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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|           |  |                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                           
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended December 31,
	2001                                              
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
	from           to           .                                  

Commission File
Number  -

Packeteer, Inc.

(Exact name of Registrant as specified in its
charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 77-0420107                          
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

10495 North de Anza

Cupertino, California 95014


(Address of principal executive
offices)


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

Securities registered pursuant to
Section 12(b) of the Act: None

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

Common Stock, $0.001 Par Value

(Title of Class)


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 if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
the Registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this
Form 10-K. o

Based on the closing sale price of the common
stock on the Nasdaq National Market System on February 28,
2002 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $154,803,781. Shares of
common stock held by each officer and director and by each
person known by the Company to own 10% or more of the
outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.

The number of shares outstanding of
Registrants common stock, $0.001 par value, was 30,043,409
at February 28, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Information required by Part III of this
form 10-K is incorporated by reference from the
Companys definitive Proxy Statement for the
Registrants 2002 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after
December 31, 2001.



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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matter to a Vote of Security Holders                                   
|PART II      
|              | Item 5. Market for Registrants Common Stock and Related Stockholder Matters                 
|              | Item 6. Selected Financial Data                                                              
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7a. Quantitative and Qualitative Disclosures about Market Risk                          
|              | Item 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES   
|EXHIBIT INDEX
|Exhibit 10.20
|Exhibit 10.21
|Exhibit 21.1 
|Exhibit 23.1 



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TABLE OF CONTENTS

|           |  |                                                                                        |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                        |    | Page
|           |  |                                                                                        |    |     
|PART I    
|Item 1.    |  | Business                                                                               |    |      | 1  | 
|Item 2.    |  | Properties                                                                             |    |      | 23 | 
|Item 3.    |  | Legal Proceedings                                                                      |    |      | 23 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
	Holders                                   |    |      | 23 | 
|PART II   
|Item 5.    |  | Market For Registrants Common Stock and
	Related Stockholder Matters                  |    |      | 24 | 
|Item 6.    |  | Selected Financial Data                                                                |    |      | 25 | 
|Item 7.    |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |    |      | 26 | 
|Item 7a    |  | Quantitative and Qualitative Disclosures about
	Market Risk                            |    |      | 34 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                            |    |      | 36 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |    |      | 61 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                     |    |      | 61 | 
|Item 11.   |  | Executive Compensation                                                                 |    |      | 61 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
	and Management                        |    |      | 61 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                         |    |      | 61 | 
|PART IV   
|Item 14.   |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |    |      | 61 | 
|Signatures |  |                                                                                        | 62 |     



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PART I




Item
1.     Business

In addition to historical information, this
Annual Report on Form 10-K contains forward-looking
statements regarding our strategy, financial performance and
revenue sources that involve a number of risks and
uncertainties, including those discussed below in Risk
Factors. Forward-looking statements in this report
include, but are not limited to, those relating to our ability
to develop multiple applications, our planned introduction of
new products and services, the possibility of acquiring
complementary businesses, products, services and technologies
and our development of relationships with providers of leading
Internet technologies. While this outlook represents our current
judgment on the future direction of the business, such risks and
uncertainties could cause actual results to differ materially
from any future performance suggested below. Readers are
cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this Annual
Report. Packeteer undertakes no obligation to publicly release
any revisions to forward-looking statements to reflect events or
circumstances arising after the date of this document. See
Risk Factors.

Overview

Packeteer is a leading provider of application
performance infrastructure systems that are designed to provide
enterprises and service providers a layer of control for
applications delivered across intranets, extranets and the
Internet. Packeteers products  powered by
PacketWise software  are designed to ensure
end-to-end quality of service (QoS) for networked applications
and managed services, enhancing users quality of
experience through comprehensive bandwidth, traffic, content,
service-level and policy management. Packeteers
PacketShaper family of products, the PacketShaper® and
AppVantage systems, integrates application discovery,
analysis, control and reporting technologies that are required
for proactive application performance and bandwidth management.
The AppCelera family of Internet acceleration appliances
employs secure socket layer (SSL) acceleration and advanced
content compression, transformation and caching technologies to
improve response times of mission critical enterprise, eBusiness
and eCommerce web applications.

Packeteers products are deployed by Global
2000 corporations and service providers, and are sold through an
established network of more than 100 resellers, distributors,
system-integrators and OEMs in more than 50 countries. Our
products are built on hardware platforms based on
Intel-compatible microprocessor technologies. In addition,
PacketWise software is licensed by several communications
industry partners who integrate the software into specific
strategic networking solutions. We primarily use indirect
channels to leverage the reach of our sales force to obtain
worldwide coverage. Our sales force and marketing efforts are
used to develop brand awareness and support our indirect
channels. We have subsidiaries or branch offices in Hong Kong,
Japan, Singapore, Korea, The Netherlands, United Kingdom,
Germany, France, Denmark, Australia, Caymans and Canada. To date
we have shipped more than 17,000 units.

We were incorporated in Delaware in January 1996
and in February 1997, we began shipping our products. In this
report, Company, Packeteer,
we, us, and our refer to
Packeteer, Inc. and its subsidiaries.

Industry Background



| |                                     
| | ------------------------------------
| | The Emergence of Internet
	Computing

Today, both the Internet and its underlying
protocol, TCP/ IP, have grown to positions of prominence in
enterprise networking. Protocols are predefined mechanisms for
computers to communicate over networks. From its origins as a
network connecting academic and government institutions, the
Internet has evolved into an interactive communications and
commerce platform supporting businesses daily operations.
Originally intended to accommodate non-interactive traffic such
as file transfers and e-mail, the Internet and TCP/ IP were
designed with the basic goals of connectivity, versatility and
bandwidth exploitation. With the evolution towards Internet
computing, TCP/ IP has become the communications fabric, or as
it is commonly referred to

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in the technology industry, the underlying
protocol of mission-critical enterprise networks. The Internet
has enabled a new generation of interactive applications to
deliver core business functions, including e-commerce, data
access and information exchange, to a broad range of users.
Leveraging the fundamental attributes of the Internet and TCP/
IP, businesses, consumers and suppliers have become better
connected. This rapid development of a vast connected economy
has given rise to a new innovative business model, the Internet
computing model.


The rapid emergence of Internet computing has had
a significant effect on todays enterprise networks and has
created new challenges for information technology managers. As
more interactive business applications are developed using
web-enabled versions of enterprise software platforms, such as
SAP R/3, Oracle, PeopleSoft and Baan, the amount of network data
is increasing dramatically. eCommerce extends the confines of
the enterprise network across the Internet, making application
performance difficult to ensure. Enterprise users access
graphic-intensive web sites, download large files, view
streaming media presentations, monitor news and stock quotes and
access other non-critical information over the Internet. The
resulting traffic deluge impacts network resources that serve
point-of-sale, order processing, enterprise resource planning,
supply-chain management and other vital business functions.

Internet computing relies on TCP/ IP as the
underlying protocol to support distributed enterprise
applications and the delivery of electronic services. The
Internet Protocol, or IP, provides for routing of packets across
networks that utilize TCP/ IP as their underlying protocol. The
Transmission Control Protocol, or TCP, provides flow control
for, and reliable ordered delivery of, Internet Protocol
packets. Unlike early non-interactive applications that did not
require real-time responsiveness, todays enterprise and
e-commerce applications depend on timely access to data and
real-time transaction responses to ensure productivity and a
high quality of experience for end users. The shift toward
real-time, delay-sensitive data is accelerating as corporations
begin to converge database transactions and multimedia traffic
onto their enterprise networks. TCP/ IP is unable to
differentiate between traffic types and is designed so that each
transmission attempts to consume all available bandwidth. These
characteristics, which make TCP/ IP suitable for non-interactive
traffic, threaten the performance of todays
mission-critical applications.



| |                                               
| | ----------------------------------------------
| | The Traffic Bottleneck at the WAN Access
	Link

In recent years, the adoption of Fast Ethernet
and Gigabit Ethernet technologies has reduced network congestion
on the LAN. Simultaneously, the deployment of fiber
infrastructure in the service provider backbone has also reduced
bandwidth contention in that portion of the network. However,
the bridge between the two, the WAN access link, has remained
the slow, weak link in the chain, forming a bandwidth
bottleneck. WAN access link capacity is often constrained,
expensive and difficult to upgrade. When faced with bandwidth
contention at the bottleneck, TCP/ IP provides neither a means
to give preferential treatment to select applications nor a good
mechanism to effectively control data flows because TCP flow
control is handled only by end systems. TCP/ IP reacts to
network congestion by discarding data packets and sporadically
reducing packet transmissions from the host computer. In
enterprise networks that are overwhelmed by increasing amounts
of both non-critical and mission-critical traffic, unmanaged
congestion at the WAN access link undermines application
performance and can result in impaired productivity and lost
revenues.

Todays enterprise networks require
solutions that ensure mission-critical application performance,
increase network efficiency, and enable the convergence of data,
voice and video traffic. Enterprises are seeking to align their
networks with their business priorities by making them adaptive
to the unique requirements of the growing mix of
mission-critical applications. At the same time, they seek to
leverage investments in application software and proactively
control recurring network costs by optimizing bandwidth
utilization.

Many existing and newly emerging
telecommunications service providers are also seeking to address
the needs of enterprises that are adopting Internet computing.
Service providers have traditionally functioned as WAN bandwidth
suppliers, leasing data lines and selling Internet access to
businesses and consumers. In the face of heightened competition,
service providers are seeking to differentiate themselves by
offering tiered services in order to attract and retain
customers and increase profitability. These offerings include
web hosting,

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application outsourcing and managed network
services. To deliver these services, service providers must be
able to ensure network and application performance and better
manage and allocate network resources.




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

Businesses and service providers currently employ
several approaches in an attempt to alleviate network congestion
at the WAN access link. These approaches include the following:

Adding bandwidth and infrastructure to
over-provision the network. This approach requires expensive
upgrades to WAN access links and associated network equipment.
Moreover, incremental increases in bandwidth only temporarily
alleviate network congestion, leaving the following problems
unresolved:



| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Over-provisioning results in under-utilization of
	the network during non-peak periods;                                                                                          
|
| |  | Increases in bandwidth tend to be consumed
	quickly by latent demand within LAN and backbone infrastructure;                                                                     
|
| |  | Deployment costs and increases in recurring
	service charges can be prohibitively expensive, especially for
	networks with many remote sites and for international networks;
	and
|
| |  | There is no application performance visibility to
	enable effective capacity planning.                                                                                           

Implementing queuing-based
features.Queuing technologies provide
some degree of prioritization and are frequently incorporated in
routers, which are devices that forward data packets from one
LAN or WAN to another. These implementations engage only after
queues form, and attempt to provide quality of service, or QoS,
by reordering packets and then discarding packets when the
queues overflow. Router-based approaches typically identify and
prioritize traffic based on rudimentary characteristics such as
port number, a simplistic mechanism to coordinate the
transmission of application data, IP address or protocol type.
While these approaches can alleviate some of the bandwidth
contention problems, they are inadequate to handle an
increasingly complex mix of interactive and real-time
mission-critical applications. These limitations include:



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Queuing-based approaches are reactive in nature
	and can only address congestion after the fact, rather than
	preventing it from occurring;                        
|
| |  | Congested queues result in packet loss,
	retransmissions and delays that waste bandwidth and undermine
	application response times;                                
|
| |  | Limited traffic classification capabilities
	inadequately distinguish between different types of
	applications, resulting in sub-optimal prioritization of traffic;
|
| |  | Queuing does not directly control end-to-end
	application performance; and                                                                                         
|
| |  | Queuing-based approaches do not control inbound
	traffic flowing from the WAN to the LAN.                                                                          

Installing network-management
tools.Several vendors provide
software that analyzes and monitors network traffic. While these
products enable network administrators to determine how
bandwidth is being utilized, thereby identifying where bandwidth
management is required, they do not comprise a complete solution
for the following reasons:



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | These products only monitor and report
	application performance and bandwidth utilization, offering no
	means of fixing or resolving performance problems; and
|
| |  | Products that detect problems once they occur are
	reactive and dont proactively prevent similar problems in
	the future.                                    



| |                                      
| | -------------------------------------
| | The Bandwidth Management
	Opportunity

As Internet computing is more widely adopted,
both businesses and service providers are seeking ways to
cost-effectively manage bandwidth, ensure application
performance and increase network efficiency. As mission-critical
applications compete with bandwidth-hungry non-critical traffic
for limited network resources, enterprises require a solution
that not only monitors and reports on application performance
problems, but also

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provides the means to fix such problems. As the
complexity of their network infrastructures increases,
enterprises seek solutions that integrate easily into the
existing network and are cost-effective to deploy and maintain.
In response to growing competition, service providers are
looking to create new revenue streams by offering differentiated
network and application-based services that meet the needs of
enterprise customers. Whether the solution is implemented by the
enterprise or purchased from a service provider, effectively
managing the performance of mission-critical applications is
essential to businesses relying on Internet computing.


The Packeteer Solution

Packeteer is a leading provider of application
performance infrastructure systems that are designed to provide
enterprises and service providers a layer of control for
applications delivered across intranets, extranets and the
Internet. Packeteers products  powered by
PacketWise® software  are designed to ensure
end-to-end quality of service (QoS) for networked applications
and managed services, enhancing users quality of
experience through comprehensive bandwidth, traffic, content,
service-level and policy management. Packeteers
PacketShaper family of products, the PacketShaper® and
AppVantage systems, integrates application discovery,
analysis, control and reporting technologies that are required
for proactive application performance and bandwidth management.
The AppCelera family of Internet acceleration appliances
employs SSL acceleration and advanced content compression,
transformation and caching technologies to improve response
times of mission critical enterprise, eBusiness and eCommerce
web applications.

PacketWise software is at the core of our
bandwidth management solutions and is embedded in
Packeteer-manufactured products, basically hardware platforms,
based on Intel-compatible microprocessor technologies, that run
various configurations of the PacketWise software. Our
PacketShaper products provide customers with solutions designed
to be deployed easily and cost-effectively without additional
investment in or impact to network equipment, software or
infrastructure.

