##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2005                                                 
|          
|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.


(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:


None


Securities registered pursuant to Section 12(g) of the
Act:






o þ


o þ


þ o


S-K 10-K 10-K. o




|                             |                        |                           
|---------------------------- | ---------------------- | --------------------------
|Large accelerated filer    o | Accelerated filer    þ | Non-accelerated filer    o

12b-2). o þ






DOCUMENTS INCORPORATED BY REFERENCE


10-K










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##### 










TABLE OF CONTENTS


|             |  |                                                                                                                     |    |      |    | 
|------------ |  | ------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|             |  |                                                                                                                     |    | Page
|             |  |                                                                                                                     |    |     
|Part I      
|Item 1.      |  | Business                                                                                                            |    |      | 3  | 
|Item 1A.     |  | Risk Factors                                                                                                        |    |      | 16 | 
|Item 1B.     |  | Unresolved Staff Comments                                                                                           |    |      | 26 | 
|Item 2.      |  | Properties                                                                                                          |    |      | 26 | 
|Item 3.      |  | Legal Proceedings                                                                                                   |    |      | 26 | 
|Item 4.      |  | Submission of Matters to a Vote of Security
    Holders                                                             |    |      | 27 | 
|            
|Part II     
|Item 5.      |  | Market For Registrants Common Stock,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |    |      | 27 | 
|Item 6.      |  | Selected Financial Data                                                                                             |    |      | 27 | 
|Item 7.      |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                           |    |      | 29 | 
|Item 7A.     |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                      |    |      | 39 | 
|Item 8.      |  | Financial Statements and Supplementary
    Data                                                                     |    |      | 41 | 
|Item 9.      |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                            |    |      | 70 | 
|Item 9A.     |  | Controls and Procedures                                                                                             |    |      | 70 | 
|Item 9B.     |  | Other Information                                                                                                   |    |      | 71 | 
|            
|Part III    
|Item 10.     |  | Directors and Executive Officers of the
    Registrant                                                              |    |      | 71 | 
|Item 11.     |  | Executive Compensation                                                                                              |    |      | 71 | 
|Item 12.     |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                  |    |      | 71 | 
|Item 13.     |  | Certain Relationships and Related
    Transactions                                                                  |    |      | 71 | 
|Item 14.     |  | Principal Accountant Fees and Services                                                                              |    |      | 71 | 
|            
|Part IV     
|Item 15.     |  | Exhibits and Financial Statement
    Schedules                                                                      |    |      | 71 | 
|Signatures   |  |                                                                                                                     | 72 |     
|EXHIBIT 21.1
|EXHIBIT 23.1
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1
|EXHIBIT 32.2



2



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PART I







|        |         
|------- | --------
|ITEM 1. | BUSINESS

10-K


OVERVIEW


®




| |                                            
| | -------------------------------------------
| | Enterprise Frontline and Network Disconnect







| |                                         
| | ----------------------------------------
| | Scalable Solution of Proven Technologies





| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Visibilityinto real time performance at the Layer 7
    identification level  a mandatory first step in
    dramatically improving efficiency and simplifying the management
    of network applications, capacity planning and troubleshooting.

3



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| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Controlover networked applications to deliver
    comprehensive quality of service, or QoS, to ensure availability
    of an enterprises most critical business processes.                            
|
| |  | Accelerationof critical business applications to improve
    performance and expand network capacity through advanced
    compression, protocol and application-specific acceleration
    technologies.
|
| |  | Managementof both small and large unit deployments for
    low total cost of ownership, or TCO, administration, with
    time-saving automation and powerful central management software.              

® ® tm ®




10-K, 10-Q, 8-K


INDUSTRY BACKGROUND




peer-to point-of






| |                               
| | ------------------------------
| | The WAN/Application Bottleneck



4



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| |                                   
| | ----------------------------------
| | Limitations of Existing Approaches



Adding bandwidth and infrastructure to over-provision the
network.




| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increases in bandwidth tend to be consumed quickly by latent
    user demand, and often disproportionately by non-mission
    critical traffic;                                   
|
| |  | Deployment costs and increases in recurring service charges can
    be prohibitively expensive, especially for networks with many
    remote sites and for international networks;
|
| |  | There is no visibility into application performance to enable
    effective capacity planning; and                                                                                
|
| |  | Over-provisioning results in network under-utilization and
    wasted expense during non-peak periods.                                                                            

Implementing queuing-based approaches in existing network
devices.




| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | Queuing-based approaches do not control inbound traffic flowing
    from the WAN to the LAN;                              
|
| |  | Queuing-based approaches are reactive and address congestion
    after the fact, rather than preventing it from occurring;

5



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| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Congested queues result in packet loss, retransmissions and
    delays that waste bandwidth and undermine application response
    times;                                    
|
| |  | Limited traffic classification capabilities inadequately
    distinguish between different types of applications, resulting
    in sub-optimal prioritization of traffic; and
|
| |  | Queuing does not directly control
    end-to-end application
    performance.                                                                                                

Deploying point solutions such as compression
technologies.




| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Latency, or the amount of time it takes a packet to travel from
    source to destination, which can negatively affect performance;                          
|
| |  | Non selective compression, which results in some already
    compressed application traffic being delayed with no discernable
    benefit to performance; and
|
| |  | Difficulty in configuring and maintaining compression tunnels.                                                                                               

Installing network management tools that may only
monitor.




| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Traditional network management tools only monitor and report
    network performance and bandwidth utilization, without offering
    a means to fix or resolve performance problems; and
|
| |  | As is the case with queuing-based approaches, traditional
    network management tools are reactive in that they detect
    problems, but do not prevent similar problems in the future.



| |                                   
| | ----------------------------------
| | Packeteers Enterprise Opportunity

IP-VPN,




| |                       
| | ----------------------
| | The Packeteer Solution



6



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Visibility. Before an organization can control
    application performance on the WAN, it needs to know what is
    running on its network and how the network is performing.
    Packeteers monitoring capabilities involve automatic
    identification and classification of traffic through
    Layer 7, the applications layer, which is the highest layer
    in the industry standard Open Systems Interconnection, or OSI,
    model. This application-layer insight is designed to enable
    organizations to analyze application performance and network
    utilization accurately. Packeteers performance analysis
    determines response times, delays, link utilization, and other
    crucial metrics. Depending on the size of the Packeteer
    deployment, performance analysis may be captured via onboard or
    centralized reporting.                                             
|
| |  | Control. Once an organization knows what is running on
    its network and how the network is performing, it can use
    Packeteers control capabilities to set policies that align
    application performance in support of business needs.
    PacketShaper appliances allow mission-critical applications to
    perform efficiently and reliably by allocating varying amounts
    of bandwidth to applications depending on their relative
    importance. For instance, network managers can tailor policy
    management and bandwidth allocation to suit the requirements of
    particular applications or traffic, such as Citrix, SAP, video
    over IP and VOIP. Meanwhile,
    peer-to-peer file
    sharing, casual web browsing and other unsanctioned traffic can
    be eliminated or minimized, depending on an organizations
    available network resources and business priorities.
|
| |  | Compression and Acceleration. Once an organization sets
    controls to protect critical applications and contain
    non-critical traffic, the next step is to deploy compression to
    stretch the current network capacity and further improve
    application performance by ensuring that the extra capacity goes
    to critical applications first. The PacketShaper Compression
    Module provides a software option that applies
    application-intelligent compression, latency management and
    tunnel management to accelerate policy-managed business traffic.
    Packeteer SkyX appliances provide protocol acceleration (TCP and
    Web) over satellite, long-haul and other latency sensitive WAN
    links. Capabilities include Xpress Transport Protocol, or XTP,
    Web prefetch and multicast content distribution.                                                            
|
| |  | Centralized Management. Packeteer appliances can provide
    reports describing current and historical network performance.
    Comprehensive reports, graphs and tables enable network managers
    to refine bandwidth management policies, evaluate efficiency and
    plan capacity. Managers can set, enforce and monitor
    service-level agreements, which quantify desired QoS for a
    particular application or customer. Packeteers
    PolicyCenter, a Windows based software solution, is designed to
    simplify deployment of multiple Packeteer appliances by
    centralizing policy and software upgrade distribution and
    providing a summary view of all managed appliances.
    Packeteers ReportCenter, also a Windows based software
    solution, is designed to provide centralized analysis and
    reporting for Packeteer system deployments.                           





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gain Application and Network Performance Visibility and
    Insight. Packeteer systems provide valuable historical and
    real-time information about application performance and network
    utilization through an
    easy-to-use browser
    interface. Network managers gain a better understanding of the
    nature of traffic running on their networks and the problems and
    inefficiencies associated with that traffic.
|
| |  | Ensure Proper Performance for Mission-Critical
    Applications. Policy-based bandwidth allocation protects
    bandwidth for mission-critical applications such as SAP, Oracle
    and Siebel, and video over IP or VOIP, preventing disruptions
    from less urgent applications such as file transfers,
    peer-to-peer file
    sharing or casual Web browsing.                                                                 
|
| |  | Permit Easy Deployment. Packeteer systems install easily,
    and automatically start to discover, classify and analyze
    network traffic and suggest policies to optimize performance.
    They complement the existing network infrastructure, require no
    router reconfiguration or desktop changes and are designed not
    to disrupt network connectivity in the event of software or
    hardware failure.                

7



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| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increase Effective and Available Bandwidth. Packeteer
    systems intelligently increase effective bandwidth and, through
    integration with our advanced monitoring and shaping
    capabilities, enable the additional bandwidth to be utilized by
    mission-critical applications.                                                                                                
|
| |  | Enable Interactive Services. VOIP, video over IP and
    other streaming media require guaranteed bandwidth in order to
    achieve minimum quality requirements. By using Packeteer systems
    to set minimum bandwidth guarantees and priority, enterprises
    and service providers can deliver smooth and predictable
    performance of these delay-sensitive multimedia services.
|
| |  | Increase Network Efficiency. Packeteer systems improve
    network efficiency and help delay expensive capacity upgrades by
    managing non-critical traffic to reduce retransmission overhead
    and smooth the variability in bandwidth utilization.                                                                                                                                 

STRATEGY




Focus on Enterprise Performance Needs for Distributed
Enterprises. easy-to


Continue to Build Indirect Distribution Channels.


Expand Presence in Telecommunications Service Provider
Market.


Expand Presence in the Managed Application Services
Market.


8



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Extend WAN Application Performance Technology Leadership.


PRODUCTS




PacketShaper


Shaping Module state-of


Compression Module


PolicyCenter


ReportCenter


SkyX Accelerator


TECHNOLOGY




9



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| |                                                   
| | --------------------------------------------------
| | Sophisticated Traffic Discovery and Classification



peer-to






| |                                            
| | -------------------------------------------
| | Application-Based Response Time Measurement







| |                                           
| | ------------------------------------------
| | Flexible Policy Definition and Enforcement



10



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Per-session rate policies. These policies enable network
    managers to limit or guarantee bandwidth to each individual
    application session. Per-session policies allocate each session
    an appropriate amount of bandwidth and prevent one large session
    from inappropriately impacting others. Network managers specify
    a minimum-guaranteed rate and allow the session scaled access to
    additional available bandwidth. For example, a bandwidth cap for
    traffic prevents web browsers from competing for bandwidth
    required by mission-critical applications. Likewise, a
    guaranteed rate for audio or video streams ensures that they are
    not interrupted by traffic that tends to consume any available
    bandwidth.                                                                                                                     
|
| |  | Partitions. Partitions allow for the creation of a
    separate, exclusive channel within a WAN link. Partitions
    represent aggregate bandwidth minimums or maximums governing how
    much of the network can be used by a single application or
    traffic category. Partitions can be fixed, dedicated virtual
    circuits, or flexible, virtual circuits whose unused bandwidth
    can be shared.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Dynamic Subscriber Bandwidth Provisioning. Dynamic
    Subscriber Bandwidth Provisioning allocates bandwidth and
    enforces QoS policies automatically by mapping a
    subscribers traffic profile (e.g. source/destination IP
    address, traffic type, URL, and so forth) to a prescribed
    policy. This feature is a scaleable and
    easy-to-deploy solution
    that actively provisions minimum and maximum bandwidth to up to
    20,000 subscribers accessing the network concurrently. In a
    5-to-1 over
    subscription model, bandwidth for as many as 100,000 subscribers
    can be managed with a single PacketShaper appliance. This
    feature also gives service providers additional revenue
    opportunities through multi-tiered Internet access services
    (e.g. bronze, silver, gold) for
    dial-up, DSL, cable and
    wireless subscribers.
|
| |  | Priority policies. This policy capability enables network
    managers to assign one of eight possible priority levels to each
    application or traffic category. Priority policies are ideal for
    traffic that does not burst, non-IP traffic and traffic
    characterized by small, high-priority flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Admission-control policies. Network managers can use
    admission-control policy features to determine the response if a
    bandwidth guarantee cannot be satisfied. Such responses may
    include denying access, accommodating an additional user with
    less than guaranteed performance, or, for web requests,
    redirecting the request to another server. For example, if an
    online streaming-video service suffers a high-demand period and
    all available bandwidth is consumed, an admission-control policy
    could present a web page explaining that resources are busy.
    This allows a maximum number of users to receive a targeted
    service quality without degradation as new users seek to access
    the service.                                                                                                                             
|
| |  | Discard and never-admit policies. These policies
    intentionally block traffic. Discard policies toss packets
    without sending feedback to the sender. Never-admit policies are
    similar to discard policies except that the policy informs the
    sender that service is blocked.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |                        
| | -----------------------
| | Traffic Flow Management



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Intelligent Compression
Algorithms to Enhance Performance








| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | making compression decisions based on application type;                                                                                                                          
|
| |  | utilizing application specific algorithms; and                                                                                                                                   
|
| |  | working with TCP rate control and other traffic management
    technology to manage flows of data through the compression
    engine to ensure consistent, predictable responses.





