##### Table of Contents



UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to          .   Commission File Number
    000-26785
  PACKETEER, INC.
 (Exact name of Registrant as
    specified in its charter)
  DELAWARE

77-0420107(State of
    incorporation)

(I.R.S. Employer
    Identification No.)   10201 NORTH DE ANZA BLVD.
    CUPERTINO, CALIFORNIA 95014 (Address of principal
    executive offices)
  Registrants telephone number, including area code:
 (408) 873-4400
  Securities registered pursuant to Section 12(b) of the
    Act:
   Title of Class

Name of Each Exchange on Which RegisteredCommon Stock, $0.001 Par
    Value

The Nasdaq Stock Market LLC   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o þ o
  Rule 12b-2).  Yes o þ
    .
  DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




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##### 



TABLE OF
    CONTENTS
  
  PART IItem 1.


Business


3Item 1A.


Risk
    Factors


9Item 1B.


Unresolved Staff
    Comments


19Item 2.


Properties


19Item 3.


Legal
    Proceedings


19Item 4.


Submission of
    Matters to a Vote of Security Holders


20PART IIItem 5.


Market For
    Registrants Common Stock, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


21Item 6.


Selected Financial
    Data


23Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


24Item 7A.


Quantitative and
    Qualitative Disclosures about Market Risk


36Item 8.


Financial
    Statements and Supplementary Data


38Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


74Item 9A.


Controls and
    Procedures


74Item 9B.


Other
    Information


75PART IIIItem 10.


Directors and
    Executive Officers of the Registrant


75Item 11.


Executive
    Compensation


75Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


75Item 13.


Certain
    Relationships and Related Transactions


75Item 14.


Principal
    Accountant Fees and Services


75PART IVItem 15.


Exhibits and
    Financial Statement Schedules


75Signatures


77EXHIBIT 10.32EXHIBIT 10.33EXHIBIT 10.34EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   2




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##### Table of Contents



PART I  ITEM 1.
    BUSINESS  Form 10-K . Form 10-K, Form 10-Q, Form 8-K www.packeteer.com
  OVERVIEW
    INDUSTRY
    BACKGROUND
  peer-to-peer point-of-sale,
   3




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The
    WAN/Application Bottleneck
      The
    Packeteer Solution
      
    gain application and network performance visibility and insight,
    ensure proper performance for mission-critical applications,
    permit easy deployment,
    increase effective and available bandwidth,
    enable time-sensitive interactive services,
    enable server consolidation,
    increase network efficiency and
    reduce operational cost.  OUR KEY
    STRATEGIES
    Focus on Enterprise Performance Needs for Distributed
    Enterprises. easy-to-use
  Continue to Build Indirect Distribution
    Channels.
 4




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Expand Presence in Telecommunications Service Provider
    Market.
  Extend Product Scope beyond WAN Equipment into Adjacent
    Infrastructure.
  Extend WAN Application Performance Technology
    Leadership.
  PRODUCTS
    PacketShaper
  Shaping Module state-of-the-art
  Compression Module
  Acceleration Module
 5




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PolicyCenter
  ReportCenter
  iShared and/or
  SkyX®
  Mobiliti
  CUSTOMERS
    MANUFACTURING
    MARKETING
    AND SALES
     6




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RESEARCH
    AND DEVELOPMENT
    CUSTOMER
    SERVICE AND TECHNICAL SUPPORT
  24/7
  COMPETITION
   7




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
    ability to address the broad range of applications that
    enterprises must deliver, including ERP, to financial
    transactions, voice, video, file access and many more
    products to suit every required delivery point
    expertise and in-depth knowledge of applications;
    ability to ensure end user performance in addition to aggregate
    performance of the WAN access link;
    ability to integrate in the existing network architecture
    without requiring network reconfigurations or desktop changes;
    timeliness of new product introductions;
    ability to compress traffic without decreasing throughput,
    performance or network capacity;
    ability to integrate traffic classification, management,
    reporting and acceleration into a single platform; and
    compatibility with industry standards;  INTELLECTUAL
    PROPERTY
      EMPLOYEES
   8




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ITEM 1A.
    RISK
    FACTORS    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
  period-to-period
  
    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 timing and success of new product and upgrade introductions;
    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; and
    the impact of acquisitions.   9




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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
   10




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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.    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.    IF OUR
    INTERNATIONAL SALES EFFORTS ARE UNSUCCESSFUL, OUR BUSINESS WILL
    FAIL TO GROW
   11




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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
     12




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IF WE
    ARE UNABLE TO DEVELOP AND MAINTAIN STRONG PARTNERING
    RELATIONSHIPS WITH OUR INDIRECT CHANNEL PARTNERS, OR IF THEIR
    SALES EFFORTS ON OUR BEHALF ARE NOT SUCCESSFUL, OR IF THEY FAIL
    TO PROVIDE ADEQUATE SERVICES TO OUR END USER CUSTOMERS, OUR
    SALES MAY SUFFER AND OUR REVENUES MAY NOT INCREASE
        SALES
    TO LARGE CUSTOMERS WOULD BE DIFFICULT TO REPLACE IF
    LOST
   13




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WE
    FACE RISKS RELATED TO INVENTORIES OF OUR PRODUCTS HELD BY OUR
    DISTRIBUTORS
      OUR
    RELIANCE ON SALES OF OUR PRODUCTS BY OTHERS AND 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
    INTRODUCTION
    OF OUR NEW PRODUCTS MAY CAUSE CUSTOMERS TO DEFER PURCHASES OF
    OUR EXISTING PRODUCTS WHICH COULD HARM OUR OPERATING
    RESULTS
   14




