Catapult Communications (CATT) 10-Q 2008 Q1 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 December 31, 2007

OR

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

Commission file number 0-24701

CATAPULT COMMUNICATIONS CORPORATION

(Exact name of Registrant as specified in its charter)

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

Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

     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 December 31, 2007, there were 13,255,026 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 December 31, 2007 and September 30, 2007		1
Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 2007 and 2006		2
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 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		16
Item 4. Controls and Procedures		16
Part II—Other Information
Item 1A. Risk Factors		17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 5. Other Information		25
Item 6. Exhibits		25
Signature		26
EXHIBIT 3.1
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

ii

Part I. Financial Information

Item 1. Financial Statements

CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31,		September 30,
	2007		2007
	(In thousands, except share
	and par value data)
ASSETS
Current Assets:
Cash and cash equivalents	$	27,638	$	23,351
Short-term investments		31,533		38,891
Accounts receivable, net of allowances of $16 and $61 as of December 31, 2007 and September 30, 2007, respectively		8,235		7,015
Inventories		2,201		2,485
Deferred tax assets		262		96
Prepaid expenses and other current assets		1,740		1,767
Total current assets		71,609		73,605
Property and equipment, net		1,558		1,585
Goodwill		49,394		49,394
Other intangibles, net		125		143
Other assets		2,243		2,243
Total assets	$	124,929	$	126,970
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	633	$	617
Accrued liabilities		3,613		4,956
Deferred revenue		5,927		6,206
Total current liabilities		10,173		11,779
Deferred revenue, long-term		166		406
Deferred taxes and other liabilities, long-term		4,477		3,009
Total liabilities		14,816		15,194
Stockholders’ Equity:
Common stock, $0.001 par value, 40,000,000 shares authorized; 13,255,026 and 13,427,073 issued and outstanding as of December 31, 2007 and September 30, 2007, respectively		13		13
Additional paid-in capital		48,637		48,661
Accumulated other comprehensive income		1,006		1,026
Retained earnings		60,457		62,076
Total stockholders’ equity		110,113		111,776
Total liabilities and stockholders’ equity	$	124,929	$	126,970

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

1

CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three months ended
	December 31,
	2007			2006
	(In thousands, except
	per share amounts)
Revenues:
Products	$	6,770		$	6,556
Services		3,531			4,011
Total revenues		10,301			10,567
Cost of revenues:
Products		1,248			1,128
Services		798			854
Amortization of purchased technology		12			12
Total cost of revenues		2,058			1,994
Gross profit		8,243			8,573
Operating expenses:
Research and development		3,553			3,015
Sales and marketing		4,345			4,291
General and administrative		2,172			2,284
Total operating expenses		10,070			9,590
Operating loss		(1,827	)		(1,017	)
Interest income		744			807
Other income (expense), net		130			(7	)
Loss before income taxes		(953	)		(217	)
Provision for income taxes		218			227
Net loss	$	(1,171	)	$	(444	)
Net loss per share — basic and diluted	$	(0.09	)	$	(0.03	)
Shares used in per share calculation:
Basic and diluted		13,373			14,103

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

2

CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three months ended
	December 31,
	2007			2006
	(In thousands)
Cash flows from operating activities:
Net loss as reported	$	(1,171	)	$	(444	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property and equipment		267			268
Amortization of purchased technology		12			12
Amortization of other acquisition related intangibles		6			6
Provision for recovery of doubtful accounts		(45	)		1
Deferred income taxes		(19	)		126
Stock based compensation expense		825			728
Change in assets and liabilities:
Accounts receivable		(1,189	)		139
Inventories		286			(95	)
Prepaid expenses and other current assets		21			564
Other assets		2			4
Accounts payable		15			13
Accrued liabilities		(28	)		(5	)
Deferred revenue		(519	)		(255	)
Net cash provided by (used in) operating activities		(1,537	)		1,062
Cash flows from investing activities:
Sale and maturities of short-term investments		20,374			29,237
Purchase of short-term investments		(13,016	)		(25,227	)
Purchase of property and equipment		(243	)		(111	)
Net cash provided by investing activities		7,115			3,899
Cash flows from financing activities:
Repurchase of common stock		(1,280	)		(3,612	)
Proceeds from exercise of stock options		—			7
Net cash used in financing activities		(1,280	)		(3,605	)
Effect of exchange rate changes on cash and cash equivalents		(11	)		115
Net increase in cash and cash equivalents		4,287			1,471
Cash and cash equivalents, beginning of period		23,351			22,462
Cash and cash equivalents, end of period	$	27,638		$	23,933
Supplemental disclosure of cash flow information:
Unrealized gain (loss) on investments	$	3		$	(1	)
Cash paid for income taxes		186			95
Non-cash investing activities:
Purchase of property and equipment on account	$	—		$	2

