##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    September 30, 2006o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to          .   Commission File Number: 0-24701
  CATAPULT COMMUNICATIONS
    CORPORATION
 (Exact name of Registrant as
    specified in its charter)
  Nevada

77-0086010(State of
    Incorporation)

(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:
  Title of Each Class

Name of Exchange on Which RegisteredCommon Stock, $0.001 par
    value

The NASDAQ Stock Market
    LLC   Securities Registered Pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



TABLE OF
    CONTENTS
  PART IITEM 1.

BUSINESS


3ITEM 1A.

RISK
    FACTORS


13ITEM 1B.

UNRESOLVED STAFF
    COMMENTS


21ITEM 2.

PROPERTIES


21ITEM 3.

LEGAL
    PROCEEDINGS


21ITEM 4.

SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS


21PART IIITEM 5.

MARKET FOR
    REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
    ISSUER PURCHASES OF EQUITY SECURITIES


22ITEM 6.

SELECTED FINANCIAL
    DATA


23ITEM 7.

MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS


24ITEM 7A.

QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISKS


35ITEM 8.

FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA


35ITEM 9.

CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE


36ITEM 9A.

CONTROLS AND
    PROCEDURES


36ITEM 9B.

OTHER
    INFORMATION


39PART IIIITEM 10.

DIRECTORS AND
    EXECUTIVE OFFICERS OF THE REGISTRANT


39ITEM 11.

EXECUTIVE
    COMPENSATION


39ITEM 12.

SECURITY OWNERSHIP
    OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
    STOCKHOLDER MATTERS


40ITEM 13.

CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS


40ITEM 14.

PRINCIPAL
    ACCOUNTANT FEES AND SERVICES


40PART IVITEM 15.

EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES


41EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32   1




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FORWARD-LOOKING
    STATEMENTS
  FORM 10-K FORM 10-K,
   2




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##### Table of Contents



PART I  Item 1.
    Business  The
    Company
  ® ®
  
    design and feature verification;
    conformance testing;
    interoperability testing;
    load and stress testing; and
    monitoring and analysis.      1-800-SEC-0330 202-551-8090.
  Form 10-K, Form 10-Q, Form 8-K
  Our DCT
    and MGTS Products
  tm
   3




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##### Table of Contents




    WiMAX;
    IP Multimedia Subsystem (IMS);
    Third and Fourth Generation Cellular (3G and 4G), including UMTS
    and cdma2000;
    General Packet Radio Service (GPRS);
    Global Systems for Mobile Communications (GSM);
    Code Division Multiple Access (CDMA);
    IP Telephony (Voice over IP or VoIP);
    Asynchronous Transfer Mode (ATM); and
    Signaling System #7 (SS7).      Applications
    Feature Verification.
  Conformance Testing.
  Interoperability Testing.
  Load and Stress Testing.
 4




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Monitoring and Analysis.
  DCT
    and MGTS Software
  tm tm tm .
    Hardware
    Products
    ® and/or
  Customers
     5




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Sales and
    Marketing
      on-site
      International
    Sales
     6




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Product
    Support
      Product
    Development
          Manufacturing
  sub-assembled sub-assembled sub-assembly
   7




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Competition
          Intellectual
    Property
     8




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Employees
   9




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Our
    Executive Officers
    Name

Age

PositionsRichard A. Karp


62


Chief Executive Officer and
    Chairman of the BoardDavid Mayfield


57


President and Chief Operating
    OfficerGlenn Stewart


56


Vice President and Chief
    Technology OfficerChris Stephenson


55


Vice President, Chief Financial
    Officer and SecretarySean Kelly


55


Vice President, SalesAdam Fowler


44


Vice President, Product ManagementGuy R. Simpson


49


Vice President, Applications
    EngineeringBarbara J. Fairhurst


58


Vice President, OperationsTerry Eastham


59


Vice President, MarketingKathy T. Omaye-Sosnow


51


Vice President, Human ResourcesKalyan Sundhar


37


Vice President, Engineering   Dr. Richard A. Karp
  Mr. David Mayfield
  Mr. Glenn Stewart
  Mr. Chris Stephenson
  Mr. Sean Kelly
  Mr. Adam Fowler
  Mr. Guy R. Simpson
 10




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Ms. Barbara J. Fairhurst
  Mr. Terry Eastham
  Ms. Kathy T. Omaye-Sosnow
  Mr. Kalyan Sundhar
 11




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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.Variant
    
    A specific implementation of a protocol, typically unique to a
    company, region or manufacturer.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.WiMAX
    
    A standards-based technology enabling the delivery of
    last-mile
    wireless broadband access as an alternative to cable and DSL. 12




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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, including delays in customer purchasing decisions or
    orders due to customer consolidation;
    the absence of long-term customer purchase contracts;
    seasonal factors that may affect capital spending by customers,
    such as the varying fiscal year ends of customers and the
    reduction in business during the summer months, particularly in
    Europe;
    the relatively long sales cycles for our products;
    competitive conditions in our markets;
    exchange rate fluctuations;
    the timing of the introduction and market acceptance of new
    products or product enhancements by us and by our customers,
    competitors and suppliers;
    costs associated with developing and introducing new products;
    product life cycles;
    changes in the level of operating expenses relative to revenues;
    product defects and other quality problems;
    customer order deferrals in anticipation of new products;
    supply interruptions;
    changes in global or regional economic conditions or in the
    telecommunications industry;
    asset impairment, valuation allowance and restructuring charges;
    changes in our tax rate;
    adverse results from current or future litigation;
    changes in the mix of products sold; and
    changes in the regulatory environment.   13




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period-to-period
    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.
      tm tm tm
    Our
    success depends on the timely development and introduction of
    new products.
   14




