##### 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 JUNE 30, 2006
 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




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##### 



PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Unaudited Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and June 30, 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2006 and June 30, 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    28PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    29Item 1A.
    
    Risk Factors
    
    
    29Item 6.
    
    Exhibits
    
    
    40Signatures
    
    
    
    
    40Exhibit IndexEXHIBIT 10.31EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
   2




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##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,891
    
    
    $
    36,221Short-term investments
    
    
    43,782
    
    
    
    81,228Accounts receivable, net of allowance for doubtful accounts
of $656 and $175, respectively
    
    
    19,187
    
    
    
    15,759Other receivables
    
    
    208
    
    
    
    207Inventories
    
    
    3,803
    
    
    
    4,979Prepaids and other current assets
    
    
    2,225
    
    
    
    2,148Total current assets
    
    
    95,096
    
    
    
    140,542Property and equipment, net of accumulated depreciation and
amortization of $8,806 and $7,663, respectively
    
    
    3,746
    
    
    
    2,681Long-term investments
    
    
    2,685
    
    
    
    5,228Goodwill
    
    
    71,966
    
    
    
    9,527Purchased intangible assets, net
    
    
    12,947
    
    
    
    5,606Other non-current assets
    
    
    9,823
    
    
    
    5,073Total assets
    
    $
    196,263
    
    
    $
    168,657LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,373
    
    
    $
    2,808Accrued compensation
    
    
    7,662
    
    
    
    6,551Other accrued liabilities
    
    
    7,738
    
    
    
    4,716Income tax payable
    
    
    5,940
    
    
    
    3,520Deferred revenue
    
    
    22,665
    
    
    
    18,986Total current liabilities
    
    
    47,378
    
    
    
    36,581Long-term liabilities:Deferred revenue, less current portion
    
    
    3,713
    
    
    
    3,129Deferred rent and other
    
    
    257
    
    
    
    340Total liabilities
    
    
    51,348
    
    
    
    40,050Stockholders equity:Preferred stock, $0.001 par value;
5,000 shares authorized; no shares issued and
outstanding as of June 30, 2006 and December 31,
2005
    
    
    
    
    
    
    Common stock, $0.001 par value;
85,000 shares authorized; 34,875 and 34,197 shares
issued and outstanding as of June 30, 2006 and
December 31, 2005, respectively
    
    
    35
    
    
    
    34Additional paid-in capital
    
    
    199,984
    
    
    
    188,046Deferred stock-based compensation
    
    
    
    
    
    
    (567
    )Accumulated other comprehensive loss
    
    
    (89
    )
    
    
    (182
    )Accumulated deficit
    
    
    (55,015
    )
    
    
    (58,724
    )Total stockholders equity
    
    
    144,915
    
    
    
    128,607Total liabilities and stockholders equity
    
    $
    196,263
    
    
    $
    168,657
  3




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##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues:Product revenues
    
    $
    25,799
    
    
    $
    21,484
    
    
    $
    50,493
    
    
    $
    43,783Service revenues
    
    
    8,370
    
    
    
    6,693
    
    
    
    15,961
    
    
    
    12,472Total net revenues
    
    
    34,169
    
    
    
    28,177
    
    
    
    66,454
    
    
    
    56,255Cost of revenues (1):Product costs
    
    
    5,662
    
    
    
    4,781
    
    
    
    10,767
    
    
    
    9,727Service costs
    
    
    2,441
    
    
    
    2,276
    
    
    
    4,762
    
    
    
    4,144Amortization of purchased intangible assets
    
    
    486
    
    
    
    400
    
    
    
    880
    
    
    
    756Total cost of revenues
    
    
    8,589
    
    
    
    7,457
    
    
    
    16,409
    
    
    
    14,627Gross profit
    
    
    25,580
    
    
    
    20,720
    
    
    
    50,045
    
    
    
    41,628Operating expenses (1):Research and development
    
    
    7,274
    
    
    
    5,463
    
    
    
    13,730
    
    
    
    10,651Sales and marketing, includes amortization of
purchased intangibles assets of $158 for the
three and six months ended June 30, 2006 and none
for the three and six months ended June 30, 2005
    
    
    13,736
    
    
    
    9,300
    
    
    
