Packeteer Inc - Quarterly Report (10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008


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 001-34017

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 Boulevard, Cupertino, CA 95014
(Address of principal executive offices)

Registrant’s telephone number, including area code: (408) 873-4400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ .

The number of shares outstanding of registrant’s common stock, $0.001 par value, was 36,483,891 at April 30, 2008.

TABLE OF CONTENTS


	Page
PART I FINANCIAL INFORMATION		3
Item 1. Financial Statements:		3
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007		3
Unaudited Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2008 and March 31, 2007		4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and March 31, 2007		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		24
Item 4. Controls and Procedures		24
PART II OTHER INFORMATION		24
Item 1. Legal Proceedings		24
Item 1A. Risk Factors		24
Item 6. Exhibits		35
Signatures		36
Exhibits
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PACKETEER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)


	March 31,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	32,887		$	40,926
Short-term investments		34,724			20,055
Accounts receivable, net of allowance for doubtful accounts and sales returns of $2,285 and $2,675, as of March 31, 2008 and December 31, 2007, respectively		27,708			27,353
Inventories		6,900			7,665
Prepaids and other current assets		6,458			6,797

Total current assets		108,677			102,796
Non-current assets:
Property and equipment, net		4,989			4,962
Long-term investments		8,688			16,798
Goodwill		67,001			67,001
Purchased intangible assets, net		6,307			7,241
Long-term deferred tax assets		21,066			19,972
Other non-current assets		758			835

Total assets	$	217,486		$	219,605

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,426		$	5,823
Accrued compensation		8,060			9,528
Other accrued liabilities		6,612			4,840
Income taxes payable		1,222			1,400
Deferred revenue		27,047			26,136

Total current liabilities		45,367			47,727
Non-current liabilities:
Deferred revenue, less current portion		6,648			5,798
Deferred rent and other		4,904			4,569

Total liabilities		56,919			58,094
Commitment and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding as of March 31, 2008 and December 31, 2007		—			—
Common stock, $0.001 par value; 85,000 shares authorized; 36,476 and 36,227 shares issued and outstanding as of March 31, 2008 and December 31, 2007, respectively		36			36
Additional paid-in capital		243,787			241,004
Accumulated other comprehensive loss		(803	)		(275	)
Accumulated deficit		(82,453	)		(79,254	)

Total stockholders’ equity		160,567			161,511

Total liabilities and stockholders’ equity	$	217,486		$	219,605

See accompanying notes to condensed consolidated financial statements.

PACKETEER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)


	Three months ended
	March 31,
	2008			2007
Net revenues:
Product revenues	$	24,574		$	23,841
Service revenues		12,609			10,887

Total net revenues		37,183			34,728
Cost of revenues:
Product costs		7,065			7,735
Service costs		3,461			3,570
Amortization of purchased intangible assets		618			635

Total cost of revenues		11,144			11,940

Gross profit		26,039			22,788
Operating expenses:
Research and development		8,872			9,227
Sales and marketing, includes amortization of purchased intangible assets of $317 for the three months ended March 31, 2008 and 2007, respectively		17,051			17,348
General and administrative		4,545			4,080

Total operating expenses		30,468			30,655

Loss from operations		(4,429	)		(7,867	)
Other income, net		662			832

Loss before income taxes		(3,767	)		(7,035	)
Benefit from income taxes		568			948

Net loss	$	(3,199	)	$	(6,087	)

Basic net loss per share	$	(0.09	)	$	(0.17	)

Diluted net loss per share	$	(0.09	)	$	(0.17	)

Shares used in computing basic net loss per share		36,389			35,740

Shares used in computing diluted net loss per share		36,389			35,740

See accompanying notes to condensed consolidated financial statements.

PACKETEER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


	Three months ended March 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(3,199	)	$	(6,087	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		827			827
Amortization of purchased intangible assets		934			952
Compensation related to stock-based awards		2,030			3,267
Excess tax benefit from stock-based compensation plans		(7	)		(446	)
Deferred income taxes		(1,095	)		(1,731	)
Miscellaneous		(17	)		(94	)
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Accounts receivable		(472	)		8,089
Other receivables		(143	)		(25	)
Inventories		543			(2,264	)
Prepaids and other current assets		718			(392	)
Accounts payable		(3,397	)		2,267
Accrued compensation		(1,468	)		(2,755	)
Other accrued liabilities		2,129			(1,042	)
Income taxes payable		(201	)		504
Deferred revenue		1,761			2,573
Other		95			61

Net cash provided by (used in) operating activities		(962	)		3,704

Cash flows from investing activities:
Purchases of property and equipment, net		(854	)		(1,373	)
Purchases of investments		(29,321	)		(14,588	)
Proceeds from sales and maturities of investments		22,234			23,306

Net cash provided by (used in) investing activities		(7,941	)		7,345

Cash flows from financing activities:
Proceeds from issuance of common stock, net of repurchases		14			3,248
Sale of stock to employees under the ESPP		843			1,505
Excess tax benefit from stock-based compensation plans		7			446

Net cash provided by financing activities		864			5,199

Net increase (decrease) in cash and cash equivalents		(8,039	)		16,248
Cash and cash equivalents at beginning of period		40,926			39,640

Cash and cash equivalents at end of period	$	32,887		$	55,888

Supplemental disclosures of cash flow information:
Cash paid during period for income taxes, net of refunds	$	324		$	56

See accompanying notes to condensed consolidated financial statements.

PACKETEER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation and Significant Accounting Policies

There have been no material changes in our significant accounting policies, except for the adoption of Statement of Financial Accounting Standards No 157 “ Fair Value Measurements ” (“SFAS 157”) and the adoption of statement of Financial Accounting Standards No. 159 “ The Fair value option for Financial Assets and Financial Liabilities ” (“SFAS 159”) during the three months ended March 31, 2008 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

SFAS 157 defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. Effective January 1, 2008, the Company adopted SFAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on its consolidated financial position, results of operations or cash flows. See Note 13 for information and related disclosures regarding the Company’s fair value measurements.

SFAS 159 permits companies to elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The company did not chose this election. Therefore, there was no impact on its consolidated results of operations, financial condition or cash flow.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Packeteer, Inc. (the “Company” or “Packeteer”) have been prepared by the Company in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These interim unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes of the Company in its Annual Report on Form 10-K for the year ended December 31, 2007 as filed with the SEC on March 4, 2008.

The condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation of the consolidated financial position, results of operations and cash flows. All significant intercompany accounts and transactions have been eliminated. Results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or other future operating periods. Certain comparative period figures have been reclassified to conform to the current basis of presentation. Such reclassifications had no effect on revenues, operating income or net income as previously reported.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates are used for, but are not limited to, revenue recognition, valuation assumptions utilized in business combinations, impairment of goodwill and other intangible assets, contingencies and litigation, allowances for doubtful accounts, stock-based compensation and taxes. Actual results could differ from those estimates.

Prepaids and other current assets

Prepaids and other current assets include balances related to: short-term deferred tax assets, prepaid taxes and prepaid insurance; none of which individually account for more than 5% of total current assets.

Other non-current liabilities

Other non-current liabilities include balances related to: various accrued liabilities none of which individually account for more than 5% of total liabilities.

Recent Pronouncements

In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, “ Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of: (i) How and why an entity uses derivative instruments; (ii) How derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and (iii) How derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is in the process of evaluating the impact of SFAS No. 161 on its Consolidated Financial Statements.

2. Accounts Receivable

Accounts receivable were stated net of sales return reserves of $1.8 million and $2.4 million at March 31, 2008 and December 31, 2007, respectively. Accounts receivable were stated net of allowance for doubtful accounts of $0.4 million and $0.3 million at March 31, 2008 and December 31, 2007, respectively.

3. Inventories

Inventories consist primarily of finished goods and are stated at the lower of cost (on a first-in, first-out basis) or market. The Company records inventory write-downs for excess and obsolete inventories based on historical usage and forecasted demand. If future demand or market conditions are less favorable than the Company’s projections, additional inventory write-downs may be required and would be reflected in cost of revenues in the period the write-down is made.

Inventories were stated net of reserves totaling $2.1 million and $1.8 million at March 31, 2008 and December 31, 2007, respectively. Inventories consisted of the following (in thousands):


	March 31,		December 31,
	2008		2007
Completed products	$	6,797	$	7,467
Raw materials and components		103		198

	$	6,900	$	7,665

4. Goodwill and other Intangible Assets

The Company tests goodwill and other intangible assets for impairment at least annually at December 1 of each year or whenever events or changes in circumstances indicate that the carrying amount of goodwill or other intangible assets may not be recoverable. These tests are performed at the reporting unit level using a two step, fair value based approach. The Company has determined that it has only one reporting unit. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, a second step is performed to measure the amount of impairment loss. The second step allocates the fair value of the reporting unit to the Company’s tangible and intangible assets and liabilities. This derives an implied fair value for the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized equal to that excess. The Company completed the annual impairment tests and concluded that no impairment existed at December 1, 2007.

Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. Goodwill of $57.5 million and $9.5 million was recorded in connection with the acquisition of Tacit Networks (which the Company acquired in May 2006) and Mentat, Inc. (which the Company acquired in December 2004), respectively.

Other intangibles include purchased intangibles recorded in connection with the acquisition of Tacit Networks and Mentat, Inc. and are amortized using the straight-line method over the estimated useful lives of the assets.

The following table provides additional details on goodwill and acquired intangible assets, net (in thousands):


	As of					As of
	December 31,					March 31,
	2007		Amortization			2008
Goodwill	$	67,001	$	—		$	67,001
Other intangibles:
Developed technology		3,631		(549	)		3,082
Customer contracts and relationships		3,312		(331	)		2,981
Trade name		298		(54	)		244

	$	74,242	$	(934	)	$	73,308

The following tables set forth the carrying amount of other intangible assets that will continue to be amortized (in thousands):


	March 31, 2008
		Gross
	Amortization	Carrying		Accumulated			Net Carrying
	Life	Amount		Amortization			Amount
Intangibles:
Developed technology	3-5 yrs	$	8,630	$	(5,548	)	$	3,082
Customer contracts and relationships	3-6 yrs		6,100		(3,119	)		2,981
Trade name	3 yrs		850		(606	)		244

		$	15,580	$	(9,273	)	$	6,307


	December 31, 2007
		Gross
	Amortization	Carrying		Accumulated			Net Carrying
	Life	Amount		Amortization			Amount
Intangibles:
Developed technology	3-5 yrs	$	8,630	$	(4,999	)	$	3,631
Customer contracts and relationships	3-6 yrs		6,100		(2,788	)		3,312
Trade name	3 yrs		850		(552	)		298

		$	15,580	$	(8,339	)	$	7,241

Included in cost of revenues was amortization expense of $0.6 million for both the three months ended March 31, 2008 and 2007. Included in sales and marketing expense was amortization expense of $0.3 million for both the three months ended March 31, 2008 and 2007, respectively.