CUSTOMERS




MANUFACTURING




12



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MARKETING AND SALES








| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | publication of technical, educational and business articles in
    industry magazines;                                          
|
| |  | public speaking opportunities at tradeshows, conferences and
    analyst events;                                                
|
| |  | electronic marketing, including web site-based communication
    programs, electronic newsletters and on-line end user seminars;
|
| |  | industry tradeshows, technical conferences and technology
    seminars; and                                                     
|
| |  | focused advertising, direct mail, public relations and analyst
    outreach.                                                    





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Channel Partners. We have teamed with value-added
    resellers and distributors in the industry that are
    distinguished by their ability to deliver comprehensive QoS
    solutions, their industry expertise and their commitment to
    customer satisfaction. We have established an indirect
    distribution channel, which is comprised of a network of over
    500 value-added resellers, distributors and system integrators
    that sell our solutions in over 50 countries. These partners
    sell our systems and software products as well as other
    third-party products that are complementary to our WAN
    Application Optimization systems.
|
| |  | Alliance Partners. Our Alliance Partners recommend and/or
    resell Packeteer solutions as our combined offerings provide
    strategic value to enterprise customers. Our Alliance Partners
    include systems integrators and service providers who offer
    value-added services built around our Wan Optimization
    Solutions, as well as technology vendors whose products
    complement our solutions. Major industry players with whom we
    have such an agreement in place include Avaya, BMC, Citrix,                                                                                                                                                 

13



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| |  |                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------
| |  | Dimension Data, Equant/France Telecom, HP, IBM Global Services,
    NTT Communications and Polycom.





RESEARCH AND DEVELOPMENT


e-mail


CUSTOMER SERVICE AND TECHNICAL SUPPORT




COMPETITION




14



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| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | 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;             
|
| |  | compatibility with industry standards;                                                                                      
|
| |  | products that do not increase latency and packet loss;                                                                      
|
| |  | size and scope of distribution network;                                                                                     
|
| |  | brand name; and                                                                                                             
|
| |  | access to customers and size of installed customer base.                                                                    

INTELLECTUAL PROPERTY






EMPLOYEES




15



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|         |             
|-------- | ------------
|ITEM 1A. | RISK FACTORS



IF THE WAN APPLICATION OPTIMIZATION SOLUTIONS 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




| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | the timing and size of orders and shipments of our products;                        
|
| |  | the mix of products we sell;                                                        
|
| |  | the mix and effectiveness of the channels through which those
    products are sold;
|
| |  | the geographical mix of the markets in which our products are
    sold;             
|
| |  | the average selling prices of our products; and                                     
|
| |  | the amount and timing of our operating expenses.                                    



16



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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




17



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| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | develop and maintain competitive products;                                                                                                                          
|
| |  | enhance our products by adding innovative features that
    differentiate our products from those of our competitors and
    meet the needs of our larger customers;
|
| |  | bring products to market and introduce new features on a timely
    basis at competitive prices;                                                                    
|
| |  | integrate acquired technology into our products;                                                                                                                    
|
| |  | identify and respond to emerging technological trends in the
    market; and                                                                                        
|
| |  | respond effectively to new technological changes or new product
    announcements by others.                                                                        



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 software development activities to
    define a combined product roadmap, ensuring timely development
    of new products, timely release of new products to market, and
    the development of efficient integration and migration tools;                                                                                                                                                                                                                                      
|
| |  | the potential product liability associated with selling the
    acquired companys products; and                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | the potential write-down of impaired goodwill and intangible and
    other assets. In particular, we recorded approximately
    $9.6 million in goodwill related to the acquisition of
    Mentat that 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




18



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


period-to


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






19



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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




20



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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




21



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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




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.                

22



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MOST OF THE COMPONENTS FOR OUR PRODUCTS COME FROM SINGLE OR
LIMITED SOURCES, AND WE COULD LOSE SALES IF THESE SOURCES FAIL
TO SATISFY OUR SUPPLY REQUIREMENTS






CHANGES IN FINANCIAL ACCOUNTING STANDARDS ARE LIKELY TO
IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF
OPERATIONS




CHANGES IN EFFECTIVE TAX RATES OR ADVERSE OUTCOMES RESULTING
FROM EXAMINATION OF OUR INCOME TAX RETURNS COULD ADVERSELY
AFFECT OUR RESULTS




23



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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








FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY WOULD
RESULT IN SIGNIFICANT HARM TO OUR BUSINESS




24



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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




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




25



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|         |                          
|-------- | -------------------------
|ITEM 1B. | UNRESOLVED STAFF COMMENTS








|        |           
|------- | ----------
|ITEM 2. | PROPERTIES








|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

In re
Packeteer, Inc. Initial Public Offering Securities Litigation,








26



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|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS






PART II







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



|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|               |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|2005:          |  |      |       |  |     |   |       | 
|Fourth Quarter |  | $    | 12.19 |  |     | $ | 7.36  | 
|Third Quarter  |  |      | 14.78 |  |     |   | 11.05 | 
|Second Quarter |  |      | 15.63 |  |     |   | 10.99 | 
|First Quarter  |  |      | 17.18 |  |     |   | 13.03 | 
|2004:          |  |      |       |  |     |   |       | 
|Fourth Quarter |  |      | 14.97 |  |     |   | 10.17 | 
|Third Quarter  |  |      | 15.89 |  |     |   | 7.82  | 
|Second Quarter |  |      | 16.15 |  |     |   | 11.80 | 
|First Quarter  |  |      | 23.10 |  |     |   | 11.95 | 








|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA



27



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|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |        |        |        |   |         |        |         | 
|------------------------------------------------------------ | -------------------------------------- | ------------------------------------- | ------- | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------- | 
|                                                             |                                        | Years Ended December 31,              |        
|                                                             |                                        |                                       |        
|                                                             |                                        | 2005                                  |         |        | 2004   |   |        | 2003   |        |   | 2002   |        |        | 2001 |       
|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |       
|                                                             |                                        | (In thousands, except per share data) |        
|CONSOLIDATED STATEMENTS OF OPERATIONS DATA:                  |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |        |        |        |   |         |       
|Net revenues                                                 |                                        | $                                     | 112,941 |        |        | $ | 92,437 |        |        | $ | 72,723 |        |        | $    | 55,014 |        |        | $ | 46,661  |       
|Product and service costs                                    |                                        |                                       | 27,738  |        |        |   | 22,837 |        |        |   | 17,036 |        |        |      | 12,852 |        |        |   | 13,867  |       
|Amortization of purchased intangible assets                  |                                        |                                       | 1,557   |        |        |   | 38     |        |        |   |       |        |        |      |       |        |        |   | 1,199   |       
|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |       
|Gross profit                                                 |                                        |                                       | 83,646  |        |        |   | 69,562 |        |        |   | 55,687 |        |        |      | 42,162 |        |        |   | 31,595  |       
|Operating expenses:                                          |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |        |        |        |   |         |       
|                                                             | Research and development               |                                       |         | 21,778 |        |   |        | 14,973 |        |   |        | 12,202 |        |      |        | 10,877 |        |   |         | 12,360 |        
|                                                             | Sales and marketing                    |                                       |         | 38,276 |        |   |        | 35,504 |        |   |        | 26,433 |        |      |        | 23,420 |        |   |         | 22,859 |        
|                                                             | General and administrative             |                                       |         | 7,222  |        |   |        | 6,061  |        |   |        | 5,494  |        |      |        | 4,636  |        |   |         | 5,832  |        
|                                                             | Amortization of goodwill               |                                       |         |       |        |   |        |       |        |   |        |       |        |      |        |       |        |   |         | 11,017 |        
|                                                             | Impairment of goodwill and intangibles |                                       |         |       |        |   |        |       |        |   |        |       |        |      |        |       |        |   |         | 52,552 |        
|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |       
|                                                             |                                        | Total operating expenses              |         |        | 67,276 |   |        |        | 56,538 |   |        |        | 44,129 |      |        |        | 38,933 |   |         |        | 104,620 | 
|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |       
|Income (loss) from operations                                |                                        |                                       | 16,370  |        |        |   | 13,024 |        |        |   | 11,558 |        |        |      | 3,229  |        |        |   | (73,025 | )     
|Other income, net                                            |                                        |                                       | 2,913   |        |        |   | 1,127  |        |        |   | 701    |        |        |      | 915    |        |        |   | 2,037   |       
|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |       
|Income (loss) before provision (benefit) for income taxes    |                                        |                                       | 19,283  |        |        |   | 14,151 |        |        |   | 12,259 |        |        |      | 4,144  |        |        |   | (70,988 | )     
|Provision (benefit) for income taxes                         |                                        |                                       | 125     |        |        |   | (383   | )      |        |   | 1,226  |        |        |      | 415    |        |        |   |        |       
|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |       
|Net income (loss)                                            |                                        | $                                     | 19,158  |        |        | $ | 14,534 |        |        | $ | 11,033 |        |        | $    | 3,729  |        |        | $ | (70,988 | )     
|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |       
|Basic net income (loss) per share                            |                                        | $                                     | 0.57    |        |        | $ | 0.44   |        |        | $ | 0.35   |        |        | $    | 0.12   |        |        | $ | (2.40   | )     
|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |       
|Diluted net income (loss) per share                          |                                        | $                                     | 0.55    |        |        | $ | 0.42   |        |        | $ | 0.32   |        |        | $    | 0.12   |        |        | $ | (2.40   | )     
|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |       
|Shares used in computing basic net income (loss) per share   |                                        |                                       | 33,823  |        |        |   | 32,994 |        |        |   | 31,634 |        |        |      | 30,205 |        |        |   | 29,559  |       
|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |       
|Shares used in computing diluted net income (loss) per share |                                        |                                       | 35,065  |        |        |   | 34,502 |        |        |   | 34,364 |        |        |      | 30,718 |        |        |   | 29,559  |       
|                                                             |                                        |                                       |         |        |        |   |        |        |        |   |        |        |        |      |       

|                                       |  |                |         |  |      |   |         |      |  |   |         |  |  |      |        |  |  |   |        | 
|-------------------------------------- |  | -------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------ |  |  | - | ------ | 
|                                       |  | DECEMBER 31,   |        
|                                       |  |                |        
|                                       |  | 2005           |         |  | 2004 |   |         | 2003 |  |   | 2002    |  |  | 2001 |       
|                                       |  |                |         |  |      |   |         |      |  |   |         |  |  |      |       
|                                       |  | (In thousands) |        
|CONSOLIDATED BALANCE SHEET DATA:       |  |                |         |  |      |   |         |      |  |   |         |  |  |      |        |  |  |   |        | 
|Cash, cash equivalents and investments |  | $              | 122,677 |  |      | $ | 92,197  |      |  | $ | 86,707  |  |  | $    | 65,474 |  |  | $ | 62,221 | 
|Working capital                        |  |                | 103,961 |  |      |   | 73,171  |      |  |   | 75,273  |  |  |      | 53,492 |  |  |   | 52,723 | 
|Total assets                           |  |                | 168,657 |  |      |   | 137,792 |      |  |   | 104,699 |  |  |      | 79,912 |  |  |   | 73,005 | 
|Deferred revenue                       |  |                | 22,115  |  |      |   | 16,157  |      |  |   | 9,592   |  |  |      | 5,968  |  |  |   | 4,106  | 
|Long-term debt obligations             |  |                |        |  |      |   |        |      |  |   |        |  |  |      | 545    |  |  |   | 1,289  | 
|Total stockholders equity             |  |                | 128,607 |  |      |   | 101,959 |      |  |   | 83,418  |  |  |      | 63,401 |  |  |   | 56,624 | 

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS



OVERVIEW




® ® tm tm tm


®






29



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SOURCES OF REVENUE




COST OF REVENUES AND OPERATING EXPENSES


Cost of Revenues.






Research and Development.


Sales and Marketing.


30



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General and Administrative.


