Catapult Communications 10Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-24701

CATAPULT COMMUNICATIONS CORPORATION

(Exact name of Registrant as specified in its charter)


Nevada		77-0086010
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification Number)

160 South Whisman Road
Mountain View, California 94041

(650) 960-1025

(Address, including zip code, and telephone number, including area code, of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

As of June 30, 2007, there were 13,644,357 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.

CATAPULT COMMUNICATIONS CORPORATION

FORM 10-Q

INDEX


	Page
Part I—Financial Information

Item 1. Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2007 and September 30, 2006		1

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2007 and 2006		2

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2007 and 2006		3

Notes to Unaudited Condensed Consolidated Financial Statements		4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3. Quantitative and Qualitative Disclosures About Market Risk		18

Item 4. Controls and Procedures		19

Part II—Other Information

Item 1. Legal Proceedings		19

Item 1A. Risk Factors		19

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 4. Submission of Matters to a Vote of Security Holders		27

Item 6. Exhibits		28

Signature		29
EXHIBIT 3.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

Part I. Financial Information

Item 1. Financial Statements

CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,		September 30,
	2007		2006
	(In thousands, except share
	and par value data)

ASSETS
Current Assets:
Cash and cash equivalents	$	24,015		$	22,462
Short-term investments		39,008			47,672
Accounts receivable, net of allowances of $16 and $15 as of June 30, 2007 and September 30, 2006, respectively		6,963			9,696
Inventories		3,156			3,484
Deferred tax assets		126			91
Prepaid expenses and other current assets		1,854			1,586

Total current assets		75,122			84,991
Property and equipment, net		1,670			1,912
Goodwill		49,394			49,394
Other intangibles, net		161			216
Deferred tax assets, long-term		993			20
Other assets		2,075			274

Total assets	$	129,415		$	136,807


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	484		$	874
Accrued liabilities		3,656			3,718
Deferred revenue		6,933			7,703

Total current liabilities		11,073			12,295
Deferred revenue, long-term		490			256
Deferred taxes and other liabilities, long-term		3,908			2,524

Total liabilities		15,471			15,075

Stockholders’ Equity:
Common stock, $0.001 par value, 40,000,000 shares authorized; 13,644,357 and 14,438,206 issued and outstanding as of June 30, 2007 and September 30, 2006, respectively		14			14
Additional paid-in capital		48,756			50,450
Accumulated other comprehensive income		886			687
Retained earnings		64,288			70,581

Total stockholders’ equity		113,944			121,732

Total liabilities and stockholders’ equity	$	129,415		$	136,807

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three months ended						Nine months ended
	June 30,						June 30,
	2007			2006			2007			2006
	(In thousands, except per share amounts)
Revenues:
Products	$	4,839		$	6,996		$	17,464		$	22,444
Services		3,636			3,793			11,171			11,110

Total revenues		8,475			10,789			28,635			33,554

Cost of revenues:
Products		1,400			1,142			3,818			3,575
Services		765			908			2,367			2,926
Amortization of purchased technology		13			171			37			514

Total cost of revenues		2,178			2,221			6,222			7,015

Gross profit		6,297			8,568			22,413			26,539

Operating expenses:
Research and development		3,463			3,543			9,748			10,058
Sales and marketing		4,177			4,423			12,409			13,205
General and administrative		2,281			2,391			6,759			7,139

Total operating expenses		9,921			10,357			28,916			30,402

Operating loss		(3,624	)		(1,789	)		(6,503	)		(3,863	)
Interest income		825			751			2,472			1,991
Other income (expense), net (Note 13)		(81	)		3			1,747			56

Loss before income taxes		(2,880	)		(1,035	)		(2,284	)		(1,816	)
Provision for (benefit from) income taxes		(541	)		(2,091	)		435			(2,226	)

Net income (loss)	$	(2,339	)	$	1,056		$	(2,719	)	$	410


Net income (loss) per share — basic	$	(0.17	)	$	0.07		$	(0.19	)	$	0.03

Net income (loss) per share — diluted	$	(0.17	)	$	0.07		$	(0.19	)	$	0.03


Shares used in per share calculation:
Basic		13,739			14,801			13,938			14,776
Diluted		13,739			14,887			13,938			14,935

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine months ended
	June 30,
	2007			2006
	(In thousands)
Cash flows from operating activities:
Net income (loss) as reported	$	(2,719	)	$	410
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of property and equipment		672			758
Amortization of purchased technology		37			514
Amortization of other acquisition related intangibles		18			253
Amortization of deferred stock-based compensation		—			3
Provision for doubtful accounts		1			—
Deferred income taxes		383			(2,741	)
Stock based compensation expenses		2,244			1,802
Excess tax benefits from stock options exercised		—			(35	)
Tax benefits related to stock based compensation		—			78
Gain on disposal of fixed assets		(25	)		—
Change in assets and liabilities:
Accounts receivable		2,739			6,369
Inventories		321			(1,405	)
Prepaid expenses and other current assets		(265	)		(67	)
Other assets		(1,804	)		27
Accounts payable		(399	)		(944	)
Accrued liabilities		(84	)		(2,018	)
Deferred revenue		(535	)		3,253

Net cash provided by operating activities		584			6,257

Cash flows from investing activities:
Sale and maturities of short-term investments		67,288			73,272
Purchase of short-term investments		(58,630	)		(72,422	)
Purchase of property and equipment		(436	)		(936	)
Proceeds from sale of property and equipment		65			—

Net cash provided (used in) investing activities		8,287			(86	)

Cash flows from financing activities:
Repurchase of common stock		(7,643	)		(931	)
Proceeds from exercise of stock options		130			604
Excess tax benefit from stock options exercised		—			35

Net cash used in financing activities		(7,513	)		(292	)

Effect of exchange rate changes on cash and cash equivalents		195			55

Net increase in cash and cash equivalents		1,553			5,934

Cash and cash equivalents, beginning of period		22,462			18,952

Cash and cash equivalents, end of period	$	24,015		$	24,886


Supplemental disclosure of cash flow information:
Unrealized gain (loss) on investments	$	(7	)	$	39
Cash paid for income taxes		305			1,040

Non-cash investing activities:
Purchase of property and equipment on account	$	7		$	36

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CATAPULT COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—THE COMPANY AND BASIS OF PRESENTATION

Catapult Communications Corporation and its subsidiaries (“we” or “the Company”) design, develop, manufacture, market and support advanced software-based test systems offering integrated suites of testing applications for the global telecommunications industry. Our advanced test systems assist our customers in the design, integration, installation and acceptance testing of a broad range of digital telecommunications equipment and services. The Company was incorporated in California in October 1985, was reincorporated in Nevada in 1998, and has operations in the United States, Canada, the United Kingdom, Europe, Japan, China, India, the Philippines and Australia. Management has determined that we conduct our business within one reportable segment: the design, development, manufacture, marketing and support of advanced software-based test systems globally.

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2006 and filed with the SEC on December 29, 2006 as amended by Amendment No. 1 to our Annual Report on Form 10-K/A as filed with the SEC on January 29, 2007. The unaudited condensed consolidated financial statements as of June 30, 2007, and for the three and nine months ended June 30, 2007 and 2006, reflect, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial information set forth herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for any subsequent interim period or for an entire year. The September 30, 2006 balance sheet was derived from audited financial statements at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies during the nine months ended June 30, 2007 as compared to what was previously disclosed in the Company’s Form 10-K for the year ended September 30, 2006 as amended by Amendment No. 1 to our Annual Report on Form 10-K/A as filed with the SEC on January 29, 2007.

NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosures. It will be effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of FIN 48 is encouraged. We are currently evaluating FIN 48 and its possible impacts on our consolidated financial statements and related disclosures. Upon adoption, there is a possibility that the cumulative effect would result in a charge or benefit to the beginning balance of retained earnings, increases in future effective tax rates, and/or increases in future effective tax rate volatility.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”),Fair Value Measurements.SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It also establishes a fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We have not yet determined the impact, if any, that the adoption of SFAS 157 will have on our consolidated financial statements and related disclosures.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB 108”),Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires companies to quantify the impact of all correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. SAB 108 is

effective for financial statements issued for fiscal years ending after November 15, 2006. The Company’s adoption of SAB 108 has not had a material impact on the Company’s consolidated financial statements and related disclosures.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements and is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adopts SFAS 157. We have not yet determined the impact, if any, that the adoption of SFAS 159 will have on our consolidated financial statements and related disclosures.

NOTE 3 — STOCK-BASED COMPENSATION

Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123(R),Share-Based Payment,(“SFAS 123(R)”). SFAS 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. The Company elected to adopt the modified prospective application method as provided by SFAS 123(R), and, accordingly, the Company records compensation costs as the requisite service is rendered for the unvested portion of previously issued awards that remain outstanding at the initial date of adoption and any awards issued, modified, repurchased, or cancelled after the effective date of SFAS 123(R). The Company recognizes compensation expense for stock option awards on an accelerated basis over the requisite service period of the award. In addition, we have adopted the long-form method as set forth in paragraph 81 of SFAS 123(R) to determine the hypothetical additional paid-in-capital pool.

Stock-based Compensation Expense

The following table summarizes the effect on our unaudited condensed consolidated statements of operations of recording stock-based compensation expense recognized under SFAS 123(R) for the three and nine months ended June 30, 2007.


