##### 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, 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 INFORMATIONItem 1.
    
    Financial Statements:
    
    
    3Unaudited Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    3Unaudited
Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2007 and June 30, 2006
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Three and Six Months
Ended June 30, 2007 and June 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
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    26PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 6.
    
    Exhibits
    
    
    37Signatures
    
    
    
    
    38Exhibits
    
    
    
    
    39EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
   2




---



##### Table of Contents



June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    50,519
    
    
    $
    39,640Short-term investments
    
    
    28,583
    
    
    
    25,681Accounts receivable, net of allowance for
doubtful accounts and sales returns of $2,573 and
$3,010, as of June 30, 2007 and December 31,
2006, respectively
    
    
    24,102
    
    
    
    31,743Other receivables
    
    
    284
    
    
    
    216Inventories
    
    
    9,206
    
    
    
    3,957Prepaids and other current assets
    
    
    7,866
    
    
    
    3,249Total current assets
    
    
    120,560
    
    
    
    104,486Non-current assets:Property and equipment, net
    
    
    4,159
    
    
    
    3,968Long-term investments
    
    
    2,248
    
    
    
    11,236Goodwill
    
    
    66,506
    
    
    
    58,656Purchased intangible assets, net
    
    
    9,142
    
    
    
    11,045Other non-current assets
    
    
    19,639
    
    
    
    27,577Total assets
    
    $
    222,254
    
    
    $
    216,968LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,501
    
    
    $
    3,014Accrued compensation
    
    
    7,532
    
    
    
    9,567Other accrued liabilities
    
    
    8,566
    
    
    
    8,431Income taxes payable
    
    
    8,400
    
    
    
    7,164Deferred revenue
    
    
    29,858
    
    
    
    23,931Total current liabilities
    
    
    57,857
    
    
    
    52,107Non-current liabilities:Deferred revenue, less current portion
    
    
    5,282
    
    
    
    5,173Deferred rent and other
    
    
    501
    
    
    
    179Total liabilities
    
    
    63,640
    
    
    
    57,459Stockholders equity:Preferred stock, $0.001 par value; 5,000 shares
authorized; no shares issued and outstanding as
of June 30, 2007 and December 31, 2006
    
    
    
    
    
    
    Common stock, $0.001 par value; 85,000 shares
authorized; 35,976 and 35,400 shares issued and
outstanding as of June 30, 2007 and December 31,
2006, respectively
    
    
    36
    
    
    
    36Additional paid-in capital
    
    
    223,995
    
    
    
    212,961Accumulated other comprehensive loss
    
    
    (27
    )
    
    
    (18
    )Accumulated deficit
    
    
    (65,390
    )
    
    
    (53,470
    )Total stockholders equity
    
    
    158,614
    
    
    
    159,509Total liabilities and stockholders equity
    
    $
    222,254
    
    
    $
    216,968
  3




---



##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues:Product revenues
    
    $
    20,829
    
    
    $
    25,799
    
    
    $
    44,670
    
    
    $
    50,493Service revenues
    
    
    11,613
    
    
    
    8,370
    
    
    
    22,500
    
    
    
    15,961Total net revenues
    
    
    32,442
    
    
    
    34,169
    
    
    
    67,170
    
    
    
    66,454Cost of revenues (1):Product costs
    
    
    5,995
    
    
    
    5,662
    
    
    
    13,730
    
    
    
    10,767Service costs
    
    
    3,291
    
    
    
    2,441
    
    
    
    6,861
    
    
    
    4,762Amortization of purchased intangible assets
    
    
    635
    
    
    
    486
    
    
    
    1,270
    
    
    
    880Total cost of revenues
    
    
    9,921
    
    
    
    8,589
    
    
    
    21,861
    
    
    
    16,409Gross profit
    
    
    22,521
    
    
    
    25,580
    
    
    
    45,309
    
    
    
    50,045Operating expenses (1):Research and development
    
    
    9,563
    
    
    
    7,274
    
    
    
    18,790
    
    
    
    13,730Sales and marketing, includes amortization of purchased
intangible assets of $316 and $633 for the three and six
months ended June 30, 2007, respectively, and $158 for
the three and six months ended June 30, 2006
    
