##### 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 MARCH 31, 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




---



##### 



PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Unaudited Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006
    
    
    3Unaudited Condensed Consolidated Income Statements for the Three Months Ended March 31, 2007 and March 31, 2006
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and March 31, 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
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    25PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    25Item 6.
    
    Exhibits
    
    
    36Signatures
    
    
    
    
    37Exhibits
    
    
    
    
    38EXHIBIT 10.35EXHIBIT 10.36EXHIBIT 10.37EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
   2




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March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    55,888
    
    
    $
    39,640Short-term investments
    
    
    28,209
    
    
    
    25,681Accounts receivable, net of allowance for
doubtful accounts and sales returns of $2,822
and $3,010, as of March 31, 2007 and December
31, 2006, respectively
    
    
    24,004
    
    
    
    31,743Other receivables
    
    
    241
    
    
    
    216Inventories
    
    
    5,965
    
    
    
    3,957Prepaids and other current assets
    
    
    5,470
    
    
    
    3,249Total current assets
    
    
    119,777
    
    
    
    104,486Non-current assets:Property and equipment, net
    
    
    4,513
    
    
    
    3,968Long-term investments
    
    
    
    
    
    
    11,236Goodwill
    
    
    58,656
    
    
    
    58,656Purchased intangible assets, net
    
    
    10,093
    
    
    
    11,045Other non-current assets
    
    
    27,492
    
    
    
    27,577Total assets
    
    $
    220,531
    
    
    $
    216,968LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,281
    
    
    $
    3,014Accrued compensation
    
    
    6,812
    
    
    
    9,567Other accrued liabilities
    
    
    7,389
    
    
    
    8,431Income taxes payable
    
    
    7,740
    
    
    
    7,164Deferred revenue
    
    
    26,102
    
    
    
    23,931Total current liabilities
    
    
    53,324
    
    
    
    52,107Non-current liabilities:Deferred revenue, less current portion
    
    
    5,575
    
    
    
    5,173Deferred rent and other
    
    
    385
    
    
    
    179Total liabilities
    
    
    59,284
    
    
    
    57,459Stockholders equity:Preferred stock, $0.001 par value; 5,000 shares
authorized; no shares issued and outstanding as
of March 31, 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 March 31, 2007 and December
31, 2006, respectively
    
    
    36
    
    
    
    36Additional paid-in capital
    
    
    220,980
    
    
    
    212,961Accumulated other comprehensive loss
    
    
    (8
    )
    
    
    (18
    )Accumulated deficit
    
    
    (59,761
    )
    
    
    (53,470
    )Total stockholders equity
    
    
    161,247
    
    
    
    159,509Total liabilities and stockholders equity
    
    $
    220,531
    
    
    $
    216,968
  3




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Three months endedMarch 31,2007
    
    
    2006Net revenues:Product revenues
    
    $
    23,841
    
    
    $
    24,694Service revenues
    
    
    10,887
    
    
    
    7,591Total net revenues
    
    
    34,728
    
    
    
    32,285Cost of revenues (1):Product costs
    
    
    7,735
    
    
    
    5,104Service costs
    
    
    3,570
    
    
    
    2,321Amortization of purchased intangible assets
    
    
    635
    
    
    
    394Total cost of revenues
    
    
    11,940
    
    
    
    7,819Gross profit
    
    
    22,788
    
    
    
    24,466Operating expenses (1):Research and development
    
    
    9,227
    
    
    
    6,456Sales and marketing, includes amortization of purchased
intangible assets of $317 and $0 for the three months ended
March 31, 2007 and 2006, respectively
    
    
    17,348
    
    
    
    10,954General and administrative
    
    
    4,080
    
    
    
    2,922Total operating expenses
    
    
    30,655
    
    
    
    20,332Income (loss) from operations
    
    
    (7,867
    )
    
    
    4,134Other income, net
    
    
    832
    
    
    