As the enterprise network increasingly extends to
include the Internet, network managers are challenged with
managing the dynamic growth in critical and non-critical
traffic. Each particular application and type of
traffic  such as transactions, file transfers, voice
or streaming multimedia  requires a tailored
management strategy to ensure optimal performance. Our solutions
are based on a comprehensive four-step methodology that provides
the elements for effective bandwidth management:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | I.     Discover and
	Classify Traffic. Currently, PacketShaper automatically
	detects and identifies over 350 types of traffic. Network
	managers can refine traffic categories based on application,
	protocol, web page, addresses, users and host names. In
	addition, managers can define criteria to recognize proprietary
	applications so that PacketShaper automatically classifies the
	associated traffic. Sophisticated traffic classification enables
	network managers to understand network congestion and to
	precisely target bandwidth-allocation policies.                                                                                                                                                                                             
|
| | II.     Analyze
	Performance. PacketShaper provides detailed analysis and
	evaluation of network resources and application performance.
	PacketShaper tracks traffic levels and trends, measures response
	times and calculates network efficiency. Network managers can
	analyze all traffic traversing a particular WAN access link or
	can focus on an individual application, client, server or
	traffic type.                                                                                                                                                                                                                                                                                                                                                       
|
| | III.     Control
	Traffic. PacketShaper allows network managers to control
	application performance and network resources by defining
	precise bandwidth-allocation policies. Policies can protect
	important traffic, cap bandwidth-intensive traffic and guarantee
	service levels. Network managers can tailor management
	strategies and bandwidth allocation to suit the requirements of
	particular applications or traffic, such as voice, video or
	data. PacketShaper paces both inbound and outbound traffic over
	the WAN access link to optimize performance and control
	end-to-end QoS. Our control technology can also prohibit
	specific applications, such as web-based entertainment or
	leisure applications, from utilizing any enterprise resources.
|
| | IV.     Report
	Performance. PacketShaper provides reports describing
	current and historical network performance. Comprehensive
	reports, graphs and tables enable network managers to refine                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | bandwidth management policies, evaluate
	efficiency and plan capacity. PacketShaper automatically
	measures per-transaction response times for each application.
	Managers can set, enforce and monitor service-level agreements,
	which quantify desired QoS for a particular application or
	customer.

Our dynamic four-step approach to
application-adaptive bandwidth management enables businesses and
service providers to realize the following key benefits:



| |   |                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gain Network Performance Visibility and
	Insight.PacketShaper provides
	valuable historical and real-time information about application
	performance and network utilization through an easy-to-use
	browser interface. Network managers gain a better understanding
	of the nature of traffic running on their networks and the
	problems and inefficiencies associated with that traffic. 
|
| |  | Ensure Bandwidth to Mission-Critical
	Applications.Policy-based bandwidth
	allocation protects bandwidth for mission-critical applications
	such as SAP R/3, Oracle, PeopleSoft and Baan, preventing
	disruptions from bandwidth-hungry but less urgent applications
	such as file transfers, peer-to-peer file sharing or casual web
	browsing.                                            
|
| |  | Simplify Deployment.PacketShaper installs easily, and automatically starts to
	discover, classify and analyze network traffic and suggests
	policies to optimize performance. It complements the existing
	network infrastructure, requires no router reconfiguration or
	desktop changes and is designed not to disrupt network
	connectivity in the event of software or hardware failure.
|
| |  | Enable Interactive
	Services.VoIP, real-time video and
	other streaming media require guaranteed bandwidth in order to
	achieve minimum quality requirements. By using PacketShaper to
	set minimum bandwidth guarantees and explicit delay bounds,
	network managers and service providers can deliver smooth and
	predictable performance of these delay-sensitive multimedia
	services.  
|
| |  | Increase Network
	Efficiency.PacketShaper improves
	network efficiency and helps delay expensive capacity upgrades
	by managing non-critical traffic to reduce retransmission
	overhead and smooth the variability in bandwidth utilization.                                                                                                                                                
|
| |  | Facilitate
	eCommerce.PacketShaper can reserve
	bandwidth for individual web site customers on a shared WAN
	connection. PacketShaper can also optimize response time for
	certain web pages, such as product order and home pages, and
	redirect users with slower connections to less data-intensive
	web pages.                                                                          

Strategy

Our objective is to be the leading provider of
application performance infrastructure systems that give
enterprises and service providers a new layer of control for
applications delivered across intranets, extranets and the
Internet. Key elements of our strategy include:

Focus on Bandwidth Management Needs of
Enterprises.We are focused on
providing high performance, easy-to-use and cost-effective
bandwidth management solutions to enterprises whose businesses
are based on Internet computing. For these businesses, managing
mission-critical application performance and optimizing the
value of the network will continue to be competitive
requirements. As the Internet proliferates and new
Internet-based applications and services emerge, we believe
businesses will continue to adopt Internet computing business
models at a rapid rate and that effective bandwidth management
will become an increasingly important requirement for
maintaining an efficient enterprise network. We believe we have
established a differentiated market position based on our
comprehensive solution that provides for effective bandwidth
management, early market leadership and brand awareness. We
intend to continue to direct our development, sales and
marketing efforts toward addressing the bandwidth management
needs of the Internet computing market.

Expand Presence in Telecommunications Service
Provider Market.We are actively
pursuing opportunities in the telecommunications service
provider market and currently have numerous telecommunications
service provider customers, including: AT&T, NTT
Corporation, Equant Integration Services, Inc., Singapore Cable,
Fujitsu Cable, Hughes Network Systems and New Skies
Satellites N. V. We believe service providers

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are under increasing pressure to attract new
subscribers, reduce subscriber turnover, improve operating
margins and develop new revenue streams. Specifically, service
providers seek to differentiate themselves through value-added
service offerings, such as web hosting, application outsourcing
and application service-level management. We believe our
PacketShaper and PacketWise solutions enable service providers
to deliver these higher value services by enhancing network and
application performance and better managing and allocating
network resources. Our goal is to increase demand for our
solutions with service providers by leveraging our strong
enterprise presence.


Expand Presence in the Management Application
Services Market.We are actively
pursuing opportunities in the application service provider
market and currently have numerous application service provider
customers, including AT&T, NTT Communications and Equant
Integration Services, Inc., that are using our application
service provider product, AppVantage. AppVantage is the
industrys first policy-based application subscriber
management (ASM) system. The AppVantage system provides an
application infrastructure that is designed to enable service
providers to quickly and cost-effectively deliver secure,
measured and performance-assured application services tailored
to the needs of specific markets and customers. The system is
the first platform to deliver a clearly defined service
demarcation point between service providers and their customers
and delivery-chain partners; provide and enforce quality of
service (QoS) application-specific service level agreements
(SLAs); and enable application-specific billing.

Continue to Build Indirect Distribution
Channels.We believe we have built a
worldwide distribution channel. We currently have over
100 resellers, distributors, systems integrators and OEMs,
that sell our products in over 50 countries. These
relationships include: Alternative Technology; ACAL Nederlands
BV; Adtran, Inc.; Allasso; Equant Integration Services, Inc.;
Lan Systems Pty. Ltd.; Macnica, Inc; Nissho Electronics
Corporation; and Westcon. We intend to continue to develop and
support new reseller and distribution relationships, as well as
to establish additional indirect channels with service
providers, systems integrators and OEMs. We believe this
strategy will enable us to increase the worldwide deployment of
our products.

Extend Bandwidth Management Technology
Leadership.Our technological
leadership is based on our sophisticated traffic classification,
flexible policy setting capabilities, precise rate control
expertise and ability to measure response time and network
performance. We intend to invest our research and development
resources to increase performance by handling higher speed WAN
connections, functionality by identifying and managing
additional applications or traffic types, and modularity by
taking individual components of PacketWise together or on a
stand-alone basis with our existing bandwidth management
solutions and to develop new leading-edge technologies for
emerging markets. This includes extending our bandwidth
management solutions to incorporate in-depth
application-management techniques that will improve performance
over the Internet and reduce bandwidth requirements. We plan to
extend our current portfolio by offering PacketWise-defined
solutions that target the specific needs of three primary market
opportunities: application service-level management, enterprise
bandwidth management and service provider bandwidth management.

Products

Packeteers products  powered by
PacketWise® software  enable enterprises and
service providers to measure, control, accelerate and validate
the performance of networked applications and managed
application services.

PacketShaper®.
PacketShaper is an application-based traffic and bandwidth
management system designed to deliver predictable, efficient
performance for applications running over the WAN and Internet.
The PacketShaper® Enterprise Edition is an
application bandwidth management system that provides effective
application QoS using state-of-the-art bandwidth, traffic,
service-level and policy management technology. The PacketShaper
ISP Edition is an Internet bandwidth management platform
that enables service providers to create differentiated services
through fast and efficient bandwidth provisioning and
management. With over 17,000 units shipped worldwide in
Global 2000 enterprises and service providers, PacketShaper is
the market leader in bandwidth management systems. The
PacketShaper product line

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currently includes the 1500, 2500, 4500, 6500 and
8500 Enterprise Editions and 4500, 6500 and 8500 ISP Editions.


AppVantage.Specifically designed for emerging managed application services,
the AppVantage family of Application Service Management
(ASM) systems provides the software needed to deliver
measured and performance-assured application services. In
addition to PacketWise core QoS technologies, which include
application-based bandwidth, traffic, performance service-level
and policy management, AppVantage incorporates service-level
mediation capabilities that allow service providers to define
clear service boundaries with customers and create enforceable
service-level agreements. It also enables application
performance reporting and billing models. AppVantage is ideally
suited for service providers who are delivering, hosting or
providing infrastructure for managed applications services.
These include application service providers (ASPs), hosting
service providers (HSPs), management service providers (MSPs)
and application infrastructure providers (AIPs). The AppVantage
product line currently includes the ASM-30, ASM-50, ASM-70 and
ASM-90 Series.

AppCelera.A line of
products designed to accelerate the performance of Internet
applications, AppCelera ICX (Internet Content Accelerator) is an
advanced content acceleration product that can reduce web
response-times by up to 50% by accelerating web content delivery
all the way to the users desktop. It combines content
compression, transformation and caching technologies to improve
web application performance across the bandwidth-constrained
last mile connections while reducing both server and bandwidth
resource consumption. Products include the AppCelera ICX-55,
ICX-75 and ICX-75s.

PolicyCenterTM.
A directory-based policy management application that enables
Packeteers enterprise and service provider customers to
broadly deploy, scale and manage application QoS throughout the
network, PolicyCenter is an LDAP directory-enabled application
running under Windows 2000 or Windows NT that enables customers
to centrally administer and update PacketShaper and AppVantage
policies, software versions, and device status for
Packeteer-based networks.

ReportCenterTM.
A software product that aggregates metrics from large
deployments and creates organization-wide reports to manage
trends and provide support for capacity planning and usage
analysis, ReportCenter lowers the cost of ownership for large
deployments of PacketWise-enabled appliances, improves the
quality of information and eases administrative overhead.

Technology

We differentiate our solution by combining our
knowledge of enterprise applications with our expertise in
underlying network protocols. We have invested heavily in
developing valuable, proprietary software and related
technologies. In particular, we have developed expertise and
technology in these major areas: sophisticated traffic
discovery and classification, flexible policy definition and
enforcement, precise rate control, application-based
response-time measurement, high-performance packet engines and
scaleable configuration. We have tied together these
technologies with an easy-to-use, web browser interface in order
to insulate the end user from the sophistication of the
underlying technology and to allow them to derive the benefits
of the technology with minimal effort.



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

The ability to automatically detect and classify
an extensive collection of applications and protocols
differentiates PacketShaper from other bandwidth management
technologies. Sophisticated traffic classification is crucial to
understand network congestion and to target appropriate
bandwidth-allocation policies. Network software or devices that
claim QoS features typically offer rudimentary solutions because
they can identify traffic based only on protocol type or port
numbers. This approach limits application-specific QoS
capabilities because these products do not recognize the
detailed information required to make intelligent classification
decisions. PacketShaper discovers and classifies traffic by
focusing on content and applications where value to the end user
lies.

7



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##### Table of Contents



Relying only on more basic traffic classification
prevents network managers from discovering important traffic
trends and limits policy setting. Sophisticated traffic types
such as voice calls over networks based on Internet Protocol, or
VoIP, Oracle 8i, TN3270, Citrix, and Microsoft DCOM cannot
be identified using rudimentary traffic classification schemes.
PacketShaper identifies traffic markers, detects changing or
dynamic port assignments and tracks transactions with changing
port assignments. This sophisticated traffic classification
allows network managers to set policies and control the traffic
related to an individual application, session, client, server or
traffic type. PacketShaper permits a network manager to isolate
each published application running on a centralized server and
can also differentiate among various applications using the same
port. For example, non-critical applications such as web
browsing and music downloading through peer-to-peer applications
and mission-critical applications such as Citrix, Oracle or SAP
and critical web sites are all assigned to the same TCP port
number on a network but can be individually classified using
PacketShaper.

PacketShaper needs no assistance from network
managers to automatically detect and identify over
350 traffic types. Without a sophisticated identification
and classification capability, managers are usually unaware of
the diversity of their own network traffic. In addition,
managers can define proprietary applications so that their
traffic can be recognized and reported. Our PacketShaper
technology is differentiated by its ability to recognize older
enterprise protocols, such as AppleTalk, DECnet, IPX and SNA. We
frequently enhance PacketShapers classification capability
to include new traffic types. Any traffic category can be made
even more specific by adding more detailed criteria 
for example, Oracle traffic to or from a particular database.
The PacketShaper automatically classifies over
350 different traffic types, some of which are listed
below. The traffic types are named either with their associated
protocol or application and are grouped according to the class
of application that generated that traffic. Each traffic type
has an associated protocol that allows it to be recognized on
the network.

A recent list of applications PacketShaper
automatically detects and classifies includes the following:

Client/ Server

CORBA


Folding@Home


FIX (Finance)


Java Rmt Mthd


MATIP (Airline)


MeetingMaker


NetIQ AppMngr


OpenConnect


JCP


SunRPC (dyn port)


ERP

Baan


JavaClient


JD Edwards


Oracle (7,8i,9i)


SAP


Internet

ActiveX


FTP, Passive FTP


Gopher


IP, IPIP, UDP, TCP


IPv6


IRC


Mime type


NNTP


SSHTCP


SSL


TFTP


UUCP


URL


Web browser


Database

FileMaker Pro


MS SQL


Oracle 7/8i


Progress


Directory Services

CRS


DHCP


DNS


DPA


Finger


Ident


Kerberos


LDAP


RADIUS


TACACS


WINS


whois


E-mail, Collaboration

Biff


cc:MAIL


IMAP


LotusNotes


MSSQ


Microsoft DCOM


(MS Exchange)


Novell GroupWise


POP3


Kerberos


SMTP


File Server

AFS


CVSup


Lockd


NetBIOS-IP


NFS


Novell NetWare5


Games

Asherons Call


Battle.net


Diablo II


Doom


EverQuest


Kali


Half-Life


MSN Zone


Quake I, II, & III


Tribes I,II


Unreal


Yahoo! Games


Host Access

ATSTCP


Attachmate


SHARESUDP


Persoft Persona


SMTBF


TN3270


TN5250


8



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##### Table of Contents



Legacy LAN

and Non-IP


AFP


AppleTalk


DECnet


IPX


FNA


LAT


NetBEUI


MOP-DL/ RC


PPPoE


SNA


Messaging

AOL Instant


Msging ICQ Chat


MSN Messenger


Yahoo! Messenger


Internet Relay


Chat


Misc

Time Server


Date-Time


Multi-Media

Multi-cast NetShow


NetMeeting


QuickTime


RTP


Real Audio


Streamworks


RTSP


MPEG


ST2


SHOUTcast


WebEx


WindowsMedia


Music P2P

Aimster


AudioGalaxy


DirectConnte


ct


eDonkey2000


Gnutella


Groove


Hotline


Imesh


KaZaA


Napster


Scour


Tripnosis


Network Management

Cisco


Discovery


ICMP by packet


type


Microsoft SMS


NTP


RSVP


SNMP


SYSLOG


Print

LPR


IPP


TN5250p


TN3287


Push

Backweb


EntryPoint


Marimba


PointCast


Routing

AURP


BGP


CBT


DRP


EGP


EIGRP


IGMP


IGP


MPLS (-tag, -app)


OSPF


PIM


RARP


RIP


Spanning Tree


VLAN (802.1q/p)


Security Protocol

DLS


DPA


GRE


IPSEC


ISAKMP/ IKE


key exchange


L2TP


PPTP


SOCKS Proxy


Session

REXEC


rlogin


rsh


Telnet


Timbuktu


VNC


Xwindows


Thin Client or

Server Based


Citrix Published


Apps and


VideoFrame


RDP/Terminal Server


Voice over IP

Clarent


CUSeeMe


Dialpad


H.323


I-Phone


MCK Commun.