	Three months ended						Nine months ended
	June 30,						June 30,
	2007			2006			2007			2006
				(in thousands)
Stock-Based Compensation Expense:
Cost of sales — products	$	49		$	32		$	112		$	73
Cost of sales — services		67			64			185			136
Research and development expense		222			192			546			442
Selling and marketing expense		184			161			498			437
General and administrative expense		351			299			903			714

Total stock-based compensation expense		873			748			2,244			1,802
Tax effect on stock-based compensation expenses		(5	)		(1,557	)		(14	)		(1,904	)

Net effect on net income	$	868		$	(809	)	$	2,230		$	(102	)

Net effect on basic net income (loss) per share	$	0.06		$	(0.05	)	$	0.16		$	(0.01	)

Net effect on diluted net income (loss) per share	$	0.06		$	(0.05	)	$	0.16		$	(0.01	)

General Option Information

Information with respect to stock option activity from October 1, 2006 through June 30, 2007 is set forth below:


						Weighted
				Weighted		Average
	Number of			Average		Remaining
	Options			Exercise		Contractual		Aggregate
	Outstanding			Price		Term		Intrinsic Value

						(years)		(in thousands)
Balance at October 1, 2006		2,334,867		$	15.14		6.95	$	569

Granted		725,899			9.65
Exercised		(23,372	)		5.57
Canceled, forfeited or expired		(199,729	)		16.73

Balance, June 30, 2007		2,837,665		$	13.70		7.00	$	1,003


Vested or expected to vest, June 30, 2007		2,706,000		$	13.82		6.89	$	967


Exercisable, June 30, 2007		1,677,128		$	15.50		5.41	$	827

As of June 30, 2007, the total number of shares available for future option grants was 407,248.

The weighted average exercise prices and weighted average fair values of options granted during the three and six-month periods ended June 30, 2007 and 2006 were as follows:


	Three months ended				Nine months ended
	June 30,				June 30,
	2007		2006		2007		2006

Weighted average exercise price	$	9.88	$	12.55	$	9.65	$	12.94
Weighted average fair value	$	5.85	$	7.39	$	5.61	$	7.66

As of June 30, 2007, approximately $5.1 million of unrecognized compensation costs related to stock options are expected to be recognized over a weighted-average period of approximately 1.7 years. During the nine-month periods ended June 30, 2007 and 2006, the aggregate intrinsic value of options exercised under the Company’s stock option plan was approximately $91,900 and $856,900, respectively.

Valuation Assumptions

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions set out in the tables below:


				Employee Stock Option Plans
	Three months ended						Nine months ended
	June 30,						June 30,
	2007			2006			2007			2006

Expected life of option	5.41 years			5.24 years			5.23 years			5.27 years
Expected volatility		64.0	%		64.0	%		63.5	%		64.3	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Risk-free interest rate		4.52	%		4.99	%		4.54	%		4.93	%

Expected life of option: The Company’s calculation of expected life of options represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

Expected Volatility: The fair value of stock-based awards was determined using the Black-Scholes valuation method with a volatility factor based on the Company’s historical stock prices.

Expected Dividend: The Company has not declared or paid any dividends and does not currently expect to do so in the future.

Risk-Free Interest Rate: The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in U.S. Treasury zero-coupon issues with an equivalent term.

NOTE 4 — BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

We have presented net income (loss) per share for all periods in accordance with SFAS 128,Earnings per Share. SFAS 128 requires the presentation of basic and diluted earnings per share. Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share include the effect of dilutive potential common shares using the treasury stock method, but in periods where net losses are recorded, common stock equivalents such as common stock options would decrease the net loss per share and therefore are not added to the weighted average shares outstanding. The following is a reconciliation of the denominator used in calculating basic and diluted net income (loss) per share:


	Three months ended					Nine months ended
	June 30,					June 30,
	2007			2006		2007			2006
	(In thousands, except per share amounts)
Net income (loss), as reported for basic and diluted per share	$	(2,339	)	$	1,056	$	(2,719	)	$	410


Weighted average shares outstanding		13,739			14,801		13,938			14,776
Dilutive options		—			86		—			159

Weighted average shares assuming dilution		13,739			14,887		13,938			14,935


Net income (loss) per share:
Basic	$	(0.17	)	$	0.07	$	(0.19	)	$	0.03

Diluted	$	(0.17	)	$	0.07	$	(0.19	)	$	0.03

Diluted net income (loss) per share does not include the effect of the following anti-dilutive potential common shares:

Three months ended

Nine months ended

June 30,

2007

2006

2007

2006

(In thousands)

Common stock options

2,651

2,184

2,343

1,959

NOTE 5 — INVENTORIES

The components of inventories are as follows:


	June 30,		September 30,
	2007		2006
	(In thousands)

Inventories:
Raw materials	$	2,862		$2,860
Work-in-process		29		241
Finished goods		265		383

	$	3,156		$3,484

NOTE 6 — GOODWILL AND INTANGIBLE ASSETS

We performed our most recent goodwill impairment test as of September 30, 2006 and determined that there were no indicators of impairment. As such, there was no write-down of the goodwill balance. Between October 1, 2006 and June 30, 2007, there have been no changes to the Company’s goodwill balance of $49.4 million.

In the nine months of fiscal year 2007, there were no events or changes in circumstances to indicate impairment of intangible assets or changes to intangible assets impaired in the fourth fiscal quarter of 2006. Intangible assets subject to amortization consist of purchased technology, trade names and customer relationships that are being amortized over a period of seven years, non-compete agreements that are being amortized over a period of eight years, and a backlog that was amortized over a period of nine months, as follows:


	As of June 30, 2007							As of September 30, 2006
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Amount		Amortization			Amount		Amount		Amortization			Amount
	(In thousands)

Purchased technology	$	4,800	$	(4,694	)	$	106	$	4,800	$	(4,658	)	$	142
Trade names		1,000		(978	)		22		1,000		(970	)		30
Customer relationships		1,000		(978	)		22		1,000		(970	)		30
Non-compete agreement		400		(389	)		11		400		(386	)		14
System backlog		400		(400	)		—		400		(400	)		—

Total	$	7,600	$	(7,439	)	$	161	$	7,600	$	(7,384	)	$	216

The estimated future amortization expense of purchased intangible assets as of June 30, 2007 was as follows:


	Estimated
	Amortization
	Expense
Fiscal Year	(In thousands)
2007 (remaining three months)	$	18
2008		73
Thereafter		70

Total	$	161

NOTE 7 — WARRANTY ACCRUAL

The following table represents the activity in the warranty accrual for the nine months ended June 30, 2007 and 2006:


	2007		2006
			(In thousands)

Balances at beginning of period	$	—	$	74
Utilized		—		(31	)
Charged (reduction) to cost and expenses		—		7

Balances at end of quarter	$	—	$	50

NOTE 8 — INCOME TAXES

Our provision for (benefit from) income taxes consists of federal, state and foreign income taxes including the change in our allowance for uncertain tax positions, plus the increase in deferred tax liability resulting from the amortization for tax purposes of a portion of our goodwill. Having taken a full valuation allowance against our U.S. deferred tax assets at the end of fiscal 2006, we no longer record a tax benefit for U.S. pre-tax losses.

In the three months ended June 30, 2007 and 2006, we recorded tax benefits of $541,000 and $2.1 million, respectively. The tax benefit for the three-month period ended June 30, 2007 resulted from a decrease during the quarter in our forecast foreign taxable income for the full fiscal year. The tax benefit for the three months ended June 30, 2006 resulted from an adjustment of our estimated tax rate for the fiscal year as a whole, primarily due to changes in forecasted pre-tax income (loss) for the full fiscal year, together with discrete quarterly adjustments of $0.3 million consisting primarily of a reduction in our accrual for uncertain tax positions.

In the nine months ended June 30, 2007 and 2006, we recorded a tax provision of $435,000 and a tax benefit of $2.2 million, respectively. The disparity in tax rates reflects primarily the full valuation allowance that we took against our U.S. deferred tax assets at the end of fiscal 2006. As a result of this allowance, in fiscal 2007 we are no longer recording a tax

benefit for U.S. pre-tax losses; our tax provision consists of tax on foreign income, including the change in our allowance for uncertain tax positions, plus the increase in deferred tax liability resulting from the amortization for tax purposes of a portion of our goodwill. The tax benefit for the nine months ended June 30, 2006 was increased by adjustments of $0.3 million consisting primarily of a reduction in our accrual for uncertain tax positions.

NOTE 9 — STOCKHOLDER’S EQUITY

Comprehensive Income (loss)

The components of comprehensive income (loss), net of tax, are as follows:


	Three months ended						Nine months ended
	June 30,						June 30,
	2007			2006			2007			2006
	(In thousands)

Net income (loss), as reported	$	(2,339	)	$	1,056		$	(2,719	)	$	410
Currency translation adjustment		29			151			206			54
Unrealized gains (losses) on investments		(5	)		(1	)		(7	)		39

Comprehensive income (loss)	$	(2,315	)	$	1,206		$	(2,520	)	$	503

Stock Option Plans

At September 30, 1997, 1,800,000 shares and 154,500 shares of common stock had been reserved for issuance to employees under the 1989 Incentive Stock Option Plan (the “1989 Plan”) and the UK Executive Share Option Scheme (the “UK Scheme”), respectively. In June 1998, the Board of Directors adopted the 1998 Stock Plan (the “1998 Plan”), which provided for the issuance of options to purchase an additional 1,800,000 shares. At the January 2003 Annual Meeting of Stockholders, the Company’s stockholders approved an increase of 1,000,000 shares to the 1998 Plan. At the January 2006 Annual Meeting of Stockholders, the Company’s stockholders approved a 1,000,000 share increase. The Board of Directors has the authority to determine optionees, the number of shares, the term of each option and the exercise price. Options under the 1989 and 1998 Plans generally become exercisable at a rate of 1/8th of the total options granted nine months after the option grant date and then at a rate of 1/48th per month thereafter. Options under the UK Scheme become exercisable at the rate of 1/36th of the total options granted per month commencing twelve months after the option grant date. Options will expire, if not exercised, upon the earlier of 10 years from the date of grant or 30 days after termination as an employee of the Company. The 1989 Plan and the UK Scheme were terminated as to future grants in 1998 effective with the adoption of the 1998 Plan.

