##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 FOR THE QUARTERLY PERIOD ENDED September 30, 2007
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the transition period from  to.
 Commission File Number 000-26785
 PACKETEER, INC.
  DELAWARE
    
    77-0420107(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 
  o þ
  o þ o
 o þ




---



##### 



PagePART I FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements:
    
    
    3Unaudited Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    3Unaudited Condensed Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2007 and September 30, 2006
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2007 and September 30, 2006
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II OTHER INFORMATION
    
    
    27Item 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    27Item 6. Exhibits
    
    
    37Signatures
    
    
    38ExhibitsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
   2




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##### Table of Contents



September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    55,634
    
    
    $
    39,640Short-term investments
    
    
    20,549
    
    
    
    25,681Accounts receivable, net of allowance for
doubtful accounts and sales returns of $2,382 and
$3,010, as of September 30, 2007 and December 31,
2006, respectively
    
    
    21,790
    
    
    
    31,743Other receivables
    
    
    219
    
    
    
    216Inventories
    
    
    8,473
    
    
    
    3,957Prepaids and other current assets
    
    
    10,225
    
    
    
    3,249Total current assets
    
    
    116,890
    
    
    
    104,486Non-current assets:Property and equipment, net of accumulated
depreciation and amortization of $12,957 and
$10,276 as of September 30, 2007 and December 31,
2006, respectively
    
    
    3,936
    
    
    
    3,968Long-term investments
    
    
    3,505
    
    
    
    11,236Goodwill
    
    
    66,506
    
    
    
    58,656Purchased intangible assets, net
    
    
    8,191
    
    
    
    11,045Other non-current assets
    
    
    19,708
    
    
    
    27,577Total assets
    
    $
    218,736
    
    
    $
    216,968LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,540
    
    
    $
    3,014Accrued compensation
    
    
    6,883
    
    
    
    9,567Other accrued liabilities
    
    
    6,978
    
    
    
    8,431Income taxes payable
    
    
    1,560
    
    
    
    7,164Deferred revenue
    
    
    26,837
    
    
    
    23,931Total current liabilities
    
    
    44,798
    
    
    
    52,107Non-current liabilities:Deferred revenue, less current portion
    
    
    5,292
    
    
    
    5,173Income taxes payable
    
    
    7,528
    
    
    
    Deferred rent and other
    
    
    618
    
    
    
    179Total liabilities
    
    
    58,236
    
    
    
    57,459Stockholders equity:Preferred stock, $0.001 par value; 5,000 shares
authorized; no shares issued and outstanding as
of September 30, 2007 and December 31, 2006
    
    
    
    
    
    
    Common stock, $0.001 par value; 85,000 shares
authorized; 36,203 and 35,400 shares issued and
outstanding as of September 30, 2007 and December
31, 2006, respectively
    
    
    36
    
    
    
    36Additional paid-in capital
    
    
    227,950
    
    
    
    212,961Accumulated other comprehensive loss
    
    
    (202
    )
    
    
    (18
    )Accumulated deficit
    
    
    (67,284
    )
    
    
    (53,470
    )Total stockholders equity
    
    
    160,500
    
    
    
    159,509Total liabilities and stockholders equity
    
    $
    218,736
    
    
    $
    216,968
  3




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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues:Product revenues
    
    $
    24,654
    
    
    $
    26,798
    
    
    $
    69,323
    
    
    $
    77,291Service revenues
    
    
    11,732
    
    
    
    9,188
    
    
    
    34,232
    
    
    
    25,149Total net revenues
    
    
    36,386
    
    
    
    35,986
    
    
    
    103,555
    
    
    
    102,440Cost of revenues (1):Product costs
    
    
    7,223
    
    
    
    6,343
    
    
    
    20,952
    
    
    
    17,110Service costs
    
    
    3,717
    
    
    
    2,946
    
    
    
    10,579
    
    
    
    7,708Amortization of purchased intangible assets
    
    
    635
    
    
    
    635
    
    
    
    1,904
    
    
    
    1,515Total cost of revenues
    
    
    11,575
    
    
    
    9,924
    
    
    
    33,435
    
    
    
    26,333Gross profit
    
    
    24,811
    
    
    
    26,062
    
    
    
    70,120
    
    
    
    76,107Operating expenses (1):Research and development
    
    
    8,961
    
    
    
    8,322
    
    
    
    27,750
    
    
    
    22,052Sales and marketing, includes amortization of purchased
intangible assets of $316 and $949 for the three and nine
months ended September 30, 2007, respectively, and $317
and $475 for the three and nine months ended September 30,
2006, respectively
    
    
    15,879
    
    
    
    15,327
    
    
    
    49,922
    
    
    
    40,017General and administrative
    
    
    3,921
    
    
    
    3,770
    
    
    
    12,394
    
    
    
    9,848In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,800Total operating expenses
    
    
    28,761
    
    
    
    27,419
    
    
    
    90,066
    
    
    