Micom VIP


RTP


RTCP


T.120


VDOPhone




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

PacketShaper provides network managers flexible
tools to tailor solutions for different applications or traffic
types. Unlike queuing-based approaches, PacketShaper allows
network managers to do more than just prioritize one traffic
type over another. Our policy features offer the flexibility
required to tune bandwidth to specific applications and
dynamically utilize available bandwidth. Our policy features may
be used individually or in conjunction with each other.
PacketShaper policy features include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Per-session rate
	policies.These policies enable
	network managers to limit or guarantee bandwidth to each
	individual session of an applications traffic. Per-session
	policies allocate each session an appropriate amount of
	bandwidth and prevent one large session from inappropriately
	impacting others. Network managers specify a minimum-guaranteed
	rate and allow the session scaled access to additional available
	bandwidth. For example, a bandwidth cap for traffic prevents web
	browsers from competing for bandwidth required by
	mission-critical applications. Likewise, a guaranteed rate for
	audio or video streams ensures that they are not interrupted by
	traffic that tends to consume any available bandwidth.
|
| |  | Partitions.Partitions allow the creation of a separate, exclusive channel
	within a WAN access link. Partitions represent aggregate
	bandwidth minimums or maximums governing how much of the network
	can be used by a single application or traffic category.
	Partitions can be fixed, creating dedicated virtual circuits, or
	burstable, creating virtual circuits whose unused bandwidth can
	be shared.                                                                                                                                                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Dynamic Subscriber Bandwidth
	Provisioning.Dynamic Subscriber
	Bandwidth Provisioning allocates bandwidth and enforces QoS
	policies automatically by mapping a subscribers traffic
	profile (e.g. source/destination IP address, traffic
	type, URL, etc.) to a prescribed policy. It is a scaleable and
	easy-to-deploy solution that actively provisions minimum and
	maximum bandwidth to up to 20,000 subscribers accessing the
	network concurrently. Using a 5-to-1 over subscription model,
	not uncommon in todays service provider market, bandwidth
	for as many as 100,000 subscribers can be managed with a single
	PacketShaper. This gives service providers additional revenue
	opportunities through multi-tiered Internet access services
	(e.g. bronze, silver, gold) for dial-up, xDSL, cable and
	wireless subscribers.
|
| |  | Priority policies.Priorities may be assigned to each application or traffic
	category. Eight priority levels are available. Priority policies
	are ideal for traffic that does not burst, non-IP traffic and
	traffic characterized by small, high-priority flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Admission-control
	policies.Admission-control determines
	the response if a bandwidth guarantee cannot be satisfied.
	Network managers may choose to deny access, accommodate an
	additional user with less than guaranteed performance, or, for
	web requests, redirect the request to another server. For
	example, if an online streaming-video service suffers a
	high-demand period and all available bandwidth is consumed, an
	admission-control policy could present a web page explaining
	that resources are busy. This allows a maximum number of users
	to receive a targeted service quality without degradation as new
	users seek to access the service.                                                                                                                                                                       
|
| |  | Discard and never-admit
	policies.These policies intentionally
	block traffic. Discard policies toss packets without sending
	feedback to the sender. Never-admit policies are similar to
	discard policies except that the policy informs the sender that
	service is blocked.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |                     
| | --------------------
| | Precise Rate Control

One of TCP/IPs primary weaknesses is an
inability to guarantee QoS. Unlike systems network architecture,
or SNA, and asynchronous transfer mode, or ATM, protocols, which
have an embedded concept of rate, TCP/IPs attempt to
consume all available bandwidth conflicts with the goal of
predictable, consistent, mission-critical application
performance. PacketShapers standards-based TCP rate
control technology overcomes TCP/IPs shortcomings by
proactively preventing congestion on both inbound and outbound
traffic flows and increasing overall network throughput. Rather
than discarding packets from a congested queue, TCP rate control
paces packet delivery to prevent congestion. Rate control uses
the remote users access speed and real-time network
latency to calculate the optimal transmission speed. Evenly
paced packet transmissions, instead of packet bursts which
consume all available bandwidth, yield significant efficiency
gains in the network. TCP rate control is a proactive and
precise way to increase network efficiency by avoiding
retransmissions and packet loss and it creates a smooth and even
flow rate that maximizes throughput. By employing TCP rate
control, PacketShaper manages the majority of traffic at the
access link before network congestion occurs.

For non-TCP-based traffic, such as UDP,
alternative rate-based management techniques must be
implemented. Typically UDP does not rely on acknowledgments to
signal successful receipt of data, and it therefore offers no
means for flow control. By directly controlling other TCP flows,
however, PacketShaper effectively makes bandwidth available for
UDP flows. The combination of per flow rate scheduling and
explicit delay bounds removes latency and variability, or
jitter, for the UDP flows traversing the WAN access link.

For example, VoIP is a UDP-based application that
is particularly latency-sensitive, requiring packets to be
evenly spaced to eliminate jitter. PacketShaper enhances VoIP
performance in two ways. First, PacketShaper manages competing
traffic by using rate control to constrain bursty TCP traffic.
In addition, a rate policy for VoIP gives a minimum bandwidth
guarantee to each flow, ensuring that each voice stream gets the
bandwidth it needs for predictable performance. When there is a
lull in the conversation, any unused bandwidth is re-allocated
to other traffic.

10



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

PacketShapers position in the enterprise
network  monitoring and controlling all the traffic
that passes  gives it an opportunity to provide
accurate response-time measurements. Because it already handles
and classifies every packet, PacketShaper can easily calculate
the time traffic spends traveling between a client and a server
and the time used by the server itself.

PacketShaper breaks each response-time
measurement into network delay, the time spent in transit, and
server delay, the time the server is used to process the
request. It can highlight clients and servers with the slowest
performance. PacketShaper allows network managers to set
acceptability standards and then track whether performance
adheres to the standards.



| |                                 
| | --------------------------------
| | High-Performance Packet
	Engines

Sophisticated classification and control of
high-speed traffic must be accomplished in an efficient manner.
Adding significant delay in the process of managing traffic
flows would negate the resulting performance improvements.
Packeteer has developed expertise in the development of
high-speed, software-based packet engines running on real-time
operating systems that can efficiently process thousands of
simultaneous high-speed connections with minimal delay. This
core-engine software technology scales to take advantage of
ever-increasing microprocessor performance to manage faster
access links.



| |                        
| | -----------------------
| | Scaleable Configuration

Large deployments require tools to ease the
process of updating tens or hundreds of PacketShapers that are
distributed throughout the network. To address these
requirements, Packeteer offers its own centralized management
tools, PolicyCenter and ReportCenter. In addition, Packeteer
aligns with industry standards and integrates with third-party
tools.

Other third party management tools that Packeteer
products integrate with include Infovista, Micromuse and HP
OpenView.



| |                        
| | -----------------------
| | Web Server Acceleration

Our solution includes a software technology,
represented by the AppCelera ICX-55, ICX-75 and ICX-75s, that
accelerates the transmission and rendering speed of Internet
applications by compressing traffic from end-to-end and
dynamically increasing the throughput of the low and medium
speed connections, and in the case of the ICX-75s, provides the
ability to offload secure socket layer (SSL) processing. The
software does this using dynamic, static and variant content
caching together with content-aware compression and
transformation techniques for an increase in performance. The
software also determines the type of content, speed of access,
and type of browser and automatically optimizes the speed of
delivery and rendering of information. By combining caching with
compression, this technology accelerates delivery of business
content and Internet applications to the user. This approach
solves the last mile problem of low to medium speed Internet
connections that is not addressed by todays reverse-proxy
and network-based caching solutions.

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| |          
| | ---------
| | Customers

We sell all of our products primarily through
indirect channel partners. The following is a representative
list of our indirect channel partners by geographic region:

|                                  |  |                         |  |                                    
|--------------------------------- |  | ----------------------- |  | -----------------------------------
|                                  |  | Europe, the Middle East |  |                                    
|North and South America           |  | and Africa              |  | Asia                               
|                                  |  |                         |  |                                    
|Alternative Technology, Inc.      |  | ACAL Nederlands BV      |  | AsiaSoft HK Ltd.                   
|Atrion Networking Corporation     |  | Access Networks AG      |  | Encom Information Systems Co., Ltd.
|Attachmate Corporation            |  | Allasso                 |  | Express Data                       
|Avaya Inc.                        |  | CDG Europe BV           |  | Kanematsu Electronics Ltd.         
|Combyte USA, Inc                  |  | Centia Ltd.             |  | Lan Systems Pty Ltd.               
|Compaq Computer Corporation       |  | Computer Links AG       |  | Macnica, Inc.                      
|Compunet Engineering, Inc.        |  | Grupo Antea             |  | Net One Systems Co., Ltd..         
|Equant Integration Services, Inc. |  | IB Solution             |  | Nissho Electronics Corporation     
|SkyStream Networks, Inc.          |  | Miel                    |  | RBR Networks Pte. Ltd.             
|Westcon, Inc.                     |  | Network Alliance Ltd.   |  | Sunrise Information Co. Ltd.       

The following is a representative list of end
users that have deployed multiple PacketShapers:

|                                           |  |                                    |  |                                  
|------------------------------------------ |  | ---------------------------------- |  | ---------------------------------
|                                           |  |                                   
|Enterprises                                |  |                                   
|                                           |  |                                   
|                                           |  | Service Providers                 
|                                           |  |                                   
|ABM                                        |  | INVESCO                            |  | AT&T                             
|Accenture                                  |  | Liz Claiborne                      |  | Equant Integration Services, Inc.
|AusBulk                                    |  | Metalim                            |  | Japan Telecom                    
|Autodesk                                   |  | Omnitel/ Vodafone                  |  | J-Phone                          
|Avaya, Inc.                                |  | PriceWaterhouseCoopers             |  | NTT                              
|Barclays Global Investors                  |  | Stanford University                |  | Sonera                           
|Beckman Coulter                            |  | Sumitomo Trust Bank                |  | Telus                            
|Catholic Department of Education, Victoria |  | Synopsys                           |  | WorldCom                         
|Charter Communications                     |  | UK Ministry of Defense             |  |                                  
|Exxon Mobil                                |  | University of California, Berkeley |  |                                  
|Fujitsu                                    |  | Verisign                           |  |                                  
|Honda                                      |  | Yamanuchi                          |  |                                  

In 2001 and 2000, one customer, Alternative
Technology, Inc., accounted for 22% and 12% of net revenues,
respectively. No other customer accounted for 10% or more of
revenues in 2001 or 2000. No one customer accounted for 10% or
more of 1999 net revenues. Sales to the top 10 indirect channel
partners accounted for 59%, 46% and 37% of net revenues for the
years ended December 31, 2001, 2000 and 1999, respectively.



| |              
| | -------------
| | Manufacturing

We outsource all of our manufacturing, including
warranty repair, to one contract manufacturer, SMTC
Manufacturing Corporation (SMTC) located in San
Jose, California. The manufacturing processes and procedures for
this manufacturer are ISO 9002 certified. Outsourcing our
manufacturing enables us to reduce fixed costs and to provide
flexibility in meeting market demand.

We design and develop 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. Product testing and burn-in is performed by our
contract manufacturer using tests and automated testing
equipment that we specify. We also use inspection testing and
statistical process controls to assure the quality and
reliability of our products.

We use a rolling seven-month forecast based on
anticipated product orders to determine our material
requirements. Lead times for the materials and components we
order vary significantly and depend on factors

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such as specific supplier, contract terms and
demand for a component at a given time. We submit purchase
orders for quantities needed within the next 90 days. SMTC
or Packeteer may terminate the contract without cause at any
time. At that time the terminating party must honor all open
purchase orders.




| |                    
| | -------------------
| | Marketing and Sales

We target our marketing and sales efforts at
enterprises and service providers. Marketing and sales
activities focus on reaching the corporate application network
managers responsible for the performance of mission-critical
applications in the enterprise. They also focus on reaching
service providers that provide valued-added service offerings,
such as web hosting, application outsourcing and application
service-level management.

Our marketing programs support the sale and
distribution of our products and educate existing and potential
enterprise and service provider customers about the benefits of
our application performance infrastructure systems. Our
marketing efforts include the following:



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

We classify our distribution channels in the
following categories:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Solutions Partners.We have established an indirect distribution channel, which is
	comprised of a network of over 100 resellers, distributors and
	systems integrators that sell our solutions in over
	50 countries. These solutions partners sell PacketShapers
	and other products that are complementary to our application
	performance infrastructure systems.                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Technology Partners.Technology partners are OEMs and companies with whom we have
	established joint development relationships in support of joint
	business opportunities. These partners license our PacketWise
	software for integration into their networking products. For
	example, we established a relationship with InfoVista to enhance
	the InfoVista product to report on PacketShaper data through its
	interface.                                                                                                                                                                                                                                                                                                                             
|
| |  | Alliance Partners.We have developed a marketing alliance program to establish new
	marketing relationships, as well as enhance existing
	relationships, with hardware, software and systems vendors. We
	believe that we can build brand awareness by working with
	alliance partners to identify the needs of specific customer
	environments. For example, we formed an alliance with Citrix to
	identify and enhance the performance of individual applications
	within the Citrix MetaFrame and WinFrame environments. We work
	with alliance partners on various joint marketing initiatives,
	including product literature, direct mailings and seminars. Some
	of these partners include Great Plains, Sales Logix and Compaq
	Computer Corporation.

