##### 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, 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




---



##### 



PART I FINANCIAL INFORMATIONItem 1. Financial Statements:
    
    
    3Unaudited Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2006 and September 30, 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended
September 30, 2006 and September 30, 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    27PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    27Item 6. Exhibits
    
    
    38Signatures
    
    
    38Exhibit IndexEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
   2




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##### Table of Contents



September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    40,775
    
    
    $
    36,221Short-term investments
    
    
    26,077
    
    
    
    81,228Accounts receivable, net of allowance for doubtful accounts of $426 and $175, respectively
    
    
    22,263
    
    
    
    15,759Other receivables
    
    
    169
    
    
    
    207Inventories
    
    
    5,764
    
    
    
    4,979Prepaids and other current assets
    
    
    2,689
    
    
    
    2,148Total current assets
    
    
    97,737
    
    
    
    140,542Property and equipment, net of accumulated depreciation and amortization of $9,507 and
$7,663, respectively
    
    
    3,666
    
    
    
    2,681Long-term investments
    
    
    5,775
    
    
    
    5,228Goodwill
    
    
    71,966
    
    
    
    9,527Purchased intangible assets, net
    
    
    11,996
    
    
    
    5,606Other non-current assets
    
    
    10,138
    
    
    
    5,073Total assets
    
    $
    201,278
    
    
    $
    168,657LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,751
    
    
    $
    2,808Accrued compensation
    
    
    6,848
    
    
    
    6,551Other accrued liabilities
    
    
    7,325
    
    
    
    4,716Income tax payable
    
    
    5,899
    
    
    
    3,520Deferred revenue
    
    
    22,852
    
    
    
    18,986Total current liabilities
    
    
    46,675
    
    
    
    36,581Long-term liabilities:Deferred revenue, less current portion
    
    
    4,302
    
    
    
    3,129Deferred rent and other
    
    
    234
    
    
    
    340Total liabilities
    
    
    51,211
    
    
    
    40,050Stockholders equity:Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and
outstanding as of September 30, 2006 and December 31, 2005
    
    
    
    
    
    
    Common stock, $0.001 par value; 85,000 shares authorized; 35,197 and 34,197 shares issued
and outstanding as of September 30, 2006 and December 31, 2005, respectively
    
    
    35
    
    
    
    34Additional paid-in capital
    
    
    204,746
    
    
    
    188,046Deferred stock-based compensation
    
    
    
    
    
    
    (567
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (182
    )Accumulated deficit
    
    
    (54,714
    )
    
    
    (58,724
    )Total stockholders equity
    
    
    150,067
    
    
    
    128,607Total liabilities and stockholders equity
    
    $
    201,278
    
    
    $
    168,657
  3




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues:Product revenues
    
    $
    26,798
    
    
    $
    17,632
    
    
    $
    77,291
    
    
    $
    61,415Service revenues
    
    
    9,188
    
    
    
    7,203
    
    
    
    25,149
    
    
    
    19,675Total net revenues
    
    
    35,986
    
    
    
    24,835
    
    
    
    102,440
    
    
    
    81,090Cost of revenues (1):Product costs
    
    
    6,343
    
    
    
    4,248
    
    
    
    17,110
    
    
    
    13,975Service costs
    
    
    2,946
    
    
    
    1,980
    
    
    
    7,708
    
    
    
    6,124Amortization of purchased intangible assets
    
    
    635
    
    
    
    401
    
    
    
    1,515
    
    
    
    1,157Total cost of revenues
    
    
    9,924
    
    
    
    6,629
    
    
    
    26,333
    
    
    
    21,256Gross profit
    
    
    26,062
    
    
    
    18,206
    
    
    
    76,107
    
    
    
    59,834Operating expenses (1):Research and development
    
    
    8,322
    
    
    
    5,524
    
    
    
    22,052
    
    
    
    16,175Sales and marketing, includes amortization of
purchased intangibles assets of $317 and $474
for the three and nine months ended September
30, 2006, respectively, and none for the three
and nine months ended September 30, 2005
    
    
    15,327
    
    
    
    8,888
    
    
    
    40,017
    
    
    
    28,097General and administrative
    
    
    3,770
    
    
    