    73,717Income (loss) from operations
    
    
    (3,950
    )
    
    
    (1,357
    )
    
    
    (19,946
    )
    
    
    2,390Other income, net
    
    
    830
    
    
    
    807
    
    
    
    2,526
    
    
    
    3,094Income (loss) before provision for (benefit from) income taxes
    
    
    (3,120
    )
    
    
    (550
    )
    
    
    (17,420
    )
    
    
    5,484Provision for (benefit from) income taxes
    
    
    (1,225
    )
    
    
    (851
    )
    
    
    (3,810
    )
    
    
    1,474Net income (loss)
    
    $
    (1,895
    )
    
    $
    301
    
    
    $
    (13,610
    )
    
    $
    4,010Basic net income (loss) per share
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    (0.38
    )
    
    $
    0.12Diluted net income (loss) per share
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    (0.38
    )
    
    $
    0.11Shares used in computing basic net income (loss) per share
    
    
    36,115
    
    
    
    34,990
    
    
    
    35,942
    
    
    
    34,704Shares used in computing diluted net income (loss) per share
    
    
    36,115
    
    
    
    35,814
    
    
    
    35,942
    
    
    
    35,660
 
 (1)
    
    Stock-based compensation included in the costs and expense line items: Product costs
    
    $
    74
    
    
    $
    115
    
    
    $
    277
    
    
    $
    299Service costs
    
    
    143
    
    
    
    201
    
    
    
    538
    
    
    
    529Research and development
    
    
    816
    
    
    
    1,259
    
    
    
    2,853
    
    
    
    3,005Sales and marketing
    
    
    1,032
    
    
    
    1,590
    
    
    
    3,092
    
    
    
    3,779General and administrative
    
    
    694
    
    
    
    756
    
    
    
    2,197
    
    
    
    2,100
  4




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##### Table of Contents



Nine months endedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (13,610
    )
    
    $
    4,010Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation
    
    
    2,705
    
    
    
    1,847Amortization of purchased intangible assets
    
    
    2,853
    
    
    
    1,989Net reversal of allowance for doubtful accounts
    
    
    (421
    )
    
    
    Write-down of inventory
    
    
    1,401
    
    
    
    Stock-based compensation related to Mentat acquisition
    
    
    66
    
    
    
    292Compensation related to stock-based awards
    
    
    8,891
    
    
    
    9,420Excess tax benefit from stock-based compensation plans
    
    
    (475
    )
    
    
    Tax benefits from employee stock option plans
    
    
    
    
    
    
    (833
    )Deferred income taxes
    
    
    (6,038
    )
    
    
    (375
    )In-process research and development
    
    
    
    
    
    
    1,800Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:Accounts receivable
    
    
    10,374
    
    
    
    (4,759
    )Other receivables
    
    
    (3
    )
    
    
    38Inventories
    
    
    (5,917
    )
    
    
    (559
    )Prepaids and other current assets
    
    
    (841
    )
    
    
    (557
    )Accounts payable
    
    
    (474
    )
    
    
    943Accrued compensation
    
    
    (2,684
    )
    
    
    (322
    )Other accrued liabilities
    
    
    (1,557
    )
    
    
    (1,799
    )Income taxes payable
    
    
    1,850
    
    
    
    1,920Deferred revenue
    
    
    3,025
    
    
    
    4,526Other
    
    
    232
    
    
    
    (31
    )Net cash provided by (used in) operating activities
    
    
    (623
    )
    
    
    17,550Cash flows from investing activities:Purchases of property and equipment, net
    
    
    (2,570
    )
    
    
    (2,532
    )Purchases of investments
    
    
    (34,792
    )
    
    
    (54,660
    )Proceeds from sales and maturities of investments
    
    
    47,471
    
    
    
    113,067Acquisition, net of cash acquired
    
    
    
    
    
    
    (66,931
    )Funds deposited into escrow in connection with acquisition
    
    
    
    
    
    
    (7,850
    )Net cash provided by (used in) investing activities
    
    
    10,109
    
    
    
    (18,906
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    3,359
    
    
    
    3,399Sale of stock to employees under the ESPP
    
    
    2,674
    
    
    
    2,511Excess tax benefit from stock-based compensation plans
    
    
    475
    
    
    
    Net cash provided by financing activities
    
    
    6,508
    
    
    
    5,910Net increase (decrease) in cash and cash equivalents
    
    
    15,994
    
    
    
    4,554Cash and cash equivalents at beginning of period
    
    
    39,640
    
    
    
    36,221Cash and cash equivalents at end of period
    
    $
    55,634
    
    
    $
    40,775Non-cash investing and financing activity:Funds related to acquisition released from escrow and allocated to purchase price
    
    $
    7,850
    
    
    $
    Supplemental disclosures of cash flow information:Net cash paid during period for income taxes
    
    $
    7
    
    
    $
    261
  5




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Acquisition of Tacit Networks, Inc.
     Pro forma financial information
  6