As of December 31, 2001, our worldwide sales
and marketing organization consisted of 78 individuals,
including managers, sales representatives and technical and
administrative support personnel. We have domestic sales offices
located in California, Florida, Georgia, Illinois, Maryland, New
Jersey and Texas. In addition, we have international sales
offices located in Australia, Canada, Denmark, England, France,
Germany, Hong Kong, Japan, Korea, Singapore and The Netherlands.

We believe there is a strong international market
for our bandwidth management solutions. Our international sales
are conducted primarily through our overseas offices. Sales to
customers outside of North America accounted for 55%, 54% and
55% of our net revenues in 2001, 2000 and 1999, respectively.

13



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| |                         
| | ------------------------
| | Research and Development

As of December 31, 2001, our research and
development organization consisted of 62 employees
providing expertise in different areas of our software: core
engineering, classification, configuration and reporting
management, user interface and platform engineering. Since
inception, we have focused our research and development efforts
on developing and enhancing our application performance
solutions.



| |                                        
| | ---------------------------------------
| | Customer Service and Technical
	Support

Our customer service and support organization
provides both product maintenance and technical support
services. Our technical support staff is strategically located
in five regional service centers: California, Hong Kong, Japan,
Australia and The Netherlands. Our indirect channel partners
offer similar support services for all of our products that they
sell. These services are typically sold as a one-year contract
to our resellers and end users. These services are not provided
without a maintenance contract.



| |            
| | -----------
| | Competition

We compete in a new, rapidly evolving and highly
competitive sector of the Internet application infrastructure
system market. We expect competition to persist and intensify in
the future from a number of different sources. Increased
competition could result in reduced prices and gross margins for
our products and could require increased spending by us on
research and development, any of which could harm our business.
We compete with Cisco, CheckPoint and several small private
companies that sell products that utilize competing technologies
to provide bandwidth management. In addition, our products and
technology compete for information technology budget allocations
with products that offer monitoring technologies, such as probes
and related software. Lastly, we face indirect competition from
companies that offer enterprises and service providers
increased bandwidth and infrastructure upgrades that increase
the capacity of their networks, and thereby may lessen or delay
the need for bandwidth management.

We believe the principal competitive factors in
the bandwidth management solutions market are:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | expertise and in-depth knowledge of applications;                                                                         
|
| |  | timeliness of new product introductions;                                                                                  
|
| |  | ability to integrate in the existing network
	architecture without requiring network reconfigurations or
	desktop changes;
|
| |  | ability to ensure end-user performance in
	addition to aggregate performance of the WAN access link;                      
|
| |  | compatibility with industry standards;                                                                                    
|
| |  | products that do not increase latency and packet
	loss;                                                                   
|
| |  | size and scope of distribution network;                                                                                   
|
| |  | brand name; and                                                                                                           
|
| |  | access to customers and size of installed
	customer base.                                                                 



| |                      
| | ---------------------
| | Intellectual Property

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, 2001 we have eight issued U.S. patents and
twenty-two pending patent applications. We cannot assure you
that our means of protecting our proprietary rights in the U.S.
or abroad will be adequate or that competitors will not
independently develop similar technologies. Our future success
depends in part on our ability to protect our proprietary rights
to the technologies used in our principal products. Despite our
efforts to protect our proprietary rights, 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. In addition, the laws of some foreign countries do
not protect our proprietary rights as fully as do the laws of the

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##### Table of Contents



U.S. We cannot assure you that any issued patent
will preserve our proprietary position, or that competitors or
others will not develop technologies similar to or superior to
our technology. Our failure to enforce and protect our
intellectual property rights could harm our business, operating
results and financial condition.


From time to time, third parties, including our
competitors, have asserted patent, copyright and other
intellectual property rights to technologies that are important
to us. We expect that we will increasingly be subject to
infringement claims as the number of products and competitors in
the application-adaptive bandwidth management market grows and
the functionality of products overlaps. The results of any
litigation matter are inherently uncertain. In the event of an
adverse result in any litigation with third parties that could
arise in the future, we could be required to pay substantial
damages, including treble damages if we are held to have
willfully infringed, to cease the manufacture, use and sale of
infringing products, to expend significant resources to develop
non-infringing technology, or to obtain licenses to the
infringing technology. Licenses may not be available from any
third party that asserts intellectual property claims against us
on commercially reasonable terms, or at all. In addition,
litigation frequently involves substantial expenditures and can
require significant management attention, even if we ultimately
prevail.



| |          
| | ---------
| | Employees

As of December 31, 2001, Packeteer employed
a total of 195 full-time employees. Of the total number of
employees, 62 were in research and development, 58 in sales
and customer service, 20 in marketing, 29 in operations and 26
in administration. Our employees are not represented by any
collective bargaining agreement with respect to their employment
by Packeteer.

RISK FACTORS

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.

Our Limited Operating History and the Rapidly
Evolving Market We Serve Makes Evaluating Our Business Prospects
Difficult

We were incorporated in January 1996 and began
shipping our products commercially in February 1997. Because of
our limited operating history and the uncertain nature of the
rapidly changing market that we serve, we believe the prediction
of future results of operations is difficult. As an investor in
our common stock, you should consider the risks and difficulties
that we face as an early stage company in a new and rapidly
evolving market. Some of the specific risks we face include our
ability to:



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | execute our sales and marketing strategy;                                                                                                                
|
| |  | maintain current and develop new relationships
	with key resellers, distributors, systems integrators and
	original equipment manufacturers, or OEMs; and
|
| |  | expand our domestic and international sales
	efforts.                                                                                                    

We Have a History of Losses and Profitability
Will Be Difficult to Achieve and Sustain

We have incurred losses since we commenced
operations in 1996 and profitability will be difficult to
achieve and sustain. We may not generate a sufficient level of
revenues to offset our expenditures or be able to adjust
spending in a timely manner to respond to any unanticipated
decline in revenues. We incurred net losses of $71.0, $9.4 and
$10.9 million in 2001, 2000 and 1999 respectively. As of
December 31, 2001, we had an accumulated deficit of
$107.2 million. Although our revenues have continued to
grow, we cannot be certain when or if we will realize sufficient
revenues to achieve and sustain profitability. If revenues grow
slower than we anticipate or if operating expenditures exceed
our expectations or cannot be adjusted accordingly, we may
experience additional losses on a quarterly and annual basis.

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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 would cause our revenue and gross margins to
decline.

Our Future Operating Results May Not Meet
Analysts Expectations 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. Our operating results may be below the
expectations of public market analysts or investors in some
future quarter. If this occurs, the price of our common stock
would likely decrease. Our operating results are likely to
fluctuate in the future on both a quarterly and an annual basis
due to a number of factors, many of which are outside our
control. Factors that could cause our operating results to
fluctuate include variations in:



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

In the past, we have experienced fluctuations in
operating results. These fluctuations resulted primarily from
variations in the mix of products sold and variations in
channels through which products were sold. Research and
development expenses have fluctuated due to increased prototype
expenses and consulting fees related to the launch of new
products and increased personnel expenses. Sales and marketing
expenses have fluctuated due to increased personnel expenses,
expenditures related to trade shows and the launch of new
products. See Managements Discussion and Analysis of
Financial Condition and Results of Operations for detailed
information on our annual operating results.

If the Application Traffic and Bandwidth
Management Solutions Market Fails to Grow, Our Business Will
Fail

The market for application performance
infrastructure solutions is in an early stage of development 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. The growth of the
bandwidth management solutions market also depends upon a number
of factors, including the availability of inexpensive bandwidth,
especially in international markets, and the growth of wide area
networks.

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 North America accounted for 55% and 54% of
our total net revenues in fiscal 2001 and 2000, respectively.
Our ability to grow will depend in part on the expansion of
international sales, which will

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require success on the part of our resellers,
distributors, systems integrators and OEMs 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 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 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, our growth in international sales will 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.

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, Our Sales May Suffer and Our Revenues May Not
Increase

We rely primarily on an indirect distribution
channel consisting of resellers, distributors, systems
integrators and OEMs 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.

We cannot assure you that our indirect channel
partners will market our products effectively or continue to
devote the resources necessary to provide us with effective
sales, marketing and technical support. 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. In
addition, our indirect channel agreements are generally not
exclusive and one or more of our channel partners may compete
directly with another channel partner for the sale of our
products in a particular region or market. This may cause such
channel partners to stop or reduce their efforts in marketing
our products. Our inability to effectively establish or manage
our distribution channels would harm our sales.

Our Reliance on Sales of Our Products by
Others Makes It Difficult to Predict Our Revenues and Results of
Operations

The timing of our revenues is difficult to
predict because of our reliance on indirect sales channels and
the variability of our sales cycle. 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. We expect to have difficulties in predicting revenues
from OEMs because we are unable to forecast unit sales of their
products that incorporate our technology.

If revenues forecasted in a particular quarter do
not occur in that quarter, our operating results for that
quarter could be adversely affected. 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.

17



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Our Products Currently Consist of the
Packetshaper, Appvantage and Appcelera Systems and Packetwise
Software, and All of Our Current Revenues and a Significant
Portion of Our Future Growth Depends on Their Commercial
Success

All of our current revenues and a significant
portion of our future growth depend on the commercial success of
our PacketShaper, AppVantage and AppCelera products and
PacketWise software, which are the primary products that we
currently offer. If our target customers do not widely adopt,
purchase and successfully deploy the PacketShaper, AppVantage
and AppCelera products or PacketWise software, our revenues will
not grow significantly or at all.

Introduction of Our New Products May Cause
Customers to Defer Purchases of Our Existing Products 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. 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.

Our Reliance on SMTC for All of Our
Manufacturing Requirements Could Cause Us to Lose Orders if this
Third Party Manufacturer Fails to Satisfy Our Cost, Quality and
Delivery Requirements

We currently contract with SMTC Corporation, for
the manufacture of all of our current products. Any
manufacturing disruption could impair our ability to fulfill
orders. Our future success will depend, in significant part, on
our ability to have 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;            
|
| |  | manufacturing yields and costs;                                                      
|
| |  | quality assurance; and                                                               
|
| |  | increases in prices and the potential
	misappropriation of our intellectual property.

We have no long-term contracts or arrangements
with any of our vendors that 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
manufacturer, 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 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. We cannot assure
you that we can effectively manage our contract manufacturer or
that this manufacturer will meet our future requirements for
timely delivery of products of sufficient quality or quantity.
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.
Further, new third-party manufacturers may encounter
difficulties in the manufacture of our products resulting in
product delivery delays.

Most of the Components for Our Products Come
from Single or Limited Sources, and We Could Lose Sales if These
Sources Fail to Satisfy Our Supply Requirements

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

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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.


We do not have any long-term supply contracts 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 sole-sourced or
limited-sourced components, or to develop alternative sources
for components or products would harm our ability to grow our
business.

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. Sales to one
customer, Alternative Technology, Inc., accounted for 22% of
total net revenues in 2001 and 12% in 2000. There were no other
customers who accounted for 10% or more of net revenues in 2001
or 2000. No one customer accounted for more than 10% of net
revenues in 1999. We expect that our largest customers in the
future could be different from our largest customers today. End
users can stop purchasing and indirect channel partners can stop
marketing our products at any time. We cannot assure you that we
will retain these 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 and liquidity.

Any Acquisitions We Make Could Result in
Dilution to Our Existing Shareholders and Difficulties in
Successfully Managing Our Business

We continually evaluate strategic acquisitions of
other businesses. Our consummation of the acquisition of other
businesses would subject us to a number of risks, including the
following:



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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; and                                                                                                                   
|
| |  | limitations on our ability to successfully
	incorporate acquired technology and rights into our product and
	service offerings and maintain uniform standards, controls,
	procedures, and policies.

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 shareholders.

Our Inability to Attract 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, retain and motivate high caliber key
personnel. We currently have a small indirect channel partner
and end-user service and support organization and will need to
increase our staff to support new indirect channel partners and
end users and the expanding needs of existing indirect channel
partners and end users. Additionally, we rely on qualified
systems engineers and service and support personnel to provide
pre- and post-sales technical support for our products.
Competition for qualified personnel in the networking industry,
including systems 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

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positions and it may become increasingly
difficult to hire such persons. Our business will suffer if we
encounter delays in hiring these additional personnel.


Competitors and others have in the past and may
in the future attempt to recruit our employees. We do not have
employment contracts with any of our personnel. The loss of
services of any of our senior management could negatively impact
our ability to carry our business plan.

We May Be Unable to Compete Effectively with
Other Companies in Our Market Sector Who Are Substantially
Larger and More Established and Who Have Significantly Greater
Resources Than Our Company

We compete in a new, rapidly evolving and highly
competitive sector of the networking technology market. We
expect competition to persist and intensify in the future from a
number of different sources. 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, Inc. and
CheckPoint Software Technologies Ltd., which sell products
incorporating competing technologies. We also compete with
several small private companies which utilize competing
technologies to provide bandwidth management. In addition, our
products and technology compete for information technology
budget allocations with products that offer monitoring
capabilities, such as probes and related software. Lastly, we
face indirect competition from companies that offer enterprises
and service providers increased bandwidth and infrastructure
upgrades that increase the capacity of their networks, which may
lessen or delay the need for bandwidth management solutions.

Many of our 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, customers who
are extremely confident in and committed to the product
offerings of our competitors. 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. These
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 bandwidth
management solutions market, we also expect that other companies
may 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.

If We Do Not Expand or Enhance Our Product
Offerings or Respond Effectively to Technological Change, Our
Business May Not Grow

Our future performance will depend on the
successful development, introduction and market acceptance of
new and enhanced products 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 application performance infrastructure solutions
market is characterized by rapid 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 could also significantly reduce
demand for our product. Alternative

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technologies, including packet-queuing
technology, could achieve widespread market acceptance. Our
future success will depend in large 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;
|
| |  | bring products to market on a timely basis at
	competitive prices;                                                 
|
| |  | 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 in the past experienced delays in product
development which to date have not materially adversely affected
us. However, these delays may occur in the future and could
result in a loss of customers and market share.

If We Are Unable to Effectively Manage Our
Growth, We May Experience Operating Inefficiencies and Have
Difficulty Meeting Demand for Our Products

We have rapidly and significantly expanded our
operations and anticipate that further significant expansion may
be 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 ourselves. 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.

Our Products May Have Errors or Defects that
We Find After the Products Have Been Sold, Which Could
Negatively Affect Our Revenues, the Market Acceptance of Our
Products and Increase Our Costs

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 the network. 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. The occurrence of defects,
errors or failures could result in the failure of our
customers network 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.

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.

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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, 2001 we have eight issued U.S. patents and
twenty-two pending patent applications. 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.

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 in litigation, 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 expect that we will increasingly be subject to
infringement claims as the number of products and competitors in
the bandwidth management solutions market grows and the
functionality of products overlaps. Any of these claims or
resulting events could harm our business.