Employee Stock Purchase Plan

In June 1998, we adopted the 1998 Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan was discontinued as of October 31, 2005. The Purchase Plan permitted eligible employees to purchase common stock through payroll deductions of up to 7% of an employee’s total compensation. The price of the common stock was generally 85% of the lower of the fair market value at the beginning of the offering period or the end of the relevant purchase period. A total of 16,044 shares were issued under the Purchase Plan in the year ended September 30, 2006.

Repurchase of Common Stock

In December 1999, our Board of Directors authorized a stock repurchase program of up to 2,000,000 shares of the Company’s common stock. Depending on market conditions and other factors, repurchases can be made from time to time in the open market and in negotiated transactions, including block transactions, and this program may be discontinued at any time. In fiscal 2006, we repurchased and canceled 388,951 shares at a cost of approximately $3.6 million. In the three months ended December 31, 2006, we repurchased and canceled 417,118 shares at a cost of approximately $3.6 million. In January 2007, our Board of Directors authorized an increase of 1,000,000 shares in the number of shares that may be repurchased under the program. In the three month period ended March 31, 2007, we repurchased and canceled 94,333 shares at a cost of approximately $0.9 million. In the three months period ended June 30, 2007, we repurchased and canceled 305,770 shares at a cost of approximately $3.2 million. The shares repurchased were restored to the status of authorized but unissued. As of June 30, 2007, approximately 1,536,000 shares remained available for repurchase under the authorization.

NOTE 10 — GEOGRAPHICAL INFORMATION

We are organized to operate in and service a single reportable segment: the design, development, manufacture, marketing and support of advanced software-based telecommunications test systems.

Revenues and long-lived assets by geographic region are as follows:


	North		UK, Europe &						Consolidated
	America		Middle East		Japan		Other		Total
			(In thousands)
Nine months ended June 30, 2007
Revenues from unaffiliated customers	$	8,177	$	9,197	$	6,816	$	4,445	$	28,635

Nine months ended June 30, 2006
Revenues from unaffiliated customers	$	10,260	$	10,139	$	7,433	$	5,722	$	33,554

As of June 30, 2007
Goodwill	$	22,896	$	26,498	$	—	$	—	$	49,394
Long-lived assets		975		395		210		90		1,670

As of September 30, 2006
Goodwill	$	22,896	$	26,498	$	—	$	—	$	49,394
Long-lived assets		1,153		394		244		121		1,912

Revenues above reflect the location of the end customer and exclude all inter-company sales.

Revenues in the United States represented 22% and 28% of our total revenues in the nine months ended June 30, 2007 and 2006, respectively. Revenues from Germany represented 10% of our total revenues in the nine months ended June 30, 2007. Operations in Ireland accounted for 32% and 31% of the consolidated identifiable assets at June 30, 2007 and 2006, respectively.

NOTE 11 — CUSTOMER INFORMATION

We currently sell our products to a small number of customers. Customers representing 10% or more of our accounts receivable balances as of June 30, 2007 or September 30, 2006, or 10% or more of our revenues for the three or nine months ended June 30, 2007 or 2006, were as follows:


	Percentage of Accounts Receivable as of						Percentage of Revenues
							Three months ended						Nine months ended
	June 30,			September 30,			June 30,						June 30,
	2007			2006			2007			2006			2007			2006

Customer A		—			10	%		—			—			—			—
Customer B		—			38	%		—			12	%		13	%		—
Customer C		—			—			—			16	%		—			13	%
Customer D		12	%		—			16	%		—			10	%		—
Customer E		20	%		11	%		13	%		—			10	%		—

NOTE 12 — CONTINGENCIES

A lawsuit was instituted in October 2002 against us and one of our subsidiaries, Catapult Communications International Limited, an Irish corporation, in the Antwerp Commercial Court, Antwerp, Belgium, by Tucana Telecom NV (“Tucana”), a Belgian company. Tucana had been a distributor of products for Tekelec, the company from which we acquired the Network Diagnostic Business (“NDB”) in August 2002. The writ alleged that the defendants improperly terminated an exclusive distribution agreement with Tucana following the acquisition of NDB and sought damages of 12,461,000 Euros (approximately $16.8 million as of June 30, 2007) plus interest and legal costs. The case was heard on April 28, 2006 and in a judgment on May 5, 2006, the Antwerp Commercial Court in Antwerp, Belgium dismissed the action for lack of jurisdiction. On June 23, 2006, Tucana filed a request for appeal against the dismissal. On May 22, 2007 the Antwerp Court of Appeal heard the appeal and on June 19, 2007 confirmed the Commercial Court’s dismissal decision and assessed the costs of the appeal against Tucana.

From time to time, we may be involved in other lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance with SFAS 5,Accounting for Contingencies, we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the

impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us, as well as adequate provisions for any probable and estimable losses. If an unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period.

NOTE 13 — LEGAL SETTLEMENT

On January 17, 2007, Catapult Communications Corporation and its wholly-owned subsidiary, Catapult Communications International Limited, (collectively, “Catapult”) entered into a settlement agreement with Nethawk Corporation and its parent company, Nethawk Oyj (collectively “Nethawk”), under which Nethawk Corporation and certain Nethawk shareholders, collectively, transferred a total of 710,000 shares of Nethawk Oyj common stock to Catapult, and Catapult dismissed all claims against Nethawk under a suit filed by Catapult in the United States District Court for the Northern District of Illinois, Eastern Division in December 2005. No party to the agreement has admitted any wrongdoing. The settlement agreement contains other terms to protect against future misuse of proprietary information by either party. The shares transferred to Catapult represent an interest of approximately 2.6% in Nethawk Oyj, a private Finnish company, at that date and have been recorded on the balance sheet of Catapult as a long-term asset under the heading Other Assets at a fair value of $1.8 million as determined by management.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2006, as filed with the Securities and Exchange Commission on December 29, 2006, as amended by Amendment No. 1 to our Annual Report on Form 10-K/A as filed with the SEC on January 29, 2007.

Forward-looking Statements

This report on Form 10-Q contains statements that are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our business’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. Such statements include, in particular, statements about our plans, strategies, prospects, changes and trends in our business and the markets in which we operate as described in this report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “forecast,” “predict,” “propose,” “potential” or “continue” or the negative of those terms or other comparable terminology. These statements are only predictions.

These forward-looking statements include but are not limited to those identified in this report with an asterisk (*) symbol. Actual results may differ materially from those discussed in such forward-looking statements, and you should carefully review the cautionary statements set forth in this report on Form 10-Q, including those set forth under the caption “Risk Factors” in Item 1A of Part II of this report and those set forth in our Annual Report on Form 10-K for the year ended September 30, 2006, filed on December 29, 2006, as amended by Amendment No. 1 to our Annual Report on Form 10-K/A as filed with the SEC on January 29, 2007.

We may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and in our reports to stockholders. We do not undertake to update any forward-looking statements that may be made in this Form 10-Q or from time to time by us or on our behalf.

Overview

Our Business and Products

Catapult Communications Corporation (“we”, “Catapult,” the “Company” or the “Registrant”) designs, develops, manufactures, markets and supports advanced software-based test systems for the global telecommunications industry. Our DCT2000^® (“DCT”) and MGTS^® products are digital communications test systems designed to enable equipment manufacturers and network operators to deliver complex digital telecommunications equipment and services more quickly and cost-effectively, while helping to ensure interoperability and reliability. Our advanced software and hardware assist customers in the design, integration, installation and acceptance testing of a broad range of digital telecommunications equipment and services by performing a variety of test functions, including:

	•		design and feature verification;

	•		conformance testing;

	•		interoperability testing;

	•		load and stress testing; and

	•		monitoring and analysis.

We offer a single line of Linux software-based telecommunications test products operating on a common hardware platform range. This product line consists of the DCT system, originally introduced in 1985 and since extensively enhanced, and the MGTS system, acquired with NDB in 2002. In addition, we will continue to offer previous Sun Microsystems SolarisTM-based generations of our products until their announced end of life.

We maintain an extensive library of software modules that provide test support for a large number of industry standard protocols and variants thereon. Our emphasis is on testing complex, high-level and emerging protocols, including:

	•		Long-Term Evolution of wireless networks (LTE);

	•		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).

Our extensive technical know-how and proprietary software development tools enable us to implement test support for new protocols and protocol variants rapidly in response to customer needs. With their extensive libraries of software protocol test modules, large selection of proprietary hardware physical interfaces and versatile range of hardware platforms, our products are easily configured to support a wide variety of digital testing functions, thereby reducing a customer’s need for multiple test systems. In addition, the systems’ multi-protocol, multi-user capabilities allow multiple complex testing operations to be performed simultaneously, helping our customers to accelerate their product development cycles.

Our test system products consist of advanced proprietary software together with our proprietary hardware interface and co-processor cards. When acquiring a system, customers typically license one or more software modules and purchase hardware and ongoing software support. Customers may upgrade their systems by purchasing additional software protocol test modules and additional hardware interfaces to meet future testing needs. Prices for our products vary widely depending upon the overall system configuration, including the number and type of software protocol modules and the number of hardware interfaces required by the customer. A system sale typically ranges in price from approximately $50,000 to over $250,000.