CRITICAL ACCOUNTING POLICIES






Revenue recognition . 97-2, 97-2:




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







31



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Inventory valuation first-in,


Valuation of long-lived and intangible assets and
goodwill




32



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Sales return reserve


Rebate reserves


Warranty reserves


Accounting for Income Taxes




Recent Accounting Pronouncements


33



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RESULTS OF OPERATIONS




|                             |  |                    |        |  |               |   |        |          |  |   |           |  |  |   |        | 
|---------------------------- |  | ------------------ | ------ |  | ------------- | - | ------ | -------- |  | - | --------- |  |  | - | ------ | 
|                             |  | 2005 Quarter Ended |       
|                             |  |                    |       
|                             |  | December 31,       |        |  | September 30, |   |        | June 30, |  |   | March 31, | 
|                             |  |                    |        |  |               |   |        |          |  |   |           | 
|Net revenues                 |  | $                  | 31,851 |  |               | $ | 24,835 |          |  | $ | 28,177    |  |  | $ | 28,078 | 
|Gross profit                 |  |                    | 23,812 |  |               |   | 18,206 |          |  |   | 20,720    |  |  |   | 20,908 | 
|Income from operations       |  |                    | 5,837  |  |               |   | 2,008  |          |  |   | 4,665     |  |  |   | 3,860  | 
|Net income                   |  |                    | 9,098  |  |               |   | 2,255  |          |  |   | 4,228     |  |  |   | 3,577  | 
|Basic net income per share   |  |                    | 0.27   |  |               |   | 0.07   |          |  |   | 0.13      |  |  |   | 0.11   | 
|Diluted net income per share |  |                    | 0.26   |  |               |   | 0.06   |          |  |   | 0.12      |  |  |   | 0.10   | 

|                             |  |                    |        |  |               |   |        |          |  |   |           |  |  |   |        | 
|---------------------------- |  | ------------------ | ------ |  | ------------- | - | ------ | -------- |  | - | --------- |  |  | - | ------ | 
|                             |  | 2004 Quarter Ended |       
|                             |  |                    |       
|                             |  | December 31,       |        |  | September 30, |   |        | June 30, |  |   | March 31, | 
|                             |  |                    |        |  |               |   |        |          |  |   |           | 
|Net revenues                 |  | $                  | 26,239 |  |               | $ | 23,052 |          |  | $ | 21,642    |  |  | $ | 21,504 | 
|Gross profit                 |  |                    | 19,772 |  |               |   | 17,173 |          |  |   | 16,010    |  |  |   | 16,607 | 
|Income from operations       |  |                    | 3,870  |  |               |   | 3,477  |          |  |   | 2,143     |  |  |   | 3,534  | 
|Net income                   |  |                    | 5,688  |  |               |   | 3,408  |          |  |   | 2,084     |  |  |   | 3,354  | 
|Basic net income per share   |  |                    | 0.17   |  |               |   | 0.10   |          |  |   | 0.06      |  |  |   | 0.10   | 
|Diluted net income per share |  |                    | 0.16   |  |               |   | 0.10   |          |  |   | 0.06      |  |  |   | 0.10   | 

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|                                                   |                                             |                          |    |    |      |  |    |      |     |  |    |    |     | 
|-------------------------------------------------- | ------------------------------------------- | ------------------------ | -- | -- | ---- |  | -- | ---- | --- |  | -- | -- | --- | 
|                                                   |                                             | 2005                     |    |    | 2004 |  |    | 2003 |    
|                                                   |                                             |                          |    |    |      |  |    |      |    
|Net revenues:                                      |                                             |                          |    |    |      |  |    |      |     |  |    |   
|                                                   | Product revenues                            |                          |    | 76 | %    |  |    | 81   | %   |  |    | 83 | %  
|                                                   | Service revenues                            |                          |    | 24 |      |  |    | 19   |     |  |    | 17 |    
|                                                   |                                             |                          |    |    |      |  |    |      |    
|                                                   |                                             | Total net revenues       |    |    | 100  |  |    |      | 100 |  |    |    | 100 | 
|Cost of revenues:                                  |                                             |                          |    |    |      |  |    |      |     |  |    |   
|                                                   | Product costs                               |                          |    | 17 |      |  |    | 18   |     |  |    | 17 |    
|                                                   | Service costs                               |                          |    | 7  |      |  |    | 7    |     |  |    | 6  |    
|                                                   | Amortization of purchased intangible assets |                          |    | 2  |      |  |    |     |     |  |    |   |    
|                                                   |                                             |                          |    |    |      |  |    |      |    
|                                                   |                                             | Total cost of revenues   |    |    | 26   |  |    |      | 25  |  |    |    | 23  | 
|Gross margin                                       |                                             |                          | 74 |    |      |  | 75 |      |     |  | 77 |   
|Operating expenses:                                |                                             |                          |    |    |      |  |    |      |     |  |    |   
|                                                   | Research and development                    |                          |    | 19 |      |  |    | 16   |     |  |    | 17 |    
|                                                   | Sales and marketing                         |                          |    | 34 |      |  |    | 38   |     |  |    | 36 |    
|                                                   | General and administrative                  |                          |    | 6  |      |  |    | 7    |     |  |    | 8  |    
|                                                   |                                             |                          |    |    |      |  |    |      |    
|                                                   |                                             | Total operating expenses |    |    | 59   |  |    |      | 61  |  |    |    | 61  | 
|                                                   |                                             |                          |    |    |      |  |    |      |    
|Income from operations                             |                                             |                          | 15 |    |      |  | 14 |      |     |  | 16 |   
|Interest and other income                          |                                             |                          | 2  |    |      |  | 1  |      |     |  | 1  |   
|Interest and other expense                         |                                             |                          |   |    |      |  |   |      |     |  |   |   
|                                                   |                                             |                          |    |    |      |  |    |      |    
|Income before provision (benefit) for income taxes |                                             |                          | 17 |    |      |  | 15 |      |     |  | 17 |   
|Provision (benefit) for income taxes               |                                             |                          |   |    |      |  | (1 | )    |     |  | 2  |   
|                                                   |                                             |                          |    |    |      |  |    |      |    
|Net income                                         |                                             |                          | 17 | %  |      |  | 16 | %    |     |  | 15 | % 
|                                                   |                                             |                          |    |    |      |  |    |      |    

OVERVIEW OF RESULTS OF OPERATIONS FOR 2005








NET REVENUES




35



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COST OF REVENUES




.






36



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RESEARCH AND DEVELOPMENT




SALES AND MARKETING




GENERAL AND ADMINISTRATIVE




INTEREST AND OTHER INCOME, NET




37



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INTEREST EXPENSE




INCOME TAX PROVISION (BENEFIT)




LIQUIDITY AND CAPITAL RESOURCES




| |                  
| | -----------------
| | Cash Requirements







|                                                |                             |                        |       |           |        |   |       |       |  |     |       |       |           |         |     |     |  |   |    |    | 
|----------------------------------------------- | --------------------------- | ---------------------- | ----- | --------- | ------ | - | ----- | ----- |  | --- | ----- | ----- | --------- | ------- | --- | --- |  | - | -- | -- | 
|                                                |                             | Payments Due By Period |      
|                                                |                             |                        |      
|                                                |                             |                        |       | Less than |        |   | 1-3   |       |  | 3-5 |       |       | More than |        
|Contractual Obligations                         |                             | Total                  |       |           | 1 Year |   |       | Years |  |     | Years |       |           | 5 Years |    
|                                                |                             |                        |       |           |        |   |       |       |  |     |       |       |           |         |    
|Cash obligations not reflected in Balance Sheet |                             |                        |       |           |        |   |       |       |  |     |       |       |           |         |     |     |  |   |    |   
|                                                | Operating lease obligations |                        | $     | 3,373     |        |   | $     | 1,887 |  |     | $     | 1,297 |           |         | $   | 136 |  |   | $  | 53 | 
|                                                | Purchase obligations        |                        |       | 3,968     |        |   |       | 3,968 |  |     |       |      |           |         |     |    |  |   |    |   | 
|                                                |                             |                        |       |           |        |   |       |       |  |     |       |       |           |         |    
|Total                                           |                             | $                      | 7,341 |           |        | $ | 5,855 |       |  | $   | 1,297 |       |           | $       | 136 |     |  | $ | 53 |   
|                                                |                             |                        |       |           |        |   |       |       |  |     |       |       |           |         |    

38



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| |                         
| | ------------------------
| | Sources and Uses of Cash

Overview.


Operating Activities.


Investing Activities.


Financing Activities.


RECENT ACCOUNTING PRONOUNCEMENTS









|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK

Fixed Income Investments




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|                           |                       |                      |         |       |      |   |       |       |  |   |            |  |  |            |         |  |  |   |        |  | 
|-------------------------- | --------------------- | -------------------- | ------- | ----- | ---- | - | ----- | ----- |  | - | ---------- |  |  | ---------- | ------- |  |  | - | ------ |  | 
|                           |                       | Amortized Cost as of |         |       |      |   |      
|                           |                       | December 31, 2005    |         |       |      |   |      
|                           |                       |                      |         |       | 2005 |   |       | 2004  | 
|Expected Maturity Date     |                       | 2006                 |         |       | 2007 |   |       | Total |  |   | Fair Value |  |  | Fair Value |        
|                           |                       |                      |         |       |      |   |       |       |  |   |            |  |  |            |        
|Cash equivalents           |                       | $                    | 33,125  |       |      | $ |      |       |  | $ | 33,125     |  |  | $          | 33,126  |  |  | $ | 12,904 | 
|                           | Weighted-average rate |                      |         | 4.02% |      |   |       |      |  |   |            |  |  |            |         |  |  |   |        |  | 
|Short-term investments     |                       |                      | 81,387  |       |      |   |      |       |  |   | 81,387     |  |  |            | 81,228  |  |  |   | 66,512 | 
|                           | Weighted-average rate |                      |         | 3.98% |      |   |       |      |  |   |            |  |  |            |         |  |  |   |        |  | 
|Long-term investments      |                       |                      |        |       |      |   | 5,252 |       |  |   | 5,252      |  |  |            | 5,228   |  |  |   | 10,019 | 
|                           | Weighted-average rate |                      |         |      |      |   |       | 4.11% |  |   |            |  |  |            |         |  |  |   |        |  | 
|                           |                       |                      |         |       |      |   |       |       |  |   |            |  |  |            |        
|Total investment portfolio |                       | $                    | 114,512 |       |      | $ | 5,252 |       |  | $ | 119,764    |  |  | $          | 119,582 |  |  | $ | 89,435 | 
|                           |                       |                      |         |       |      |   |       |       |  |   |            |  |  |            |        

Foreign Exchange




40



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|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

10-K.


|                                                                                                                                      |  |        |    | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | -- | 
|                                                                                                                                      |  | Page   |   
|                                                                                                                                      |  | Number |   
|                                                                                                                                      |  |        |   
|Reports of Independent Registered Public
    Accounting Firm                                                                          |  |        | 42 | 
|Consolidated Balance Sheets as of
    December 31, 2005 and 2004                                                                      |  |        | 45 | 
|Consolidated Income Statements for the
    years ended December 31, 2005, 2004 and 2003                                               |  |        | 46 | 
|Consolidated Statements of
    Stockholders Equity and Comprehensive Income for the years
    ended December 31, 2005, 2004 and 2003 |  |        | 47 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2005, 2004 and 2003                                        |  |        | 48 | 
|Notes To Consolidated Financial
    Statements                                                                                        |  |        | 49 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Internal
Control  Integrated Framework












42



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Internal
Control  Integrated Framework Internal Control  Integrated Framework .




| |             
| | ------------
| | /s/ KPMG LLP





43



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM












Internal Control 
Integrated Framework




| |             
| | ------------
| | /s/ KPMG LLP





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PACKETEER, INC.