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Historically,
    our revenues have been dependent upon a few significant
    customers, the loss of one or more of which could significantly
    reduce our revenues.
    Our
    business is dependent on our customers outsourcing their
    telecommunications testing needs, and our business could be
    harmed if the market for outsourced testing solutions declines
    or fails to grow.
    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.   15




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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; 16




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
    distraction of management and other resources;
    integration of personnel and technology of an acquired company;
    difficulties in evaluating the technology of a potential target;
    inability to motivate and retain new personnel;
    maintenance of uniform standards, controls, procedures and
    policies;
    impairment of goodwill or other long-lived assets acquired due
    to a failure to generate the levels of cash flow anticipated at
    the acquisition date; and
    impairment of relationships with employees and clients as a
    result of the integration of new management personnel.    The
    inability to successfully defend claims from taxing authorities
    could adversely affect our operating results and financial
    position.
    We are
    a defendant in a lawsuit with a distributor in Belgium, and an
    adverse result in this matter could require us to pay
    significant damages.
    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.
   17




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We
    depend on a limited number of independent manufacturers, which
    reduces our ability to control our manufacturing
    process.
    The
    high level of complexity and integration of our products
    increases the risk of latent defects, which could damage
    customer relationships and increase our costs.
    We
    face exposure to product liability claims, which if successful
    could harm our business.
    Our
    success is dependent on our ability to protect our intellectual
    property, and our failure to protect our intellectual property
    could have a significant adverse impact on our
    business.
   18




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We
    could become subject to litigation regarding intellectual
    property, which could divert management attention, be costly to
    defend and prevent us from using or selling the challenged
    technology.
    Environmental
    laws and regulations subject us to a number of risks and could
    result in significant liabilities and costs.
     19




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Risks
    Related to Our Stock
  Our
    stock has been, and likely will continue to be, subject to
    substantial price and volume fluctuations due to a number of
    factors, many of which will be beyond our control.
    
    quarterly variations in our operating results;
    changes in our revenue growth rates as a whole or for specific
    geographic areas or products;
    changes in earning estimates by market analysts;
    the announcements of new products or product enhancements by us
    or our competitors;
    speculation in the press or analyst community; and
    general market conditions or market conditions specific to
    particular industries.    If we
    are unable to determine and demonstrate that we maintain
    effective internal control over financial reporting, this may
    cause investors to lose confidence in our reported financial
    information and the price of our stock could drop
    significantly.
  Form 10-K Form 10-K 10-K.
  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 stockholders could prevent or delay a change in
    control.
   20




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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 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties      Item 3.
    Legal
    Proceedings      Item 4.
    Submission
    of Matters to a Vote of Security Holders   21




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PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities    2006


2005High


Low


High


LowFirst fiscal quarter

$
18.34


$
14.79


$
29.59


$
18.66Second fiscal quarter

$
15.42


$
11.79


$
25.20


$
18.18Third fiscal quarter

$
13.45


$
8.85


$
21.65


$
13.91Fourth fiscal quarter

$
12.15


$
8.36


$
20.00


$
15.40       Repurchases of Common StockTotal Number of


Maximum NumberTotal





Shares Purchased


of Shares That MayNumber


Average


as Part of Publicly


Yet be Purchasedof Shares


Price Paid


Announced


Under the PlansPurchased


per Share(1)


Plans or Programs


or ProgramsJuly 1, 2006 
    July 31, 2006














1,643,900August 1, 2006 
    August 31, 2006


183,551


$
8.90



183,551



1,460,349September 1, 2006 
    September 30, 2006


106,700


$
9.63



106,700



1,353,649Total for the Quarter


290,251


$
9.17



290,251



1,353,649     (1)
    
    Average price paid per share includes brokerage commission   22




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Item 6.
    Selected
    Financial Data  Form 10-K.
  Fiscal Year Ended September 30,2006


2005


2004


2003


2002(In thousands, except per share amounts)Consolidated Statements of
    Operations Data:Revenues:Products

$
32,372


$
50,441


$
45,703


$
35,344


$
33,988Services


15,012



14,507



12,315



9,880



6,051Total revenues


47,384



64,948



58,018



45,224



40,039Cost of revenues:Products


5,513



5,766



5,192



5,652



2,700Services


3,811



3,434



3,570



2,825



1,172Amortization and impairment of
    purchased technology


2,543



686



686



686



57Total cost of revenues


11,867



9,886



9,448



9,163



3,929Gross profit


35,517



55,062



48,570



36,061



36,110Operating expenses:Research and development


13,652



12,445



11,740



13,519



7,520Sales and marketing


17,341



18,401



17,075



14,506



10,714General and administrative


10,647



9,008



6,885



6,679



4,899Restructuring costs


359











730



Purchased in-process research and
    development


















1,400Total operating expenses


41,999



39,854



35,700



35,434



24,533Operating income (loss)


(6,482
)


15,208



12,870



627



11,577Interest income


2,817



1,364



801



786



1,456Interest expense










(321
)


(350
)


(29
)Other income (expense), net


(11
)


(148
)


148



1,216



(219
)Income (loss) from continuing
    operations before income taxes


(3,676
)


16,424



13,498



2,279



12,785Provision for (benefit from)
    income taxes


6,990



2,276



(413
)


(2,086
)


3,580Income (loss) from continuing
    operations


(10,666
)


14,148



13,911



4,365



9,205Loss from discontinued operations,
    adjusted for applicable benefit for income taxes of $46(1)


















(56
)Net income (loss)

$
(10,666
)

$
14,148


$
13,911


$
4,365


$
9,149Net income (loss) per
    share  basicIncome (loss) from continuing
    operations

$
(0.72
)

$
0.96


$
1.06


$
0.34


$
0.71Net income (loss) per
    share  basic

$
(0.72
)