Conditions and Trends in Our Industry

In our fiscal year ended September 30, 2006, we experienced a reduction in revenues in comparison with the previous fiscal year due to three factors: increased competition from customers’ own test equipment offerings in the Japanese market, our own product development delays, and weaker overall demand in the market for software-based telecommunications test systems. These factors resulted in reduced purchasing of our products and services by our customers in North America, Europe and Japan. In other markets (referred to by us as “Rest of World”), we continued to see revenue growth. The 33% growth in Rest of World revenues in fiscal 2006 in comparison with the previous fiscal year reflected additional business from domestic telecommunications manufacturer customers in China and Korea, and increased research and development activity in China by some of our multinational customers.

In the nine months ended June 30, 2007, we were no longer affected by product development delays, but we continued to experience weak demand due to competition from customer test products in Japan and to the effects of

consolidation among major customers outside Japan, such as Alcatel-Lucent (which also acquired the 3G wireless business from Nortel) and Nokia Siemens Networks. The effects of this major customer consolidation extended to our Rest of World business, which experienced a 22% reduction in revenues in the nine months ended June 30, 2007 in comparison with the same period in the previous year.

Summary of Our Financial Performance in the Third Quarter of Fiscal 2007

For the reasons outlined in the preceding paragraph, our revenues in the three months ended June 30, 2007 decreased by 21% to $8.5 million from $10.8 million in the three months ended June 30, 2006. Our gross profit margin decreased by five percentage points to 74% due to increased hardware component and manufacturing overhead costs as a percentage of product revenues. Our operating expenses decreased by 4% primarily due to reductions in staffing levels, distributor commission, contractor fees and amortization expenses. As these operating expense level decreases were not sufficient to offset the decrease in revenue and gross profit margin, our operating loss increased to $3.6 million from $1.8 million.

During the third quarter of 2007, our cash, cash equivalents and short-term investments decreased by $4.2 million due to $3.2 million in share repurchases and $1.1 million in negative cash flows from operating activities. Net capital expenditures in the third quarter of fiscal 2007 amounted to just $0.1 million.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended September 30, 2006 as amended by Amendment No. 1 to our Annual Report on Form 10-K/A as filed with the SEC on January 29, 2007.

Results of Operations

The following table sets forth, for the periods indicated, the percentage relationship of certain items from our consolidated statements of operations to total revenues.


	Three months ended					Nine months ended
	June 30,					June 30,
		2007		2006			2007		2006
Revenues:
Products		57.1	%	64.8	%		61.0	%	66.9	%
Services		42.9		35.2			39.0		33.1

Total revenues		100.0		100.0			100.0		100.00

Cost of revenues:
Products		16.5		10.6			13.3		10.7
Services		9.0		8.4			8.3		8.7
Amortization of purchased technology		0.2		1.6			0.1		1.5

Total cost of revenues		25.7		20.6			21.7		20.9

Gross profit		74.3		79.4			78.3		79.1

Operating expenses:
Research and development		40.9		32.8			34.0		30.0
Sales and marketing		49.3		41.0			43.3		39.4
General and administrative		26.9		22.2			23.6		21.3

Total operating expenses		117.1		96.0			100.9		90.7

Operating loss		(42.8	)	(16.6	)		(22.7	)	(11.5	)
Interest income		9.7		7.0			8.6		5.9
Other income, net		(0.9	)	0.0			6.1		0.2

Income (loss) before income taxes		(34.0	)	(9.6	)		(8.0	)	(5.4	)
Provision for (benefit from) income taxes		(6.4	)	(19.4	)		1.5		(6.6	)

Net income (loss)		(27.6	)%	9.8	%		(9.5	)%	1.2	%

Gross profit margin on products (1)		71.1	%	83.7	%		78.1	%	84.1	%

Gross profit margin on services (1)		79.0	%	76.1	%		78.8	%	73.7	%


(1)		Gross profit margin on products and services excludes amortization of purchased technology.

Comparison of the Three-Month Periods Ended June 30, 2007 and 2006

Revenues

Our revenues for the three months ended June 30, 2007 decreased by 21% to $8.5 million from $10.8 million in the three months ended June 30, 2006. Over the same period, product revenues decreased by approximately 31% to $4.8 million from $7.0 million. The decrease in product revenues was attributable to decreased sales of our DCT and MGTS test systems, primarily due to weaker demand resulting from the effects of consolidation among major customers outside Japan such as Alcatel-Lucent and Nokia Siemens Networks and continuing competition from customer test products in Japan. Services revenues decreased approximately 4% to $3.6 million from $3.8 million, due primarily to a decrease in the number of test systems under maintenance.

Our revenues by geographic sales territory varied as follows in the three months ended June 30, 2007 in comparison with the three months ended June 30, 2006:

	•		North American revenues decreased by 5% to $2.9 million from $3.1 million;

	•		European revenues increased by 5% to $3.2 million from $3.1 million;

	•		Japanese revenues decreased by 40% to $1.1 million from $1.8 million; and

	•		Rest of World revenues decreased by 56% to $1.3 million from $2.9 million.

Information on revenues from major customers is provided in Note 11 to the Unaudited Condensed Consolidated Financial Statements.

Cost of Revenues

Cost of product revenues consists of the costs of board assembly by independent contractors, purchased components, payroll, benefits and stock-based compensation for personnel in product testing, purchasing, shipping and inventory management, as well as supplies, media and freight. Cost of product revenues increased by approximately 23% to $1.4 million for the three months ended June 30, 2007 from $1.1 million in the three months ended June 30, 2006. Gross margin on product revenues decreased to 71% from 84% due to increased hardware component and manufacturing overhead costs as a percentage of product revenues. We expect our gross margin on product revenues in future quarterly periods to fluctuate based on product mix and revenue levels.*

Cost of services revenues consists primarily of the costs of payroll, benefits and stock-based compensation for customer support, training and consulting personnel as well as the costs of materials and equipment. Cost of services revenues decreased by approximately 16% to $0.8 million in the three months ended June 30, 2007 from $0.9 million in the three months ended June 30, 2006, due primarily to a decrease of 31%, or 8 employees, in the number of employees engaged in customer support. Gross margin on services revenues increased to 79% from 76% as cost of services revenues decreased more than services revenues. We expect our gross margin on services revenues in future quarterly periods to fluctuate based on changes in both revenue and cost levels.*

Amortization of purchased technology decreased by $0.2 million to $13,000 in the three months ended June 30, 2007 compared with the same period the previous year due to the impairment charge recognized in the fourth quarter of fiscal 2006.

Gross margins did not vary significantly by geographic region.

Research and Development

Research and development expenses consist primarily of the costs of payroll, benefits and stock-based compensation for engineers, as well as materials, equipment and contractor services. To date, because we have released our products as soon as technological feasibility was established, all software development costs have been charged to research and development expenses as incurred. Research and development expenses remained substantially unchanged at $3.5 million for the three months ended June 30, 2007 in comparison with the three months ended June 30, 2006. As a percentage of total revenues, research and development expenses increased to 41% from 33% over the same period. We expect research and development expenses in the remaining quarter of the current fiscal year to increase, primarily as a result of an anticipated increase in the number of engineering employees as a result of hiring for our new applications development center in the Philippines.*

Sales and Marketing

Sales and marketing expenses consist primarily of the costs of payroll, benefits, commissions, bonuses and stock-based compensation, as well as occupancy costs, travel and promotional expenses. Sales and marketing expenses decreased by approximately 6% to $4.2 million for the three months ended June 30, 2007 from $4.4 million for the three months ended June 30, 2006, primarily due to a decrease of 11%, or 11 employees, in the number of employees engaged in sales and marketing activities and to a decrease of $0.2 million in distributor commission. As a percentage of total revenues, sales and marketing expenses increased to 49% from 41% over the same period. We expect quarterly sales and marketing expenses to remain substantially unchanged in the remaining quarter of the current fiscal year.*

General and Administrative

General and administrative expenses include costs associated with our general corporate and risk management, public reporting, employee recruitment and retention, regulatory compliance, investor relations and finance, accounting and internal control functions, as well as amortization of certain acquired intangible assets, and stock-based compensation. General and administrative expenses decreased approximately 5% to $2.3 million for the three months ended June 30, 2007 from $2.4 million for the three months ended June 30, 2006, primarily due to a decrease of 14%, or 3 employees, in the number of employees engaged in general and administrative activities. As a percentage of total revenues, general and administrative expenses increased to 27% from 22% over the same period. We expect quarterly general and administrative expenses to remain substantially unchanged in the remaining quarter of the current fiscal year.*

Interest income

Interest income remained substantially unchanged at $0.8 million in the three months ended June 30, 2007 in comparison with the three months ended June 30, 2006 as increases in short-term interest rates and in the portion of the Company’s short-term investment portfolio invested in securities with a higher, fully-taxable yield were offset by the lower value of interest-bearing balances.

Other income (expense), net

Other income (expense), net decreased by $0.1 million in the three months ended June 30, 2007 from the three months ended June 30, 2006 due to foreign exchange losses in the more recent period.

Benefit from income taxes

We recorded a tax benefit of $0.5 million in the three months ended June 30, 2007, compared with a tax benefit of $2.1 million in the three months ended June 30, 2006. In both periods, the benefit resulted primarily from a decrease during the period in our forecast pre-tax results of operations for the full fiscal year. The year-over-year reduction in the benefit reflects the full valuation allowance against our U.S. deferred tax assets at the end of fiscal 2006. As a result of this allowance, in fiscal 2007 we have accrued tax only on foreign pre-tax income and no longer recorded a benefit on U.S. pre-tax income. In addition, the benefit in the three months ended June 30, 2006 was increased by quarterly adjustments of $0.3 million, consisting primarily of a reduction in our accrual for uncertain tax positions. There were no significant quarterly adjustments in fiscal 2007.