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##### Table of Contents



Nine months endedSeptember 30, 2006Total net revenues
    
    $
    105,677Net loss
    
    
    (3,663
    )Net loss per share:Basic
    
    $
    (0.11
    )Diluted
    
    $
    (0.11
    )
    
    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred,
    
    the fee is fixed or determinable, and
    
    collectibility is probable.
       7




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##### Table of Contents



September 30,
    
    
    December 31,2007
    
    
    2006Completed products
    
    $
    8,033
    
    
    $
    3,785Raw materials and components
    
    
    440
    
    
    
    172$
    8,473
    
    
    $
    3,957
  Goodwill
 Other intangibles
  As of
    
    
    
    
    
    
    
    
    
    
    As ofDecember 31,
    
    
    
    
    
    
    
    
    
    
    September 30,2006
    
    
    Adjustment
    
    
    Amortization
    
    
    2007Goodwill
    
    $
    58,656
    
    
    $
    7,850
    
    
    $
    
    
    
    $
    66,506Other intangibles:Developed technology
    
    
    5,828
    
    
    
    
    
    
    
    (1,647
    )
    
    
    4,181Customer contracts and relationships
    
    
    4,637
    
    
    
    
    
    
    
    (994
    )
    
    
    3,643Trade name
    
    
    580
    
    
    
    
    
    
    
    (213
    )
    
    
    367$
    69,701
    
    
    $
    7,850
    
    
    $
    (2,854
    )
    
    $
    74,697
  September 30, 2007GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingLife
    
    
    Amount
    
    
    Amortization
    
    
    AmountIntangibles:Developed technology
    
    3-5 yrs
    
    $
    8,630
    
    
    $
    (4,449
    )
    
    $
    4,181Customer contracts and relationships
    
    3-6 yrs
    
    
    6,100
    
    
    
    (2,457
    )
    
    
    3,643Trade name
    
    3 yrs
    
    
    850
    
    
    
    (483
    )
    
    
    367$
    15,580
    
    
    $
    (7,389
    )
    
    $
    8,191
 8




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##### Table of Contents



December 31, 2006GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingLife
    
    
    Amount
    
    
    Amortization
    
    
    AmountIntangibles:Developed technology
    
    3-5 yrs
    
    $
    8,630
    
    
    $
    (2,802
    )
    
    $
    5,828Customer contracts and relationships
    
    3-6 yrs
    
    
    6,100
    
    
    
    (1,463
    )
    
    
    4,637Trade name
    
    3 yrs
    
    
    850
    
    
    
    (270
    )
    
    
    580$
    15,580
    
    
    $
    (4,535
    )
    
    $
    11,045
   Year
    
    AmountRemainder of 2007
    
    $
    9492008
    
    
    3,7382009
    
    
    2,8412010
    
    
    663$
    8,191
      9




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##### Table of Contents



Accrued warranty obligations at December 31, 2006
    
    $
    488Provision for current period sales
    
    
    260Warranty costs incurred
    
    
    (384
    )Accrued warranty obligations at September 30, 2007
    
    $
    364
     10




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##### Table of Contents



Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Alternative Technology, Inc
    
    
    22
    %
    
    
    26
    %
    
    
    26
    %
    
    
    24
    %Westcon, Inc
    
    
    16
    %
    
    
    15
    %
    
    
    16
    %
    
    
    17
    %
        11




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##### Table of Contents



1999 STOCK INCENTIVE PLAN
  Stock Options
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Stock Options:Expected life (years)
    
    
    4.58
    
    
    
    4.61
    
    
    
    4.78
    
    
    
    4.62Expected volatility
    
    
    59
    %
    
    
    63
    %
    
    
    58
    %
    
    
    62
    %Risk-free interest rate
    
    
    4.53
    %
    
    
    4.85
    %
    
    
    4.68
    %
    
    
    4.90
    %
   WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term (Years)
    
    
    Value(In thousands, except per share amounts)Options outstanding at December 31, 2006
    
    
    7,149
    
    
    $
    12.02Granted
    
    
    1,186
    
    
    
    10.39Exercised
    
    
    (407
    )
    
    
    8.26Canceled/ forfeited/expired
    
    
    (1,183
    )
    
    
    13.41Options outstanding at September 30, 2007
    
    
    6,745
    
    
    
    11.71
    
    
    
    6.79
    
    
    $
    3,296Options vested and expected to vest at September 30, 2007
    
    
    5,828
    
    
    
    11.89
    
    
    
    6.49
    
    
    $
    3,182Options exercisable at September 30, 2007
    
    
    4,107
    
    
    
    12.33
    
    
    
    5.59
    
    
    $
    2,952
  12




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##### Table of Contents



Range ofExercise Prices
    
    
    Options Outstanding
    
    
    Options ExercisableWeighted-
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    Average
    
    
    
    
    
    
    AverageRemaining
    
    
    Exercise
    
    
    
