    
    
    
    15,087
    
    
    
    14,463
  4




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine months endedJune 30,2005
    
    2004Cash flows from operating activities:Net income
    
    $
    11,626
    
    
    $
    8,368Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,350
    
    
    
    1,340Amortization of deferred stock-based compensation
    
    
    27
    
    
    
    27Amortization of intangible assets
    
    
    766
    
    
    
    766Provision for doubtful accounts
    
    
    (24
    )
    
    
    61Deferred income taxes
    
    
    62
    
    
    
    Amortization of premium on note payable
    
    
    
    
    
    
    (306
    )Change in assets and liabilities:Accounts receivable
    
    
    (3,785
    )
    
    
    2,165Inventories
    
    
    (200
    )
    
    
    (556
    )Prepaid expenses and other current assets
    
    
    130
    
    
    
    (967
    )Other assets
    
    
    19
    
    
    
    55Accounts payable
    
    
    165
    
    
    
    137Accrued liabilities
    
    
    30
    
    
    
    2,135Deferred revenue
    
    
    2,910
    
    
    
    871Net cash provided by operating activities
    
    
    13,076
    
    
    
    14,096Cash flows from investing activities:Sales and maturities of short-term investments
    
    
    30,193
    
    
    
    25,964Purchases of short-term investments
    
    
    (37,428
    )
    
    
    (27,712
    )Purchases of property and equipment
    
    
    (681
    )
    
    
    (714
    )Net cash used in investing activities
    
    
    (7,916
    )
    
    
    (2,462
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    2,128
    
    
    
    2,316Net cash provided by financing activities
    
    
    2,128
    
    
    
    2,316Effect of exchange rate changes on cash and cash equivalents
    
    
    40
    
    
    
    130Increase in cash and cash equivalents
    
    
    7,328
    
    
    
    14,080Cash and cash equivalents, beginning of period
    
    
    20,108
    
    
    
    8,769Cash and cash equivalents, end of period
    
    $
    27,436
    
    
    $
    22,849
  5




---



##### 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
   6




---



##### Table of Contents



NOTE 3 STOCK-BASED COMPENSATION
   Three months
    
    Nine monthsended
    
    endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income, as
reported for basic
earnings per share
    
    $
    2,383
    
    
    $
    2,923
    
    
    $
    11,626
    
    
    $
    8,368Interest on
convertible notes,
net of related tax
effects
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (30
    )Net income for
diluted earnings per
share
    
    
    2,383
    
    
    
    2,913
    
    
    
    11,626
    
    
    
    8,338Add: Stock-based
employee
compensation expense
included in reported
net income, net of
related tax
effects
    
    
    8
    
    
    
    8
    
    
    
    23
    
    
    
    24Deduct: Total
stock-based employee
compensation expense
determined under
fair-value-based
method for all
awards, net of
related tax
effects
    
    
    (773
    )
    
    
    (568
    )
    
    
    (2,063
    )
    
    
    (1,705
    )Pro forma net
income, for basic
earnings per share
    
    $
    1,618
    
    
    $
    2,363
    
    
    $
    9,586
    
    
    $
    6,687Pro forma net
income, for diluted
earnings per share
    
    $
    1,618
    
    
    $
    2,353
    
    
    $
    9,586
    
    
    $
    6,657Net income per share:Basic, as
reported
    
    $
    0.16
    
    
    $
    0.22
    
    
    $
    0.79
    
    
    $
    0.64Basic, pro
forma
    
    $
    0.11
    
    
    $
    0.18
    
    
    $
    0.65
    
    
    $
    0.51Diluted, as
reported
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.77
    
    
    $
    0.58Diluted, pro
forma
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    0.64
    
    
    $
    0.46
 7




---



##### Table of Contents



Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Employee Stock Option PlansDividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life of option
    
    2.73 years
    
    2.70 years
    
    2.70 years
    
    2.70 yearsRisk-free interest rate
    
    
    3.70
    %
    
    
    2.85
    %
    
    
    3.53
    %
    
    
    2.85
    %Expected volatility
    
    
    68.4
    %
    
    
    90.1
    %
    
    
    75.8
    %
    
    
    90.1
    %
 Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Employee Stock Purchase PlansDividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life of option
    
    0.5 years
    
    0.5 years
    
    0.5 years
    
    0.5 yearsRisk-free interest rate
    
    
    2.96
    %
    
    
    1.15
    %
    
    
    2.80
    %
    
    
    1.15
    %Expected volatility
    
    
    61.8
    %
    
    
    71.3
    %
    
    
    56.7
    %
    
    
    71.3
    %
 NOTE 4BASIC AND DILUTED NET INCOME PER SHARE
  Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income, as
reported for basic
earnings per
share
    
