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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended September 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto.
 Commission
File Number: 0-24701
 CATAPULT COMMUNICATIONS CORPORATION
 (Exact name of Registrant as specified in its charter)
 Nevada
(State of Incorporation)
    
    77-0086010
(IRS Employer Identification Number)
 160 South Whisman Road, Mountain View, California 94041
(Address of principal executive offices, including zip code)
 Registrants telephone number, including area code: (650) 960-1025
 Securities Registered Pursuant to Section 12(b) of the Act: None
 Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
 o þ
 o þ
 þ o
 o
 þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 PART IITEM 1.
    
    BUSINESS
    
    2ITEM 1A.
    
    RISK FACTORS
    
    11ITEM 2.
    
    PROPERTIES
    
    18ITEM 3.
    
    LEGAL PROCEEDINGS
    
    18ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    18PART IIITEM 5.
    
    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    18ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    19ITEM 7.
    
    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    21ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
    
    30ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    30ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    30ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    31ITEM 9B.
    
    OTHER INFORMATION
    
    32PART IIIITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    32ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    32ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    32ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    32ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    32PART IVITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    33EXHIBIT 3.2EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
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##### Table of Contents



FORWARD-LOOKING STATEMENTS
   
 PART I
 
 Item 1.
    
    Business
 The Company
  
    
    design and feature verification;
    
    conformance testing;
    
    interoperability testing;
    
    load and stress testing; and
    
    monitoring and analysis.
    2




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Our DCT and MGTS 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).
   Applications
  Feature Verification
 3




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Conformance Testing
 Interoperability Testing.
 Load and Stress Testing
 Monitoring and Analysis.
 DCT and MGTS Software
 Ô Ô Ô
  Hardware Products
    4




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Customers
    Sales and Marketing
      International Sales
  5




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Product Support
   Product Development
     Manufacturing
  6




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Competition
     Intellectual Property
  7




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Employees
  8




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Our Executive Officers
  Name
    
    Age
    
    PositionsRichard A. Karp
    
    
    61
    
    
    Chief Executive Officer and Chairman of the BoardDavid Mayfield
    
    
    56
    
    
    President and Chief Operating OfficerGlenn Stewart
    
    
    55
    
    
    Vice President and Chief Technology OfficerChris Stephenson
    
    
    54
    
    
    Vice President, Chief Financial Officer and SecretarySean Kelly
    
    
    54
    
    
    Vice President, SalesAdam Fowler
    
    
    43
    
    
    Vice President, Product ManagementGuy R. Simpson
    
    
    47
    
    
    Vice President, Applications EngineeringBarbara J. Fairhurst
    
    
    57
    
    
    Vice President, OperationsTerry Eastham
    
    
    58
    
    
    Vice President, MarketingKathy T. Omaye-Sosnow
    
    
    49
    
    
    Vice President, Human ResourcesAnn Zimmerman
    
    
    43
    
    
    Vice President, Engineering
        9




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GLOSSARY
 3G
    
    Third generation digital cellular telecommunication.Asynchronous Transfer Mode
(ATM)
    
    A cell-based network technology protocol that
supports simultaneous transmission of data, voice
and video typically at T-1 or higher speeds.cdma2000
    
    A third generation digital high-speed wireless
technology for packet-based transmission of text,
digitized voice, video, and multimedia that is the
successor to CDMA.Code Division Multiple Access
(CDMA)
    
    A digital wireless technology that uses a
modulation technique in which many channels are
independently coded for transmission over a single
wideband channel.General Packet Radio Service
(GPRS)
    
    A packet-based digital intermediate speed wireless
technology based on GSM.Global System for Mobile
Communications (GSM)
    
    A digital wireless technology that is widely
deployed in Europe and, increasingly, in other
parts of the world.IP Multimedia Subsystem
(IMS)
    
    An internationally recognized standard defining a
generic architecture for offering Voice over IP and
multimedia services to multiple access
technologies.Protocol
    
    A specific set of rules, procedures or conventions
governing the format, means and timing of
transmissions between two devices.Signaling System 7
(SS7)
    
    A message-based protocol for exchanging signaling
and control information between telephony network
entities.
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Variant
    
    A specific implementation of a protocol, typically
unique to a country or region.Universal Mobile
Telecommunications
System (UMTS)
    
    A third generation digital high speed wireless
technology for packet-based transmission of text,
digitized voice, video, and multimedia that is the
successor to GSM and GPRS.Voice over IP (VoIP)
    
    The transmission of voice signals over IP networks,
primarily the Internet.
 
 Item 1A.
    
    Risk Factors
 Factors That May Affect Future Results
  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; and
    
    changes in the regulatory environment.
  11




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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.
  Historically, our revenues have been dependent upon a few significant customers, the loss of one
or more of which could significantly reduce our revenues.
  12




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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.
   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;
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
    
    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.
  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.
  15




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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.
  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;
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
    
    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.
 Share-Based Payment
 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.
  17




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Item 2.
    
    Properties
   
 Item 3.
    
    Legal Proceedings
   
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5.
    
    Market for the Registrants Common Equity and Related Stockholder Matters
  2004
    
    
    2005High
    
    
    Low
    
    
    High
    
    
    LowFirst fiscal quarter
    
    $
    16.79
    
    
    $
    10.70
    
    
    $
    29.59
    
    
    $
    18.66Second fiscal quarter
    
    $
    25.26
    
    
    $
    14.47
    
    
    $
    25.20
    
    
    $
    18.18Third fiscal quarter
    
    $
    23.36
    
    
    $
    16.00
    
    
    $
    21.65
    
    
    $
    13.91Fourth fiscal quarter
    
    $
    24.99
    
    
    $
    17.00
    
    
    $
    20.00
    
    
    $
    15.40
 18




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Item 6.
    
    Selected Financial Data
  19




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Consolidated Statements of Income Data:
 Fiscal Year Ended September 30,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(In thousands, except per share amounts)Revenues:Products
    
    $
    34,689
    
    
    $
    33,988
    
    
    $
    35,344
    
    
    $
    45,703
    
    
    $
    50,441Services
    
    
    5,197
    
    
    
    6,051
    
    
    
    9,880
    
    
    
    12,315
    
    
    
    14,507Total revenues
    
    
    39,886
    
    
    
    40,039
    
    
    
    45,224
    
    
    
    58,018
    
    
    
    64,948Cost of revenues:Products
    
    
    3,794
    
    
    
    2,700
    
    
    
    5,652
    
    
    
    5,192
    
    
    
    5,766Services
    
    
    591
    
    
    
    1,172
    
    
    
    2,825
    
    
    
    3,570
    
    
    
    3,434Amortization of purchased technology
    
    
    
    
    
    
    57
    
    
    
    686
    
    
    
    686
    
    
    
    686Total cost of revenues
    
    
    4,385
    
    
    
    3,929
    
    
    
    9,163
    
    
    
    9,448
    
    
    
    9,886Gross profit
    
    
    35,501
    
    
    
    36,110
    
    
    
    36,061
    
    
    
    48,570
    
    
    
    55,062Operating expenses:Research and development
    
    
    4,938
    
    
    
    7,520
    
    
    