$
0.96


$
1.06


$
0.34


$
0.70Net income (loss) per
    share  dilutedIncome (loss) from continuing
    operations

$
(0.72
)

$
0.94


$
0.95


$
0.33


$
0.69Net income (loss) per
    share  diluted

$
(0.72
)

$
0.94


$
0.95


$
0.33


$
0.69Shares used in per share
    calculation:Basic


14,736



14,677



13,100



12,948



13,039Diluted


14,736



15,019



14,556



13,113



13,313   23




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September 30,2006


2005


2004


2003


2002(In thousands)Consolidated Balance Sheets
    Data:Cash, cash equivalents and
    short-term investments

$
70,134


$
68,807


$
52,670


$
30,671


$
35,365Working capital


72,696



73,887



55,347



16,629



28,852Total assets


136,807



147,760



128,271



107,089



117,850Convertible notes payable














17,674



18,081Total stockholders equity

$
121,732


$
132,523


$
115,765


$
76,621


$
72,965     (1)
    
    Effective September 30, 2002, we discontinued the
    distribution and consulting businesses engaged in by Tekelec
    Limited in Japan. The results of operations and the assets and
    liabilities of the discontinued operations were segregated in
    the consolidated financial statements.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Overview
    when-and-if-available on-site
  Conditions
    and Trends in Our Industry
    Summary
    of Our Financial Performance in Fiscal 2006 compared to Fiscal
    2005
   24




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
    In Japan, revenues decreased by 48% or $8.9 million from
    fiscal 2005, primarily due to reduced orders as a result of
    competition from test products developed by two of our Japanese
    OEM customers, both for their own internal use and for sale to
    our major Japanese telecom operator customers. We expect this
    competitive factor to continue to impact our Japanese revenues
    in fiscal 2007. Revenues in Japan were also impacted by an 8%
    decrease in the average value of the yen, in which all our
    revenues in Japan are denominated.
    In regions outside Japan, our revenues were adversely affected
    by our internal product development delays. Although only
    $0.4 million in orders requiring additional product
    development on which no revenue could be recognized remained at
    fiscal year end, other customer orders that we would have
    expected to receive during the year in the absence of product
    development delays were themselves delayed or issued to other
    vendors.
    We saw a decrease of ten percentage points in overall gross
    profit margin due to four factors:  1.
    a $1.9 million non-cash impairment charge recorded against
    intangible purchased technology assets in the fourth fiscal
    quarter;2.
    a $0.4 million non-cash increase in the fourth fiscal
    quarter in our provision for the accelerated obsolescence of
    pre-common platform hardware components;3.
    the recognition of $0.3 million in pre-tax, non-cash,
    stock-based compensation expense under Statement of Financial
    Accounting Standard (SFAS) 123(R), Share-Based
    Payment, which we adopted at the beginning of the current
    fiscal year. Because we elected to adopt this standard under the
    modified prospective transition method, we did not restate prior
    periods to include stock-based compensation expense. Refer to
    Stock-Based Compensation in the Critical
    Accounting Policies and Estimates section below; and4.
    increased hardware component and manufacturing overhead costs as
    a percentage of sales.  
    Operating expenses increased by $2.1 million, as reductions
    in variable compensation expenses and costs to comply with the
    internal control requirements of the Sarbanes-Oxley Act were
    more than offset by four additional expenses:  1.
    the recognition of $2.4 million in pre-tax, non-cash,
    stock-based compensation expense under SFAS 123(R);2.
    a $1.0 million non-cash impairment charge recorded in the
    fourth fiscal quarter against long-lived and intangible assets
    related to the acquisition of NDB in 2002;3.
    a $0.4 million restructuring charge for the costs of a
    reduction in force late in the fourth fiscal quarter; and4.
    a $0.4 million increase in contractor costs related to a
    research and development project that was substantially
    completed by fiscal year end.      Critical
    Accounting Policies and Estimates
   25




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Revenue
    Recognition
  SOP 97-2, Software 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.        Income
    Taxes
    year-to-date
   26




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Accounting for Contingencies
    Foreign
    Exchange Risk and Derivative Financial Instruments
    Allowance
    for Doubtful Accounts and Excess or Obsolete
    Inventory
    first-in,
 27




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Goodwill
    and Long Lived Assets
  Goodwill and Other
    Intangible Assets
  Accounting for Impairment or
    Disposal of Long-Lived Assets.
  Stock-Based
    Compensation
  Share-Based Payment.
 28




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Results
    of Operations
    Percentage of Total RevenuesYear Ended September 30,2006


2005


2004Revenues:Products


68.3
%


77.7
%


78.8
%Services


31.7



22.3



21.2Total revenues


100.0



100.0



100.0Cost of revenues:Products


11.6



8.9



8.9Services


8.0



5.3



6.2Amortization and impairment of
    purchased technology


5.4



1.0



1.2Total cost of revenues


25.0



15.2



16.3Gross profit


75.0



84.8



83.7Operating expenses:Research and development


28.8



19.2



20.2Sales and marketing


36.6



28.3



29.4General and administrative


22.5



13.9



11.9Restructuring costs


0.8







Total operating expenses


88.7



61.4



61.5Operating income (loss)


(13.7
)


23.4



22.2Interest income


5.9



2.1



1.4Interest expense










(0.6
)Other income (expense), net






(0.2
)


0.3Income (loss) before income taxes


(7.8
)


25.3



23.3Provision for (benefit from)
    income taxes


14.7



3.5



(0.7
)Net income (loss)