    $
    2,383
    
    
    $
    2,923
    
    
    $
    11,626
    
    
    $
    8,368Interest on
convertible notes,
net of related tax
effects
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (30
    )Net Income, for
diluted earnings
per share
    
    $
    2,383
    
    
    $
    2,913
    
    
    $
    11,626
    
    
    $
    8,338Weighted average
shares outstanding
    
    
    14,712
    
    
    
    13,139
    
    
    
    14,662
    
    
    
    13,014Dilutive options
    
    
    259
    
    
    
    362
    
    
    
    425
    
    
    
    368Convertible notes payable
    
    
    
    
    
    
    1,081
    
    
    
    
    
    
    
    1,081Weighted
average shares assuming dilution
    
    
    14,971
    
    
    
    14,582
    
    
    
    15,087
    
    
    
    14,463Net income per share:Basic
    
    $
    0.16
    
    
    $
    0.22
    
    
    $
    0.79
    
    
    $
    0.64Diluted
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.77
    
    
    $
    0.58
  Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Common stock options
    
    
    869
    
    
    
    462
    
    
    
    309
    
    
    
    532
 8




---



##### Table of Contents



NOTE 5  GOODWILL AND INTANGIBLE ASSETS
   As of June 30, 2005
    
    As of September 30, 2004Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountPurchased
Technology
    
    $
    4,800
    
    
    $
    (1,942
    )
    
    $
    2,858
    
    
    $
    4,800
    
    
    $
    (1,428
    )
    
    $
    3,372Trade names
    
    
    1,000
    
    
    
    (405
    )
    
    
    595
    
    
    
    1,000
    
    
    
    (298
    )
    
    
    702Customer
relationships
    
    
    1,000
    
    
    
    (405
    )
    
    
    595
    
    
    
    1,000
    
    
    
    (298
    )
    
    
    702Non-compete
agreements
    
    
    400
    
    
    
    (142
    )
    
    
    258
    
    
    
    400
    
    
    
    (104
    )
    
    
    296System backlog
    
    
    400
    
    
    
    (400
    )
    
    
    
    
    
    
    400
    
    
    
    (400
    )
    
    
    Total
    
    $
    7,600
    
    
    $
    (3,294
    )
    
    $
    4,306
    
    
    $
    7,600
    
    
    $
    (2,528
    )
    
    $
    5,072
  Fiscal Year
    
    Amount2005 (remaining 3 months)
    
    $
    2562006
    
    
    1,0212007
    
    
    1,0222008
    
    
    1,021Thereafter
    
    
    986Total
    
    $
    4,306
 NOTE 6WARRANTY ACCRUAL
  2005
    
    2004Balance at beginning of period
    
    $
    69
    
    
    $
    60Warranty accrual used during the period
    
    
    (55
    )
    
    
    (53
    )Warranty accrual additions during the period
    
    
    45
    
    
    
    58Balance at end of period
    
    $
    59
    
    
    $
    65
 9




---



##### Table of Contents



NOTE 7COMPREHENSIVE INCOME
  Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income
    
    $
    2,383
    
    
    $
    2,923
    
    
    $
    11,626
    
    
    $
    8,368Currency translation adjustment
    
    
    (109
    )
    
    
    (86
    )
    
    
    15
    
    
    
    99Unrealized gains (losses) on investments, net
    
    
    16
    
    
    
    (13
    )
    
    
    (21
    )
    
    
    (16
    )Comprehensive income
    
    $
    2,290
    
    
    $
    2,824
    
    
    $
    11,620
    
    
    $
    8,451
 NOTE 8INVENTORIES
  June 30,
    
    September 30,2005
    
    2004Raw materials
    
    $
    2,242
    
    
    $
    1,908Work-in-process
    
    
    228
    
    
    
    298Finished goods
    
    
    108
    
    
    
    174$
    2,578
    
    
    $
    2,380
 NOTE 9  CONVERTIBLE NOTES PAYABLE
   NOTE 10 ISSUANCE OF COMMON STOCK
  NOTE 11 REPURCHASE OF COMMON STOCK
  10




---



##### Table of Contents



NOTE 12 INCOME TAXES
  NOTE 13 GEOGRAPHIC INFORMATION
   North
    
    
    
    
    
    
    
    
    
    Rest of
    
    ConsolidatedAmerica
    
    Europe
    
    Japan
    
    World
    
    TotalNine months ended June 30, 2005Revenues from unaffiliated customers
    
    $
    14,477
    
    
    $
    15,253
    
    
    $
    13,796
    
    
    $
    5,671
    
    
    $
    49,197As of June 30, 2005Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    $
    