    13,519
    
    
    
    11,740
    
    
    
    12,445Sales and marketing
    
    
    10,673
    
    
    
    10,714
    
    
    
    14,506
    
    
    
    17,075
    
    
    
    18,401General and administrative
    
    
    5,369
    
    
    
    4,899
    
    
    
    6,679
    
    
    
    6,885
    
    
    
    9,008Restructuring costs
    
    
    
    
    
    
    
    
    
    
    730
    
    
    
    
    
    
    
    Purchased in-process research
and development
    
    
    
    
    
    
    1,400
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    20,980
    
    
    
    24,533
    
    
    
    35,434
    
    
    
    35,700
    
    
    
    39,854Operating income
    
    
    14,521
    
    
    
    11,577
    
    
    
    627
    
    
    
    12,870
    
    
    
    15,208Interest income
    
    
    2,919
    
    
    
    1,456
    
    
    
    786
    
    
    
    801
    
    
    
    1,364Interest expense
    
    
    
    
    
    
    (29
    )
    
    
    (350
    )
    
    
    (321
    )
    
    
    Other income (expense), net
    
    
    (585
    )
    
    
    (219
    )
    
    
    1,216
    
    
    
    148
    
    
    
    (148
    )Income from continuing operations
before income taxes
    
    
    16,855
    
    
    
    12,785
    
    
    
    2,279
    
    
    
    13,498
    
    
    
    16,424Provision for (benefit from) income taxes
    
    
    5,810
    
    
    
    3,580
    
    
    
    (2,086
    )
    
    
    (413
    )
    
    
    2,276Income from continuing operations
    
    
    11,045
    
    
    
    9,205
    
    
    
    4,365
    
    
    
    13,911
    
    
    
    14,148Loss from discontinued operations, adjusted for
applicable benefit for income taxes of $46
    
    
    
    
    
    
    (56
    )1
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    11,045
    
    
    $
    9,149
    
    
    $
    4,365
    
    
    $
    13,911
    
    
    $
    14,148Net income per share  basicIncome from continuing operations
    
    $
    0.85
    
    
    $
    0.71
    
    
    $
    0.34
    
    
    $
    1.06
    
    
    $
    0.96Net income per share  basic
    
    $
    0.85
    
    
    $
    0.70
    
    
    $
    0.34
    
    
    $
    1.06
    
    
    $
    0.96Net income per share  dilutedIncome from continuing operations
    
    $
    0.83
    
    
    $
    0.69
    
    
    $
    0.33
    
    
    $
    0.95
    
    
    $
    0.94Net income per share  diluted
    
    $
    0.83
    
    
    $
    0.69
    
    
    $
    0.33
    
    
    $
    0.95
    
    
    $
    0.94Shares used in per share calculation:Basic
    
    
    12,933
    
    
    
    13,039
    
    
    
    12,948
    
    
    
    13,100
    
    
    
    14,677Diluted
    
    
    13,276
    
    
    
    13,313
    
    
    
    13,113
    
    
    
    14,556
    
    
    
    15,019
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Consolidated Balance Sheets Data:
 September 30,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(In thousands)Cash, cash equivalents and
short-term investments
    
    $
    61,476
    
    
    $
    35,365
    
    
    $
    30,671
    
    
    $
    52,670
    
    
    $
    68,807Working capital
    
    
    61,517
    
    
    
    28,852
    
    
    
    16,629
    
    
    
    55,347
    
    
    
    73,887Total assets
    
    
    72,833
    
    
    
    117,850
    
    
    
    107,089
    
    
    
    128,271
    
    
    
    147,760Convertible notes payable
    
    
    
    
    
    
    18,081
    
    
    
    17,674
    
    
    
    
    
    
    
    Total stockholders equity
    
    $
    63,490
    
    
    $
    72,965
    
    
    $
    76,621
    
    
    $
    115,765
    
    
    $
    132,523
  
 Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
   Conditions and Trends in Our Industry
  Summary of Our Financial Performance in Fiscal 2005
   
    
    In North America, Europe and Rest of World, we saw revenue increases of 14%, 8%, and
160% respectively due to the continuing improvement in market conditions discussed above.
    
    We saw a further improvement of one percentage point in overall gross profit margin as
our services revenues increased by more than the associated cost.
 21




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
    
    Despite an increase of $2.1 million or 31% in general and administrative expenses due
almost entirely to the first year costs to comply with the internal control requirements of
the Sarbanes-Oxley Act, we limited the increase in our operating expenses to 12%, the same
level as our revenue growth rate.
   Critical Accounting Policies and Estimates
  Revenue Recognition
   
    
    We examine the customer agreement and/or purchase order to determine that persuasive
evidence of an arrangement exists and there is no basis for considering that the
transaction forms a single arrangement with one or more other transactions.
    
    We assess that the fee is fixed or determinable by verifying that it is not subject to
an agreement to provide additional products or services at a later date or to renegotiation
or contingencies including refund, right of return or third-party financing or
transactions, and that the payment terms do not extend significantly beyond our customary
range.
    
    We assess that collection is probable based on customer credit information and payment
history.
    Foreign Exchange Risk and Derivative Financial Instruments
  22




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Allowance for Doubtful Accounts and Inventory Obsolescence Reserve
   Income Taxes
    23




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Goodwill and Long Lived Assets
 Goodwill and
Other Intangible Assets
 Accounting for Impairment or Disposal of Long-Lived Assets
 Results of Operations
  Percentage of Total RevenuesYear Ended September 30,2003
    
    
    2004
    
    
    2005Revenues:Products
    
    
    78.2
    %
    
    
    78.8
    %
    
    
    77.7
    %Services
    
    
    21.8
    
    
    
    21.2
    
    
    
    22.3Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenues:Products
    
    
    12.5
    
    
    
    8.9
    
    
    
    8.9Services
    
    
    6.2
    
    
    
    6.2
    
    
    
    5.3Amortization of purchased technology
    
    
    1.5
    
    
    
    1.2
    
    
    
    1.0Total cost of revenues
    
    
    20.2
    
    
    
    16.3
    
    
    
    15.2Gross profit
    
    
    79.8
    
    
    
    83.7
    
    
    
    84.8Operating expenses:Research and development
    
    
    29.9
    
    
    
    20.2
    
    
    
    19.2Sales and marketing
    
    
    32.1
    
    
    
    29.4
    
    
    
    28.3General and administrative
    
    
    14.8
    
    
    
    11.9
    
    
    
    13.9Restructuring costs
    
    
    1.6
    
    
    
    
    
    
    
    Total operating expenses
    
    
    78.4
    
    
    
    61.5
    
    
    
    61.4Operating income
    
    
    1.4
    
    
    
    22.2
    
    
    
    23.4Interest income
    
    
    1.7
    
    
    
    1.4
    
    
    
    2.1Interest expense
    
    
    (0.7
    )
    
    
    (0.6
    )
    
    
    Other income (expense), net
    
    
    2.6
    
    
    
    0.3
    
    
    
    (0.2
    )Income before income taxes
    
    
    5.0
    
    
    
    23.3
    
    
    