    
    
    
    ExerciseNumber
    
    
    Contractual
    
    
    Price per
    
    
    Number
    
    
    Price perOutstanding
    
    
    Life (in Years)
    
    
    Share
    
    
    Exercisable
    
    
    Share$
    0.92-4.71
    
    
    
    704
    
    
    
    4.56
    
    
    $
    3.81
    
    
    
    682
    
    
    $
    3.864.75-8.01
    
    
    
    740
    
    
    
    6.88
    
    
    
    6.77
    
    
    
    339
    
    
    
    6.448.33-9.31
    
    
    
    589
    
    
    
    7.09
    
    
    
    8.54
    
    
    
    350
    
    
    
    8.449.41-9.51
    
    
    
    915
    
    
    
    8.37
    
    
    
    9.51
    
    
    
    299
    
    
    
    9.519.54-12.03
    
    
    
    982
    
    
    
    7.34
    
    
    
    11.55
    
    
    
    511
    
    
    
    11.4612.05-13.01
    
    
    
    701
    
    
    
    8.44
    
    
    
    12.62
    
    
    
    223
    
    
    
    12.3713.03-14.00
    
    
    
    839
    
    
    
    7.11
    
    
    
    13.83
    
    
    
    540
    
    
    
    13.8414.01-17.25
    
    
    
    675
    
    
    
    5.16
    
    
    
    15.42
    
    
    
    600
    
    
    
    15.4818.49-48.06
    
    
    
    600
    
    
    
    5.18
    
    
    
    25.60
    
    
    
    563
    
    
    
    26.01Total
    
    
    6,745
    
    
    
    6.79
    
    
    $
    11.71
    
    
    
    4,107
    
    
    $
    12.33
 Restricted Stock Units
   Weighted-averagegrant date fairUnits
    
    
    value per share(In thousands, except per share amounts)Nonvested at December 31, 2006
    
    
    
    
    
    
    Granted
    
    
    594
    
    
    $
    10.66Vested
    
    
    
    
    
    
    Forfeited
    
    
    (41
    )
    
    
    12.19Nonvested at September 30, 2007
    
    
    553
    
    
    
    10.55
 Performance Shares
  13




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##### Table of Contents



Weighted-averagegrant date fairShares
    
    
    value per share(In thousands, except per share amounts)Nonvested at December 31, 2006
    
    
    Granted
    
    
    180
    
    
    $
    12.78Vested
    
    
    Forfeited
    
    
    (25
    )
    
    
    12.78Nonvested at September 30, 2007
    
    
    155
    
    
    
    12.78Maximum potential vested shares at September 30, 2007
    
    
    388
    
    
    
    12.78
 Employee Stock Purchase Plan
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006ESPP Grants:Expected life (years)
    
    
    1.17
    
    
    
    1.21
    
    
    
    1.16
    
    
    
    1.19Expected volatility
    
    
    58
    %
    
    
    60
    %
    
    
    49
    %
    
    
    61
    %Risk-free interest rate
    
    
    4.94
    %
    
    
    5.08
    %
    
    
    4.95
    %
    
    
    5.07
    %
  Restricted Stock Issued in Acquisition
  STOCK- BASED COMPENSATION
  14




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##### Table of Contents



Unrecognized
    
    
    RemainingStock-Based
    
    
    RecognitionStock -Based Award
    
    Expense
    
    
    Period (Years)Stock options
    
    $
    7,019
    
    
    
    1.29Restricted stock units
    
    
    2,426
    
    
    
    2.06Performance shares
    
    
    678
    
    
    
    2.25ESPP
    
    
    2,039
    
    
    
    0.83Restricted stock issued in acquisition
    
    
    22
    
    
    
    0.25Total
    
    $
    12,184
    
    
    
    1.42
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Shares issuable under stock options
    
    
    5,750
    
    
    
    6,097
    
    
    
    4,323
    
    
    
    5,359
  15




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income (loss)
    
    $
    (1,895
    )
    
    $
    301
    
    
    $
    (13,610
    )
    
    $
    4,010Denominator:Basic:Weighted-average shares of common stock outstanding
    
    
    36,134
    
    
    
    35,055
    
    
    
    35,961
    
    
    
    34,770Less: shares subject to repurchase
    
    
    (18
    )
    
    
    (65
    )
    
    
    (18
    )
    
    
    (66
    )Basic weighted-average common shares outstanding
    
    
    36,115
    
    
    
    34,990
    
    
    
    35,942
    
    
    
    34,704Diluted:Basic weighted-average common shares outstanding
    
    
    36,115
    
    
    
    34,990
    
    
    
    35,942
    
    
    
    34,704Add: potentially dilutive common shares from stock
options and shares subject to repurchase
    
    
    
    
    
    
    808
    
    
    
    
    
    
    
    937Add: potentially dilutive common shares from warrants
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    19Diluted weighted-average common shares outstanding
    