    1,240Income (loss) before provision for (benefit from) income taxes
    
    
    (7,035
    )
    
    
    5,374Provision for (benefit from) income taxes
    
    
    (948
    )
    
    
    860Net income (loss)
    
    $
    (6,087
    )
    
    $
    4,514Basic net income (loss) per share
    
    $
    (0.17
    )
    
    $
    0.13Diluted net income (loss) per share
    
    $
    (0.17
    )
    
    $
    0.13Shares used in computing basic net income (loss) per
share
    
    
    35,740
    
    
    
    34,416Shares used in computing diluted net income (loss)
per share
    
    
    35,740
    
    
    
    35,377
 
 (1)
    
    Stock-based compensation included in the costs and expense line items: Product costs
    
    $
    111
    
    
    $
    96Service costs
    
    
    214
    
    
    
    169Research and development
    
    
    1,120
    
    
    
    817Sales and marketing
    
    
    1,042
    
    
    
    1,059General and administrative
    
    
    780
    
    
    
    695
  4




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Three months ended March 31,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (6,087
    )
    
    $
    4,514Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depreciation
    
    
    827
    
    
    
    542Amortization of purchased intangible assets
    
    
    952
    
    
    
    394Reversal of allowance for doubtful accounts
    
    
    (350
    )
    
    
    Write-down of inventory
    
    
    256
    
    
    
    Stock-based compensation related to Mentat acquisition
    
    
    22
    
    
    
    102Compensation related to stock-based awards
    
    
    3,245
    
    
    
    2,734Excess tax benefit from stock-based compensation plans
    
    
    (446
    )
    
    
    Deferred income taxes
    
    
    (1,731
    )
    
    
    Changes in operating assets and liabilities, net of acquired
assets and assumed liabilities:Accounts receivable
    
    
    8,089
    
    
    
    (1,424
    )Other receivables
    
    
    (25
    )
    
    
    (31
    )Inventories
    
    
    (2,264
    )
    
    
    1,202Prepaids and other current assets
    
    
    (392
    )
    
    
    (474
    )Accounts payable
    
    
    2,267
    
    
    
    469Accrued compensation
    
    
    (2,755
    )
    
    
    (1,250
    )Other accrued liabilities
    
    
    (1,042
    )
    
    
    578Income taxes payable
    
    
    504
    
    
    
    732Deferred revenue
    
    
    2,573
    
    
    
    1,151Other
    
    
    61
    
    
    
    25Net cash provided by operating activities
    
    
    3,704
    
    
    
    9,264Cash flows from investing activities:Purchases of property and equipment, net
    
    
    (1,373
    )
    
    
    (720
    )Purchases of investments
    
    
    (14,588
    )
    
    
    (24,723
    )Proceeds from sales and maturities of investments
    
    
    23,306
    
    
    
    13,132Net cash provided by (used in) investing activities
    
    
    7,345
    
    
    
    (12,311
    )Cash flows from financing activities:Proceeds from issuance of common stock, net of repurchases
    
    
    3,248
    
    
    
    2,209Sale of stock to employees under the ESPP
    
    
    1,505
    
    
    
    1,289Excess tax benefit from stock-based compensation plans
    
    
    446
    
    
    
    Net cash provided by financing activities
    
    
    5,199
    
    
    
    3,498Net increase in cash and cash equivalents
    
    
    16,248
    
    
    
    451Cash and cash equivalents at beginning of period
    
    
    39,640
    
    
    
    36,221Cash and cash equivalents at end of period
    
    $
    55,888
    
    
    $
    36,672Supplemental disclosures of cash flow information:Cash paid during period for income taxes, net of refunds
    
    $
    56
    
    
    $
    116
  5




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




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##### Table of Contents



Three months endedMarch 31, 2006Total net revenues
    
    $
    34,551Net loss
    
    
    (1,550
    )Net loss per share:Basic
    
    $
    (.05
    )Diluted
    
    $
    (.05
    )
    