(22.5
)%


21.8
%


24.0
%Gross profit margin on products


83.0
%


88.6
%


88.6
%Gross profit margin on services


74.6
%


76.3
%


71.0
%     Fiscal
    Years Ended September 30, 2006 and 2005
  Revenues
   29




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
    North American revenues decreased by 37% to $12.5 million
    from $19.8 million;
    European revenues decreased by 19% to $16.0 million from
    $19.7 million;
    Japanese revenues decreased by 48% to $9.6 million from
    $18.5 million; and
    Rest of World revenues increased by 33% to $9.3 million
    from $7.0 million.    Form 10-K.
  Cost
    of Revenues
  Share-Based Payment
        Research
    and Development
     30




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Sales
    and Marketing
      
    a decrease of $2.0 million in variable compensation due to
    below-target order levels;
    an exchange rate-driven decrease of $0.3 million due to
    average decreases of 8% in the Japanese yen, 3% in the British
    pound and 3% in the Euro against the dollar.    General
    and Administrative
      Restructuring
    Costs
    Interest
    Income
    Other
    Expense, Net
   31




---



##### Table of Contents



Income
    Taxes
    Fiscal
    Years Ended September 30, 2005 and 2004
  Revenues
      Cost
    of Revenues
          Research
    and Development
   32




---



##### Table of Contents



Sales
    and Marketing
    General
    and Administrative
    Interest
    Income
    Interest
    Expense
    Other
    Income (Expense), Net
    Income
    Taxes
    Liquidity
    and Capital Resources
     33




---



##### Table of Contents



Payments Due by PeriodLess Than


1-3


3-5


More ThanContractual Obligations

Total


1 Year


Years


Years


5 Years(In millions)Operating leases

$
3.4


$
1.5


$
1.7


$
0.2



Unconditional purchase obligations

$
0.2


$
0.2











Total contractual cash obligations

$
3.6


$
1.7


$
1.7


$
0.2



      34




---



##### Table of Contents



Off-Balance
    Sheet Arrangements
  Regulation S-K.
  Item 7A.  Quantitative
    and Qualitative Disclosures about Market Risks  Foreign
    Exchange Risk and Derivative Financial Instruments
        Interest
    Rate Risk
  available-for-sale
  Item 8.
    Financial
    Statements and Supplementary Data   35




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures    Rule 13a-15(e) Form 10-K.
    Rules 13a-15(f)
  
    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
   36




---



##### Table of Contents



Forms 10-Q
           37




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the Board of Directors and Stockholders of Catapult
    Communications Corporation:
  Internal Control 
    Integrated Framework
             38




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##### Table of Contents



Internal Control  Integrated Framework Internal Control  Integrated Framework
  Share-Based
    Payment
       Item 9B.
    Other
    Information   PART III  Form 10-K
  Item 10.
    Directors
    and Executive Officers of the Registrant    Form 10-K
    Code of
    Ethics
  Form 10-K
  Item 11.
    Executive
    Compensation   39




---



##### Table of Contents



Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accountant Fees and Services   40




---



##### Table of Contents



PART IV  Item 15.
    Exhibit
    and Financial Statement Schedules  Form 10-K:
  Page(1)  Consolidated
    Financial Statements:Report of
    Independent Registered Public Accounting Firm


42Report of
    Independent Registered Public Accounting Firm


43Consolidated
    Balance Sheets at September 30, 2006 and 2005


44Consolidated
    Statements of Operations for each of the three years in the
    period ended September 30, 2006


45Consolidated
    Statements of Stockholders Equity for each of the three
    years in the period ended September 30, 2006


46Consolidated
    Statements of Cash Flows for each of the three years in the
    period ended September 30, 2006


47Notes to
    Consolidated Financial Statements


48(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 theretoSupplementary
    Financial Data (Unaudited):Quarterly Financial Data for each
    of the years ended September 30, 2006 and 2005


69(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


70All other schedules are omitted
    because they are not applicable or the required information is
    shown in the Consolidated Financial Statements or Notes thereto  41




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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:
        Share-Based Payment
  Internal Control 
    Integrated Framework
      42




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Stockholders of Catapult
    Communications Corporation:
  Form 10-K)
  
    43




---



##### Table of Contents



CATAPULT
    COMMUNICATIONS CORPORATION
  CONSOLIDATED BALANCE SHEETS
  September 30,2006


2005(In thousands, except share and par value data)ASSETSCurrent Assets:Cash and cash equivalents

$
22,462


$
18,952Short-term investments


47,672



49,855Accounts receivable, net of
    allowances of $15 and $271 as of September 30, 2006 and
    2005, respectively


9,696



14,724Inventories


3,484



3,104Deferred tax assets


91



603Prepaid expenses


1,586



1,401Total current assets


84,991



88,639Property and equipment, net


1,912



1,693Goodwill


49,394



49,394Other intangibles, net


216



4,051Other assets


294



3,983Total assets

$
136,807


$
147,760LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
874


$
1,547Accrued liabilities


3,718



5,508Deferred revenue


7,703



7,697Total current liabilities


12,295



14,752Deferred revenue, long-term portion


256



485Deferred taxes and other
    liabilities, long term


2,524



Total liabilities


15,075



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; 14,438,206 and
    14,724,708 issued and outstanding as of September 30, 2006
    and 2005, respectively


14



15Additional paid-in capital


50,450



48,944Deferred stock-based compensation






(3
)Accumulated other comprehensive
    income


687



587Retained earnings


70,581



82,980Total stockholders equity


121,732



132,523Total liabilities and
    stockholders equity

$
136,807


$
147,760    44




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##### Table of Contents



CATAPULT
    COMMUNICATIONS CORPORATION
  CONSOLIDATED STATEMENTS OF OPERATIONS
  Year Ended September 30,2006


2005


2004(In thousands, exceptper share amounts)Revenues:Products

$
32,372


$
50,441


$
45,703Services


15,012



14,507



12,315Total revenues


47,384



64,948



58,018Cost of revenues:Products


5,513



5,766



5,192Services


3,811



3,434



3,570Amortization and impairment of
    purchased technology


2,543



686



686Total cost of revenues


11,867



9,886



9,448Gross profit


35,517



55,062



48,570Operating expenses:Research and development


13,652



12,445



11,740Sales and marketing


17,341



18,401



17,075General and administrative


10,647



9,008



6,885Restructuring costs


359







Total operating expenses


41,999



39,854



35,700Operating income (loss)