If Our Products Do Not Comply with Evolving
Industry Standards and Government Regulations, Our Business
Could Be Harmed

The market for bandwidth management solutions 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 may be required to comply with
standards established by telecommunications authorities in
various countries 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.

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 and available line of credit 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.

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In addition, we expect to review potential
acquisitions that would complement our existing product
offerings or enhance our technical capabilities. While we have
no current agreements or negotiations underway with respect to
any such acquisition, 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 corporate 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 2.     Properties

We lease approximately 40,800 square feet of
administrative and research and development facilities in
Cupertino, California. We believe our current facilities will be
sufficient to handle our operations for at least the next
12 months. We believe that we can accommodate future growth
by leasing the necessary additional space. Packeteer leases
offices in the following domestic locations: Bedminster,
New Jersey; Dallas, Texas; Irvine, California; and
Schaumburg, Illinois; In addition, we have international leased
offices located in Canada, Australia, Hong Kong, Singapore,
Japan, England, Germany, France, Korea and The Netherlands.




Item 3.     Legal
Proceedings

In November 2001, Packeteer, certain company
officers and directors, and its underwriters were named as
defendants in a securities class-action lawsuit filed in the
United States District Court for the Southern District of New
York. The complaint, captioned Antoniono v. Packeteer, Inc.
et. al., alleges violations of Sections 11, 12(a)2 and
15 of the Securities Act of 1933, as amended, Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder on behalf of a purported class of
purchasers of Packeteer common stock between July 27, 1999
and December 6, 2000. The plaintiffs seek unspecified
damages.

Various plaintiffs have filed similar actions
asserting virtually identical allegations against more than
300 other issuers. These cases have all been assigned to
the Hon. Shira A. Scheindlin for coordination and
decisions on pretrial motions, discovery, and related matters
other than trial. We believe that we have meritorious defenses
to the lawsuit and will defend ourselves vigorously in the
litigation. An unfavorable resolution of the actions could have
a material adverse effect on our business, results of operations
and financial condition. As of December 31, 2001 no accrual
for this contingency has been recorded.

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




Item 4.     Submission
of Matter to a Vote of Security Holders

Not applicable.

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PART II




Item 5.     Market
for Registrants Common Stock and Related Stockholder
Matters

Our common stock has been quoted on the Nasdaq
National Market under the symbol PKTR since our
initial public offering on July 28, 1999. Prior to this
time, there was no public market for our common stock. The
following table shows the high and low closing prices per share
of our common stock as reported on the Nasdaq National Market
for the periods indicated:

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|Fiscal 2001:   |  |      |       |     |  |   |       | 
|Fourth Quarter |  | $    | 8.71  |     |  | $ | 2.83  | 
|Third Quarter  |  |      | 11.92 |     |  |   | 3.03  | 
|Second Quarter |  |      | 12.53 |     |  |   | 2.13  | 
|First Quarter  |  |      | 20.13 |     |  |   | 3.03  | 
|Fiscal 2000:   |  |      |       |     |  |   |       | 
|Fourth Quarter |  |      | 37.94 |     |  |   | 9.50  | 
|Third Quarter  |  |      | 51.06 |     |  |   | 29.00 | 
|Second Quarter |  |      | 31.31 |     |  |   | 12.00 | 
|First Quarter  |  |      | 67.13 |     |  |   | 34.63 | 

As of February 28, 2002, there were
approximately 520 registered holders of our common stock.
We have never declared or paid any dividends on our capital
stock. We currently expect to retain future earnings, if any,
for use in the operation and expansion of our business and do
not anticipate paying any cash dividends in the foreseeable
future. The covenants under our Loan and Security Agreement with
Silicon Valley Bank prohibit us from paying cash dividends.

Two Packeteer executives have informed us that,
in order to diversify their investment portfolios while avoiding
conflicts of interest or the appearance of any such conflict
that might arise from their position with the company, they have
established a written plan in accordance with SEC
Rule 10b5-1 for gradually liquidating a portion of their
holdings of our common stock. Craig W. Elliott, President
and CEO and Brett D. Galloway, Vice President of Corporate
Development have established plans which call for sales of a
specific number of shares of stock per month, subject to certain
contingencies relating to prevailing stock price.

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Item 6.     Selected
Financial Data

The selected consolidated financial data set
forth below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated
Financial Statements of Packeteer, Inc. and the notes thereto
included elsewhere in this report. The historical results are
not necessarily indicative of the operating results to be
expected in the future.

|                                                                               |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |       |       | 
|------------------------------------------------------------------------------ | ---------------------------------------- | ------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ----- | 
|                                                                               |                                          |                                      
|                                                                               |                                          | Years Ended December 31,             
|                                                                               |                                          |                                      
|                                                                               |                                          | 2001                                  |         | 2000   |         | 1999 |         | 1998   |        | 1997
|                                                                               |                                          |                                       |         |        |         |      |         |        |        |     
|                                                                               |                                          |                                      
|                                                                               |                                          | (In thousands, except per share data)
|CONSOLIDATED STATEMENTS OF OPERATIONS DATA:                                    |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|Net revenues                                                                   |                                          | $                                     | 46,661  |        |         | $    | 41,097  |        |        | $    | 18,441  |        |        | $ | 7,230  |       |        | $ | 1,413  |      
|Cost of revenues                                                               |                                          |                                       | 13,867  |        |         |      | 12,585  |        |        |      | 5,286   |        |        |   | 2,386  |       |        |   | 457    |      
|Amortization of acquired technology                                            |                                          |                                       | 1,199   |        |         |      | 678     |        |        |      |        |        |        |   |       |       |        |   |       |      
|                                                                               |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|Gross profit                                                                   |                                          |                                       | 31,595  |        |         |      | 27,834  |        |        |      | 13,155  |        |        |   | 4,844  |       |        |   | 956    |      
|Operating expenses:                                                            |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|                                                                               | Research and development*                |                                       |         | 11,697 |         |      |         | 8,760  |        |      |         | 5,164  |        |   |        | 2,779 |        |   |        | 2,932 |      
|                                                                               | Sales and marketing*                     |                                       |         | 22,417 |         |      |         | 18,614 |        |      |         | 13,737 |        |   |        | 8,866 |        |   |        | 3,210 |      
|                                                                               | General and administrative*              |                                       |         | 5,704  |         |      |         | 4,824  |        |      |         | 2,936  |        |   |        | 1,750 |        |   |        | 934   |      
|                                                                               | Amortization of goodwill                 |                                       |         | 11,017 |         |      |         | 6,424  |        |      |         |       |        |   |        |      |        |   |        |      |      
|                                                                               | Impairment of goodwill and intangibles   |                                       |         | 52,552 |         |      |         |       |        |      |         |       |        |   |        |      |        |   |        |      |      
|                                                                               | Amortization of stock-based compensation |                                       |         | 1,233  |         |      |         | 1,683  |        |      |         | 3,088  |        |   |        | 537   |        |   |        |      |      
|                                                                               |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|                                                                               |                                          | Total operating expenses              |         |        | 104,620 |      |         |        | 40,305 |      |         |        | 24,925 |   |        |       | 13,932 |   |        |       | 7,076 | 
|                                                                               |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|Net loss from operations                                                       |                                          |                                       | (73,025 | )      |         |      | (12,471 | )      |        |      | (11,770 | )      |        |   | (9,088 | )     |        |   | (6,120 | )    
|Interest and other income                                                      |                                          |                                       | 3,170   |        |         |      | 4,020   |        |        |      | 1,757   |        |        |   | 367    |       |        |   | 238    |      
|Interest and other expense                                                     |                                          |                                       | (1,133  | )      |         |      | (618    | )      |        |      | (863    | )      |        |   | (78    | )     |        |   | (27    | )    
|                                                                               |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|Net loss before income taxes                                                   |                                          |                                       | (70,988 | )      |         |      | (9,069  | )      |        |      | (10,876 | )      |        |   | (8,799 | )     |        |   | (5,909 | )    
|Provision for income taxes                                                     |                                          |                                       |        |        |         |      | 300     |        |        |      |        |        |        |   |       |       |        |   |       |      
|                                                                               |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|Net loss                                                                       |                                          | $                                     | (70,988 | )      |         | $    | (9,369  | )      |        | $    | (10,876 | )      |        | $ | (8,799 | )     |        | $ | (5,909 | )    
|                                                                               |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|Basic and diluted net loss per share                                           |                                          | $                                     | (2.40   | )      |         | $    | (0.35   | )      |        | $    | (0.71   | )      |        | $ | (1.54  | )     |        | $ | (1.82  | )    
|                                                                               |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|Shares used in computing basic and diluted net
	loss per share                 |                                          |                                       | 29,559  |        |         |      | 27,152  |        |        |      | 15,343  |        |        |   | 5,709  |       |        |   | 3,253  |      
|                                                                               |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|*Excludes amortization of deferred stock-based
	compensation of the following: |                                          |                                       |         |        |         |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|                                                                               | Research and development                 |                                       | $       | 663    |         |      | $       | 558    |        |      | $       | 459    |        |   | $      | 86    |        |   | $      |      |      
|                                                                               | Sales and marketing                      |                                       |         | 442    |         |      |         | 892    |        |      |         | 2,184  |        |   |        | 436   |        |   |        |      |      
|                                                                               | General and administrative               |                                       |         | 128    |         |      |         | 233    |        |      |         | 445    |        |   |        | 15    |        |   |        |      |      

|                                       |  |                |        |      |  |      |         |      |  |      |        |  |  |   |       |  |  |   |       | 
|-------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ----- |  |  | - | ----- | 
|                                       |  |               
|                                       |  | December 31,  
|                                       |  |               
|                                       |  | 2001           |        | 2000 |  | 1999 |         | 1998 |  | 1997
|                                       |  |                |        |      |  |      |         |      |  |     
|                                       |  |               
|                                       |  | (In thousands)
|CONSOLIDATED BALANCE SHEET DATA:       |  |                |        |      |  |      |         |      |  |      |        |  |  |   |       |  |  |   |       | 
|Cash, cash equivalents and investments |  | $              | 62,221 |      |  | $    | 62,206  |      |  | $    | 65,158 |  |  | $ | 4,477 |  |  | $ | 2,416 | 
|Working capital                        |  |                | 52,723 |      |  |      | 51,958  |      |  |      | 51,285 |  |  |   | 3,501 |  |  |   | 2,611 | 
|Total assets                           |  |                | 73,005 |      |  |      | 144,281 |      |  |      | 70,821 |  |  |   | 8,570 |  |  |   | 4,935 | 
|Long-term obligations                  |  |                | 1,289  |      |  |      | 3,215   |      |  |      | 839    |  |  |   | 739   |  |  |   | 356   | 
|Total stockholders equity             |  |                | 56,624 |      |  |      | 124,133 |      |  |      | 59,120 |  |  |   | 3,759 |  |  |   | 2,804 | 

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Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion should be read in
conjunction with our consolidated financial statements and the
related notes included elsewhere in this report. Except for
historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of a
number of factors, including the risks described in the section
titled RISK FACTORS beginning on page 16.

Overview

Packeteer is a leading provider of application
performance infrastructure systems designed to provide
enterprises and service providers a layer of control for
applications delivered across intranets, extranets and the
Internet. Packeteers products  powered by
PacketWise® software  are designed to ensure
end-to-end quality of service (QoS) for networked
applications and managed services, enhancing users quality
of experience through comprehensive bandwidth, traffic, content,
service-level and policy management. Packeteers
PacketShaper family of products, the PacketShaper® and
AppVantageTM systems, integrates application
discovery, analysis, control and reporting technologies that are
required for proactive application performance and bandwidth
management. The AppCeleraTM family of Internet
acceleration appliances employs secure socket layer
(SSL) acceleration and advanced content compression,
transformation and caching technologies to improve response
times of mission critical enterprise, eBusiness and eCommerce
web applications.

Packeteers products are deployed by
Global 2000 corporations and service providers, and sold
through an established network of more than 100 resellers,
distributors, system-integrators and OEMs in more than
50 countries. Our products are built on hardware platforms
based on Intel-compatible microprocessor technologies. In
addition, PacketWise software is licensed by major
communications industry partners who integrate the software into
specific strategic networking solutions. We primarily use
indirect channels, resellers, distributors, system integrators
and OEMS, to leverage the reach of our sales force and to obtain
worldwide coverage. Our sales and marketing efforts are used to
develop brand awareness and support our indirect channels. We
have subsidiaries in Hong Kong, Japan, The Netherlands, England,
Germany, France, Denmark, Australia, Caymans and Canada. To
date, we have shipped more than 17,000 units.

We were incorporated in January 1996. From our
inception through January 1997, our operating activities related
primarily to establishing a research and development
organization, developing and testing prototype designs,
establishing a sales and marketing organization and developing
customer, vendor and manufacturing relationships. We shipped our
first product in February 1997. Since then, we have focused on
developing additional products and product enhancements,
building our worldwide indirect sales channel and establishing
our sales, marketing and customer support organizations. Since
inception, we have incurred significant losses and as of
December 31, 2001, had an accumulated deficit of
$107.2 million.

In order to further the growth of our business,
we sold 4,600,000 shares of common stock in our initial
public offering on July 28, 1999, which raised
approximately $62.6 million net of fees and expenses.

We have a limited operating history. We have
incurred losses since we commenced operations in 1996 and
profitability will be difficult to achieve and sustain. We
expect to continue to incur significant sales and marketing,
product development and administrative expenses and, as a
result, will need to generate significant quarterly revenues to
achieve and then maintain profitability.



| |                             
| | ----------------------------
| | Critical Accounting Policies

Our discussion and analysis of our financial
condition and results of operations are based upon our
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 inventory valuation, valuation of long-lived assets,
valuation allowances including

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sales return reserves and allowance for doubtful
accounts, and other liabilities, specifically warranty reserves.
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.


The items in our financial statements requiring
the most significant estimates and judgment are as follows:

Revenue recognition.Product revenue consists primarily of sales of our PacketShaper,
AppVantage and AppCelera products, which include hardware, as
well as software licenses. Service revenue consists primarily of
maintenance revenue and, to a lesser extent, training revenue.

The Company applies the provisions of Statement
of Position 97-2, Software Revenue Recognition,
as amended by Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions, to all
transactions involving the sale of hardware and software
products. Revenue is generally recognized when all of the
following criteria are met as set forth in paragraph 8 of
SOP 97-2:



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

Receipt of a customer purchase order is
persuasive evidence of an arrangement. Sales through our
distribution channel are evidenced by an agreement governing the
relationship together with purchase orders on a
transaction-by-transaction basis.

Delivery generally occurs when product is
delivered to a common carrier from Packeteer or its designated
fulfillment house. For maintenance contracts, delivery is deemed
to occur ratably over the contract period.