CONSOLIDATED BALANCE SHEETS


|                                              |                                                                                                                                                                      |                                            |   |         |         |  |   |         |         | 
|--------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------- | ------- |  | - | ------- | ------- | 
|                                              |                                                                                                                                                                      | December 31,                               |  
|                                              |                                                                                                                                                                      |                                            |  
|                                              |                                                                                                                                                                      | 2005                                       |   |         | 2004    | 
|                                              |                                                                                                                                                                      |                                            |   |         |         | 
|                                              |                                                                                                                                                                      | (In thousands, except                      |  
|                                              |                                                                                                                                                                      | per share amounts)                         |  
|ASSETS                                       
|Current assets:                               |                                                                                                                                                                      |                                            |   |         |         |  |   |        
|                                              | Cash and cash equivalents                                                                                                                                            |                                            | $ | 36,221  |         |  | $ | 10,672  |        
|                                              | Short-term investments                                                                                                                                               |                                            |   | 81,228  |         |  |   | 71,506  |        
|                                              | Accounts receivable, less allowance for doubtful accounts of
    $175 and $229 as of December 31, 2005 and 2004, respectively                                        |                                            |   | 15,759  |         |  |   | 16,828  |        
|                                              | Other receivables                                                                                                                                                    |                                            |   | 207     |         |  |   | 1,888   |        
|                                              | Inventories                                                                                                                                                          |                                            |   | 4,979   |         |  |   | 3,106   |        
|                                              | Prepaids and other current assets                                                                                                                                    |                                            |   | 2,148   |         |  |   | 1,784   |        
|                                              |                                                                                                                                                                      |                                            |   |         |         | 
|                                              |                                                                                                                                                                      | Total current assets                       |   |         | 140,542 |  |   |         | 105,784 | 
|Non-current assets:                           |                                                                                                                                                                      |                                            |   |         |         |  |   |        
|                                              | Property and equipment, net                                                                                                                                          |                                            |   | 2,681   |         |  |   | 3,066   |        
|                                              | Long-term investments                                                                                                                                                |                                            |   | 5,228   |         |  |   | 10,019  |        
|                                              | Other non-current assets                                                                                                                                             |                                            |   | 5,073   |         |  |   | 2,233   |        
|                                              | Goodwill                                                                                                                                                             |                                            |   | 9,527   |         |  |   | 9,527   |        
|                                              | Other intangible assets, net                                                                                                                                         |                                            |   | 5,606   |         |  |   | 7,163   |        
|                                              |                                                                                                                                                                      |                                            |   |         |         | 
|                                              |                                                                                                                                                                      | Total assets                               |   | $       | 168,657 |  |   | $       | 137,792 | 
|                                              |                                                                                                                                                                      |                                            |   |         |         | 
|                                             
|LIABILITIES AND STOCKHOLDERS EQUITY         
|                                             
|Current liabilities:                          |                                                                                                                                                                      |                                            |   |         |         |  |   |        
|                                              | Accounts payable                                                                                                                                                     |                                            | $ | 2,808   |         |  | $ | 2,802   |        
|                                              | Accrued compensation                                                                                                                                                 |                                            |   | 6,551   |         |  |   | 6,467   |        
|                                              | Other accrued liabilities                                                                                                                                            |                                            |   | 4,716   |         |  |   | 7,588   |        
|                                              | Income taxes payable                                                                                                                                                 |                                            |   | 3,520   |         |  |   | 2,438   |        
|                                              | Deferred revenue                                                                                                                                                     |                                            |   | 18,986  |         |  |   | 13,318  |        
|                                              |                                                                                                                                                                      |                                            |   |         |         | 
|                                              |                                                                                                                                                                      | Total current liabilities                  |   |         | 36,581  |  |   |         | 32,613  | 
|Non-current liabilities:                      |                                                                                                                                                                      |                                            |   |         |         |  |   |        
|                                              | Deferred revenue, less current portion                                                                                                                               |                                            |   | 3,129   |         |  |   | 2,839   |        
|                                              | Deferred rent and other                                                                                                                                              |                                            |   | 340     |         |  |   | 381     |        
|                                              |                                                                                                                                                                      |                                            |   |         |         | 
|                                              |                                                                                                                                                                      | Total liabilities                          |   |         | 40,050  |  |   |         | 35,833  | 
|Commitments 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, 2005 and 2004, respectively                  |                                            |   |        |         |  |   |        |        
|                                              | Common stock, $0.001 par value;
    85,000 shares authorized; 34,197 and 33,418 shares
    issued and outstanding as of December 31, 2005 and 2004,
    respectively |                                            |   | 34      |         |  |   | 33      |        
|                                              | Additional paid-in capital                                                                                                                                           |                                            |   | 188,046 |         |  |   | 181,625 |        
|                                              | Deferred stock-based compensation                                                                                                                                    |                                            |   | (567    | )       |  |   | (1,610  | )      
|                                              | Accumulated other comprehensive loss                                                                                                                                 |                                            |   | (182    | )       |  |   | (207    | )      
|                                              | Accumulated deficit                                                                                                                                                  |                                            |   | (58,724 | )       |  |   | (77,882 | )      
|                                              |                                                                                                                                                                      |                                            |   |         |         | 
|                                              |                                                                                                                                                                      | Total stockholders equity                 |   |         | 128,607 |  |   |         | 101,959 | 
|                                              |                                                                                                                                                                      |                                            |   |         |         | 
|                                              |                                                                                                                                                                      | Total liabilities and stockholders equity |   | $       | 168,657 |  |   | $       | 137,792 | 
|                                              |                                                                                                                                                                      |                                            |   |         |         | 



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PACKETEER, INC.





CONSOLIDATED INCOME STATEMENTS


|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |        |   |        |        |        | 
|----------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------ | ------ | ------- | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                      |                                                                                                                                                                      | Years Ended December 31, |       
|                                                      |                                                                                                                                                                      |                          |       
|                                                      |                                                                                                                                                                      | 2005                     |        |        | 2004    |   |        | 2003   |       
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|                                                      |                                                                                                                                                                      | (In thousands, except    |       
|                                                      |                                                                                                                                                                      | per share amounts)       |       
|Net revenues:                                         |                                                                                                                                                                      |                          |        |        |         |   |        |        |        |   |        |       
|                                                      | Product revenues                                                                                                                                                     |                          | $      | 85,590 |         |   | $      | 74,557 |        |   | $      | 60,294 |       
|                                                      | Service revenues                                                                                                                                                     |                          |        | 27,351 |         |   |        | 17,880 |        |   |        | 12,429 |       
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|                                                      |                                                                                                                                                                      | Total net revenues       |        |        | 112,941 |   |        |        | 92,437 |   |        |        | 72,723 | 
|Cost of revenues:                                     |                                                                                                                                                                      |                          |        |        |         |   |        |        |        |   |        |       
|                                                      | Product costs                                                                                                                                                        |                          |        | 19,575 |         |   |        | 16,780 |        |   |        | 12,520 |       
|                                                      | Service costs                                                                                                                                                        |                          |        | 8,163  |         |   |        | 6,057  |        |   |        | 4,516  |       
|                                                      | Amortization of purchased intangible assets                                                                                                                          |                          |        | 1,557  |         |   |        | 38     |        |   |        |       |       
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|                                                      |                                                                                                                                                                      | Total cost of revenues   |        |        | 29,295  |   |        |        | 22,875 |   |        |        | 17,036 | 
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|Gross profit                                          |                                                                                                                                                                      |                          | 83,646 |        |         |   | 69,562 |        |        |   | 55,687 |       
|Operating expenses:                                   |                                                                                                                                                                      |                          |        |        |         |   |        |        |        |   |        |       
|                                                      | Research and development (includes stock-based compensation
    expense of $867, $13 and $19 for the years ended
    December 31, 2005, 2004 and 2003, respectively) |                          |        | 21,778 |         |   |        | 14,973 |        |   |        | 12,202 |       
|                                                      | Sales and marketing (includes stock-based compensation expense
    of $25, $1 and $0 for the years ended December 31, 2005,
    2004 and 2003, respectively)         |                          |        | 38,276 |         |   |        | 35,504 |        |   |        | 26,433 |       
|                                                      | General and administrative (includes stock-based compensation
    expense of $9, $0 and $0 for the years ended December 31,
    2005, 2004 and 2003, respectively)   |                          |        | 7,222  |         |   |        | 6,061  |        |   |        | 5,494  |       
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|                                                      |                                                                                                                                                                      | Total operating expenses |        |        | 67,276  |   |        |        | 56,538 |   |        |        | 44,129 | 
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|Income from operations                                |                                                                                                                                                                      |                          | 16,370 |        |         |   | 13,024 |        |        |   | 11,558 |       
|Interest and other income, net                        |                                                                                                                                                                      |                          | 2,916  |        |         |   | 1,165  |        |        |   | 842    |       
|Interest expense                                      |                                                                                                                                                                      |                          | (3     | )      |         |   | (38    | )      |        |   | (141   | )     
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|Income before provision (benefit) for income taxes    |                                                                                                                                                                      |                          | 19,283 |        |         |   | 14,151 |        |        |   | 12,259 |       
|Provision (benefit) for income taxes                  |                                                                                                                                                                      |                          | 125    |        |         |   | (383   | )      |        |   | 1,226  |       
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|Net income                                            |                                                                                                                                                                      | $                        | 19,158 |        |         | $ | 14,534 |        |        | $ | 11,033 |       
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|Basic net income per share                            |                                                                                                                                                                      | $                        | 0.57   |        |         | $ | 0.44   |        |        | $ | 0.35   |       
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|Diluted net income per share                          |                                                                                                                                                                      | $                        | 0.55   |        |         | $ | 0.42   |        |        | $ | 0.32   |       
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|Shares used in computing basic net income per share   |                                                                                                                                                                      |                          | 33,823 |        |         |   | 32,994 |        |        |   | 31,634 |       
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       
|Shares used in computing diluted net income per share |                                                                                                                                                                      |                          | 35,065 |        |         |   | 34,502 |        |        |   | 34,364 |       
|                                                      |                                                                                                                                                                      |                          |        |        |         |   |        |        |       



46



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##### Table of Contents



PACKETEER, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME


|                                                                  |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |          |        |  |   |         |        |   |   |        |        |  
|----------------------------------------------------------------- | ------------------------------ | -------------- | ------ | - | ---------- | - | -- | ----------- |  | ----------- | ------------- | - |  | ---------- | ------ | - | ------------ | - | ---- | ------- | - | ------------- | ----- | - |  | ------ | -------- | ------ |  | - | ------- | ------ | - | - | ------ | ------ | -
|                                                                  |                                |                |        |   |            |   |    |             |  | Accumulated |               |   |  |            |        |   |              |   |     
|                                                                  |                                |                |        |   |            |   |    | Other       |  |             | Notes         |   |  |            |        |   |              |  
|                                                                  |                                | Common Stock   |        |   | Additional |   |    | Deferred    |  |             | Comprehensive |   |  | Receivable |        |   |              |   |      |         |  
|                                                                  |                                |                |        |   | Paid-In    |   |    | Stock-Based |  |             | Income        |   |  | From       |        |   | Accumulated  |   |      |         |   | Comprehensive |      
|                                                                  |                                | Shares         |        |   | Amount     |   |    | Capital     |  |             | Compensation  |   |  | (Loss)     |        |   | Stockholders |   |      | Deficit |   |               | Total |   |  | Income |         
|                                                                  |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |         
|                                                                  |                                | (In thousands) |       
|Balances as of December 31, 2002                                  |                                |                | 30,599 |   |            | $ | 31 |             |  | $           | 166,727       |   |  | $          | (19    | ) |              | $ | 165  |         |   | $             | (54   | ) |  | $      | (103,449 | )      |  | $ | 63,401  |        |   |   |        |       
|Issuance of common stock upon exercise of stock options           |                                |                | 1,662  |   |            |   | 1  |             |  |             | 8,313         |   |  |            |       |   |              |   |     |         |   |               |      |   |  |        |         |        |  |   | 8,314   |        |   |   |        |       
|Issuance of common stock pursuant to Employee Stock Purchase Plan |                                |                | 240    |   |            |   |   |             |  |             | 780           |   |  |            |       |   |              |   |     |         |   |               |      |   |  |        |         |        |  |   | 780     |        |   |   |        |       
|Repayments of notes receivable from stockholders                  |                                |                |       |   |            |   |   |             |  |             |              |   |  |            |       |   |              |   |     |         |   |               | 48    |   |  |        |         |        |  |   | 48      |        |   |   |        |       
|Amortization of stock-based compensation                          |                                |                |       |   |            |   |   |             |  |             |              |   |  |            | 19     |   |              |   |     |         |   |               |      |   |  |        |         |        |  |   | 19      |        |   |   |        |       
|Comprehensive income:                                             |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |          |        |  |   |         |        |   |   |        |       
|                                                                  | Unrealized loss on investments |                |        |  |            |   |    |            |  |             |               |  |  |            |        |  |              |   |      | (177    | ) |               |       |  |  |        |          |       |  |   |         | (177   | ) |   | $      | (177   | )
|                                                                  | Net income                     |                |        |  |            |   |    |            |  |             |               |  |  |            |        |  |              |   |      |        |   |               |       |  |  |        |          | 11,033 |  |   |         | 11,033 |   |   |        | 11,033 |  
|                                                                  |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |         
|Comprehensive income                                              |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |          |        |  |   |         |        |   | $ | 10,856 |       
|                                                                  |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |         
|Balances as of December 31, 2003                                  |                                |                | 32,501 |   |            |   | 32 |             |  |             | 175,820       |   |  |            |       |   |              |   | (12  | )       |   |               | (6    | ) |  |        | (92,416  | )      |  |   | 83,418  |        |   |   |        |       
|Issuance 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         |   |  |            |       |   |              |   |     |         |   |               |      |   |  |        |         |        |  |   | 2,926   |        |   |   |        |       
|Issuance of common stock pursuant to Employee Stock Purchase Plan |                                |                | 297    |   |            |   |   |             |  |             | 1,256         |   |  |            |       |   |              |   |     |         |   |               |      |   |  |        |         |        |  |   | 1,256   |        |   |   |        |       
|Repayments of notes receivable from stockholders                  |                                |                |       |   |            |   |   |             |  |             |              |   |  |            |       |   |              |   |     |         |   |               | 6     |   |  |        |         |        |  |   | 6       |        |   |   |        |       
|Amortization of stock-based compensation                          |                                |                |       |   |            |   |   |             |  |             |              |   |  |            | 14     |   |              |   |     |         |   |               |      |   |  |        |         |        |  |   | 14      |        |   |   |        |       
|Comprehensive income:                                             |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |          |        |  |   |         |        |   |   |        |       
|                                                                  | Unrealized loss on investments |                |        |  |            |   |    |            |  |             |               |  |  |            |        |  |              |   |      | (195    | ) |               |       |  |  |        |          |       |  |   |         | (195   | ) |   | $      | (195   | )
|                                                                  | Net income                     |                |        |  |            |   |    |            |  |             |               |  |  |            |        |  |              |   |      |        |   |               |       |  |  |        |          | 14,534 |  |   |         | 14,534 |   |   |        | 14,534 |  
|                                                                  |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |         
|Comprehensive income                                              |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |          |        |  |   |         |        |   | $ | 14,339 |       
|                                                                  |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |         
|Balances as of December 31, 2004                                  |                                |                | 33,418 |   |            |   | 33 |             |  |             | 181,625       |   |  |            | (1,610 | ) |              |   | (207 | )       |   |               |      |   |  |        | (77,882  | )      |  |   | 101,959 |        |   |   |        |       
|Issuance of common stock upon exercise of stock options           |                                |                | 490    |   |            |   | 1  |             |  |             | 3,033         |   |  |            |       |   |              |   |     |         |   |               |      |   |  |        |         |        |  |   | 3,034   |        |   |   |        |       
|Issuance of common stock pursuant to Employee Stock Purchase Plan |                                |                | 299    |   |            |   |   |             |  |             | 2,346         |   |  |            |       |   |              |   |     |         |   |               |      |   |  |        |         |        |  |   | 2,346   |        |   |   |        |       
|Repurchase of restricted common stock                             |                                |                | (10    | ) |            |   |   |             |  |             | (149          | ) |  |            | 142    |   |              |   |     |         |   |               |      |   |  |        |         |        |  |   | (7      | )      |   |   |        |       
|Tax benefit from employee stock option plans                      |                                |                |       |   |            |   |   |             |  |             | 1,191         |   |  |            |       |   |              |   |     |         |   |               |      |   |  |        |         |        |  |   | 1,191   |        |   |   |        |       
|Amortization of stock-based compensation                          |                                |                |       |   |            |   |   |             |  |             |              |   |  |            | 901    |   |              |   |     |         |   |               |      |   |  |        |         |        |  |   | 901     |        |   |   |        |       
|Comprehensive income:                                             |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |          |        |  |   |         |        |   |   |        |       
|                                                                  | Unrealized gain on investments |                |        |  |            |   |    |            |  |             |               |  |  |            |        |  |              |   |      | 25      |   |               |       |  |  |        |          |       |  |   |         | 25     |   |   | $      | 25     |  
|                                                                  | Net income                     |                |        |  |            |   |    |            |  |             |               |  |  |            |        |  |              |   |      |        |   |               |       |  |  |        |          | 19,158 |  |   |         | 19,158 |   |   |        | 19,158 |  
|                                                                  |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |         
|Comprehensive income                                              |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |          |        |  |   |         |        |   | $ | 19,183 |       
|                                                                  |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |         
|Balances as of December 31, 2005                                  |                                |                | 34,197 |   |            | $ | 34 |             |  | $           | 188,046       |   |  | $          | (567   | ) |              | $ | (182 | )       |   | $             |      |   |  | $      | (58,724  | )      |  | $ | 128,607 |        |   |   |        |       
|                                                                  |                                |                |        |   |            |   |    |             |  |             |               |   |  |            |        |   |              |   |      |         |   |               |       |   |  |        |         