    
    16,695
    
    
    
    13,736
    
    
    
    34,043
    
    
    
    24,690General and administrative
    
    
    4,392
    
    
    
    3,156
    
    
    
    8,472
    
    
    
    6,078In- process research and development
    
    
    
    
    
    
    1,800
    
    
    
    
    
    
    
    1,800Total operating expenses
    
    
    30,650
    
    
    
    25,966
    
    
    
    61,305
    
    
    
    46,298Income (loss) from operations
    
    
    (8,129
    )
    
    
    (386
    )
    
    
    (15,996
    )
    
    
    3,747Other income, net
    
    
    865
    
    
    
    1,046
    
    
    
    1,697
    
    
    
    2,287Income (loss) before provision for (benefit from) income taxes
    
    
    (7,264
    )
    
    
    660
    
    
    
    (14,299
    )
    
    
    6,034Provision for (benefit from) income taxes
    
    
    (1,636
    )
    
    
    1,465
    
    
    
    (2,584
    )
    
    
    2,325Net income (loss)
    
    $
    (5,628
    )
    
    $
    (805
    )
    
    $
    (11,715
    )
    
    $
    3,709Basic net income (loss) per share
    
    $
    (0.16
    )
    
    $
    (0.02
    )
    
    $
    (0.33
    )
    
    $
    0.11Diluted net income (loss) per share
    
    $
    (0.16
    )
    
    $
    (0.02
    )
    
    $
    (0.33
    )
    
    $
    0.10Shares used in computing basic net income (loss) per share
    
    
    35,967
    
    
    
    34,701
    
    
    
    35,854
    
    
    
    34,559Shares used in computing diluted net income (loss) per share
    
    
    35,967
    
    
    
    34,701
    
    
    
    35,854
    
    
    
    35,566
 
 (1)
    
    Stock-based compensation included in the costs and expense line items: Product costs
    
    $
    93
    
    
    $
    88
    
    
    
    204
    
    
    $
    184Service costs
    
    
    180
    
    
    
    159
    
    
    
    394
    
    
    
    328Research and development
    
    
    917
    
    
    
    929
    
    
    
    2,036
    
    
    
    1,746Sales and marketing
    
    
    1,018
    
    
    
    1,130
    
    
    
    2,060
    
    
    
    2,189General and administrative
    
    
    723
    
    
    
    649
    
    
    
    1,503
    
    
    
    1,344
  4




---



##### Table of Contents



Six months ended June 30,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (11,715
    )
    
    $
    3,709Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation
    
    
    1,742
    
    
    
    1,143Amortization of purchased intangible assets
    
    
    1,903
    
    
    
    1,039Net reversal of allowance for doubtful accounts
    
    
    (329
    )
    
    
    Write-down of inventory
    
    
    315
    
    
    
    Stock-based compensation related to Mentat acquisition
    
    
    44
    
    
    
    198Compensation related to stock-based awards
    
    
    6,153
    
    
    
    5,593Excess tax benefit from stock-based compensation plans
    
    
    (472
    )
    
    
    Deferred income taxes
    
    
    (3,977
    )
    
    
    (212
    )In-process research and development
    
    
    
    
    
    
    1,800Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:Accounts receivable
    
    
    7,970
    
    
    
    (1,683
    )Other receivables
    
    
    (68
    )
    
    
    (1
    )Inventories
    
    
    (5,564
    )
    
    
    1,402Prepaids and other current assets
    
    
    (541
    )
    
    
    71Accounts payable
    
    
    487
    
    
    
    565Accrued compensation
    
    
    (2,035
    )
    
    
    492Other accrued liabilities
    
    
    135
    
    
    
    (1,364
    )Income taxes payable
    
    
    1,163
    
    
    
    1,961Deferred revenue
    
    
    6,036
    
    
    
    3,750Other
    
    
    180
    
    
    
    (40
    )Net cash provided by operating activities
    
    
    1,427
    
    
    
    18,423Cash flows from investing activities:Purchases of property and equipment, net
    
    
    (1,934
    )
    
    
    (1,908
    )Purchases of investments
    
    
    (28,159
    )
    