    1,786
    
    
    
    9,848
    
    
    
    5,029In- process research and development
    
    
    
    
    
    
    
    
    
    
    1,800
    
    
    
    Total operating expenses
    
    
    27,419
    
    
    
    16,198
    
    
    
    73,717
    
    
    
    49,301Income (loss) from operations
    
    
    (1,357
    )
    
    
    2,008
    
    
    
    2,390
    
    
    
    10,533Other income, net
    
    
    807
    
    
    
    776
    
    
    
    3,094
    
    
    
    1,887Income (loss) before provision for income taxes
    
    
    (550
    )
    
    
    2,784
    
    
    
    5,484
    
    
    
    12,420Provision (benefit) for income taxes
    
    
    (851
    )
    
    
    529
    
    
    
    1,474
    
    
    
    2,360Net income
    
    $
    301
    
    
    $
    2,225
    
    
    $
    4,010
    
    
    $
    10,060Basic net income per share
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    0.12
    
    
    $
    0.30Diluted net income per share
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    0.11
    
    
    $
    0.29Shares used in computing basic net income per share
    
    
    34,990
    
    
    
    33,924
    
    
    
    34,704
    
    
    
    33,740Shares used in computing diluted net income per share
    
    
    35,814
    
    
    
    35,098
    
    
    
    35,660
    
    
    
    35,102
 
 (1)
    
    Stock-based compensation included in the costs and expense line items: Product costs
    
    $
    115
    
    
    $
    
    
    
    $
    299
    
    
    $
    Service costs
    
    
    201
    
    
    
    
    
    
    
    529
    
    
    
    Research and development
    
    
    1,259
    
    
    
    217
    
    
    
    3,005
    
    
    
    651Sales and marketing
    
    
    1,590
    
    
    
    8
    
    
    
    3,779
    
    
    
    22General and administrative
    
    
    756
    
    
    
    2
    
    
    
    2,100
    
    
    
    6
  4




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##### Table of Contents



Nine months endedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    4,010
    
    
    $
    10,060Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    1,847
    
    
    
    1,848Amortization of purchased intangible assets
    
    
    1,989
    
    
    
    1,157Loss on disposal of property and equipment
    
    
    
    
    
    
    17Stock-based compensation related to Mentat acquisition
    
    
    292
    
    
    
    679Stock-based compensation related to stock options and ESPP
    
    
    9,420
    
    
    
    Tax benefits
from employee stock option activity prior to the adoption of FAS 123R
    
    
    (833
    )
    
    
    Deferred income taxes
    
    
    (375
    )
    
    
    In-process research and development
    
    
    1,800
    
    
    
    Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:Accounts receivable, net
    
    
    (4,759
    )
    
    
    (403
    )Other receivables
    
    
    38
    
    
    
    1,333Inventories
    
    
    (559
    )
    
    
    (3,318
    )Prepaids and other current assets
    
    
    (557
    )
    
    
    (218
    )Other non-current assets
    
    
    (31
    )
    
    
    39Accounts payable
    
    
    943
    
    
    
    (588
    )Accrued compensation
    
    
    (322
    )
    
    
    (1,176
    )Other accrued liabilities
    
    
    (1,799
    )
    
    
    (911
    )Income tax payable
    
    
    1,920
    
    
    
    1,450Deferred revenue
    
    
    4,526
    
    
    
    9,084Net cash provided by operating activities
    
    
    17,550
    
    
    
    19,053Cash flows from investing activities:Purchases of property and equipment
    
    
    (2,532
    )
    
    
    (1,543
    )Purchases of investments
    
    
    (56,780
    )
    
    
    (78,863
    )Proceeds from sales and maturities of investments
    
    
    113,066
    
    
    
    70,799Acquisition, net of cash acquired
    
    
    (64,810
    )
    
    
    (1,750
    )Funds deposited into escrow in connection with acquisition
    
    
    (7,850
    )
    
    
    Net cash used in investing activities
    
    
    (18,906
    )
    
    
    (11,357
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    3,399
    
    
    
    2,670Sale of stock to employees under the ESPP
    
    
    2,511
    
    
    
    2,346Net cash provided by financing activities
    
    
    5,910
    
    
    