47



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##### Table of Contents



PACKETEER, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |        |        |         |         |       |        |         |  
|---------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------- | ----------------------------------------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                     |                                                                                         | Years Ended December 31,                                                                 |                                  
|                                                     |                                                                                         |                                                                                          |                                  
|                                                     |                                                                                         | 2005                                                                                     |                                   |                                           | 2004   |        |         | 2003    |       
|                                                     |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |       
|                                                     |                                                                                         | (In thousands)                                                                           |                                  
|Cash flows from operating activities:                |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |        |        |         |        
|                                                     | Net income                                                                              |                                                                                          | $                                 | 19,158                                    |        |        | $       | 14,534  |        |        | $       | 11,033  |      
|                                                     | Adjustments to reconcile net income to net cash provided by
    operating activities:   |                                                                                          |                                   |                                           |        |        |         |         |        |        |         |         |      
|                                                     |                                                                                         | Depreciation                                                                             |                                   |                                           | 2,414  |        |         |         | 1,728  |        |         |         | 1,418 |       
|                                                     |                                                                                         | Amortization of purchased intangibles                                                    |                                   |                                           | 1,557  |        |         |         | 38     |        |         |         |      |       
|                                                     |                                                                                         | Amortization of stock-based compensation                                                 |                                   |                                           | 901    |        |         |         | 14     |        |         |         | 19    |       
|                                                     |                                                                                         | Tax benefit from employee stock option plans                                             |                                   |                                           | 1,191  |        |         |         |       |        |         |         |      |       
|                                                     |                                                                                         | Deferred taxes                                                                           |                                   |                                           | (2,965 | )      |         |         | (2,375 | )      |         |         |      |       
|                                                     |                                                                                         | Loss on disposal of property and equipment                                               |                                   |                                           | 20     |        |         |         | 9      |        |         |         |      |       
|                                                     |                                                                                         | Other non-cash charges                                                                   |                                   |                                           |       |        |         |         |       |        |         |         | 1     |       
|                                                     |                                                                                         | Changes in operating assets and liabilities, net of acquired
    assets and liabilities: |                                   |                                           |        |        |         |         |        |        |         |         |       |       
|                                                     |                                                                                         |                                                                                          | Accounts receivable               |                                           |        | 1,069  |         |         |        | (5,351 | )       |         |       | (3,897 | )      
|                                                     |                                                                                         |                                                                                          | Other receivables                 |                                           |        | 1,680  |         |         |        | 475    |         |         |       | 223    |        
|                                                     |                                                                                         |                                                                                          | Inventories                       |                                           |        | (1,873 | )       |         |        | (192   | )       |         |       | (400   | )      
|                                                     |                                                                                         |                                                                                          | Prepaids and other current assets |                                           |        | (186   | )       |         |        | (12    | )       |         |       | 169    |        
|                                                     |                                                                                         |                                                                                          | Accounts payable                  |                                           |        | 6      |         |         |        | 573    |         |         |       | 877    |        
|                                                     |                                                                                         |                                                                                          | Accrued compensation              |                                           |        | 84     |         |         |        | 2,217  |         |         |       | 789    |        
|                                                     |                                                                                         |                                                                                          | Other accrued liabilities         |                                           |        | (1,163 | )       |         |        | 1,896  |         |         |       | 662    |        
|                                                     |                                                                                         |                                                                                          | Income taxes payable              |                                           |        | 1,082  |         |         |        | 1,379  |         |         |       | 553    |        
|                                                     |                                                                                         |                                                                                          | Deferred revenue                  |                                           |        | 5,958  |         |         |        | 6,428  |         |         |       | 3,624  |        
|                                                     |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |       
|                                                     |                                                                                         |                                                                                          |                                   | Net cash provided by operating activities |        |        | 28,933  |         |        |        | 21,361  |         |       |        | 15,071  |  
|                                                     |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |       
|Cash flows from investing activities:                |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |        |        |         |        
|                                                     | Purchases of property and equipment                                                     |                                                                                          |                                   | (2,049                                    | )      |        |         | (1,931  | )      |        |         | (985    | )    
|                                                     | Purchases of investments                                                                |                                                                                          |                                   | (109,851                                  | )      |        |         | (93,487 | )      |        |         | (88,113 | )    
|                                                     | Proceeds from sales and maturities of investments                                       |                                                                                          |                                   | 104,945                                   |        |        |         | 72,810  |        |        |         | 46,223  |      
|                                                     | Acquisition, net of cash acquired                                                       |                                                                                          |                                   | (1,750                                    | )      |        |         | (17,304 | )      |        |         |        |      
|                                                     | Other assets                                                                            |                                                                                          |                                   | (52                                       | )      |        |         | (33     | )      |        |         | (83     | )    
|                                                     |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |       
|                                                     |                                                                                         |                                                                                          |                                   | Net cash used in investing activities     |        |        | (8,757  | )       |        |        | (39,945 | )       |       |        | (42,958 | )
|                                                     |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |       
|Cash flows from financing activities:                |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |        |        |         |        
|                                                     | Proceeds from issuance of common stock, net of repurchases                              |                                                                                          |                                   | 3,027                                     |        |        |         | 2,926   |        |        |         | 8,314   |      
|                                                     | Sale of stock to employees under the ESPP                                               |                                                                                          |                                   | 2,346                                     |        |        |         | 1,256   |        |        |         | 780     |      
|                                                     | Proceeds from repayment of notes receivable from stockholders                           |                                                                                          |                                   |                                          |        |        |         | 6       |        |        |         | 48      |      
|                                                     | Repayments of line of credit                                                            |                                                                                          |                                   |                                          |        |        |         |        |        |        |         | (1,000  | )    
|                                                     | Payments of notes payable                                                               |                                                                                          |                                   |                                          |        |        |         | (139    | )      |        |         | (189    | )    
|                                                     | Principal payments of capital lease obligations                                         |                                                                                          |                                   |                                          |        |        |         | (457    | )      |        |         | (546    | )    
|                                                     |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |       
|                                                     |                                                                                         |                                                                                          |                                   | Net cash provided by financing activities |        |        | 5,373   |         |        |        | 3,592   |         |       |        | 7,407   |  
|                                                     |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |       
|Net increase (decrease) in cash and cash equivalents |                                                                                         |                                                                                          | 25,549                            |                                           |        |        | (14,992 | )       |        |        | (20,480 | )      
|Cash and cash equivalents at beginning of year       |                                                                                         |                                                                                          | 10,672                            |                                           |        |        | 25,664  |         |        |        | 46,144  |        
|                                                     |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |       
|Cash and cash equivalents at end of year             |                                                                                         | $                                                                                        | 36,221                            |                                           |        | $      | 10,672  |         |        | $      | 25,664  |        
|                                                     |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |       
|Supplemental Disclosures of Cash Flow Information:   |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |        |        |         |        
|Non-cash investing and financing activities:         |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |        |        |         |        
|                                                     | Issuance of restricted common stock, net of repurchases, to
    former Mentat employees |                                                                                          | $                                 |                                          |        |        | $       | 1,624   |        |        | $       |        |      
|                                                     |                                                                                         |                                                                                          |                                   |                                           |        |        |         |         |       



48



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                                                           
|-- | --------------------------------------------------------------------------
|1. | DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES



| |                        
| | -----------------------
| | DESCRIPTION OF BUSINESS





| |                     
| | --------------------
| | BASIS OF PREPARATION





| |                 
| | ----------------
| | USE OF ESTIMATES





| |                    
| | -------------------
| | REVENUE RECOGNITION



97-2, 98-9, 97-2, 97-2:




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



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















| |                      
| | ---------------------
| | SALES RETURN RESERVES





|                             |                                     |                          |       |        |      |   |       |        |   |   |     |        |  
|---------------------------- | ----------------------------------- | ------------------------ | ----- | ------ | ---- | - | ----- | ------ | - | - | --- | ------ | -
|                             |                                     | Years Ended December 31, |      
|                             |                                     |                          |      
|                             |                                     | 2005                     |       |        | 2004 |   |       | 2003   |  
|                             |                                     |                          |       |        |      |   |       |        |  
|Balance at beginning of year |                                     | $                        | 1,251 |        |      | $ | 713   |        |   | $ | 875 |       
|                             | Additions, charged against revenues |                          |       | 3,400  |      |   |       | 2,247  |   |   |     | 1,160  |  
|                             | Deductions                          |                          |       | (3,026 | )    |   |       | (1,709 | ) |   |     | (1,322 | )
|                             |                                     |                          |       |        |      |   |       |        |  
|Balance at end of year       |                                     | $                        | 1,625 |        |      | $ | 1,251 |        |   | $ | 713 |       
|                             |                                     |                          |       |        |      |   |       |        |  

50



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                
| | ---------------
| | REBATE RESERVES