    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred,
    
    the fee is fixed or determinable, and
    
    collectibility is probable.
        7




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March 31,
    
    
    December 31,2007
    
    
    2006Completed products
    
    $
    5,691
    
    
    $
    3,785Raw materials and components
    
    
    274
    
    
    
    172$
    5,965
    
    
    $
    3,957
  Goodwill
 Other intangibles
  As of
    
    
    
    
    
    
    As ofDecember 31,
    
    
    
    
    
    
    March 31,2006
    
    
    Amortization
    
    
    2007Goodwill
    
    $
    58,656
    
    
    $
    
    
    
    $
    58,656Other intangibles:Developed technology
    
    
    5,828
    
    
    
    (549
    )
    
    
    5,279Customer contracts and relationships
    
    
    4,637
    
    
    
    (332
    )
    
    
    4,305Trade name
    
    
    580
    
    
    
    (71
    )
    
    
    509$
    69,701
    
    
    $
    (952
    )
    
    $
    68,749
  March 31, 2007GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingLife
    
    
    Amount
    
    
    Amortization
    
    
    AmountIntangibles:Developed technology
    
    3-5 yrs
    
    $
    8,630
    
    
    $
    (3,351
    )
    
    $
    5,279Customer contracts and relationships
    
    3-6 yrs
    
    
    6,100
    
    
    
    (1,795
    )
    
    
    4,305Trade name
    
    3 yrs
    
    
    850
    
    
    
    (341
    )
    
    
    509$
    15,580
    
    
    $
    (5,487
    )
    
    $
    10,093
 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
 8




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Year
    
    AmountRemainder of 2007
    
    $
    2,8512008
    
    
    3,7382009
    
    
    2,8412010
    
    
    663$
    10,093
      9




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Accrued warranty obligations at December 31, 2006
    
    $
    488Provision for current period sales
    
    
    179Warranty
costs incurred
    
    
    (89
    )Accrued warranty obligations at March 31, 2007
    
    $
    578
     10




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Three months endedMarch 31,2007
    
    2006Alternative Technology, Inc
    
    
    26
    %
    
    
    22
    %Westcon, Inc
    
    
    17
    %
    
    
    14
    %Macnica, Inc.
    
    
    n/a
    
    
    
    11
    %
         1999 STOCK INCENTIVE PLAN
  11




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##### Table of Contents



Stock Options
  Three months endedMarch 31,2007
    
    2006Stock Options:Expected life (years)
    
    
    4.58
    
    
    
    4.65Expected volatility
    
    
    58
    %
    
    
    62
    %Risk-free interest rate
    
    
    4.78
    %
    
    
    4.83
    %
   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
    
    
    (380
    )
    
    
    8.55Canceled /forfeited/expired
    
    
    (284
    )
    
    
    12.99Options outstanding at March 31, 2007
    
    
    7,116
    
    
    
    12.24
    
    
    
    6.96
    
    
    $
    14,290Options vested and expected to vest at March 31, 2007
    
    
    6,063
    
    
    
    12.37
    
    
    
    6.66
    
    
    $
    12,836Options exercisable at March 31, 2007
    
    
    3,738
    
    
    
    12.58
    
    
    
    5.58
    
    
    $
    10,176
   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
    
    
    938
    
    
    
    4.81
    
    
    $
    4.27
    
    
    
    898
    
    
    $
    4.366.139.31
    
    
    735
    
    
    
    7.10
    
    
    
    8.29
    
    
    
    442
    
    
    
    8.029.419.51
    
    
    890
    
    
    
    8.34
    
    
    
    9.51
    
    
    
    218
    
    
    
    9.519.5412.03
    
    
    1,114
    
    
    
    8.18
    
    
    
    11.55
    
    
    
    286
    
    
    
    11.2312.0512.94
    
    
    930
    
    
    
    8.57
    
    
    
