THIS REPORT ON FORM 10-K CONTAINS STATEMENTS THAT ARE NOT HISTORICAL FACTS BUT ARE FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, TECHNOLOGICAL DEVELOPMENTS, NEW PRODUCTS AND SIMILAR MATTERS. SUCH STATEMENTS ARE GENERALLY IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS AND PHRASES, SUCH AS “INTENDED,” “EXPECTS,” “ANTICIPATES” AND “IS (OR ARE) EXPECTED (OR ANTICIPATED).” 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 OUR STOCKHOLDERS SHOULD CAREFULLY REVIEW THE CAUTIONARY STATEMENTS SET FORTH IN THIS REPORT ON FORM 10-K, INCLUDING THOSE SET FORTH UNDER THE CAPTION “FACTORS THAT MAY AFFECT FUTURE RESULTS.”

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 FROM TIME TO TIME BY US OR ON OUR BEHALF.

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:

We market our products through our direct sales force with offices in the United States, Canada, the United Kingdom, Germany, France, Finland, Sweden, Japan and China. In other markets, we use distributors or sales agents. Our end customers include industry leaders such as Alcatel, Cingular Wireless, Fujitsu Limited, LM Ericsson, Lucent Technologies, Inc., Motorola, Inc., NEC Corporation, Nippon Telephone and Telegraph, Nokia Corporation, Nortel Networks Limited, NTT DoCoMo, Inc., Siemens AG and Vodafone Group Plc.

Catapult was incorporated in California in October 1985, reincorporated in Nevada in 1998, and has operations in the United States, Canada, Ireland, the United Kingdom, Germany, France, Finland, Sweden, Japan, China, Australia and India. We completed our initial public offering in 1999 and acquired the Network Diagnostics Business (“NDB”) from Tekelec in 2002.

We are subject to the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and hence file periodic reports, proxy statements and other information with the Securities and Exchange Commission (“the SEC”). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Room 1580, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330 or 202-551-8090. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

Financial and other information can also be obtained at our web site, www.catapult.com, where we make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. A glossary of some of the technical terms used in this report can be found at the end of this Item 1.

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

Our products are used to perform a variety of test functions, including design and feature verification, conformance testing, interoperability testing, load and stress testing, and monitoring and analysis. We maintain an

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 systems vary widely depending upon the overall system configuration, 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.

The principal applications of our test systems are feature verification, conformance testing, interoperability testing, load and stress testing, and monitoring and analysis.

Feature Verification.  Our systems are used to perform feature verification by simulating one or more network devices and testing a wide variety of possible scenarios to establish that the device under test handles all features specified by the protocol. The user is able to initiate multiple simultaneous calls across one or many links, create correct call scenarios, send messages out of sequence to verify error response mechanisms and verify a voice or data path.

Conformance Testing.  Our systems are used to verify that network devices conform to industry standards. Because industry standards for protocols are constantly changing, we regularly develop new protocol test modules and update existing protocol test modules so that customers can validate the implementation of new features and the functionality of existing features against those standards.

Interoperability Testing.  Our systems are used to simulate one or more network devices, emulating their actions and responses. By simulating various network devices, such as digital switches, wireless base stations, network access nodes and network databases, our products assist engineers with the cost-effective development of equipment that will be compatible with the networks within which they will be deployed. This helps ensure that network equipment will interoperate reliably, thereby reducing costly failures after installation.

Load and Stress Testing.  Our systems are used to verify that a device under test can successfully handle its designed traffic capacity and that its performance will degrade gracefully, rather than fail completely, when stressed

Monitoring and Analysis.  Our systems are used in development laboratories to monitor network links and store network activity information for future analysis, typically without affecting network traffic. By collecting and analyzing traffic, our systems help ensure that the links have been brought into service and that the devices connected by the links are functioning properly. Our systems can also provide notice of network device failure, set “traps” and “triggers,” count error messages and filter packets by address or selected field criteria. Our systems can simultaneously monitor multiple links, each of which may be using different protocols.

Our products employ proprietary test software, specialized programming languages and tools, graphical user interfaces and extensive libraries of proprietary test modules for a large number of protocols and variants. This enables the systems to be configured for many different applications. Test modules are developed in accordance with telecom industry standard specifications and may include protocol encoders and decoders, state machines, validation tests and conformance test suites. The current generation of software runs under the Linux^tm operating system; previous generations ran under Sun Microsystems Solaris^tm UNIX^tm.

Our systems include a number of productivity tools. Using the DCT, customers may choose to program their tests by using our graphical user interface, CATTgen, or by writing their own code using our Digital Communication Programming Language (“DCPL”). DCPL is a fully featured, optimized communications language. DCT customers can also choose to integrate their own libraries of test subroutines written in industry standard programming languages such as C or C++. Using the MGTS system, customers may implement their tests using our Protocol Adaptable State Machine (“PASM”). PASM allows the user to construct custom tests in a graphical environment. Our products also provide “Quick Start” applications to aid in training new users and provide a starting point for developing new test applications.

Our products employ modular hardware architectures that support a wide variety of proprietary physical interfaces connecting the systems to devices under test.

In September 2004, we introduced a range of five hardware common platforms that allow our test system products to address a broad range of telecom test environments and applications. Unlike the previous generation of separate hardware platforms for the two products, these Linux-based common platforms support both the DCT and MGTS systems and do not require a Sun workstation. These platforms meet an increasing demand for transportable, desktop and rack-mount form factors that provide greater price and performance scalability. The platforms support our PowerPCI^® or CompactPCI (“cPCI”) type network interface and/or co-processor cards: the transportable and desktop platforms support up to four PowerPCI cards; small and medium rack-mount platforms support up to two and up to nine PowerPCI cards, respectively; and the high-capacity rack-mount mesh backplane m500 platform supports up to 18 more powerful Catapult cPCI cards.

Catapult’s worldwide customer base includes both telecommunications equipment manufacturers and network operators.

Revenues from our top five customers represented approximately 50%, 52% and 55% of total revenues in fiscal 2006, 2005 and 2004, respectively. In fiscal 2006, sales to Siemens and Motorola accounted for approximately 19% and 11% of total revenues, respectively. In fiscal 2005, sales to Ericsson, Motorola, and Siemens accounted for approximately 14%, 11% and 11% of total revenues, respectively. In fiscal 2004, sales to Nortel, NTT DoCoMo, Ericsson and NEC accounted for approximately 13%, 12%, 12% and 11% of total revenues, respectively. Separate engineering groups of the same customer at different locations often make independent decisions to

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. The loss of a major customer or the reduction, delay or cancellation of orders from one or more of our significant customers could materially adversely affect our business, financial condition and results of operations.

We market our products and services primarily through our direct sales force, most of whom have technical degrees. As of September 30, 2006, our direct sales force consisted of 23 employees. This direct sales force is supported by applications engineering, administrative and marketing personnel. Our sales and marketing staff is located in North America, Europe, Japan and China. In addition, we sell our products through distributors or sales agents in Europe, the Middle East, Africa, Australia and Korea. In the year ended September 30, 2006, approximately 12% of our sales involved distributors or sales agents.