01-9,




| |                                
| | -------------------------------
| | ALLOWANCE FOR DOUBTFUL ACCOUNTS





|                             |                                                                            |              |     |     |      |   |     |      |   |   |     |     |  
|---------------------------- | -------------------------------------------------------------------------- | ------------ | --- | --- | ---- | - | --- | ---- | - | - | --- | --- | -
|                             |                                                                            | Years Ended  |    
|                             |                                                                            | December 31, |    
|                             |                                                                            |              |    
|                             |                                                                            | 2005         |     |     | 2004 |   |     | 2003 |  
|                             |                                                                            |              |     |     |      |   |     |      |  
|Balance at beginning of year |                                                                            | $            | 229 |     |      | $ | 149 |      |   | $ | 145 |    
|                             | Provision for (reversal of) allowance for doubtful accounts
    receivable |              |     | (45 | )    |   |     | 89   |   |   |     | 65  |  
|                             | Amounts written off, net of recoveries                                     |              |     | (9  | )    |   |     | (9   | ) |   |     | (61 | )
|                             |                                                                            |              |     |     |      |   |     |      |  
|Balance at end of year       |                                                                            | $            | 175 |     |      | $ | 229 |      |   | $ | 149 |    
|                             |                                                                            |              |     |     |      |   |     |      |  



| |                 
| | ----------------
| | COST OF REVENUES





| |                          
| | -------------------------
| | CASH AND CASH EQUIVALENTS





| |            
| | -----------
| | INVESTMENTS



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |            
| | -----------
| | INVENTORIES

first-in,




|                   |             |      |       |       |      |   |       |       | 
|------------------ | ----------- | ---- | ----- | ----- | ---- | - | ----- | ----- | 
|                   |             | 2005 |       |       | 2004 |  
|                   |             |      |       |       |      |  
|Completed products |             | $    | 4,584 |       |      | $ | 2,957 |      
|Components         |             |      | 395   |       |      |   | 149   |      
|                   |             |      |       |       |      |  
|                   | Inventories |      | $     | 4,979 |      |   | $     | 3,106 | 
|                   |             |      |       |       |      |  



| |                  
| | -----------------
| | LONG-LIVED ASSETS

Property and equipment,




|                                                |  |      |        |   |      |   |        |  
|----------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                |  | 2005 |        |   | 2004 |  
|                                                |  |      |        |   |      |  
|Computers and equipment                         |  | $    | 7,323  |   |      | $ | 6,848  |  
|Furniture and fixtures                          |  |      | 1,439  |   |      |   | 783    |  
|Leasehold improvements                          |  |      | 1,582  |   |      |   | 1,539  |  
|                                                |  |      |        |   |      |  
|                                                |  |      | 10,344 |   |      |   | 9,170  |  
|Less: accumulated depreciation and amortization |  |      | (7,663 | ) |      |   | (6,104 | )
|                                                |  |      |        |   |      |  
|Property and equipment, net                     |  | $    | 2,681  |   |      | $ | 3,066  |  
|                                                |  |      |        |   |      |  

Goodwill


Other intangibles


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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                     |                             |                   |       |       |                   |   |        |        |   |   |          |       |  |              |       |       |        |   |     |     |   |   |       |       | 
|------------------------------------ | --------------------------- | ----------------- | ----- | ----- | ----------------- | - | ------ | ------ | - | - | -------- | ----- |  | ------------ | ----- | ----- | ------ | - | --- | --- | - | - | ----- | ----- | 
|                                     |                             | December 31, 2005 |       |       | December 31, 2004 |  
|                                     |                             |                   |       |       |                   |  
|                                     |                             | Gross             |       |       |                   |   | Gross  |        |   |  
|                                     |                             | Carrying          |       |       | Accumulated       |   |        | Net    |   |   | Carrying |       |  | Accumulated  |       |       | Net    |  
|                                     |                             | Amount            |       |       | Amortization      |   |        | Amount |   |   | Amount   |       |  | Amortization |       |       | Amount |  
|                                     |                             |                   |       |       |                   |   |        |        |   |   |          |       |  |              |       |       |        |  
|Developed technology                 |                             | $                 | 5,100 |       |                   | $ | (1,047 | )      |   | $ | 4,053    |       |  | $            | 5,100 |       |        | $ | (28 | )   |   | $ | 5,073 |      
|Customer contracts and relationships |                             |                   | 1,900 |       |                   |   | (479   | )      |   |   | 1,421    |       |  |              | 1,900 |       |        |   | (8  | )   |   |   | 1,892 |      
|Tradename                            |                             |                   | 200   |       |                   |   | (68    | )      |   |   | 132      |       |  |              | 200   |       |        |   | (2  | )   |   |   | 198   |      
|                                     |                             |                   |       |       |                   |   |        |        |   |   |          |       |  |              |       |       |        |  
|                                     | Purchased intangible assets |                   | $     | 7,200 |                   |   | $      | (1,594 | ) |   | $        | 5,606 |  |              | $     | 7,200 |        |   | $   | (38 | ) |   | $     | 7,163 | 
|                                     |                             |                   |       |       |                   |   |        |        |   |   |          |       |  |              |       |       |        |  





|     |  |        |       | 
|---- |  | ------ | ----- | 
|Year |  | Amount |      
|     |  |        |      
|2006 |  | $      | 1,415 | 
|2007 |  |        | 1,360 | 
|2008 |  |        | 1,295 | 
|2009 |  |        | 1,268 | 
|2010 |  |        | 268   | 
|     |  |        |      
|     |  | $      | 5,606 | 
|     |  |        |      







| |                                      
| | -------------------------------------
| | ADVERTISING AND SALES PROMOTION COSTS





| |                  
| | -----------------
| | WARRANTY RESERVES



53



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                             |                                  |                     |     |      |      |   |     |      |   |   |     |      |  
|---------------------------- | -------------------------------- | ------------------- | --- | ---- | ---- | - | --- | ---- | - | - | --- | ---- | -
|                             |                                  | For the Years Ended |    
|                             |                                  | December 31,        |    
|                             |                                  |                     |    
|                             |                                  | 2005                |     |      | 2004 |   |     | 2003 |  
|                             |                                  |                     |     |      |      |   |     |      |  
|Balance at beginning of year |                                  | $                   | 315 |      |      | $ | 303 |      |   | $ | 284 |     
|                             | Provision for current year sales |                     |     | 242  |      |   |     | 422  |   |   |     | 372  |  
|                             | Warranty costs incurred          |                     |     | (323 | )    |   |     | (410 | ) |   |     | (353 | )
|                             |                                  |                     |     |      |      |   |     |      |  
|Balance at end of year       |                                  | $                   | 234 |      |      | $ | 315 |      |   | $ | 303 |     
|                             |                                  |                     |     |      |      |   |     |      |  



| |                               
| | ------------------------------
| | RESEARCH AND DEVELOPMENT COSTS





| |                       
| | ----------------------
| | CONCENTRATIONS OF RISK









| |             
| | ------------
| | INCOME TAXES



54



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                         
| | ------------------------
| | STOCK-BASED COMPENSATION



|                                                                                                                          |  |                          |         |   |      |   |         |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                                                          |  | Years Ended December 31, |        
|                                                                                                                          |  |                          |        
|                                                                                                                          |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|                                                                                                                          |  |                          |         |   |      |   |         |      | 
|Net income as reported                                                                                                    |  | $                        | 19,158  |   |      | $ | 14,534  |      |  | $ | 11,033 |  
|Add: Stock-based compensation under APB 25, net of tax                                                                    |  |                          | 784     |   |      |   | 12      |      |  |   | 17     |  
|Deduct: Stock-based employee compensation expense determined
    under fair value-based method for all awards, net of tax |  |                          | (11,589 | ) |      |   | (10,169 | )    |  |   | (9,069 | )
|                                                                                                                          |  |                          |         |   |      |   |         |      | 
|Pro forma net income                                                                                                      |  | $                        | 8,353   |   |      | $ | 4,377   |      |  | $ | 1,981  |  
|                                                                                                                          |  |                          |         |   |      |   |         |      | 
|Earnings per share:                                                                                                       |  |                          |         |   |      |   |         |      |  |   |        |  
|Basic  as reported                                                                                                       |  | $                        | 0.57    |   |      | $ | 0.44    |      |  | $ | 0.35   |  
|Diluted  as reported                                                                                                     |  | $                        | 0.55    |   |      | $ | 0.42    |      |  | $ | 0.32   |  
|Basic  pro forma                                                                                                         |  | $                        | 0.25    |   |      | $ | 0.13    |      |  | $ | 0.06   |  
|Diluted  pro forma                                                                                                       |  | $                        | 0.24    |   |      | $ | 0.13    |      |  | $ | 0.06   |  





|                         |  |         |      |   |      |  |      |      |  |  |      |  
|------------------------ |  | ------- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                         |  | Options |     
|                         |  |         |     
|                         |  | 2005    |      |   | 2004 |  |      | 2003 | 
|                         |  |         |      |   |      |  |      |      | 
|Expected life (years)    |  |         | 3.3  |   |      |  | 3.3  |      |  |  | 3.4  |  
|Expected volatility      |  |         | 90   | % |      |  | 102  | %    |  |  | 109  | %
|Risk-free interest rates |  |         | 4.03 | % |      |  | 2.64 | %    |  |  | 2.22 | %





55



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |  |                |      |   |      |  |      |      |  |  |      |  
|------------------------ |  | -------------- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                         |  | ESPP Issuances |     
|                         |  |                |     
|                         |  | 2005           |      |   | 2004 |  |      | 2003 | 
|                         |  |                |      |   |      |  |      |      | 
|Expected life (years)    |  |                | 1.2  |   |      |  | 1.3  |      |  |  | 1.3  |  
|Expected volatility      |  |                | 91   | % |      |  | 101  | %    |  |  | 111  | %
|Risk-free interest rates |  |                | 3.60 | % |      |  | 2.15 | %    |  |  | 1.10 | %





| |                              
| | -----------------------------
| | FOREIGN CURRENCY TRANSACTIONS







| |                                  
| | ---------------------------------
| | OTHER COMPREHENSIVE INCOME (LOSS)





| |                     
| | --------------------
| | NET INCOME PER SHARE



56



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|             |                              |                                                                                                 |                                                    |        |        |        |   |        |        |        |   |        |        |        | 
|------------ | ---------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|             |                              | Years Ended December 31,                                                                        |                                                   
|             |                              |                                                                                                 |                                                   
|             |                              | 2005                                                                                            |                                                    |        | 2004   |        |   | 2003   |       
|             |                              |                                                                                                 |                                                    |        |        |        |   |        |       
|Numerator:   |                              |                                                                                                 |                                                    |        |        |        |   |        |        |        |   |       
|             | Net income                   |                                                                                                 | $                                                  | 19,158 |        |        | $ | 14,534 |        |        | $ | 11,033 |       
|             |                              |                                                                                                 |                                                    |        |        |        |   |        |       
|Denominator: |                              |                                                                                                 |                                                    |        |        |        |   |        |        |        |   |       
|             | Basic:                       |                                                                                                 |                                                    |        |        |        |   |        |        |        |   |        |       
|             |                              | Weighted-average common shares outstanding                                                      |                                                    |        | 33,932 |        |   |        | 33,104 |        |   |        | 31,634 |       
|             |                              | Less: common shares subject to repurchase                                                       |                                                    |        | (109   | )      |   |        | (110   | )      |   |        |       |       
|             |                              |                                                                                                 |                                                    |        |        |        |   |        |       
|             |                              |                                                                                                 | Basic weighted-average common shares outstanding   |        |        | 33,823 |   |        |        | 32,994 |   |        |        | 31,634 | 
|             |                              |                                                                                                 |                                                    |        |        |        |   |        |       
|             | Diluted:                     |                                                                                                 |                                                    |        |        |        |   |        |        |        |   |        |       
|             |                              | Basic weighted-average common shares outstanding                                                |                                                    |        | 33,823 |        |   |        | 32,994 |        |   |        | 31,634 |       
|             |                              | Add: potentially dilutive common shares from stock options and
    shares subject to repurchase |                                                    |        | 1,221  |        |   |        | 1,485  |        |   |        | 2,706  |       
|             |                              | Add: potentially dilutive common shares from warrants                                           |                                                    |        | 21     |        |   |        | 23     |        |   |        | 24     |       
|             |                              |                                                                                                 |                                                    |        |        |        |   |        |       
|             |                              |                                                                                                 | Diluted weighted-average common shares outstanding |        |        | 35,065 |   |        |        | 34,502 |   |        |        | 34,364 | 
|             |                              |                                                                                                 |                                                    |        |        |        |   |        |       
|             | Basic net income per share   |                                                                                                 | $                                                  | 0.57   |        |        | $ | 0.44   |        |        | $ | 0.35   |       
|             |                              |                                                                                                 |                                                    |        |        |        |   |        |       
|             | Diluted net income per share |                                                                                                 | $                                                  | 0.55   |        |        | $ | 0.42   |        |        | $ | 0.32   |       
|             |                              |                                                                                                 |                                                    |        |        |        |   |        |       



|                                    |  |              |       |  |      |  |       |      |  |  |     | 
|----------------------------------- |  | ------------ | ----- |  | ---- |  | ----- | ---- |  |  | --- | 
|                                    |  | Years Ended  |      
|                                    |  | December 31, |      
|                                    |  |              |      
|                                    |  | 2005         |       |  | 2004 |  |       | 2003 | 
|                                    |  |              |       |  |      |  |       |      | 
|Shares issuable under stock options |  |              | 4,174 |  |      |  | 2,170 |      |  |  | 226 | 





| |                                 
| | --------------------------------
| | RECENT ACCOUNTING PRONOUNCEMENTS



57



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












123(R)-3,


58



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|   |                            
|-- | ---------------------------
|2. | ACQUISITION OF MENTAT, INC.