(6,482
)


15,208



12,870Interest income


2,817



1,364



801Interest expense










(321
)Other income (expense), net


(11
)


(148
)


148Income (loss) before income taxes


(3,676
)


16,424



13,498Provision for (benefit from)
    income taxes


6,990



2,276



(413
)Net income (loss)

$
(10,666
)

$
14,148


$
13,911Net income (loss) per
    share  basic

$
(0.72
)

$
0.96


$
1.06Net income (loss) per
    share  diluted

$
(0.72
)

$
0.94


$
0.95Shares used in per share
    calculation:Basic


14,736



14,677



13,100Diluted


14,736



15,019



14,556    45




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##### Table of Contents



CATAPULT
    COMMUNICATIONS CORPORATION
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY
  Deferred


AccumulatedStock-


Other





TotalAdditional


based


Comp-





Stock-


Compre-Common Stock


Paid-in


Compen-


rehensive


Retained


holders


hensiveShares


Amount


Capital


sation


Income


Earnings


Equity


Income (Loss)(In thousands, except share data)Balances at October 1, 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



14,075Issuance of common stock from
    exercise of stock options


102,449







614















614Repurchase and cancellation of
    common stock


(388,951
)


(1
)


(1,858
)










(1,733
)


(3,592
)Stock-based compensation










2,750















2,750Amortization of deferred
    stock-based compensation














3











3Currency translation adjustment


















50







50



50Unrealized gains and (losses) on
    investments, net


















50







50



50Net loss






















(10,666
)


(10,666
)


(10,666
)Balances at September 30, 2006


14,438,206


$
14


$
50,450


$



$
687


$
70,581


$
121,732


$
(10,566
)    46




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##### Table of Contents



CATAPULT
    COMMUNICATIONS CORPORATION
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended September 30,2006


2005


2004(In thousands)Cash flows from operating
    activities:Net income (loss)

$
(10,666
)

$
14,148


$
13,911Adjustments to reconcile net
    income (loss) to net cash provided by operating activities:Depreciation and amortization of
    property and equipment


1,082



1,733



1,842Amortization and impairment of
    purchased technology


2,543



686



686Amortization and impairment of
    other acquisition related intangibles


1,292



335



335Amortization of deferred
    stock-based compensation


3



36



36Amortization of convertible notes
    premium










(374
)Provision for (recovery of)
    doubtful accounts


(256
)


(24
)


16Deferred income taxes


6,686



(259
)


(895
)Stock-based compensation expense


2,750







Tax benefits from employee stock
    option plans






470



1,409Change in assets and liabilities:Accounts receivable


5,291



(4,588
)


461Inventories


(392
)


(731
)


(47
)Prepaid expenses


(190
)


228



(516
)Other assets


43



35



57Accounts payable


(778
)


490



244Accrued liabilities


(1,812
)


(461
)


(487
)Deferred revenue


(223
)


2,724



(119
)Net cash provided by operating
    activities


5,373



14,822



16,559Cash flows from investing
    activities:Sale and maturities of short-term
    investments


89,977



55,318



34,990Purchase of short-term investments


(87,744
)


(72,656
)


(45,658
)Purchase of property and equipment


(1,179
)


(799
)


(1,077
)Net cash provided by (used in)
    investing activities


1,054



(18,137
)


(11,745
)Cash flows from financing
    activities:Repurchase of common stock


(3,592
)






Proceeds from exercise of stock
    options


614



2,177



3,390Proceeds from stock offering, net
    of offering costs










3,012Net cash provided by (used in)
    financing activities


(2,978
)


2,177



6,402Effect of exchange rate changes on
    cash and cash equivalents


61



(18
)


123Net increase (decrease) in cash
    and cash equivalents


3,510



(1,156
)


11,339Cash and cash equivalents,
    beginning of year


18,952



20,108



8,769Cash and cash equivalents, end of
    year

$
22,462


$
18,952


$
20,108Supplemental disclosure of cash
    flow information:Unrealized gain (loss) on
    investments

$
50


$
(45
)

$
(8
)Cash paid for income taxes

$
1,305


$
2,690


$
1,807Non-cash investing and financing
    activities:Purchase of property and equipment
    on account

$
69







Conversion of notes payable to
    common stock









$
17,300    47




---



##### 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
    Use of
    Estimates
    Cash
    and Cash Equivalents
    Short-Term
    Investments
  Accounting
    for Certain Investments in Debt and Equity Securities
   48




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          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.    (SOP) 97-2, Software Revenue
 49




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Recognition.
  Foreign
    Currency Translation
    Derivative
    Financial Instruments
      Fair
    Value of Financial Instruments
    Concentration
    of Credit Risk and Major Customers
   50




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Percentage of


Percentage of RevenuesAccounts Receivable


for the Fiscal Year Endedas of September 30,


September 30,2006


2005


2006


2005


2004Customer A


















13
%Customer B


10
%














12
%Customer C






14
%






14
%


12
%Customer D






13
%










11
%Customer E


38
%


20
%


19
%


11
%


Customer F










11
%


11
%


     Inventories
  first-in,
  Capitalized
    Software Development Costs
  Accounting for the
    Costs of Computer Software to Be Sold, Leased, or Otherwise
    Marketed.
  Property
    and Equipment
   51




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Research
    and Development
    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
   52