Based on the purchased intangible assets balance as of March 31, 2008, the estimated related future amortization is as follows (in thousands):


Year	Amount
Remainder of 2008	$	2,804
2009		2,841
2010		662

	$	6,307

5. Commitment and Contingencies

Legal Matters

In November 2001, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York against us, certain of the Company’s officers and directors, and the underwriters of its initial public offering. An amended complaint, captioned In re Packeteer, Inc. Initial Public Offering Securities Litigation, 01-CV-10185 (SAS), was filed on April 20, 2002.

The amended complaint alleges violations of the federal securities laws on behalf of a purported class of those who acquired the Company’s common stock between the date of its initial public offering, or IPO, and December 6, 2000. The amended complaint alleges that the description in the prospectus for the Company’s IPO was materially false and misleading in describing the compensation to be earned by the underwriters of its IPO, and in not describing certain alleged arrangements among underwriters and initial purchasers of the Company’s common stock. The amended complaint seeks damages and certification of a plaintiff class consisting of all persons who acquired shares of the Company’s common stock between July 27, 1999 and December 6, 2000.

A special committee of the board of directors authorized the Company’s management to negotiate a settlement of the pending claims substantially consistent with a memorandum of understanding negotiated among class plaintiffs, all issuer defendants and their insurers. The parties negotiated a settlement which was subject to approval by the Court. On August 31, 2005, the Court preliminarily approved the settlement. On December 5, 2006, the United States Court of Appeals for the Second Circuit overturned the District Court’s certification of the class of plaintiffs who are pursuing the claims that would be settled in the settlement against the underwriter defendants. Plaintiffs filed a Petition for Rehearing with the Second Circuit on January 5, 2007 in response to the Second Circuit’s decision, and on April 6, 2007, the Second Circuit denied plaintiffs’ Petition for Rehearing but clarified that the plaintiffs may seek to certify a more limited class in the District Court. On June 25, 2007, the District Court signed an Order terminating the settlement in light of the Second Circuit’s decision. On or about October 10, 2007, Vanessa Simmonds, a purported shareholder of the Company, filed a complaint in the United States District Court, Western District of Washington, against underwriters involved in the Company’s 1999 initial public offering of its common stock, seeking recovery in the name of the Company, which is named as a nominal defendant, for alleged violation by the underwriters of Section 16(b) of the Securities Exchange Act of 1934, as amended. The Company does not currently believe that the outcome of this proceeding will have a material adverse impact on its financial condition, results of operations or cash flows. No amount has been accrued as of March 31, 2008 as the Company believes a loss is neither probable nor estimable.

We are routinely involved in legal and administrative proceedings incidental to its normal business activities and believe that these matters will not have a material adverse effect on its financial position, results of operations or cash flows.

Commitments

The Company leases its facilities and certain equipment under operating leases that expire at various dates through 2014. At December 31, 2007, the Company estimated the total future minimum lease payments under non-cancelable operating leases at $23.1 million in aggregate. During the three months ended March 31, 2008, there were no material changes to the Company’s operating lease commitments since December 31, 2007.

6. Accounting for and Disclosure of Guarantees

The Company’s distributor and reseller agreements generally include a provision for indemnifying such parties against certain liabilities if the Company’s products are claimed to infringe a third party’s intellectual property rights. To date, the Company has not incurred any costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying condensed consolidated financial statements.

7. Concentrations of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents, investments and accounts receivable. The Company’s cash, cash equivalents and investments are maintained with highly accredited financial institutions and investments are placed with high quality issuers. The Company believes no significant concentration of credit risk exists with respect to these financial instruments. Credit risk with respect to trade receivables is limited as the Company performs ongoing credit evaluations of its customers. Based on management’s evaluation of potential credit losses, the Company believes its allowances for doubtful accounts are adequate.

A limited number of indirect channel partners have accounted for a large part of the Company’s revenues to date and the Company expects that this trend will continue. The following table provides details of sales to individual customers who are indirect channel partners and accounted for 10% or more of total revenues:


	Three months ended
	March 31,
	2008			2007
Alternative Technology, Inc		23	%		26	%
Westcon, Inc		24	%		17	%

At March 31, 2008, Alternative Technologies, Inc., and Westcon, Inc. accounted for 21% and 21% of gross accounts receivable, respectively. At December 31, 2007, Alternative Technologies and Westcon accounted for 15% and 14% of gross accounts receivable, respectively.

The Company principally relies on one contract manufacturer and an original equipment manufacturer (OEM), and to a lesser extent two additional manufacturers, for all of its manufacturing requirements. Any manufacturing disruption could impair the Company’s ability to fulfill orders. The Company’s reliance on these third-party manufacturers for all its manufacturing requirements could cause it to lose orders if these third-party manufacturers fail to satisfy the Company’s cost, quality and delivery requirements.

8. Income Taxes

The Company recorded a tax benefit of $0.6 million, or 15% of the loss before benefit from income taxes, for the three months ended March 31, 2008. The effective income tax provision rate for the three months ended March 31, 2007 was approximately 13%. The Company’s effective income tax rate depends on various factors, such as tax legislation, the geographic composition of the Company’s pre-tax income, and non-tax deductible stock compensation expenses. The Company carefully monitors these factors and timely adjusts the effective income tax rate accordingly.

On January 1, 2007, the Company adopted FASB Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 ”, (“FIN 48”), and as a result recognized a $0.1 million decrease to deferred tax assets and a $0.1 million increase to income taxes payable for uncertain tax positions, which was accounted for as an adjustment to the January 1, 2007 balance of accumulated deficit. At March 31, 2008, the Company has total grass unrecognized tax benefits of approximately $ 4.0 million compared with approximately $3.7 million as of December 31,2007. All of the total gross unrecognized tax benefits would reduce our effective tax rate in the period of recognition, The company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes.

The Company considers the US and the Netherlands, as well as the US states of California and New Jersey, to be major taxing jurisdictions. For all major taxing jurisdictions, as of March 31, 2008, the tax years 2000 through 2007 remain open to examination, except that for federal tax purposes the tax years 2006 and 2007 remain open for examination and for New Jersey tax purposes the tax years 2002 through 2007 remain open to examination. The Company currently does not expect any other material changes to unrecognized tax positions within the next twelve months.

9. Shareholders’ Equity

Warrants

As of March 31, 2008 and December 31, 2007, 45,000 warrants issued in May 1999 to purchase common stock were outstanding and exercisable with a $6.25 exercise price per share and an expiration date in May 2009.

1999 Stock Incentive Plan

In May 1999, the Company’s Board of Directors adopted and its stockholders approved the 1999 Stock Incentive Plan (1999 Plan), which became effective on July 27, 1999, and serves as the successor program to its 1996 Equity Incentive Plan (the predecessor

plan). Under the 1999 Plan, the Company may grant incentive or nonstatutory stock options, stock appreciation rights, restricted stock purchase rights and bonuses, restricted stock units, performance shares and performance units to eligible participants, including its officers, other key employees, the Company’s non-employee directors and certain consultants. The 1999 Plan is generally administered by the Compensation Committee of the Board of Directors, which sets the terms and conditions of the options and other awards.

Stock Options

Non-statutory stock options and incentive stock options are exercisable at prices not less than 85% and 100%, respectively, of the market value on the date of grant. The options generally become 25% vested one year after the date of grant with 1/48 per month vesting thereafter and expire at the end of 10 years from date of grant or earlier if terminated by the Board of Directors. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, assuming no expected dividends and the following weighted-average assumptions:


	Three months ended
	March 31,
	2008			2007
Stock Options:
Expected life (years)		5.02			4.58
Expected volatility		65	%		58	%
Risk-free interest rate		2.66	%		4.78	%

The computation of the expected volatility assumption used in the Black-Scholes calculations for new grants is based on a combination of historical and implied volatilities. When establishing the expected life assumption, the Company reviews historical employee exercise behavior of option grants with similar vesting terms.

A summary of the changes in stock options outstanding under the Company’s stock-based compensation plan during the three months ended March 31, 2008 is presented below:


						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (Years)		Value
	(In thousands, except per share amounts)
Options outstanding at December 31, 2007		6,540		$	11.64
Granted		325			4.5
Exercised		(9	)		1.62
Canceled/ forfeited/expired		(169	)		12.17

Options outstanding at March 31, 2008		6,688			11.29		6.59	$	1,034
Options vested and expected to vest at March 31, 2008		5,822			11.55		6.31	$	960
Options exercisable at March 31, 2008		4,344			12.30		5.52	$	811

The weighted average grant date fair value of options granted during the three months ended March 31, 2008 and 2007 was $2.93 and $6.63, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2008 and 2007 was $26,000 and $1.8 million, respectively. The total fair value of options that vested during the three months ended March 31, 2008 and 2007 was $1.8 million and $6.2 million, respectively. Cash received from stock option exercises was $14,000 and $3.2 million during the three months ended March 31, 2008 and 2007, respectively.

The following table summarizes significant ranges of outstanding and exercisable options as of March 31, 2008 (in thousands, except years and per-share amounts):


		Options Outstanding						Options Exercisable
				Weighted-		Weighted-				Weighted-
				Average		Average				Average
				Remaining		Exercise				Exercise
Range of		Number		Contractual		Price per		Number		Price per
Exercise Prices		Outstanding		Life (in Years)		Share		Exercisable		Share
$	0.92-4.50		757		6.70	$	3.85		424	$	3.41
	4.60-6.89		710		5.17		5.88		491		5.44
	6.92-8.36		742		7.09		7.95		386		8.22
	8.37-9.31		149		7.71		9.03		66		9.03
	9.49-9.51		859		7.89		9.51		388		9.51
	9.54-12.03		866		6.89		11.57		531		11.49
	12.05-13.01		675		8.02		12.62		347		12.51
	13.03-14.00		783		6.72		13.84		601		13.84
	14.01-19.40		1,012		5.22		17.08		975		17.16
	20.77-48.06		135		1.76		47.05		135		47.05

Total			6,688		6.59	$	11.29		4,344	$	12.30

Restricted Stock Units

Restricted stock units are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting of restricted stock units is subject to the employee’s continued service with the Company. The compensation expense related to these awards is determined using the fair value of the Company’s common stock on the date of the grant, and compensation is recognized over the service period. Restricted stock units vest at the rate of 25% per year over four years on the anniversary of the grant date.