    12.67
    
    
    
    146
    
    
    
    12.3812.9914.00
    
    
    975
    
    
    
    7.46
    
    
    
    13.81
    
    
    
    484
    
    
    
    13.8314.0118.10
    
    
    917
    
    
    
    4.77
    
    
    
    16.06
    
    
    
    746
    
    
    
    16.0918.4948.06
    
    
    617
    
    
    
    5.86
    
    
    
    25.43
    
    
    
    518
    
    
    
    26.59Total
    
    
    7,116
    
    
    
    6.96
    
    
    $
    12.24
    
    
    
    3,738
    
    
    $
    12.58
 12




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Restricted Stock Units
   Weighted-averagegrant date fairUnits
    
    
    value per share(In thousands, except per share amounts)Nonvested at December 31, 2006
    
    
    
    
    
    
    Granted
    
    
    326
    
    
    $
    12.77Vested
    
    
    
    
    
    
    Forfeited
    
    
    (4
    )
    
    
    13.26Nonvested at March 31, 2007
    
    
    322
    
    
    $
    12.77
 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
    
    
    Nonvested at March 31, 2007
    
    
    180
    
    
    $
    12.78Maximum potential vested shares at March 31, 2007
    
    
    450
    
    
    $
    12.78
 13




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Employee Stock Purchase Plan
  Three Months EndedMarch 31,2007
    
    2006ESPP Grants:Expected life (years)
    
    
    0.95
    
    
    
    0.50Expected volatility
    
    
    47
    %
    
    
    81
    %Risk-free interest rate
    
    
    5.10
    %
    
    
    4.60
    %
  Restricted Stock Issued in Acquisition
  STOCK- BASED COMPENSATION
   14




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Unrecognized
    
    
    RemainingStock-Based
    
    
    RecognitionStock -Based Award
    
    Expense
    
    
    Period (Years)Stock Options
    
    $
    9,599
    
    
    
    1.35Restricted stock units
    
    
    2,059
    
    
    
    2.33Performance shares
    
    
    1,464
    
    
    
    2.75ESPP
    
    
    1,182
    
    
    
    0.67Restricted stock issued in acquisition
    
    
    67
    
    
    
    0.75Total
    
    $
    14,371
    
    
    
    1.57
    Three Months EndedMarch 31,2007
    
    2006Shares issuable under stock options
    
    
    2,993
    
    
    
    4,755
   Three Months EndedMarch 31,2007
    
    
    2006Numerator:Net income (loss)
    
    $
    (6,087
    )
    
    $
    4,514Denominator:Basic:Weighted-average shares of common stock outstanding
    
    
    35,758
    
    
    
    34,482Less: shares subject to repurchase
    
    
    (18
    )
    
    
    (66
    )Basic weighted-average common shares outstanding
    
    
    35,740
    
    
    
    34,416Diluted:Basic weighted-average common shares outstanding
    
    
    35,740
    
    
    
    34,416Add: potentially dilutive common shares from stock
options and shares subject to repurchase
    
    
    
    
    
    
    940Add: potentially dilutive common shares from warrants
    
    
    
    
    
    
    21Diluted weighted-average common shares outstanding
    
    
    35,740
    
    
    
    35,377Basic net income (loss) per share
    
    $
    (0.17
    )
    
    $
    0.13Diluted net income (loss) per share
    
    $
    (0.17
    )
    
    $
    0.13
 15




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Three months endedMarch 31,2007
    
    
    2006Net revenues:Americas
    
    $
    16,380
    
    
    $
    15,343Asia Pacific
    
    
    8,142
    
    
    
    8,814Europe, Middle East, Africa
    
    
    10,206
    
    
    
    8,128Total net revenues
    
    $
    34,728
    
    
    $
    32,285
      16




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17




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Accounting for Uncertainty in Income Taxes
       18