The Companys fees are typically considered
to be fixed or determinable at the inception of the
arrangements. The fee the Companys customers pay for its
products is negotiated at the outset of an arrangement, and is
generally based on specific products and quantities to be
delivered. In the event payment terms are provided that differ
significantly from our standard business practices, the fees are
deemed to not be fixed or determinable and revenue is recognized
as the fees become due and payable.

We assess collectibility based on a number of
factors, including credit worthiness of the customer and past
transaction history of the customer.

This revenue recognition policy is modified under
certain circumstances as follows: Product revenue on sales to
major new distributors are recorded based on sell-through to the
end user customers until such time as the Company has
established significant experience with the distributors
product return and exchange activity. Additionally, when the
Company introduces new product into its distribution channel for
which there is no historical customer demand or acceptance
history, revenue is recognized on the basis of sell-through to
end user customers.

The Company has analyzed all of the elements
included in its multiple element arrangements and has determined
that it has sufficient vendor specific objective evidence
(VSOE) to allocate revenue to the maintenance component of
its product and to training. VSOE is based upon separate sales
of maintenance renewals and training to other customers.
Accordingly, assuming other revenue recognition criteria are
met, revenue from product sales is recognized upon delivery
using the residual method in accordance with SOP 98-9,
revenue from maintenance is recognized ratably over the
maintenance term and revenue from training is recognized when
the training has taken place. To date, training revenues have
not been material.

Inventory valuation.Inventories consist primarily of finished goods and are stated
at the lower of cost (on a first-in, first-out basis) or market.
We currently contract with SMTC for the manufacture of all of
our products. We record inventory reserves for excess and
obsolete inventories based on historical usage and

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forecasted demand. Factors which could cause our
forecasted demand to prove inaccurate include our reliance on
indirect sales channels and the variability of our sales cycle;
the potential of announcements of our new products or
enhancements to replace or shorten the life cycle of our current
products, or cause customers to defer their purchases; loss of
sales due to product shortages; and the potential of new or
alternative technologies achieving widespread market acceptance
and thereby rendering our existing products obsolete. If future
demand or market conditions are less favorable than our
projections, additional inventory write-downs may be required
and would be reflected in cost of sales in the period the
revision is made.


Valuation of Long-Lived and Intangible Assets
and Goodwill.The Company regularly
performs reviews to determine if the carrying value of its
long-lived assets is impaired. The purpose for the review is to
identify any facts or circumstances, either internal or
external, which indicate that the carrying value of the assets
cannot be recovered. Such facts or circumstances might include
significant underperformance relative to expected historical or
projected future operating results or significant negative
industry or economic trends. If such indicators are present, we
determine whether the sum of the estimated undiscounted cash
flows attributable to the assets in question is less than their
carrying value. If less, we recognize an impairment loss based
on the excess carrying amount of the assets over their
respective fair values. If quoted market prices for assets are
not available, the fair value is estimated based on the present
value of expected future cash flows. The fair value of the asset
then becomes the assets new carrying value.

During the third quarter of 2001, the Company
performed an assessment of the carrying value of the goodwill
and other intangible assets related to its acquisition of
Workfire Technologies International, Inc. pursuant to the
Companys stated policy as described in Note 1 to the
Financial Statements. Managements determination of the
existence of impairment indicators included continued general
economic slowing, broad based declines in the values of
networking technologies and a review of current, historical and
future projections of cash flows related to these assets. The
conclusion of the assessment was a determination that the
carrying value of the goodwill and other intangible assets
exceeded its fair value. The fair value was determined based on
Company projections of the present value of future net cash
flows to be generated over the expected lives of these assets.
Accordingly, the Company recorded an impairment charge of
$52.6 million during the third quarter of 2001 for the
entire unamortized balance.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS
No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Any goodwill
or other intangible assets recorded in the future will be tested
for impairment on an annual basis according to the specific
guidance in the statement.

Sales return reserve and allowance for
doubtful accounts.The preparation of
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Specifically, management must make estimates of
potential future product returns related to current period
product revenue. When providing for sales return reserves,
management analyzes historical return rates as it is the primary
indicator for estimating future returns. Judgments and estimates
must be made in connection with establishing the sales return
reserve. Material differences may result in the amount and
timing of our revenue for any period if management made
different judgments or used different estimates. The sales
return reserve liability balance at December 31, 2001 and
2000 was $331,000 and $460,000, respectively. Management must
also make estimates of the uncollectibility of accounts
receivable. When evaluating the adequacy of the allowance for
doubtful accounts, management reviews the aged receivables on an
account-by-account basis, taking into consideration such factors
as age of the receivables, customer history and projected or
estimated continued credit-worthiness, as well as general
economic and industry trends. If the financial condition of our
customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances could be
required. The allowance for doubtful accounts was $132,000 and
$223,000 at December 31, 2001 and 2000, respectively.

Warranty reserves.Upon shipment of products to its customers, the Company provides
for the estimated cost to repair or replace products that may be
returned under warranty. The Companys warranty period is
typically 12 months from the date of shipment to the end
user customer. For existing products, the

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reserve is estimated based on actual historical
experience. For new products, the required reserve is based on
historical experience of similar products until such time as
sufficient historical data has been collected on the new
product. Factors that may impact our warranty costs in the
future include our reliance on our contract manufacturer to
provide quality product in a timely manner and the fact that our
products are complex and may contain undetected defects, errors
or failures in either the hardware or the software which could
affect the functionality of our customers network or
mission-critical applications. To date, these problems have not
materially adversely affected us. Warranty reserves amounted to
$552,000 and $577,000 at December 31, 2001 and 2000,
respectively.




| |                      
| | ---------------------
| | Results of Operations

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.

|                                    |                                          |                          |      |      |     |      |     |    |    |  |     |    |     | 
|----------------------------------- | ---------------------------------------- | ------------------------ | ---- | ---- | --- | ---- | --- | -- | -- |  | --- | -- | --- | 
|                                    |                                          | 2001                     |      | 2000 |     | 1999
|                                    |                                          |                          |      |      |     |     
|Net revenues                        |                                          |                          | 100  | %    |     |      | 100 | %  |    |  | 100 | % 
|Cost of revenues                    |                                          |                          | 30   |      |     |      | 31  |    |    |  | 29  |   
|Amortization of acquired technology |                                          |                          | 2    |      |     |      | 1   |    |    |  |    |   
|                                    |                                          |                          |      |      |     |      |     |    |    |  |     |   
|Gross margin                        |                                          |                          | 68   |      |     |      | 68  |    |    |  | 71  |   
|Operating expenses:                 |                                          |                          |      |      |     |      |     |    |    |  |     |   
|                                    | Research and development                 |                          |      | 25   |     |      |     | 21 |    |  |     | 28 |    
|                                    | Sales and marketing                      |                          |      | 48   |     |      |     | 45 |    |  |     | 74 |    
|                                    | General and administrative               |                          |      | 12   |     |      |     | 12 |    |  |     | 16 |    
|                                    | Amortization of goodwill                 |                          |      | 24   |     |      |     | 16 |    |  |     |   |    
|                                    | Impairment of goodwill and intangibles   |                          |      | 113  |     |      |     |   |    |  |     |   |    
|                                    | Amortization of stock-based compensation |                          |      | 3    |     |      |     | 4  |    |  |     | 17 |    
|                                    |                                          |                          |      |      |     |      |     |    |    |  |     |   
|                                    |                                          | Total operating expenses |      |      | 225 |      |     |    | 98 |  |     |    | 135 | 
|                                    |                                          |                          |      |      |     |      |     |    |    |  |     |   
|Net loss from operations            |                                          |                          | (157 | )    |     |      | (30 | )  |    |  | (64 | ) 
|Interest and other income           |                                          |                          | 7    |      |     |      | 10  |    |    |  | 10  |   
|Interest and other expense          |                                          |                          | (2   | )    |     |      | (2  | )  |    |  | (5  | ) 
|                                    |                                          |                          |      |      |     |      |     |    |    |  |     |   
|Net loss before income taxes        |                                          |                          | (152 | )    |     |      | (22 | )  |    |  | (59 | ) 
|Provision for income taxes          |                                          |                          |     |      |     |      | (1  | )  |    |  |    |   
|                                    |                                          |                          |      |      |     |      |     |    |    |  |     |   
|Net loss                            |                                          |                          | (152 | )%   |     |      | (23 | )% |    |  | (59 | )%
|                                    |                                          |                          |      |      |     |      |     |    |    |  |     |   



| |             
| | ------------
| | Net Revenues

Product revenues consist primarily of sales of
our PacketShaper, AppVantage and AppCelera products. Service
revenues consist primarily of maintenance revenues and, to a
lesser extent, training revenues.

Net revenues increased to $46.7 million in
fiscal 2001 from $41.1 million in fiscal 2000 and from
$18.4 million in fiscal 1999. Product revenues increased to
$41.1 million in fiscal 2001 from $38.1 million in
fiscal 2000 and from $17.7 million in fiscal 1999. The
increase from 2000 to 2001 was due to a more favorable product
mix, with sales of our PacketShaper 6500 Edition models,
introduced in the fourth quarter of fiscal 2000, showing the
largest growth in 2001. The increase from 1999 to 2000 was due
to the increased number of units sold as a result of increased
channel and market development and product acceptance. Service
revenues increased to $5.6 million in fiscal 2001 from
$3.0 million in fiscal 2000 and from $0.7 million in
1999 due mainly to increases in the number of units on
maintenance.

In fiscal 2001 and 2000, one customer,
Alternative Technology, Inc., accounted for 22% and 12% of net
revenues, respectively. No other customer accounted for 10% or
more of revenues in 2001 or 2000. No one

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customer accounted for 10% or more of sales in
1999. Sales to the top 10 indirect channel partners
accounted for 59%, 46% and 37% of net revenues for fiscal 2001,
2000 and 1999, respectively. See Note 14 of the notes to
consolidated financial statements.


We believe that our current value proposition,
which enables our enterprise customers to get more value out of
existing network resources and improved performance of their
critical applications, combined with the anticipated economic
recovery, should allow us to grow our business again in 2002.
Our future profitability and rate of growth, if any, will be
directly affected by the continued acceptance of our product in
the marketplace, as well as the timing and size of orders and
shipments, product mix, average selling price of our products
and general economic conditions. Our growth rate and net revenue
depend significantly on continued growth in the application
traffic and bandwidth solutions market, our ability to develop
and maintain strong partnering relationships with our indirect
channel partners and our ability to expand or enhance our
product offerings or respond to technological change. Our growth
in service revenues is dependent upon increasing the number of
units on maintenance, which is dependent on both growing our
installed base and renewing existing maintenance contracts. Our
failure to successfully convince the market of our value
proposition and maintain strong relationships with our indirect
channel partners to ensure the success of their selling efforts
on our behalf, would adversely impact our net revenues and
operating results.



| |                 
| | ----------------
| | Cost of Revenues

Our cost of revenues (excluding amortization of
acquired technology) consists of the cost of finished products
purchased from our turnkey contract manufacturer and overhead
costs. Our cost of revenues increased to $13.9 million in fiscal
2001 from $12.6 million in fiscal 2000 and from
$5.3 million in fiscal 1999. The cost of revenues
represented 30%, 31% and 29% of net revenues in fiscal 2001,
2000, and 1999, respectively. The percentage decrease from
fiscal 2000 to fiscal 2001 was due to reductions in
manufacturing and other product costs, specifically certain
component costs, partially offset by increases in overhead
costs, including service support costs. The percentage increase
from fiscal 1999 to fiscal 2000 was due to increases in overhead
costs, service support costs and other product costs.

Product costs increased to $10.9 million in
fiscal 2001 from $10.7 million in fiscal 2000 and
$5.3 million in fiscal 1999. The increase from 2000 to 2001
was due to increases in overhead costs, partially offset by
reductions in manufacturing and other product costs. The
increase from 1999 to 2000 was due to an increase in units
shipped as well as increasing overhead costs. Costs of service
revenues increased to $3.0 million in fiscal 2001 from
$1.9 million in fiscal 2000 and $18,000 in fiscal 1999. The
increases are due to the costs of developing the service support
organization to support the increased installed base. Prior to
fiscal 2000, support activities were handled primarily by the
sales organization.

To maintain our gross margins we must continue to
develop and introduce on a timely basis new products and
enhancements and reduce product costs as we did in 2001.



| |                                    
| | -----------------------------------
| | Amortization of Acquired Technology

Amortization of acquired technology relates to
the acquired developed technologies of Workfire Technologies
International, Inc. (Workfire). The acquisition
occurred in September 2000. There was no amortization during the
second half of 2001 due to the impairment reduction discussed
below under Impairment of Goodwill and Other
Intangibles. The amortization of acquired technology was
$1.2 million during 2001, compared to $678,000 in 2000 and
none in 1999.



| |                         
| | ------------------------
| | Research and Development

Research and development expenses consist
primarily of salaries and related personnel expenses, consultant
fees and prototype expenses related to the design, development,
testing and enhancement of the PacketShaper, AppVantage and
AppCelera systems and PacketWise software. Excluding the effects
of stock-based compensation of $663,000, $558,000 and $459,000
for the years 2001, 2000 and 1999, respectively, research and
development expenses increased to $11.7 million in fiscal
2001 from $8.8 million in fiscal 2000 and from
$5.2 million in fiscal 1999. The increase in research and
development expenses from fiscal 2000 to

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fiscal 2001 was due to increases in staffing and
related personnel costs, as well as increases in project related
materials. The increase in personnel related expenses was due to
the inclusion of Workfire for all of fiscal 2001, compared to
only three and one half months in fiscal 2000. The increase in
research and development expenses from fiscal 1999 to fiscal
2000 was due to increases in personnel, consulting and related
overhead costs. Research and development expenses represented
25%, 21% and 28% of net revenues in fiscal 2001, 2000 and 1999,
respectively. The level of research and development spending
varies depending on both the breadth of the Companys
research and development efforts and the stage of specific
product development.


As of December 31, 2001, all research and
development costs have been expensed as incurred. We believe
that continued investment in research and development is
critical to attaining our strategic product and cost reduction
objectives. We intend to continue to invest in appropriate
projects related to the enhancement of our product offerings and
expect expenses as a percentage of revenue to decrease over time.