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

3

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 condensed consolidated balance sheet as of September 30, 2007, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of December 31, 2007 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include the accounts of Catapult Communications Corporation and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated. 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, 2007 and filed with the SEC on December 13, 2007. The unaudited condensed consolidated financial statements as of December 31, 2007, and for the three months ended December 31, 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, 2007 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 three months ended December 31, 2007 as compared to what was previously disclosed in the Company’s Form 10-K for the year ended September 30, 2007 as filed with the SEC on December 13, 2007, except that we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141 (revised 2007) (“SFAS 141(R)”),Business Combinations,which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree in a business combination. SFAS No.141(R) also establishes principles around how goodwill acquired in a business combination or a gain from a bargain purchase should be recognized and measured, as well as provides guidelines on the disclosure requirements on the nature and financial impact of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008.

     In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”),Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented by requiring net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and to disclose those amounts on the face of the income statement. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.

4

NOTE 3 — STOCK-BASED COMPENSATION

     Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)”),Share-Based Payment.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 months ended December 31, 2007 and 2006.

	Three months ended			Three months ended
	December 31,			December 31,
	2007			2006
	(In thousands)
Stock-Based Compensation Expense:
Cost of sales — products	$	50		$	34
Cost of sales — services		68			67
Research and development expense		201			147
Selling and marketing expense		168			172
General and administrative expense		338			308
Total stock-based compensation expense		825			728
Tax effect on stock-based compensation expenses		(4	)		(5	)
Net effect on net income	$	821		$	723

General Option Information

     Information with respect to stock option activity from October 1, 2007 through December 31, 2007 is set forth below:

						Weighted Average
	Number of Options			Weighted Average		Remaining		Aggregate Intrinsic
	Outstanding			Exercise Price		Contractual Term		Value
						(years)		(in thousands)
Balance at October 1, 2007		2,833,760		$	13.68		6.75	$	361
Granted		46,696			7.43
Exercised		—			—
Canceled, forfeited or expired		(6,859	)		18.61
Balance, December 31, 2007		2,873,597		$	13.57		6.56	$	349
Vested or expected to vest, December 31, 2007		2,741,322		$	13.70		6.45	$	347
Exercisable, December 31, 2007		1,874,820		$	15.01		5.32	$	343

5

     As of December 31, 2007, 370,957 options remained available for grant.

     Exercise prices, which were equal to the market value of the shares for which options were granted, were as follows:

	Three months ended		Three months ended
	December 31,		December 31,
	2007		2006
Weighted average exercise price	$	7.43	$	8.72
Weighted average fair value	$	3.47	$	4.67

     As of December 31, 2007, approximately $3.2 million of unrecognized compensation costs related to stock options are expected to be recognized over a weighted-average period of approximately 1.5 years. During the three-month periods ended December 31, 2007 and 2006, the aggregate intrinsic value of options exercised under the Company’s stock option plan was approximately $0 and $3,500, respectively.

Valuation Assumptions

     The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model and ratable attribution approach with the following weighted average assumptions:

	Employee Stock Option Plan
	Three months ended
	December 31,
	2007			2006
Dividend yield		0.0	%		0.0	%
Expected life of option	4.3 years			4.6 years
Risk-free interest rate		3.61	%		4.54	%
Expected volatility		55.0	%		61.7	%

     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 expected volatility was determined using the Company’s historical stock price.

     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.