As a result of the application of the quarterly tax calculation procedure established by Financial Accounting Standards Board Interpretation Number 18,Accounting for Income Taxes in Interim Periods, we expect to record a tax provision rather than a tax benefit in the fourth quarter of the current fiscal year despite a forecast pre-tax loss for this period.*

Comparison of the Nine-Month Periods Ended June 30, 2007 and 2006

Revenues

Our revenues for the nine months ended June 30, 2007 decreased by 15% to $28.6 million from $33.6 million in the nine months ended June 30, 2006. Over the same period, product revenues decreased by approximately 22% to $17.5 million from $22.4 million. The decrease in product revenues was attributable to decreased sales of our DCT and MGTS test systems, primarily due to weaker demand resulting from the effects of consolidation among major customers outside Japan such as Alcatel, Lucent, Nortel, Nokia and Siemens and to a 2% decrease in the value of the Japanese yen, in which all our sales in Japan are denominated. Services revenues increased approximately 1% to $11.2 million from $11.1 million primarily due to an increase of $0.3 million in training and consulting revenue, partially offset by a decrease in maintenance revenue resulting from a decrease in the number of test systems under maintenance.

Our revenues by geographic sales territory varied as follows in the nine months ended June 30, 2007 in comparison with the nine months ended June 30, 2006:

	•		North American revenues decreased by 20% to $8.2 million from $10.3 million;

	•		European revenues decreased by 9% to $9.2 million from $10.1 million;

	•		Japanese revenues decreased by 8% to $6.8 million from $7.4 million; and

	•		Rest of World revenues decreased by 22% to $4.4 million from $5.7 million.

Information on revenues from major customers is provided in Note 11 to the Unaudited Condensed Consolidated Financial Statements included with this Quarterly Report on Form 10-Q.

Cost of Revenues

Cost of product revenues consists of the costs of board assembly by independent contractors, purchased components, payroll, benefits and stock-based compensation for personnel in product testing, purchasing, shipping and inventory management, as well as supplies, media and freight. Cost of product revenues increased to $3.8 million in the nine months ended June 30, 2007 from $3.6 million in the nine months ended June 30, 2006. Gross margin on product revenues decreased to 78% from 84% due to increased hardware component and manufacturing overhead costs as a percentage of revenue.

Cost of services revenues consists primarily of the costs of payroll, benefits and stock-based compensation for customer support, training and consulting personnel as well as the costs of materials and equipment. Cost of services revenues decreased by approximately 19% to $2.4 million in the nine months ended June 30, 2007 from $2.9 million in the nine months ended June 30, 2006, due primarily to a decrease of 31%, or 8 employees, in the number of employees engaged in customer support. This decrease was partially offset by annual compensation increases. Gross margin on services revenues increased to 79% from 74% as services revenues increased while the cost of those revenues decreased.

Amortization of purchased technology decreased to $37,000 in the nine months ended June 30, 2007 compared with $0.5 million in the same period the previous year due to an impairment of this technology recorded at the end of fiscal 2006.

Gross margins did not vary significantly by geographic region.

Research and Development

Research and development expenses consist primarily of the costs of payroll, benefits and stock-based compensation for engineers, materials, equipment and consulting services. To date, because we have released our products as soon as technological feasibility was established, all software development costs have been charged to research and development expenses as incurred. Research and development expenses decreased by approximately 3% to $9.7 million for the nine months ended June 30, 2007 from $10.1 million for the nine months ended June 30, 2006 due to a decrease of 4%, or 3 employees, in the number of employees engaged in research and development and to a decrease of $0.3 million in hardware development expenses. These decreases were partially offset by an exchange rate driven increase of $0.2 million due to average increases of 10% in the British pound and 7% in the Australian dollar against the US dollar. As a percentage of total revenues, research and development expenses increased to 34% from 30% over the same period.

Sales and Marketing

Sales and marketing expenses consist primarily of the costs of payroll, benefits, commissions, bonuses and stock-based compensation, occupancy costs, travel and promotional expenses such as product brochure and trade show costs. Sales and marketing expenses decreased by approximately 6% to $12.4 million for the nine months ended June 30, 2007 from $13.2 million for the nine months ended June 30, 2006 due primarily to a decrease of 12%, or 12 employees, in the number of employees engaged in sales and marketing and to a decrease of $0.3 million in distributor commission. These decreases were partially offset by an exchange rate driven increase of $0.4 million due to average increases of 10% in the British pound and 8% in the Euro against the dollar and by an increase of $0.3 million in variable compensation due to improved performance against targets. As a percentage of total revenues, sales and marketing expenses increased to 43% from 39% over the same period.

General and Administrative

General and administrative expenses include costs associated with our general corporate and risk management, public reporting, employee recruitment and retention, regulatory compliance, investor relations and finance, accounting and internal control functions, as well as amortization of certain acquired intangible assets, and stock-based compensation. General and administrative expenses decreased approximately 5% to $6.8 million for the nine months ended June 30, 2007 from $7.1 million for the nine months ended June 30, 2006, reflecting a decrease of 18%, or 4 employees, in the number of administrative personnel together with a decrease of $0.2 million in amortization charges. These decreases were partially offset by an increase of $0.3 million in variable compensation due to improved performance against targets and objectives and to an increase of $0.2 million in non-cash stock option expenses. As a percentage of total revenues, general and administrative expenses increased to 24% from 21% over the same period.

Interest income

Interest income increased to $2.5 million for the nine months ended June 30, 2007 from $2.0 million for the nine months ended June 30, 2006 due to increases both in short-term interest rates and in the portion of the Company’s short-term investment portfolio invested in securities with a higher, fully-taxable yield.

Other income, net

Other income, net increased to $1.7 million in the nine months ended June 30, 2007 from $56,000 in the nine months ended June 30, 2006 due to the $1.8 million in private company stock received in settlement of a lawsuit.

Provision for (benefit from) income taxes

We recorded a tax provision of $0.4 million in the nine months ended June 30, 2007 in comparison with a tax benefit of $2.2 million in the nine months ended June 30, 2006. The disparity occurred because we are no longer recording a tax benefit for U.S. pre-tax losses in fiscal 2007 as a result of the full valuation allowance that we took against our U.S. deferred tax assets at the end of fiscal 2006. In fiscal 2007, our tax provision consists of tax on foreign income, including the change in our allowance for uncertain tax positions, plus the increase in deferred tax liability resulting from the amortization for tax purposes of a portion of our goodwill. The benefit in the nine months ended June 30, 2006 also reflected discrete quarterly adjustments of $0.3 million, consisting primarily of a reduction in our accrual for uncertain tax positions.

Impact of Inflation

We do not believe that inflation has had a material impact on either the pricing of our products and services or our results of operations for the last three fiscal years.

Liquidity and Capital Resources

We have financed our operations to date primarily through cash generated from operations, from the proceeds of our initial public offering completed in early 1999 and from the proceeds of a second public offering completed in September 2004. The proceeds to us from the 1999 and 2004 offerings, net of underwriter fees and other expenses, were approximately $19.2 million and $3.0 million, respectively.

Cash provided by operating activities decreased to $0.6 million in the nine months ended June 30, 2007 from $6.3 million in the nine months ended June 30, 2006. Over the same period, the net income (loss) component of cash flows from operating activities decreased to a net loss of $2.7 million from net income of $0.4 million and the contribution from adjustments for non-cash charges increased to $3.3 million from $0.6 million. These non-cash charges represented primarily depreciation, amortization, stock-based compensation and deferred income tax expense. The contribution from changes in non-cash balance sheet components used net cash of $27,000 in the nine months ended June 30, 2007 and provided net cash of $5.2 million in the nine months ended June 30, 2006.

Our primary source of operating cash flow is the collection of accounts receivable from our customers. We measure the effectiveness of our collection efforts by an analysis of average accounts receivable days outstanding (“days outstanding”). We calculate our days outstanding by dividing our accounts receivable balance net of allowances at the end of a period by the revenues for that period and multiplying the result by the number of days in the period. Our days outstanding decreased to 66 days for the nine months ended June 30, 2007 in comparison with 79 days for the same period in the previous year. We expect that collections of accounts receivable and related days outstanding will fluctuate in future periods due to the timing and amount of our future revenues, payment terms extended to our customers and the effectiveness of our collection efforts.*

Investing activities have consisted of two components: net purchases of property and equipment and purchases and sales of short-term investments. Net purchases of property and equipment decreased by $0.5 million to $0.4 million in the nine months ended June 30, 2007 from $0.9 million in the nine months ended June 30, 2006. We expect that capital expenditures for our full fiscal 2007 year will total approximately $0.7 million.* We invest cash that is surplus to our operating requirements in professionally managed investment portfolios. These portfolios consist of both cash equivalents and short-term investments, and the mix between these elements may vary from period to period due to changes in the investment approaches of the portfolio managers. Sales of short-term investments, net of purchases, provided cash of $8.7 million in the nine months ended June 30, 2007 in comparison with $0.9 million in the nine months ended June 30, 2006.

Financing activities used cash of $7.5 million in the nine months ended June 30, 2007 in comparison with $0.3 million in the nine months ended June 30, 2006 due to the increased repurchase of common shares and the reduction in proceeds from stock issuance in the more recent period.