    
    
    $
    
    
    
    $
    49,394Long-lived assets
    
    
    1,192
    
    
    
    502
    
    
    
    273
    
    
    
    
    
    
    
    1,967Nine months ended June 30, 2004Revenues from unaffiliated customers
    
    $
    14,068
    
    
    $
    10,655
    
    
    $
    16,616
    
    
    $
    1,272
    
    
    $
    42,611As of September 30, 2004Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    $
    
    
    
    $
    
    
    
    $
    49,394Long-lived assets
    
    
    2,034
    
    
    
    339
    
    
    
    267
    
    
    
    
    
    
    
    2,640
   11




---



##### Table of Contents



NOTE 14CUSTOMER INFORMATION
  Percentage of AccountsReceivable as of
    
    Percentage of RevenuesThree months
    
    Nine monthsended
    
    endedJune 30,
    
    September 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004Customer A
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    15
    %Customer B
    
    
    <10
    %
    
    
    14
    %
    
    
    10
    %
    
    
    <10
    %
    
    
    14
    %
    
    
    <10
    %Customer C
    
    
    <10
    %
    
    
    12
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    12
    %Customer D
    
    
    14
    %
    
    
    <10
    %
    
    
    14
    %
    
    
    15
    %
    
    
    10
    %
    
    
    <10
    %Customer E
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    10
    %
    
    
    <10
    %Customer F
    
    
    13
    %
    
    
    <10
    %
    
    
    24
    %
    
    
    15
    %
    
    
    12
    %
    
    
    <10
    %Customer G
    
    
    11
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    27
    %
    
    
    <10
    %
    
    
    14
    %
 NOTE 15RECLASSIFICATION
      12




---



##### Table of Contents



NOTE 16 CONTINGENCIES
   
 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
Consolidated 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, 2004, as filed with the
Securities and Exchange Commission on December 10, 2004.
 Forward-looking Statements
 This report on Form 10-Q contains statements that are not historical facts but are
forward-looking statements relating 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
 13




---



##### Table of Contents



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 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 report on Form 10-Q , including those set forth under the caption Risk Factors and
those set forth in our Annual Report on Form 10-K for the year ended September 30, 2004, filed on
December 10, 2004.
 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
    
    
    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).
  14




---



##### Table of Contents



Conditions and Trends in Our Industry
   Summary of Our Financial Performance in the Third Quarter of Fiscal 2005
  
    
    an increase of $0.7 million in operating expenses;
    
    a increase of $0.2 million in cost of revenues.
    Critical Accounting Policies and Estimates
  15




---



##### Table of Contents



Results of Operations
  For the three months ended
    
    For the nine months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenues:Products
    
    
    76.2
    %
    
    
    78.7
    %
    
    
    77.9
    %
    
    
    78.9
    %Services
    
    
    23.8
    
    
    
    21.3
    
    
    
    22.1
    
    
    
    21.1Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenues:Products
    
    
    8.7
    
    
    
    8.3
    
    
    
    7.9
    
    
    
    8.8Services
    
    
    6.5
    
    
    
    5.5
    
    
    
    5.3
    
    
    
    5.7Amortization of purchased technology
    
    
    1.2
    
    
    
    1.2
    
    
    
    1.0
    
    
    
    1.2Total cost of revenues
    
    
    16.4
    
    
    
    15.0
    
    
    
    14.2
    
    
    
    15.7Gross profit
    
    
    83.6
    
    
    
    85.0
    
    
    
    85.8
    
    
    
    84.3Operating expenses:Research and development
    
    
    22.6
    
    
    
    20.8
    
    
    
    19.1
    
    
    
    20.4Sales and marketing
    
    
    31.0
    
    
    
    29.6
    
    
    
    28.3
    
    
    
    30.2General and administrative
    
    
    13.6
    
    
    
    11.7
    
    
    
    12.0
    
    
    
    12.0Total operating expenses
    
    
    67.2
    
    
    
    62.1
    
    
    
    59.4
    
    
    
    62.6Income from operations
    
    
    16.4
    
    
    
    22.9
    
    
    
    26.4
    
    
    
    21.7Interest income
    
    
    2.9
    
    
    
    1.4
    
    
    
    1.9
    
    
    
    1.4Interest expense
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    (0.6
    )Other income (expense)
    
    
    0.1
    
    
    
    
    
    
    
    (0.2
    )
    
    
    0.3Income before income taxes
    
    
    19.4
    
    
    
    23.7
    
    
    
    28.1
    
    
    