Our sales strategy is to focus on the functional groups related to the customer’s product development and testing cycle, including research and development, network integration and interoperability testing. Sales to a new customer have often led to additional sales at other facilities of that customer, because often a customer performs development at multiple sites. We intend to continue to leverage our existing customer base not only for follow-on and upgrade sales but also to gain access to new customers. For example, because users of similar test systems can benefit from sharing test scripts and results, an initial sale can facilitate a subsequent sale to other equipment manufacturers and network operators.

We have implemented a number of marketing initiatives to support the sales of our products and services. These efforts are intended to inform customers of the capabilities and benefits of our advanced software-based test systems. Marketing programs include direct mail, on-site customer seminars, limited participation in industry trade shows, technology conferences and forums, and dissemination of information concerning products through our website.

Customers generally purchase on an as-needed basis, and none of our customers has entered into agreements that require minimum purchases. 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 and shipped in that quarter.

A customer’s decision to purchase our products typically involves a significant technical evaluation and may also involve internal procedural delays associated with large capital expenditure approvals. For these and other reasons, the sales cycle associated with our products is typically lengthy and subject to a number of significant risks over which we have little or no control. Historically, the period between initial customer contact and purchase of our products has ranged from two to nine months, with sales to new customers (including new divisions within existing customers) at the upper end of this range. Because of the lengthy sales cycle and the relatively small number and large size of customers’ orders, if revenues forecasted from a specific customer for a particular quarter are not realized in that quarter, our operating results for that quarter could be materially adversely affected.

International sales outside the United States constituted approximately 75%, 75% and 76% of our total revenues in fiscal 2006, 2005 and 2004, respectively. We expect that international sales will continue to account for a significant portion of our revenues in future periods. We sell our products worldwide through our direct sales force and distribution and sales agency channels. Our direct sales staff outside the United States is located in offices in Canada, the United Kingdom, Germany, France, Finland, Sweden, Japan and China, and we plan to open new offices internationally from time to time.

Information with respect to our revenues and identifiable long-lived assets by principal geographic area of operations is set forth in Note 12 of the Notes to Consolidated Financial Statements of this report.

Due to the complexity of our customers’ testing needs, we offer our customers support and training using our highly skilled technical personnel. As of September 30, 2006, we had 64 applications engineers worldwide who provide full-time technical assistance and development support to our customers. We provide training, generally at the customer’s site, and ongoing technical assistance from all of our offices. Support is generally offered during normal business hours applicable to each office. We also offer product warranties for various lengths of time ranging from three to twelve months, depending on the product and the country of purchase or operation.

We provide periodic software releases that contain new features, new protocol variants and other improvements. Each new software release is carefully designed not only to enhance performance and flexibility, but also to maximize compatibility with our earlier software releases, enabling our products to continue to be used as customer needs and applications evolve.

Our development efforts are directed at improving the capability, performance and ease of use of our test system products as well as developing new products. We intend to continue to devote a large portion of our engineering resources to the enhancement of our suite of software protocol test and analysis modules in order to meet current and projected customer requirements. We also intend to continue to develop and enhance our proprietary internal tools and techniques for supporting new protocols in the systems. We have also begun to devote a small portion of our research and development resources to the identification and development of new product opportunities.

We are continually seeking to make our products easier to use in order to expand our market to include a broader range of users. In order to run test scenarios, particularly on advanced telecommunications systems, users may need to create customized test scripts, a process that may require significant technical expertise. To assist this process, we plan to continue the expansion and refinement of our graphical user interface and other script development tools.

Most of our hardware development program is directed towards designing protocol co-processors and associated physical interfaces. We have initiated these projects to increase the performance and capabilities of our products and expand the range of devices to which these products can be directly connected for testing purposes.

Our research and product development expenses were approximately $13.7 million, $12.4 million and $11.7 million in fiscal 2006, 2005 and 2004, respectively. Our policy is to evaluate software development projects for technological feasibility to determine if they meet capitalization requirements. To date, all software development costs have been expensed as research and development expenses as incurred. As of September 30, 2006, 76 engineers were engaged in or provided support to research and development.

Our manufacturing operations consist of the procurement and inspection of components, final system assembly, quality control tests and packaging. Printed circuit boards, chassis and most of the other major components used in our products are sub-assembled to our specifications by independent contractors. The sub-assembled components are then delivered to our facilities for final system assembly, quality control and testing against product specifications, and product configuration, including installation of our software and proprietary hardware. We believe that our use of independent contractors for sub-assembly combined with in-house final assembly improves production planning, increases efficiency, reduces costs and improves quality. We purchase many key components from the sole supplier of those components and we do not have any long-term supply arrangements with these vendors to ensure uninterrupted supply of these components.

We have a computerized manufacturing inventory control system that is integrated with our financial accounting system. This manufacturing control system monitors purchasing, inventory and production.

The market for telecommunications test and analysis products is characterized by intense competition. We believe that the principal competitive factors affecting our market include availability of a broad range of protocols and protocol variants, system performance, length of operating history and industry experience, product reliability, ease of use, quality of service and support, status as an independent vendor and price/performance. In addition, we believe that potential customers consider other factors, such as the number of protocols required and whether the test system vendor sells competing telecommunications products. We believe that we compete favorably with respect to these factors.

We believe our principal competitors are Artiza Networks, JDS Uniphase Corporation (“JDSU”), Agilent Technologies, Inc., Spirent plc, NetHawk Oyj, Radcom Ltd. and Tektronix, Inc. Many of our existing and potential competitors are large domestic and international companies that have substantially greater financial, manufacturing, technological, marketing, sales, distribution and other resources, larger installed customer bases, greater name recognition and longer-standing customer relationships than we have. Accordingly, such competitors or potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sales of their products than we may be able to.

We also compete with the internal test system groups of our customers and potential customers, most notably at NEC Corporation. Many other existing and potential customers have the technical capability and financial resources to produce their own test systems and perform test services internally. These systems and services would be competitive with the test systems that we offer.

We expect competition to increase in the future from existing competitors and from other companies that may enter this market with solutions that may be less costly or provide higher performance or offer more features than our solutions. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to develop new test solutions for internal use or for sale to third parties in our markets. Accordingly, it is possible that new competitors may emerge and acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which would have a material adverse effect on our business, financial condition, results of operations and cash flows.

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. We generally enter into nondisclosure and invention assignment agreements with our employees and consultants, and into nondisclosure agreements with our customers and suppliers. To date, we have not sought patent protection for our proprietary technology. We believe that, historically, because of the rapid pace of technological change in the telecommunications test system market, patent protection has been a less significant factor than the knowledge, ability and experience of our employees, the nature and frequency of product enhancement and the quality of our support services. However, there can be no assurance that patent protection will not become a more significant factor in our industry in the future. Likewise, there can be no assurance that the measures we undertake will 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. There can be no assurance that the lack of federal registration of all of our trademarks and copyrights would not have a material 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.