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THE
    AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY,
    WHICH MAY NEGATIVELY IMPACT GROSS MARGINS AND
    REVENUES
  period-to-period
  OUR
    PRODUCTS MAY HAVE ERRORS OR DEFECTS THAT WE FIND AFTER THE
    PRODUCTS HAVE BEEN SOLD, WHICH COULD INCREASE OUR COSTS AND
    NEGATIVELY AFFECT OUR REVENUES AND THE MARKET ACCEPTANCE OF OUR
    PRODUCTS
      OUR
    RELIANCE ON THIRD-PARTY MANUFACTURERS FOR ALL OF OUR
    MANUFACTURING REQUIREMENTS COULD CAUSE US TO LOSE ORDERS IF
    THESE THIRD-PARTY MANUFACTURERS FAIL TO SATISFY OUR COST,
    QUALITY AND DELIVERY REQUIREMENTS
    
    reduced control over delivery schedules;
    the potential lack of adequate capacity during periods of excess
    demand;
    decreases in manufacturing yields and increases in costs;
    the potential for a lapse in quality assurance procedures;
    increases in prices; and
    the potential misappropriation of our intellectual property. 15




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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
   16




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CHANGES
    IN FINANCIAL ACCOUNTING STANDARDS ARE LIKELY TO IMPACT OUR
    FUTURE FINANCIAL POSITION AND RESULTS OF
    OPERATIONS
    CHANGES
    IN OR INTERPRETATIONS OF, TAX RULES AND REGULATIONS MAY
    ADVERSELY AFFECT OUR EFFECTIVE TAX RATES.
      OUR
    INABILITY TO ATTRACT, INTEGRATE AND RETAIN QUALIFIED PERSONNEL
    COULD SIGNIFICANTLY INTERRUPT OUR BUSINESS
    OPERATIONS
   17




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IF WE
    ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE MAY EXPERIENCE
    OPERATING INEFFICIENCIES AND HAVE DIFFICULTY MEETING DEMAND FOR
    OUR PRODUCTS
        FAILURE
    TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY WOULD RESULT IN
    SIGNIFICANT HARM TO OUR BUSINESS
    CLAIMS
    BY OTHERS THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS
    COULD BE COSTLY TO DEFEND AND COULD HARM OUR
    BUSINESS
    IF OUR
    PRODUCTS DO NOT COMPLY WITH EVOLVING INDUSTRY STANDARDS AND
    GOVERNMENT REGULATIONS, OUR BUSINESS COULD BE
    HARMED
   18




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OUR
    GROWTH AND OPERATING RESULTS WOULD BE IMPAIRED IF WE ARE UNABLE
    TO MEET OUR FUTURE CAPITAL REQUIREMENTS
      CERTAIN
    PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF
    PACKETEER MORE DIFFICULT, WHICH COULD LOWER THE MARKET PRICE OF
    THE COMMON STOCK
    ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES    ITEM 3.
    LEGAL
    PROCEEDINGS  In re Packeteer, Inc. Initial Public
    Offering Securities Litigation 01-CV-10185
   19




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ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   20




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PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON STOCK, RELATED STOCKHOLDER MATTERS
    AND ISSUER REPURCHASES OF EQUITY SECURITIES    High


Low2006:Fourth Quarter

$
13.85


$
8.55Third Quarter


11.81



7.91Second Quarter


14.18



10.15First Quarter


13.80



8.012005:Fourth Quarter

$
12.19


$
7.36Third Quarter


14.78



11.05Second Quarter


15.63



10.99First Quarter


17.18



13.03    21




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COMPARISON
    OF CUMULATIVE TOTAL RETURN
    FROM DECEMBER 31, 2001 THROUGH DECEMBER 29,
    2006(1)
 Among Packeteer, The S & P 500 Index, The Nasdaq
    Composite Index
 And The Nasdaq Computer Manufacturers Index
  
   12/31/01


12/31/02


12/31/03


12/31/04


12/30/05


12/29/06Packeteer



100.00




93.08




230.39




196.07




105.43




184.53S & P 500



100.00




77.90




100.24




111.15




116.61




135.03NASDAQ Composite



100.00




69.66




99.71




113.79




114.47




124.20NASDAQ Computer
    Manufacturers



100.00




67.48




109.37




115.04




107.28




134.84   (1)
    The graph assumes that $100 was invested in the Company at the
    closing price on December 31, 2001, in our Common Stock and
    in each index, and all dividends were reinvested. No cash
    dividends have been declared on our Common Stock. 22




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ITEM 6.
    SELECTED
    FINANCIAL DATA    Years Ended December 31,2006


2005


2004


2003


2002(In thousands, except per share data)CONSOLIDATED STATEMENTS OF
    OPERATIONS DATA:Net revenues

$
145,123


$
112,941


$
92,437


$
72,723


$
55,014Product and service costs


36,935



27,738



22,837



17,036



12,852Amortization of purchased
    intangible assets


2,150



1,557



38







Gross profit


106,038



83,646



69,562



55,687



42,162Operating expenses:Research and development


30,646



21,778



14,973



12,202



10,877Sales and marketing


57,889



38,276



35,504



26,433



23,420General and administrative


13,949



7,222



6,061



5,494



4,636In-process research and development


1,800















Total operating expenses


104,284



67,276



56,538



44,129



38,933Income from operations


1,754



16,370



13,024



11,558



3,229Other income, net


3,932



2,913



1,127



701



915Income before provision (benefit)
    for income taxes


5,686



19,283



14,151



12,259



4,144Provision (benefit) for income
    taxes


782



125



(383
)


1,226



415Net income

$
4,904


$
19,158


$
14,534


$
11,033


$
3,729Basic net income per share

$
0.14


$
0.57


$
0.44


$
0.35


$
0.12Diluted net income per share

$
0.14


$
0.55


$
0.42


$
0.32


$
0.12Shares used in computing basic net
    income per share


34,848



33,823



32,994



31,634



30,205Shares used in computing diluted
    net income per share


35,740



35,065



34,502



34,364



30,718   December 31,2006


2005


2004


2003


2002(In thousands)CONSOLIDATED BALANCE SHEET DATA:Cash, cash equivalents and
    investments

$
76,557


$
122,677


$
92,197


$
86,707


$
65,474Working capital


52,379



103,961



73,171



75,273



53,492Total assets


216,968



168,657



137,792



104,699



79,912Deferred revenue


29,104



22,115



16,157



9,592



5,968Long-term debt obligations


















545Total stockholders equity


159,509



128,607



101,959



83,418



63,401  23




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ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS    OVERVIEW
         24




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CRITICAL
    ACCOUNTING POLICIES
      Revenue recognition. 97-2, SOP 98-9, SOP 97-2, SOP 97-2:
  
    persuasive evidence of an arrangement exists,
    delivery has occurred,
    the fee is fixed or determinable, and
    collectibility is probable.  transaction-by-transaction
     25