Nonvested restricted stock units as of March 31, 2008 and changes during 2008 were as follows:


				Weighted-average
				grant date fair
	Units			value per share
	(In thousands, except per share amounts)
Nonvested at December 31, 2007		529		$	10.45
Granted		364			4.60
Vested		(67	)		12.78
Forfeited		(22	)		9.02

Nonvested at March 31, 2008		804		$	7.64

Performance Shares

On January 24, 2007, the Compensation Committee of the Board of Directors approved new awards of 180,000 performance-based stock units (performance shares) for the Company’s executive officers. These awards will convert into common shares of the Company’s common stock upon vesting at the end of a three year period only if specific performance goals set by the Committee are achieved. The goals require the achievement of specified target levels of the Company’s revenue growth and operating income margins over the three year period and also that the officer remain an employee of the Company through the vesting date. Up to 250% of the performance shares can vest if the Company’s performance achievement exceeds the performance targets. No performance shares will vest if the performance fails to meet minimum performance levels. Each vested performance share will convert into one share of the Company’s common stock on the vesting date. The fair value of the performance shares was estimated at March 31, 2008 using the fair value of the Company’s common stock on the date of the grant and a probability assessment that assumes that the Company will not meet the minimum performance levels. Therefore, it was estimated as of March 31, 2008 that no shares will ultimately vest and no related compensation expense was recorded during the three months ended March 31, 2008. The fair value amortization is adjusted periodically for any changes to the Company’s probability assessment of the number of performance shares expected to vest as a result of the Company’s percentage achievement of the performance targets.

On February 27, 2008, the Compensation Committee of the Board of Directors approved new awards of 76,000 performance-based stock units (performance shares) for the Company’s executive officers. These awards will convert into common shares of the Company’s common stock upon vesting at the end of a three year period only if specific performance goals set by the Committee are achieved. The goals require the achievement of specified target levels of the Company’s revenue growth and operating income margins over a one year period and also that the officer remain an employee of the Company through the vesting date. Up to 200% of the performance shares can vest if the Company’s performance achievement exceeds the performance targets. No performance shares will vest if the Company fails to meet minimum performance levels. Each vested performance share will convert into one common share of the Company’s common stock on the vesting date. The fair value of the performance shares was estimated at March 31, 2008 using the fair value of the Company’s common stock on the date of the grant and a probability assessment that assumes that the Company will meet the minimum performance levels. Therefore, it was estimated as of March 31, 2008 that 100% of the shares will ultimately vest and a total of $9,000 of compensation expense was recorded during the quarter ended March 31, 2008. The expense is adjusted periodically for any changes to the Company’s probability assessment of the number of performance shares expected to vest as a result of the Company’s percentage achievement of the performance targets. Expense previously recorded is not revised unless the Company believes it is not probable that the awards will vest at the minimum target levels.

Nonvested performance shares as of March 31, 2008 and changes during 2008 were as follows:


			Weighted-average
			grant date fair
	Shares		value per share
	(In thousands, except per share amounts)
Nonvested at December 31, 2007		388	$	12.78
Granted		76		4.69
Vested		—
Forfeited		—

Nonvested at March 31, 2008		464	$	11.47

Maximum potential vested shares at March 31, 2008		540	$	11.47

Employee Stock Purchase Plan

In May 1999, the Company’s Board of Directors adopted the 1999 Employee Stock Purchase Plan (ESPP). The ESPP became effective July 27, 1999. The ESPP permits participants to purchase common stock through payroll deductions of up to 15% of an employee’s compensation, including base salary, commissions, overtime, bonuses and other incentive compensation. Purchases are limited to a maximum of 1,000 for an individual employee for each purchase period. The purchase price per share is equal to 85% of the fair market value per share on the participant’s entry date into the offering period or, if lower, 85% of the fair market value per share on the semi-annual purchase date. The fair value of the employees’ purchase rights granted was calculated under the Black-Scholes model, assuming no expected dividends and the following weighted average assumptions:


	Three Months Ended
	March 31,
	2008			2007
ESPP Grants:
Expected life (years)		1.0			.95
Expected volatility		64	%		47	%
Risk-free interest rate		2.12	%		5.10	%

The weighted-average fair value of the purchase rights granted under the ESPP during the three months ended March 31, 2008 and 2007 was $1.99 and $4.57 per share, respectively. During the three months ended March 31, 2008 and 2007, approximately 200,000 and 197,000 shares were issued under the ESPP, respectively.

Stock — based Compensation

Stock-based compensation included in the costs and expense line items:


	Three months ended
	March 31,
	2008		2007
Product costs	$	88	$	111
Service costs		202		214
Research and development		676		1,120
Sales and marketing		177		1,042
General and administrative		887		780

Stock-based compensation expense recognized under SFAS 123(R) in the consolidated statements of operations for the three months ended March 31, 2008 and 2007 related to stock-based awards was $2.0 million and $3.3 million, respectively. The Company recognized an income tax benefit related to stock-based compensation during the three months ended March 31, 2008 and 2007 of $0.5 million and $0.9 million, respectively. The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period using the graded vesting method. The stock-based compensation expense for the three months ended March 31, 2008 and 2007 included $0.7 million and $0.2 million, respectively, related to restricted stock units. In addition, the stock-based compensation expense for the three months ended March 31, 2008 and 2007 included none and $22,000, respectively, related to restricted stock issued in connection with the Mentat acquisition.

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s statements of operations. Stock-based compensation expense recognized in the Company’s statements of operations includes compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of Statement of Financial Accounting Standards No. 123, “ Accounting for Stock-Based Compensation ” (SFAS 123), as amended, and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

At March 31, 2008, the Company had unrecognized compensation expense, net of estimated forfeitures, which will be recognized under the remaining vesting period as follows (in thousands, except year amounts):


	Unrecognized		Remaining
	Stock-Based		Recognition
Stock -Based Award	Expense		Period (Years)
Stock options	$	4,594		1.24
Restricted stock units		2,340		2.09
Performance shares		330		2.75
ESPP		1,334		1.33

Total	$	8,598		1.54

10. Net Loss Per Share

Basic net loss per share has been computed using the weighted-average number of common shares outstanding during the period, less the weighted-average number of common shares that are subject to repurchase. Diluted net income per share has been computed using the weighted average number of common and potential common shares outstanding during the period, as calculated using the treasury stock method.

For purposes of computing diluted net income per share, weighted average common share equivalents do not include stock options with an exercise price that exceeded the average fair market value of the Company’s common stock for the period, as the effect would be anti-dilutive. As a result, options to purchase shares of common stock that were excluded from the computation were as follows (in thousands):


	Three Months Ended
	March 31,
	2008		2007
Shares issuable under stock options		6,002		2,993

In addition, for the three months ended March 31, 2008 and 2007, approximately 179,676 and 1,128,738 common share equivalents, respectively, relate to stock-based awards, shares subject to repurchase and warrants, as computed using the treasury stock method, were excluded from the computation of diluted loss per share as they were anti-dilutive.

The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts):


	Three Months Ended
	March 31,
	2008			2007
Numerator:
Net loss	$	(3,199	)	$	(6,087	)

Denominator:
Basic:
Weighted-average shares of common stock outstanding		36,389			35,758
Less: shares subject to repurchase		—			(18	)

Basic weighted-average common shares outstanding		36,389			35,740

Diluted:
Basic weighted-average common shares outstanding		36,389			35,740
Add: potentially dilutive common shares from stock options and shares subject to repurchase		—			—
Add: potentially dilutive common shares from warrants		—			—

Diluted weighted-average common shares outstanding		36,389			35,740

Basic net income (loss) per share	$	(0.09	)	$	(0.17	)

Diluted net income (loss) per share	$	(0.09	)	$	(0.17	)

11. Comprehensive Income (Loss)

Comprehensive loss shows the impact on net income of revenues, expenses, gains and losses that under U.S. GAAP are recorded as an element of shareholders’ equity and are excluded from net income. For the three months ended March 31, 2008 and 2007, comprehensive income included unrealized gains (losses) on investments, and the reversal from other comprehensive income of realized (gains) losses on investments in the period.


	Three Months Ended
	March 31,
(in thousands)	2008			2007
Net loss	$	(3,199	)	$	(6,087	)
Other comprehensive income:
Unrealized net losses on investments, net of tax		(449	)		(8	)
Realized net losses on investments, net of tax, reclassified into earnings		6			8
Total comprehensive loss	$	(3,642	)	$	(6,087	)

12. Segment Reporting

The Company’s chief operating decision maker is considered to be the Company’s Chief Executive Officer (CEO). The CEO reviews financial information presented on a consolidated basis substantially similar to the accompanying consolidated condensed financial statements. Therefore, the Company has concluded that it operates in one segment and accordingly has provided only the required enterprise-wide disclosures.

The Company operates in the United States and internationally and derives its revenue from the sale of products and software licenses and maintenance contracts related to the Company’s products.

Geographic information is as follows (in thousands):


	Three months ended
	March 31,
	2008		2007
Net revenues:
Americas	$	17,170	$	16,380
Asia Pacific		10,920		8,142
Europe, Middle East, Africa		9,093		10,206

Total net revenues	$	37,183	$	34,728

Net revenues reflect the destination of the shipped product.

Long-lived assets are primarily located in North America. Assets located outside North America are not significant.

13. Financial Instruments

The Company measures certain financial assets at fair value on a recurring basis, including available for sale asset-backed and mortgage-backed securities, corporate bonds and US Treasury and agencies. The fair value of these certain financial assets was determined using the following inputs at March 31, 2008:


	Fair Value Measurements at Reporting Date Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets Asset and mortgage backed securities ⁽¹⁾	$	4,879	$	—	$	4,879	$	—
Corporate Bonds ⁽¹⁾		7,834		—		7,834		—
US Treasury and agencies ⁽²⁾		30,699		—		30,699		—


Total	$	43,412	$	—	$	43,412	$	—


⁽¹⁾		Included in short-term investments on our condensed consolidated balance sheet.

⁽²⁾		Included in short-term investments and long-term investments on our condensed consolidated balance sheet.

The Company invests in investment grade securities all of which were classified as available for sale. The unrealized losses on these investments were caused by changes in credit quality and interest rates. At this time, the Company believes that, due to the nature of the investments, the financial condition of the issuers, and the Company’s ability and intent to hold the investments until a recovery in value, these unrealized losses should not be classified as “other than temporary.”

14. Subsequent Events

Blue Coat Acquisition

On April 21, 2008, the Company announced that Blue Coat Systems, Inc. (NASDAQ:BCSI) and Packeteer had entered into a definitive agreement for Blue Coat Systems, Inc. (Blue Coat) to acquire Packeteer. Pursuant to this agreement, Blue Coat is to commence a tender offer to purchase for cash all outstanding shares of Packeteer for $7.10 per share. The transaction is subject to certain regulatory reviews and other conditions and is expected to close during the second quarter of 2008.