In connection with our acquisition of NDB in 2002, Catapult and Tekelec entered into license agreements with respect to certain technology and intellectual property that were used by Tekelec in NDB’s business but were not transferred outright to us. Under these agreements, Tekelec granted to us and to our Irish subsidiary perpetual, royalty-free, worldwide (except as to the United States for the subsidiary) licenses to exploit the subject technology and intellectual property. These licenses are exclusive to us and our subsidiary for eight years from the date of the acquisition for products used in protocol analysis or simulating, diagnosing, analyzing or testing communications

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to duplicate aspects of our products or to obtain and use information that we regard as proprietary. There can be no assurance that the steps taken by us to protect our proprietary technology will be adequate to prevent misappropriation of such technology or that they will preclude competitors from independently developing products with functionality or features similar to our products. The failure by us to protect our proprietary technology would have a material adverse effect on our business, financial condition and results of operations.

While, to date, we have not been subject to claims of infringement or misappropriation of intellectual property of third parties, there can be no assurance that third parties will not assert infringement claims against us, that any such assertion of infringement will not result in litigation or that we would prevail in such litigation. Furthermore, any such claims, with or without merit, could result in substantial cost to us and diversion of our personnel, require us to develop new technology or require us to enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to us or at all. Because we do not rely on patents to protect our technology, we will not be able to offer a license for patented technology in connection with any settlement of patent infringement lawsuits. In the event of a successful claim of infringement or misappropriation against us and our failure or inability to develop non-infringing technology or to license the infringed, misappropriated or similar technology at a reasonable cost, our business, financial condition and results of operations would be materially 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 could have a material adverse effect on our business, financial condition and results of operations.

As of September 30, 2006, we employed 220 full-time employees, including 76 in research and development, 23 in application engineering customer support, 81 in sales and sales support, 10 in marketing, 19 in administration and 11 in manufacturing. Of these employees, 137 were employed in North America, where our head office and NDB office are both located, 36 in the United Kingdom and Europe, 18 in Australia, 16 in Japan, 12 in China and 1 in India. We are not subject to any collective bargaining agreement and have not experienced any work stoppages. We believe that our relations with our employees are good.

The following table sets forth certain information, including ages as of November 30, 2006, with respect to our executive officers:

Dr. Richard A. Karp founded Catapult in 1985 and has served as our Chief Executive Officer and Chairman of the Board since inception. In May 2000, Dr. Karp relinquished his title as President to David Mayfield, our Chief Operating Officer. Dr. Karp holds a Ph.D. in computer science from Stanford University, an M.S. in mathematics from the University of Wisconsin and a B.S. in science from the California Institute of Technology.

Mr. David Mayfield joined Catapult in May 2000 as our President and Chief Operating Officer. Prior to joining Catapult, Mr. Mayfield served as interim General Manager at Scitex Digital Video, a manufacturer of non-linear digital video editing systems. Prior to 1998, Mr. Mayfield was Executive Vice President and General Manager of the Philips DVS organization in Salt Lake City, UT, a manufacturer of digital video systems. Mr. Mayfield holds a B.S. in Electrical Engineering from California Polytechnic State University and has completed selected courses towards a M.S.E.E. at the University of Santa Clara.

Mr. Glenn Stewart joined Catapult in 1992 as Vice President of Engineering and was promoted to the position of Chief Technology Officer in January 2003. Prior to joining Catapult, he was Director of Engineering at Tektronix/LP Com, a manufacturer of telecommunications test products. Previously, he spent nine years at Bell Northern Research as a manager of development of telecommunications products and services. Mr. Stewart holds an M.Sc. and a B.Sc. in Computer Science from the University of Toronto.

Mr. Chris Stephenson joined Catapult in July 2000 in a full-time consulting capacity and assumed the role of Chief Financial Officer in February 2001 upon approval of the required work visa. From 1985 to April 2000, he was Chief Financial Officer of Telco Research Corporation Limited and its predecessor, TSB International Inc., both telecommunications management companies. He holds a B.A. and an M.A. from the University of Toronto.

Mr. Sean Kelly joined Catapult in July 2003 as Vice President of Sales. From 1980 to 2002, Mr. Kelly held progressively more senior product management, marketing and sales management positions with Hewlett-Packard Company, most recently that of General Manager — Worldwide Business Customer Sales — Industry Standard Servers, PCs, Printers. Mr. Kelly holds a B.S. in Mathematics from the U.S. Naval Academy.

Mr. Adam Fowler joined Catapult in August 2002 in connection with our acquisition of NDB and was promoted to the position of Vice President of Advanced Development in January 2003. In December 2005, he assumed the position of Vice President, Product Management. From 1998 to 2002, Mr. Fowler held progressively more senior development management positions with Tekelec, lastly that of Assistant Vice President of Engineering with responsibility for the MGTS product line. Prior to 1998, he was employed by Nortel, Inc. for 14 years, where his last position was Senior Manager, Product Development and Verification. Mr. Fowler holds a B.S.E in Electrical Engineering from Duke University.

Mr. Guy R. Simpson joined Catapult in 1989 and has held a number of technical and management positions with us since that time. Mr. Simpson has served as Deputy Chairman of our UK subsidiary since October 1996 and

Ms. Barbara J. Fairhurst joined Catapult in June 1995 as Director of Operations. From 1994 to 1995, Ms. Fairhurst was Principal at BJF Consulting, a consulting firm, where she developed business plans and implemented operating systems. From 1990 to 1993, Ms. Fairhurst was Corporate Vice President at Intersource Technologies, Inc., a developer of lighting technology, where she was responsible for operations and manufacturing. Prior to that time, Ms. Fairhurst spent 10 years as President and Chief Operating Officer of Sequential Circuits, a manufacturer of electronic music equipment. Ms. Fairhurst holds a M.B.A. from the Santa Clara University and a B.A. from San Jose State University.

Mr. Terry Eastham joined Catapult in 1999 as our first Vice President of Marketing. Prior to joining Catapult, he served as Chief Operating Officer for Sherwood Networks, a manufacturer of network computers and display terminals. Previously, he spent six years at Wyse Technology, a manufacturer of display terminals, as Vice President of Product Marketing and 17 years at Hewlett-Packard Company where he held a variety of marketing and sales development positions. Mr. Eastham holds both a M.B.A. degree and a M.S. in Physics degree from Washington University and a B.S. degree in Physics from Oklahoma State University.

Ms. Kathy T. Omaye-Sosnow joined Catapult in 1997 as our Manager of Human Resources. She was promoted to the position of Director of Human Resources in June 1999 and to Vice President of Human Resources in November 2000. Prior to joining Catapult, she held a variety of human resources positions, most recently as Manager of Corporate Employment at McKesson HBOC Corporation, a pharmaceutical distributor and health management corporation. Ms. Omaye-Sosnow holds a B.S. degree in Human Resources from California State University, Sacramento.

Mr. Kalyan Sundhar joined Catapult in connection with our acquisition of NDB and was promoted to the position of Vice President of Engineering in November 2006. From 1999 to 2002, Mr. Sundhar held senior engineering management positions with Tekelec. Prior to joining Tekelec, he was responsible for developing software for various switching and wireless products for Nortel. Mr. Sundhar holds a B.E. in Computer Science & Engineering from Madras University, India and an M.S in Computer Science from Clemson University.