6

NOTE 4 — BASIC AND DILUTED NET LOSS PER SHARE

     We have presented net 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 loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share includes 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 loss per share:

	Three months ended
	December 31,
	2007			2006
	(In thousands, except
	per share amounts)
Net loss, as reported for basic and diluted net loss per share	$	(1,171	)	$	(444	)
Weighted average shares outstanding		13,373			14,103
Dilutive options		—			—
Weighted average shares assuming dilution		13,373			14,103
Net loss per share:
Basic and diluted	$	(0.09	)	$	(0.03	)

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

	Three months ended
	December 31,
	2007		2006
	(In thousands)
Common stock options		2,852		2,192

NOTE 5 — INVENTORIES

     The components of inventories are as follows:

	December 31,		September 30,
	2007		2007
	(In thousands)
Inventories:
Raw materials	$	1,870	$	2,235
Work-in-process		34		23
Finished goods		297		227
	$	2,201	$	2,485

7

NOTE 6 — GOODWILL AND INTANGIBLE ASSETS

     We performed our most recent goodwill impairment test as of December 31, 2007 and determined that there was no impairment. As such, there was no write-down of the goodwill balance. Between October 1, 2007 and December 31, 2007, there have been no changes to the Company’s goodwill balance of $49.4 million.

     In the first fiscal quarter 2008, 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 six months, as follows:

	As of December 31, 2007							As of September 30, 2007
	Gross Carrying		Accumulated			Net Carrying		Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount		Amount		Amortization			Amount
	(In thousands)
Purchased technology	$	4,800	$	(4,718	)	$	82	$	4,800	$	(4,706	)	$	94
Trade names		1,000		(983	)		17		1,000		(980	)		20
Customer relationships		1,000		(983	)		17		1,000		(980	)		20
Non-compete agreements		400		(391	)		9		400		(391	)		9
System backlog		400		(400	)		—		400		(400	)		—
Total	$	7,600	$	(7,475	)	$	125	$	7,600	$	(7,457	)	$	143

     The estimated future amortization expense of purchased intangible assets as of December 31, 2007 was as follows:

	Estimated
	Amortization
Fiscal Year	Expense
	(In thousands)
2008 (remaining nine months)	$	55
2009		67
Thereafter		3
Total	$	125

NOTE 7 — INCOME TAXES

     Our provision for income taxes consists of federal, state and foreign income taxes. We recorded a tax provision of $218,000 in the three months ended December 31, 2007, compared with $227,000 in the three months ended December 31, 2006. 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. As a result, our tax provision consists primarily 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.

     On October 1, 2007, we adopted FIN 48 (“FIN 48”),Accounting for Uncertainty in IncomeTaxes,an interpretation of FASB Statement No. 109. The cumulative effect of adopting FIN 48 was a $17,000 decrease to retained earnings as of October 1, 2007. As of the adoption date of October 1, 2007, we had $3,909,000 of gross unrecognized tax benefits, of which $1,042,000 would affect the effective tax rate if recognized. Consistent with the provisions of FIN 48, we reclassified $1,108,000 of current income tax payable resulting in a $1,108,000 increase to non-current income taxes payable.

     In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. This policy did not change as a result of the adoption of FIN 48. As of the date of adoption, we had approximately $231,000 of accrued interest and penalties related to uncertain tax positions.

     We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, or foreign examinations by tax authorities for years prior to 2000. At this time, we cannot estimate the possible change in unrecognized tax benefits.

8

NOTE 8 — STOCKHOLDERS’ EQUITY

Comprehensive loss

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

	Three months ended
	December 31,
	2007			2006
	(in thousands)
Net loss, as reported	$	(1,171	)	$	(444	)
Currency translation adjustment		(18	)		128
Unrealized losses on investments		(3	)		(1	)
Comprehensive loss	$	(1,192	)	$	(317	)

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 six 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.

Repurchase of Common Stock

     In December 1999, our Board of Directors authorized a stock repurchase program of up to 2,000,000 shares of its 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 repurchased under the program. In November 2007, our Board of Directors authorized an increase of 208,974 shares in the number of shares that may be repurchased under the share repurchase program. 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 2007, we repurchased and canceled 1,034,864 shares at a cost of approximately $9.3 million. In the three month period ended December 31, 2007, we repurchased and canceled 172,047 shares at a cost of approximately $1.3 million. The shares repurchased were restored to the status of authorized but unissued. As of December 31, 2007, approximately 1,356,000 shares remained available for repurchase under the authorization.