Shareholder rights agreement

On March 31, 2008, the Board of Directors of the Company declared a dividend distribution of one Preferred Stock Purchase Right (each a “Right” and collectively the “Rights”) for each outstanding share of Common Stock, $0.001 par value (“Common Stock”), of the Company. The distribution was paid as of April 14, 2008 (the “Record Date”), to stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of the Company’s Series A Preferred Stock, $0.001 par value (the “Preferred Stock”), at a price of $21.00 (the “Purchase Price”). If any person or group acquires 15% or more of Packeteer, Inc.’s Common Stock without prior Board approval, there would be a triggering event causing significant dilution in the voting power of such person or group. Until there is a triggering event, the rights trade with the Company’s Common Stock. The description and terms of the Rights are set forth in the Rights Agreement dated as of April 1, 2008 (the “Rights Agreement”), between the Company and Computershare Trust Company, N.A. (the “Rights Agent”). The Rights Plan will continue in effect until March 31, 2009, unless earlier redeemed or terminated by Packeteer, as provided in the Rights Plan.

On April 20, 2008, in connection with the Merger Agreement with Blue Coat, the Company entered into an amendment to the Rights Plan such that the Rights will expire on the earlier of (i) March 31, 2009 , (ii) redemption or exchange by Packeteer, or (iii) immediately prior to the acceptance of the shares for payment by Blue Coat in the tender offer under the Merger Agreement.

Patent infringement action

Realtime Data, LLC d/b/a IXO v. Packeteer, Inc. et al. United States District Court, Eastern District of Texas, Civil Action No. 6:08-cv-144. On or about April 18, 2008, Realtime Data, LLC d/b/a IXO (“Realtime”) filed a patent infringement lawsuit against the Company and eleven other companies (including five Company customers). There are seven patents-at-issue: U.S. Patent Nos. 6,601,104; 6,604,158; 6,624,761; 6,748,457; 7,161,506; 7,321,937; and 7,352,300. The patents relate generally to accelerated data storage and data compression. Discovery has not yet commenced. The Company intends to defend this matter vigorously. However, the results of litigation are inherently uncertain, and there can be no assurance that we will prevail.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW

The following discussion and analysis should be read together with our Condensed Consolidated Financial Statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q . This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about Packeteer, Inc. and our industry. These forward-looking statements include, but are not limited to, statements concerning risks and uncertainties. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described in the “Risk Factors” section of this Quarterly Report on Form 10-Q . We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur.

Blue Coat Acquisition

On April 21, 2008, we announced that we and Blue Coat Systems, Inc. or Blue Coat had entered into a definitive agreement for Blue Coat to acquire us. Pursuant to this agreement, Blue Coat is to commence a tender offer to purchase for cash all outstanding shares of our common stock for $7.10 per share. The transaction is subject to certain regulatory reviews and other conditions and is expected to close during the three months ending June 30, 2008.

General

We are a leading provider of wide area network, or WAN, Application Delivery systems designed to deliver a comprehensive set of visibility, Quality of Service, or QoS, control, compression, application acceleration and branch office service capabilities. Our product family includes PacketShaper, iShared, SkyX and Mobiliti Client products that can be deployed within large data centers, smaller branch office sites and software clients on PCs for mobile and Small Office/Home Office, or SOHO, users throughout a distributed enterprise. We deliver superior application performance and end user experience using an “intelligent overlay”, which bridges applications and IP networks, adapts to our customers’ existing infrastructure and addresses the demands created by a changing application environment in order to deliver high performance applications across all WAN and Internet links.

Net revenues for the three months ended March 31, 2008 were $37.2 million, an increase of $2.5 million, or 7%, from the comparable period in 2007. Product revenues for the three months ended March 31, 2008 were $24.6 million, an increase of 3% over the three months ended March 31, 2007. This is primarily the result of the progress achieved on our iShared/iShaper product

introduction during 2007. Service revenues for the three months ended March 31, 2008 were $12.6 million, an increase of 16% over the three months ended March 31, 2007. This increase resulted from a larger customer base due to our new product sales and continued renewals of our prior service contracts.

Gross profit was $26.0 million, or 70%, and loss from operations was $4.4 million. During the comparable period a year ago, net revenues were $34.7million, gross profit was $22.8 million, or 66%, and loss from operations was $7.9 million. Included in cost of revenues and operating expenses for the three months ended March 31, 2008 and 2007 was stock-based compensation expense of $2.0 million and $3.3 million, respectively, related to stock-related awards as determined in accordance with Statement of Financial Accounting Standards No. 123(R), “ Share-Based Payment ” (SFAS 123(R)) and amortization of intangible assets of $0.9 and $1.0, respectively.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowance for doubtful accounts, revenue recognition, sales returns, inventory valuation, rebate and warranty reserves, valuation of long lived assets, including intangible assets and goodwill, income taxes and stock-based compensation, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes in our critical accounting policies, except for the adoption of the Financial Accounting Standards Board No 157 (“SFAS 157”) “ Fair Value Measurements, ” and the adoption of Statement of Financial Accounting Standards No. 159 “ The Fair Value Option for Financial Assets and Financial Liabilities ” (“ SFAS 159”) during the three months ended March 31, 2008 as compared to the critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

SFAS No. 157 defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. Effective January 1, 2008, we adopted SFAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows.

SFAS 159 permits companies to elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. We did not chose this election. Therefore, there was no impact on our consolidated results of operations, financial condition or cash flow.

Results of Operations

Net revenues for the three months ended March 31, 2008 were $37.2 million, loss from operations was $4.4 million and net loss was $3.2 million. During the comparable period in 2007, net revenues were $34.7 million, loss from operations was $7.9 million and net loss was $6.1 million.

During the three months ended March 31, 2008, our loss from operations decreased by $3.4 million largely due to our improvement in gross margins and a decrease in operating expenses as a percentage of revenue to 82% from 88% during the three months ended March 31, 2007. The reduction in operating expenses primarily resulted from a decrease in headcount to 440 at March 31, 2008 compared to 455 at March 31, 2007.

The following table sets forth certain financial data as a percentage of net revenues for the periods indicated. These historical operating results are not necessarily indicative of the results for any future period:


	Three months ended
	March 31,
	2008			2007
Net revenues:
Product revenues		66	%		69	%
Service revenues		34			31

Total net revenues		100			100
Cost of revenues:
Product costs		19			22
Service costs		9			10
Amortization of purchased intangible assets		2			2

Total cost of revenues		30			34

Gross margin		70			66
Operating expenses:
Research and development		24			26
Sales and marketing		46			50
General and administrative		12			12

Total operating expenses		82			88

Loss from operations		(12	)		(22	)
Interest and other income, net		2			2

Loss before provision (benefit) for income taxes		(10	)		(20	)
Benefit from income taxes		1			3

Net Loss		(9	)%		(17	)%

Net Revenues

We derive our revenue from two sources, product and service revenues. Product revenues consist primarily of sales of our WAN Application Delivery systems. Product revenues accounted for 66% and 69% of our net revenues in the three months ended March 31, 2008 and 2007, respectively. Product revenues increased to $24.6 million in the three months ended March 31, 2008 from $23.8 million in the three months ended March 31, 2007. The increase in product revenues of $0.8 million, or 3%, is primarily the result of progress achieved on our iShared/iShaper product introduction during 2007 and a shift to selling higher average selling price products.

Service revenues consist primarily of maintenance revenues and, to a lesser extent, training revenues. Maintenance revenues, which are included in service revenues, are recognized on a daily basis over the life of the contract. The typical subscription and support term is twelve months, although multi-year contracts of up to three years with prepaid renewal options are also sold. Service revenues accounted for 34% and 31% of net revenues in the three months ended March 31, 2008 and 2007, respectively. Service revenues increased to $12.6 million in the three months ended March 31, 2008 from $10.9 million in the three months ended March 31, 2007. This increase resulted from a larger customer base due to our new product sales and continued renewals of our prior service contracts.

Net sales by region were as follows:


	Three Months Ended March 31,
	2008				2007
	($)		(%)		($)		(%)
	(Dollars in millions)
Americas*	$	17.2		46	$	16.4		47
Asia Pacific		10.9		29		8.1		24
Europe, the Middle East and Africa (EMEA)		9.1		25		10.2		29

Total	$	37.2		100	$	34.7		100


*		Primarily the United States.

A limited number of indirect channel partners have accounted for a large part of our revenues to date and we expect that this trend will continue. Indirect channel partners in turn sell to a large number of value-added resellers, system integrators and other resellers.

The following table provides details of sales to individual customers who are indirect channel partners and accounted for 10% or more of total revenues:


	Three months ended
	March 31,
	2008			2007
Alternative Technology, Inc		23	%		26	%
Westcon, Inc		24	%		17	%

At March 31, 2008, Alternative Technologies, Inc., and Westcon, Inc. accounted for 21% and 21% of gross accounts receivable, respectively. At December 31, 2007, Alternative Technologies and Westcon accounted for 16% and 14% of gross accounts receivable, respectively.

Cost of Revenues

Our cost of revenues consists of the cost of finished products purchased from our contract manufacturers, overhead costs, service support costs and amortization of purchased intangible assets.

We outsource all of our manufacturing. We design and develop a majority of the key components of our products, including printed circuit boards and software. In addition, we determine the components that are incorporated into our products and select the appropriate suppliers of these components. Our overhead costs consist primarily of personnel related costs for our product operations and order fulfillment groups and other product costs such as warranty and fulfillment charges. Service support costs consist primarily of personnel related costs for our customer support and training groups, as well as fees paid to third-party service providers to facilitate next business day replacement for end user customers located outside the United States. Additionally, we allocate overhead such as facilities, depreciation and IT costs to all departments based on headcount and usage. As such, general overhead costs are reflected in each cost of revenue and operating expense category. We must continue to work closely with our contract manufacturers as we develop and introduce new products and try to reduce production costs for existing products. To the extent our customer base continues to grow, we intend to continue to invest additional resources in our customer support group and expect that our fees to third-party services providers will continue to increase as our international base grows.

Cost of revenues was $11.1 million for the three months ended March 31, 2008, a decrease of $0.8 million, or 7%, from $11.9 million for the three months ended March 31, 2007. The cost of revenues represent 30% of total net revenues for the three months ended March 31, 2008, compared to 34% in the comparable period of 2007.

Product costs decreased $0.7 million, or 9%, to $7.1 million in the three months ended March 31, 2008 from $7.7 million in the three months ended March 31, 2007. The decrease was primarily related to product costs in the three months ended March 31, 2007 included increases in charges to cost of revenues of $0.3 million in inventory write-downs, $0.3 million in freight and fulfillment costs and $0.1 million in warranty expense.