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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                   |                           |   |       |        |  
|---------------------------------- | ------------------------- | - | ----- | ------ | -
|Accounts receivable                |                           | $ | 435   |       
|Non-trade receivables              |                           |   | 2,176 |       
|Inventory, net                     |                           |   | 223   |       
|Prepaids and other current assets  |                           |   | 99    |       
|Property, plant and equipment, net |                           |   | 279   |       
|Intangible assets                  |                           |   | 7,200 |       
|Goodwill                           |                           |   | 9,527 |       
|Other assets                       |                           |   | 20    |       
|                                   |                           |   |      
|                                   | Total assets acquired     |   |       | 19,959 |  
|                                   |                           |   |      
|Current liabilities                |                           |   | (891  | )     
|Long-term accrued liabilities      |                           |   | (14   | )     
|                                   |                           |   |      
|                                   | Total liabilities assumed |   |       | (905   | )
|                                   |                           |   |      
|                                   | Net assets acquired       |   | $     | 19,054 |  
|                                   |                           |   |      







60



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |                      
|-- | ---------------------
|3. | FINANCIAL INSTRUMENTS



|                                              |                       |                               |         |            |       |   |            |        |  |           |            |      |   |   |         |        | 
|--------------------------------------------- | --------------------- | ----------------------------- | ------- | ---------- | ----- | - | ---------- | ------ |  | --------- | ---------- | ---- | - | - | ------- | ------ | 
|                                              |                       | Available-for-Sale Securities |        
|                                              |                       |                               |        
|                                              |                       |                               |         | Gross      |       |   | Gross      |        |  |          
|                                              |                       |                               |         | Unrealized |       |   | Unrealized |        |  | Estimated |           
|                                              |                       | Amortized Cost                |         |            | Gains |   |            | Losses |  |           | Fair Value |     
|                                              |                       |                               |         |            |       |   |            |        |  |           |            |     
|DECEMBER 31, 2005                             |                       |                               |         |            |       |   |            |        |  |           |            |      |   |   |         |       
|Commercial paper and money markets            |                       | $                             | 17,160  |            |       | $ |           |        |  | $         | (1         | )    |   | $ | 17,159  |       
|Asset and mortgage backed securities          |                       |                               | 23,987  |            |       |   | 4          |        |  |           | (62        | )    |   |   | 23,929  |       
|Corporate bonds                               |                       |                               | 19,215  |            |       |   | 2          |        |  |           | (14        | )    |   |   | 19,203  |       
|                                              |                       |                               |         |            |       |   |            |        |  |           |            |     
|                                              | Total debt securities |                               |         | 60,362     |       |   |            | 6      |  |           |            | (77  | ) |   |         | 60,291 | 
|US Treasury and Agencies                      |                       |                               | 59,402  |            |       |   | 2          |        |  |           | (113       | )    |   |   | 59,291  |       
|                                              |                       |                               |         |            |       |   |            |        |  |           |            |     
|                                              |                       | $                             | 119,764 |            |       | $ | 8          |        |  | $         | (190       | )    |   | $ | 119,582 |       
|                                              |                       |                               |         |            |       |   |            |        |  |           |            |     
|Amounts included in cash and cash equivalents |                       | $                             | 33,125  |            |       | $ | 1          |        |  | $         |           |      |   | $ | 33,126  |       
|Amounts included in short-term investments    |                       |                               | 81,387  |            |       |   | 7          |        |  |           | (166       | )    |   |   | 81,228  |       
|Amounts included in long-term investments     |                       |                               | 5,252   |            |       |   |           |        |  |           | (24        | )    |   |   | 5,228   |       
|                                              |                       |                               |         |            |       |   |            |        |  |           |            |     
|                                              |                       | $                             | 119,764 |            |       | $ | 8          |        |  | $         | (190       | )    |   | $ | 119,582 |       
|                                              |                       |                               |         |            |       |   |            |        |  |           |            |     
|DECEMBER 31, 2004                             |                       |                               |         |            |       |   |            |        |  |           |            |      |   |   |         |       
|Commercial paper and money markets            |                       | $                             | 1,229   |            |       | $ |           |        |  | $         |           |      |   | $ | 1,229   |       
|Asset and mortgage backed securities          |                       |                               | 18,530  |            |       |   | 3          |        |  |           | (61        | )    |   |   | 18,472  |       
|Corporate bonds                               |                       |                               | 16,694  |            |       |   | 1          |        |  |           | (42        | )    |   |   | 16,653  |       
|                                              |                       |                               |         |            |       |   |            |        |  |           |            |     
|                                              | Total debt securities |                               |         | 36,453     |       |   |            | 4      |  |           |            | (103 | ) |   |         | 36,354 | 
|US Treasury and Agencies                      |                       |                               | 53,189  |            |       |   | 1          |        |  |           | (109       | )    |   |   | 53,081  |       
|                                              |                       |                               |         |            |       |   |            |        |  |           |            |     
|                                              |                       | $                             | 89,642  |            |       | $ | 5          |        |  | $         | (212       | )    |   | $ | 89,435  |       
|                                              |                       |                               |         |            |       |   |            |        |  |           |            |     
|Amounts included in cash and cash equivalents |                       | $                             | 7,909   |            |       | $ | 1          |        |  | $         |           |      |   | $ | 7,910   |       
|Amounts included in short-term investments    |                       |                               | 71,683  |            |       |   | 4          |        |  |           | (181       | )    |   |   | 71,506  |       
|Amounts included in long-term investments     |                       |                               | 10,050  |            |       |   |           |        |  |           | (31        | )    |   |   | 10,019  |       
|                                              |                       |                               |         |            |       |   |            |        |  |           |            |     
|                                              |                       | $                             | 89,642  |            |       | $ | 5          |        |  | $         | (212       | )    |   | $ | 89,435  |       
|                                              |                       |                               |         |            |       |   |            |        |  |           |            |     

61



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                      |  |            |         | 
|------------------------------------- |  | ---------- | ------- | 
|                                      |  | Fair Value |        
|                                      |  |            |        
|Mature in one year or less            |  | $          | 114,354 | 
|Mature between one year and two years |  |            | 5,228   | 
|                                      |  |            |        
|                                      |  | $          | 119,582 | 
|                                      |  |            |        





|                                     |  |                     |        |  |                      |   |      |            |  |   |                 |  |  |            |     |   |                 |   |        |  |  |   |      |  
|------------------------------------ |  | ------------------- | ------ |  | -------------------- | - | ---- | ---------- |  | - | --------------- |  |  | ---------- | --- | - | --------------- | - | ------ |  |  | - | ---- | -
|                                     |  | 2005                |       
|                                     |  |                     |       
|                                     |  | Less than 12 Months |        |  | 12 Months or Greater |   |      | Total      | 
|                                     |  |                     |        |  |                      |   |      |            | 
|Security Description                 |  | Fair Value          |        |  | Unrealized Loss      |   |      | Fair Value |  |   | Unrealized Loss |  |  | Fair Value |     |   | Unrealized Loss |  
|                                     |  |                     |        |  |                      |   |      |            |  |   |                 |  |  |            |     |   |                 |  
|Commercial 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 | )
|                                     |  |                     |        |  |                      |   |      |            |  |   |                 |  |  |            |     |   |                 |  

|                                     |  |                     |        |  |                      |   |       |            |  |                 |   |            |  |   |                 |  |  |   |        |  |  |   |      |  
|------------------------------------ |  | ------------------- | ------ |  | -------------------- | - | ----- | ---------- |  | --------------- | - | ---------- |  | - | --------------- |  |  | - | ------ |  |  | - | ---- | -
|                                     |  | 2004                |       
|                                     |  |                     |       
|                                     |  | Less than 12 Months |        |  | 12 Months or Greater |   | Total |           
|                                     |  |                     |        |  |                      |   |       |           
|Security Description                 |  | Fair Value          |        |  | Unrealized Loss      |   |       | Fair Value |  | Unrealized Loss |   | Fair Value |  |   | Unrealized Loss | 
|                                     |  |                     |        |  |                      |   |       |            |  |                 |   |            |  |   |                 | 
|Asset and mortgage backed securities |  | $                   | 16,056 |  |                      | $ | (61   | )          |  | $               |  |            |  | $ |                |  |  | $ | 16,056 |  |  | $ | (61  | )
|Corporate bonds                      |  |                     | 12,439 |  |                      |   | (42   | )          |  |                 |  |            |  |   |                |  |  |   | 12,439 |  |  |   | (42  | )
|US Treasury and Agencies             |  |                     | 49,094 |  |                      |   | (109  | )          |  |                 |  |            |  |   |                |  |  |   | 49,094 |  |  |   | (109 | )
|                                     |  |                     |        |  |                      |   |       |            |  |                 |   |            |  |   |                 |  |  |  
|                                     |  | $                   | 77,589 |  |                      | $ | (212  | )          |  | $               |  |            |  | $ |                |  |  | $ | 77,589 |  |  | $ | (212 | )
|                                     |  |                     |        |  |                      |   |       |            |  |                 |   |            |  |   |                 |  |  |  





|   |                           
|-- | --------------------------
|4. | COMMITMENTS AND GUARANTEES



62



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                    |  |                   |       | 
|----------------------------------- |  | ----------------- | ----- | 
|Years Ending December 31,           |  | Lease Obligations |      
|                                    |  |                   |      
|2006                                |  | $                 | 1,887 | 
|2007                                |  |                   | 1,217 | 
|2008                                |  |                   | 80    | 
|2009                                |  |                   | 80    | 
|2010                                |  |                   | 56    | 
|Thereafter                          |  |                   | 53    | 
|                                    |  |                   |      
|Total future minimum lease payments |  | $                 | 3,373 | 
|                                    |  |                   |      







|   |              
|-- | -------------
|5. | CONTINGENCIES

In re
Packeteer, Inc. Initial Public Offering Securities Litigation,








63



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |             
|-- | ------------
|6. | INCOME TAXES



|              |                                                        |      |        |        |      |   |        |        |  |   |       |        | 
|------------- | ------------------------------------------------------ | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ----- | ------ | 
|              |                                                        | 2005 |        |        | 2004 |   |        | 2003   | 
|              |                                                        |      |        |        |      |   |        |        | 
|United States |                                                        | $    | 6,060  |        |      | $ | 2,627  |        |  | $ | 3,337 |       
|Foreign       |                                                        |      | 13,223 |        |      |   | 11,524 |        |  |   | 8,922 |       
|              |                                                        |      |        |        |      |   |        |        | 
|              | Net income before provision (benefit) for income taxes |      | $      | 19,283 |      |   | $      | 14,151 |  |   | $     | 12,259 | 
|              |                                                        |      |        |        |      |   |        |        | 



|          |         |                                      |   |        |        |   |   |        |        |   |   |       |       | 
|--------- | ------- | ------------------------------------ | - | ------ | ------ | - | - | ------ | ------ | - | - | ----- | ----- | 
|          |         | 2005                                 |   |        | 2004   |   |   | 2003   |       
|          |         |                                      |   |        |        |   |   |        |       
|Current:  |         |                                      |   |        |        |   |   |        |        |   |   |      
|          | Federal |                                      | $ | 1,681  |        |   | $ | 1,174  |        |   | $ | 75    |      
|          | State   |                                      |   | 37     |        |   |   | 6      |        |   |   | 9     |      
|          | Foreign |                                      |   | 1,374  |        |   |   | 812    |        |   |   | 1,142 |      
|          |         |                                      |   |        |        |   |   |        |       
|          |         | Total current                        |   |        | 3,092  |   |   |        | 1,992  |   |   |       | 1,226 | 
|Deferred: |         |                                      |   |        |        |   |   |        |        |   |   |      
|          | Federal |                                      |   | (387   | )      |   |   | (2,375 | )      |   |   |      |      
|          | State   |                                      |   | (1,910 | )      |   |   |       |        |   |   |      |      
|          | Foreign |                                      |   | (670   | )      |   |   |       |        |   |   |      |      
|          |         |                                      |   |        |        |   |   |        |       
|          |         | Total deferred                       |   |        | (2,967 | ) |   |        | (2,375 | ) |   |       |      | 
|          |         |                                      |   |        |        |   |   |        |       
|          |         | Provision (benefit) for income taxes |   | $      | 125    |   |   | $      | (383   | ) |   | $     | 1,226 | 
|          |         |                                      |   |        |        |   |   |        |       



|                               |                                            |                                  |        |     |      |   |        |      |   |   |        |       | 
|------------------------------ | ------------------------------------------ | -------------------------------- | ------ | --- | ---- | - | ------ | ---- | - | - | ------ | ----- | 
|                               |                                            | For the Years Ended December 31, |       
|                               |                                            |                                  |       
|                               |                                            | 2005                             |        |     | 2004 |   |        | 2003 |  
|                               |                                            |                                  |        |     |      |   |        |      |  
|Federal tax at statutory rate  |                                            | $                                | 6,749  |     |      | $ | 4,953  |      |   | $ | 4,168  |      
|State taxes                    |                                            |                                  | (90    | )   |      |   | 6      |      |   |   | 9      |      
|Operating loss utilized        |                                            |                                  |       |     |      |   | (3,742 | )    |   |   | (1,188 | )    
|Non deductible expenses        |                                            |                                  | 77     |     |      |   | 65     |      |   |   | 54     |      
|Alternative minimum income tax |                                            |                                  |       |     |      |   | 1,172  |      |   |   | 75     |      
|Change in valuation allowance  |                                            |                                  | (3,168 | )   |      |   | (2,375 | )    |   |   |       |      
|Tax credits                    |                                            |                                  | (1,967 | )   |      |   | (895   | )    |   |   |       |      
|Foreign tax differential       |                                            |                                  | (1,476 | )   |      |   | 400    |      |   |   | (1,892 | )    
|Other                          |                                            |                                  |       |     |      |   | 33     |      |   |   |       |      
|                               |                                            |                                  |        |     |      |   |        |      |  
|                               | Total provision (benefit) for income taxes |                                  | $      | 125 |      |   | $      | (383 | ) |   | $      | 1,226 | 
|                               |                                            |                                  |        |     |      |   |        |      |  