    
    36,115
    
    
    
    35,814
    
    
    
    35,942
    
    
    
    35,660Basic net income (loss) per share
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    (0.38
    )
    
    $
    0.12Diluted net income (loss) per share
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    (0.38
    )
    
    $
    0.11
       Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues:Americas
    
    $
    14,903
    
    
    $
    17,111
    
    
    $
    47,918
    
    
    $
    47,949Asia Pacific
    
    
    11,140
    
    
    
    9,147
    
    
    
    25,455
    
    
    
    26,396Europe, Middle East, Africa
    
    
    10,343
    
    
    
    9,728
    
    
    
    30,182
    
    
    
    28,095Total net revenues
    
    $
    36,386
    
    
    $
    35,986
    
    
    $
    103,555
    
    
    $
    102,440
     16




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17




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Accounting for Uncertainty in Income Taxes
  18




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##### Table of Contents



Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Net revenues:Product revenues
    
    
    67.8
    %
    
    
    74.5
    %
    
    
    66.9
    %
    
    
    75.5
    %Service revenues
    
    
    32.2
    
    
    
    25.5
    
    
    
    33.1
    
    
    
    24.5Total net revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenues:Product costs
    
    
    19.9
    
    
    
    17.6
    
    
    
    20.2
    
    
    
    16.7Service costs
    
    
    10.2
    
    
    
    8.2
    
    
    
    10.2
    
    
    
    7.5Amortization of purchased intangible assets
    
    
    1.7
    
    
    
    1.8
    
    
    
    1.9
    
    
    
    1.5Total cost of revenues
    
    
    31.8
    
    
    
    27.6
    
    
    
    32.3
    
    
    
    25.7Gross margin
    
    
    68.2
    
    
    
    72.4
    
    
    
    67.7
    
    
    
    74.3Operating expenses:Research and development
    
    
    24.7
    
    
    
    23.1
    
    
    
    26.8
    
    
    
    21.5Sales and marketing
    
    
    43.6
    
    
    
    42.6
    
    
    
    48.2
    
    
    
    39.1General and administrative
    
    
    10.8
    
    
    
    10.5
    
    
    
    12.0
    
    
    
    9.6In- process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.8Total operating expenses
    
    
    79.1
    
    
    
    76.2
    
    
    
    87.0
    
    
    
    72.0Income (loss) from operations
    
    
    (10.9
    )
    
    
    (3.8
    )
    
    
    (19.3
    )
    
    
    2.3Interest and other income, net
    
    
    2.3
    
    
    
    2.2
    
    
    
    2.5
    
    
    
    3.0Income (loss) before provision (benefit) for income taxes
    
    
    (8.6
    )
    
    
    (1.6
    )
    
    
    (16.8
    )
    
    
    5.3Provision (benefit) for income taxes
    
    
    (3.4
    )
    
    
    2.4
    
    
    
    (3.7
    )
    
    
    (1.4
    )Net income (loss)
    
    
    (5.2
    )%
    
    
    0.8
    %
    
    
    (13.1
    )%
    
    
    3.9
    %
 19




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NET REVENUES
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006($)
    
    
    (%)
    
    
    ($)
    
    
    (%)
    
    
    ($)
    
    
    (%)
    
    
    ($)
    
    
    (%)Americas*
    
    $
    14.9
    
    
    
    41
    
    
    $
    17.1
    
    
    
    48
    
    
    $
    47.9
    
    
    
    46
    
    
    $
    47.9
    
    
    
    47Asia Pacific
    
    
    11.1
    
    
    
    31
    
    
    
    9.2
    
    
    
    25
    
    
    
    25.5
    
    
    
    25
    
    
    
    26.4
    
    
    
    26Europe, the Middle East and Africa (EMEA)
    
    
    10.4
    
    
    
    28
    
    
    
    9.7
    
    
    
    27
    
    
    
    30.2
    
    
    
    29
    
    
    
    28.1
    
    
    
    27Total
    
    $
    36.4
    
    
    
    100
    
    
    $
    36.0
    
    
    
    100
    
    
    $
    103.6
    
    
    
    100
    
    
    $
    102.4
    
    
    
    100
 
 *
    
    Primarily the United States.    Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Alternative Technology, Inc
    
    
    22
    %
    
    
    26
    %
    
    
    26
    %
    
    
    24
    %Westcon, Inc
    
    
    16
    %
    
    
    15
    %
    
    
    16
    %
    
    
    17
    %
 20




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##### Table of Contents



COST OF REVENUES
         21




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OPERATING EXPENSES (1)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,Variance
    
    
    Variance
    
    
    
    
    
    
    
    
    
    
    Variance
    
    
    Variance2007
    
    
    2006
    
    
    in Dollars
    
    
    in Percent
    
    
    2007
    
    
    2006
    
    
    in Dollars
    
    
    in PercentResearch and development
    
    $
    8,961
    
    
    $
    8,322
    
    
    $
    639
    
    
    