Service costs decreased $0.1 million, or 3%, to $3.5 million for the three months ended March 31, 2008 from $3.6 million for the three months ended March 31, 2007. This decrease despite higher service revenues primarily resulted from leveraging lower cost support centers in Malaysia.

Operating Expenses


	Three Months Ended March 31,
					Variance			Variance
	2008		2007		in Dollars			in Percent
Research and development	$	8,872	$	9,227	$	(355	)		(4	%)
Sales and marketing		17,051		17,348		(297	)		(2	%)
General and administrative		4,545		4,080		465			11	%

Total	$	30,468	$	30,655	$	(187	)		(1	%)

Research and Development

Research and development expenses consist primarily of salaries and related personnel expenses, allocated overhead, consultant fees and prototype expenses related to the design, development, testing and enhancement of our products and software. We have historically focused our research and development efforts on developing and enhancing our WAN Application Delivery solutions.

Research and development expenses of $8.9 million for the three months ended March 31, 2008 decreased from $9.2 million for the comparable period of the prior year. The decreased costs were primarily due to decreased stock-based compensation of $0.4 million and decreased consulting expenses of $0.3 million in the three months ended March 31, 2008 compared to the three months ended March 31, 2007. These decreases were partially mitigated by an increase in salary costs of $0.2 million in the three months ended March 31, 2008 when compared to the three months ended March 31, 2007. Research and development expenses represented 24% of net revenues for the three months ended March 31, 2008 compared to 26% for the comparable period in the prior year. As of March 31, 2008, all research and development costs have been expensed as incurred.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries, commissions and related personnel expenses for those engaged in the sales, marketing and support of our products, as well as related trade show, promotional and public relations expenses and allocated overhead. Our sales force and marketing efforts are used to develop brand awareness, drive demand for system solutions and support our indirect channels.

Sales and marketing expenses decreased to $17.1 million in the three months ended March 31, 2008 from $17.3 million in the comparable period of the prior year. This decrease primarily related to lower stock-based compensation of $0.9 million and a decrease of $0.3 million in marketing costs in the three months ended March 31, 2008 compared to the three months ended March 31, 2007. These decreases were partially mitigated by an increase in consulting costs of $0.5 million in the three months ended March 31, 2008 when compared to the three months ended March 31, 2007. Sales and marketing expenses represented 46% of net revenues for the three months ended March 31, 2008 compared to 50% for the comparable period in the prior year.

General and Administrative

General and administrative expenses consist primarily of salaries and related personnel expenses for administrative personnel, professional fees, allocated overhead and other general corporate expenses.

General and administrative expenses increased to $4.5 million in the three months ended March 31, 2008 from $4.1 million in the comparable period of the prior year. The increase was primarily due to personnel related costs, including salaries, employee benefits and stock-based compensation of $0.5 million in the three months ended March 31, 2008 when compared to March 31, 2007. This reflects a 17% increase in general and administrative headcount from 35 at March 31, 2007 to 41 at March 31, 2008. In addition, bad debt expense increased $0.5 million in the three months ended March 31, 2008 when compared to the three months ended March 31, 2007 primarily due to a credit of $0.4 million in bad debt expense in the three months ended March 31, 2007. These increases were partially mitigated by a decrease in general legal costs of $0.3 million in the three months ended March 31, 2008 compared to the three months ended March 31, 2007. General and administrative expenses represented 12% of net revenues for the both the three months ended March 31, 2008 and 2007.

Interest and Other Income, Net

Interest and other income, net, consists primarily of investment income from our cash, cash equivalents and investments. Interest and other income, net decreased to $0.7 million in the three months ended March 31, 2008 from $0.8 million in the comparable period of the prior year. The decrease was primarily due to lower average balances of invested funds and decreased investment yields.

Income Tax Provision (Benefit)

We recorded a tax benefit of $0.6 million, or 15% of the loss before benefit from income taxes, for the three months ended March 31, 2008. The effective income tax provision rate for the three months ended March 31, 2007 was approximately 13%. Our effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income, and non-tax deductible stock compensation expenses. We carefully monitor these factors and timely adjusts the effective income tax rate accordingly.

Liquidity and Capital Resources

During the three months ended March 31, 2008, we used $1.0 million of cash in operating activities, compared to $3.7 million generated in the comparable period a year ago. At March 31, 2008 we had cash, cash equivalents and investments of $76.3 million and accounts receivable of $27.7 million.

Balance Sheet and Cash Flows

Cash and Cash Equivalents and Investments. The following table summarizes our cash and cash equivalents and investments, which are classified as “available for sale” and consist of highly liquid financial instruments (in thousands):


	March 31,		December 31,		Increase
	2008		2007		(Decrease)
Cash and cash equivalents	$	32,887	$	40,926	$	(8,039	)
Investments		43,412		36,853		6,559

Total	$	76,299	$	77,779	$	(1,480	)

The cash and cash equivalents balance decreased $8.0 million and the combined balance decreased by $1.5 million from December 31, 2007 due to activities in the following areas (in thousands).


Net cash used in operating activities	$	(962	)
Net cash used in investing activities		(7,941	)
Net cash provided by financing activities		864

Net change in cash and cash equivalents	$	(8,039	)

The decrease in cash and cash equivalents of $8.0 million in the three months ended March 31, 2008 was primarily due to net cash used by investing activities of $7.9 million. This decrease in cash and equivalents in investing activities resulted by a net increase in cash used for investment purchases of $7.1 million. Additionally, we used $0.9 million on purchases of property and equipment. The decrease in cash and cash equivalents from operating activities resulted primarily from our operating loss of $3.2 million and the cash used to decrease in our accounts payable by $3.4 million. These decreases were partially mitigated by $0.9 million in financing activities from proceeds from the issuance of stock through option exercises and our Employee Stock Purchase Plan (“ESPP”).

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, accounts receivable collections and excess tax benefits from stock-based compensation.

Contractual Obligations

We lease our facilities and certain equipment under operating leases that expire at various dates through 2014. At December 31, 2007, we estimated the total future minimum lease payments under non-cancelable operating leases at $23.1million in aggregate. Additionally, we have purchase obligations incurred under the normal course of operations. At December 31, 2007, our purchase obligations were $14.7 million. During the three months ended March 31, 2008, there have been no material changes to our contractual obligations since December 31, 2007.

Future Liquidity Requirements

We have historically had sufficient financial resources to meet our operating requirements, to fund our capital spending and to repay all of our debt obligations.

We expect to experience growth in our working capital needs for at least the next twelve months in order to execute our business plan. We anticipate that operating activities, as well as planned capital expenditures, will constitute a partial use of our cash resources. In addition, we may utilize cash resources to fund additional acquisitions or investments in complementary businesses, technologies or products. We believe that our current cash, cash equivalents and investments of $76.3 million at March 31, 2008 will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next twelve months. However, we may need to raise additional funds if our estimates of revenues, working capital or capital expenditure requirements change or prove inaccurate or in order for us to respond to unforeseen technological or marketing hurdles or to take advantage of unanticipated opportunities. These funds may not be available at the time or times needed, or available on terms acceptable to us. If adequate funds are not available, or are not available on acceptable terms, we may not be able to take advantage of market opportunities to develop new products or to otherwise respond to competitive pressures.

Recent Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS 161, “ Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of: (i) How and why an entity uses derivative instruments; (ii) How derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and (iii) How derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are in the process of evaluating the impact of SFAS No. 161 on our Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and changes to certain investments. We believe there have been no significant changes in our market risk during the three months ended March 31, 2008 compared to what was previously disclosed in Part II, Item 7A, “ Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report for the year ended December 31, 2007, with the exception of changes in credit quality which cannot be quantitatively measured. See Item 1A under Part II of this report under the heading “OUR INVESTMENT PORTFOLIO MAY BECOME IMPAIRED BY FURTHER DETERIORATION OF THE CAPITAL MARKETS” for additional information.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)). Based on this evaluation, our principal executive officer and principal financial officer have concluded that as of March 31, 2008, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth under Note 7, entitled “Contingencies” and Note 14, “Subsequent Events” of the Notes to Condensed Consolidated Financial Statements, is incorporated herein by reference.

ITEM 1A. RISK FACTORS

The Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2007 have not materially changed, other than that we have added a new Risk Factor entitled “FAILURE TO COMPLETE THE ACQUISITION BY BLUE COAT SYSTEMS COULD MATERIALLY AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND OUR STOCK PRICE” and a new Risk Factor entitled “OUR INVESTMENT PORTFOLIO MAY BECOME IMPAIRED BY FURTHER DETERIORATION OF THE CAPITAL MARKETS.”

You should carefully consider the risks described below before making an investment decision. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

FAILURE TO COMPLETE THE ACQUISITION BY BLUE COAT SYSTEMS COULD MATERIALLY AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND OUR STOCK PRICE.

On April 20, 2008, we entered into a definitive merger agreement with Blue Coat Systems, Inc., or Blue Coat, pursuant to which Blue Coat has agreed to acquire all of the outstanding shares of our common stock through a tender offer followed by a back-end merger (the “Acquisition”). Consummation of the Acquisition is subject to customary closing conditions and regulatory approvals, including antitrust approvals. We cannot assure you that these conditions will be met or waived, that the necessary approvals will be obtained, or that we will be able to successfully consummate the Acquisition as currently contemplated under the merger agreement or at all. If the Acquisition is not consummated:

	•		our investors may not receive $7.10 in cash per share of our common stock which Blue Coat has agreed to pay in the Acquisition, and our stock price would likely decline;

	•		we are liable for significant transaction costs, including legal, accounting, financial advisory and other costs relating to the

			Acquisition;

	•		under some circumstances, we may have to pay a termination fee to Blue Coat in the amount of $4 million;

	•		the attention of our management and our employees may be diverted from day-to-day operations as they focus on the Acquisition;

	•		our customers may seek to modify or terminate existing agreements, or prospective customers may delay entering into new agreements or purchasing our products as a result of the announcement of the Acquisition, which could cause our revenues to materially decline or any anticipated increases in revenue to be lower than expected; and

	•		our ability to attract new employees and retain our existing employees may be harmed by uncertainties associated with the Acquisition, and we may be required to incur substantial costs to recruit replacements for lost personnel.

The occurrence of any of these events individually or in combination could have a material adverse affect on our results of operations and our stock price.

IF THE WAN APPLICATION DELIVERY SYSTEMS MARKET FAILS TO GROW, OUR BUSINESS WILL FAIL

The market for WAN Application Delivery systems is still developing and its success is not guaranteed. Therefore, we cannot accurately assess the size of the market, the products needed to address the market, the optimal distribution strategy, or the competitive environment that will develop. In order for us to be successful, our potential customers must recognize the value of more sophisticated bandwidth management solutions, decide to invest in the management of their networks and the performance of important business software applications and, in particular, adopt our bandwidth management solutions.