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##### Table of Contents



Three months endedMarch 31,2007
    
    2006Net revenues:Product revenues
    
    
    69
    %
    
    
    76
    %Service revenues
    
    
    31
    
    
    
    24Total net revenues
    
    
    100
    
    
    
    100Cost of revenues:Product costs
    
    
    22
    
    
    
    16Service costs
    
    
    10
    
    
    
    7Amortization of purchased intangible assets
    
    
    2
    
    
    
    1Total cost of revenues
    
    
    34
    
    
    
    24Gross margin
    
    
    66
    
    
    
    76Operating expenses:Research and development
    
    
    26
    
    
    
    20Sales and marketing
    
    
    50
    
    
    
    34General and administrative
    
    
    12
    
    
    
    9Total operating expenses
    
    
    88
    
    
    
    63Income (loss) from operations
    
    
    (22
    )
    
    
    13Interest and other income, net
    
    
    2
    
    
    
    4Income (loss) before provision (benefit) for income taxes
    
    
    (20
    )
    
    
    17Provision (benefit) for income taxes
    
    
    (3
    )
    
    
    3Net income (loss)
    
    
    (17
    )%
    
    
    14
    %
 NET REVENUES
    Three Months Ended March 31,2007
    
    
    2006($)
    
    
    (%)
    
    
    ($)
    
    
    (%)(Dollars in millions)Americas*
    
    $
    16.4
    
    
    
    47
    
    
    $
    15.4
    
    
    
    48Asia Pacific
    
    
    8.1
    
    
    
    24
    
    
    
    8.8
    
    
    
    27Europe, the Middle East and Africa (EMEA)
    
    
    10.2
    
    
    
    29
    
    
    
    8.1
    
    
    
    25Total
    
    $
    34.7
    
    
    
    100
    
    
    $
    32.3
    
    
    
    100
 
 *
    
    Primarily the United States.   19




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##### Table of Contents



Three months endedMarch 31,2007
    
    2006Alternative Technology, Inc
    
    
    26
    %
    
    
    22
    %Westcon, Inc
    
    
    17
    %
    
    
    14
    %Macnica, Inc.
    
    
    n/a
    
    
    
    11
    %
  COST OF REVENUES
       20




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OPERATING EXPENSES
 Three Months Ended March 31,Variance
    
    
    Variance2007
    
    
    2006
    
    
    in Dollars
    
    
    in PercentResearch and development
    
    $
    9,227
    
    
    $
    6,456
    
    
    $
    2,771
    
    
    
    43
    %Sales and marketing
    
    
    17,348
    
    
    
    10,954
    
    
    
    6,394
    
    
    
    58
    %General and administrative
    
    
    4,080
    
    
    
    2,922
    
    
    
    1,158
    
    
    
    40
    %Total
    
    $
    30,655
    
    
    $
    20,332
    
    
    $
    10,323
    
    
    
    51
    %
 RESEARCH AND DEVELOPMENT
    SALES AND MARKETING
    21




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GENERAL AND ADMINSTRATIVE
    INTEREST AND OTHER INCOME, NET
  INCOME TAX PROVISION (BENEFIT)
     LIQUIDITY AND CAPITAL RESOURCES
 Balance Sheet and Cash Flows
 Cash and Cash Equivalents and Investments.
 March 31,
    
    
    December 31,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Cash and cash equivalents
    
    $
    55,888
    
    
    $
    39,640
    
    
    $
    16,248Investments
    
    
    28,209
    
    
    
    36,917
    
    
    
    (8,708
    )Total
    
    $
    84,097
    
    
    $
    76,557
    
    
    $
    7,540
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Net cash provided by operating activities
    