    5,016Net increase in cash and cash equivalents
    
    
    4,554
    
    
    
    12,712Cash and cash equivalents at beginning of period
    
    
    36,221
    
    
    
    10,672Cash and cash equivalents at end of period
    
    $
    40,775
    
    
    $
    23,384Supplemental disclosures of cash flow information:Cash paid during period for income taxes
    
    $
    261
    
    
    $
    966
  5




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##### Table of Contents



6




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##### Table of Contents



Stock Options
  Three Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    September 30, 2006Stock Option Grants:Expected life (years)
    
    
    4.61
    
    
    
    4.62Expected volatility
    
    
    63.28
    %
    
    
    62.16
    %Risk-free interest rate
    
    
    4.85
    %
    
    
    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
    
    
    2,392
    
    
    
    10.67Exercised
    
    
    (684
    )
    
    
    4.97Canceled /forfeited/expired
    
    
    (683
    )
    
    
    13.62Options outstanding at September 30, 2006
    
    
    7,674
    
    
    
    11.89
    
    
    
    7.63
    
    
    $
    5,657Options vested and expected to vest at September 30, 2006
    
    
    6,934
    
    
    
    11.95
    
    
    
    7.47
    
    
    $
    5,544Options exercisable at September 30, 2006
    
    
    3,743
    
    
    
    12.26
    
    
    
    6.31
    
    
    $
    4,833
 
 (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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##### Table of Contents



Options OutstandingRange of Exercise Prices
    
    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
    
    
    883
    
    
    
    5.87
    
    
    $
    3.48
    
    
    
    777
    
    
    $
    3.684.758.36
    
    
    978
    
    
    
    6.29
    
    
    
    7.46
    
    
    
    691
    
    
    
    7.168.389.51
    
    
    1,158
    
    
    
    9.28
    
    
    
    9.46
    
    
    
    15
    
    
    
    9.069.54-12.03
    
    
    1,411
    
    
    
    8.59
    
    
    
    11.49
    
    
    
    354
    
    
    
    10.9412.05-13.99
    
    
    764
    
    
    
    8.19
    
    
    
    12.67
    
    
    
    339
    
    
    
    12.6214.00
    
    
    809
    
    
    
    8.32
    
    
    
    14.00
    
    
    
    344
    
    
    
    14.0014.01-17.20
    
    
    767
    
    
    
    6.88
    
    
    
    15.35
    
    
    
    572
    
    
    
    15.4417.25-20.77
    
    
    774
    
    
    
    7.31
    
    
    
    19.00
    
    
    
    521
    
    
    
    19.0148.06
    
    
    130
    
    
    
    3.32
    
    
    
    48.06
    
    
    
    130
    
    
    
    48.06Total
    
    
    7,674
    
    
    
    7.63
    
    
    
    11.89
    
    
    
    3,743
    
    
    
    12.26
 Employee Stock Purchase Plan
  Three Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    September 30, 2006ESPP Grants:Expected life (years)
    
    
    1.21
    
    
    
    1.19Expected volatility
    
    
    60.00
    %
    
    
    60.53
    %Risk-free interest rate
    
    
    5.08
    %
    
    
    5.07
    %
  8




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##### Table of Contents



Restricted Stock Issued in Acquisition
  Pro Forma Information under SFAS 123 for Periods Prior to 2006
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005Net income as reported
    
    $
    2,255
    
    
    $
    10,060Deduct: Stock-based
compensation expense
determined under fair
value-based method for all
awards, net of tax
    
    
    (3,021
    )
    
    
    (9,937
    )Net income (loss) pro forma
    
    $
    (766
    )
    
    $
    123Net income (loss) per share:Basic  as reported
    
    $
    0.07
    
    
    $
    0.30Diluted  as reported
    
    $
    0.06
    
    
    $
    0.29Basic  pro forma
    
    $
    (0.02
    )
    
    $
    0.00Diluted  pro forma
    
    $
    (0.02
    )
    
    $
    0.00
   Three Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2005Stock Option Grants:Expected life (years)
    
    
    3.41
    
    
    