    25.3Provision for (benefit from) income taxes
    
    
    (4.7
    )
    
    
    (0.7
    )
    
    
    3.5Net income
    
    
    9.7
    %
    
    
    24.0
    %
    
    
    21.8
    %Gross profit margin on products
    
    
    84.0
    %
    
    
    88.6
    %
    
    
    88.6
    %Gross profit margin on services
    
    
    71.4
    %
    
    
    71.0
    %
    
    
    76.3
    %~~~~~          ~
  24




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Fiscal Years Ended September 30, 2004 and 2005
 Revenues
   Cost of Revenues
     Research and Development
  25




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Sales and Marketing
  General and Administrative
  Interest Income
  Interest Expense
  Other Income (Expense), Net
  Income Taxes
  Future Additional Expense for Stock-Based Compensation
 Share-Based Payment
 26




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Fiscal Years Ended September 30, 2003 and 2004
 Revenues
   Cost of Revenues
     Research and Development
  Sales and Marketing
  27




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General and Administrative
  Restructuring Costs
  Interest Income
  Interest Expense
  Other Income (Expense), Net
  Income Taxes
  Liquidity and Capital Resources
   28




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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
    
    $
    3.8
    
    
    $
    1.3
    
    
    $
    1.8
    
    
    $
    0.7
    
    
    
    Unconditional purchase obligations
    
    $
    1.0
    
    
    $
    1.0
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    4.8
    
    
    $
    2.3
    
    
    $
    1.8
    
    
    $
    0.7
    
    
    
    
   29




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##### Table of Contents



Item 7A.
    
    Quantitative and Qualitative Disclosure about Market Risks
 Foreign Exchange Risk and Derivative Financial Instruments
     Interest Rate Risk
  
 Item 8.
    
    Financial Statements and Supplementary Data
  
 Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  30




---



##### Table of Contents



Item 9A.
    
    Controls and Procedures
     
    
    pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the Company;
    
    provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company; and
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Companys assets that could have a
material effect on the financial statements.
  Internal Control-Integrated Framework
     31




---



##### Table of Contents



Item 9B.
    
    Other Information
  
 PART III
  
 Item 10.
    
    Directors and Executive Officers of the Registrant
    Code of Ethics
  
 Item 11.
    
    Executive Compensation
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
  
 Item 13.
    
    Certain Relationships and Related Transactions
  
 Item 14.
    
    Principal Accountants Fees and Services
  32




---



##### Table of Contents



PART IV
 
 Item 15. Exhibit and Financial Statement Schedules
 Annual Report on Form 10-K
 Page(1)
    
    Consolidated Financial Statements:Report of Independent Registered Public Accounting Firm
    
    34Consolidated Balance Sheets at September 30, 2004 and 2005
    
    36Consolidated Statements of Income for each of the three years in the period ended September 30, 2005
    
    37Consolidated Statements of Stockholders' Equity for each of the three years in the period ended September 30, 2005
    
    38Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 2005
    
    39Notes to Consolidated Financial Statements
    
    40(2)
    
    Financial Statement Schedules:All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.Supplementary Financial Data (Unaudited):Quarterly Financial Data for each of the years ended September 30, 2004 and 2005
    
    57(3)
    
    Exhibits:The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K
    
    58
  33




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors and Stockholders of Catapult Communications Corporation:
  Consolidated financial statements
  Internal control over financial reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
  34




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##### Table of Contents



35




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
 September 30,2004
    
    
    2005(In thousands, exceptshare and per share data)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    20,108
    
    
    $
    24,852Short-term investments
    
    
    32,562
    
    
    
    43,955Accounts receivable, net of allowances of $294 and $271
as at September 30, 2004 and 2005, respectively
    
    
    10,110
    
    
    
    14,724Inventories
    
    
    2,380
    
    
    
    3,104Deferred income taxes
    
    
    985
    
    
    
    603Prepaid expenses
    
    
    1,638
    
    
    
    1,401Total current assets
    
    
    67,783
    
    
    
    88,639Property and equipment, net
    
    
    2,640
    
    
    
    1,693Goodwill
    
    
    49,394
    
    
    
    49,394Other intangibles, net
    
    
    5,072
    
    
    
    4,051Other assets
    
    
    3,382
    
    
    
    3,983Total assets
    
    $
    128,271
    
    
    $
    147,760LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,502
    
    
    $
    1,547Accrued liabilities
    
    
    5,546
    
    
    
    5,508Deferred revenue
    
    
    5,388
    
    
    
    7,697Total current liabilities
    
    
    12,436
    
    
    
    14,752Deferred revenue, long-term portion
    
    
    70
    
    
    
    485Total liabilities
    
    
    12,506
    
    
    
    15,237Commitments and contingencies (Note 11)Stockholders Equity:Preferred stock, $0.001 par value, 5,000,000 shares authorized;
none issued and outstanding
    
    
    
    
    

    
    Common stock, $0.001 par value, 40,000,000 shares
authorized; 14,545,546 and 14,724,708 issued and outstanding
as of September 30, 2004 and 2005, respectively
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    46,297
    
    
    
    48,944Deferred stock-based compensation
    
    
    (39
    )
    
    
    (3
    )Accumulated other comprehensive income
    
    
    660
    
    
    
    587Retained earnings
    
    
    68,832
    
    
    
    82,980Total stockholders equity
    
    
    115,765
    
    
    
    132,523Total liabilities and stockholders equity
    
    $
    128,271
    
    
    $
    147,760
  36




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 Year Ended September 30,2003
    
    
    2004
    
    
    2005(In thousands, exceptper share amounts)Revenues:Products
    
    $
    35,344
    
    
    $
    45,703
    
    
    $
    50,441Services
    
    
    9,880
    
    
    
    12,315
    
    
    
    14,507Total revenues
    
    
    45,224
    
    
    
    58,018
    
    
    
    64,948Cost of revenues:Products
    
    
    5,652
    
    
    
    5,192
    
    
    
    5,766Services
    
    
    2,825
    
    
    
    3,570
    
    
    
    3,434Amortization of purchased technology
    
    
    686
    
    
    
    686
    
    
    
    686Total cost of revenues
    
    
    9,163
    
    
    
    9,448
    
    
    
    9,886Gross profit
    
    
    36,061
    
    
    
    48,570
    
    
    
    55,062Operating expenses:Research and development
    
    
    13,519
    
    
    
    11,740
    
    
    
    12,445Sales and marketing
    
    
    14,506
    
    
    
    17,075
    
    
    
    18,401General and administrative
    
    
    6,679
    
    
    
    6,885
    
    
    
    9,008Restructuring costs
    
    
    730
    
    
    
    
    
    
    
    Total operating expenses
    
    
    35,434
    
    
    
    35,700
    
    
    
    39,854Operating income
    
    
    627
    
    
    
    12,870
    
    
    
    15,208Interest income
    
    
    786
    
    
    
    801
    
    
    
    1,364Interest expense
    
    
    (350
    )
    
    
    (321
    )
    
    
    Other income (expense), net
    
    
    1,216
    
    
    
    148
    
    
    
    (148
    )Income before income taxes
    
    
    2,279
    
    
    