    24,690
    
    
    
    19,209General and administrative
    
    
    3,156
    
    
    
    1,292
    
    
    
    6,078
    
    
    
    3,243In- process research and development
    
    
    1,800
    
    
    
    
    
    
    
    1,800
    
    
    
    Total operating expenses
    
    
    25,966
    
    
    
    16,055
    
    
    
    46,298
    
    
    
    33,103Income (loss) from operations
    
    
    (386
    )
    
    
    4,665
    
    
    
    3,747
    
    
    
    8,525Other income, net
    
    
    1,046
    
    
    
    609
    
    
    
    2,287
    
    
    
    1,111Income before provision for income taxes
    
    
    660
    
    
    
    5,274
    
    
    
    6,034
    
    
    
    9,636Provision for income taxes
    
    
    1,465
    
    
    
    1,046
    
    
    
    2,325
    
    
    
    1,831Net income (loss)
    
    $
    (805
    )
    
    $
    4,228
    
    
    $
    3,709
    
    
    $
    7,805Basic net income (loss) per share
    
    $
    (0.02
    )
    
    $
    0.13
    
    
    $
    0.11
    
    
    $
    0.23Diluted net income (loss) per share
    
    $
    (0.02
    )
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.22Shares used in computing basic net income (loss) per
share
    
    
    34,701
    
    
    
    33,747
    
    
    
    34,625
    
    
    
    33,647Shares used in computing diluted net income (loss)
per share
    
    
    34,701
    
    
    
    34,993
    
    
    
    35,566
    
    
    
    35,103
 
  Product costs
    
    $
    88
    
    
    $
    
    
    
    $
    184
    
    
    $
    Service costs
    
    
    159
    
    
    
    
    
    
    
    328
    
    
    
    Research and development
    
    
    929
    
    
    
    216
    
    
    
    1,746
    
    
    
    434Sales and marketing
    
    
    1,130
    
    
    
    4
    
    
    
    2,189
    
    
    
    14General and administrative
    
    
    649
    
    
    
    2
    
    
    
    1,344
    
    
    
    4
  4




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##### Table of Contents



Six months endedJune 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    3,709
    
    
    $
    7,805Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,143
    
    
    
    1,277Amortization of purchased intangible assets
    
    
    1,039
    
    
    
    756Loss on disposal of property and equipment
    
    
    
    
    
    
    17Stock-based compensation related to Mentat acquisition
    
    
    198
    
    
    
    452Stock-based compensation related to stock options and ESPP
    
    
    5,593
    
    
    
    Deferred income taxes
    
    
    (212
    )
    
    
    In-process research and development
    
    
    1,800
    
    
    
    Changes in
operating assets and liabilities, net of acquired assets and assumed
liabilities:Accounts receivable, net
    
    
    (1,683
    )
    
    
    (2,077
    )Other receivables
    
    
    (1
    )
    
    
    1,741Inventories
    
    
    1,402
    
    
    
    (2,616
    )Prepaids and other current assets
    
    
    71
    
    
    
    163Other non-current assets
    
    
    (42
    )
    
    
    31Accounts payable
    
    
    565
    
    
    
    505Accrued compensation
    
    
    492
    
    
    
    (96
    )Other accrued liabilities
    
    
    (1,364
    )
    
    
    (127
    )Income tax payable
    
    
    1,961
    
    
    
    1,454Deferred revenue
    
    
    3,750
    
    
    
    5,869Net cash provided by operating activities
    
    
    18,423
    
    
    
    15,154Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,908
    )
    
    
    (1,105
    )Purchases of investments
    
    
    (42,665
    )
    
    
    (54,374
    )Proceeds from sales and maturities of investments
    
    
    84,246
    
    
    
    46,545Acquisition, net of cash acquired
    
    
    (64,811
    )
    
    
    (1,773
    )Funds
deposited into escrow in connection with acquisition
    
    
    (7,850
    )
    
    
    Net cash used in investing activities
    
    
    (32,988
    )
    
    
    (10,676
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    2,946
    
    
    
    1,964Sale of stock to employees under the ESPP
    
    
    1,289
    
    
    
    1,126Net cash provided by financing activities
    
    
    4,235
    
    
    
    3,090Net increase in cash and cash equivalents
    
    
    (10,330
    )
    