As of June 30, 2007, we had working capital of $64.0 million and cash, cash equivalents and short-term investments of $63.0 million. As of June 30, 2007, we had the following payment obligations in the listed categories of contractual obligations:


	Payments Due by Period
			Less Than		2-3		4-5		After
Contractual Obligations	Total		1 Year		Years		Years		5 Years
	(In millions)
Operating leases	$	2.7	$	1.4	$	1.2	$	0.1	$	—
Unconditional purchase obligations		0.2		0.2		—		—		—

Total contractual cash obligations	$	2.9	$	1.6	$	1.2	$	0.1	$	—

We may require additional funds to support our working capital requirements or for other purposes. There can be no assurance that additional financing will be available if needed or that, if available, such financing will be obtainable on terms favorable to us or to our stockholders. We believe that cash and cash equivalents, short-term investments and funds generated from operations will provide us with sufficient funds to finance our requirements for at least the next 12 months.*

Recent Accounting Pronouncements

See Note 2 of our Notes to Unaudited Condensed Consolidated Financial Statements included with this Quarterly Report on Form 10-Q for information on recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk and Derivative Financial Instruments

Our foreign subsidiaries operate and sell our products in various global markets. In the nine months ended June 30, 2007, approximately 23% of our revenue was derived from invoices issued and paid in Japanese yen and 5% in other foreign currencies. As a result, we are exposed to changes in exchange rates on foreign currency denominated accounts receivable. We use foreign currency forward exchange contracts, and we infrequently use options, to mitigate the risk of future movements in foreign exchange rates that affect certain foreign currency denominated accounts receivable or expected revenues. The forward contracts and options are not designated as accounting hedges. We attempt to match the forward contracts with the underlying receivables in terms of currency, amount and maturity, and to match the options with expected foreign currency revenue in terms of currency, amount and recognition period. We do not use derivative financial instruments for speculative or trading purposes. Because the impact of movements in currency exchange rates on forward contracts and options generally offsets the related impact on the exposures economically hedged, these derivative financial instruments do not subject us to speculative risk that would otherwise result from changes in currency exchange rates. Gains and losses on forward exchange contracts generally offset the foreign exchange transaction gains or losses from revaluation of foreign currency denominated amounts receivable. Gains on options generally offset the reduction in income resulting from revenues recognized at an exchange rate less favorable than the option rate. To date, we have not fully mitigated all risk associated with our revenues and resulting accounts receivable denominated in foreign currencies, and there can be no assurance that our future mitigation activities, if any, will be successful. At June 30, 2007, there were no forward exchange contracts or options outstanding.

We also incur expenses in foreign currencies including the Japanese yen, the British pound, the Euro, the Australian dollar, the Canadian dollar, the Swedish krona, the Chinese renminbi, the Indian rupee and the Philippino peso. These expenses include cost of goods and services, operating expenses and provision for taxes. In the nine months ended June 30, 2007, we incurred approximately $10.7 million of expenses in foreign currencies. In Japan, our yen expenses, which amounted to approximately $2.0 million in the nine months ended June 30, 2007, are lower than our yen revenues and act as a partial natural hedge on our exchange rate exposure on those revenues. Our operating expenses in other foreign currencies greatly exceed our revenues in those currencies and thus represent an exchange rate exposure. We do not attempt to mitigate this operating expense exchange rate exposure through the use of derivatives.

We have evaluated the potential near-term losses in future earnings, fair values and cash flows from reasonably possible near-term currency fluctuations, and we believe that any such losses would not be material.*

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our short-term investment portfolio. As of June 30, 2007, short-term investments consisted of available-for-sale securities of $39.0 million. These fixed income marketable securities included corporate and municipal bonds and government securities, all of which are of high investment grade. They are subject to interest rate risk and will decline in value if the market interest rates increase. If the market interest rates were to increase immediately and uniformly by 10% from levels as of June 30, 2007, the decline in the fair value of the portfolio would not be material to our financial position.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) designed to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2007 because we had not completed the remediation of the material weakness in internal control over financial reporting as described in Item 9A of our Annual Report on Form 10-K for the period ended September 30, 2006 as filed with the SEC on December 29, 2006, as amended by Amendment No. 1 to our Annual Report on Form 10-K/A as filed with the SEC on January 29, 2007 (“2006 Form 10-K”). As discussed in more detail in our 2006 Form 10-K, as of September 30, 2006, our management concluded that we did not maintain effective controls over the accounting for and disclosure of short-term investments classification.

During the nine months ended June 30, 2007, we began remediating the material weakness as described in our 2006 Form 10-K. However, as of June 30, 2007 we had not completed the remediation of this material weakness.

Changes in internal control over financial reporting.

Our management has initiated the following action plan, which we believe will remediate the material weakness identified in the 2006 Form 10-K as follows:

•

The Company’s Chief Financial Officer performs a detailed quarterly review to confirm that the Company’s accounting for its cash, cash equivalents and short-term investments is in accordance with the requirements of generally accepted accounting principles in the United States.

The Company believes that this step taken to remediate the material weakness will reduce to a remote likelihood material errors in the classification of short-term investments. This control is being tested throughout the year to confirm that it is operating effectively.

Except as set forth above, there was no other change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

On May 22, 2007 the Antwerp Court of Appeal heard an appeal by Tucana Telecom NV, a Belgian company, of the previous dismissal by the Antwerp Commercial Court of an action by Tucana against Catapult. Tucana had sought damages of 12,461,000 euros (approximately $16.8 million at June 30, 2007) for the alleged improper termination by Catapult of Tucana’s distribution agreement with the Company. On June 19, the Antwerp Court of Appeal confirmed the Commercial Court’s dismissal of Tucana’s action and assessed the costs of the appeal against Tucana.

Item 1A. Risk Factors

We have described below known risks and uncertainties that are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. This list is not inclusive of all the risks and uncertainties we face, but any of these factors could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report or that we may issue from time to time in the future.

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.

We have experienced, and anticipate that we will continue to experience, significant fluctuations in quarterly revenues and operating results. Our revenues and operating results are relatively difficult to forecast for a number of reasons, including:

	•		the variable size and timing of individual purchases by our customers, including delays in customer purchasing decisions or orders due to customer consolidation;

	•		absence of long-term customer purchase contracts;

	•		seasonal factors that may affect capital spending by customers, such as the varying fiscal year ends of customers and the reduction in business during the summer months, particularly in Europe;

	•		the relatively long sales cycles for our products;

	•		competitive conditions in our markets;

	•		exchange rate fluctuations;

	•		the timing of the introduction and market acceptance of new products or product enhancements by us and by our customers, competitors and suppliers;

	•		costs associated with developing and introducing new products;

	•		product life cycles;

	•		changes in the level of operating expenses relative to revenues;

	•		product defects and other quality problems;

	•		customer order deferrals in anticipation of new products;

	•		supply interruptions;

	•		changes in global or regional economic conditions or in the telecommunications industry;

	•		asset impairment, valuation allowance and restructuring charges;

	•		changes in our tax rate;

	•		adverse results from current or future litigation;

	•		changes in the mix of products sold; and

	•		changes in the regulatory environment.

Our revenues in any period generally have been, and may continue to be, derived from relatively small numbers of sales and service transactions with relatively high average revenues per order. Therefore, the loss of any orders or delays in closing such transactions could have a more significant impact on our quarterly revenues and results of operations than on those of companies with relatively high volumes of sales or low revenues per order. For example, delays in receipt of orders in our Japan and Rest of World sales regions in the three months ended June 30, 2007 resulted in significantly lower revenues in that period than originally anticipated. Our products generally are shipped within a maximum of 45 days after orders are received. As a result, we generally do not have a significant backlog of orders, and revenues in any quarter are substantially dependent on orders booked, shipped and installed in that quarter.

Most of our costs, including personnel and facilities costs, are relatively fixed at levels based on anticipated revenue. As a result, a decline in revenue from even a limited number of transactions, failure to achieve expected revenue in any quarter or unanticipated variations in the timing of recognition of specific revenues can cause significant variations in our quarterly operating results and could result in losses. For example, lower than expected revenues in the three months ended June 30, 2007 resulted in a significantly increased loss in comparison with our original expectations. We believe, therefore, that period-to-period comparisons of our operating results should not be relied upon as an indication of future performance.

Due to the factors described above, as well as other unanticipated factors, it is possible that in a particular quarter our results of operations could fail to meet the expectations of public market analysts or investors. If this occurs, the price of our common stock may fall.

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.

The market for telecommunications test systems and services is subject to rapid technological change, evolving industry standards, rapid changes in customer requirements and frequent product and service introductions and enhancements.

In addition, because of the rapid technological change characteristic of the telecommunications industry, we may be required to support legacy systems used by our customers. As a result, this may place additional demands on our personnel and other resources and may require us to maintain an inventory of otherwise obsolete components.

Our test systems currently operate only on the LinuxÔ and Sun Microsystems SolarisÔ operating systems. Our current and prospective customers may request other operating systems, such as Windows XPÔ, to be used in their telecommunications test systems or may require the integration of other industry standards. We may not be able to successfully adapt our products to such operating systems on a timely or cost-effective basis, if at all. Our failure to respond to rapidly changing technologies and to develop and introduce new products and services in a timely manner could result in a reduction in customer orders and thereby adversely affect our revenues, cash flows and results of operations.