    
    (40,545
    )Proceeds from sales and maturities of investments
    
    
    34,236
    
    
    
    84,246Acquisition, net of cash acquired
    
    
    
    
    
    
    (66,931
    )Funds
deposited into escrow in connection with acquisition
    
    
    
    
    
    
    (7,850
    )Net cash provided by (used in) investing activities
    
    
    4,143
    
    
    
    (32,988
    )Cash flows from financing activities:Proceeds from issuance of common stock, net of repurchases
    
    
    3,332
    
    
    
    2,946Sale of stock to employees under the ESPP
    
    
    1,505
    
    
    
    1,289Excess tax benefit from stock-based compensation plans
    
    
    472
    
    
    
    Net cash provided by financing activities
    
    
    5,309
    
    
    
    4,235Net increase (decrease) in cash and cash equivalents
    
    
    10,879
    
    
    
    (10,330
    )Cash and cash equivalents at beginning of period
    
    
    39,640
    
    
    
    36,221Cash and cash equivalents at end of period
    
    $
    50,519
    
    
    $
    25,891Non-cash
investing 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 (received) during period for income taxes
    
    $
    (11
    )
    
    $
    53
  5




---



##### Table of Contents



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




---



##### Table of Contents



Three months ended
    
    Six months endedJune 30, 2006
    
    June 30, 2006Total net revenues
    
    $
    35,140
    
    
    $
    69,691Net loss
    
    
    (2,761
    )
    
    
    (4,311
    )Net loss per share:Basic
    
    $
    (0.08
    )
    
    $
    (0.12
    )Diluted
    
    $
    (0.08
    )
    
    $
    (0.12
    )
    
    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred,
    
    the fee is fixed or determinable, and
    
    collectibility is probable.
       7




---



##### Table of Contents



June 30,
    
    
    December 31,2007
    
    
    2006Completed products
    
    $
    8,854
    
    
    $
    3,785Raw materials and components
    
    
    352
    
    
    
    172$
    9,206
    
    
    $
    3,957
  Goodwill
 Other intangibles
  As of
    
    
    
    
    
    
    
    
    
    
    As ofDecember 31,
    
    
    
    
    
    
    
    
    
    
    June 30,2006
    
    
    Adjustment
    
    
    Amortization
    
    
    2007Goodwill
    
    $
    58,656
    
    
    $
    7,850
    
    
    $
    
    
    
    $
    66,506Other intangibles:Developed technology
    
    
    5,828
    
    
    
    
    
    
    
    (1,098
    )
    
    
    4,730Customer contracts and relationships
    
    
    4,637
    
    
    
    
    
    
    
    (663
    )
    
    
    3,974Trade name
    
    
    580
    
    
    
    
    
    
    
    (142
    )
    
    
    438$
    69,701
    
    
    $
    7,850
    
    
    $
    (1,903
    )
    
    $
    75,648
  June 30, 2007GrossAmortization
    

    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingLife
    

    
    Amount
    
    
    Amortization
    
    
    AmountIntangibles:Developed technology
    
    3-5 yrs
    
    
    
    $
    8,630
    
    
    $
    (3,900
    )
    
    $
    4,730Customer contracts and relationships
    
    3-6 yrs
    
    
    
    
    6,100
    
    
    
    (2,126
    )
    
    
    3,974Trade name
    
    3 yrs
    

    
    
    
    850
    
    
    
    (412
    )
    
    
    438$
    15,580
    
    
    $
    (6,438
    )
    
    $
    9,142
 8




---



##### 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
    
    $
    1,9002008
    
    
    3,7382009
    
    
    2,8412010
    
    
    663$
    9,142
     9




---



##### Table of Contents



Accrued warranty obligations at December 31, 2006
    
    $
    488Provision for current period sales
    
    
    155Warranty costs incurred
    
    
    (218
    )Accrued warranty obligations at June 30, 2007
    
    $
    425
    10




---



##### Table of Contents



Three months ended
    
    Six months endedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Alternative Technology, Inc
    
    
    31
    %
    
    
    25
    %
    
    
    29
    %
    
    
    23
    %Westcon, Inc
    
    
    16
    %
    
    
    22
    %
    
    
    16
    %
    
    
    18
    %Macnica, Inc.
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    10
    %
        11