    
    7,537Cash and cash equivalents at beginning of period
    
    
    36,221
    
    
    
    10,672Cash and cash equivalents at end of period
    
    $
    25,891
    
    
    $
    18,209Supplemental disclosures of cash flow information:Cash paid during period for income taxes
    
    $
    53
    
    
    $
    447
  5




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6




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##### Table of Contents



Stock Options
  Three Months Ended
    
    Six Months EndedJune 30, 2006
    
    June 30, 2006Stock Option Grants:Expected life (years)
    
    
    4.59
    
    
    
    4.62Expected volatility
    
    
    62.1
    %
    
    
    62.1
    %Risk-free interest rate
    
    
    4.99
    %
    
    
    4.90
    %
   WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term (Years)
    
    
    Value(In thousands, except per share amounts)Options outstanding at December 31, 2005
    
    
    6,329
    
    
    $
    12.33Options assumed (a)
    
    
    320
    
    
    
    1.28Granted
    
    
    2,224
    
    
    
    10.75Exercised
    
    
    (520
    )
    
    
    5.66Canceled /forfeited/expired
    
    
    (437
    )
    
    
    13.95Options outstanding at June 30, 2006
    
    
    7,916
    
    
    
    11.79
    
    
    
    7.82
    
    
    $
    14,523Options vested and expected to vest at June 30, 2006
    
    
    6,934
    
    
    
    11.83
    
    
    
    7.62
    
    
    $
    13,542Options exercisable at June 30, 2006
    
    
    3,661
    
    
    
    12.00
    
    
    
    6.45
    
    
    $
    9,691
 
 (a)
    
    Represents activity related to options that were assumed as a
result of the acquisition of Tacit in May 2006. See Note 3 for
additional information. 7




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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$0.19-4.71
    
    
    1,010
    
    
    
    6.15
    
    
    $
    3.24
    
    
    
    822
    
    
    $
    3.494.758.36
    
    
    1,023
    
    
    
    6.49
    
    
    
    7.41
    
    
    
    701
    
    
    
    7.078.389.51
    
    
    1,088
    
    
    
    9.48
    
    
    
    9.48
    
    
    
    15
    
    
    
    9.069.54-12.03
    
    
    1,437
    
    
    
    8.79
    
    
    
    11.58
    
    
    
    333
    
    
    
    10.9412.05-13.99
    
    
    777
    
    
    
    8.45
    
    
    
    12.67
    
    
    
    306
    
    
    
    12.6214.00
    
    
    842
    
    
    
    8.58
    
    
    
    14.00
    
    
    
    307
    
    
    
    14.0014.01-16.88
    
    
    797
    
    
    
    7.15
    
    
    
    15.32
    
    
    
    552
    
    
    
    15.4616.91-19.40
    
    
    807
    
    
    
    7.57
    
    
    
    18.96
    
    
    
    491
    
    
    
    18.9720.77-48.06
    
    
    135
    
    
    
    3.73
    
    
    
    47.05
    
    
    
    133
    
    
    
    47.44Total
    
    
    7,916
    
    
    
    7.82
    
    
    $
    11.79
    
    
    
    3,661
    
    
    $
    12.00
 Employee Stock Purchase Plans
  8




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Three Months Ended
    
    Six Months EndedJune 30, 2006
    
    June 30, 2006ESPP Grants:Expected life (years)
    
    
    n/a
    
    
    
    0.50Expected volatility
    
    
    n/a
    
    
    
    81
    %Risk-free interest rate
    
    
    n/a
    
    
    
    4.60
    %
  Restricted Stock Issued in Acquisition
  Pro Forma Information under SFAS 123 for Periods Prior to 2006
  Three Months
    
    
    Six Months EndedEnded June 30,
    
    
    June 30,2005
    
    
    2005Net income as reported
    
    $
    4,228
    
    
    $
    7,805Deduct: Stock-based compensation
expense determined under fair
value-based method for all awards,
net of tax
    
    
    (3,753
    )
    