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SOP 98-9.
  Inventory valuation. first-in,
  Valuation of long-lived and intangible assets and
    goodwill. reporting-unit
    Sales return reserve.
 26




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Rebate reserves. 01-9,
  Warranty reserves.
  Stock Based Compensation.
  Accounting for Income Taxes.
   27




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Quantification of Errors.
      Years Ended December 31,2004


2005


TotalAccumulated deficitNet revenues

$
(603
)

$
103


$
(500
)Provision for income taxes


181



(31
)


150Total, net of tax

$
(422
)

$
72


$
350   RESULTS
    OF OPERATIONS
    2006Quarter EndedDecember 31,


September 30,


June 30,


March 31,Net revenues

$
42,683


$
35,986


$
34,169


$
32,285Gross profit


29,930



26,062



25,580



24,466Income (loss) from operations


(637
)


(1,357
)


(386
)


4,134Net income (loss)


894



301



(805
)


4,514Basic net income (loss) per share


0.03



0.01



(0.02
)


0.13Diluted net income (loss) per share


0.02



0.01



(0.02
)


0.13   28




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2005Quarter EndedDecember 31,


September 30,


June 30,


March 31,Net revenues

$
31,851


$
24,835


$
28,177


$
28,078Gross profit


23,812



18,206



20,720



20,908Income from operations


5,837



2,008



4,665



3,860Net income


9,098



2,255



4,228



3,577Basic net income per share


0.27



0.07



0.13



0.11Diluted net income per share


0.26



0.06



0.12



0.10     2006


2005


2004Net revenues:Product revenues


76
%


76
%


81
%Service revenues


24



24



19Total net revenues


100



100



100Cost of revenues:Product costs


18



17



18Service costs


8



7



7Amortization of purchased
    intangible assets


1



2



Total cost of revenues


27



26



25Gross margin


73



74



75Operating expenses:Research and development


21



19



16Sales and marketing


40



34



38General and administrative


10



6



7In-process research and development


1







Total operating expenses


72



59



61Income from operations


1



15



14Interest and other income, net


3



2



1Income before provision (benefit)
    for income taxes


4



17



15Provision (benefit) for income
    taxes


1







(1
)Net income


3
%


17
%


16
%   OVERVIEW
    OF RESULTS OF OPERATIONS FOR 2006
     29




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NET
    REVENUES
            COST OF
    REVENUES
   30




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RESEARCH
    AND DEVELOPMENT
   31




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SALES AND
    MARKETING
       32




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GENERAL
    AND ADMINSTRATIVE
        IN-PROCESS
    RESEARCH AND DEVELOPMENT
      INTEREST
    AND OTHER INCOME, NET
    INCOME
    TAX PROVISION (BENEFIT)
   33




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RECENT
    ACCOUNTING PRONOUNCEMENTS
        LIQUIDITY
    AND CAPITAL RESOURCES
  Balance
    Sheet and Cash Flows
  Cash and Cash Equivalents and Investments.
  December 31,Increase2006


2005


(Decrease)Cash and cash equivalents

$
39,640


$
36,221


$
3,419Investments


36,917



86,456



(49,539
)Total

$
76,557


$
122,677


$
(46,120
)  34




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Net cash provided by operating
    activities

$
20,428Net cash used in investing
    activities


(25,084
)Net cash provided by financing
    activities


8,075Net change in cash and cash
    equivalents

$
3,419       Accounts receivable, net.
  December 31,Increase2006


2005


(Decrease)Accounts receivable, net

$
31,743


$
15,759


$
15,984     Deferred Revenue.
  December 31,Increase2006


2005


(Decrease)Current deferred revenue

$
23,931


$
18,986


$
4,945Long-term deferred revenue


5,173



3,129



2,044Total


29,104



22,115



6,989     Contractual
    Obligations
   35




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Payments Due by PeriodLess Than


1 - 3


3 - 5Contractual Obligations

Total


1 Year


Years


YearsCash obligations not reflected in
    Consolidated Balance SheetOperating lease obligations(1)

$
6,095


$
2,871


$
2,228


$
996Purchase obligations


12,469



11,669



400



400Total

$
18,564


$
14,540


$
2,628


$
1,396     (1)
    
    In January 2007, we entered into an amendment to extend the term
    of the lease of our Cupertino, California facilities through
    December 2014 and to expand the premises subject to the lease.
    The lease payments under the amended lease, which will begin in
    December 2007, will be approximately $2.6 million per year,
    with a total commitment of $19 million over the extended
    lease term. This amount is not reflected in the above chart.  Liquidity
    and Capital Resource Requirements
      ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Fixed
    Income Investments
  available-for-sale
     36




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other-than-temporarily
  Foreign
    Exchange
   37




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ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  Form 10-K.
  PageNumberReports of
    Independent Registered Public Accounting Firm


39Consolidated
    Balance Sheets as of December 31, 2006 and 2005


42Consolidated
    Statement of Operations for the years ended December 31,
    2006, 2005 and 2004


43Consolidated
    Statements of Stockholders Equity and Comprehensive Income
    for the years ended December 31, 2006, 2005 and
    2004


44Consolidated
    Statements of Cash Flows for the years ended December 31,
    2006, 2005 and 2004


45Notes to
    Consolidated Financial Statements


46  38




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REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     Internal
    Control  Integrated Framework
           39




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Internal
    Control  Integrated Framework Internal Control  Integrated Framework
  KPMG
    LLP
    40




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REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
           Share-Based Payment
  Internal Control 
    Integrated Framework
  KPMG
    LLP
    41




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PACKETEER,
    INC.
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2006


2005(In thousands, except per share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
39,640


$
36,221Short-term investments


25,681



81,228Accounts receivable, net of
    allowance for doubtful accounts and sales returns of $3,010 and
    $1,800, as of December 31, 2006 and 2005, respectively