---



##### Table of Contents



1999 STOCK INCENTIVE PLAN
  Stock Options
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Stock Options:Expected life (years)
    
    
    n/a
    
    
    
    4.59
    
    
    
    4.58
    
    
    
    4.62Expected volatility
    
    
    n/a
    
    
    
    62
    %
    
    
    58
    %
    
    
    62
    %Risk-free interest rate
    
    
    n/a
    
    
    
    4.99
    %
    
    
    4.78
    %
    
    
    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
    
    
    631
    
    
    
    12.88Exercised
    
    
    (400
    )
    
    
    8.34Canceled/ forfeited/expired
    
    
    (565
    )
    
    
    13.02Options outstanding at June 30, 2007
    
    
    6,815
    
    
    
    12.23
    
    
    
    6.73
    
    
    $
    3,324Options vested and expected to vest at June 30, 2007
    
    
    5,910
    
    
    
    12.36
    
    
    
    6.44
    
    
    $
    3,274Options exercisable at June 30, 2007
    
    
    4,149
    
    
    
    12.57
    
    
    
    5.55
    
    
    $
    3,160
  12




---



##### 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$0.096.10
    
    
    921
    
    
    
    4.48
    
    
    $
    4.30
    
    
    
    892
    
    
    $
    4.376.139.31
    
    
    719
    
    
    
    6.75
    
    
    
    8.27
    
    
    
    456
    
    
    
    8.049.419.51
    
    
    848
    
    
    
    8.33
    
    
    
    9.51
    
    
    
    267
    
    
    
    9.519.5412.03
    
    
    1,061
    
    
    
    7.48
    
    
    
    11.54
    
    
    
    488
    
    
    
    11.4612.0512.94
    
    
    855
    
    
    
    8.90
    
    
    
    12.67
    
    
    
    203
    
    
    
    12.3412.9914.00
    
    
    938
    
    
    
    7.25
    
    
    
    13.80
    
    
    
    542
    
    
    
    13.8314.0118.10
    
    
    865
    
    
    
    4.68
    
    
    
    15.98
    
    
    
    761
    
    
    
    16.1018.4948.06
    
    
    608
    
    
    
    5.61
    
    
    
    25.52
    
    
    
    540
    
    
    
    26.30Total
    
    
    6,815
    
    
    
    6.73
    
    
    $
    12.23
    
    
    
    4,149
    
    
    $
    12.57
 Restricted Stock Units
   Weighted-averagegrant date fairUnits
    
    value per share(In thousands, except per share amounts)Nonvested at December 31, 2006
    
    
    
    
    
    
    Granted
    
    
    368
    
    
    $
    12.43Vested
    
    
    
    
    
    
    Forfeited
    
    
    (18
    )
    
    
    12.05Nonvested at June 30, 2007
    
    
    350
    
    
    
    12.45
 Performance Shares
   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 June 30, 2007
    
    
    155
    
    
    
    12.78Maximum potential vested shares at June 30, 2007
    
    
    388
    
    
    
    12.78
 13




---



##### Table of Contents



Employee Stock Purchase Plan
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006ESPP Grants:Expected life (years)
    
    
    n/a
    
    
    
    n/a
    
    
    
    0.95
    
    
    
    0.50Expected volatility
    
    
    n/a
    
    
    
    n/a
    
    
    
    47
    %
    
    
    81
    %Risk-free interest rate
    
    
    n/a
    
    
    
    n/a
    
    
    
    5.10
    %
    
    
    4.60
    %
  Restricted Stock Issued in Acquisition
  STOCK- BASED COMPENSATION
   14




---



##### Table of Contents



Unrecognized
    
    
    RemainingStock-Based
    
    
    RecognitionStock -Based Award
    
    Expense
    
    
    Period (Years)Stock Options
    
    $
    7,451
    
    
    
    1.31Restricted stock units
    
    
    1,921
    
    
    
    2.11Performance shares
    
    
    1,334
    
    
    
    2.50ESPP
    
    
    766
    
    
    
    0.46Restricted stock issued in acquisition
    
    
    45
    
    
    