9

NOTE 9 — 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:

			Europe, Middle				Asia		Consolidated
	Americas		East & Africa		Japan		Pacific		Total
			(In thousands)
Three months ended December 31, 2007
Revenues from unaffiliated customers	$	2,997	$	3,356	$	2,402	$	1,546	$	10,301
Three months ended December 31, 2006
Revenues from unaffiliated customers	$	2,929	$	3,643	$	2,169	$	1,826	$	10,567
As of December 31, 2007
Goodwill	$	22,896	$	26,498	$	—	$	—	$	49,394
Long-lived assets		880		272		215		191		1,558
As of September 30, 2007
Goodwill	$	22,896	$	26,498	$	—	$	—	$	49,394
Long-lived assets		937		323		223		102		1,585

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

     Revenues in the United States represented 26%, and 26% of our total revenues in the three months ended December 31, 2007 and 2006, respectively. Revenues from China represented 10% and 11% of our total revenues in the three months ended December 31, 2007 and 2006, respectively. Revenues from France represented 10% of our total revenues in the three months ended December 31, 2007. Revenues from Germany accounted for 17% of our total revenues in the three months ended December 31, 2006. Operations in Ireland accounted for 34% and 31% of the consolidated identifiable assets at December 31, 2007 and 2006, respectively.

NOTE 10 — 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 December 31, 2007 or September 30, 2007, or 10% or more of our revenues for the three months ended December 31, 2007 or 2006, were as follows:

	Percentage of Accounts						Percentage of Revenues
	Receivable as of						For the three months ended
	December 31,			September 30,			December 31,			December 31,
	2007			2007			2007			2006
Customer A		—			—			—			19	%
Customer B		17	%		—			12	%		—
Customer C		15	%		22	%		11	%		—
Customer D		25	%		33	%		17	%		10	%
Customer E		—			—			10	%		—

NOTE 11 — CONTINGENCIES

     From time to time, we may be involved in 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. 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.

10

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, 2007, as filed with the Securities and Exchange Commission on December 13, 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 and involve known and unknown risks, uncertainties and other factors that may cause our business 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, 2007, filed on December 13, 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; and

• load and stress testing.

     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 the Network Diagnostics Business (“NDB”) purchased from Tekelec in 2002.

     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 (LTE);

• WiMAX;

• IP Multimedia Subsystem (IMS);

• Third Generation Cellular (3G), including UMTS, cdma2000 and TD-SCDMA;

11

• 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 parameters, including the number and type of software protocol modules and the number of physical 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, 2007, we experienced lower revenues due 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, and to continued competition from our customers’ own test equipment offerings in the Japanese market. These factors resulted in reduced purchasing of our products and services by our customers throughout the world.

     In the three months ended December 31, 2007, we saw some improvement in revenues in Japan, but we continued to experience both reduced demand in Europe due to the effects of consolidation among major customers and weakness in the domestic Chinese telecom test market.

Summary of Our Financial Performance in the First Quarter of Fiscal 2008

     Our revenues in the three months ended December 31, 2007 decreased by 3% to $10.3 million from $10.6 million in the same period in the previous year for the reasons outlined in the preceding section, “Conditions and Trends in our Industry”. Our gross profit margin decreased by one percentage point to 80%, primarily due to a less favorable product mix, and our operating expenses increased by 5%, due primarily to increases in staffing levels, non-cash stock option expenses, contractor expenses and exchange rates. Our operating loss increased to $1.8 million from $1.0 million.

     During the three months ended December 31, 2007, our cash, cash equivalents and short-term investments decreased by $3.1 million, due to $1.5 million in negative cash flow from operations, $1.3 million in share repurchases and $0.2 million in capital expenditures.

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, 2007 as filed with the SEC on December 13, 2007, except that we adopted Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.

12

Results of Operations

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

	For the three months ended
	December 31,
	2007			2006
Revenues:
Products		65.7	%		62.0	%
Services		34.3			38.0
Total revenues		100.0			100.0
Cost of revenues:
Products		12.1			10.7
Services		7.7			8.1
Amortization of purchased technology		0.1			0.1
Total cost of revenues		19.9			18.9
Gross profit		80.1			81.1
Operating expenses:
Research and development		34.5			28.5
Sales and marketing		42.2			40.6
General and administrative		21.1			21.6
Total operating expenses		97.8			90.7
Operating loss		(17.7	)		(9.6	)
Interest income		7.2			7.6
Other income (expense), net		1.2			(0.1	)
Loss before income taxes		(9.3	)		(2.1	)
Provision for income taxes		2.1			2.1
Net loss		(11.4	)%		(4.2	)%
Gross profit margin on products		81.6	%		82.8	%
Gross profit margin on services		77.4	%		78.7	%

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

Comparison of the Three-Month Periods Ended December 31, 2007 and 2006

     Revenues

     Our revenues for the three months ended December 31, 2007 decreased by 3% to $10.3 million from $10.6 million in the three months ended December 31, 2006. Over the same period, product revenues increased by approximately 3% to $6.8 million from $6.6 million. The increase in product revenues was attributable to increased sales of our DCT and MGTS test systems in Japan. Services revenues decreased approximately 12% to $3.5 million from $4.0 million, due primarily to a decrease in the number of test systems under maintenance.