Our success will depend in part on whether a large number of telecommunications equipment manufacturers and network operators purchase our products and services. Because the telecommunications market is rapidly evolving, it is difficult to predict the future success of products and services in this market. The customers in this market use products from a number of competing suppliers for various testing purposes, and there has not been broad adoption of the products of one company. Our current or future products or services may not achieve widespread acceptance among telecommunications equipment manufacturers, network operators or other potential customers. In addition, our competitors may develop solutions that could render our products obsolete or uncompetitive. In the event the telecommunications industry does not broadly adopt our products or services or does so less rapidly than we expect, or in the event our products are rendered obsolete or uncompetitive by more advanced solutions, our business, financial condition and operating results could be seriously harmed.

Our success depends on the timely development and introduction of new products.

Our future success will depend in part on our ability to anticipate and respond to changing industry standards and customer requirements by enhancing our existing products and services. We will need to develop and introduce, on a timely and cost-effective basis, new products, features and services that address the needs of our customer base. We may not be successful in identifying, developing and marketing new products, product enhancements and related services that respond to technological change or evolving industry standards or that adequately meet new market demands. For example, in fiscal 2006, our revenues were negatively impacted by product development delays resulting from the length of time and level of resources that were required to complete our common hardware platform that supports both our DCT and MGTS products.

Historically, our revenues have been dependent upon a few significant customers, the loss of one or more of which as a result of competition or industry consolidation could significantly reduce our revenues.

Our customer base is highly concentrated, and a relatively small number of companies have accounted for substantially all of our revenues to date. In the nine months ended June 30, 2007, our top five customers represented approximately 48% of total revenues. In our fiscal year ended September 30, 2006, our top five customers represented approximately 50% of total revenues. We expect that we will continue to depend upon a relatively limited number of customers for substantially all of our revenues in future periods, although no customer is presently obligated either to purchase a specific amount of products or to provide us with binding forecasts of purchases for any period. If we were to lose a significant customer as a result of competition or industry consolidation such as the Alcatel-Lucent or Nokia Siemens mergers, or if a significant customer were to reduce, delay or cancel its orders, our operating results could be seriously harmed.

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.

Our success will depend on continued growth in the market for telecommunications test systems and services and the continued commercial acceptance of our products as a solution to address the testing requirements of telecommunications equipment manufacturers and network operators. While most of our present and potential customers have the technical capability and financial resources to produce their own test systems and perform test services internally, to date, many have chosen to outsource a substantial proportion of their test system and service requirements. In fiscal 2006 and in the nine months ended June 30, 2007, our revenues in Japan were negatively impacted by 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 at least the remainder of fiscal 2007. Our customers may not continue, and potential new customers may not choose, to outsource any of their test systems and service requirements. If the market for telecommunications test systems and services, or the demand for outsourcing,

declines or fails to grow, or if our products and services are less widely adopted as a telecommunications test solution, our business, financial condition and operating results could be seriously harmed.

We face foreign business, political and economic risks because a significant portion of our sales is to customers outside the United States.

In the nine months ended June 30, 2007 and the fiscal year ended September 30, 2006, we derived 78% and 75%, respectively, of our revenues from customers outside of the United States, and we maintain operations in twelve other countries. International sales and operations are subject to inherent risks, including:

	•		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.

A significant portion of our sales, including all our sales in Japan, is denominated in local currencies. Fluctuations in foreign currency exchange rates may contribute to fluctuations in our operating results. For example, changes in foreign currency exchange rates could adversely affect the revenues, net income, earnings per share and cash flow of our operations in affected markets. Similarly, such fluctuations may cause us to raise prices, which could affect demand for our products and services. In addition, if exchange or price controls or other restrictions are imposed in countries in which we do business, our business, financial condition and operating results could be seriously harmed.

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.

The market for our products is highly competitive. A number of our competitors are better known and have substantially greater financial, technological, production and marketing resources than we do. While we believe that the price/performance characteristics of our products are competitive, competition in the markets for our products could force us to reduce prices. Any material reduction in the price of our products without corresponding decreases in manufacturing costs and increases in unit volume would negatively affect our gross margins. Increased competition for our products that results in lower product sales could also adversely impact our upgrade sales. Our ability to maintain our competitive position will depend upon, among other factors, our success in anticipating industry trends, investing in product research and development, developing new products with improved price/performance characteristics and effectively managing the introduction of new products into targeted markets.

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 future success is dependent upon the continued growth of the telecommunications industry. The global telecommunications industry is evolving rapidly, and it is difficult to predict its potential growth rate or future trends in technology development. The deregulation, privatization and economic globalization of the worldwide telecommunications market that have resulted in increased competition and escalating demand for new technologies and services may not continue in a manner favorable to us or our business strategies. In addition, the growth in demand for Internet services and the resulting need for high speed or enhanced telecommunications equipment may not continue at its current rate or at all.

Our future success depends upon the increased utilization of our test solutions by network operators and telecommunications equipment manufacturers. Industry-wide network equipment and infrastructure development driving the demand for our products and services may be delayed or prevented by a variety of factors, including cost, regulatory obstacles, industry consolidation or the lack of or reduction in consumer demand for advanced telecommunications products and services. Telecommunications equipment manufacturers and network operators may not develop new technology or enhance current technology. Further, any such new technology or enhancements may not lead to greater demand for our products or services.

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.

Our future growth and success depends to a significant extent upon the continuing services of our executive officers and other key employees. We do not have long-term employment agreements or non-competition agreements with any of our employees. Competition for qualified management and other high-level telecommunications industry personnel is intense, and we may not be successful in attracting and retaining qualified personnel. If we lose the services of any key employees, we may not be able to manage our business successfully or achieve our business objectives.

Our success also depends on our ability to identify, attract and retain qualified technical, sales, finance and management personnel. We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. If we do not succeed in hiring and retaining candidates with appropriate qualifications, our revenues and product development efforts could be harmed.

We may not be able to achieve the anticipated benefits of any acquisitions we may make of other companies, products or technologies.

As part of our business strategy, we acquired Tekelec’s Network Diagnostics Business in 2002, and we may make further acquisitions of, or significant investments in, companies, products or technologies that we believe are complementary. Any such transactions would be accompanied by the risks commonly encountered in making acquisitions of companies, products and technologies. Such risks include, among others:

	•		difficulties associated with assimilating the personnel and operations of acquired companies;

	•		potential disruption of our ongoing business;

	•		distraction of management and other resources;

	•		integration of personnel and technology of an acquired company;

	•		difficulties in evaluating the technology of a potential target;

	•		inability to motivate and retain new personnel;

	•		maintenance of uniform standards, controls, procedures and policies;

	•		impairment of goodwill or other long-lived assets acquired due to a failure to generate the levels of cash flow anticipated at the acquisition date; and

	•		impairment of relationships with employees and clients as a result of the integration of new management personnel.

We have limited experience in assimilating acquired companies or product lines into our operations. In the fiscal year ended September 30, 2006, we recorded an impairment charge against long-lived assets acquired with NDB. We may not be successful in overcoming these risks or any other problems encountered in connection with any such future acquisitions. Furthermore, any future acquisitions could result in the issuance of dilutive equity securities, the incurrence of debt or contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could seriously harm our business, financial condition and operating results or decrease the value of our common stock.

The inability to successfully defend claims from taxing authorities could adversely affect our operating results and financial position.

We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those tax jurisdictions. Due to the complexity of tax laws between those jurisdictions as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Potential claims from tax authorities related to these differences could have an adverse impact on our operating results and financial position.

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 purchase many key components, including certain microprocessors, workstations, bus interface and other chips, connectors and other hardware, from the sole supplier of a particular component. For other components, even though multiple vendors may exist, we may purchase components from only a single source. We do not have any long-term supply agreements with these vendors to ensure uninterrupted supply of these components. If our supply of a key component is reduced or interrupted, we might require a significant amount of time to qualify alternative suppliers and receive an adequate flow of

replacement components. We may also need to reconfigure our products to adapt to new components, which could entail substantial time and expense. In addition, the process of manufacturing certain of these components is extremely complex, and our reliance on the suppliers of these components exposes us to potential production difficulties and quality variations. These could negatively affect cost and timely delivery of our products. We have in the past experienced supply problems as a result of the financial or operational difficulties of our suppliers, shortages and discontinuations resulting from component obsolescence. Although to date we have not experienced material delays in product deliveries to our customers resulting from supply problems, such problems may recur or, if such problems do recur, we may not find satisfactory solutions. If we are unable to obtain adequate amounts of fully functional components or are otherwise required to seek alternative sources of supply, our relationship with our customers and our results of operations could be harmed.

We depend on a limited number of independent manufacturers to provide assembly services, which reduces our ability to control our manufacturing process.

We rely on a limited number of independent manufacturers, some of which are small, privately held companies, to provide certain assembly services to our specifications. We do not have any long-term supply agreements with any third-party manufacturer. If our assembly services are reduced or interrupted, our business, financial condition and results of operations could be adversely affected until we are able to establish sufficient assembly services supply from alternative sources. Alternative manufacturing sources may not be able to meet our future requirements, and existing or alternative sources may not continue to be available to us at favorable prices.

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.

Our complex products may contain undetected errors or “bugs”, particularly when first introduced or when new versions are released. Errors may be found in future releases of our software. In addition, any such errors may generate adverse publicity, impair the market acceptance of these products, create customer concerns or adversely affect operating results due to product returns, the costs of generating corrective releases or otherwise.

We face exposure to product liability claims, which if successful could harm our business.

Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims and we have not experienced any product liability claims to date. However, it is possible that the limitation of liability provisions contained in our license agreements may not be effective under the laws of certain jurisdictions, particularly since we sell a majority of our products internationally. Our sale and support of products may thus entail the risk of such claims. A successful product liability claim brought against us could have a material adverse effect upon our business, financial condition and results of operations. If we fail to maintain adequate product liability insurance and if we were to lose a large uninsured claim, then such a loss could significantly harm our business, financial condition and operating results.