    0.50Total
    
    $
    11,517
    
    
    
    1.52
    Three Months Ended
    Six Months EndedJune 30,
    June 30,2007
    
    2006
    
    2007
    
    2006Shares issuable under stock options
    
    
    4,780
    
    
    
    5,084
    
    
    
    4,235
    
    
    
    5,030
   Three Months Ended
    
    
    Six Months Ended}June 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income (loss)
    
    $
    (5,628
    )
    
    $
    (805
    )
    
    $
    (11,715
    )
    
    $
    3,709Denominator:Basic:
 15




---



##### Table of Contents



Three Months Ended
    
    
    Six Months Ended}June 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted-average shares of common stock outstanding
    
    
    35,985
    
    
    
    34,767
    
    
    
    35,874
    
    
    
    34,625Less: shares subject to repurchase
    
    
    (18
    )
    
    
    (66
    )
    
    
    (17
    )
    
    
    (66
    )Basic weighted-average common shares outstanding
    
    
    35,967
    
    
    
    34,701
    
    
    
    35,854
    
    
    
    34,559Diluted:Basic weighted-average common shares outstanding
    
    
    35,967
    
    
    
    34,701
    
    
    
    35,854
    
    
    
    34,625Add: potentially dilutive common shares from stock
options and shares subject to repurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    963Add: potentially dilutive common shares from warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Diluted weighted-average common shares outstanding
    
    
    35,967
    
    
    
    34,701
    
    
    
    35,854
    
    
    
    35,566Basic net income (loss) per share
    
    $
    (0.16
    )
    
    $
    (0.02
    )
    
    $
    (0.33
    )
    
    $
    0.11Diluted net income (loss) per share
    
    $
    (0.16
    )
    
    $
    (0.02
    )
    
    $
    (0.33
    )
    
    $
    0.10
       Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues:Americas
    
    $
    16,635
    
    
    $
    15,495
    
    
    $
    33,015
    
    
    $
    30,838Asia Pacific
    
    
    6,173
    
    
    
    8,434
    
    
    
    14,315
    
    
    
    17,249Europe, Middle East, Africa
    
    
    9,634
    
    
    
    10,240
    
    
    
    19,840
    
    
    
    18,367Total net revenues
    
    $
    32,442
    
    
    $
    34,169
    
    
    $
    67,170
    
    
    $
    66,454
      16




---



##### Table of Contents



17




---



##### Table of Contents



Accounting for Uncertainty in Income Taxes
      18




---



##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues:Product revenues
    
    
    64.2
    %
    
    
    75.5
    %
    
    
    66.5
    %
    
    
    76.0
    %Service revenues
    
    
    35.8
    
    
    
    24.5
    
    
    
    33.5
    
    
    
    24.0Total net revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenues:Product costs
    
    
    18.5
    
    
    
    16.6
    
    
    
    20.4
    
    
    
    16.2Service costs
    
    
    10.1
    
    
    
    7.1
    
    
    
    10.2
    
    
    
    7.2Amortization of purchased intangible assets
    
    
    2.0
    
    
    
    1.4
    
    
    
    1.9
    
    
    
    1.3Total cost of revenues
    
    
    30.6
    
    
    
    25.1
    
    
    
    32.5
    
    
    
    24.7Gross margin
    
    
    69.4
    
    
    
    74.9
    
    
    
    67.5
    
    
    
    75.3Operating expenses:Research and development
    
    
    29.5
    
    
    
    21.3
    
    
    
    28.0
    
    
    
    20.7Sales and marketing
    
    
    51.5
    
    
    
    40.2
    
    
    
    50.7
    
    
    
    37.2General and administrative
    
    
    13.5
    
    
    
    9.2
    
    
    
    12.6
    
    
    
    9.1In- process research and development
    
    
    
    
    
    
    5.3
    
    
    
    
    
    
    
    2.7Total operating expenses
    
    
    94.5
    
    
    
    76.0
    
    
    
    91.3
    
    
    
    69.7Income (loss) from operations
    
    
    (25.1
    )
    
    
    (1.1
    )
    
    
    (23.8
    )
    