    8
    %
    
    $
    27,750
    
    
    $
    22,052
    
    
    $
    5,698
    
    
    
    26
    %Sales and marketing
    
    
    15,879
    
    
    
    15,327
    
    
    
    552
    
    
    
    4
    %
    
    
    49,922
    
    
    
    40,017
    
    
    
    9,905
    
    
    
    25
    %General and administrative
    
    
    3,921
    
    
    
    3,770
    
    
    
    151
    
    
    
    4
    %
    
    
    12,394
    
    
    
    9,848
    
    
    
    2,546
    
    
    
    26
    %Total
    
    $
    28,761
    
    
    $
    27,419
    
    
    $
    1,342
    
    
    
    5
    %
    
    $
    90,066
    
    
    $
    71,917
    
    
    $
    18,149
    
    
    
    25
    %
 
 (1)
    
    Excludes IPR&D. RESEARCH AND DEVELOPMENT
     SALES AND MARKETING
   22




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GENERAL AND ADMINISTRATIVE
    IN-PROCESS RESEARCH AND DEVELOPMENT
  INTEREST AND OTHER INCOME, NET
  23




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INCOME TAX PROVISION (BENEFIT)
    LIQUIDITY AND CAPITAL RESOURCES
 Balance Sheet and Cash Flows
 Cash and Cash Equivalents and Investments.
 September 30,
    
    
    December 31,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Cash and cash equivalents
    
    $
    55,634
    
    
    $
    39,640
    
    
    $
    15,994Investments
    
    
    24,054
    
    
    
    36,917
    
    
    
    (12,863
    )Total
    
    $
    79,688
    
    
    $
    76,557
    
    
    $
    3,131
  Net cash used in operating activities
    
    $
    (623
    )Net cash provided by investing activities
    
    
    10,109Net cash provided by financing activities
    
    
    6,508Net change in cash and cash equivalents
    
    $
    15,994
   24




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##### Table of Contents



Accounts receivable, net.
 September 30,
    
    December 31,2007
    
    2006
    
    DecreaseAccounts receivable, net
    
    $
    21,790
    
    
    $
    31,743
    
    
    $
    (9,953
    )
  Deferred Revenue.
 September 30,
    
    
    December 31,2007
    
    
    2006
    
    
    IncreaseCurrent deferred revenue
    
    $
    26,837
    
    
    $
    23,931
    
    
    $
    2,906Long-term deferred revenue
    
    
    5,292
    
    
    
    5,173
    
    
    
    119Total
    
    $
    32,129
    
    
    $
    29,104
    
    
    $
    3,025
  Contractual Obligations
   Payments Due by PeriodRemainder
    
    
    1  3
    
    
    3  5Total
    
    
    of 2007
    
    
    Years
    
    
    Years
    
    
    ThereafterContractual Obligations (1)Cash obligations not reflected in Consolidated Balance Sheet:Operating lease obligations
    
    $
    23,432
    
    
    $
    964
    
    
    $
    7,517
    
    
    $
    6,507
    
    
    $
    8,444Purchase obligations
    
    
    13,004
    
    
    
    12,204
    
    
    
    400
    
    
    
    400
    
    
    
    Total
    
    $
    36,436
    
    
    $
    13,168
    
    
    $
    7,917
    
    
    $
    6,907
    
    
    $
    8,444
 
 (1)
    
    Excludes payments of approximately $0.5 million in income taxes and interest expected
to be paid in the three months ending December 31, 2007 as a result of an agreement reached
effective October 24, 2007 with the IRS related to the IRS examination of the 2003 and
2004 income tax returns and certain issues impacting the 2005 tax year as described in Note
15 to the consolidated condensed financial statements included herein. Liquidity and Capital Resource Requirements
   25




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##### Table of Contents



a.
    
    Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined under Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer, have concluded that our
disclosure controls and procedures were sufficiently effective to ensure that the
information required to be disclosed by us in this Quarterly Report on Form 10-Q was
recorded, processed, summarized and reported within the time periods specified in the SECs
rules and instructions for Form 10-Q.b.
    
    We reported the following material weaknesses as of December 31, 2006 in our Annual
Report on Form 10-K: we did not maintain effective control over financial reporting related
to our (1) accounting for income taxes and (2) rebate reserves. Specifically, (i) we did not
maintain effective controls to provide for the reconciliation of the income taxes payable
account to
 26




---



##### Table of Contents



supporting detail and the review of the income taxes payable account reconciliation by someone
other than the preparer; and (ii) we did not maintain effective controls over the review of the
rebate reserves as the review was not appropriately designed, nor was the review conducted in
sufficient detail. In order to remediate these material weaknesses, we are implementing revised
policies and procedures pertaining to income taxes payable and rebate accruals and increasing
the size and training of our financial staff. We believe that these corrective steps will
sufficiently remediate the material weaknesses described above. Aside from the ongoing
implementation of these measures, there was no change in our internal control over financial
reporting during the nine months ended September 30, 2007 that has materially affected, or is
reasonably likely to material affect, our internal controls over financial reporting.
 