    3.33Expected volatility
    
    
    87.34
    %
    
    
    90.95
    %Risk-free interest rate
    
    
    4.18
    %
    
    
    3.97
    %Expected dividend rate
    
    
    0
    %
    
    
    0
    %
  9




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##### Table of Contents



Acquisition of Tacit Networks, Inc.
    Cash
    
    $
    66,358Fair value of options assumed
    
    
    2,482Acquisition related transaction costs
    
    
    1,655Total initial purchase price
    
    $
    70,495
    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 initial purchase price
    
    $
    70,495
 10




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##### Table of Contents



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
   In-process research and development
  Deferred tax liability
  Pro forma financial information
  11




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Total revenue
    
    $
    35,986
    
    
    $
    26,227
    
    
    $
    105,677
    
    
    $
    83,326Net income (loss)
    
    
    648
    
    
    
    (4,751
    )
    
    
    (3,663
    )
    
    
    (8,692
    )Net income (loss) per share:Basic
    
    $
    0.02
    
    
    $
    (0.14
    )
    
    $
    (0.11
    )
    
    $
    (0.26
    )Diluted
    
    $
    0.02
    
    
    $
    (0.14
    )
    
    $
    (0.11
    )
    
    $
    (0.26
    )
    
    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred,
    
    the fee is fixed or determinable, and
    
    collectibility is probable.
       12




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##### Table of Contents



September 30,
    
    
    December 31,2006
    
    
    2005Completed products
    
    $
    5,497
    
    
    $
    4,584Raw materials and components
    
    
    267
    
    
    
    395$
    5,764
    
    
    $
    4,979
  Goodwill
 Other intangibles
  December 31,
    
    
    
    
    
    
    
    
    
    
    September 30,2005
    
    
    
    
    
    
    
    
    
    
    2006Balance
    
    
    Acquisition
    
    
    Amortization
    
    
    BalanceGoodwill
    
    $
    9,527
    
    
    $
    62,439
    
    
    $
    
    
    
    $
    71,966Other intangibles:Developed technology
    
    
    4,053
    
    
    
    3,530
    
    
    
    (1,206
    )
    
    
    6,377Customer contracts and relationships
    
    
    1,421
    
    
    
    4,200
    
    
    
    (653
    )
    
    
    4,968Trade name
    
    
    132
    
    
    
    650
    
    
    
    (131
    )
    
    
    651$
    15,133
    
    
    $
    70,819
    
    
    $
    (1,990
    )
    
    $
    83,962
  September 30, 2006GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingLife
    
    
    Amount
    
    
    Amortization
    
    
    AmountIntangibles:Developed technology
    
    3-5 yrs
    
    $
    8,630
    
    
    $
    (2,253
    )
    
    $
    6,377Customer contracts and relationships
    
    3-6 yrs
    
    
    6,100
    
    
    
    (1,132
    )
    
    
    4,968Trade name
    
    3 yrs
    
    
    850
    
    
    
    (199
    )
    
    
    651$
    15,580
    
    
    $
    (3,584
    )
    
    $
    11,996
 13




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##### Table of Contents



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
    Year
    
    AmountRemainder of 2006
    
    $
    9512007
    
    
    3,8032008
    
    
    3,7382009
    
    
    2,8412010
    
    
    663$
    11,996
  In re Packeteer, Inc. Initial Public Offering Securities Litigation
   14




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##### Table of Contents



Accrued warranty obligations at December 31, 2005
    
    $
    234Provision for current period sales
    
    
    393Warranty costs incurred
    
    
    (242
    )Accrued warranty obligations at September 30, 2006
    
    $
    385
      15




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Number of shares excluded
    
    
    6,097
    
    
    
    3,978
    
    
    
    5,359
    
    
    
    3,796
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income
    
    $
    301
    
    
    $
    2,255
    
    
    $
    4,010
    
    
    $
    10,060Denominator:Basic:Weighted-average shares of common stock
outstanding
    
    
    35,055
    
    
    
    34,024
    
    
    
    34,770
    
    
    
    33,842Less: shares subject to repurchase
    
    
    (65
    )
    
    
    (100
    )
    
    
    (66
    )
    
    
    (102
    )Basic weighted-average common shares
outstanding
    
    
    34,990
    
    
    