    
    (6,916
    )Net income pro forma
    
    $
    475
    
    
    $
    889Net income per share:Basic  as reported
    
    $
    0.13
    
    
    $
    0.23Diluted  as reported
    
    $
    0.12
    
    
    $
    0.22Basic  pro forma
    
    $
    0.01
    
    
    $
    0.03Diluted  pro forma
    
    $
    0.01
    
    
    $
    0.03
  9




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Three Months Ended
    
    Six Months EndedJune 30, 2005
    
    June 30, 2005Stock Option Grants:Expected life (years)
    
    
    2.95
    
    
    
    3.33Expected volatility
    
    
    89.7
    %
    
    
    91.2
    %Risk-free interest rate
    
    
    3.68
    %
    
    
    3.95
    %Expected dividend rate
    
    
    0
    %
    
    
    0
    %
    Acquisition of Tacit Networks, Inc.
    Cash
    
    $
    66,358Fair value of options assumed
    
    
    2,482Acquisition related transaction costs
    
    
    1,655Total
initial purchase price
    
    $
    70,495
   10




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AmountCash and cash equivalents
    
    $
    3,202Short-term investments
    
    
    1,500Accounts receivable
    
    
    1,745Inventories
    
    
    226Other current assets
    
    
    148Property and equipment
    
    
    300Accounts payable and accrued liabilities
    
    
    (5,380
    )Deferred revenue
    
    
    (513
    )Goodwill
    
    
    62,439Identifiable intangible assets
    
    
    8,380In-process research and development
    
    
    1,800Net deferred tax liabilities
    
    
    (3,352
    )Total purchase price
    
    $
    70,495
 Identifiable intangible assets
  EstimatedUseful Life(in Years)
    
    
    AmountIntangible AssetsDeveloped technology
    
    
    3.0
    
    
    $
    3,530Customer relationships
    
    
    4.0
    
    
    
    4,200Trade name
    
    
    3.0
    
    
    
    650Total
    
    
    
    
    
    $
    8,380
 Goodwill
   11




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##### Table of Contents



In-process research and development
  Deferred tax liability
  Pro forma financial information
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Total revenue
    
    $
    35,140
    
    
    $
    28,930
    
    
    $
    69,691
    
    
    $
    57,099Net income (loss)
    
    
    (2,761
    )
    
    
    63
    
    
    
    (4,311
    )
    
    
    (3,941
    )Net income (loss) per share:Basic
    
    $
    (0.08
    )
    
    $
    0.00
    
    
    $
    (0.12
    )
    
    $
    (0.12
    )Diluted
    
    $
    (0.08
    )
    
    $
    0.00
    
    
    $
    (0.12
    )
    
    $
    (0.12
    )
 12




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
    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred,
    
    the fee is fixed or determinable, and
    
    collectibility is probable.
          13




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##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005Completed products
    
    $
    3,569
    
    
    $
    4,584Raw materials and components
    
    
    234
    
    
    
    395$
    3,803
    
    
    $
    4,979
  Goodwill
 Other intangibles
  December 31,
    
    
    
    
    
    
    
    
    
    
    June 30,2005
    
    
    
    
    
    
    
    
    
    
    2006Balance
    
    
    Acquisition
    
    
    Amortization
    
    
    BalanceGoodwill
    
    $
    9,527
    
    
    $
    62,439
    
    
    $
    
    
    
    $
    71,966Other intangibles:Developed technology
    
    
    4,053
    
    
    
    3,530
    
    
    
    (656
    )
    
    
    6,927Customer contracts
and relationships
    
    
    1,421
    
    
    
    4,200
    
    
    
    (322
    )
    
    
    5,299Trade name
    
    
    132
    
    
    
    650
    
    
    
    (61
    )
    
    
    721$
    15,133
    
    
    $
    70,819
    
    
    $
    (1,039
    )
    
    $
    84,913
  June 30, 2006GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingLife
    
    
    Amount
    
    
    Amortization
    
    
    AmountIntangibles:Developed technology
    
    3-5 yrs
    
    $
    8,630
    
    
    $
    (1,703
    )
    
    $
    6,927Customer contracts
and relationships
    
    3-6 yrs
    
    
    6,100
    
    
    
    (801
    )
    
    
    5,299Trade name
    
    3 yrs
    
    
    850
    
    
    
    (129
    )
    
    
    721$
    15,580
    
    
    $
    (2,633
    )
    