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.

Our success and ability to compete effectively are dependent in part upon our proprietary technology. We rely on a combination of trademark, copyright and trade secret laws, as well as nondisclosure agreements and other contractual restrictions, to establish and protect our proprietary rights. To date, we have not sought patent protection for our proprietary technology. Patent protection may become more significant in our industry in the future. Likewise, the measures we undertake may not be adequate to protect our proprietary technology. To date, we have federally registered certain of our trademarks and copyrights. Our practice is to affix copyright notices on software, hardware and product literature in order to assert copyright protection for these works. The lack of federal registration of all of our trademarks and copyrights may have an adverse effect on our intellectual property rights in the future. Additionally, we may be subject to further risks as we enter into transactions in countries where intellectual property laws are unavailable, do not provide adequate protection or are difficult to enforce. Unauthorized parties may attempt to duplicate aspects of our products or to obtain and use information that we regard as proprietary. In March 2007, we received assets in settlement of a lawsuit that we had brought against a competitor for alleged misappropriation of our confidential and trade secret information. Our steps to protect our proprietary technology may not be adequate to prevent misappropriation of such technology, and may not preclude competitors from independently developing products with functionality or features similar to our products. If we fail to protect our proprietary technology, our business, financial condition and results of operations could be harmed significantly.

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.

The telecommunications industry is characterized by a relatively high level of litigation based on allegations of infringement of proprietary rights. To date we have not been subject to claims of infringement or misappropriation of intellectual property by third parties. In the future, third parties may assert infringement claims against us. In addition, an assertion of infringement may result in litigation in which we may not prevail. Furthermore, any such claims, with or without merit, could result in substantial cost to us and diversion of our management. In addition, infringement claims may require us to develop new technology or require us to enter into royalty or licensing arrangements. These royalty or licensing agreements, if required, may not be available on terms acceptable to us. Because we do not rely on patents to protect our technology, we will not be able to offer a license for patented technology in connection with any settlement of patent infringement lawsuits. If a claim of infringement or misappropriation against us were successful and we fail or are unable to develop non-infringing technology or license any infringed, misappropriated or similar technology at a reasonable cost, our business, financial condition and results of operations would be adversely affected. In addition, we indemnify our customers against claimed infringement of patents, trademarks, copyrights and other proprietary rights of third parties. Any requirement for us to indemnify a customer may significantly harm our business, financial condition and operating results.

Environmental laws and regulations subject us to a number of risks and could result in significant liabilities and costs.

Some of our operations are subject to state, federal, and international laws governing protection of the environment, human health and safety, and regulating the use of certain chemical substances. We endeavor to comply with these environmental laws, yet compliance with such laws could increase our operations and product costs; increase the complexities of product design, procurement, and manufacture; limit our sales activities; and impact our future financial results. Any violation of these laws can subject us to significant liability, including fines, penalties, and prohibiting sales of our products into one or more states or countries, and result in a material adverse effect on our financial condition.

Currently, a significant portion of our revenues comes from international sales. Recent environmental legislation within the European Union (EU) may increase our cost of doing business internationally and impact our revenues from EU countries as we comply with and implement these new requirements. The EU has published Directives on Waste Electrical and Electronic Equipment (the “WEEE Directive”). The WEEE Directive makes producers of certain electrical and electronic equipment financially responsible for collection, reuse, recycling, treatment, and disposal of equipment placed on the EU market after August 13, 2005 (the “effective date”). The WEEE Directive also makes commercial end users of electronic equipment financially responsible for the collection and management of equipment placed on the market before the effective date. The WEEE Directive also requires labeling products placed on the EU market after the effective date. As a result of these obligations, our product distribution, logistics and waste management costs may increase and may adversely impact our financial condition.

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.

In recent years, the stock market in general and the market for technology stocks in particular, including our common stock, have experienced extreme price fluctuations. The market price of our common stock may be significantly affected by various factors such as:

	•		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.

The market price of our common stock may experience significant fluctuations in the future.

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.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our Annual Report on Form 10-K an assessment of the effectiveness of our internal control over financial reporting together with a report from our independent registered public accounting firm on our assessment and the effectiveness of our internal control over financial reporting. If we fail to achieve and maintain the adequacy of our internal control, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting. For example, as more fully described in our Annual Report on Form 10-K in Item 9A. “Controls and Procedures,” for the fiscal year ended September 30, 2006 as filed with the SEC on December 29, 2006, as amended by Amendment No. 1 to the Annual Report on Form 10-K/A as filed with the SEC on January 29, 2007, our management concluded that we did not maintain effective internal controls over reviews and proper classification of short-term investments. During the first nine months of fiscal 2007, our management implemented an action plan to remediate a control deficiency that resulted in the misclassification of short-term investments as more fully described under Part I, Item 4 of this report. Effective internal control is necessary for us to produce reliable financial reports and is important in helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading 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.

Sales of substantial numbers of shares of common stock by our major stockholders in the public market could harm the market price for our common stock. As of June 30, 2007, Richard A. Karp, our Chief Executive Office and Chairman of our Board, beneficially owned 3,001,811 shares, and Nancy H. Karp, one of our directors, beneficially owned 1,369,364 shares of our common stock. These shares are eligible for resale into the public market within the restrictions imposed by Rule 144 under the Securities Act of 1933. Sales of a significant amount of these shares could adversely affect the market price for our common stock.

Our principal stockholder could prevent or delay a change in control.

As of June 30, 2007, Dr. Karp beneficially owned 3,001,811 shares or approximately 22% of our common stock outstanding and Nancy H. Karp, one of our directors, beneficially owned 1,369,364 shares or approximately 10% of our common stock outstanding. Such a concentration of ownership and voting power may have the effect of delaying or preventing a change in the control of our company.

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.

Nevada law, our articles of incorporation and our bylaws contain provisions that could discourage a proxy contest or make more difficult the acquisition of a substantial block of our common stock. In addition, our board of directors is authorized to issue, without stockholder approval, up to 5,000,000 shares of preferred stock with voting, conversion and other rights and preferences that may be superior to those of the common stock and that could adversely affect the voting power or other rights of the holders of common stock. The issuance of preferred stock or rights to purchase preferred stock could be used to discourage an unsolicited acquisition proposal.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information regarding repurchases of our common stock during the quarter ended June 30, 2007:


	Repurchases of Common Stock
					Total Number of		Maximum Number
	Total				Shares Purchased as		of Shares that May
	Number		Average		Part of Publicly		Yet Be Purchased
	of Shares		Price Paid		Announced		Under the Plans
	Purchased		Per Share (1)		Plans or Programs		Or Programs

April 1, 2007 — April 30, 2007		135,000	$	10.53		135,000		1,707,198
May 1, 2007 — May 31, 2007		150,000	$	10.23		150,000		1,557,198
June 1, 2007 — June 30, 2007		20,770	$	9.90		20,770		1,536,428

Total for the Quarter		305,770	$	10.34		305,770		1,536,428


(1)		Average price paid per share includes brokerage commission

All shares were repurchased pursuant to the Company’s share repurchase program authorized in December 1999 to repurchase up to 2,000,000 shares of our common stock. In January 2007, our Board of Directors authorized an increase of 1,000,000 shares in the number of shares that may be purchased under the program. During the third quarter of fiscal 2007, the Company repurchased 305,770 shares at a cost of approximately $3.2 million. As of June 30, 2007, approximately 1,536,000 shares remained available for repurchase under the authorization. Depending on market conditions and other factors, repurchases can be made from time to time in the open market and in negotiated transactions, including block transactions, and this program may be discontinued at any time.

Item 4. Submission of Matters to a Vote of Security Holders

We held our Annual Meeting of Stockholders on April 24, 2007 at the Company’s principal executive offices in Mountain View, California. Out of 13,929,142 shares of Common Stock entitled to vote at such meeting, there were present in person or by proxy 11,699,170 shares. At the Annual Meeting, our stockholders approved the following matters:

(a) The election of Peter S. Cross, R. Stephen Heinrichs, Richard A. Karp, Nancy H. Karp, Henry P. Massey, Jr., and John M. Scandalios as directors of Catapult Communications Corporation for the ensuing year and until their successors are elected. The vote for the nominated directors was as follows:

Peter S. Cross, 11,071,415 votes cast for and 627,755 votes withheld;

R. Stephen Heinrichs, 11,631,108 votes cast for and 68,062 votes withheld;

Richard A. Karp, 10,785,445 votes cast for and 913,725 votes withheld;

Nancy H. Karp, 11,669,937 votes cast for and 29,233 votes withheld;

Henry P. Massey, Jr., 11,507,858 votes cast for and 191,312 votes withheld;

John M. Scandalios, 11,396,671 votes cast for and 302,499 votes withheld;

(b) The ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending September 30, 2007.

11,625,106 votes cast for and 6,264 votes withheld.

Item 6. Exhibits



	3.1			Bylaws of the Registrant, as amended April 24, 2007.
	31.1			Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2			Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32			Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.


	CATAPULT COMMUNICATIONS CORPORATION
Date: August 8, 2007	By:	/s/Christopher A. Stephenson
		Christopher A. Stephenson
		Vice President and Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX


Exhibit No.		Description

	3.1	Bylaws of the Registrant, as amended April 24, 2007.
	31.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Good

Catapult Communications (CATT) Inactive 10-Q2007 Q3 Quarterly report

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