OUR FUTURE OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE

We believe that period-to-period comparisons of our operating results cannot be relied upon as an indicator of our future performance, and that the results of any quarterly period are not necessarily indicative of results to be expected for a full fiscal year.

We have experienced fluctuations in our operating results in the past and may continue to do so in the future. Our operating results are subject to numerous factors, many of which are outside of our control and are difficult to predict. As a result, our quarterly operating results could fall below our forecasts or the expectations of public market analysts or investors in the future. If this occurs, the price of our common stock would likely decrease. Factors that could cause our operating results to fluctuate include variations in:

	•		the impact of the Acquisition;

	•		the timing and size of orders and shipments of our products;

	•		the timing and success of new product and upgrade introductions;

	•		the mix of products we sell;

	•		the mix and effectiveness of the channels through which those products are sold;

	•		the geographical mix of the markets in which our products are sold;

	•		the average selling prices of our products;

	•		the amount and timing of our operating expenses;

	•		the impact of changes in effective tax rates;

	•		write-offs for impairment of intangible assets; and

	•		the impact of acquisitions.

Our revenues for a particular quarter are difficult to predict. Our revenues may grow at a slower rate than in past periods, or may decline. In the past, revenue fluctuations resulted primarily from variations in the timing, volume and mix of products sold and variations in channels through which products were sold. For example, for the year ended December 31, 2007, we believe that our revenues were adversely impacted by a changing and increasingly competitive marketplace, as well as product transition issues associated with our greater focus on acceleration related technologies and new product introductions. In addition, for the three months ended June 30, 2007 and the three months ended September 30, 2005 we deferred recognition of revenue on approximately $3.0 million and $3.6 million, respectively, in product sales due to channel inventory levels, which contributed to our revenues being below analyst expectations. Furthermore, as an increasing portion of our revenues is derived from larger unit sales, the timing of such sales can have a material impact on quarterly performance. As a result, a delay in completion of large deals at the end of a quarter can result in our missing analysts’ forecasts for the quarter.

Our operating expenses may fluctuate between quarters due to the timing of spending and contribute to the variability in our quarterly results. For example, research and development expenses, specifically prototype expenses, consulting fees and other program costs, have fluctuated relative to the specific stage of product development of the various projects underway. Sales and marketing expenses have fluctuated due to the timing of specific events such as sales meetings or tradeshows, or the launch of new products. Additionally, operating costs outside the United States are incurred in local currencies, and are remeasured from the local currency to the U.S. dollar upon consolidation. As exchange rates vary, these operating costs, when remeasured, may differ from our prior performance and our expectations. In addition, because we plan our operating expense levels based primarily on forecasted revenue levels, these expenses and the impact of long-term commitments are relatively fixed in the short term. A shortfall in revenue, such as we experienced in 2007, could lead to operating results being below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes. Tax rates can vary significantly based upon the geographical mix of the markets in which our products are sold and may also cause our operating results to fluctuate. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained in Part II of this report for detailed information on our operating results.

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

We compete in a rapidly evolving and highly competitive sector of the networking technology market. We expect competition to persist and intensify in the future as our sector becomes subject to increasing industry focus. Increased competition could result in reduced prices and gross margins for our products and could require increased spending by us on research and development, sales and marketing and customer support, any of which could harm our business. We compete with Cisco Systems, Juniper Networks and other switch/router vendors, Blue Coat Systems and Riverbed Technology in the wide area file systems market segment, Citrix System through their acquisition of Orbital Data, security vendors and several small private companies that sell products that utilize competing technologies to provide monitoring or bandwidth management, compression and acceleration. We expect this competition to increase particularly due to the anticipated requirement from enterprises to consolidate more functionality into a single appliance. Additionally, as more companies enter the acceleration technology market, there could be increased marketplace confusion regarding the differentiation of our products. In addition, our products and technology compete for information technology budget allocations with products that offer monitoring capabilities, such as probes and related software. Also, merger and acquisition activity by other companies can and has created new perceived competitors. Additionally, we face indirect competition from companies that offer enterprise customers and service providers increased bandwidth and infrastructure upgrades that increase the capacity of their networks, which may lessen or delay the need for WAN Application Delivery solutions.

Many of our competitors and potential competitors are substantially larger than we are and have significantly greater financial, sales and marketing, technical, manufacturing and other resources and more established distribution channels. These competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can. We have encountered, and expect to encounter, prospective customers who are extremely confident in and committed to the product offerings of our competitors, and therefore are unlikely to buy our products. Furthermore, some of our competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties to increase their ability to rapidly gain market share by addressing the needs of our prospective customers. Our competitors may enter our existing or future markets with solutions that may be less expensive, provide higher performance or additional features or be introduced earlier than our solutions. Given the market opportunity in the WAN Application Delivery solutions market, we also expect that other companies may enter or announce an intention to enter our market with alternative products and technologies, which could reduce the sales or market acceptance of our products and services, perpetuate intense price competition or make our products obsolete. If any technology that is competing with ours is or becomes more reliable, higher performing, less expensive or has other advantages over our technology, then the demand for our products and services would decrease, which would harm our business. Similarly, demand for our products could decrease if current or prospective competitors make prospective product release announcements claiming superior performance or other advantages regardless of the market availability of such products.

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

Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products and features that address customer requirements in a cost-effective manner. We cannot assure you that our technological approach will achieve broad market acceptance or that other technologies or solutions will not supplant our approach. The WAN Application Delivery solutions market is characterized by ongoing technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. The introduction of new products, market acceptance of products based on new or alternative technologies, or the emergence of new industry standards, could render our existing products obsolete or make it easier for other products to compete with our products. Developments in router-based queuing schemes or alternative acceleration or compression technologies could also significantly reduce demand for our products. Our future success will depend in part upon our ability to:

	•		develop and maintain competitive products;

	•		enhance our products by adding innovative features that differentiate our products from those of our competitors and meet the needs of our larger customers;

	•		bring products to market and introduce new features on a timely basis at competitive prices;

	•		integrate acquired technology into our products;

	•		successfully negotiate and integrate acquisitions;

	•		identify and respond to emerging technological trends in the market; and

	•		respond effectively to new technological changes or new product announcements by others.

We have experienced delays related to these factors in the past, including a delay in the integration of certain acceleration technologies. If we are unable to effectively perform with respect to the foregoing, or if we experience delays in product development, we could experience a loss of customers and market share.

WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF PRODUCTS FOR A SIGNIFICANT PORTION OF OUR REVENUES

Most of our revenues have been derived from sales of our WAN Application Delivery systems and related maintenance and training services. We currently expect that our system-related revenues will continue to account for a substantial percentage of our revenues for the foreseeable future. Our future operating results are significantly dependent upon the continued market acceptance of our products and enhanced applications. Our business will be harmed if our products do not continue to achieve market acceptance or if we fail to successfully develop and market improvements to our products or new and enhanced products. A decline in demand for our WAN Application Delivery systems as a result of competition, technological change or other factors would harm our business.

INTRODUCTION OF OUR NEW PRODUCTS MAY CAUSE CUSTOMERS TO DEFER PURCHASES OF OUR EXISTING PRODUCTS OR COULD RESULT IN LONGER SALES CYCLES WHICH COULD HARM OUR OPERATING RESULTS

When we announce new products or product enhancements that have the potential to replace or shorten the life cycle of our existing products, customers may defer purchasing our existing products. In addition, as a result of new product introductions, customers may take longer to evaluate products, which may result in longer sales cycles. These actions could harm our operating results by unexpectedly decreasing sales, increasing our inventory levels of older products and exposing us to greater risk of product obsolescence.

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

The failure of our indirect partners to sell our products internationally will harm our business. Sales to customers outside of the Americas accounted for 55%, 53% and 53% in 2007, 2006 and 2005, respectively. Our ability to grow will depend in part on the expansion of international sales, which will require success on the part of our resellers, distributors and systems integrators in marketing our products.

We intend to expand operations in our existing international markets and to enter new international markets, which will demand management attention and financial commitment. We may not be able to successfully sustain and expand our international operations. In addition, a successful expansion of our international operations and sales in foreign markets will require us to develop relationships with suitable indirect channel partners operating abroad. We may not be able to identify, attract, manage or retain these indirect channel partners.

Furthermore, to increase revenues in international markets, we will need to continue to establish foreign operations, to hire additional personnel to run these operations and to maintain good relations with our foreign indirect channel partners. To the extent that we are unable to successfully do so, or to the extent our foreign indirect channel partners are unable to perform effectively, our growth in international sales may be limited.

Our international sales are currently all U.S. dollar-denominated. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets. In the future, we may elect to invoice some of our international customers in local currency. Doing so will subject us to fluctuations in exchange rates between the U.S. dollar and the particular local currency and could negatively affect our financial performance. Additionally, operating costs outside the United States are incurred in local currencies, and are remeasured from the local currency to the U.S. dollar upon consolidation. As exchange rates vary, these operating costs, when remeasured, may differ from our prior performance and our expectations. Tax rates can vary significantly based upon the geographical mix of the markets in which our products are sold and may also cause our operating results to fluctuate.

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

We rely primarily on an indirect distribution channel consisting of resellers, distributors and systems integrators for our revenues. Because many of our indirect channel partners also sell competitive products, our success and revenue growth will depend on our ability to develop and maintain strong cooperative relationships with significant indirect channel partners, as well as on the sales efforts and success of those indirect channel partners.

Our products are complex, and there can be no assurance that the sales training programs that are offered to our sales channel partners will be effective. In addition, our indirect channel partners may not market our products effectively, receive and fulfill customer orders of our products on a timely basis or continue to devote the resources necessary to provide us with effective sales, marketing and technical support for our products and services for reasons unrelated to training. In order to support and develop leads for our indirect distribution channels, we plan to continue to expand our field sales and support staff as needed. We cannot assure you that this internal expansion will be successfully completed, that the cost of this expansion will not exceed the revenues generated or that our expanded sales and support staff will be able to compete successfully against the significantly more extensive and well-funded sales and marketing operations of many of our current or potential competitors.

Our indirect channel partners do not have minimum purchase or resale requirements, and may cease selling our products at any time. In addition, our indirect channel agreements are generally not exclusive and one or more of our channel partners may market, sell and support products and services that are competitive with ours, and may devote more resources to the marketing, sales and support of products competitive to ours. In addition, they may compete directly with another channel partner for the sale of our products in a particular region or market, which could cause such channel partners to stop or reduce their efforts in marketing our products. There is no assurance that we will retain these indirect channel partners or that we will be able to secure additional or replacement indirect channel partners in the future. The loss of one or more of our key indirect channel partners in a given geographic area could harm our operating results within that area, as new indirect channel partners typically require extensive training and take several months to achieve acceptable productivity. Our inability to effectively establish, train, retain and manage our distribution channel would harm our sales.