    $
    3,704Net cash provided by investing activities
    
    
    7,345Net cash provided by financing activities
    
    
    5,199Net change in cash and cash equivalents
    
    $
    16,248
   Accounts receivable, net.
 March 31,
    
    
    December 31,2007
    
    
    2006
    
    
    DecreaseAccounts receivable, net
    
    $
    24,004
    
    
    $
    31,743
    
    
    $
    (7,739
    )
  Deferred Revenue.
 March 31,
    
    
    December 31,
    
    
    Increase2007
    
    
    2006Current deferred revenue
    
    $
    26,102
    
    
    $
    23,931
    
    
    $
    2,171Long-term deferred revenue
    
    
    5,575
    
    
    
    5,173
    
    
    
    402Total
    
    $
    31,677
    
    
    $
    29,104
    
    
    $
    2,573
  Contractual Obligations
   Payments Due by PeriodRemainder
    
    1 - 3
    
    3 - 5Total
    
    of 2007
    
    Years
    
    Years
    
    ThereafterContractual ObligationsCash
obligations not reflected in Consolidated Balance Sheet:Operating lease obligations
    
    $
    24,159
    
    
    $
    2,202
    
    
    $
    7,121
    
    
    $
    6,392
    
    
    $
    8,444Purchase obligations
    
    
    10,959
    
    
    
    10,159
    
    
    
    400
    
    
    
    400
    
    
    
    Total
    
    $
    35,118
    
    
    $
    12,361
    
    
    $
    7,521
    
    
    $
    6,792
    
    
    $
    8,444
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Liquidity and Capital Resource Requirements
     
        24




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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 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 three months
ended March 31, 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.
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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.
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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
  27




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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;
    
    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
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 $49.1 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.
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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
    29




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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
  30




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INTRODUCTION OF OUR NEW PRODUCTS MAY CAUSE CUSTOMERS TO DEFER PURCHASES OF OUR EXISTING PRODUCTS
WHICH COULD HARM OUR OPERATING RESULTS
  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;
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
    
    the potential for a lapse in quality assurance procedures;
    
    increases in prices; and
    
    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
  32




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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
  33




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CHANGES IN OR INTERPRETATIONS OF, TAX RULES AND REGULATIONS MAY ADVERSELY AFFECT OUR EFFECTIVE TAX
RATES.
   OUR INABILITY TO ATTRACT, INTEGRATE AND RETAIN QUALIFIED PERSONNEL COULD SIGNIFICANTLY INTERRUPT
OUR BUSINESS OPERATIONS
  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
  34




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FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY WOULD RESULT IN SIGNIFICANT HARM TO OUR
BUSINESS
  IF OUR PRODUCTS DO NOT COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS, OUR
BUSINESS COULD BE HARMED
  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
  35




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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  CFOExhibit 10.35(1)*
    

Form of Change in Control Agreement dated March 26, 2007 entered into
between each executive officer (other than Dave Côté and David Yntema) and Packeteer,
Inc.Exhibit 10.36(1)*
    
    Severance and Change in Control Agreement dated March 26, 2007 between
Dave Côté and Packeteer, Inc.Exhibit 10.37(1)*
    
    Severance and Change in Control Agreement dated March 26, 2007 between
David Yntema and Packeteer, Inc.
 
 *
    
    Management contract, or compensatory plan or arrangement.(1)
    
    Filed herewith. 36




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PACKETEER, INC.By:
    /s/  DAVE CÔTÉDave CôtéPresident and Chief Executive Officer By:
    /s/   DAVID YNTEMADavid YntemaChief Financial Officer and Secretary 37




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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  CFOExhibit 10.35(1)*
    

Form of Change in Control Agreement dated March 26, 2007 entered into
between each executive officer (other than Dave Côté and David Yntema) and Packeteer,
Inc.Exhibit 10.36(1)*
    
    Severance and Change in Control Agreement dated March 26, 2007 between
Dave Côté and Packeteer, Inc.Exhibit 10.37(1)*
    
    Severance and Change in Control Agreement dated March 26, 2007 between
David Yntema and Packeteer, Inc.
 
 *
    
    Management contract, or compensatory plan or arrangement.(1)
    
    Filed herewith. 38