    
    5.6Interest and other income, net
    
    
    2.7
    
    
    
    3.0
    
    
    
    2.5
    
    
    
    3.5Income (loss) before provision (benefit) for income taxes
    
    
    (22.4
    )
    
    
    1.9
    
    
    
    (21.3
    )
    
    
    9.1Provision (benefit) for income taxes
    
    
    (5.0
    )
    
    
    4.3
    
    
    
    (3.9
    )
    
    
    3.5Net income (loss)
    
    
    (17.4
    )%
    
    
    (2.4
    )%
    
    
    (17.4
    )%
    
    
    5.6
    %
 NET REVENUES
   19




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006($)
    
    
    (%)
    
    
    ($)
    
    
    (%)
    
    
    ($)
    
    
    (%)
    
    
    ($)
    
    
    (%)Americas*
    
    $
    16.6
    
    
    
    51
    
    
    $
    15.6
    
    
    
    45
    
    
    $
    33.0
    
    
    
    49
    
    
    $
    30.8
    
    
    
    46Asia Pacific
    
    
    6.2
    
    
    
    19
    
    
    
    8.4
    
    
    
    25
    
    
    
    14.3
    
    
    
    21
    
    
    
    17.2
    
    
    
    26Europe, the Middle East and Africa (EMEA)
    
    
    9.6
    
    
    
    30
    
    
    
    10.2
    
    
    
    30
    
    
    
    19.8
    
    
    
    30
    
    
    
    18.5
    
    
    
    28Total
    
    $
    32.4
    
    
    
    100
    
    
    $
    34.2
    
    
    
    100
    
    
    $
    67.2
    
    
    
    100
    
    
    $
    66.5
    
    
    
    100
 
 *
    
    Primarily the United States.    Three months ended
    
    Six months endedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Alternative Technology, Inc
    
    
    31
    %
    
    
    25
    %
    
    
    29
    %
    
    
    23
    %Westcon, Inc
    
    
    16
    %
    
    
    22
    %
    
    
    16
    %
    
    
    18
    %Macnica, Inc.
    
    
    <10
    %
    
    
    <10
    %
    
    
    <10
    %
    
    
    10
    %
  COST OF REVENUES
     20




---



##### Table of Contents



OPERATING
EXPENSES(1)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,Variance
    
    
    Variance
    
    
    
    
    
    
    
    
    
    
    Variance
    
    
    Variance2007
    
    
    2006
    
    
    in Dollars
    
    
    in Percent
    
    
    2007
    
    
    2006
    
    
    in Dollars
    
    
    in PercentResearch and development
    
    $
    9,563
    
    
    $
    7,274
    
    
    $
    2,289
    
    
    
    31
    %
    
    $
    18,790
    
    
    $
    13,730
    
    
    $
    5,060
    
    
    
    37
    %Sales and marketing
    
    
    16,695
    
    
    
    13,736
    
    
    
    2,959
    
    
    
    22
    %
    
    
    34,043
    
    
    
    24,690
    
    
    
    9,353
    
    
    
    38
    %General and administrative
    
    
    4,392
    
    
    
    3,156
    
    
    
    1,236
    
    
    
    39
    %
    
    
    8,472
    
    
    
    6,078
    
    
    
    2,394
    
    
    
    39
    %Total
    
    $
    30,650
    
    
    $
    24,166
    
    
    $
    6,484
    
    
    
    26
    %
    
    $
    61,305
    
    
    $
    44,498
    
    
    $
    16,807
    
    
    
    38
    %
 
 (1)
    
    Excludes IPR&D. RESEARCH AND DEVELOPMENT
    21




---



##### Table of Contents



SALES AND MARKETING
     GENERAL AND ADMINISTRATIVE
    22




---



##### Table of Contents



IN-PROCESS RESEARCH AND DEVELOPMENT
  INTEREST AND OTHER INCOME, NET
  INCOME TAX PROVISION (BENEFIT)
    LIQUIDITY AND CAPITAL RESOURCES
 Balance Sheet and Cash Flows
 Cash and Cash Equivalents and Investments.
 June 30,
    
    
    December 31,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Cash and cash equivalents
    