31,743



15,759Other receivables


216



207Inventories


3,957



4,979Prepaids and other current assets


3,249



2,148Total current assets


104,486



140,542Non-current assets:Property and equipment, net


3,968



2,681Long-term investments


11,236



5,228Goodwill


58,656



9,527Purchased intangible assets, net


11,045



5,606Other non-current assets


27,577



5,073Total assets

$
216,968


$
168,657LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
3,014


$
2,808Accrued compensation


9,567



6,551Other accrued liabilities


8,431



4,716Income taxes payable


7,164



3,520Deferred revenue


23,931



18,986Total current liabilities


52,107



36,581Non-current liabilities:Deferred revenue, less current
    portion


5,173



3,129Deferred rent and other


179



340Total liabilities


57,459



40,050Commitments and contingencies
    (Notes 4 and 5)Stockholders equity:Preferred stock, $0.001 par
    value; 5,000 shares authorized; no shares issued and
    outstanding as of December 31, 2006 and December 31,
    2005






Common stock, $0.001 par
    value; 85,000 shares authorized; 35,400 and
    34,197 shares issued and outstanding as of
    December 31, 2006 and December 31, 2005, respectively


36



34Additional paid-in capital


212,961



188,046Deferred stock-based compensation






(567
)Accumulated other comprehensive
    loss


(18
)


(182
)Accumulated deficit


(53,470
)


(58,724
)Total stockholders equity


159,509



128,607Total liabilities and
    stockholders equity

$
216,968


$
168,657    42




---



##### Table of Contents



PACKETEER,
    INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Years Ended December 31,2006


2005


2004(In thousands, except per share amounts)Net revenues:Product revenues

$
110,164


$
85,590


$
74,557Service revenues


34,959



27,351



17,880Total net revenues


145,123



112,941



92,437Cost of revenues(1):Product costs


26,028



19,575



16,780Service costs


10,907



8,163



6,057Amortization of purchased
    intangible assets


2,150



1,557



38Total cost of revenues


39,085



29,295



22,875Gross profit


106,038



83,646



69,562Operating expenses(1):Research and development


30,646



21,778



14,973Sales and marketing, includes
    amortization of purchased intangible assets of $791 in 2006, and
    none in 2005 and 2004


57,889



38,276



35,504General and administrative


13,949



7,222



6,061In-process research and development


1,800







Total operating expenses


104,284



67,276



56,538Income from operations


1,754



16,370



13,024Interest and other income, net


3,932



2,913



1,127Income before provision (benefit)
    for income taxes


5,686



19,283



14,151Provision (benefit) for income
    taxes


782



125



(383
)Net income

$
4,904


$
19,158


$
14,534Basic net income per share

$
0.14


$
0.57


$
0.44Diluted net income per share

$
0.14


$
0.55


$
0.42Shares used in computing basic net
    income per share


34,848



33,823



32,994Shares used in computing diluted
    net income per share


35,740



35,065



34,502(1) Stock-based compensation
    included in the costs and expenses line items:Product costs

$
414


$



$
Service costs


732







Research and development


4,371



867



13Sales and marketing


5,241



25



1General and administrative


3,037



9



    43




---



##### Table of Contents



PACKETEER,
    INC.
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY AND COMPREHENSIVE INCOME
  Accumulated


NotesAdditional


Deferred


Other


ReceivableCommon Stock


Paid-in


Stock-Based


Comprehensive


from


Accumulated





ComprehensiveShares


Amount


Capital


Compensation


Income (Loss)


Stockholders


Deficit


Total


Income(In thousands)Balances as of December 31,
    2003


32,501


$
32


$
175,820


$



$
(12
)

$
(6
)

$
(92,416
)

$
83,418Issuance of restricted common
    stock, net of repurchases


110







1,624



(1,624
)














Issuance of common stock upon
    exercise of stock options


510



1



2,925



















2,926Issuance of common stock pursuant
    to Employee Stock Purchase Plan


297







1,256



















1,256Repayments of notes receivable from
    stockholders






















6







6Amortization of stock-based
    compensation














14















14Comprehensive income:Unrealized loss on investments


















(195
)










(195
)

$
(195
)Net income


























14,534



14,534



14,534Comprehensive income

































$
14,339Balances as of December 31,
    2004


33,418



33



181,625



(1,610
)


(207
)






(77,882
)


101,959Issuance of common stock upon
    exercise of stock options


490



1



3,033



















3,034Issuance of common stock pursuant
    to Employee Stock Purchase Plan


299







2,346



















2,346Repurchase of restricted common
    stock


(10
)






(149
)


142















(7
)Tax benefit from employee stock
    option plans










1,191



















1,191Amortization of stock-based
    compensation














901















901Comprehensive income:Unrealized gain on investments


















25











25


$
25Net income


























19,158



19,158



19,158Comprehensive income

































$
19,183Balances as of December 31,
    2005


34,197



34



188,046



(567
)


(182
)






(58,724
)


128,607Cumulative effect of adjustments
    from the adoption of SAB No. 108, net of taxes


























350



350Adjusted balances as of
    January 1, 2006


34,197



34



188,046



(567
)


(182
)






(58,374
)


128.957Reclassification of deferred stock
    based compensation upon adoption of SFAS 123(R)










(567
)


567















Issuance of common stock upon
    exercise of stock options


888



2



4,581



















4,583Issuance of common stock pursuant
    to Employee Stock Purchase Plan


315







2,511



















2,511Stock options assumed in acquisition










2,482



















2,482Tax benefit from employee stock
    option plans










2,113



















2,113Stock-based compensation related to
    acquisition










484



















484Stock-based compensation related to
    stock options and Employee Stock Purchase Plan










13,311



















13,311Comprehensive income:Unrealized gain on investments


















164











164


$
164Net income


























4,904



4,904



4,904Comprehensive income

































$
5,068Balances as of December 31,
    2006


35,400


$
36


$
212,961


$



$
(18
)

$



$
(53,470
)

$
159,509    44




---



##### Table of Contents



PACKETEER,
    INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2006


2005


2004(In thousands)Cash flows from operating
    activities:Net income

$
4,904


$
19,158


$
14,534Adjustments to reconcile net income
    to net cash provided by operating activities:Depreciation


2,630



2,414



1,728Amortization of purchased
    intangible assets


2,941



1,557



38Provision for (reversal of)
    allowance for doubtful accounts


292



(45
)