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Impairment
    of Long-Lived Assets
      Stock-Based
    Compensation
  Share-Based Payment paid-in-capital
  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.
  Earnings
    per Share
  Earnings per Share.
 53




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended September 30,2006


2005


2004(In thousands, exceptper share amounts)Net income (loss), as reported for
    basic earnings per share

$
(10,666
)

$
14,148


$
13,911Interest on convertible notes, net
    of related tax effects










(24
)Net income (loss), for diluted
    earnings per share

$
(10,666
)

$
14,148


$
13,887Weighted average shares outstanding


14,736



14,677



13,100Dilutive options






342



404Convertible notes payable










1,052Weighted average shares assuming
    dilution


14,736



15,019



14,556Net income (loss) per share:Basic

$
(0.72
)

$
0.96


$
1.06Diluted

$
(0.72
)

$
0.94


$
0.95     Year Ended September 30,2006


2005


2004(In thousands)Common stock options


2,039



401



493   Recently
    Issued Accounting Standards
  Transition Election to
    Accounting for the Tax Effects of Share-Based Payment
    Awards. additional-paid-in-capital Share-Based
    Payment paid-in-capital
  Classification of Options and Similar Instruments Issued as
    Employee Compensation That Allow for Cash Settlement upon the
    Occurrence of a Contingent Event. Share-Based Payment.
  Accounting for Uncertainty in
    Income Taxes, an interpretation of FASB Statement
    No. 109.
 54




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  and/or
  Fair Value Measurements.
  Financial Statements 
    Considering the Effects of Prior Year Misstatements when
    Quantifying Misstatements in Current Year Financial
    Statements.
  Note 2 
    Goodwill and Intangible Assets
        As of September 30, 2006


As of September 30, 2005Gross





Net


Gross





NetCarrying


Accumulated


Carrying


Carrying


Accumulated


CarryingAmount


Amortization


Amount


Amount


Amortization


Amount(In thousands)Purchased technology

$
4,800


$
(4,658
)

$
142


$
4,800


$
(2,115
)

$
2,685Trade names


1,000



(970
)


30



1,000



(440
)


560Customer relationships


1,000



(970
)


30



1,000



(440
)


560Non-compete agreement


400



(386
)


14



400



(154
)


246System backlog


400



(400
)






400



(400
)


Total

$
7,600


$
(7,384
)

$
216


$
7,600


$
(3,549
)

$
4,051  55




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    EstimatedAmortizationFiscal Year

Expense(In thousands)2007

$
712008


71Thereafter


74Total

$
216   Note 3 
    Restructuring Costs
    Note 4 
    Other Income (Expense), Net
    Note 5 
    Balance Sheet Components
  available-for-sale
  September 30,2006


2005(In thousands)Cash and cash
    equivalents:Cash

$
7,324


$
6,522Corporate debt and money market
    securities


14,171



7,722U.S. government and agencies
    securities


901



913State and municipal securities


66



3,795$
22,462


$
18,952Short-term
    investments:Corporate debt securities

$
5,505


$
4,944U.S. government and agencies
    securities


10,302



9,454State and municipal securities


31,865



35,457$
47,672


$
49,855  56




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  September 30,2006


2005(In thousands)Inventories:Raw materials

$
2,860


$
2,600Work-in-process


241



231Finished goods


383



273$
3,484


$
3,104Property and equipment,
    net:Equipment

$
7,959


$
7,808Leasehold improvements


1,977



1,9559,936



9,763Less accumulated depreciation and
    amortization


(8,024
)


(8,070
)$
1,912


$
1,693   September 30,2006


2005


2004(In thousands)Allowance for doubtful
    accounts:Balances at beginning of year

$
271


$
294


$
320Provision for doubtful accounts






1



16Write-off of doubtful accounts


(256
)


(24
)


(42
)Balances at end of year

$
15


$
271


$
294   September 30,2006


2005(In thousands)Accrued liabilities:Payroll and related expenses

$
1,765


$
2,723Income taxes payable


558



715Other taxes payable


70



322Professional services fees payable


902



925Other


423



823$
3,718


$
5,508     2006


2005(In thousands)Balances at beginning of year

$
74


$
69Warranty accrual used during the
    year


(30
)


(74
)Warranty accrual additions during
    the year


(44
)


79Balances at end of year

$
0


$
74  57




---



##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 6 
    Related Party Transaction
    Note 7 
    Income Taxes
  non-U.S. income
    Year Ended September 30,2006


2005


2004(In thousands)Current:United States federal

$
47


$
(78
)

$
(2,677
)Foreign


344



2,082



2,012State and local


31



59



30Total current


422



2,063



(635
)Deferred:United States federal


5,700



172



100Foreign


(154
)






State and local


1,022



41



122Total deferred


6,568



213



222Total income tax provision
    (benefit)

$
6,990


$
2,276


$
(413
)     Year Ended September 30,2006


2005


2004Tax at federal rate


(34
)%


34
%


34
%State taxes, net of federal benefit


1



1



1Foreign tax differential


5



(13
)


(36
)Research credit


(6
)


(5
)


(1
)Tax exempt interest


(9
)


(1
)


(1
)Non-deductible stock-based
    compensation


4







Other


2



(2
)


Valuation allowance


227







Total


190
%


14
%


(3
)%    58




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  and/or Accounting for
    Contingencies.
        September 30,2006


2005(In thousands)Deferred tax assets:Accrued expenses and reserves

$
1,693


$
516Net operating loss carryforwards


565



1,615Depreciation and amortization


1,973



Foreign deferred tax assets(1)


112



Research and other credits


2,585



2,314Net Foreign taxes


743



274Current and deferred state taxes
    and other


4



20Total deferred tax assets


7,675



4,739Valuation allowance


(7,563
)


(206
)Net deferred tax assets(1)


112



4,533Deferred tax liabilities:Tax deductible goodwill


(2,386
)


Depreciation






(265
)Foreign deferred tax liabilities


(25
)


Total deferred tax liabilities


(2,411
)


(265
)Net deferred tax assets
    (liabilities)...