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 the product as
well as related trade show, promotional and public relations
expenses. Excluding the effects of stock-based compensation of
$442,000, $892,000 and $2.2 million in 2001, 2000 and 1999
respectively, sales and marketing expenses increased to
$22.4 million in fiscal 2001 from $18.6 million in
fiscal 2000 and from $13.7 million in fiscal 1999. The
increases in both fiscal 2001 and fiscal 2000 reflected the
hiring of additional personnel in connection with building our
sales force, and channel and increased marketing activities.
Sales and marketing expenses represented 48%, 45% and 74% of net
revenues for fiscal 2001, 2000, and 1999, respectively. We
intend to continue to invest in appropriate sales and marketing
campaigns and therefore expect sales and marketing expenses in
absolute dollar expenses to increase in the future. We continue
to work towards our long-term business model target showing
sales and marketing expenses in the range of 26 to 28% of
revenues, but do not expect to achieve this on a quarterly basis
for at least the next eight quarters.



| |                           
| | --------------------------
| | General and Administrative

General and administrative expenses consist
primarily of salaries and related personnel expenses for
administrative personnel, professional fees and other general
corporate expenses. Excluding the effects of stock based
compensation of $128,000, $233,000 and $445,000 in 2001, 2000
and 1999 respectively, general and administrative expenses
increased to $5.7 million in fiscal 2001 from
$4.8 million in fiscal 2000 and from $2.9 million in
fiscal 1999. General and administrative expenses represented 12%
of net revenues in 2001 and 2000, and 16% of net revenues for
fiscal 1999. The percentage decrease from 1999 to 2000 was
primarily due to increased net revenues. We expect general and
administrative expenses as a percentage of revenues to decrease.



| |                         
| | ------------------------
| | Amortization of Goodwill

In connection with the Workfire acquisition
completed in September 2000, we recorded goodwill and other
intangible assets of approximately $66.1 million, which was
being amortized on a straight-line basis over a three-year
period. Amortization of this goodwill and other intangibles
totaled an aggregate of $11.0 million in 2001 and
$6.4 million in 2000. There was no amortization during the
second half of 2001, due to an impairment charge discussed below.

We may have additional acquisitions in future
periods that could give rise to the acquisition of additional
goodwill. Beginning January 1, 2002, under the provisions
of SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill will be accounted for using an
impairment-only approach.



| |                                              
| | ---------------------------------------------
| | Impairment of Goodwill and Other
	Intangibles

In September 2000, the Company purchased Workfire
Technologies International, Inc. for approximately
$72.8 million, mostly in Packeteer stock. Substantially all
the purchase price was allocated to goodwill and other
intangibles.

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During the third quarter of 2001, the Company
performed an assessment of the carrying value of the goodwill
and other intangible assets related to its acquisition of
Workfire Technologies International, Inc. pursuant to the
Companys stated policy as described in Note 1 to the
Financial Statements. Managements determination of the
existence of impairment indicators included continued general
economic slowing, broad based declines in the values of
networking technologies and a review of current, historical and
future projections of cash flows related to these assets. The
conclusion of the assessment was a determination that the
carrying value of the goodwill and other intangible assets
exceeded its fair value. The fair value was determined based on
Company projections of the present value of future net cash
flows to be generated over the expected lives of these assets.
Accordingly, the Company recorded an impairment charge of
$52.6 million during the third quarter of 2001 for the
entire unamortized balance.



| |                         
| | ------------------------
| | Stock-Based Compensation

Amortization of stock-based compensation resulted
from the granting of stock options to employees and consultants
with exercise prices per share determined to be below the deemed
fair value per share of our common stock on the dates of grant
for financial reporting purposes. Stock-based compensation is
being amortized to expense in accordance with FASB
Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option Award
Plans, over the vesting period of the individual options,
generally four years. We recorded stock-based compensation
expense of $1.2 million, $1.7 million and
$3.1 million in fiscal 2001, 2000 and 1999, respectively
leaving $400,000 to be amortized in future periods.



| |                          
| | -------------------------
| | Interest and Other Income

Interest and other income consists primarily of
interest income from our cash and investments and totaled
$3.2 million, $4.0 million and $1.8 million for
fiscal 2001, 2000 and 1999, respectively. The decrease in
interest income from 2000 to 2001 is the result of lower yields
on invested funds. The increase from 1999 to 2000 is due
primarily to higher average cash balances in 2000 resulting from
proceeds from our initial public offering in July 1999.

Interest and Other Expense

Interest and other expense consists primarily of
interest expense related to our line of credit, debt and capital
lease obligations. Interest and other expense totaled
$1.1 million in 2001, $618,000 in 2000 and $863,000 in
1999. The increase from 2000 to 2001 was due primarily to the
$545,000 loss on the disposition of $3.0 million of
defaulted California Edison notes in the first quarter of 2001.
The decrease in fiscal 2000 from 1999 is primarily due to
decreased interest charges on our line of credit, debt and
capital lease obligations.

Income Tax Provision

As of December 31, 2001, we had incurred net
operating losses for federal and state purposes and had not
recognized any tax provision or benefit, except in fiscal 2000.
In fiscal 2000, we recognized a $300,000 tax provision related
to charges in lieu of income taxes associated with alternative
minimum income tax. A corresponding credit was made to
paid-in-capital. As of December 31, 2001, we had net
operating loss carryforwards of approximately $49.3 million
and $22.9 million for federal and state income tax
purposes, respectively. These carryforwards, if not utilized,
expire 2004 through 2021. See Note 11 of Notes to
Consolidated Financial Statements.

Liquidity and Capital Resources

Since inception, we have financed our operations
primarily from the sale of preferred and common stock and other
financing activities such as bank credit against accounts
receivable, subordinated debt offerings and equipment leasing
and loans. Cash, cash equivalents and investments totaled
$62.2 million at December 31, 2001, unchanged from the
$62.2 million reported at December 31, 2000. Working
capital increased to $52.7 million at December 31,
2001, compared to $52.0 million at December 31, 2000.

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Net cash provided by operating activities was
$416,000 in fiscal 2001, compared with net cash used in
operations of $1.1 million and $5.9 million in fiscal
2000 and 1999, respectively. The increase in operating cash
flows was due primarily to a decrease in receivables and
inventory levels.

Net cash provided by (used in) investing
activities was $25.2 million, $1.4 million and $(44.5)
million in 2001, 2000, and 1999, respectively primarily
reflecting transactions in marketable securities. In 2001, the
activity in our portfolio generated net cash proceeds of
$25.7 million, which was reinvested in short-term
securities. In 2000, the net cash proceeds of $7.8 from
portfolio activity were offset by disbursements related to
purchases of fixed assets totaling $2.6 million and cash
outlays related to our acquisition of Workfire totaling
$3.3 million. In 1999, $45.7 million of the net
proceeds related to our initial public offering were used to
purchase investments.

Net cash provided by financing activities was
$200,000, $4.3 million and $67.5 million in 2001,
2000, and 1999, respectively. In 2001, proceeds from issuance of
stock totaled $2.3 million, which was offset by
disbursements repaying lease obligations and notes payable. In
2000, proceeds were generated by issuance of common stock, lease
financing and increased borrowing under the line of credit. Net
cash provided in 1999 included $62.6 million of net
proceeds from Packeteers initial public offering, as well
as increased debt related to borrowings under the line of credit
and notes payable.

We have a revolving credit facility against
accounts receivable, which provides for borrowings of up to
$10.0 million. This facility expires in May 2003.
Borrowings under this credit facility bear interest at the prime
rate, which was 4.75% as of December 31, 2001, are due upon
demand, and are secured by substantially all of our assets. At
December 31, 2001, amounts outstanding under this credit
facility were $1.9 million.

In August 2001, we secured a $551,000 equipment
loan. Borrowings under this agreement are collateralized by the
equipment, bear interest at the rate of 11.1%, and are repayable
in monthly installments over a three-year period. At
December 31, 2001, approximately $500,000 was outstanding
under this loan.

A summary of future payments, including interest
where applicable, due under debt and lease obligations as of
December 31, 2001 (in thousands) is shown below. Capital
lease obligations are equipment leases entered into in prior
years. Operating leases relate to facilities and the note
payable is the equipment loan entered into in August 2001.

|           |  |                |       |                  |  |              |       |       |  |   |     |  |  |   |       | 
|---------- |  | -------------- | ----- | ---------------- |  | ------------ | ----- | ----- |  | - | --- |  |  | - | ----- | 
|           |  | Capital Leases |       | Operating Leases |  | Note Payable |       | Total
|           |  |                |       |                  |  |              |       |      
|2002       |  | $              | 862   |                  |  | $            | 1,512 |       |  | $ | 217 |  |  | $ | 2,591 | 
|2003       |  |                | 616   |                  |  |              | 257   |       |  |   | 217 |  |  |   | 1,090 | 
|2004       |  |                | 496   |                  |  |              | 215   |       |  |   | 145 |  |  |   | 856   | 
|2005       |  |                |      |                  |  |              | 215   |       |  |   |    |  |  |   | 215   | 
|2006       |  |                |      |                  |  |              | 215   |       |  |   |    |  |  |   | 215   | 
|thereafter |  |                |      |                  |  |              | 253   |       |  |   |    |  |  |   | 253   | 
|           |  |                |       |                  |  |              |       |       |  |   |     |  |  |   |       | 
|           |  | $              | 1,974 |                  |  | $            | 2,667 |       |  | $ | 579 |  |  | $ | 5,220 | 
|           |  |                |       |                  |  |              |       |       |  |   |     |  |  |   |       | 

Additionally, Packeteer has outstanding purchase
order commitments with its contract manufacturer for completed
products of approximately $1.5 million as of
December 31, 2001. Packeteer expects the purchase orders to
be fulfilled in the first quarter of 2002.

We have used a portion of the net initial public
offering proceeds of $62.6 million to repay subordinated
loans of $5.0 million in 1999 and to fund operations,
including expanding and enhancing our sales and marketing
operations and product offerings. The balance remains invested
as described in Note 3 of the notes to consolidated financial
statements.

We expect to experience growth in our working
capital needs for the foreseeable future 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 acquisitions or investments in complementary
businesses, technologies or products. We believe that our
current cash, cash

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equivalents and investments of $62.2 million
at December 31, 2001 and available borrowings under our
credit facilities will be sufficient to meet our anticipated
cash requirements for working capital and capital expenditures
for at least 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. 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

The impact of recent accounting pronouncements is
discussed in Note 1 of the notes to consolidated financial
statements.




Item
7a.     Quantitative and Qualitative
Disclosures about Market Risk



| |                         
| | ------------------------
| | Fixed Income Investments

Our exposure to market risks for changes in
interest rates and principal relates primarily to investments in
debt securities issued by U.S. government agencies and corporate
debt securities. We place our investments with high credit
quality issuers and, by policy, limit the amount of the credit
exposure to any one issuer. Our investment securities are
classified as available-for-sale and consequently are recorded
on the balance sheet at fair value with unrealized gains and
losses reported as a separate component of accumulated other
comprehensive income (loss).

We do not use derivative financial instruments.
In general the Companys policy is to limit the risk of
principal loss and ensure the safety of invested funds by
limiting market and credit risk. All highly liquid investments
with less than three months to maturity from date of purchase
are considered to be cash equivalents; investments with
maturities between three and twelve months are considered to be
short-term investments; and investments with maturities in
excess of twelve months are considered to be long-term
investments. The following table presents the amortized cost,
fair value and related weighted-average interest rates by year
of maturity for our investment portfolio as of December 30,
2001 and comparable fair values as of December 31, 2000.

|                           |                       |                |        |      |   |       |       |            |   |            |        |  |  |   |        |  |  |   |        |  | 
|-------------------------- | --------------------- | -------------- | ------ | ---- | - | ----- | ----- | ---------- | - | ---------- | ------ |  |  | - | ------ |  |  | - | ------ |  | 
|                           |                       |                |        |     
|                           |                       | 2001           |        |     
|                           |                       |                |        | 2000
|                           |                       | 2002           |        | 2003 |   | Total |       | Fair Value |   | Fair Value
|                           |                       |                |        |      |   |       |       |            |   |           
|                           |                       |               
|                           |                       | (In thousands)
|Cash equivalents           |                       | $              | 48,336 |      |   |       |      |            |   | $          | 48,336 |  |  | $ | 48,286 |  |  | $ | 20,999 | 
|                           | Weighted-average rate |                |        | 1.96 | % |       |       |           |   |            |        |  |  |   |        |  |  |   |        |  | 
|Short-term investments     |                       |                | 8,539  |      |   |       |      |            |   |            | 8,539  |  |  |   | 8,624  |  |  |   | 32,183 | 
|                           | Weighted-average rate |                |        | 4.33 | % |       |       |           |   |            |        |  |  |   |        |  |  |   |        |  | 
|Long-term investments      |                       |                |       |      |   | $     | 3,536 |            |   |            | 3,536  |  |  |   | 3,588  |  |  |   | 5,750  | 
|                           | Weighted-average rate |                |        |     |   |       |       | 5.08       | % |            |        |  |  |   |        |  |  |   |        |  | 
|                           |                       |                |        |      |   |       |       |            |   |            |        |  |  |   |        |  |  |   |        | 
|Total investment portfolio |                       | $              | 56,875 |      |   | $     | 3,536 |            |   | $          | 60,411 |  |  | $ | 60,498 |  |  | $ | 58,932 | 
|                           |                       |                |        |      |   |       |       |            |   |            |        |  |  |   |        |  |  |   |        | 

At December 31, 2000, short-term investments
included approximately $3.0 million in corporate notes of
Southern California Edison that had been accounted for as
available-for-sale securities under SFAS No. 115. These
notes were valued at fair market value as of December 31,
2000. On January 16, 2001, the scheduled redemption date,
Southern California Edison announced that it would not redeem
these notes at that time. Subsequently, on March 26, 2001,
Packeteer sold these notes incurring a $545,000 realized loss,
which has been included in the caption Interest and other
expense on the Consolidated Statements of Operations for
the year ended December 31, 2001.

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| |                 
| | ----------------
| | Foreign Exchange

We develop products in the United States and sell
in North America, Asia, Europe and the rest of the world. As a
result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. All sales are currently made in
U.S. dollars; however, a strengthening of the dollar could make
our products less competitive in foreign markets. We have no
foreign exchange contracts, option contracts or other foreign
hedging arrangements.

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Item
8.     Financial Statements and
Supplementary Data

The following consolidated financial statements,
and the related notes thereto, of Packeteer and the Report of
Independent Auditors are filed as a part of this Form 10-K.

|                                                                                                                              |  |        |    | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ------ | -- | 
|                                                                                                                              |  | Page  
|                                                                                                                              |  | Number
|                                                                                                                              |  |       
|Independent Auditors Report                                                                                                  |  |        | 37 | 
|Consolidated Balance Sheets as of
	December 31, 2001 and 2000                                                                 |  |        | 38 | 
|Consolidated Statements of Operations for the
	years ended December 31, 2001, 2000 and 1999                                   |  |        | 39 | 
|Consolidated Statements of Stockholders
	Equity and Comprehensive Loss for the years ended
	December 31, 2001, 2000 and 1999 |  |        | 40 | 
|Consolidated Statements of Cash Flows for the
	years ended December 31, 2001, 2000 and 1999                                   |  |        | 41 | 
|Notes to Consolidated Financial Statements                                                                                    |  |        | 42 | 

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INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of
Packeteer, Inc.:

We have audited the accompanying consolidated
balance sheets of Packeteer, Inc. and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders equity and
comprehensive loss, and cash flows for each of the years in the
three-year period ended December 31, 2001. In connection
with our audits of the consolidated financial statements, we
have also audited the financial statement schedule listed in
Item 14(a)2. These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and the
financial statement schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Packeteer, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.