89Write-down of inventory


568



89



86Stock-based compensation related to
    Mentat acquisition


484



901



14Stock-based compensation related to
    stock options and ESPP


13,311







Excess tax benefit from stock-based
    compensation plans


(981
)






Tax benefits from employee stock
    option plans


2,829



1,191



Deferred income taxes


(5,794
)


(2,967
)


(2,375
)Loss on disposal of property and
    equipment


9



20



9In-process research and development


1,800







Changes in operating assets and
    liabilities, net of acquired assets and assumed liabilities:Accounts receivable


(14,324
)


1,114



(5,440
)Other receivables


(9
)


1,680



475Inventories


680



(1,962
)


(278
)Prepaids and other current assets


(522
)


(186
)


(12
)Accounts payable


206



6



573Accrued compensation


2,397



84



2,217Other accrued liabilities


(247
)


(1,163
)


1,896Income taxes payable


2,846



1,082



1,379Deferred revenue


6,476



5,958



6,428Other


(68
)


(50
)


(33
)Net cash provided by operating
    activities


20,428



28,881



21,328Cash flows from investing
    activities:Purchases of property and
    equipment, net


(3,626
)


(2,049
)


(1,931
)Purchases of investments


(66,834
)


(109,851
)


(93,487
)Proceeds from sales and maturities
    of investments


120,156



104,945



72,810Acquisitions, net of cash acquired


(66,930
)


(1,750
)


(17,304
)Funds deposited into escrow in
    connection with acquisition


(7,850
)






Net cash used in investing
    activities


(25,084
)


(8,705
)


(39,912
)Cash flows from financing
    activities:Proceeds from issuance of common
    stock, net of repurchases


4,583



3,027



2,926Sale of stock to employees under
    the ESPP


2,511



2,346



1,256Excess tax benefit from stock-based
    compensation plans


981







Proceeds from repayment of notes
    receivable from stockholders










6Payments of notes payable










(139
)Principal payments of capital lease
    obligations










(457
)Net cash provided by financing
    activities


8,075



5,373



3,592Net increase (decrease) in cash and
    cash equivalents


3,419



25,549



(14,992
)Cash and cash equivalents at
    beginning of year


36,221



10,672



25,664Cash and cash equivalents at end of
    year

$
39,640


$
36,221


$
10,672Non-cash investing and financing
    activities:Issuance of restricted common
    stock, net of repurchases, to former Mentat employees

$



$



$
1,624Options assumed in acquisition of
    Tacit

$
2,482


$



$
Supplemental disclosures of cash
    flow information:Cash paid during period for income
    taxes, net of refunds

$
348


$
811


$
475Cash paid during period for interest

$



$



$
27    45




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    DESCRIPTION
    OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES  DESCRIPTION
    OF BUSINESS
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES
  BASIS
    OF PREPARATION
    USE OF
    ESTIMATES
    REVENUE
    RECOGNITION
    97-2, SOP 98-9, SOP 97-2, SOP 97-2:
  
    persuasive evidence of an arrangement exists,
    delivery has occurred,
    the fee is fixed or determinable, and
    collectibility is probable. 46




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   transaction-by-transaction
            SOP 98-9.
  SALES
    RETURN RESERVES
      Years Ended December 31,2006


2005


2004Balance at beginning of year

$
1,625


$
1,251


$
713Additions, charged against revenues


5,604



3,400



2,247Deductions


(4,766
)


(3,026
)


(1,709
)Balance at end of year

$
2,463


$
1,625


$
1,251  47




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ALLOWANCE
    FOR DOUBTFUL ACCOUNTS
  account-by-account
    Years Ended December 31,2006


2005


2004Balance at beginning of year

$
175


$
229


$
149Provision for (reversal of)
    allowance for doubtful accounts receivable


292



(45
)


89Addition to reserve related to
    acquisition of Tacit


277







Amounts written off, net of
    recoveries


(197
)


(9
)


(9
)Balance at end of year

$
547


$
175


$
229   COST
    OF REVENUES
    CASH
    AND CASH EQUIVALENTS
    INVESTMENTS
  available-for-sale. available-for-sale
  INVENTORIES
  first-in,
 48




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2006


2005Completed products

$
3,785


$
4,584Components


172



395Total inventories

$
3,957


$
4,979   LONG-LIVED
    ASSETS
  Property and equipment
    2006


2005Computers and equipment

$
9,785


$
7,323Furniture and fixtures


2,142



1,439Leasehold improvements


2,317



1,58214,244



10,344Less: accumulated depreciation and
    amortization


(10,276
)


(7,663
)Property and equipment, net

$
3,968


$
2,681   Goodwill
  Other intangibles
    December 31,








December 31,2005








2006Balance


Acquisition


Amortization


BalanceGoodwill

$
9,527


$
49,129


$



$
58,656Other intangibles:Developed technology


4,053



3,530



(1,755
)


5,828Customer contracts and
    relationships


1,421



4,200



(984
)


4,637Trade name


132



650



(202
)


580$
15,133


$
57,509


$
(2,941
)

$
69,701  49




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    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   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

Amount2007

$
3,8032008


3,7382009


2,8412010


663$
11,045      50




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Other Assets
  2006


2005Deferred tax assets

$
19,210


$
4,622Amounts held in escrow


7,850



Other


517



451$
27,577


$
5,073   ADVERTISING
    COSTS
    OTHER
    ACCRUED LIABILITIES
    2006


2005Rebate reserves

$
2,311


$
1,634Warranty reserves


488



234Other


5,632



2,848$
8,431


$
4,716   REBATE
    RESERVES
  01-9,
  WARRANTY
    RESERVES
   51




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     For the Years Ended December 31,2006


2005


2004Balance at beginning of year

$
234


$
315


$
303Provision for current year sales


586



242



422Warranty costs incurred


(332
)


(323
)


(410
)Balance at end of year

$
488


$
234


$
315   RESEARCH
    AND DEVELOPMENT COSTS
    STOCK-BASED
    COMPENSATION
       52




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           Stock
    Options
   53




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year EndedDecember 31,2006Stock Option Grants:Expected life (years)