    $
    50,519
    
    
    $
    39,640
    
    
    $
    10,879Investments
    
    
    30,831
    
    
    
    36,917
    
    
    
    (6,086
    )Total
    
    $
    81,350
    
    
    $
    76,557
    
    
    $
    4,793
 23




---



##### Table of Contents



Net cash provided by operating activities
    
    $
    1,427Net cash provided by investing activities
    
    
    4,143Net cash provided by financing activities
    
    
    5,309Net change in cash and cash equivalents
    
    $
    10,879
   Accounts receivable, net.
 June 30,
    
    
    December 31,2007
    
    
    2006
    
    
    DecreaseAccounts receivable, net
    
    $
    24,102
    
    
    $
    31,743
    
    
    $
    (7,641
    )
  Deferred Revenue.
 June 30,
    
    
    December 31,2007
    
    
    2006
    
    
    IncreaseCurrent deferred revenue
    
    $
    29,858
    
    
    $
    23,931
    
    
    $
    5,927Long-term deferred revenue
    
    
    5,282
    
    
    
    5,173
    
    
    
    109Total
    
    $
    35,140
    
    
    $
    29,104
    
    
    $
    6,036
  Contractual Obligations
  24




---



##### Table of Contents



Payments Due by PeriodRemainder
    
    
    1  3
    
    
    3  5Total
    
    
    of 2007
    
    
    Years
    
    
    Years
    
    
    ThereafterContractual ObligationsCash obligations not reflected in Consolidated Balance Sheet:Operating lease obligations
    
    $
    23,713
    
    
    $
    1,608
    
    
    $
    7,217
    
    
    $
    6,444
    
    
    $
    8,444Purchase obligations
    
    
    9,623
    
    
    
    8,823
    
    
    
    400
    
    
    
    400
    
    
    
    Total
    
    $
    33,336
    
    
    $
    10,431
    
    
    $
    7,617
    
    
    $
    6,844
    
    
    $
    8,444
 Liquidity and Capital Resource Requirements
     
      25




---



##### 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 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
six months ended June 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.
  26




---



##### Table of Contents



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;
    
    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.
   27




---



##### Table of Contents



WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES IN OUR MARKET SECTOR WHO OFFER, OR
MAY IN THE FUTURE OFFER, COMPETING TECHNOLOGIES
   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;
 28




---



##### Table of Contents




    
    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.
  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.
  29




---



##### Table of Contents



IF OUR INTERNATIONAL SALES EFFORTS ARE UNSUCCESSFUL, OUR BUSINESS WILL FAIL TO GROW
     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
    30




---



##### Table of Contents



SALES TO LARGE CUSTOMERS WOULD BE DIFFICULT TO REPLACE IF LOST
  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
  31




---



##### Table of Contents



THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY, WHICH MAY NEGATIVELY IMPACT
GROSS MARGINS AND REVENUES
  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
 32




---



##### Table of Contents




    
    the potential misappropriation of our intellectual property.
   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
  33




---



##### Table of Contents



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
   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.
   34




---



##### Table of Contents



OUR INABILITY TO ATTRACT, INTEGRATE AND RETAIN QUALIFIED PERSONNEL COULD SIGNIFICANTLY INTERRUPT
OUR BUSINESS OPERATIONS
  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
  35




---



##### Table of Contents



IF OUR PRODUCTS DO NOT COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS, OUR
BUSINESS COULD BE HARMED
  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
    1.
    
    The following persons were elected as directors of the Company to serve until the 2010 Annual
Stockholders Meeting, and until their successors are elected and qualified, with the votes
indicated below:
 Director
    
    Votes For
    
    Votes WithheldDave Côté
    
    
    31,961,981
    
    
    
    1,198,483Gregory E. Myers
    
    
    32,356,974
    
    
    
    803,490
 36




---



##### Table of Contents



2.
    
    The proposal to ratify the appointment of KPMG LLP as the Companys independent auditors for
the fiscal year ending December 31, 2007 was approved with the following votes:
 Votes for
    
    Votes Against
    
    Abstain31,494,980
    
    
    1,637,299
    
    
    
    28,185
 
  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




---



##### Table of Contents



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