  
   
   
    
    The Risk Factor entitled OUR FUTURE OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY
FLUCTUATE SIGNIFICANTLY, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE has been updated to
identify additional factors that could cause our quarterly results to fluctuate and to
provide additional examples of such factors;
    
    The Risk Factor entitled WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES IN
OUR MARKET SECTOR WHO OFFER, OR MAY IN THE FUTURE OFFER, COMPETING TECHNOLOGIES has been
updated to reference the potential impact upon our business of additional companies entering
the market for acceleration products;
    
    The Risk Factor entitled THE VARIABILITY OF OUR SALES CYCLE MAKES IT DIFFICULT TO
PREDICT OUR REVENUES AND RESULTS OF OPERATIONS has been updated to add additional factors
which may impact the length of our sales cycle.
  IF THE WAN APPLICATION DELIVERY SYSTEMS MARKET FAILS TO GROW, OUR BUSINESS WILL FAIL
  OUR FUTURE OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD
ADVERSELY AFFECT OUR STOCK PRICE
  
    
    the timing and size of orders and shipments of our products;
    
    the timing and success of new product and upgrade introductions;
 27




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##### Table of Contents




    
    the mix of products we sell;
    
    the mix and effectiveness of the channels through which those products are sold;
    
    the geographical mix of the markets in which our products are sold;
    
    the average selling prices of our products;
    
    the amount and timing of our operating expenses;
    
    the impact of changes in effective tax rates;
    
    write-offs for impairment of intangible assets; and
    
    the impact of acquisitions.
   WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES IN OUR MARKET SECTOR WHO OFFER, OR
MAY IN THE FUTURE OFFER, COMPETING TECHNOLOGIES
  28




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##### Table of Contents



IF WE DO NOT EXPAND OR ENHANCE OUR PRODUCT OFFERINGS OR RESPOND EFFECTIVELY AND ON A TIMELY BASIS
TO TECHNOLOGICAL CHANGE, OUR BUSINESS MAY NOT GROW OR WE MAY LOSE CUSTOMERS AND MARKET SHARE
  
    
    develop and maintain competitive products;
    
    enhance our products by adding innovative features that differentiate our products from
those of our competitors and meet the needs of our larger customers;
    
    bring products to market and introduce new features on a timely basis at competitive
prices;
    
    integrate acquired technology into our products;
    
    successfully negotiate and integrate acquisitions;
    
    identify and respond to emerging technological trends in the market; and
    
    respond effectively to new technological changes or new product announcements by others.
  29




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##### Table of Contents



INTRODUCTION OF OUR NEW PRODUCTS MAY CAUSE CUSTOMERS TO DEFER PURCHASES OF OUR EXISTING PRODUCTS
OR COULD RESULT IN LONGER SALES CYCLES WHICH COULD HARM OUR OPERATING RESULTS
  ANY ACQUISITIONS WE MAKE COULD RESULT IN DILUTION TO OUR EXISTING STOCKHOLDERS AND DIFFICULTIES IN
SUCCESSFULLY MANAGING OUR BUSINESS
  
    
    difficulty in integrating the acquired operations and retaining acquired personnel;
    
    limitations on our ability to retain acquired distribution channels and customers;
    
    diversion of managements attention and disruption of our ongoing business;
    
    difficulties in managing product development activities to define a combined product
roadmap, ensuring timely development of new products, timely release of new products to
market, and the development of efficient integration and migration tools;
    
    the potential product liability associated with selling the acquired companys products;
and
    
    the potential write-down of impaired goodwill and intangible and other assets. In
particular, we recorded approximately $57.0 million in goodwill related to the acquisition
of Tacit and $9.5 million in goodwill related to the acquisition of Mentat. Goodwill will be
subject to impairment testing rather than being amortized over a fixed period. To the extent
that the business acquired in that transaction does not remain competitive, some or all of
the goodwill related to that acquisition could be charged against future earnings.
  IF OUR INTERNATIONAL SALES EFFORTS ARE UNSUCCESSFUL, OUR BUSINESS WILL FAIL TO GROW
    30




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IF WE ARE UNABLE TO DEVELOP AND MAINTAIN STRONG PARTNERING RELATIONSHIPS WITH OUR INDIRECT CHANNEL
PARTNERS, OR IF THEIR SALES EFFORTS ON OUR BEHALF ARE NOT SUCCESSFUL, OR IF THEY FAIL TO PROVIDE
ADEQUATE SERVICES TO OUR END USER CUSTOMERS, OUR SALES MAY SUFFER AND OUR REVENUES MAY NOT
INCREASE
    SALES TO LARGE CUSTOMERS WOULD BE DIFFICULT TO REPLACE IF LOST
  31