4.62Expected volatility


62
%Risk-free interest rate


4.88
%       Employee
    Stock Purchase Plan.
    Year EndedDecember 31,2006ESPP Rights:Expected life (years)


1.19Expected volatility


61
%Risk-free interest rate


5.07
%     Restricted
    Stock Issued in Acquisition
   54




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Pro Forma
    Information under SFAS 123 for Periods Prior to
    2006
    Years Ended December 31,2005


2004Net income as reported

$
19,158


$
14,534Add: Stock-based compensation
    under APB 25 related to acquisitions, net of tax


599



9Deduct: Stock-based employee
    compensation expense determined under fair value-based method
    for all awards, net of tax


(10,021
)


(8,595
)Pro forma net income

$
9,736


$
5,948Earnings per share:Basic  as reported

$
0.57


$
0.44Diluted  as reported

$
0.55


$
0.42Basic  pro forma

$
0.29


$
0.18Diluted  proforma

$
0.28


$
0.17       2005


2004Employee Stock Option
    Plan:Expected life (years)


3.34



3.28Expected volatility


90
%


102
%Risk-free interest rate


4.03
%


2.64
%   2005


2004Employee Stock Purchase
    Plan:Expected life (years)


1.25



1.26Expected volatility


63
%


91
%Risk-free interest rates


3.90
%


3.62
%    55




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     CONCENTRATIONS
    OF RISK
      Years Ended December 31,2006


2005


2004Alternative Technology, Inc


23
%


22
%


22
%Westcon, Inc


18
%


13
%


19
%       INCOME
    TAXES
    FOREIGN
    CURRENCY TRANSACTIONS
     56




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    OTHER
    COMPREHENSIVE INCOME (LOSS)
    NET
    INCOME PER SHARE
      Years Ended December 31,2006


2005


2004Shares issuable under stock options


5,199



4,174



2,170    57




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Years Ended December 31,2006


2005


2004Numerator:Net income

$
4,904


$
19,158


$
14,534Denominator:Basic:Weighted-average common shares
    outstanding


34,910



33,932



33,104Less: common shares subject to
    repurchase


(62
)


(109
)


(110
)Basic weighted-average common
    shares outstanding


34,848



33,823



32,994Diluted:Basic weighted-average common
    shares outstanding


34,848



33,823



32,994Add: potentially dilutive common
    shares from stock Options and ESPP and shares subject to
    repurchase


872



1,221



1,485Add: potentially dilutive common
    shares from warrants


20



21



23Diluted weighted-average common
    shares outstanding


35,740



35,065



34,502Basic net income per share

$
0.14


$
0.57


$
0.44Diluted net income per share

$
0.14


$
0.55


$
0.42   QUANTIFICATION
    OF ERRORS
     58




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Years Ended December 31,2004


2005


TotalAccumulated deficitNet revenues

$
(603
)

$
103


$
(500
)Provision for income taxes


181



(31
)


150Total, net of tax

$
(422
)

$
72


$
350   RECENT
    ACCOUNTING PRONOUNCEMENTS
      2.
    BUSINESS
    COMBINATIONS  Acquisition
    of Tacit Networks, Inc.
     59




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Cash

$
66,358Fair value of options assumed


2,482Acquisition related transaction
    costs


1,655Total initial purchase price

$
70,495         AmountCash and cash equivalents

$
1,083Short-term investments


3,620Accounts receivable


1,952Inventories


226Prepaids and other current assets


862Property and equipment


300Net deferred tax assets


9,036Accounts payable and accrued
    liabilities


(5,380
)Deferred revenue


(513
)Goodwill


49,129Identifiable intangible assets


8,380In-process research and development


1,800Total initial purchase price

$
70,495   Identifiable
    intangible assets
   60




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    EstimatedUseful Life


Amount(In years)Intangible AssetsDeveloped technology


3


$
3,530Customer relationships


4



4,200Trade name


3



650Total





$
8,380   Goodwill
      In-process
    research and development
    Net
    deferred tax assets
   61




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Pro
    forma financial information
      Year EndedDecember 31,2006


2005Total net revenues

$
148,360


$
116,450Net income (loss)


(2,639
)


879Net income (loss) per share:Basic

$
(0.08
)

$
0.03Diluted

$
(0.08
)

$
0.03   Acquisition
    of Mentat
      Net tangible assets

$
2,327Intangible assets


7,200Goodwill


9,527Net assets acquired

$
19,054  62




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           63




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   3.
    FINANCIAL
    INSTRUMENTS    Available-for-Sale SecuritiesGross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueDECEMBER 31, 2006Commercial paper and money markets

$
31,442


$
1


$
(1
)

$
31,442Asset and mortgage backed
    securities


7,514



8



(21
)


7,501Corporate bonds


11,473



3



(2
)


11,474Total debt securities


50,429



12



(24
)


50,417US Treasury and agencies


16,656



2



(8
)


16,650$
67,085



14


$
(32
)

$
67,067Amounts included in cash and cash
    equivalents













$
30,150Amounts included in short-term
    investments














25,681Amounts included in long-term
    investments














11,236$
67,067DECEMBER 31, 2005Commercial paper and money markets

$
17,160


$



$
(1
)

$
17,159Asset and mortgage backed
    securities


23,987



4



(62
)


23,929Corporate bonds


19,215



2



(14
)


19,203Total debt securities


60,362



6



(77
)


60,291US Treasury and agencies


59,402



2



(113
)


59,291$
119,764


$
8


$
(190
)

$
119,582Amounts included in cash and cash
    equivalents













$
33,126Amounts included in short-term
    investments














81,228Amounts included in long-term
    investments














5,228$
119,582     EstimatedAmortized


FairCost


ValueMature in one year or less

$
55,843


$
55,831Mature between one year and two
    years


11,242



11,236$
67,085


$
67,067    64




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##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Less Than 12 Months


12 Months or Greater


TotalFair


Unrealized


Fair


Unrealized


Fair


UnrealizedValue


Loss


Value


Loss


Value


LossDECEMBER 31, 2006Security DescriptionCommercial paper and money markets

$
7,925


$



$
149


$
(1
)

$
8,074


$
(1
)Asset and mortgage backed
    securities


4,434



(21
)