     Our revenues by sales territory, based on origin of order taken, varied as follows in the three months ended December 31, 2007 in comparison with the three months ended December 31, 2006:

• revenues in the Americas increased by 2% to $3.0 million from $2.9 million;

• revenues in Europe, the Middle East and Africa decreased by 8% to $3.4 million from $3.6 million;

• revenues in Japan increased by 11% to $2.4 million from $2.2 million; and

• revenues in Asia Pacific outside Japan decreased by 15% to $1.5 million from $1.8 million.

     Information on revenues from major customers is provided in Note 10 to the Unaudited Condensed Consolidated Financial Statements.

13

     Cost of Revenues

     Cost of product revenues consists of the costs of purchased components, circuit board assembly by independent contractors, salaries, benefits and stock-based compensation for personnel in product purchasing, testing, shipping and inventory management, as well as supplies, media and freight. Cost of product revenues increased by $0.1 million to $1.2 million for the three months ended December 31, 2007 from $1.1 million in the three months ended December 31, 2006, due to a less favorable product mix. Gross margin on product revenues decreased to 82% from 83%, due to increased hardware component costs as a percentage of revenue. 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 salaries, benefits and stock-based compensation for customer support and training personnel as well as the costs of travel, materials and equipment. Cost of services revenues decreased by approximately 7% to $0.8 million in the three months ended December 31, 2007 from $0.9 million in the three months ended December 31, 2006, due primarily to lower compensation costs. Gross margin on services revenues decreased to 77% from 79% as services revenues decreased to a greater extent than the associated costs. 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 remained unchanged at $12,000 in the three months ended December 31, 2007 compared with the same period the previous year.

     Gross margins did not vary significantly by geographic region.

     Research and Development

     Research and development expenses consist primarily of the costs of salaries, benefits and stock-based compensation for engineers, as well as materials, equipment and contractors. 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 increased by approximately 18% to $3.6 million for the three months ended December 31, 2007 from $3.0 million for the three months ended December 31, 2006 primarily due to annual compensation increases, an increase of $0.1 million in contractor expenses, an increase of $0.1 million in non-cash stock option expenses and an exchange rate driven increase of $0.1 million due to average increases of 15% in the Australian dollar and 6% in the British pound against the U.S. dollar. As a percentage of total revenues, research and development expenses increased to 34% from 29% over the same period.

     Sales and Marketing

     Sales and marketing expenses consist primarily of the costs of salaries, benefits, commissions, bonuses and stock-based compensation, as well as occupancy costs, travel and promotional expenses. Sales and marketing expenses remained substantially unchanged at $4.3 million for the three months ended December 31, 2007 in comparison with the same period in the prior year. As a percentage of total revenues, sales and marketing expenses increased to 42% from 41% over the same period.

     General and Administrative

     General and administrative expenses consist primarily of salaries, benefits, bonuses and stock-based compensation, as well as third party 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 and impairment of certain acquired intangible assets. General and administrative expenses decreased approximately 5% to $2.2 million for the three months ended December 31, 2007 from $2.3 million for the three months ended December 31, 2006, primarily due to a decrease of $0.1 million in accounting expenses. As a percentage of total revenues, general and administrative expenses decreased to 21% from 22% over the same period.

     Interest income

     Interest income decreased to $0.7 million in the three months ended December 31, 2007 from $0.8 million in the three months ended December 31, 2006 due to decreases in both short-term interest rates and cash, cash equivalent and short-term investment balances.

14

     Provision for income taxes

     Our provision for income taxes consists of federal, state and foreign income taxes. Having recorded a full valuation allowance on our deferred tax assets in the U.S. in fiscal 2006, we no longer accrue a benefit on U.S. pre-tax losses. We recorded a tax provision of $0.2 million in the three months ended December 31, 2007, substantially unchanged from the same period in the prior year.