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##### Table of Contents



WE FACE RISKS RELATED TO INVENTORIES OF OUR PRODUCTS HELD BY OUR DISTRIBUTORS
   THE VARIABILITY OF OUR SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR REVENUES AND RESULTS OF
OPERATIONS
   WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF PRODUCTS FOR A SIGNIFICANT
PORTION OF OUR REVENUES
  THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY, WHICH MAY NEGATIVELY IMPACT
GROSS MARGINS AND REVENUES
  32




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##### Table of Contents



OUR PRODUCTS MAY HAVE ERRORS OR DEFECTS THAT WE FIND AFTER THE PRODUCTS HAVE BEEN SOLD, WHICH
COULD INCREASE OUR COSTS AND NEGATIVELY AFFECT OUR REVENUES AND THE MARKET ACCEPTANCE OF OUR
PRODUCTS
   OUR RELIANCE ON THIRD-PARTY MANUFACTURERS FOR ALL OF OUR MANUFACTURING REQUIREMENTS COULD CAUSE
US TO LOSE ORDERS IF THESE THIRD-PARTY MANUFACTURERS FAIL TO SATISFY OUR COST, QUALITY AND
DELIVERY REQUIREMENTS
  
    
    reduced control over delivery schedules;
    
    the potential lack of adequate capacity during periods of excess demand;
    
    decreases in manufacturing yields and increases in costs;
    
    the potential for a lapse in quality assurance procedures;
    
    increases in prices; and
    
    the potential misappropriation of our intellectual property.
   33




---



##### Table of Contents



MOST OF THE COMPONENTS AND SOME OF THE SOFTWARE USED IN OUR PRODUCTS COME FROM SINGLE OR LIMITED
SOURCES, AND OUR BUSINESS COULD BE HARMED IF THESE SOURCES FAIL TO SATISFY OUR SUPPLY REQUIREMENTS
    THE PENDING LITIGATION TO WHICH WE ARE A PARTY, INCLUDING ANY ADVERSE RESOLUTION OF SUCH
LITIGATION MAY ADVERSELY IMPACT OUR BUSINESS
  IF WE ARE UNABLE TO FAVORABLY ASSESS THE EFFECTIVENESS OF OUR INTERNAL CONTROL OVER FINANCIAL
REPORTING, OR IF OUR INDEPENDENT AUDITORS ARE UNABLE TO PROVIDE AN UNQUALIFIED ATTESTATION REPORT
ON OUR ASSESSMENT, OUR STOCK PRICE COULD BE ADVERSELY AFFECTED
  34




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##### Table of Contents



CHANGES IN FINANCIAL ACCOUNTING STANDARDS ARE LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION AND
RESULTS OF OPERATIONS
  CHANGES IN OR INTERPRETATIONS OF, TAX RULES AND REGULATIONS MAY ADVERSELY AFFECT OUR EFFECTIVE TAX
RATES.
    OUR INABILITY TO ATTRACT, INTEGRATE AND RETAIN QUALIFIED PERSONNEL COULD SIGNIFICANTLY INTERRUPT
OUR BUSINESS OPERATIONS
  35




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IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE MAY EXPERIENCE OPERATING INEFFICIENCIES AND
HAVE DIFFICULTY MEETING DEMAND FOR OUR PRODUCTS
    CLAIMS BY OTHERS THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS COULD BE COSTLY TO DEFEND
AND COULD HARM OUR BUSINESS
  FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY WOULD RESULT IN SIGNIFICANT HARM TO OUR
BUSINESS
  IF OUR PRODUCTS DO NOT COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS, OUR
BUSINESS COULD BE HARMED
  36




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OUR GROWTH AND OPERATING RESULTS WOULD BE IMPAIRED IF WE ARE UNABLE TO MEET OUR FUTURE CAPITAL
REQUIREMENTS
   CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF PACKETEER MORE DIFFICULT,
WHICH COULD LOWER THE MARKET PRICE OF THE COMMON STOCK
  
  Exhibit 31.1
    
    Sarbanes-Oxley Section 302 Certification  CEOExhibit 31.2
    
    Sarbanes-Oxley Section 302 Certification  CFOExhibit 32.1
    
    Sarbanes-Oxley Section 906 Certification  CEOExhibit 32.2
    
    Sarbanes-Oxley Section 906 Certification  CFO
 
 37




---



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PACKETEER, INC.By:
    /s/ DAVE CÔTÉDave CôtéPresident and Chief Executive OfficerBy:
    /s/ DAVID YNTEMADavid YntemaChief Financial Officer and Secretary 38




---



##### Table of Contents



Exhibit 31.1
    
    Sarbanes-Oxley Section 302 Certification  CEOExhibit 31.2
    
    Sarbanes-Oxley Section 302 Certification  CFOExhibit 32.1
    
    Sarbanes-Oxley Section 906 Certification  CEOExhibit 32.2
    
    Sarbanes-Oxley Section 906 Certification  CFO