We also depend on many of our indirect channel partners to deliver first line service and support for our products. Any failure on their part to provide such service and support could adversely impact customer satisfaction with us or our products and services due to delays in maintenance and replacement, decreases in our customers’ network availability and other losses. These occurrences could result in the loss of customers and repeat orders and could delay or limit market acceptance of our products, which would negatively affect our sales and results of operations.

SALES TO LARGE CUSTOMERS WOULD BE DIFFICULT TO REPLACE IF LOST

A limited number of indirect channel partners have accounted for a large part of our revenues to date and we expect that this trend will continue. Because our expense levels are based on our expectations as to future revenue and to a large extent are fixed in the short term, any significant reduction or delay in sales of our products to any significant indirect channel partner or unexpected returns from these indirect channel partners could harm our business. In 2007, sales to two indirect channel customers, Alternative Technology, Inc., Alternative Technology, and Westcon, Inc., Westcon, accounted for 25% and 16% of net revenues, respectively. In 2006, sales to Alternative Technology and Westcon accounted for 23% and 18% of net revenues, respectively. In 2005, sales to Alternative

Technology and Westcon accounted for 22% and 13% of net revenues, respectively. At December 31, 2007, Alternative Technology and Westcon accounted for 18% and 15% of accounts receivable, respectively. These customers are indirect channel partners, who in turn sell to a large number of value-added resellers, system integrators and other resellers. In addition, as an increasing portion of our revenues is derived from larger unit sales, the timing of such sales can have a material impact on quarterly performance. As a result, a delay in completion of large deals at the end of a quarter can result in our missing analysts forecasts for the quarter. We expect that our largest customers in the future could be different from our largest customers today. End users could stop purchasing and indirect channel partners could stop marketing our products at any time. We cannot assure you that we will retain our current indirect channel partners or that we will be able to obtain additional or replacement partners. The loss of one or more of our key indirect channel partners or the failure to obtain and ship a number of large orders each quarter could harm our operating results.

ANY ACQUISITIONS WE MAKE COULD RESULT IN DILUTION TO OUR EXISTING STOCKHOLDERS AND DIFFICULTIES IN SUCCESSFULLY MANAGING OUR BUSINESS

We have made, and may in the future make, acquisitions of, mergers with, or significant investments in, businesses that offer complementary products, services and technologies. For example, in May 2006 we announced our acquisition of Tacit Networks, and in December 2004 we announced our acquisition of Mentat. There are risks involved in these activities, including but not limited to:

	•		difficulty in integrating the acquired operations and retaining acquired personnel;

	•		limitations on our ability to retain acquired distribution channels and customers;

	•		diversion of management’s attention and disruption of our ongoing business;

	•		difficulties in managing product development activities to define a combined product roadmap, ensuring timely development of new products, timely release of new products to market, and the development of efficient integration and migration tools;

	•		the potential product liability associated with selling the acquired company’s products; and

	•		the potential write-down of impaired goodwill and intangible and other assets. In particular, we recorded approximately $57.5 million in goodwill related to the acquisition of Tacit and $9.5 million in goodwill related to the acquisition of Mentat. Goodwill will be subject to impairment testing rather than being amortized over a fixed period. The Company monitors its current market capitalization ($223 million at December 31, 2007) as compared to total stockholders’ equity ($162 million at December 31, 2007) and other triggers of impairment. To the extent that the Company’s business does not remain competitive, some or all of the goodwill could be charged against future earnings.

These factors could have a material adverse effect on our business, results of operations or financial position, especially in the case of a large acquisition. In particular, we may complete acquisitions, which we believe will substantially contribute to our future revenues and profits, but may have an adverse impact on our profitability in the shorter term. Furthermore, we may incur indebtedness or issue equity securities to pay for future acquisitions. The issuance of equity or convertible debt securities could be dilutive to our existing stockholders.

WE FACE RISKS RELATED TO INVENTORIES OF OUR PRODUCTS HELD BY OUR DISTRIBUTORS

Many of our distributors maintain inventories of our products. We work closely with these distributors to monitor channel inventory levels so that appropriate levels of products are available to resellers and end users. However, if distributors reduce their levels of inventory or if they do not maintain sufficient levels to meet customer demand, our sales could be negatively impacted.

Additionally, we monitor and track channel inventory with our distributors in order to estimate end user requirements. Overstocking could occur if reports from our distributors about expected customer orders are inaccurate, if customer orders are not fulfilled in a forecasted quarter or the demand for our products were to rapidly decline due to economic downturns, increased competition, underperformance of distributors or the introduction of new products by our competitors or ourselves. This could cause sales and cost of sales to fluctuate from quarter to quarter.

THE VARIABILITY OF OUR SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR REVENUES AND RESULTS OF OPERATIONS

The timing of our revenues is difficult to predict because of the variability of our sales cycle. We rely primarily upon an indirect sales channel. The length of our sales cycle for sales through our indirect channel partners to our end users may vary substantially depending upon the size of the order and the distribution channel through which our products are sold. The length of our sales cycle may also vary due to product evaluations and proof of concept trials, delayed completion of enhancements to our products or increased competition in the market for our products.

We generally ship product upon receipt of orders and as a result have limited unfulfilled product orders at any point in time. Substantially all of our revenues in any quarter depend upon customer orders that we receive and fulfill in that quarter. To the extent that an order that we anticipate will be received and fulfilled in a quarter is not actually received in time to fulfill prior to the end of that quarter, we will not be able to recognize any revenue associated with that order in the quarter. If revenues forecasted in a particular quarter do not occur in that quarter, our operating results for that quarter could be adversely affected. The greater the volume of an anticipated order, the lengthier the sales cycle for the order and the more material the potential adverse impact on our operating results if the order is not timely received in a quarter. In addition, as an increasing portion of our revenues is now derived from larger sales, the risk of delayed sales having a material impact on quarterly performance has increased. Furthermore, because our expense levels are based on our expectations as to future revenue and to a large extent are fixed in the short term, a substantial reduction or delay in sales of our products or the loss of any significant indirect channel partner could harm our business.

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

We may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices. The average selling prices of our products could decrease in the future in response to competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors or other factors. Therefore, to maintain our gross margins, we must develop and introduce on a timely basis new products and product enhancements and continually reduce our product costs. Our failure to do so could cause our revenue and gross margins to decline.

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 products are complex and may contain undetected defects, errors or failures in either the hardware or software. In addition, because our products plug into our end users’ existing networks, they can directly affect the functionality of those networks. Furthermore, end users rely on our products to maintain acceptable service levels. We have in the past encountered errors in our products, which in a few instances resulted in network failures and in a number of instances resulted in degraded service. To date, these errors have not materially adversely affected us. Additional errors may occur in our products in the future. In particular, as our products and our customers’ networks become increasingly complex, the risk and potential consequences of such errors increases. The occurrence of defects, errors or failures could result in the failure of our customers’ networks or mission-critical applications, delays in installation, product returns and other losses to us or to our customers or end users. In addition, we would have limited experience responding to new problems that could arise with any new products that we introduce. These occurrences could also result in the loss of or delay in market acceptance of our products, which could harm our business. In particular, when a customer experiences what they believe to be a defect, error or failure, they will often delay additional purchases of our product until such matter is addressed or consider products offered by competitors.

We may also be subject to liability claims for damages related to product errors. While we carry insurance policies covering this type of liability, these policies may not provide sufficient protection should a claim be asserted. A material product liability claim may harm our business.

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

We currently rely on our longstanding contract manufacturer, SMTC, located in San Jose, California, and our OEM, Lanner, located in Taiwan, and to a lesser extent two additional manufacturers, for all of our manufacturing requirements. Either we or SMTC, Lanner and our other third-party manufacturers may terminate our contract with them without cause at any time. Third-party manufacturers may encounter difficulties in the manufacture of our products, resulting in product delivery delays. Any manufacturing disruption could impair our ability to fulfill orders. Our future success will depend, in significant part, on our ability to have these third party manufacturers, or others, manufacture our products cost-effectively and in sufficient volumes. We face a number of risks associated with our dependence on third-party manufacturers including:

	•		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.

We have no long-term contracts or arrangements with our manufacturers which guarantee product availability, the continuation of particular payment terms or the extension of credit limits. We have experienced in the past, and may experience in the future, problems with our contract manufacturers, such as inferior quality, insufficient quantities and late delivery of product. To date, these problems have not materially adversely affected us. We may not be able to obtain additional volume purchase or manufacturing arrangements with these manufacturers on terms that we consider acceptable, if at all. If we enter into a high-volume or long-term supply arrangement and subsequently decide that we cannot use the products or services provided for in the agreement, our business will be harmed. In the future, we may seek to shift manufacturing of certain products from one manufacturer to another. We cannot assure you that we can effectively manage our third-party manufacturers or any such transition or that our third-party manufacturers will meet our future requirements for timely delivery of products of sufficient quality or quantity or facilitate any such transition efficiently. Any of these difficulties could harm our relationships with customers and cause us to lose orders.

In the future, we may seek to use additional contract manufacturers. We may experience difficulty in locating and qualifying suitable manufacturing candidates capable of satisfying our product specifications or quantity requirements, or we may be unable to obtain terms that are acceptable to us. The lead-time required to identify and qualify new manufacturers could affect our ability to timely ship our products and cause our operating results to suffer. In addition, failure to meet customer demand in a timely manner could damage our reputation and harm our customer relationships, resulting in reduced market share.

MOST OF THE COMPONENTS AND SOME OF THE SOFTWARE USED IN OUR PRODUCTS COME FROM SINGLE OR LIMITED SOURCES, AND OUR BUSINESS COULD BE HARMED IF THESE SOURCES FAIL TO SATISFY OUR SUPPLY REQUIREMENTS

Almost all of the components used in our products are obtained from single or limited sources. Our products have been designed to incorporate a particular set of components. As a result, our desire to change the components of our products or our inability to obtain suitable components on a timely basis would require engineering changes to our products before we could incorporate substitute components. Any such changes could be costly and result in lost sales.

We do not have any long-term supply contracts with any of our vendors to ensure sources of supply. If our contract manufacturers fail to obtain components in sufficient quantities when required, our business could be harmed. Our suppliers also sell products to our competitors. Our suppliers may enter into exclusive arrangements with our competitors, stop selling their products or components to us at commercially reasonable prices or refuse to sell their products or components to us at any price. Our inability to obtain sufficient quantities of single-sourced or limited-sourced components, or to develop alternative sources for components or products could harm our ability to maintain and expand our business.