4,434



(21
)Corporate bonds


3,353



(2
)










3,353



(2
)US Treasury and agencies


11,526



(8
)










11,526



(8
)$
27,238


$
(31
)

$
149


$
(1
)

$
27,387


$
(32
)   Less Than 12 Months


12 Months or Greater


TotalFair


Unrealized


Fair


Unrealized


Fair


UnrealizedValue


Loss


Value


Loss


Value


LossDECEMBER 31, 2005Security DescriptionCommercial paper and money markets

$
12,434


$
(1
)

$



$



$
12,434


$
(1
)Asset and mortgage backed
    securities


9,762



(45
)


1,598



(17
)


11,360



(62
)Corporate bonds


7,370



(2
)


1,325



(12
)


8,695



(14
)US Treasury and agencies


35,532



(107
)


6,541



(6
)


42,073



(113
)$
65,098


$
(155
)

$
9,464


$
(35
)

$
74,562


$
(190
)   other-than-temporary.
 65




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##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   4.
    COMMITMENTS
    AND GUARANTEES    LeaseYears Ending December 31,

Obligations2007

$
2,8712008


1,2292009


9992010


6482011


348Total future minimum lease payments

$
6,095       5.
    CONTINGENCIES  In re
    Packeteer, Inc. Initial Public Offering Securities
    Litigation
     66




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##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          6.
    INCOME
    TAXES    2006


2005


2004United States

$
(9,736
)

$
6,060


$
2,627Foreign


15,422



13,223



11,524Income before provision (benefit)
    for income taxes

$
5,686


$
19,283


$
14,151  67




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##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2006


2005


2004Current:Federal

$
3,670


$
1,681


$
1,174State


149



37



6Foreign


2,757



1,374



812Total current


6,576



3,092



1,992Deferred:Federal


(3,984
)


(387
)


(2,375
)State


(1,656
)


(1,910
)


Foreign


(154
)


(670
)


Total deferred


(5,794
)


(2,967
)


(2,375
)Provision (benefit) for income
    taxes

$
782


$
125


$
(383
)     For the Years Ended December 31,2006


2005


2004Federal tax at statutory rate

$
1,990


$
6,749


$
4,953State taxes, net of federal benefit


(980
)


(90
)


6Change in valuation allowance






(3,168
)


(6,117
)Non deductible in-process research
    and development


630







Non deductible stock-based
    compensation


1,126



Other non deductible expenses


110



77



65Alternative minimum income tax










1,172Tax credits


(1,487
)


(1,967
)


(895
)Foreign tax differential


(607
)


(1,476
)


400Other










33Total provision (benefit) for
    income taxes

$
782


$
125


$
(383
)  68




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##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2006


2005Deferred tax assets:Various accruals, reserves and
    other temporary differences not deductible for tax purposes

$
7,357


$
3,326Property and equipment


1,298



540Net operating loss carryforwards


22,845



10,978Tax credit carryforwards


9,509



6,864Gross deferred tax assets


41,009



21,708Deferred tax liabilities:Intangible assets related to
    acquisition


(2,690
)


Gross deferred tax liabilities


(2,690
)


Total gross net deferred tax assets


38,319



21,708Valuation allowance


(17,961
)


(16,368
)Net deferred tax assets

$
20,358


$
5,340          69




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        7.
    STOCKHOLDERS
    EQUITY  PREFERRED
    AND COMMON STOCK
      WARRANTS
  ,
  1999
    STOCK INCENTIVE PLAN
   70




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   STOCK
    OPTIONS ASSUMED IN ACQUISITION
      Options OutstandingWeightedWeighted


AverageAverage


Remaining


AggregateAvailable





Exercise


Contractual


Intrinsicfor Grant


Shares


Price


Term (Years)


Value(In thousands, except per share amounts)Options outstanding as of
    December 31, 2003


2,174



4,729


$
9.51Shares made available for grant


1,625



Granted


(2,337
)


2,337



16.03Exercised






(510
)


5.74Cancelled


898



(898
)


14.17Options outstanding as of
    December 31, 2004


2,360



5,658



11.80Shares made available for grant


1,671



Granted


(1,750
)


1,750



12.95Exercised






(490
)


6.20Cancelled


589



(589
)


14.23Options outstanding as of
    December 31, 2005


2,870



6,329



12.33Shares made available for grant


1,710



Options assumed(a)






320



1.28Granted


(2,594
)


2,594



10.68Exercised






(888
)


5.16Cancelled/forfeited/expired


1,193



(1,206
)


12.98Options outstanding at
    December 31, 2006


3,179



7,149



12.01



7.43


$
21,390Options vested and expected to
    vest at December 31, 2006






6,553



12.09



7.28


$
19,838Options exercisable at
    December 31, 2006






3,768



12.46



6.17


$
12,951     (a)
    
    Represents activity related to options that were assumed as a
    result of the acquisition of Tacit in May 2006. See Note 2
    for additional information. 71




---



##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Options ExercisableOptions Outstanding


Weighted-





Weighted-Weighted-


Average





AverageAverage


Exercise





ExerciseNumber


Remaining


Price per


Number


Price perRange of Exercise Prices

Outstanding


Contractual Life


Share


Exercisable


Share(In years)$ 0.19 - 4.71


810



5.51


$
3.67



751


$
3.794.75 - 8.36


880



6.12



7.52



695



7.348.37 - 9.51


1,125



9.09



9.43



18



9.099.54 - 12.03


1,279



8.43



11.53



316



11.0712.05 - 13.81


727



8.14



12.71



358



12.6013.87 - 14.00


738



8.07



14.00



384



14.0014.01 - 18.10


943



6.68



16.03



731



16.0518.49 - 20.77


517



7.08



19.39



385



19.3948.06


130



3.07



48.06



130



48.06Total


7,149



7.43



12.01



3,768



12.46     1999
    EMPLOYEE STOCK PURCHASE PLAN
    RESTRICTED
    STOCK ISSUED IN ACQUISITION
   72




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##### Table of Contents



PACKETEER,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   8.
    401(k)
    PLAN    9.
    SEGMENT
    REPORTING        Years Ended December 31,2006