     Impact of Inflation

     We believe that inflation has not had a material impact on our results of operations.

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.

     Our operating activities used $1.5 million in cash in the three months ended December 31, 2007 and provided $1.1 million in the three months ended December 31, 2006. Over the same period, the net loss component of cash flows from operating activities increased to $1.2 million from $0.4 million and the contribution from adjustments for non-cash charges remained substantially unchanged at $1.1 million. These non-cash charges include charges for depreciation, amortization, deferred income taxes and stock-based compensation expense. Finally, our cash flows from operations are affected by changes in current assets and liabilities. Changes in non-cash assets and liabilities used $1.4 million in cash in the three months ended December 31, 2007 and provided $0.4 million in the three months ended December 31, 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 improved to 74 days for the quarter ended December 31, 2007 from 83 days for the quarter ended December 31, 2006 due primarily to stronger collections and lower maintenance renewal invoicing in the more recent period. 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: purchases of property and equipment and purchases and sales of short-term investments. Purchases of property and equipment increased by $0.1 million to $0.2 million in the three months ended December 31, 2007 from $0.1 million in the three months ended December 31, 2006. We expect that capital expenditures for our full fiscal 2008 year will total approximately $0.8 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. Net purchases and sales of short-term investments provided net cash of $7.4 million in the three months ended December 31, 2007 in comparison with $4.0 million in the three months ended December 31, 2006.

     Financing activities representing primarily the repurchase of common shares used cash of $1.3 million in the three months ended December 31, 2007 in comparison with $3.6 million in the three months ended December 31, 2006.

     As of December 31, 2007, we had working capital of $61.4 million and cash, cash equivalents and short-term investments of $59.2 million. As of December 31, 2007, we had the following payment obligations in the listed categories of contractual obligations:

					Payments Due by Period
			Less Than		1-3		3-5		More than
Contractual Obligations	Total		1 Year		Years		Years		5 Years
					(In millions)
Operating leases	$	4.3	$	1.6	$	1.8	$	0.8	$	0.1
Unconditional purchase obligations		0.3		0.3		—		—		—
Total contractual cash obligations	$	4.6	$	1.9	$	1.8	$	0.8	$	0.1

15

     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 three months ended December 31, 2007, approximately 23% of our revenue was derived from invoices issued and paid in Japanese yen, and 6% 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 December 31, 2007, we had no forward exchange contracts and no options outstanding.

     We also incur operating 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 Philippines peso and the Indian rupee. In the three months ended December 31, 2007, we incurred approximately $4 million of operating expenses in foreign currencies. In Japan, our yen operating expenses, which amounted to approximately $0.5 million in the three months ended December 31, 2007, are lower than our yen revenues and act as a partial natural hedge on our exposure on those revenues. Our operating expenses in other foreign currencies 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 December 31, 2007, short-term investments consisted of available-for-sale securities of $31.5 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 December 31, 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

16

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 effective as of December 31, 2007.

     Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2007. In making this assessment, management used the criteria set forth inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

     As a result of its assessment of internal control over financial reporting, management had concluded at the end of fiscal year 2007 that the material weakness reported in the Annual Report on Form 10-K for the fiscal year ended September 30, 2006 had been remediated as of September 30, 2007, and our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

     Our former independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on our assessment of the Company’s internal control of financial reporting. This report was included in our Annual Report on Form 10-K filed with the SEC on December 13, 2007.

     Changes in internal control over financial reporting.

     There were no changes in our internal control over financial reporting that occurred during the first quarter of fiscal 2008 that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1A. Risk Factors

     Factors That May Affect Future Results

     The known risks described below 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.

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;

• the absence of long-term customer purchase contracts;

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

• the relatively long sales cycles for our products;

• competitive conditions in our markets;

• exchange rate fluctuations;

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

17

• 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;

• changes in the mix of products sold;

• changes in the regulatory environment; and

• adverse results from litigation.

     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. Our products generally are shipped within 15 to 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 can result in losses. 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 current generation of software runs under the LinuxÔ operating system; previous generations ran under Sun Microsystems SolarisÔ UNIXÔ. Our current and prospective customers may request other operating systems, such as Windows VistaÔ, 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

18

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 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 2007 and 2006, our revenues in Japan were negatively impacted by competition from test products developed by one of our Japanese OEM customers, both for their own internal use and for sale to our major Japanese telecom operator customers. We expect this competitive factor to continue to impact our Japanese revenues in fiscal 2008. 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.