    13,498
    
    
    
    16,424Provision for (benefit from) income taxes
    
    
    (2,086
    )
    
    
    (413
    )
    
    
    2,276Net income
    
    $
    4,365
    
    
    $
    13,911
    
    
    $
    14,148Net income per share  basic
    
    $
    0.34
    
    
    $
    1.06
    
    
    $
    0.96Net income per share  diluted
    
    $
    0.33
    
    
    $
    0.95
    
    
    $
    0.94Shares used in per share calculation:Basic
    
    
    12,948
    
    
    
    13,100
    
    
    
    14,677Diluted
    
    
    13,113
    
    
    
    14,556
    
    
    
    15,019
  37




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except share data)
 Accum-ulatedDeferred
    
    
    OtherStock-
    
    
    Compre-
    
    
    
    
    
    
    
    
    
    
    TotalAdditional
    
    
    based
    
    
    hensive
    
    
    
    
    
    
    
    
    
    
    Stock-
    
    
    Compre-Common Stock
    
    
    Paid-in
    
    
    Compen-
    
    
    Income
    
    
    Treasury
    
    
    Retained
    
    
    holders'
    
    
    hensiveShares
    
    
    Amount
    
    
    Capital
    
    
    sation
    
    
    (loss)
    
    
    Stock
    
    
    Earnings
    
    
    Equity
    
    
    IncomeBalances at September 30, 2002
    
    
    13,055,273
    
    
    $
    13
    
    
    $
    22,625
    
    
    $
    (111
    )
    
    $
    182
    
    
    $
    (300
    )
    
    $
    50,556
    
    
    $
    72,965
    
    
    $
    8,719Issuance of common stock
    
    
    88,672
    
    
    
    
    
    
    
    530
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    530Tax benefit from employee
stock transactions
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92Cancellation of treasury stock
    
    
    
    
    
    
    
    
    
    
    (300
    )
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    Repurchase of common stock
    
    
    (257,400
    )
    
    
    
    
    
    
    (1,760
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,760
    )Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    399
    
    
    
    
    
    
    
    
    
    
    
    399
    
    
    $
    399Unrealized gains and (losses)
on investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,365
    
    
    
    4,365
    
    
    
    4,365Balances at September 30, 2003
    
    
    12,886,545
    
    
    
    13
    
    
    
    21,187
    
    
    
    (75
    )
    
    
    575
    
    
    
    
    
    
    
    54,921
    
    
    
    76,621
    
    
    $
    4,758Issuance of common stock from
exercise of stock options
    
    
    377,751
    
    
    
    
    
    
    
    3,390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,390Tax benefit from employee
stock transactions
    
    
    
    
    
    
    
    
    
    
    1,409
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,409Conversion of notes payable
    
    
    1,081,250
    
    
    
    2
    
    
    
    17,299
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,301Issuance of common stock from
stock offering, net of
offering costs
    
    
    200,000
    
    
    
    
    
    
    
    3,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,012Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    93
    
    
    $
    93Unrealized gains and (losses)
on investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,911
    
    
    
    13,911
    
    
    
    13,911Balances at September 30, 2004
    
    
    14,545,546
    
    
    
    15
    
    
    
    46,297
    
    
    
    (39
    )
    
    
    660
    
    
    
    
    
    
    
    68,832
    
    
    
    115,765
    
    
    $
    13,996Issuance of common stock from
exercise of stock options
    
    
    179,162
    
    
    
    
    
    
    
    2,177
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,177Tax benefit from employee
stock transactions
    
    
    
    
    
    
    
    
    
    
    470
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    $
    (28
    )Unrealized gains and (losses)
on investments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    (45
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,148
    
    
    
    14,148
    
    
    
    14,148Balances at September 30, 2005
    
    
    14,724,708
    
    
    $
    15
    
    
    $
    48,944
    
    
    $
    (3
    )
    
    $
    587
    
    
    $
    
    
    
    $
    82,980
    
    
    $
    132,523
    
    
    $
    14,075
  38




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year ended September 30,2003
    
    
    2004
    
    
    2005(In thousands)Cash flows from operating activities:Net income
    
    $
    4,365
    
    
    $
    13,911
    
    
    $
    14,148Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of property and equipment
    
    
    1,659
    
    
    
    1,842
    
    
    
    1,733Amortization of deferred stock-based compensation
    
    
    36
    
    
    
    36
    
    
    
    36Amortization of purchased technology
    
    
    686
    
    
    
    686
    
    
    
    686Amortization of other acquisition related intangibles
    
    
    536
    
    
    
    335
    
    
    
    335Provision for (recovery of) doubtful accounts
    
    
    282
    
    
    
    16
    
    
    
    (24
    )Deferred income taxes
    
    
    (1,193
    )
    
    
    (895
    )
    
    
    (259
    )Tax benefits from employee stock option plans
    
    
    92
    
    
    
    1,409
    
    
    
    470Amortization of convertible notes premium
    
    
    (407
    )
    
    
    (374
    )
    
    
    Change in assets and liabilities (net of effect of acquisition):Accounts receivable
    
    
    (588
    )
    
    
    461
    
    
    
    (4,588
    )Inventories
    
    
    1,047
    
    
    
    (47
    )
    
    
    (731
    )Prepaid expenses
    
    
    314
    
    
    
    (516
    )
    
    
    228Assets of discontinued operations
    
    
    2,636
    
    
    
    
    
    
    
    Other assets
    
    
    51
    
    
    
    57
    
    
    
    35Accounts payable
    
    
    (1,113
    )
    
    
    244
    
    
    
    490Accrued liabilities
    
    
    (5,030
    )
    
    
    (487
    )
    
    
    (461
    )Deferred revenue
    
    
    1,084
    
    
    
    (119
    )
    
    
    2,724Liabilities of discontinued operations
    
    
    (889
    )
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    3,568
    
    
    
    16,559
    
    
    
    14,822Cash flows from investing activities:Sale and maturities of short-term investments
    
    
    40,257
    
    
    
    34,990
    
    
    
    49,018Purchase of short-term investments
    
    
    (39,375
    )
    
    
    (45,658
    )
    
    
    (60,456
    )Acquisition, net of cash acquired
    
    
    (5,976
    )
    
    
    
    
    
    
    Purchase of property and equipment
    
    
    (1,302
    )
    
    
    (1,077
    )
    
    
    (799
    )Net cash used in investing activities
    
    
    (6,396
    )
    
    
    (11,745
    )
    
    
    (12,237
    )Cash flows from financing activities:Repurchase of common stock
    
    
    (1,760
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    530
    
    
    
    3,390
    
    
    
    2,177Proceeds from stock offering, net of offering costs
    
    
    
    
    
    
    3,012
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (1,230
    )
    
    
    6,402
    
    
    
    2,177Effect of exchange rate changes on cash and cash equivalents
    
    
    252
    
    
    
    123
    
    
    
    (18
    )Net increase (decrease) in cash and cash equivalents
    
    
    (3,806
    )
    
    
    11,339
    
    
    
    4,744Cash and cash equivalents, beginning of year
    
    
    12,575
    
    
    
    8,769
    
    
    
    20,108Cash and cash equivalents, end of year
    
    $
    8,769
    
    
    $
    20,108
    
    
    $
    24,852Supplemental disclosures of cash flow information:Income taxes paid
    
    $
    1,586
    
    
    $
    1,807
    
    
    $
    2,690Supplemental disclosure of non cash investing and financing
activities:Conversion of notes payable to common stock
    
    $
    
    
    
    $
    17,300
    
    
    $
    
  39




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  The Company and Summary of Significant Accounting Policies
 The Company
  Basis of Consolidation
  Reclassification of Short-term Investments
    Accounting for
Certain Investments in Debt and Equity Securities.
   40




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##### Table of Contents



Use of Estimates
  Cash and Cash Equivalents
  Short-Term Investments
   Revenue Recognition
   
    
    We examine the customer agreement and/or purchase order to determine that persuasive
evidence of an arrangement exists and there is no basis for considering that the
transaction forms a single arrangement with one or more other transactions.
    