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.

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:

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.

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

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

Our test systems currently operate only on the Linux^tm and Sun Microsystems’s Solaris^tm operating systems. Our current and prospective customers may request other operating systems, such as Windows XP^tm, 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 operation.

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

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

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

Our success will depend on continued growth in the market for telecommunications test systems and services and the continued commercial acceptance of our products as a solution to address the testing requirements of telecommunications equipment manufacturers and network operators. While most of our present and potential customers have the technical capability and financial resources to produce their own test systems and perform test services internally, to date, many have chosen to outsource a substantial proportion of their test system and service requirements. In fiscal 2006, our revenues in Japan were negatively impacted by competition from test products developed by two of our Japanese OEM customers, both for their own internal use and for sale to our major Japanese telecom operator customers. We expect this competitive factor to continue to impact our Japanese revenues in fiscal 2007. Our customers may not continue, and potential new customers may not choose, to outsource any of their test systems and service requirements. If the market for telecommunications test systems and services, or the demand for outsourcing, declines or fails to grow, or if our products and services are less widely adopted as a telecommunications test solution, our business, financial condition and operating results could be seriously harmed.

In fiscal 2006, we derived 75% of our revenues from customers outside of the United States, and we maintain operations in eleven other countries. International sales and operations are subject to inherent risks, including:

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.

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 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 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.

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:

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.

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.

In October 2002 Tucana Telecom NV, a Belgian company, sued us and one of our subsidiaries in the Antwerp Commercial Court, Antwerp, Belgium. Tucana had been a distributor of products for Tekelec, the company from which we acquired the Network Diagnostic Business in August 2002. The writ alleges that we improperly terminated an exclusive distribution agreement with Tucana following the acquisition and seeks damages of 12,461,000 euros ($15,809,271 as of September 30, 2006) plus interest and legal costs. The case was heard April 28, 2006 and in a judgment on May 5, 2006, the Antwerp Commercial Court in Antwerp, Belgium dismissed the action on the basis of lack of jurisdiction. On June 23, 2006, the Company was notified by its Belgian counsel that Tucana has filed a request for appeal against the judgment. A hearing has been scheduled for October 1, 2007. We have defended the action vigorously and will continue to do so in the appeal. In the event that the Belgian court of appeal should rule in Tucana’s favor on the jurisdictional issue and should then find that we improperly terminated the distribution agreement with Tucana, we could be assessed significant damages. In the event of a judgment against us, we may be able to seek indemnification from Tekelec for damages in this matter under the terms of our acquisition agreement with Tekelec, but there is no assurance that such indemnification would be available.

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

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.

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.

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 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 December 2005 we brought suit against a competitor for alleged misappropriation of confidential

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

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 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:

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. As stated in Item 9A of Part II, our Chief Executive Officer and Chief Financial Officer each concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Annual Report on Form 10-K. 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 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 November 30, 2006, Richard A. Karp, our Chief Executive Office and Chairman of our Board, beneficially owned 2,990,352 shares and Nancy H. Karp, one of our directors, beneficially owned 1,365,978 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.

As of November 30, 2006, Dr. Karp beneficially owned 2,990,352 shares or approximately 20% of our common stock outstanding and Nancy H. Karp, one of our directors, beneficially owned 1,365,978 shares or approximately 9% of our common stock outstanding. Such a concentration of ownership and voting power may have the effect of delaying or preventing a change in the control of our company.

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.

None

Our executive offices, product development and primary support and production operations are located in Mountain View, California, where we occupy approximately 39,000 square feet pursuant to leases that expire in 2010. The annual rent for the property is approximately $448,000. In addition we lease approximately 31,000 square feet in Morrisville, North Carolina for product development and support operations, expiring in 2008. The annual rent for the property is approximately $284,000. We believe that these facilities will be adequate for our planned purposes.*

We also lease a total of approximately 31,000 square feet of professional services office space in the following locations: Schaumburg, Illinois; Dallas, Texas; Fairfax, Virginia; Ottawa, Canada; Chippenham, England; Gilching, Germany; Antony Cedex, France; Helsinki, Finland; Sollentuna, Sweden; Tokyo, Japan; Yokosuka Research Park, Japan; Melbourne, Australia; Shanghai, China, Beijing, China and Bangalore, India.

A lawsuit was instituted in October 2002 against us and one of our subsidiaries, Catapult Communications International Limited, an Irish corporation, in the Antwerp Commercial Court, Antwerp, Belgium, by Tucana Telecom NV, a Belgian company. Tucana had been a distributor of products for Tekelec, the company from which NDB was acquired in August 2002. The writ alleges that the defendants improperly terminated an exclusive distribution agreement with Tucana following the acquisition of NDB and seeks damages of 12,461,000 euros ($15,809,271 as of September 30, 2006) plus interest and legal costs. The case was heard April 28, 2006 and in a judgment on May 5, 2006, the Antwerp Commercial Court in Antwerp, Belgium dismissed the action on the basis of lack of jurisdiction. On June 23, 2006, the Company was notified by its Belgian counsel that Tucana has filed a request for appeal against the judgment. A hearing has been scheduled for October 1, 2007. We believe that we properly terminated any contract we had with Tucana and that Tucana is not entitled to any damages in this matter*. We have defended the action vigorously and will continue to do so in the appeal. We may be able to seek indemnification from Tekelec for any damages assessed against us in this matter under the terms of the Asset Purchase Agreement we entered into with Tekelec, but there is no assurance that such indemnification would be available.

On December 9, 2005, we filed suit in federal court in Chicago, Illinois against NetHawk Corporation (“NetHawk”), formerly known as ipNetfusion, Inc. NetHawk is a wholly-owned U.S. subsidiary of NetHawk, Oyj., a Finnish company. In the lawsuit, we assert that NetHawk used improper means to acquire our confidential and trade secret information and that NetHawk used such information in the course of its business. We believe that we have been damaged, possibly materially, by NetHawk’s actions, and we have sought monetary damages and injunctive relief. The lawsuit is in its preliminary stages. Therefore, we are unable to express an opinion regarding the likely outcome of this litigation or the range of any potential damages that could be recovered.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2006.

Our common stock is quoted on the Nasdaq National Market System (“Nasdaq”) under the symbol “CATT.” The following table sets forth the range of high and low closing sales prices for each fiscal period indicated:

We had approximately 47 stockholders of record as of December 8, 2006. We have not declared or paid any cash dividends on our common stock and presently intend to retain our future earnings, if any, to fund the development and growth of our business. Therefore, we do not anticipate paying cash dividends in the foreseeable future.

The following table sets forth information regarding repurchases of our common stock during the quarter ended September 30, 2006:

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. During the fourth quarter of fiscal 2006, the Company repurchased 290,251 shares at a cost of approximately $2.7 million. As of September 30, 2006, approximately 1.4 million shares remained available for repurchase under the authorization. Depending on market conditions and other factors, repurchases can be made from time to time in the open market and in negotiated transactions, including block transactions, and this program may be discontinued at any time.

The following selected financial data is derived from audited financial statements to and should be read in conjunction with the “Management Discussion and Analysis of Financial Condition and Results of Operations” section and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.