2005


2004Net revenues:Americas

$
67,614


$
52,604


$
37,934Asia Pacific


35,284



27,715



24,963Europe, Middle East, Africa


42,225



32,622



29,540Total net revenues

$
145,123


$
112,941


$
92,437       10.
    SUBSEQUENT
    EVENT   73




---



##### Table of Contents



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  (a)
    Conclusion
    Regarding the Effectiveness of Disclosure Controls and
    Procedures  Rule 13a-15(e)
  (b)
    Managements
    Report on Internal Control Over Financial Reporting  Rules 13a-15(f) 15d-15(f)
            (c)
    Changes
    in Internal Control Over Financial Reporting   74




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##### Table of Contents



ITEM 9B.
    OTHER
    INFORMATION   PART III  Item 10.
    Directors
    and Executive Officers of the Registrant  Regulation S-K
  Item 11.
    Executive
    Compensation  Regulation S-K Regulation S-K
  Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accounting Fees and Services   PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES    Form 10-K.
 75




---



##### Table of Contents



Form 10-K.
  Form 10-K.
   76




---



##### Table of Contents



SIGNATURES  Form 10-K th
    By:
    /s/  DAVE
    CÔTÉ       POWER OF
    ATTORNEY
  attorney-in-fact, Form 10-K attorneys-in-fact attorneys-in-fact,
    Name

Title

Date/s/  DAVE
    CÔTÉDave
    Côté

President and Chief Executive
    Officer (Principal Executive Officer) and Director

March 15, 2007/s/  DAVID
    YNTEMADavid
    Yntema

Chief Financial Officer and
    Secretary (Principal Financial and Accounting Officer)

March 15, 2007/s/  STEVEN
    CAMPBELLSteven
    Campbell

Chairman of the Board of Directors

March 15, 2007/s/  CRAIG
    ELLIOTTCraig
    Elliott

Director

March 15, 2007/s/  JOSEPH
    GRAZIANOJoseph
    Graziano

Director

March 15, 2007/s/  L.
    WILLIAM
    KRAUSEL.
    William Krause

Director

March 15, 2007 77




---



##### Table of Contents



Name

Title

Date/s/  BERNARD
    MATHAISELBernard
    Mathaisel

Director

March 15, 2007/s/  PETER
    VAN CAMPPeter
    Van Camp

Director

March 15, 2007/s/  GREGORY
    MYERSGregory
    Myers

Director

March 15, 2007  78




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNumber

Description3
.1(2)

Registrants Amended and
    Restated Certificate of Incorporation.3
.3(4)

Registrants Amended and
    Restated Bylaws.4
.1(2)

Form of Registrants Specimen
    Common Stock Certificate.10
.8(2)*

Registrants 1996 Equity
    Incentive Plan.10
.9(2)*

Registrants 1999 Stock
    Incentive Plan.10
.10(2)*

Registrants 1999 Employee
    Stock Purchase Plan.10
.11(2)*

Form of Indemnity Agreement
    entered into by Packeteer, Inc. with each of its executive
    officers and directors.10
.21(3)*

Amendment dated May 23, 2001
    to the 1999 Stock Incentive Plan.10
.22(4)*

Amendment dated May 22, 2002
    to the 1999 Stock Incentive Plan.10
.23(4)

Facilities Lease Agreement dated
    July 15, 2003, between NMSPCSLDHB, a California Limited
    Partnership, and Packeteer, Inc.10
.24(5)*

Employment Agreement dated
    September 27, 2002 between Dave Côté and
    Packeteer, Inc.10
.25(6)*

Amendment dated July 16, 2003
    to the 1999 Employee Stock Purchase Plan.10
.26(7)*

Amendment dated December 15,
    2004 to the 1999 Stock Incentive Plan.10
.27(7)

Agreement and Plan of
    Reorganization by and among Packeteer, Inc., P Acquisition
    Corporation, Mentat Inc. and Certain Shareholders of Mentat Inc.10
.29(8)*

Amendment dated February 24,
    2005 to the 1999 Employee Stock Purchase Plan.10
.30(9)*

Amendment dated May 24, 2005
    to the 1999 Stock Incentive Plan.10
.31(10)

Agreement and Plan of
    Reorganization by and among Packeteer, Inc., Oslo Acquisition
    Corporation, Tacit Networks, Inc. and Vikram Gupta dated
    May 8, 2006.10
.32(1)*

Form of Notice of Grant and
    Performance Share Agreement under 1999 Stock Incentive Plan.10
.33(1)

First Amendment of Lease dated
    January 31, 2007, between NMSPCSLDHB, a California Limited
    Partnership, and Packeteer, Inc.10
.34(1)*

Amendment dated February 5,
    2007 to the 1999 Stock Incentive Plan.21
.1(1)

Subsidiaries of Packeteer.23
.1(1)

Consent of KPMG LLP, Independent
    Registered Public Accounting Firm.24
.1(1)

Power of Attorney (see
    page 77).31
.1(1)

Sarbanes-Oxley Section 302
    Certification  CEO31
.2(1)

Sarbanes-Oxley Section 302
    Certification  CFO32
.1(1)

Sarbanes-Oxley Section 906
    Certification  CEO32
.2(1)

Sarbanes-Oxley Section 906
    Certification  CFO     *
    
    Management contract, or compensatory plan or arrangement.(1)
    
    Filed herewith.(2)
    
    Incorporated by reference from Packeteers Registration
    Statement on
    Form S-1
    (Reg.
    No. 79333-79077),
    as amended.(3)
    
    Incorporated by reference from Packeteers
    10-K dated
    March 22, 2002.(4)
    
    Incorporated by reference from Packeteers
    10-K dated
    March 29, 2001.(5)
    
    Incorporated by reference from Packeteers
    10-K dated
    March 21, 2003.(6)
    
    Incorporated by reference from Packeteers
    10-K dated
    March 5, 2004.(7)
    
    Incorporated by reference from Packeteers
    10-K dated
    March 16, 2005.(8)
    
    Incorporated by reference from Packeteers
    10-Q dated
    April 29, 2005.(9)
    
    Incorporated by reference from Packeteers
    8-K dated
    May 26, 2005.(10)
    
    Incorporated by reference from Packeteers 10-Q dated
    August 9, 2006. 79