    We assess that the fee is fixed or determinable by verifying that it is not subject to
an agreement to provide additional products or services at a later date or to renegotiation
or contingencies including refund, right of return or third-party financing or
transactions, and that the payment terms do not extend significantly beyond our customary
range.
    
    We assess that collection is probable based on customer credit information and payment
history.
   41




---



##### Table of Contents



Foreign Currency Translation
  Derivative Financial Instruments
   Fair Value of Financial Instruments
  Concentration of Credit Risk and Major Customers
  42




---



##### Table of Contents



Percentage of
    
    
    Percentage of RevenuesAccounts Receivable
    
    
    for the fiscal year endedas of September 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2003
    
    
    2004
    
    
    2005Customer A
    
    
    < 10
    %
    
    
    < 10
    %
    
    
    12
    %
    
    
    13
    %
    
    
    <10
    %Customer B
    
    
    < 10
    %
    
    
    < 10
    %
    
    
    13
    %
    
    
    12
    %
    
    
    <10
    %Customer C
    
    
    14
    %
    
    
    14
    %
    
    
    < 10
    %
    
    
    12
    %
    
    
    14
    %Customer D
    
    
    12
    %
    
    
    13
    %
    
    
    10
    %
    
    
    11
    %
    
    
    <10
    %Customer E
    
    
    <10
    %
    
    
    20
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    11
    %Customer F
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    11
    %
  Inventories
  Capitalized Software Development Costs
  Property and Equipment
  Research and Development
  43




---



##### Table of Contents



Repairs and Maintenance
  Warranty
  Income Taxes
  Goodwill
  
    
    Step 1: We compare the market value of our single reporting unit to
the carrying value, including goodwill of the unit. If the carrying
value of the reporting unit, including goodwill, exceeds the units
market value, we move on to step 2. If the market value of the
reporting unit exceeds the carrying value, no further work is
performed and no impairment charge is necessary.
    
    Step 2: We perform an allocation of the market value of the reporting
unit to its identifiable tangible and non-goodwill intangible assets
and liabilities. This derives an implied fair value for the reporting
units goodwill. We then compare the implied fair value of the
reporting units goodwill with the carrying amount of the reporting
units goodwill. If the carrying amount of the reporting units
goodwill is greater than the implied fair value of its goodwill, an
impairment charge is recognized for the excess.
  Other Intangible Assets
  Impairment of Long-Lived Assets
  44




---



##### Table of Contents



Stock-based Compensation
 Accounting for Stock Issued to
Employees Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of Opinion No. 25 Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation, Transition and Disclosure
  Employee Stock Option Plans
    
    
    Employee Stock Purchase PlanYear ended September 30,
    
    
    Year ended September 30,2003
    
    
    2004
    
    
    2005
    
    
    2003
    
    
    2004
    
    
    2005Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life of option
    
    3.0 years
    
    2.7 years
    
    5.7 years
    
    0.5 years
    
    0.5 years
    
    0.5 yearsRisk-free interest rate
    
    
    2.38
    %
    
    
    2.85
    %
    
    
    3.50
    %
    
    
    1.21
    %
    
    
    1.15
    %
    
    
    2.80
    %Expected volatility
    
    
    104.9
    %
    
    
    90.1
    %
    
    
    96.0
    %
    
    
    78.9
    %
    
    
    71.3
    %
    
    
    56.7
    %
  Year ended September 30,2003
    
    
    2004
    
    
    2005(In thousands, except per share amounts)Net income, as reported for basic earnings per share
    
    $
    4,365
    
    
    $
    13,911
    
    
    $
    14,148Interest on convertible notes, net of related tax effects
    
    
    
    
    
    
    (24
    )
    
    
    Net income, for diluted earnings per share
    
    
    4,365
    
    
    
    13,887
    
    
    
    14,148Add: Stock-based employee compensation expense included in reported
income, net of related tax effects
    
    
    26
    
    
    
    31
    
    
    $
    22Deduct: Total stock-based employee compensation expense determined under
fair-value based method for all awards, net of related tax effects
    
    
    (2,506
    )
    
    
    (2,404
    )
    
    $
    (5,063
    )Pro forma net income, for basic earnings per share
    
    $
    1,885
    
    
    $
    11,538
    
    
    $
    9,107Pro forma net income, for diluted earnings per share
    
    $
    1,885
    
    
    $
    11,514
    
    
    $
    9,107Net income per share:Basic net income per share as reported
    
    $
    0.34
    
    
    $
    1.06
    
    
    $
    0.96Basic net income per share pro forma
    
    $
    0.15
    
    
    $
    0.88
    
    
    $
    0.62Diluted net income per share as reported
    
    $
    0.33
    
    
    $
    0.95
    
    
    $
    0.94Diluted net income per share pro forma
    
    $
    0.14
    
    
    $
    0.79
    
    
    $
    0.61
  45




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##### Table of Contents



Earnings per Share
 Earnings
per Share
 Year ended September 30,2003
    
    
    2004
    
    
    2005(In thousands, except per share amounts)Net income, as reported for basic earnings per share
    
    $
    4,365
    
    
    $
    13,911
    
    
    $
    14,148Interest on convertible notes, net of related tax effects
    
    
    
    
    
    
    (24
    )
    
    
    Net income, for diluted earnings per share
    
    $
    4,365
    
    
    $
    13,887
    
    
    $
    14,148Weighted average shares outstanding
    
    
    12,948
    
    
    
    13,100
    
    
    
    14,677Dilutive options
    
    
    165
    
    
    
    404
    
    
    
    342Convertible notes payable
    
    
    
    
    
    
    1,052
    
    
    
    Weighted average shares assuming dilution
    
    
    13,113
    
    
    
    14,556
    
    
    
    15,019Net income per share:Basic
    
    $
    0.34
    
    
    $
    1.06
    
    
    $
    0.96Diluted
    
    $
    0.33
    
    
    $
    0.95
    
    
    $
    0.94
  Year ended September 30,2003
    
    
    2004
    
    
    2005Common stock options
    
    
    1,453,000
    
    
    
    493,000
    
    
    
    400,869Convertible notes payable
    
    
    1,081,250
    
    
    
    
    
    
    