    33,924
    
    
    
    34,704
    
    
    
    33,740Diluted:Basic weighted-average common shares outstanding
    
    
    34,990
    
    
    
    33,924
    
    
    
    34,704
    
    
    
    33,740Add: Potentially dilutive common shares from
stock options and shares subject to repurchase
    
    
    808
    
    
    
    1,152
    
    
    
    937
    
    
    
    1,338
 16




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Add: Potentially dilutive common shares from
warrants
    
    
    16
    
    
    
    22
    
    
    
    19
    
    
    
    24Diluted weighted-average common shares
outstanding
    
    
    35,814
    
    
    
    35,098
    
    
    
    35,660
    
    
    
    35,102Basic net income per share
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    0.12
    
    
    $
    0.30Diluted net income per share
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    0.11
    
    
    $
    0.29
       Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues:Americas
    
    $
    17,111
    
    
    $
    12,751
    
    
    $
    47,949
    
    
    $
    38,061Asia Pacific
    
    
    9,147
    
    
    
    4,083
    
    
    
    26,396
    
    
    
    19,148Europe, Middle East, Africa
    
    
    9,728
    
    
    
    8,001
    
    
    
    28,095
    
    
    
    23,881Total net revenues
    
    $
    35,986
    
    
    $
    24,835
    
    
    $
    102,440
    
    
    $
    81,090
     17




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19




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Cost of Revenues
  Research and Development
 Sales and Marketing .
 General and Administrative
   20




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Stock-based compensation- Employee stock plans and employee stock purchase plans
    Three months
    
    Nine monthsended
    
    endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Net revenues:Product revenues
    
    
    74
    %
    
    
    71
    %
    
    
    75
    %
    
    
    76
    %Service revenues
    
    
    26
    
    
    
    29
    
    
    
    25
    
    
    
    24Total net revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenues:Product costs
    
    
    18
    
    
    
    17
    
    
    
    17
    
    
    
    17Service costs
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    8Amortization of purchased intangible assets
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    1Total cost of revenues
    
    
    28
    
    
    
    27
    
    
    
    26
    
    
    
    26Gross margin
    
    
    72
    
    
    
    73
    
    
    
    74
    
    
    
    74Operating expenses:Research and development
    
    
    23
    
    
    
    22
    
    
    
    21
    
    
    
    20Sales and marketing
    
    
    43
    
    
    
    36
    
    
    
    39
    
    
    
    35General and administrative
    
    
    10
    
    
    
    7
    
    
    
    10
    
    
    
    6In- process research and development
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    Total operating expenses
    
    
    76
    
    
    
    65
    
    
    
    72
    
    
    
    61Income (loss) from operations
    
    
    (4
    )
    
    
    8
    
    
    
    2
    
    
    
    13Other income, net
    
    
    2
    
    
    
    3
    
    
    
    3
    
    
    
    2Income (loss) before provision for income taxes
    
    
    (1
    )
    
    
    11
    
    
    
    5
    
    
    
    15Provision (benefit) for income taxes
    
    
    (2
    )
    
    
    2
    
    
    
    1
    
    
    
    3Net income
    
    
    1
    %
    
    
    9
    %
    
    
    4
    %
    
    
    12
    %
 21




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22




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,
      23




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.
  .
    24




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25




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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
    
    $
    5,080
    
    
    $
    745
    
    
    $
    3,166
    
    
    $
    1,048
    
    
    $
    121Purchase obligations
    
    
    7,323
    
    
    
    7,323
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    12,403
    
    
    $
    8,068
    
    
    $
    3,166
    
    
    $
    1,048
    
    
    $
    121
  Overview
 Operating Activities.
 Investing Activities.
 Financing Activities.
   
      26




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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 September 30,
2006 that has materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
 
  
   
    27




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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;
    
    the amount and timing of our operating expenses; and
    
    the impact of acquisitions.
  28
    Table of Contents       
    
    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.
 29    Table of Contents  
    
    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.
      30
    Table of Contents  31
    Table of Contents  32
    Table of Contents  33
    Table of Contents  
    
    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.
       34
    Table of Contents  35
    Table of Contents  36
    Table of Contents  37
    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
 
   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