Our revenues are derived from product sales, which include both licenses of our test system software and sales of our test system hardware, and from services, which include customer support under hardware and software support contracts as well as training. Prices for our test systems vary widely depending upon overall system configuration, 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. In addition to the initial system purchase, customers also may upgrade their systems by purchasing additional software protocol modules and hardware. Product sales are recognized upon shipment, provided persuasive evidence of an arrangement exists, the fee is fixed or determinable, collection of the resulting receivable is probable and fair value exists for any undelivered elements of the arrangement.

We offer product warranties for various lengths of time, depending on the product and the country of purchase or operation. Customers may elect to purchase a software support contract that includes both ongoing technical support and any new software releases on a when-and-if-available basis during the term of the contract. Revenues from software support contracts are recognized ratably over the contract period, which is generally one year. New customers often purchase on-site training, which is charged based on the number of days provided and recognized when delivered.

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

Our operating financial performance in the fiscal year ended September 30, 2006 deteriorated in comparison with our performance in the previous fiscal year: our revenues decreased by 27% to $47.4 million and our operating income (loss) decreased from income of $15.2 million to a loss of $6.5 million.

Four major factors contributed to this deterioration in financial performance:

Our net loss was further increased by a $7.0 million provision for income taxes, primarily due to an increase of $7.4 million in the non-cash valuation allowance against our U.S. deferred tax assets.

During fiscal 2006, our cash, cash equivalents and short-term investments increased by $1.3 million, of which $5.4 million was provided by operating activities, $3.0 million was used by financing activities, including the repurchase of common shares, and $1.2 million was used by capital expenditures.

We have identified the accounting policies below and the methods, estimates and judgments that we use in applying these policies as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed below and throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such

Sales of our product arrangements normally include hardware and software. We also offer professional training, consulting and maintenance services separately from our product arrangements. We recognize revenue in accordance with SOP 97-2, Software Revenue Recognition, as amended, as follows.

In connection with each transaction involving these arrangements:

Subject to the foregoing considerations, we recognize revenue on product sales upon delivery. We recognize revenues allocated to training and other professional services at the time the services are completed. We recognize revenues allocated to maintenance ratably over the term of the maintenance contract during which the services are delivered.

For arrangements with multiple elements, we allocate revenue to each component of the arrangement based on vendor-specific objective evidence of fair value (“VSOE”). If we have VSOE for the undelivered elements only, we allocate value using the residual method, under which we defer revenue from the arrangement fee equivalent to the VSOE of the undelivered elements and apply any discount to the delivered elements. VSOE for the ongoing maintenance and support obligations within an arrangement is based upon substantive renewal rates quoted in the contracts or, in the absence of stated renewal rates, upon a history of separate sales of renewals to each customer or class of customers. VSOE for services such as training or consulting is based upon separate sales of these services to other customers without the bundling of other elements.

The amount and timing of revenue recognized in any period may differ materially if we make different judgments in any of these areas involving revenue recognition.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, any valuation allowance recorded against our deferred tax assets, and our accrued liability for uncertain tax positions.

At the end of each interim reporting period, we estimate an expected effective tax rate for the full fiscal year based on our most current forecast of pre-tax income in each of the jurisdictions in which we operate, permanent book and tax differences and global tax-planning strategies. We use this effective rate to provide for income taxes on a year-to-date basis, excluding the effect of discrete items or items that are reported net of their related tax effects. We recognize the tax effect of discrete items in the period in which they occur.

Deferred tax assets and liabilities included on our consolidated balance sheet arise from temporary differences resulting from differing treatment of items such as deferred revenue for tax and accounting purposes. We assess the likelihood that the value of our deferred tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we establish a valuation allowance. If we establish or increase a valuation

We operate in numerous tax jurisdictions and are subject to regular examinations by various U.S. federal, U.S. state, and foreign tax authorities. Our income tax filing positions in each of the jurisdictions in which we do business are supported by interpretations of the local income tax laws and rulings. Cross-jurisdictional transactions involving the transfer prices for products, services and intellectual property comprise our significant income tax exposures. Tax authorities are increasingly asserting interpretations of laws and facts to challenge cross-jurisdictional transactions. We regularly assess our position with regard to tax exposures, and we record liabilities for uncertain tax positions and related interest and penalties, if any, according to the principles of SFAS No. 5, Accounting for Contingencies, based on our estimate of the possibility that additional taxes will be due. Due to the uncertainty in estimating the final resolution of complex tax matters, actual amounts payable as finally determined by tax audits may differ from our estimates, and such differences could have a material effect on our financial position.

Additional information regarding income taxes is contained in Note 7 of the Notes to the Consolidated Financial Statements.

Our foreign subsidiaries operate and sell our products in various global markets. As a result, we are exposed to changes in exchange rates on foreign currency denominated transactions. We use foreign currency forward exchange contracts, and we infrequently use currency options, to mitigate the risk of future movements in foreign exchange rates that affect certain foreign currency-denominated receivables 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. Gains or losses on forward contracts and options as well as the cost of the options are included in other income (expense), net. To the extent that our judgment in mitigating the risk of movements in foreign exchange rates is imperfect, we may incur foreign exchange losses that could affect our results of operations.

When judging the adequacy of our allowance for doubtful accounts, we specifically analyze accounts receivable, historical bad debt experience, customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms. Bad debt expenses recognized in any period may differ materially if we make different judgments. Our accounts receivable balance as of September 30, 2006 was $9.7 million, net of an allowance for doubtful accounts of less than $0.1 million.

Inventory is stated at the lower of cost (computed using standard cost, which approximates actual cost on a first-in, first-out basis) or market value. We regularly review inventory quantities on hand and write down excess or obsolete inventories to their estimated net realizable value. We make significant estimates and assumptions based on our judgment of inventory age, shipment history and our forecast of future demand. A significant decrease in market demand for our product could result in an increase in our reserve for excess inventory quantities on hand. In addition, our industry is subject to technological change that could result in an increase in the amount of our reserve for obsolete inventory quantities on hand. When we record provisions for excess and obsolete inventory, we create a new cost basis for the inventory. Recoveries of previously written down inventory are recognized only when the related inventory has been sold and revenue has been recognized. Our inventory balance as of September 30, 2006 was $3.5 million, net of excess or obsolete inventories of $2.2 million. The majority of the allowance for excess or

In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets, we evaluate goodwill for impairment on an annual basis, or as other indicators exist for a potential impairment. We performed our most recent annual impairment test as of September 30, 2006 and determined that we have a single reporting unit. We did not record an impairment of goodwill during the fiscal years ended September 30, 2006, 2005 and 2004. In assessing potential impairment, we make significant estimates and assumptions regarding the discounted future cash flows of our reporting unit to determine its fair value. These estimates include, but are not limited to, projected future operating results, working capital ratios, cash flow, terminal values, market discount rates and tax rates. If our estimates or the related assumptions change in the future, we may be required to record an impairment charge on goodwill to reduce its carrying amount to its estimated fair value. Goodwill was $49.4 million at September 30, 2006 and 2005.

SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. For assets to be held and used, including acquired intangibles, we initiate a review whenever events or changes in circumstances indicate that the carrying value of a long-lived asset may not be recoverable or that the useful life of a long-lived asset may be shortened. Recoverability of an asset is measured by comparing its carrying value to the future undiscounted cash flows that the asset is expected to generate. Any impairment is measured by the amount by which the carrying value exceeds the projected discounted future operating cash flows. Assets to be disposed of and that we have committed to a plan to dispose of, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell. In the three months ended September 30, 2006, we initiated an impairment review because updated revenue and cash flow forecast information indicated that the carrying value of long-lived and intangible assets might not be recoverable. As a result, we determined that the carrying value of long-lived and intangible assets exceeded the associated projected cash flows and accordingly, we recorded an impairment charge in the amount of $2.9 million as of September 30, 2006. The impairment charge was recorded in our consolidated statement of operations as follows: approximately $1.9 million was charged to cost of sales, $0.9 million to general and administrative expense, and $45,000 to sales and marketing expense. During the years ended September 30, 2005 and 2004, we did not record any impairment charges on long-lived assets or intangible assets. In assessing potential impairment, we make significant estimates and assumptions regarding the useful lives of intangible assets and the discounted future cash flows that these assets are expected to generate to determine their fair value. If our estimates or the related assumptions change in the future, we may be required to record additional impairment charges on long-lived assets and intangible assets to further reduce the carrying value of these assets. Net intangible assets and long-lived assets were $2.1 million and $5.7 million at September 30, 2006 and 2005, respectively.

We account for stock-based compensation in accordance with SFAS 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the fair value of share-based awards at the grant date requires judgment, including estimating stock price volatility, forfeiture rates, and expected option life. If actual experience differs significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

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

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

Our revenues for fiscal 2006 decreased by 27% to $47.4 million from $64.9 million in fiscal 2005. Over the same period, product revenues decreased by 36% to $32.4 million from $50.4 million. The decrease in product revenues was attributable to decreased sales of our test systems for the reasons discussed above under the heading “Conditions and Trends in our Industry”. Services revenues increased approximately 3% to $15.0 million from $14.5 million primarily due to an increase in consulting revenue.

Our revenues by sales territory, based on origin of order taken, varied as follows in fiscal 2006 in comparison with fiscal 2005:

An 8% decrease in the average value of the Japanese yen, in which all our revenues in Japan are denominated, had the effect of decreasing our revenues by $0.8 million.

Information on revenues from major customers is provided in Note 1 of the Notes to Consolidated Financial Statements included with this Annual Report on Form 10-K.

Cost of product revenues consists of the costs of purchased components, circuit board assembly by independent contractors, payroll, benefits and, in fiscal 2006, stock-based compensation for personnel in product testing, purchasing, shipping and inventory management, as well as supplies, media and freight. Cost of product revenues decreased by 4% to $5.5 million in fiscal 2006 from $5.8 million in fiscal 2005. Gross margin on product revenues decreased to 83% from 89% due to a $0.4 million increase in our inventory reserve in the fourth fiscal quarter to provide for the accelerated obsolescence of pre-common platform hardware components, and the recognition of $0.1 million in pre-tax, non-cash, stock-based compensation expense under SFAS 123(R), Share-Based Payment, which we adopted at the beginning of the current fiscal year. Because we elected to adopt this standard under the modified prospective transition method, we did not restate prior periods to include stock-based compensation expense. Refer to “Stock-Based Compensation” in the “Critical Accounting Policies and Estimates” section above.

Cost of services revenues consists primarily of the costs of payroll, benefits and, in fiscal 2006, stock-based compensation for customer support, installation and training personnel, as well as the costs of materials and equipment. Cost of services revenues increased by approximately 11% to $3.8 million in fiscal 2006 from $3.4 million in fiscal 2005, due primarily to an increase of $0.1 million in demonstration and development equipment expenses and the inclusion of $0.2 million in non-cash stock option expenses in the more recent period. Gross margin on services revenues decreased to 75% from 76% as services revenues increased less than the cost of those revenues.

Amortization and impairment of purchased technology increased by $1.8 million to $2.5 million in fiscal 2006 from $0.7 million fiscal 2005 due to a $1.9 million impairment charge recognized in the fourth fiscal quarter.

Gross margins did not vary significantly by geographic region.

Research and development expenses consist primarily of salaries, benefits and, in fiscal 2006, stock-based compensation for engineers, as well as materials, equipment and consulting services. To date, because we have released our products as soon as technological feasibility was established, all software development costs have been charged to research and development expenses as incurred.

Research and development expenses increased by approximately 10% to $13.7 million in fiscal 2006 from $12.4 million in fiscal 2005 due to the inclusion of $0.7 million in non-cash stock option expenses in the more recent period, an increase of 6%, or five employees, in the average number of employees engaged in research and development, and an increase of $0.4 million in contractor expenses. These factors were partially offset by a decrease of $0.6 million in depreciation expense, a decrease of $0.4 million in variable compensation due to below-target performance and an exchange rate driven decrease of $0.1 million due to average decreases of 2% in the Australian dollar and 3% in the British pound against the US dollar. As a percentage of total revenues, research and development expenses increased to 29% in fiscal 2006 from 19% in fiscal 2005. We expect the absolute annual level

Sales and marketing expenses consist primarily of salaries, benefits, commissions, bonuses and, in fiscal 2006, stock-based compensation, as well as occupancy costs, travel and promotional expenses such as product brochure and trade show costs.

Sales and marketing expenses decreased by approximately 6% to $17.3 million in fiscal 2006 from $18.4 million in fiscal 2005. Two major factors contributed to this decrease:

These factors were partially offset by an increase of 2%, or two employees, in the average number of employees engaged in sales and marketing, an increase of $0.4 million in distributor commission and the inclusion in the more recent period of $0.6 million in non-cash stock-based compensation expenses. As a percentage of total revenues, sales and marketing expenses increased to 37% from 28% over the same period. We expect the absolute annual level of sales and marketing expenses to increase in fiscal 2007, primarily as a result of an anticipated increase in variable compensation, partially offset by a reduction in headcount through attrition and reduction in force at the end of fiscal 2006.*

General and administrative expenses salaries, benefits, bonuses and, in fiscal 2006, 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 increased approximately 18% to $10.6 million in fiscal 2006 from $9.0 million in fiscal 2005, due to the inclusion of two items in the more recent period: $1.1 million in non-cash stock option expenses and a $0.9 million non-cash impairment charge against certain identifiable intangible assets related to the acquisition of NDB in 2002. These increases were partially offset by a decrease of $0.5 million in variable compensation due to below-target performance. As a percentage of total revenues, general and administrative expenses increased to 22% from 14% over the same period. We expect the absolute annual level of general and administrative expenses to decrease in fiscal 2007, primarily due to the expected absence of any impairment charge.*

A $0.4 million restructuring charge was recorded in fiscal 2006 related to a reduction in force of 20 employees. No restructuring charge was recorded in fiscal 2005.