    
 Recently Issued Accounting Standards
 The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments
 Accounting Changes and Error Corrections-A
Replacement of APB Opinion No. 20 and FASB Statement No. 3
 46




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##### Table of Contents



Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143
 Exchanges of Nonmonetary Assets, an amendment
of APB Opinion No. 29 Accounting for Nonmonetary Transactions
 Share-Based Payment Share-Based Payment
 Inventory Costs, an amendment of ARB No. 43,
Chapter 4
  Note 2  Goodwill and Intangible Assets
   47




---



##### Table of Contents



As of September 30, 2004
    
    
    As of September 30, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    Amount(In thousands)Purchased technology
    
    $
    4,800
    
    
    $
    (1,428
    )
    
    $
    3,372
    
    
    $
    4,800
    
    
    $
    (2,115
    )
    
    $
    2,685Trade names
    
    
    1,000
    
    
    
    (298
    )
    
    
    702
    
    
    
    1,000
    
    
    
    (440
    )
    
    
    560Customer relationships
    
    
    1,000
    
    
    
    (298
    )
    
    
    702
    
    
    
    1,000
    
    
    
    (440
    )
    
    
    560Non-compete agreement
    
    
    400
    
    
    
    (104
    )
    
    
    296
    
    
    
    400
    
    
    
    (154
    )
    
    
    246System backlog
    
    
    400
    
    
    
    (400
    )
    
    
    
    
    
    
    400
    
    
    
    (400
    )
    
    
    Total
    
    $
    7,600
    
    
    $
    (2,528
    )
    
    $
    5,072
    
    
    $
    7,600
    
    
    $
    (3,549
    )
    
    $
    4,051
  EstimatedAmortizationFiscal Year
    
    Expense(In thousands)2006
    
    $
    1,0212007
    
    
    1,0222008
    
    
    1,021Thereafter
    
    
    987Total
    
    $
    4,051
 Note 3  Restructuring of Acquired Business
  Accrual
    
    
    
    
    
    
    
    
    
    
    Balanceas of
    
    
    Paid in
    
    
    Adjustments
    
    
    as ofSeptember 30,
    
    
    in fiscal
    
    
    made in
    
    
    September 30,Restructuring costs
    
    2002
    
    
    2003
    
    
    fiscal 2003
    
    
    2003(In millions)Redundancy compensation costs
    
    $
    1.2
    
    
    $
    (0.6
    )
    
    $
    (0.6
    )
    
    $
    Occupancy costs
    
    
    0.3
    
    
    
    (0.3
    )
    
    
    
    
    
    
    Associated costs
    
    
    0.2
    
    
    
    (0.2
    )
    
    
    
    
    
    
    Totals
    
    $
    1.7
    
    
    $
    (1.1
    )
    
    $
    (0.6
    )
    
    $
    
 Note 4  Restructuring Charge
  Note 5  Other Income (Expense), Net
  48




---



##### Table of Contents



Note 6  Balance Sheet Components
  September 30,2004
    
    
    2005(In thousands)Cash equivalents:Corporate debt securities and money
market securities
    
    $
    11,802
    
    
    $
    7,722U.S. government and agencies
securities
    
    
    300
    
    
    
    913State and municipal securities
    
    
    2,425
    
    
    
    9,695$
    14,527
    
    
    $
    18,330Short-term investments:Corporate debt securities
    
    $
    2,659
    
    
    $
    4,944U.S. government and agencies securities
    
    
    3,246
    
    
    
    9,454State and municipal securities
    
    
    26,657
    
    
    
    29,557$
    32,562
    
    
    $
    43,955
 September 30,2004
    
    
    2005(In thousands)Inventories:Raw materials
    
    $
    1,908
    
    
    $
    2,600Work-in-process
    
    
    298
    
    
    
    231Finished goods
    
    
    174
    
    
    
    273$
    2,380
    
    
    $
    3,104Property and equipment, net:Equipment
    
    $
    7,073
    
    
    $
    7,808Leasehold improvements
    
    
    1,915
    
    
    
    1,9558,988
    
    
    
    9,763Less accumulated depreciation and amortization
    
    
    (6,348
    )
    
    
    (8,070
    )$
    2,640
    
    
    $
    1,693
 September 30,2003
    
    
    2004
    
    
    2005(In thousands)Allowance for doubtful accounts:Balances at beginning of year
    
    $
    38
    
    
    $
    320
    
    
    $
    294Provision for doubtful accounts
    
    
    282
    
    
    
    16
    
    
    
    1Write-off of doubtful accounts
    
    
    
    
    
    
    (42
    )
    
    
    (24
    )Balances at end of year
    
    $
    320
    
    
    $
    294
    
    
    $
    271
 49




---



##### Table of Contents



September 30,2004
    
    
    2005(In thousands)Accrued liabilities:Payroll and related expenses
    
    $
    2,716
    
    
    $
    2,723Income taxes payable
    
    
    881
    
    
    
    715Other taxes payable
    
    
    228
    
    
    
    322Professional services fees payable
    
    
    292
    
    
    
    925Stock offering costs
    
    
    409
    
    
    
    10Other
    
    
    1,020
    
    
    
    813$
    5,546
    
    
    $
    5,508
  2004
    
    
    2005(In thousands)Balances at beginning of year
    
    $
    60
    
    
    $
    69Warranty accrual used during the year
    
    
    (69
    )
    
    
    (74
    )Warranty accrual additions during the year
    
    
    78
    
    
    
    79Balances at end of year
    
    $
    69
    
    
    $
    74
 Note 7  Related Party Transaction
  Note 8  Income Taxes
   Year ended September 30,2003
    
    
    2004
    
    
    2005(In thousands)Current:U.S. federal
    
    $
    (1,212
    )
    
    $
    (2,677
    )
    
    $
    (78
    )State
    
    
    30
    
    
    
    30
    
    
    
    59Foreign
    
    
    978
    
    
    
    2,012
    
    
    
    2,082(204
    )
    
    
    (635
    )
    
    
    2,063Deferred:U.S. federal
    
    
    (1,677
    )
    
    
    100
    
    
    
    172State
    
    
    (205
    )
    
    
    122
    
    
    
    41(1,882
    )
    
    
    222
    
    
    
    213$
    (2,086
    )
    
    $
    (413
    )
    
    $
    2,276
 50




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##### Table of Contents



Year ended September 30,2003
    
    
    2004
    
    
    2005Tax at federal rate
    
    
    34
    %
    
    
    34
    %
    
    
    34
    %State taxes, net of federal benefit
    
    
    (8
    )
    
    
    1
    
    
    
    1Foreign tax differential
    
    
    (42
    )
    
    
    (36
    )
    
    
    (13
    )Foreign tax credit
    
    
    (45
    )
    
    
    
    
    
    
    Research credit
    
    
    (25
    )
    
    
    (1
    )
    
    
    (5
    )Tax exempt interest
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Other
    
    
    (6
    )
    
    
    
    
    
    
    (2
    )(92
    )%
    
    
    (3
    )%
    
    
    14
    %
     September 30,2004
    
    
    2005(In thousands)Accruals and reserves
    
    $
    915
    
    
    $
    516Net operating losses
    
    
    1,491
    
    
    