$
(2,299
)

$
4,268Recognized as:Deferred tax asset, current

$
91


$
603Deferred tax asset (liabilities),
    non-current


(2,390
)


3,665Total net deferred tax assets
    (liabilities)

$
(2,299
)

$
4,268    59




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (1)
    
    Remaining deferred tax assets as of September 30, 2006
    relates to foreign deferred tax assets.  non-U.S. subsidiaries
      Note 8 
    Stockholders Equity
  Stock
    Option Plans
   60




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Employee
    Stock Purchase Plan
    Convertible
    Notes Payable
      Issuance
    of Common Stock
  Form S-3 No. 333-112610)
  Repurchase
    of Common Stock
    Note 9 
    Stock-based Compensation
  Share-Based Payment
 61




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  paid-in-capital
  Adoption
    of SFAS 123(R)
    Year EndedSeptember 30,2006(In thousands)Stock-Based Compensation
    Expense:Cost of sales  products

$
113Cost of sales  services


220Research and development expense


691Selling and marketing expense


633General and administrative expense


1,093Total stock-based compensation
    expense


2,750Tax effect on stock-based
    compensation expenses


(20
)Net effect on net income

$
2,730Net effect on basic net income per
    share

$
0.19Net effect on diluted net income
    per share

$
0.19   Periods
    prior to the adoption of SFAS 123(R)
  Accounting for
    Stock Issued to Employees Accounting for Stock-Based
    Compensation
 62




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended September 30,2005


2004(In thousands, except per share amounts)Net income, as reported for basic
    earnings per share

$
14,148


$
13,911Interest on convertible notes, net
    of related tax effects






(24
)Net income, for diluted earnings
    per share


14,148



13,887Add: Stock-based employee
    compensation expense included in reported income, net of related
    tax effects


22



31Deduct: Total stock-based employee
    compensation expense determined under fair-value based method
    for all awards, net of related tax effects


(5,063
)


(2,404
)Pro forma net income, for basic
    earnings per share

$
9,107


$
11,538Pro forma net income, for diluted
    earnings per share

$
9,107


$
11,514Net income per share:Basic net income per share as
    reported

$
0.96


$
1.06Basic net income per share pro
    forma

$
0.62


$
0.88Diluted net income per share as
    reported

$
0.94


$
0.95Diluted net income per share pro
    forma

$
0.61


$
0.79   out-of-the-money
 63




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  General
    Option Information
    WeightedWeighted


AverageNumber of


Average


Remaining


AggregateOptions


Exercise


Contractual


IntrinsicOutstanding


Price


Term


Value(Years)


(In thousands)Balance at September 30, 2003


1,785,793


$
12.54Options granted


253,034


$
18.79Options exercised


(344,943
)

$
8.91Options canceled, forfeited or
    expired


(62,374
)

$
16.92Balance at September 30, 2004


1,631,510


$
14.15Options granted


495,564


$
19.20Options exercised


(148,912
)

$
11.84Options canceled, forfeited or
    expired


(22,133
)

$
18.14Balance at September 30, 2005


1,956,029


$
15.56Options granted


559,585


$
12.85Options exercised


(86,405
)

$
4.80Options canceled, forfeited or
    expired


(94,342
)

$
19.79Balance at September 30, 2006


2,334,867


$
15.14



6.95


$
569Vested or expected to vest,
    September 30, 2006


2,315,562


$
15.17



6.90


$
568Exercisable, September 30,
    2006


1,556,773


$
16.22



5.89


$
476     Options OutstandingWeighted





Options ExercisableAverage


Weighted





WeightedRemaining


Average





AverageNumber of


Contractual


Exercise


Number of


ExerciseRange of Exercise Price

Shares


Life


Price


Shares


Price$ 1.27  $ 5.80


218,723



6.5


$
5.78



182,308


$
5.77$ 5.81  $ 9.91


4,219



3.0


$
8.56



4,219


$
8.56$ 9.92  $12.55


732,621



8.4


$
12.22



219,518


$
11.75$12.56  $15.87


461,844



6.3


$
14.56



322,857


$
14.76$15.88  $18.62


301,111



5.6


$
17.52



211,522


$
17.63$18.63  $25.10


616,349



6.6


$
21.24



616,349


$
21.242,334,867











1,556,773  64




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended September 30,
    2004Exercise price equal to market
    value

$
10.07Year Ended September 30,
    2005Exercise price equal to market
    value

$
14.68Year Ended September 30,
    2006Exercise price equal to market
    value

$
7.58   twelve-month
  Valuation
    Assumptions
  Black-Scholes Black-Scholes
  Employee Stock Option Plans

Employee Stock Purchase PlanYear Ended September 30,

Year Ended September 30,2006

2005

2004

2006*

2005

2004Dividend yield

0.0%

0.0%

0.0%



0.0%

0.0%Expected life of option

5.2 years

5.7 years

2.7 years



0.5 years

0.5 yearsRisk-free interest rate

4.9%

3.50%

2.85%



2.80%

1.15%Expected volatility

64.0%

96.0%

90.1%



56.7%

71.3%     *
    
    The company terminated its Employee Stock Purchase Plan
    effective October 31, 2005  Expected life of option:
  Expected Volatility:
  Expected Dividend:
  Risk-Free Interest Rate:
  Note 10
    
    401-K
    Plan   65




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 11 
    Commitments and Contingencies
  Operating
    Leases
        Year Ending September 30,