64



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                        |                                                                                                |                           |         |        |        |   |         |        |        | 
|----------------------- | ---------------------------------------------------------------------------------------------- | ------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                        |                                                                                                | 2005                      |         |        | 2004   |  
|                        |                                                                                                |                           |         |        |        |  
|Deferred tax assets:    |                                                                                                |                           |         |        |        |   |         |       
|                        | Various accruals, reserves and other temporary differences not
    deductible for tax purposes |                           | $       | 3,326  |        |   | $       | 3,340  |       
|                        | Property and equipment                                                                         |                           |         | 540    |        |   |         | 617    |       
|                        | Net operating loss carryforwards                                                               |                           |         | 10,978 |        |   |         | 13,331 |       
|                        | Tax credit carryforwards                                                                       |                           |         | 6,864  |        |   |         | 3,934  |       
|                        |                                                                                                |                           |         |        |        |  
|                        |                                                                                                | Gross deferred tax assets |         |        | 21,708 |   |         |        | 21,222 | 
|Valuation allowance     |                                                                                                |                           | (16,368 | )      |        |   | (18,847 | )     
|                        |                                                                                                |                           |         |        |        |  
|Net deferred tax assets |                                                                                                | $                         | 5,340   |        |        | $ | 2,375   |       
|                        |                                                                                                |                           |         |        |        |  











65



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                     
|-- | --------------------
|7. | STOCKHOLDERS EQUITY



| |                           
| | --------------------------
| | PREFERRED AND COMMON STOCK







| |         
| | --------
| | WARRANTS

,




| |                                  
| | ---------------------------------
| | 1999 EMPLOYEE STOCK PURCHASE PLAN





| |                          
| | -------------------------
| | 1999 STOCK INCENTIVE PLAN



66



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                 |                                 |           |       |                     |           |  |       |                  |   |   |       |       | 
|-------------------------------- | ------------------------------- | --------- | ----- | ------------------- | --------- |  | ----- | ---------------- | - | - | ----- | ----- | 
|                                 |                                 |           |       | Options Outstanding |          
|                                 |                                 |           |       |                     |          
|                                 |                                 | Available |       |                     | Number of |  |       | Weighted-Average |  
|                                 |                                 | for Grant |       |                     | Shares    |  |       | Exercise Price   |  
|                                 |                                 |           |       |                     |           |  |       |                  |  
|Balances as of December 31, 2002 |                                 |           | 1,808 |                     |           |  | 5,010 |                  |   | $ | 7.77  |      
|                                 | Shares made available for grant |           |       | 1,530               |           |  |       |                 |   |   |       |      | 
|                                 | Granted                         |           |       | (1,614              | )         |  |       | 1,614            |   |   |       | 10.84 | 
|                                 | Exercised                       |           |       |                    |           |  |       | (1,611           | ) |   |       | 5.12  | 
|                                 | Cancelled                       |           |       | 284                 |           |  |       | (284             | ) |   |       | 11.22 | 
|                                 |                                 |           |       |                     |           |  |       |                  |  
|Balances as of December 31, 2003 |                                 |           | 2,008 |                     |           |  | 4,729 |                  |   |   | 9.51  |      
|                                 | Shares made available for grant |           |       | 1,625               |           |  |       |                 |   |   |       |      | 
|                                 | Granted                         |           |       | (2,337              | )         |  |       | 2,337            |   |   |       | 16.03 | 
|                                 | Exercised                       |           |       |                    |           |  |       | (510             | ) |   |       | 5.74  | 
|                                 | Cancelled                       |           |       | 898                 |           |  |       | (898             | ) |   |       | 14.17 | 
|                                 |                                 |           |       |                     |           |  |       |                  |  
|Balances as of December 31, 2004 |                                 |           | 2,194 |                     |           |  | 5,658 |                  |   |   | 11.80 |      
|                                 | Shares made available for grant |           |       | 1,671               |           |  |       |                 |   |   |       |      | 
|                                 | Granted                         |           |       | (1,750              | )         |  |       | 1,750            |   |   |       | 12.95 | 
|                                 | Exercised                       |           |       |                    |           |  |       | (490             | ) |   |       | 6.20  | 
|                                 | Cancelled                       |           |       | 589                 |           |  |       | (589             | ) |   |       | 14.23 | 
|                                 |                                 |           |       |                     |           |  |       |                  |  
|Balances as of December 31, 2005 |                                 |           | 2,704 |                     |           |  | 6,329 |                  |   |   | 12.33 |      
|                                 |                                 |           |       |                     |           |  |       |                  |  



|         |                  |                     |             |          |                     |              |          |  |          |        |  |             |          |  |          |  |       |  |  |   |       | 
|-------- | ---------------- | ------------------- | ----------- | -------- | ------------------- | ------------ | -------- |  | -------- | ------ |  | ----------- | -------- |  | -------- |  | ----- |  |  | - | ----- | 
|         |                  | Options Outstanding |             |          |                    
|         |                  |                     |             |          | Options Exercisable |             
|         |                  |                     |             | Weighted |                     |              |          |  |          |       
|         |                  |                     |             | Average  |                     |              | Weighted |  |          | Number |  |             | Weighted | 
|Range of |                  |                     | Number      |          |                     | Remaining    |          |  | Average  |        |  | Exercisable |          |  | Average  | 
|Exercise |                  |                     | Outstanding |          |                     | Contractual  |          |  | Exercise |        |  | at          |          |  | Exercise | 
|Prices   |                  |                     | at 12/31/05 |          |                     | Life (Years) |          |  | Price    |        |  | 12/31/05    |          |  | Price    | 
|         |                  |                     |             |          |                     |              |          |  |          |        |  |             |          |  |          | 
|         | $1.50 to $4.71   |                     |             |          | 861                 |              |          |  | 5.89     |        |  | $           | 3.80     |  |          |  | 730   |  |  | $ | 3.85  | 
|         | $4.75 to $7.36   |                     |             |          | 669                 |              |          |  | 5.30     |        |  |             | 6.26     |  |          |  | 620   |  |  |   | 6.22  | 
|         | $7.63 to $8.36   |                     |             |          | 663                 |              |          |  | 7.94     |        |  |             | 8.27     |  |          |  | 308   |  |  |   | 8.27  | 
|         | $8.38 to $12.06  |                     |             |          | 634                 |              |          |  | 7.34     |        |  |             | 10.81    |  |          |  | 351   |  |  |   | 10.71 | 
|         | $12.10 to $13.77 |                     |             |          | 638                 |              |          |  | 8.59     |        |  |             | 12.58    |  |          |  | 206   |  |  |   | 12.67 | 
|         | $13.79 to $14.00 |                     |             |          | 945                 |              |          |  | 9.06     |        |  |             | 14.00    |  |          |  | 6     |  |  |   | 13.83 | 
|         | $14.01 to $15.82 |                     |             |          | 643                 |              |          |  | 8.37     |        |  |             | 14.78    |  |          |  | 307   |  |  |   | 14.74 | 
|         | $16.12 to $18.60 |                     |             |          | 500                 |              |          |  | 7.03     |        |  |             | 17.41    |  |          |  | 325   |  |  |   | 17.28 | 
|         | $18.69 to $20.77 |                     |             |          | 646                 |              |          |  | 8.07     |        |  |             | 19.41    |  |          |  | 317   |  |  |   | 19.42 | 
|         | $48.06           |                     |             |          | 130                 |              |          |  | 4.07     |        |  |             | 48.06    |  |          |  | 130   |  |  |   | 48.06 | 
|         |                  |                     |             |          |                     |              |          |  |          |        |  |             |          |  |          | 
|         | $1.50-$48.06     |                     |             |          | 6,329               |              |          |  | 7.46     |        |  |             | 12.33    |  |          |  | 3,300 |  |  |   | 11.58 | 
|         |                  |                     |             |          |                     |              |          |  |          |        |  |             |          |  |          | 



67



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                         
| | ------------------------
| | STOCK-BASED COMPENSATION







| |                            
| | ---------------------------
| | COMPREHENSIVE INCOME (LOSS)





|   |            
|-- | -----------
|8. | 401(k) PLAN





|   |                  
|-- | -----------------
|9. | SEGMENT REPORTING



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|              |                             |                          |   |        |         |  |   |        |        |  |   |        |        | 
|------------- | --------------------------- | ------------------------ | - | ------ | ------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|              |                             | Years Ended December 31, |  
|              |                             |                          |  
|              |                             | 2005                     |   |        | 2004    |  |   | 2003   |       
|              |                             |                          |   |        |         |  |   |        |       
|Net revenues: |                             |                          |   |        |         |  |   |        |        |  |   |       
|              | Americas                    |                          | $ | 52,604 |         |  | $ | 37,934 |        |  | $ | 32,847 |       
|              | Asia Pacific                |                          |   | 27,715 |         |  |   | 24,963 |        |  |   | 21,570 |       
|              | Europe, Middle East, Africa |                          |   | 32,622 |         |  |   | 29,540 |        |  |   | 18,306 |       
|              |                             |                          |   |        |         |  |   |        |       
|              |                             | Total net revenues       |   | $      | 112,941 |  |   | $      | 92,437 |  |   | $      | 72,723 | 
|              |                             |                          |   |        |         |  |   |        |       





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##### 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

13a-15(e)




|    |                                                                     
|--- | --------------------------------------------------------------------
|(b) | Managements Report on Internal Control Over Financial
    Reporting

13a-15(f) 15d-15(f)














|    |                                                     
|--- | ----------------------------------------------------
|(c) | Changes in Internal Control Over Financial Reporting



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##### Table of Contents










|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

S-K







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accounting Fees and Services






PART IV







|         |                                           
|-------- | ------------------------------------------
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements


10-K.




| |     |                             
| | --- | ----------------------------
| | (2) | Financial Statement Schedule



Exhibits


10-K.


10-K.




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##### Table of Contents






SIGNATURES


10-K




| |                
| | ---------------
| | PACKETEER, INC.



| |     |              
| | --- | -------------
| | By: | /s/ DAVE CÔTÉ

| |                                      
| | -------------------------------------
| |                                      
| | Dave Côté                            
| | President and Chief Executive Officer
| | Date: March 16, 2006                 

POWER OF ATTORNEY


attorney-in 10-K attorneys-in attorneys-in




|                                   |  |                                                                                        |  |                |  | 
|---------------------------------- |  | -------------------------------------------------------------------------------------- |  | -------------- |  | 
|Name                               |  | Title                                                                                  |  | Date          
|                                   |  |                                                                                        |  |               
|                                  
|/s/ DAVE CÔTÉDave Côté             |  | President and Chief Executive Officer (Principal Executive
    Officer) and Director   |  | March 16, 2006
|                                  
|/s/ DAVID YNTEMADavid Yntema       |  | Chief Financial Officer and Secretary (Principal Financial and
    Accounting Officer) |  | March 16, 2006
|                                  
|/s/ STEVEN CAMPBELLSteven Campbell |  | Chairman of the Board of Directors                                                     |  | March 16, 2006
|                                  
|/s/ CRAIG ELLIOTTCraig Elliott     |  | Director                                                                               |  | March 16, 2006
|                                  
|/s/ JOSEPH GRAZIANOJoseph Graziano |  | Director                                                                               |  | March 16, 2006

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##### Table of Contents



|                                       |  |          |  |                |  | 
|-------------------------------------- |  | -------- |  | -------------- |  | 
|Name                                   |  | Title    |  | Date          
|                                       |  |          |  |               
|                                      
|/s/ L. WILLIAM KRAUSEL. William Krause |  | Director |  | March 16, 2006
|                                      
|/s/ BERNARD MATHAISELBernard Mathaisel |  | Director |  | March 16, 2006
|                                      
|/s/ PETER VAN CAMPPeter Van Camp       |  | Director |  | March 16, 2006

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##### Table of Contents



EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                          
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .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 Registrant 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 the Company.                               
|        | 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 | .28(8)      |  | Professional Manufacturing Services Agreement between Plexus
    Services, Corp. and Packeteer, Inc. dated January 17, 2005.                             
|        | 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.                                                                                       
|        | 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 72).                                                                                                                         
|        | 31 | .1(1)       |  | Sarbanes-Oxley Section 302 Certification  CEO.                                                                                                          
|        | 31 | .2(1)       |  | Sarbanes-Oxley Section 302 Certification  CFO.                                                                                                          
|        | 32 | .1(1)       |  | Sarbanes-Oxley Section 906 Certification  CEO.                                                                                                          
|        | 32 | .2(1)       |  | Sarbanes-Oxley Section 906 Certification  CFO.                                                                                                          






|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(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                                                        

74