Similarly, the software for our ReportCenter product and certain of the software components for our iShared products are developed by single sources. We rely upon these providers for resolving software errors, developing software for product updates and providing certain levels of customer support for these products. It would be time-consuming and costly to replace these providers if they failed to provide quality services in an efficient manner, or if our relationships with them were interrupted or terminated.

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 INTERNAL CONTROL OVER FINANCIAL REPORTING, OUR STOCK PRICE COULD BE ADVERSELY AFFECTED

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, our management is required to report on the effectiveness of our internal control over financial reporting in each of our annual reports. In addition, our independent auditors must attest to and report on the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex, and require significant documentation, testing and possible remediation. As a result, our efforts to comply with Section 404 have required the commitment of significant managerial and financial resources. As we are committed to maintaining high standards of public disclosure, our efforts to comply with Section 404 are ongoing, and we are continuously in the process of reviewing, documenting and testing our internal control over financial reporting, which will result in continued commitment of significant financial and managerial resources.

We had material weaknesses in internal control over financial reporting as of December 31, 2006 and 2005. Although we intend to diligently and regularly review and update our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, in future years we may discover areas of our internal controls that need improvement, and our management may encounter problems or delays in completing the implementation and maintenance of any such improvements necessary to make a favorable assessment of our internal controls over financial reporting. We may not be able to favorably assess the effectiveness of our internal controls over financial reporting as of December 31, 2008 or beyond, or our independent auditors may be unable to provide an unqualified attestation report on our internal control over financial reporting.. If this occurs, investor confidence and our stock price could be adversely affected.

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

New laws, regulations and accounting standards, as well as changes to and varying interpretations of currently accepted accounting practices in the technology industry might adversely affect our reported financial results, which could have an adverse effect on our stock price. For example, our operating results since our adoption of SFAS No. 123(R), “Share Based Payments,” on January 1, 2006, have been adversely affected.

OUR INVESTMENT PORTFOLIO MAY BECOME IMPAIRED BY FURTHER DETERIORATION OF THE CAPITAL MARKETS.

Our cash equivalent and investment portfolio as of March 31, 2008 consisted of U.S. treasury securities, government agency securities, corporate bonds, money market funds, asset backed securities, and mortgage backed securities. We follow an established investment policy and set of guidelines to limit our exposure to interest rate and credit risk. The policy sets forth credit quality standards, liquidity guidelines, and concentration limits that limit our exposure to any one issuer and maximum exposure to any one asset class.

As a result of the current adverse financial market conditions, investments in some financial instruments, such as mortgage-backed securities and corporate bonds, may pose risks arising from liquidity and credit concerns. All such securities in our portfolio are rated as investment grade in conformance with our investment policy. We recognize unrealized losses from securities that are trading below our cost basis at each period end as part of other comprehensive income. When impairment on a security or group of securities is determined to be "other than temporary" we recognize realized losses as part of current earnings. We cannot predict future market conditions and provide no assurance that our investment portfolio will remain unimpaired.

CHANGES IN OR INTERPRETATIONS OF TAX RULES AND REGULATIONS MAY ADVERSELY AFFECT OUR EFFECTIVE TAX RATES.

As a global company, we are subject to taxation in the United States and various other countries. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities or changes in our reserves.

In addition, we are subject to examination of our income tax returns by the Internal Revenue Service and other domestic and foreign tax authorities.

We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, and believe such estimates to be reasonable. However, there can be no assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.

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

Our future success will depend, to a significant extent, on the ability of our management to operate effectively, both individually and as a group. We are dependent on our ability to attract, successfully integrate, retain and motivate high caliber key personnel. Competition for qualified personnel and management in the networking industry, including engineers, sales and service and support personnel, is intense, and we may not be successful in attracting and retaining such personnel. There may be only a limited number of persons with the requisite skills to serve in these key positions and it may become increasingly difficult to hire such persons. Competitors and others have in the past and may in the future attempt to recruit our employees. With the exception of our CEO and CFO, we do not have employment contracts with any of our personnel. Our business will suffer if we encounter delays in hiring additional personnel as needed. In addition, if we are unable to successfully integrate new key personnel into our business operations in an efficient and effective manner, the attention of our management may be diverted from growing our business or we may be unable to retain such personnel.

IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE MAY EXPERIENCE OPERATING INEFFICIENCIES AND HAVE DIFFICULTY MEETING DEMAND FOR OUR PRODUCTS

In the past, we have experienced rapid and significant expansion of our operations. If further rapid and significant expansion is required to address potential growth in our customer base and market opportunities, this expansion could place a significant strain on our management, products and support operations, sales and marketing personnel and other resources, which could harm our business.

In the future, we may experience difficulties meeting the demand for our products and services. The use of our products requires training, which is provided by our channel partners, as well as us. If we are unable to provide training and support for our products in a timely manner, the implementation process will be longer and customer satisfaction may be lower. In addition, our management team may not be able to achieve the rapid execution necessary to fully exploit the market for our products and services. We cannot assure you that our systems, procedures or controls will be adequate to support the anticipated growth in our operations.

We may not be able to install management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations.

CLAIMS BY OTHERS THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS COULD BE COSTLY TO DEFEND AND COULD HARM OUR BUSINESS

We may be subject to claims by others that our products infringe on their intellectual property rights. These claims, whether or not valid, could require us to spend significant sums and amount of time in litigation and customer relations, pay damages, delay product shipments, reengineer our products or acquire licenses to such third-party intellectual property. We may not be able to secure any required licenses on commercially reasonable terms, or at all. We have from time to time in the past received notices from third parties with respect to patent related matters and expect that we will continue to receive such notices in the future. In addition, we expect that we will increasingly be subject to infringement claims as the number of products and competitors in the WAN Application Delivery systems market grows and the functionality of products overlaps. Any of these claims or resulting events could harm our business.

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

Our success depends significantly upon our proprietary technology and our failure or inability to protect our proprietary technology would result in significant harm to our business. We rely on a combination of patent, copyright and trademark laws, and on trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. As of December 31, 2007, we have 43 issued U.S. patents and 78 pending U.S. patent applications. Currently, none of our technology is patented outside of the United States. Our means of protecting our proprietary rights in the U.S. or abroad may not be adequate and competitors may independently develop similar technologies. Our future success will depend in part on our ability to protect our proprietary rights and the technologies used in our principal products. Despite our efforts to protect our proprietary rights and technologies unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary. Legal proceedings to enforce our intellectual property rights could be burdensome and expensive and could involve a high degree of uncertainty. These legal proceedings may also divert management’s attention from growing our business. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the U.S. Issued patents may not preserve our proprietary position. If we do not enforce and protect our intellectual property, our business will suffer substantial harm.

IF OUR PRODUCTS DO NOT COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS, OUR BUSINESS COULD BE HARMED

The market for WAN Application Delivery systems is characterized by the need to support industry standards as these different standards emerge, evolve and achieve acceptance. In the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories. Internationally, products that we develop must comply with standards established by the International Electrotechnical Commission as well as with recommendations of the International Telecommunication Union. To remain competitive, we must continue to introduce new products and product enhancements that meet these emerging U.S. and international standards. However, in the future we may not be able to effectively address the compatibility and interoperability issues that arise as a result of technological changes and evolving industry standards. Failure to comply with existing or evolving industry standards or to obtain timely domestic or foreign regulatory approvals or certificates could harm our business.

WE ARE CURRENTLY IMPLEMENTING UPGRADES TO KEY INTERNAL IT SYSTEMS, AND PROBLEMS WITH THE DESIGN OR IMPLEMENTATION OF THESE SYSTEMS COULD INTERFERE WITH OUR BUSINESS AND OPERATIONS.

We have initiated a project to upgrade certain key internal IT systems, including our company-wide ERP system. We have invested, and will continue to invest, significant capital and human resources in the design and implementation of these systems, which may be disruptive to our underlying business. Any disruptions or delays in the design and implementation of the new systems, particularly any disruptions or delays that impact our operations, could adversely affect our ability to process customer orders, ship products, provide services and support to our customers, bill and track our customers, file SEC reports in a timely manner and otherwise run our business. Even if we do not encounter these adverse effects, the design and implementation of these new systems may be much more costly than we anticipate. If we are unable to successfully design and implement these new systems as planned, our financial position, results of operations and cash flows could be negatively impacted.

OUR GROWTH AND OPERATING RESULTS WOULD BE IMPAIRED IF WE ARE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS

We currently anticipate that our existing cash and investment balances will be sufficient to meet our liquidity needs for the foreseeable future. However, we may need to raise additional funds if our estimates of revenues, working capital or capital expenditure requirements change or prove inaccurate or in order for us to respond to unforeseen technological or marketing hurdles or to take advantage of unanticipated opportunities.

In addition, we expect to review potential acquisitions that would complement our existing product offerings or enhance our technical capabilities. Any future transaction of this nature could require potentially significant amounts of capital. These funds may not be available at the time or times needed or available on terms acceptable to us. If adequate funds are not available, or are not available on acceptable terms, we may not be able to take advantage of market opportunities to develop new products or to otherwise respond to competitive pressures.

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

Our charter documents and Section 203 of the Delaware General Corporation Law could discourage, delay or prevent a third- party or a significant stockholder from acquiring control of Packeteer. In addition, provisions of our certificate of incorporation may have the effect of discouraging, delaying or preventing a merger, tender offer or proxy contest involving Packeteer. Any of these anti-takeover provisions could lower the market price of the common stock and could deprive our stockholders of the opportunity to receive a premium for their common stock that they might otherwise receive from the sale of Packeteer.

ITEM 6. EXHIBITS


Exhibit 31.1		Sarbanes-Oxley Section 302 Certification — CEO

Exhibit 31.2		Sarbanes-Oxley Section 302 Certification — CFO

Exhibit 32.1		Sarbanes-Oxley Section 906 Certification — CEO

Exhibit 32.2		Sarbanes-Oxley Section 906 Certification — CFO

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cupertino, State of California, on this 8th day of May, 2008.


	PACKETEER, INC.
	By:	/s/ DAVE CÔTÉ
		Dave Côté
		President and Chief Executive Officer


	By:	/s/ DAVID YNTEMA
		David Yntema
		Chief Financial Officer and Secretary

Exhibit Index


Exhibit 31.1		Sarbanes-Oxley Section 302 Certification — CEO

Exhibit 31.2		Sarbanes-Oxley Section 302 Certification — CFO

Exhibit 32.1		Sarbanes-Oxley Section 906 Certification — CEO

Exhibit 32.2		Sarbanes-Oxley Section 906 Certification — CFO