Interest income increased to $2.8 million in fiscal 2006 from $1.4 million in fiscal 2005 due to increases both in short-term interest rates and in cash, cash equivalent and short-term investment balances, and to interest on a tax refund received. Realized gains and losses on sale of securities are included in interest income.

Other expense, net decreased to $0 in fiscal 2006 from $0.1 million in fiscal 2005 due to a corresponding reduction in foreign exchange losses.

In fiscal 2006, we recorded a provision for income taxes of $7.0 million, primarily due to an increase of $7.4 million in the valuation allowance against our U.S. deferred tax assets. In fiscal 2005, we recorded a provision for income taxes of $2.3 million. The fiscal 2005 provision was net of $0.8 million in tax benefits related to several items, including additional research and development tax benefits resulting both from the retroactive reintroduction of the related tax credit program and from a claim for additional benefits filed as a result of the Internal Revenue Service audit completed at the beginning of the fiscal year. Our future tax rate will vary depending in part on the relative pre-tax income contribution from our domestic and foreign operations.*

Total revenues increased by 12% to $64.9 million in fiscal 2005 from $58.0 million in fiscal 2004. Product revenues increased by approximately 10% to $50.4 million in fiscal 2005 from $45.7 million in fiscal 2004, due to the continuing recovery in the global telecommunications market discussed above under the heading “Conditions and Trends in our Industry” and to a 2% increase in the value of the Japanese yen, in which all our revenues in Japan are denominated. Services revenues increased by approximately 18% to $14.5 million in fiscal 2005 from $12.3 million in fiscal 2004 due to the increase in the number of systems under maintenance.

By geographic region, North American revenues increased by approximately 14% to $19.8 million in fiscal 2005 from $17.4 million in fiscal 2004, European revenues increased by approximately 8% to $19.7 million in fiscal 2005 from $18.4 million in fiscal 2004, Japanese revenues decreased by approximately 6% to $18.5 million in fiscal 2005 from $19.6 million in fiscal 2004 and Rest of World revenues increased by approximately 160% to $7.0 million in fiscal 2005 from $2.7 million in fiscal 2004.

Cost of product revenues excluding amortization of purchased technology increased by approximately 11% to $5.8 million in fiscal 2005 from $5.2 million in fiscal 2004. Gross margin on product revenues excluding amortization of purchased technology remained unchanged at 89% as higher hardware component costs were offset by a more favorable product mix and economies of scale in our manufacturing operation.

Cost of services revenues decreased by approximately 4% to $3.4 million in fiscal 2005 from $3.6 million in fiscal 2004 as the impact of an increase of 13%, or 3 employees, in the average number of customer support personnel was more than offset by two factors: a $0.2 million decrease in variable compensation as a result of less favorable performance against target, and the absence in the latter year of a one-time $0.3 million provision recorded in fiscal 2004 for the replacement of certain product under maintenance contract. Gross margin on services revenues increased to 76% in fiscal 2005 from 71% in fiscal 2004 as the cost of providing services revenues decreased for the reasons discussed above, while the associated revenues increased.

Amortization of purchased technology in fiscal 2005 remained unchanged from the $0.7 million expensed in fiscal 2004.

Cost of revenues expressed as a percentage of revenues did not vary significantly by geographic region from year to year.

Research and development expenses increased by approximately 6% to $12.4 million in fiscal 2005 from $11.7 million in fiscal 2004. This increase reflected primarily three factors: an increase of 7%, or 6 employees, in the average number of research and development personnel; an exchange rate driven increase of $0.1 million due to average increases of 5% in the Australian dollar and 3% in the British pound against the US dollar; and a partially offsetting decrease of $0.2 million in variable compensation as a result of less favorable performance against target. As a percentage of total revenues, research and development expenses decreased to 19% in fiscal 2005 from 20% in fiscal 2004.

Sales and marketing expenses increased by approximately 8% to $18.4 million in fiscal 2005 from $17.1 million in fiscal 2004 primarily as a result of four factors: an increase of 10%, or 9 employees, in the number of sales and marketing personnel; an exchange rate driven increase of $0.2 million due to average increases of 3% in the British pound, 4% in the Euro and 2% in the Japanese yen against the US dollar; an increase of $0.2 million in recruiting costs; and a partially offsetting decrease of $0.6 million in variable compensation as a result of less favorable performance against target. As a percentage of total revenues, sales and marketing expenses decreased to 28% in fiscal 2005 from 29% of revenues in fiscal 2004.

General and administrative expenses increased by approximately 31% to $9.0 million in fiscal 2005 from $6.9 million in fiscal 2004. This increase was due primarily to a $2.0 million increase in accounting costs due to increased Sarbanes-Oxley compliance and audit costs. As a percentage of total revenues, general and administrative expenses increased to 14% from 12% over the same period.

Interest income increased to $1.4 million fiscal 2005 from $0.8 million in fiscal 2004 due to higher prevailing rates of return and higher cash, cash equivalent and short-term investment balances. Realized gains and losses on sale of securities are included in interest income.

No interest expense was recorded in fiscal 2005. Interest expense of $0.3 million was recorded in fiscal 2004 on the convertible notes payable that were converted into common stock in September 2004.

Other income (expense), net decreased to an expense of $0.1 million in fiscal 2005 from income of $0.1 million in fiscal 2004 as $0.2 million in foreign exchange losses were recorded in fiscal 2005 in comparison with foreign exchange gains of less than $0.1 million in fiscal 2004.

We recorded a provision for income taxes of $2.3 million in fiscal 2005. This provision was net of $0.8 million in tax benefits related to several items, including additional research and development tax benefits resulting both from the retroactive reintroduction of the related tax credit program and from a claim for additional benefits filed as a result of the IRS audit completed at the beginning of the fiscal year. We recorded a benefit from income taxes of $0.4 million in fiscal 2004 primarily due to a reduction of approximately $2.3 million in the estimated tax payable at the end of the fiscal year. This reduction was made as a result of a determination that additional taxes for which we had previously recognized liabilities would not be due. As a result, our effective tax rate changed to a provision of 14% in fiscal 2005 from a benefit of 3% in fiscal 2004. In the absence of the benefits noted above, we would have recorded a tax provision of 19% in fiscal 2005.

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 purchase of NDB in 2002 was additionally financed through the issuance of two convertible notes in the aggregate principal amount of $17.3 million. The convertible notes were issued by our Irish subsidiary and were guaranteed by us. These notes were converted by Tekelec into 1,081,250 shares of our common stock in September 2004.

Our operating activities provided cash of $5.4 million, $14.8 million and $16.6 million in fiscal 2006, 2005 and 2004, respectively. Our net loss used $10.7 million in fiscal 2006, while net income provided $14.1 million and $13.9 million in fiscal 2005 and 2004, respectively. Cash generated (used) by net income (loss) was increased by adjustments for non-cash items totaling $14.1 million, $3.0 million and $3.1 million in fiscal 2006, 2005 and 2004, respectively. These non-cash items included changes in deferred tax balances, charges for additional depreciation and amortization of intangible assets related to our acquisition of NDB, including, in fiscal 2006, impairment charges recorded against these assets, and, in fiscal 2006, stock-based compensation expense. Finally, our cash flows from operations are affected by changes in current assets and liabilities. These changes in non-cash working capital components increased cash flow from operations by $1.9 million in fiscal 2006 and decreased cash flow from operations by $2.3 million and $0.4 million in fiscal 2005 and 2004, respectively.