    1,615Current and deferred state taxes
    
    
    9
    
    
    
    20Research credit
    
    
    1,268
    
    
    
    2,314Net foreign taxes
    
    
    688
    
    
    
    274Deferred tax assets
    
    
    4,371
    
    
    
    4,739Valuation allowance
    
    
    (160
    )
    
    
    (206
    )Net deferred tax assets
    
    
    4,211
    
    
    
    4,533Depreciation
    
    
    (199
    )
    
    
    (265
    )Deferred tax liabilities
    
    
    (199
    )
    
    
    (265
    )Net deferred tax assets
    
    
    4,012
    
    
    
    4,268Less: Non-current portion
    
    
    3,027
    
    
    
    3,665$
    985
    
    
    $
    603
  51




---



##### Table of Contents



Note 9  Stockholders Equity
 Stock Option Plans
   WeightedNumber of
    
    
    AverageOptions
    
    
    ExerciseOutstanding
    
    
    PriceBalance at September 30, 2002
    
    
    1,228,642
    
    
    $
    13.75Options granted
    
    
    777,466
    
    
    $
    10.08Options exercised
    
    
    (55,577
    )
    
    $
    4.27Options canceled
    
    
    (164,738
    )
    
    $
    12.81Balance at September 30, 2003
    
    
    1,785,793
    
    
    $
    12.54Options granted
    
    
    253,034
    
    
    $
    18.79Options exercised
    
    
    (344,943
    )
    
    $
    8.91Options canceled
    
    
    (62,374
    )
    
    $
    16.92Balance at September 30, 2004
    
    
    1,631,510
    
    
    $
    14.15Options granted
    
    
    495,564
    
    
    $
    19.20Options exercised
    
    
    (148,912
    )
    
    $
    11.84Options canceled
    
    
    (22,133
    )
    
    $
    18.14Balance at September 30, 2005
    
    
    1,956,029
    
    
    $
    15.56
 52




---



##### Table of Contents



Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Contractual
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseRange of Exercise Price
    
    shares
    
    
    Life
    
    
    Price
    
    
    shares
    
    
    Price$  0.83 - $12.14
    
    
    547,348
    
    
    
    6.6
    
    
    $
    8.22
    
    
    
    346,392
    
    
    $
    7.81$12.70 - $17.44
    
    
    501,588
    
    
    
    7.1
    
    
    $
    14.67
    
    
    
    267,560
    
    
    $
    15.24$17.50 - $19.21
    
    
    501,243
    
    
    
    6.9
    
    
    $
    18.51
    
    
    
    428,768
    
    
    $
    18.66$19.25 - $25.10
    
    
    405,850
    
    
    
    7.9
    
    
    $
    22.92
    
    
    
    376,823
    
    
    $
    22.951,956,029
    
    
    
    
    
    
    
    
    
    
    
    1,419,543
  Weighted Average

    
    Weighted AverageExercise Price

    
    Fair ValueYear Ended September 30, 2003Exercise price equal to market value
    
    $
    10.08
    
    
    $
    6.40Year Ended September 30, 2004Exercise price equal to market value
    
    $
    18.79
    
    
    $
    10.07Year Ended September 30, 2005Exercise price equal to market value
    
    $
    19.20
    
    
    $
    14.68
 Employee Stock Purchase Plan
  Convertible Notes Payable
   Issuance of Common Stock
  53




---



##### Table of Contents



Repurchase of Common Stock
  Note
10  401-K Plan
  Note 11  Commitments and Contingencies
 Operating Leases
    Year ending September 30,
    
    Future Payments(In thousands)2006
    
    $
    1,2662007
    
    
    1,0062008
    
    
    8412009
    
    
    5672010
    
    
    164$
    3,844
 Unconditional purchase obligations
  Contingencies
  54




---



##### Table of Contents



Accounting for
Contingencies
 Indemnifications
    Note 12  Geographic Information
 Disclosures About Segments of an Enterprise and
Related Information
 55




---



##### Table of Contents



North
    
    
    UK, Europe
    
    
    
    
    
    
    Rest of
    
    
    ConsolidatedAmerica
    
    
    & Other
    
    
    Japan
    
    
    World
    
    
    Total(In thousands)Year ended September 30, 2003Revenues from unaffiliated customers
    
    $
    17,399
    
    
    $
    9,676
    
    
    $
    15,622
    
    
    $
    2,527
    
    
    $
    45,224As of September 30, 2003Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    $
    
    
    
    $
    
    
    
    $
    49,394Long-lived assets
    
    $
    2,864
    
    
    $
    324
    
    
    $
    196
    
    
    $
    
    
    
    $
    3,384Year ended September 30, 2004Revenues from unaffiliated customers
    
    $
    17,355
    
    
    $
    18,355
    
    
    $
    19,628
    
    
    $
    2,680
    
    
    $
    58,018As of September 30, 2004Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    $
    
    
    
    $
    
    
    
    $
    49,394Long-lived assets
    
    $
    2,035
    
    
    $
    338
    
    
    $
    267
    
    
    $
    
    
    
    $
    2,640Year ended September 30, 2005Revenues from unaffiliated customers
    
    $
    19,751
    
    
    $
    19,739
    
    
    $
    18,482
    
    
    $
    6,976
    
    
    $
    64,948As of September 30, 2005Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    $
    
    
    
    $
    
    
    
    $
    49,394Long-lived assets
    
    $
    950
    
    
    $
    479
    
    
    $
    264
    
    
    $
    
    
    
    $
    1,693
   Note 13  Subsequent Events
  56




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##### Table of Contents



Supplementary Financial Data
 Quarterly Financial Data Unaudited)
 Consolidated Statements of Income Data:
 Quarter EndedDec. 31, 2003
    
    
    Mar. 31, 2004
    
    
    June 30, 2004
    
    
    Sept. 30, 2004 (1)(In thousands, except per share amounts)Revenues
    
    $
    11,049
    
    
    $
    17,242
    
    
    $
    14,320
    
    
    $
    15,407Gross profit
    
    
    9,157
    
    
    
    14,594
    
    
    
    12,166
    
    
    
    12,653Operating income
    
    
    879
    
    
    
    5,086
    
    
    
    3,283
    
    
    
    3,622Net income
    
    $
    915
    
    
    $
    4,530
    
    
    $
    2,923
    
    
    $
    5,543Net income per share:Basic
    
    $
    0.07
    
    
    $
    0.35
    
    
    $
    0.22
    
    
    $
    0.42Diluted
    
    $
    0.07
    
    
    $
    0.32
    
    
    $
    0.20
    
    
    $
    0.38
 Dec. 31, 2004
    
    
    Mar. 31, 2005
    
    
    June 30, 2005
    
    
    Sept. 30, 2005Revenues
    
    $
    15,871
    
    
    $
    19,050
    
    
    $
    14,276
    
    
    $
    15,751Gross profit
    
    
    13,637
    
    
    
    16,597
    
    
    
    11,946
    
    
    
    12,883Operating income
    
    
    4,057
    
    
    
    6,558
    
    
    
