FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

For the quarterly period ended March 31, 2005

OR

Commission file number 0-24701

CATAPULT COMMUNICATIONS CORPORATION

160 South Whisman Road
Mountain View, California 94041

(650) 960-1025

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

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

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

     As of April 22, 2005, there were 14,700,274 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.

CATAPULT COMMUNICATIONS CORPORATION
FORM 10-Q

INDEX

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Part I. Financial Information

Item 1. Financial Statements

CATAPULT COMMUNICATIONS CORPORATION

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

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CATAPULT COMMUNICATIONS CORPORATION

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

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CATAPULT COMMUNICATIONS CORPORATION

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

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CATAPULT COMMUNICATIONS CORPORATION

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 1985, was reincorporated in Nevada in 1998 and has operations in the United States, Canada, the United Kingdom, Europe, Japan, China and Australia. Management has determined that we conduct our business within one global industry segment: the design, development, manufacture, marketing and support of advanced software-based telecommunications test systems.

     The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2004, and filed with the SEC on December 10, 2004. The unaudited condensed consolidated financial statements as of March 31, 2005, and for the three and six months ended March 31, 2005 and 2004, 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, 2004 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.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement Number 123 (revised 2004), “SFAS No. 123(R)”, Share-Based Payment. SFAS No. 123(R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments, such as stock options granted to employees. On April 14, 2005, the SEC approved a new rule that for public companies delays the effective date of SFAS No. 123(R) to annual, rather than interim, periods that begin after June 15, 2005. We may elect to apply SFAS No. 123(R) using the modified prospective application method, under which we would record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption, without restating prior periods. Alternatively, we may elect to apply the modified retrospective application method, under which financial statements for prior periods would be adjusted on a basis consistent with the pro forma disclosures required for those periods by SFAS No. 123. We expect the adoption of SFAS No. 123(R) may have a material adverse effect on our reported net income per share. We are currently evaluating the extent of that impact and we have not made an election with respect to application method.

     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”. This Statement requires abnormal amounts of idle facility expense, freight, handling costs, and wasted material be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal”. In addition, this Statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. However, as we do not include amounts of idle facility expense, freight, handling costs and wasted material in our inventory, the adoption of SFAS No. 151 is not expected to have a material impact on our financial position or results of operations.

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     In October 2004, the American Jobs Creation Act of 2004 (the “Act”), was signed into law, allowing U.S. companies to repatriate accumulated income from abroad by providing a one-time deduction of 85% for certain dividends from controlled foreign corporations. The deduction is subject to certain limitations, and numerous provisions of the Act contain uncertainties that require interpretation and evaluation. We are currently evaluating whether, and to what extent, to repatriate accumulated income from abroad under the provisions of the Act. Until such evaluation is complete, we have not accrued income taxes on the accumulated undistributed earnings of our Irish subsidiary, as these earnings are currently expected to be reinvested indefinitely.

NOTE 3 — STOCK-BASED COMPENSATION

     We currently account for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as interpreted by FASB Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of Opinion No. 25”. We also comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” Under APB Opinion No. 25, compensation cost is recognized over the vesting period based on the difference, if any, on the date of grant between the fair value of our stock and the amount an employee must pay to acquire the stock. The changes that will be required by SFAS No. 123(R) are discussed in Note 2 above.

     Had compensation expense been determined based on the fair value at the grant dates for the awards under these plans using the Black-Scholes option pricing model prescribed by SFAS No. 123, our pro forma net income and pro forma basic and diluted earnings per share would have been as set forth in the table below. Such pro forma disclosures may not be representative of future compensation expense because options vest over several years and additional grants are made each year.

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

NOTE 4—BASIC AND DILUTED NET INCOME PER SHARE

     Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share includes the effect of dilutive potential common shares issued during the period from the exercise of options using the treasury stock method.

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

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NOTE 5—GOODWILL AND INTANGIBLE ASSETS

     We performed our most recent annual impairment test on September 30, 2004, and determined that there was no impairment of goodwill. As such, there was no write-down of the goodwill balance. Between October 1, 2004 and March 31, 2005, there were no changes to the Company’s goodwill balance of $49.4 million or indicators of impairment.

     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 backlog that was amortized over a period of six months, as follows (in thousands):