    22.8Provision for income taxes
    
    
    2.7
    
    
    
    3.3
    
    
    
    4.3
    
    
    
    3.2Net income
    
    
    16.7
    %
    
    
    20.4
    %
    
    
    23.8
    %
    
    
    19.6
    %Gross margin on products
    
    
    88.6
    %
    
    
    89.4
    %
    
    
    89.8
    %
    
    
    88.8
    %Gross margin on services
    
    
    72.9
    %
    
    
    74.2
    %
    
    
    76.1
    %
    
    
    73.1
    %
 Comparison of the Three-Month Periods Ended June 30, 2005 and 2004
 Revenues
  16




---



##### Table of Contents




    
    North American revenues decreased by 44% from
$7.1 million to $4.0 million;
    
    European revenues increased by 22% from $4.7 million to $5.7 million;
    
    Japanese revenues increased by 14% from $1.9 million to $2.2 million; and
    
    Rest of World revenues increased by 331% from $0.5 million to $2.4 million.
   Cost of Revenues
     Research and Development
  17




---



##### Table of Contents



Sales and Marketing
  
    
    An increase of 14%, or 12 employees, in the number of sales and marketing personnel. Of
the 12 additional employees, seven were hired in China where compensation costs are
significantly lower than in the other countries in which we have employees.
    
    An exchange rate driven increase of $0.1 million due to average increases of 2% in the
Japanese yen, 3% in the British pound and 5% in the Euro against the dollar.
   General and Administrative
  Interest income and interest expense
  Provision for income taxes
  Comparison of the Nine-Month Periods Ended June 30, 2005 and 2004
 Revenues
  18




---



##### Table of Contents




    
    North American revenues increased by 3% from $14.1 million to $14.5 million;
    
    European revenues increased by 43% from $10.7 million to $15.3 million;
    
    Japanese revenues decreased by 17% from $16.6 million to $13.8 million; and
    
    Rest of World revenues increased by 346% from $1.3 million to $5.7 million.
   Cost of Revenues
     Research and Development
  19




---



##### Table of Contents



Sales and Marketing
  
    
    An increase of 9%, or eight employees, in the number of sales and marketing personnel.
Of the eight additional employees, five were hired in China where compensation costs are
significantly lower than in the other countries in which we have employees.
    
    An increase of $0.2 million in recruiting costs.
    
    An exchange rate driven increase of $0.2 million due to average increases of 2% in the
Japanese yen, 5% in the British pound and 6% in the Euro against the dollar.
   General and Administrative
  Interest income and interest expense
  Provision for income taxes
  Liquidity and Capital Resources
  20




---



##### Table of Contents



21




---



##### Table of Contents



Payments Due by PeriodLess Than
    
    2-3
    
    4-5
    
    AfterContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsOperating leases
    
    $
    4.0
    
    
    $
    1.2
    
    
    $
    1.9
    
    
    $
    0.9
    
    
    $
    0.0Unconditional purchase obligations
    
    
    0.9
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    4.9
    
    
    $
    2.1
    
    
    $
    1.9
    
    
    $
    0.9
    
    
    $
    0.0
   Recent Accounting Pronouncements
  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;
    
    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; and
    
    changes in the regulatory environment.
 22




---



##### Table of Contents



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.
  23




---



##### 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.
   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.
    24




---



##### Table of Contents



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.
   25




---



##### Table of Contents



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.
  26




---



##### Table of Contents



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.
  27




---



##### Table of Contents



Our success depends on the timely development and introduction of new products.
  Risks Related to Our Stock
 Our stock has been and will likely 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;
    
    changes in the extent to which a significant percentage of our shares are held
by a small number of investors;
    
    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.
  The requirement to record an expense for our stock-based compensation plans, and the resultant
ongoing accounting charges, will significantly reduce our reported net income and net income per
share, and the price of our stock could drop significantly.
  If we are unable to determine and demonstrate that we maintain effective controls over internal
financial reporting, this may cause investors to lose confidence in our reported financial
information and the price of our stock could drop significantly.
  28




---



##### Table of Contents



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 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Exchange Risk and Derivative Financial Instruments
   29




---



##### Table of Contents



Interest Rate Risk
  
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
  Changes in internal control over financial reporting.
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 5. Other Information
  30




---



##### Table of Contents



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.
 
 SIGNATURES
  CATAPULT COMMUNICATIONS CORPORATIONDate: August 8, 2005
    
    By: /s/ Christopher A. StephensonChristopher A. Stephenson
Vice President and Chief Financial Officer
(Principal Financial Officer)
 31




---



##### Table of Contents



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.