    2,345
    
    
    
    2,249Net income
    
    $
    3,813
    
    
    $
    5,430
    
    
    $
    2,383
    
    
    $
    2,522Net income per share:Basic
    
    $
    0.26
    
    
    $
    0.37
    
    
    $
    0.16
    
    
    $
    0.17Diluted
    
    $
    0.25
    
    
    $
    0.36
    
    
    $
    0.16
    
    
    $
    0.17
   57




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##### Table of Contents



INDEX TO EXHIBITS
  ExhibitNumber
    
    Description3.1
    
    Articles of Incorporation of Registrant incorporated by
reference to Exhibit 3.1 to Registration Statement No. 333-56627.3.2
    
    Bylaws of the Registrant.10.1
    
    Forms of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers  incorporated
by reference to Exhibit 10.1 to Registration Statement No.
333-56627.10.2*
    
    1989 Stock Option Plan and related agreements  incorporated by
reference to Exhibit 10.3 to our Form 10-K dated December 17,
2001.10.3*
    
    UK Executive Share Option Scheme and related agreements 
incorporated by reference to Exhibit 10.4 to Registration
Statement No. 333-56627.10.4*
    
    1998 Stock Plan, as amended
October 28, 2003  incorporated by reference to
Exhibit 10.4 to our Annual Report on Form 10-K dated
December 5, 2003 (related agreements
are incorporated by reference to Exhibit 10.15 to our Form 10-Q
dated May 14, 2003).10.6
    
    Lease for office space located at 160 and 190 South Whisman Road,
Mountain View, CA  incorporated by reference to Exhibit 10.9 to
our Form 10-K dated December 17, 2001.10.7
    
    Lease for office space located at 800 Perimeter Park Drive,
Morrisville, NC 27560  incorporated by reference to Exhibit
10.9 to our Form 10-K dated December 20, 2002.10.8
    
    Form of Software Support Agreement  incorporated by reference
to Exhibit 10.9 to Registration Statement No. 333-56627.10.10
    
    License Agreement dated July 15, 2002 between the Company and
Tekelec incorporated by reference to Exhibit 2.2.3 to
Registrants Form 10-Q dated August 14, 2002.10.11
    
    International Rights License Agreement dated July 15, 2002
between the Company and Tekelec  incorporated by reference to
Exhibit 2.2.4 to Registrants Form 10-Q dated August 14, 2002.10.12
    
    Lease for office space located at 190 South Whisman Road,
building G, Mountain View, CA  incorporated by reference to
Exhibit 10.8 to Registrants Form 10-K dated December 17, 2001.11.1
    
    Calculation of Earnings per
Common Share (contained in
Note 1 of the Notes to
Financial Statements).14
    
    Code of Ethics for Principal Executive and Senior Financial Officers  incorporated by reference to
Exhibit 14 to Registrants Annual Report on Form 10-K dated December 5, 2003.21.1
    
    Subsidiaries of the Registrantincorporated by reference to Exhibit 21.1 to Registrants
Annual Report on Form 10-K dated December 10, 2004.23.1
    
    Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.24.1
    
    Power of Attorney (Contained in the
signature page of this Annual Report on Form 10-K).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
    
    Certifications 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.
   58




---



##### Table of Contents



SIGNATURES
  CATAPULT COMMUNICATIONS CORPORATIONDate: December 14, 2005
    By:

/s/
Richard A. KarpRichard A. KarpChief Executive Officer & Chairman of the Board POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ Richard A. Karp

(Richard A. Karp)
    
    Chief Executive Officer,
Chairman of the Board
(Principal Executive
Officer)
    
    December 14, 2005/s/ Christopher A. Stephenson

(Christopher A. Stephenson)
    
    Chief Financial Officer
(Principal Financial
and Principal
Accounting Officer)
    
    December 14, 2005/s/ Charles L. Waggoner

(Charles L. Waggoner)
    
    Director
    
    December 14, 2005/s/ R. Stephen Heinrichs

(R. Stephen Heinrichs)
    
    Director
    
    December 14, 2005/s/ John M. Scandalios

(John M. Scandalios)
    
    Director
    
    December 14, 2005/s/ Nancy H. Karp

(Nancy H. Karp)
    
    Director
    
    December 14, 2005/s/ Henry P. Massey, Jr.

(Henry P. Massey, Jr.)
    
    Director
    
    December 14, 2005/s/ Peter S. Cross

(Peter S. Cross)
    
    Director
    
    December 14, 2005
 59




---



##### Table of Contents



ExhibitNumber
    
    Description3.1
    
    Articles of Incorporation of Registrant incorporated by
reference to Exhibit 3.1 to Registration Statement No. 333-56627.3.2
    
    Bylaws of the Registrant.10.1
    
    Forms of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers  incorporated
by reference to Exhibit 10.1 to Registration Statement No.
333-56627.10.2*
    
    1989 Stock Option Plan and related agreements  incorporated by
reference to Exhibit 10.3 to our Form 10-K dated December 17,
2001.10.3*
    
    UK Executive Share Option Scheme and related agreements 
incorporated by reference to Exhibit 10.4 to Registration
Statement No. 333-56627.10.4*
    
    1998 Stock Plan, as amended
October 28, 2003  incorporated by reference to
Exhibit 10.4 to our Annual Report on Form 10-K dated
December 5, 2003 (related agreements
are incorporated by reference to Exhibit 10.15 to our Form 10-Q
dated May 14, 2003).10.6
    
    Lease for office space located at 160 and 190 South Whisman Road,
Mountain View, CA  incorporated by reference to Exhibit 10.9 to
our Form 10-K dated December 17, 2001.10.7
    
    Lease for office space located at 800 Perimeter Park Drive,
Morrisville, NC 27560  incorporated by reference to Exhibit
10.9 to our Form 10-K dated December 20, 2002.10.8
    
    Form of Software Support Agreement  incorporated by reference
to Exhibit 10.9 to Registration Statement No. 333-56627.10.10
    
    License Agreement dated July 15, 2002 between the Company and
Tekelec incorporated by reference to Exhibit 2.2.3 to
Registrants Form 10-Q dated August 14, 2002.10.11
    
    International Rights License Agreement dated July 15, 2002
between the Company and Tekelec  incorporated by reference to
Exhibit 2.2.4 to Registrants Form 10-Q dated August 14, 2002.10.12
    
    Lease for office space located at 190 South Whisman Road,
building G, Mountain View, CA  incorporated by reference to
Exhibit 10.8 to Registrants Form 10-K dated December 17, 2001.11.1
    
    Calculation of Earnings per
Common Share (contained in
Note 1 of the Notes to
Financial Statements).14
    
    Code of Ethics for Principal Executive and Senior Financial Officers  incorporated by reference to
Exhibit 14 to Registrants Annual Report on Form 10-K dated December 5, 2003.21.1
    
    Subsidiaries of the Registrantincorporated by reference to Exhibit 21.1 to Registrants
Annual Report on Form 10-K dated December 10, 2004.23.1
    
    Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.24.1
    
    Power of Attorney (Contained in the
signature page of this Annual Report on Form 10-K).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
    
    Certifications 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.