Future Payments(In thousands)2007

$
1,5012008


1,0942009


6212010


2032011


33$
3,452   Unconditional
    purchase obligations
    Contingencies
   66




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accounting for Contingencies
  Indemnifications
        Note 12 
    Geographic Information
  Disclosures About Segments of an Enterprise and Related
    Information.
   67




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##### Table of Contents



CATAPULT COMMUNICATIONS CORPORATION
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    North


UK, Europe








ConsolidatedAmerica


& Middle East


Japan


Other


Total(In thousands)Year ended September 30,
    2006Revenues from unaffiliated
    customers

$
13,610


$
15,438


$
9,636


$
8,700


$
47,384Year ended September 30,
    2005Revenues from unaffiliated
    customers

$
19,751


$
19,739


$
18,482


$
6,976


$
64,948Year ended September 30,
    2004Revenues from unaffiliated
    customers

$
17,355


$
18,355


$
19,628


$
2,680


$
58,018As of September 30,
    2006Goodwill

$
22,896


$
26,498










$
49,394Long-lived assets

$
1,153


$
394


$
244


$
121


$
1,912As of September 30,
    2005Goodwill

$
22,896


$
26,498










$
49,394Long-lived assets

$
950


$
479


$
264






$
1,693As of September 30,
    2004Goodwill

$
22,896


$
26,498










$
49,394Long-lived assets

$
2,035


$
338


$
267






$
2,640      68




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##### Table of Contents



Supplementary
    Financial Data  Quarterly
    Financial Data (Unaudited)
  Consolidated Statements of Operations Data:
  Quarter EndedSept. 30,


June 30,


Mar. 31,


Dec. 31,2006


2006


2006


2005(In thousands, except per share amounts)Revenues

$
13,830


$
10,789


$
10,663


$
12,102Gross profit


8,978



8,568



8,290



9,681Operating income (loss)


(2,619
)


(1,789
)


(1,618
)


(456
)Net income (loss)

$
(11,076
)

$
1,056


$
(789
)

$
143Net income (loss) per share:Basic

$
(0.76
)

$
0.07


$
(0.05
)

$
0.01Diluted

$
(0.76
)

$
0.07


$
(0.05
)

$
0.01   Sept. 30,


June 30,


Mar. 31,


Dec. 31,2005


2005


2005


2004Revenues

$
15,751


$
14,276


$
19,050


$
15,871Gross profit


12,883



11,946



16,597



13,637Operating income


2,249



2,345



6,558



4,057Net income

$
2,522


$
2,383


$
5,430


$
3,813Net income per share:Basic

$
0.17


$
0.16


$
0.37


$
0.26Diluted

$
0.17


$
0.16


$
0.36


$
0.25  69




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##### Table of Contents



INDEX TO
    EXHIBITS
  Regulation S-K):
  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  incorporated by reference to
    Exhibit 3.2 to our Annual Report on
    Form 10-K
    dated December 14, 2005.10
.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 Annual Report on
    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
    through January 24, 2006  incorporated by
    reference to Exhibit 10.2 to our Current Report on
    Form 8-K
    dated January 30, 2006.10
.4.1*

Form of Stock Option Agreement,
    1998 Stock Plan  incorporated by reference to Exhibit
    10.15 to our Quarterly Report on
    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 Annual
    Report on
    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 Annual
    Report on
    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 Quarterly Report on
    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 Quarterly Report on
    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 Annual Report on
    Form 10-K
    dated December 17, 2001.10
.13*

Executive Officer Fiscal Year 2006
    Variable Compensation Plan  incorporated by reference
    to Exhibit 10.1 to our Current Report on
    Form 8-K
    dated January 30, 2006.11
.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, 2003.16
.1

Letter from PricewaterhouseCoopers
    LLP to the Securities and Exchange Commission dated
    January 4, 2006  incorporated by reference to
    Exhibit 16.1 to our Current Report on
    Form 8-K
    dated January 4, 2006.21
.1

Subsidiaries of the Registrant.23
.1

Consent of Independent Registered
    Public Accounting Firm.23
.2

Consent of Independent Registered
    Public Accounting Firm.24
.1

Power of Attorney (contained in
    the signature page of this Annual Report on
    Form 10-K). 70




---



##### Table of Contents



ExhibitNumber

Description31
.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.     *
    
    Represents a management contract or compensatory plan, contract
    or arrangement in which any director or any of the named
    executives participates.We will mail a copy of any exhibit listed above for a nominal
    fee to any stockholder upon written request. 71




---



##### Table of Contents



SIGNATURES
      By:
    /s/  Richard
    A. Karp   Chief Executive Officer & Chairman of
 the Board
    POWER OF
    ATTORNEY
  attorney-in-fact, Form 10-K, attorney-in-fact,
    Signature

Title

Date/s/  Richard
    A. Karp(Richard
    A. Karp)

Chief Executive Officer,
    Chairman of the Board
    (Principal Executive Officer)

December 29, 2006/s/  Christopher
    A.
    Stephenson(Christopher
    A. Stephenson)

Chief Financial Officer
    (Principal Financial and
    Principal Accounting Officer)

December 29, 2006/s/  Charles
    L. Waggoner(Charles
    L. Waggoner)

Director

December 29, 2006/s/  R.
    Stephen
    Heinrichs(R.
    Stephen Heinrichs)

Director

December 29, 2006/s/  John
    M.
    Scandalios(John
    M. Scandalios)

Director

December 29, 2006/s/  Nancy
    H. Karp(Nancy
    H. Karp)

Director

December 29, 2006/s/  Henry
    P. Massey
    Jr.(Henry
    P. Massey, Jr.)

Director

December 29, 2006/s/  Peter
    S. Cross(Peter
    S. Cross)

Director

December 29, 2006  72