    $
    12,947
 December 31, 2005GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingLife
    
    
    Amount
    
    
    Amortization
    
    
    AmountIntangibles:Developed technology
    
    5 yrs
    
    $
    5,100
    
    
    $
    (1,047
    )
    
    $
    4,053Customer contracts
and relationships
    
    6 yrs
    
    
    1,900
    
    
    
    (479
    )
    
    
    1,421Trade name
    
    3 yrs
    
    
    200
    
    
    
    (68
    )
    
    
    132$
    7,200
    
    
    
    (1,594
    )
    
    $
    5,606
 14




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##### Table of Contents



Year
    
    AmountRemainder of 2006
    
    $
    1,9022007
    
    
    3,8032008
    
    
    3,7382009
    
    
    2,8412010
    
    
    663$
    12,947
  In re Packeteer, Inc. Initial Public Offering Securities
Litigation
   15




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##### Table of Contents



Accrued warranty obligations at December 31, 2005
    
    $
    234Provision for current period sales
    
    
    190Warranty costs incurred
    
    
    (137
    )Accrued warranty obligations at June 30, 2006
    
    $
    287
      16




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Number of shares excluded
    
    
    5,084
    
    
    
    3,451
    
    
    
    5,030
    
    
    
    3,004
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income (loss)
    
    $
    (805
    )
    
    $
    4,228
    
    
    $
    3,709
    
    
    $
    7,805Denominator:Basic:Weighted-average shares of common
stock outstanding
    
    
    34,767
    
    
    
    33,847
    
    
    
    34,625
    
    
    
    33,750Less: shares subject to repurchase
    
    
    (66
    )
    
    
    (100
    )
    
    
    (66
    )
    
    
    (103
    )Basic weighted-average common shares
outstanding
    
    
    34,701
    
    
    
    33,747
    
    
    
    34,559
    
    
    
    33,647Diluted:Basic weighted-average common
shares outstanding
    
    
    34,701
    
    
    
    33,747
    
    
    
    34,625
    
    
    
    33,647Add: potentially dilutive
common shares from stock
options and shares subject to
repurchase
    
    
    
    
    
    
    1,223
    
    
    
    963
    
    
    
    1,431Add: potentially dilutive
common shares from warrants
    
    
    
    
    
    
    23
    
    
    
    21
    
    
    
    24Diluted weighted-average common shares
outstanding
    
    
    34,701
    
    
    
    34,993
    
    
    
    35,566
    
    
    
    35,103Basic net income (loss) per share
    
    $
    (0.02
    )
    
    $
    0.13
    
    
    $
    0.11
    
    
    $
    0.23Diluted net income (loss) per share
    
    $
    (0.02
    )
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.22
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Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues:Americas
    
    $
    15,465
    
    
    $
    13,406
    
    
    $
    30,808
    
    
    $
    25,310Asia Pacific
    
    
    8,434
    
    
    
    7,087
    
    
    
    17,249
    
    
    
    15,065Europe, Middle East, Africa
    
    
    10,240
    
    
    
    7,684
    
    
    
    18,367
    
    
    
    15,880Total net revenues
    
    $
    34,139
    
    
    $
    28,177
    
    
    $
    66,424
    
    
    $
    56,255
     Accounting for Uncertainty in Income
Taxes  An Interpretation of FASB Statement No. 109,
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##### Table of Contents



Accounting for Income Taxes.
  19




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® ® ®
 ®
      20




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Cost of Revenues
  Research and Development
 Sales and Marketing .
 General and Administrative
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Stock-based compensation- Employee stock plans and employee stock purchase plans
    Three months
    
    
    Six monthsended
    
    
    endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues:Product revenues
    
    
    76
    %
    
    
    76
    %
    
    
    76
    %
    
    
    78
    %Service revenues
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    22Total net revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenues:Product costs
    
    
    17
    
    
    
    17
    
    
    
    16
    
    
    
    17Service costs
    
    
    7
    
    
    
    8
    
    
    
    7
    
    
    
    8Amortization of purchased intangible assets
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    1Total cost of revenues
    
    
    25
    
    
    
    26
    
    
    
    25
    
    
    
    26Gross margin
    
    
    75
    
    
    
    74
    
    
    