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 75 days for the year ended September 30, 2006 from 83 days for the year ended September 30, 2005 due primarily to stronger collections in the more recent year. Our days outstanding deteriorated to 83 days for the year ended September 30, 2005 from 64 days for the year ended September 30, 2004 due primarily to a decrease in intra-quarter invoicing linearity that resulted from purchasing by our customers later in the quarter. 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 purchases of property and equipment and purchases and sales of short-term investments. Purchases of property and equipment increased to $1.2 million in fiscal 2006 from $0.8 million in fiscal 2005 and $1.1 million in fiscal 2004. We expect that capital expenditures will total approximately $1.0 million in fiscal 2007. We invest cash that is surplus to our operating requirements in professionally managed short-term 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 cash of $2.2 million in fiscal 2006 and used cash of $17.3 million and $10.7 million in fiscal 2005 and 2004, respectively, as surplus cash that we generated was invested.

Financing activities used cash of $3.0 million in fiscal 2006 as the $3.6 million used to repurchase common stock under our approved stock repurchase program exceeded the $0.6 million received from the exercise of stock options, the sale of shares under our employee stock purchase plan. Financing activities provided cash of $2.2 million in fiscal 2005 from the exercise of stock options and the sale of shares under our employee stock purchase plan. Financing activities provided cash of $6.4 million in fiscal 2004 from the sale of shares in a public offering, the exercise of stock options and the sale of shares under our employee stock purchase plan.

As of September 30, 2006, we had working capital of $72.7 million, cash and cash equivalents of $22.5 million and short-term investments of $47.7 million. As of September 30, 2006, we had the following payment obligations in the listed categories of contractual obligations:

We believe that inflation has not had a material impact on our liquidity or cash requirements.

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 or that, if available, such financing will be obtainable on

As of September 30, 2006, we did not have any off-balance sheet arrangements as defined in item 303 (a)(4)(ii) of Regulation S-K.

Our foreign subsidiaries operate and sell our products in various global markets. In fiscal 2006, approximately 20% of our invoices were issued and paid in Japanese yen and 3% 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 receivables 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 September 30, 2006, we had no forward exchange contracts or 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 and the Indian rupee. In fiscal 2006, we incurred approximately $12.9 million of operating expenses in foreign currencies. In Japan, our yen operating expenses, which amounted to approximately $2.4 million in fiscal 2006, 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.

Our exposure to market risk for changes in interest rates relates primarily to our short-term investment portfolio. As of September 30, 2006, short-term investments consisted of available-for-sale securities of $47.7 million (see Note 5, Balance Sheet Components in the Notes to Consolidated Financial Statements). 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 September 30, 2006, the decline in the fair value of the portfolio would not be material to our financial position.

The consolidated financial statements required by this Item are set forth on the pages indicated at Item 15 (a) and are incorporated herein by reference.

Not applicable.

(a) Evaluation of Disclosure Controls and Procedures.

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) designed to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2006 solely because of the material weakness in internal control over financial reporting with respect to the misclassification of variable rate demand notes as cash equivalents rather than as short-term investments described below.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become ineffective because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2006. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

During our fiscal year ended September 30, 2006, we held variable rate demand notes as an investment. In our balance sheets as of December 31, 2005, March 31, 2006 and June 30, 2006, we classified these securities as cash and cash equivalents rather than short-term investments as required by generally accepted accounting principles (GAAP). We also reported the purchase and sale of these securities in our statements of cash flows for the three months ended December 31, 2005, six months ended March 31, 2006 and nine months ended June 30, 2006 as purchases and sales of cash equivalents. Upon further review, our management determined that these securities should be reported on our balance sheets as short-term investments, and that the purchase and sale of the securities

As a result of the material weaknesses in internal control over financial reporting described above, management has concluded that as of September 30, 2006, our internal control over financial reporting was not 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 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 is included herein.

(c) Changes in internal controls over financial reporting.

There was no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2006 that materially affected, or was reasonably likely to materially affect, our internal control over financial reporting.

In order to remediate the material weakness in our internal control over financial reporting discussed above, management is in the process of designing, implementing and enhancing controls to ensure the proper presentation and disclosure of short-term investments on our consolidated balance sheets and statements of cash flows. We expect to remediate this material weakness in our internal control over financial reporting in fiscal 2007.

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Catapult Communications Corporation and subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of September 30, 2006, because of the effect of the material weakness identified in management’s assessment based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment:

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended September 30, 2006, of the Company and this report does not affect our report on such financial statements.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of September 30, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of September 30, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended September 30, 2006, of the Company and our report dated December 29, 2006 expressed an unqualified opinion on those consolidated financial statements and includes an explanatory paragraph regarding the Company’s adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

Not applicable.

Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file a definitive proxy statement within one hundred twenty (120) days after the end of our fiscal year pursuant to Regulation 14A (the “Proxy Statement”) for our Annual Meeting of Stockholders currently scheduled for January 30, 2007, and the information included in the Proxy Statement is incorporated herein by reference.

Information regarding our directors is incorporated by reference to the information under the heading “Proposal One — Election of Directors” in our Proxy Statement.

Information regarding our executive officers is incorporated by reference to the section of Part I of this Annual Report on Form 10-K entitled “Item 1 — Business — Our Executive Officers.”

Information regarding compliance with Section 16 of the Securities Exchange Act of 1934, as amended, is incorporated by reference to the information under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.

We have adopted a Code of Ethics for Principal Executive and Senior Financial Officers, a copy of which has been filed as Exhibit 14 to our Annual Report on Form 10-K dated December 5, 2003.

Information regarding the compensation of our named executive officers is incorporated by reference from the information under the heading “Executive Compensation” in our Proxy Statement. Information regarding the compensation of our directors is incorporated by reference from the information under the heading “Corporate Governance — Director Compensation” in our Proxy Statement.

Incorporated by reference to the information under the headings “Principal Stockholders” and “Executive Compensation — Equity Compensation Plan Information” in our Proxy Statement.

Incorporated by reference to the information under the caption “Certain Transactions” in our Proxy Statement.

Incorporated by reference to the information under the caption “Proposal Two — Ratification of Appointment of Independent Registered Public Accounting Firm” in our Proxy Statement.

(a) The following documents are filed as part of this Annual Report on Form 10-K:

We have audited the accompanying consolidated balance sheet of Catapult Communications and subsidiaries (collectively the “Company”) as of September 30, 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such 2006 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2006, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, in fiscal year 2006, the Company changed its method of accounting for stock-based compensation in accordance with guidance provided in Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of September 30, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 29, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness.

In our opinion, the consolidated balance sheet as of September 30, 2005 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of two years in the period ended September 30, 2005 (appearing on pages 44 through 47 of Catapult Communications Corporation’s 2006 Annual Report on Form 10-K) present fairly, in all material respects, the financial position of Catapult Communication Corporation and its subsidiaries at September 30, 2005, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2005, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.