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

     Our customer base is highly concentrated, and a relatively small number of companies have accounted for substantially all of our revenues to date. In the three months ended December 31, 2007, our top five customers represented approximately 59% 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 further industry consolidation, or if a significant customer were to reduce, delay or cancel its orders, our 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 the common hardware platform that supports both our DCT and MGTS products.

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

     In the three months ended December 31, 2007, we derived 74% 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.

19

     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. A decrease in the value of the Japanese yen against the dollar contributed to some degree to the revenue decrease we experienced in Japan in fiscal 2006. 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 technological innovation in 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, industry consolidation, regulatory obstacles or the lack of or a 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.

20

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. 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.

21

We depend on a limited number of independent manufacturers, 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 reached a favorable settlement of a lawsuit that we had brought against a competitor for alleged misappropriation of 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

22

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 and results of operations. In January 2003, the EU adopted Directive 2002/95/EC on Restriction on the Certain Hazardous Substances in Electrical and Electronic Equipment (the “RoHS Directive”). The RoHS Directive bans in the EU the use of certain hazardous materials in electrical and electronic equipment. We have not incurred significant incremental costs as a result of the RoHS Directive and we do not expect costs to be significant in the future, but if they are, our financial condition or results of operations could be materially adversely affected. In addition, similar legislation has been or could be enacted in other countries outside the EU (such as China) and/or the scope of the RoHS Directive could be expanded by the EU or EU-member countries, which could have an adverse effect on our financial condition or results of operations.

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.

23

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, beginning with our Annual Report on Form 10-K for our fiscal year ending September 30, 2005, we were 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. In our Annual Report on Form 10-K for the fiscal year ended September 30, 2006, our Chief Executive Officer and Chief Financial Officer each concluded that our disclosure controls and procedures were not effective. Although these officers have concluded that our disclosure controls and processes were effective as of the end of the period covered by our Annual Report on Form 10-K for the fiscal year ended September 30, 2007, if we fail to achieve and maintain the adequacy of our internal control over financial reporting, 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. Moreover, 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 December 31, 2007, Richard A. Karp, our Chief Executive Officer and Chairman of our Board, beneficially owned 3,034,559 shares, and Nancy H. Karp, one of our directors, beneficially owned 1,373,010 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 stockholders could prevent or delay a change in control.

     As of December 31, 2007, Dr. Karp beneficially owned 3,034,559 shares or approximately 23% of our common stock outstanding, and Nancy H. Karp, one of our directors, beneficially owned 1,373,010 shares or approximately 10% of our common stock outstanding. Due to repurchases of common stock by the Company, the percentage of shares held by these individuals has increased and may continue to increase. 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.

24

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 December 31, 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
October 1, 2007 - October 31, 2007		11,700	$	7.46		11,700		1,307,085
November 1, 2007 - November 30, 2007		56,796		7.50		56,796		1,459,263
December 1, 2007 - December 31, 2007		103,551		7.40		103,551		1,355,712
Total for the Quarter		172,047	$	7.44		172,047		1,355,712

(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 repurchased under the program. In November 2007, our Board of Directors authorized an increase of 208,974 shares in the number of shares that may be repurchased under the share repurchase program. 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. During the first quarter of fiscal 2008, the Company repurchased and canceled 172,047 shares at a cost of approximately $1.3 million. As of December 31, 2007, approximately 1,356,000 shares remained available for repurchase under the authorization.

Item 5. Other Information

     On February 5, 2008, in connection with the departure of Mr. Henry P. Massey, Jr. from the Board of Directors of the Company, the Board amended Article 9 of the Bylaws of the Company to provide for five (5) authorized directors rather than six (6). The amended Bylaws are filed as Exhibit 3.1 to this Report.

Item 6. Exhibits

3.1	Bylaws of the Registrant, as amended February 5, 2008.
10.1	First Amendment to Lease, effective October 31, 2007, by and between the Registrant and Raleigh Flex Owner I LLC relating to office space located at 800 Perimeter Park Drive, Morrisville, NC 27560.
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.

25

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: February 11, 2008	By:	/s/Christopher A. Stephenson
		Christopher A. Stephenson
		Vice President and Chief Financial Officer (Principal Financial Officer)

26