    75
    
    
    
    74Operating expenses:Research and development
    
    
    22
    
    
    
    19
    
    
    
    21
    
    
    
    19Sales and marketing
    
    
    40
    
    
    
    33
    
    
    
    37
    
    
    
    34General and administrative
    
    
    9
    
    
    
    5
    
    
    
    9
    
    
    
    6In- process research and development
    
    
    5
    
    
    
    
    
    
    
    3
    
    
    
    Total operating expenses
    
    
    76
    
    
    
    57
    
    
    
    70
    
    
    
    59Income (loss) from operations
    
    
    (1
    )
    
    
    17
    
    
    
    5
    
    
    
    15Other income, net
    
    
    3
    
    
    
    2
    
    
    
    3
    
    
    
    2Income before provision for income taxes
    
    
    2
    
    
    
    19
    
    
    
    8
    
    
    
    17Provision for income taxes
    
    
    4
    
    
    
    4
    
    
    
    3
    
    
    
    3Net income (loss)
    
    
    (2
    )%
    
    
    15
    %
    
    
    5
    %
    
    
    14
    %
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,
      24




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Contractual Obligations
    
    Payments due by periodRemainder
    
    
    1  3
    
    
    3  5
    
    
    More thanTotal
    
    
    of 2006
    
    
    Years
    
    
    Years
    
    
    5 YearsCash obligations not reflected in Balance Sheet:Operating lease obligations
    
    $
    4,433
    
    
    $
    1,365
    
    
    $
    2,497
    
    
    $
    515
    
    
    $
    56Purchase obligations
    
    
    7,008
    
    
    
    7,008
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    11,441
    
    
    $
    8,373
    
    
    $
    2,497
    
    
    $
    515
    
    
    $
    56
  Overview
 Operating Activities.
 Investing Activities.
 Financing Activities.
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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 weakness as of December 31, 2005 in our annual
report on Form 10-K: we did not maintain effective control over: (i) the reconciliation
of the income tax accounts to the supporting schedules, and (ii) the review of the income
tax account reconciliation by someone other than the preparer. To remediate that weakness,
we have implemented the following changes in our internal control over financial reporting:
(i) income tax accounts are reconciled to the supporting schedules, (ii) the income tax
reconciliations are reviewed by individuals other than the preparer, and (iii) we have
increased our use of third party tax experts. We believe that the corrective measures
taken above have sufficiently remediated this material weakness. Aside from the ongoing
implementation of these measures, there was no change in our internal control over
financial reporting during the three months ended June 30, 2006 that has materially
affected, or is reasonably likely to materially affect, our internal controls over
financial reporting.
 
  28




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-
    
    the timing and size of orders and shipments of our products;-
    
    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;
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-
    
    the amount and timing of our operating expenses; and-
    
    the impact of acquisitions.
     30




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-
    
    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;-
    
    identify and respond to emerging technological trends in the market; and-
    
    respond effectively to new technological changes or new product announcements by others.
    -
    
    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 software 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 $62.4 million in goodwill related to the acquisition
of Tacit and $9.6 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.
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-
    
    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.
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Director
    
    Votes For
    
    Votes WithheldL. William Krause
    
    
    30,669,133
    
    
    
    1,950,123Bernard F. (Bud) Mathaisel
    
    
    31,372,961
    
    
    
    1,246,295Peter Van Camp
    
    
    30,669,890
    
    
    
    1,949,366
   Votes for
    
    Votes Against
    
    Abstain32,275,878
    
    340,658
    
    2,720
    39




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Exhibit 10.31
    
    Agreement and Plan of Reorganization by and amount Packeteer, Inc., Oslo
Acquisition Corporation, Tacit Networks, Inc. and Vikram Gupta dated May 8, 2006Exhibit 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
 
   PACKETEER, INC.By:
    
    /s/ DAVE CÔTÉDave CôtéPresident and Chief Executive OfficerBy:
    
    /s/ DAVID YNTEMADavid YntemaChief Financial Officer and Secretary
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Exhibit 10.31
    
    Agreement and Plan of Reorganization by and amount Packeteer, Inc., Oslo
Acquisition Corporation, Tacit Networks, Inc. and Vikram Gupta dated May 8, 2006Exhibit 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