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

Mountain View, California

January 17, 2002


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PACKETEER, INC.

CONSOLIDATED BALANCE SHEETS

|                                                  |                                                                                                                                                         |                                            |       |          |        |  |        |         |         | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | -------- | ------ |  | ------ | ------- | ------- | 
|                                                  |                                                                                                                                                         |                                           
|                                                  |                                                                                                                                                         | December 31,                              
|                                                  |                                                                                                                                                         |                                           
|                                                  |                                                                                                                                                         | 2001                                       |       | 2000    
|                                                  |                                                                                                                                                         |                                            |       |         
|                                                  |                                                                                                                                                         |                                           
|                                                  |                                                                                                                                                         | (In thousands,                            
|                                                  |                                                                                                                                                         | except per share data)                    
|ASSETS                                           
|Current assets:                                   |                                                                                                                                                         |                                            |       |          |        |  |        |        
|                                                  | Cash and cash equivalents                                                                                                                               |                                            | $     | 50,009   |        |  | $      | 24,273  |        
|                                                  | Short-term investments                                                                                                                                  |                                            |       | 8,624    |        |  |        | 32,183  |        
|                                                  | Accounts receivable, less allowance for doubtful
	accounts of $132, and $223, as of December 31, 2001 and
	2000, respectively                           |                                            |       | 5,772    |        |  |        | 7,600   |        
|                                                  | Other receivables                                                                                                                                       |                                            |       | 183      |        |  |        | 1,097   |        
|                                                  | Inventories                                                                                                                                             |                                            |       | 2,189    |        |  |        | 2,554   |        
|                                                  | Prepaids and other current assets                                                                                                                       |                                            |       | 1,038    |        |  |        | 1,184   |        
|                                                  |                                                                                                                                                         |                                            |       |          |        |  |        |        
|                                                  |                                                                                                                                                         | Total current assets                       |       |          | 67,815 |  |        |         | 68,891  | 
|Property and equipment, net                       |                                                                                                                                                         |                                            | 1,377 |          |        |  | 2,529  |        
|Long-term investments                             |                                                                                                                                                         |                                            | 3,588 |          |        |  | 5,750  |        
|Other assets                                      |                                                                                                                                                         |                                            | 225   |          |        |  | 660    |        
|Goodwill and other intangible assets, net         |                                                                                                                                                         |                                            |      |          |        |  | 66,451 |        
|                                                  |                                                                                                                                                         |                                            |       |          |        |  |        |        
|                                                  |                                                                                                                                                         | Total assets                               |       | $        | 73,005 |  |        | $       | 144,281 | 
|                                                  |                                                                                                                                                         |                                            |       |          |        |  |        |        
|LIABILITIES AND STOCKHOLDERS
	EQUITY            
|Current liabilities:                              |                                                                                                                                                         |                                            |       |          |        |  |        |        
|                                                  | Line of credit                                                                                                                                          |                                            | $     | 1,851    |        |  | $      | 3,679   |        
|                                                  | Current portion of capital lease obligations                                                                                                            |                                            |       | 748      |        |  |        | 751     |        
|                                                  | Current portion of note payable                                                                                                                         |                                            |       | 169      |        |  |        | 50      |        
|                                                  | Accounts payable                                                                                                                                        |                                            |       | 2,282    |        |  |        | 2,430   |        
|                                                  | Accrued compensation                                                                                                                                    |                                            |       | 2,082    |        |  |        | 2,410   |        
|                                                  | Other accrued liabilities                                                                                                                               |                                            |       | 3,854    |        |  |        | 4,246   |        
|                                                  | Deferred revenue                                                                                                                                        |                                            |       | 4,106    |        |  |        | 3,367   |        
|                                                  |                                                                                                                                                         |                                            |       |          |        |  |        |        
|                                                  |                                                                                                                                                         | Total current liabilities                  |       |          | 15,092 |  |        |         | 16,933  | 
|Capital lease obligations, less current portion   |                                                                                                                                                         |                                            | 958   |          |        |  | 1,815  |        
|Note payable, less current portion                |                                                                                                                                                         |                                            | 331   |          |        |  |       |        
|Deferred tax liability                            |                                                                                                                                                         |                                            |      |          |        |  | 1,400  |        
|                                                  |                                                                                                                                                         |                                            |       |          |        |  |        |        
|                                                  |                                                                                                                                                         | Total liabilities                          |       |          | 16,381 |  |        |         | 20,148  | 
|Commitments and contingencies (Notes 4, 9 and 10) |                                                                                                                                                         |                                            |       |          |        |  |        |        
|Stockholders equity:                             |                                                                                                                                                         |                                            |       |          |        |  |        |        
|                                                  | Preferred stock, $0.001 par value; 5,000 shares
	authorized; no shares issued and outstanding as of
	December 31, 2001 and 2000, respectively           |                                            |       |         |        |  |        |        |        
|                                                  | Common stock, $0.001 par value; 85,000 shares
	authorized; 29,951 and 29,434 shares issued and outstanding at
	December 31, 2001 and 2000, respectively |                                            |       | 30       |        |  |        | 29      |        
|                                                  | Additional paid-in capital                                                                                                                              |                                            |       | 164,273  |        |  |        | 162,118 |        
|                                                  | Deferred stock-based compensation                                                                                                                       |                                            |       | (400     | )      |  |        | (1,715  | )      
|                                                  | Accumulated other comprehensive income (loss)                                                                                                           |                                            |       | (18      | )      |  |        | 77      |        
|                                                  | Notes receivable from stockholders                                                                                                                      |                                            |       | (83      | )      |  |        | (186    | )      
|                                                  | Accumulated deficit                                                                                                                                     |                                            |       | (107,178 | )      |  |        | (36,190 | )      
|                                                  |                                                                                                                                                         |                                            |       |          |        |  |        |        
|                                                  |                                                                                                                                                         | Total stockholders equity                 |       |          | 56,624 |  |        |         | 124,133 | 
|                                                  |                                                                                                                                                         |                                            |       |          |        |  |        |        
|                                                  |                                                                                                                                                         | Total liabilities and stockholders equity |       | $        | 73,005 |  |        | $       | 144,281 | 
|                                                  |                                                                                                                                                         |                                            |       |          |        |  |        |        

See accompanying notes to consolidated financial
statements.

38



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##### Table of Contents



PACKETEER, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                               |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |        |        | 
|-------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                               |                                                                                                                                                |                                      
|                                                               |                                                                                                                                                | Years Ended December 31,             
|                                                               |                                                                                                                                                |                                      
|                                                               |                                                                                                                                                | 2001                                  |         | 2000   |         | 1999
|                                                               |                                                                                                                                                |                                       |         |        |         |     
|                                                               |                                                                                                                                                |                                      
|                                                               |                                                                                                                                                | (In thousands, except per share data)
|Net revenues:                                                  |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|                                                               | Product revenues                                                                                                                               |                                       | $       | 41,108 |         |      | $       | 38,118 |        |   | $       | 17,744 |       
|                                                               | Service revenues                                                                                                                               |                                       |         | 5,553  |         |      |         | 2,979  |        |   |         | 697    |       
|                                                               |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|                                                               |                                                                                                                                                | Total net revenues                    |         |        | 46,661  |      |         |        | 41,097 |   |         |        | 18,441 | 
|Cost of revenues:                                              |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|                                                               | Product costs                                                                                                                                  |                                       |         | 10,860 |         |      |         | 10,718 |        |   |         | 5,268  |       
|                                                               | Service costs                                                                                                                                  |                                       |         | 3,007  |         |      |         | 1,867  |        |   |         | 18     |       
|                                                               | Amortization of acquired technology                                                                                                            |                                       |         | 1,199  |         |      |         | 678    |        |   |         |       |       
|                                                               |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|                                                               |                                                                                                                                                | Total cost of revenues                |         |        | 15,066  |      |         |        | 13,263 |   |         |        | 5,286  | 
|                                                               |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|Gross profit                                                   |                                                                                                                                                |                                       | 31,595  |        |         |      | 27,834  |        |        |   | 13,155  |       
|Operating expenses:                                            |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|                                                               | Research and development, excluding amortization
	of stock-based compensation of $663, $558 and $459 for 2001,
	2000 and 1999, respectively    |                                       |         | 11,697 |         |      |         | 8,760  |        |   |         | 5,164  |       
|                                                               | Sales and marketing, excluding amortization of
	stock-based compensation of $442, $892 and $2,184 for 2001, 2000
	and 1999, respectively       |                                       |         | 22,417 |         |      |         | 18,614 |        |   |         | 13,737 |       
|                                                               | General and administrative, excluding
	amortization of stock-based compensation of $128, $233 and $445
	for 2001, 2000, and 1999, respectively |                                       |         | 5,704  |         |      |         | 4,824  |        |   |         | 2,936  |       
|Amortization of goodwill                                       |                                                                                                                                                |                                       | 11,017  |        |         |      | 6,424   |        |        |   |        |       
|Impairment of goodwill and intangibles                         |                                                                                                                                                |                                       | 52,552  |        |         |      |        |        |        |   |        |       
|Amortization of stock-based compensation                       |                                                                                                                                                |                                       | 1,233   |        |         |      | 1,683   |        |        |   | 3,088   |       
|                                                               |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|                                                               |                                                                                                                                                | Total operating expenses              |         |        | 104,620 |      |         |        | 40,305 |   |         |        | 24,925 | 
|                                                               |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|Net loss from operations                                       |                                                                                                                                                |                                       | (73,025 | )      |         |      | (12,471 | )      |        |   | (11,770 | )     
|Interest and other income                                      |                                                                                                                                                |                                       | 3,170   |        |         |      | 4,020   |        |        |   | 1,757   |       
|Interest and other expense                                     |                                                                                                                                                |                                       | (1,133  | )      |         |      | (618    | )      |        |   | (863    | )     
|                                                               |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|Net loss before income taxes                                   |                                                                                                                                                |                                       | (70,988 | )      |         |      | (9,069  | )      |        |   | (10,876 | )     
|Provision for income taxes                                     |                                                                                                                                                |                                       |        |        |         |      | 300     |        |        |   |        |       
|                                                               |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|Net loss                                                       |                                                                                                                                                | $                                     | (70,988 | )      |         | $    | (9,369  | )      |        | $ | (10,876 | )     
|                                                               |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|Basic and diluted net loss per share                           |                                                                                                                                                | $                                     | (2.40   | )      |         | $    | (0.35   | )      |        | $ | (0.71   | )     
|                                                               |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       
|Shares used in computing basic and diluted net
	loss per share |                                                                                                                                                |                                       | 29,559  |        |         |      | 27,152  |        |        |   | 15,343  |       
|                                                               |                                                                                                                                                |                                       |         |        |         |      |         |        |        |   |         |       

See accompanying notes to consolidated financial
statements.

39



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##### Table of Contents



PACKETEER, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE LOSS

|                                                                                      |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |      |        |   |  |   |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |         |  
|------------------------------------------------------------------------------------- | ---------------------------------- | --------------- | ------- | ------------ |  | ---------- | --- | ----------- |  | ------- | ------ | ------------ |  | ----------- | -- | ------- |  | ------- | ------- | ----- |  | ---- | ------ | - |  | - | --- | ---- | - | - | ---- | - |  | - | -------- | ------- | - | - | ------- | ------- | - | - | -------- | ------- | -
|                                                                                      |                                    |                 |         |              |  |            |     |             |  |         |        |              |  | Accumulated |    |         |  |         |         |       |  |     
|                                                                                      |                                    |                 |         |              |  |            |     |             |  |         |        | Other        |  | Notes       |    |         |  |         |         |      
|                                                                                      |                                    | Convertible     |         |              |  |            |     |             |  | Compre- |        | Receivable   |  |             |    |         |  |        
|                                                                                      |                                    | Preferred Stock |         | Common Stock |  | Additional |     | Deferred    |  | hensive |        | From         |  |             |    |         |  | Compre-
|                                                                                      |                                    |                 |         |              |  | Paid-in    |     | Stock-Based |  | Income  |        | Stock-       |  | Accumulated |    |         |  | hensive
|                                                                                      |                                    | Shares          |         | Amount       |  | Shares     |     | Amount      |  | Capital |        | Compensation |  | (Loss)      |    | holders |  | Deficit |         | Total |  | Loss
|                                                                                      |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |     
|                                                                                      |                                    |                
|                                                                                      |                                    | (In thousands) 
|Balances as of December 31, 1998                                                      |                                    |                 | 12,391  |              |  | $          | 13  |             |  |         | 9,723  |              |  | $           | 10 |         |  | $       | 20,924  |       |  | $    | (514   | ) |  |   |    |      |   | $ | (729 | ) |  | $ | (15,945  | )       |   | $ | 3,759   |         |   | $ | (15,945  | )      
|Stock-based compensation to non-employees                                             |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         | 798     |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   | 798     |         |   |   |          |        
|Stock options granted to non- employees                                               |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         | 42      |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   | 42      |         |   |   |          |        
|Issuance of common stock upon exercise of stock
	options                              |                                    |                 |        |              |  |            |    |             |  |         | 125    |              |  |             |   |         |  |         | 278     |       |  |      |       |   |  |   |    |      |   |   | (188 | ) |  |   |         |         |   |   | 90      |         |   |   |          |        
|Issuance of common stock, net of issuance costs
	of $6,445                            |                                    |                 |        |              |  |            |    |             |  |         | 4,600  |              |  |             | 4  |         |  |         | 62,552  |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   | 62,556  |         |   |   |          |        
|Conversion of preferred stock                                                         |                                    |                 | (12,391 | )            |  |            | (13 | )           |  |         | 12,391 |              |  |             | 13 |         |  |         |        |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   |        |         |   |   |          |        
|Repurchase of common stock                                                            |                                    |                 |        |              |  |            |    |             |  |         | (103   | )            |  |             |   |         |  |         | (28     | )     |  |      |       |   |  |   |    |      |   |   | 28   |   |  |   |         |         |   |   |        |         |   |   |          |        
|Issuance of warrants for preferred stock                                              |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         | 368     |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   | 368     |         |   |   |          |        
|Issuance of common stock upon exercise of
	warrants, net                              |                                    |                 |        |              |  |            |    |             |  |         | 56     |              |  |             |   |         |  |         |        |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   |        |         |   |   |          |        
|Repayments of notes receivable from stockholders                                      |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         |        |       |  |      |       |   |  |   |    |      |   |   | 151  |   |  |   |         |         |   |   | 151     |         |   |   |          |        
|Deferred compensation related to stock option
	grants                                 |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         | 3,914   |       |  |      | (3,914 | ) |  |   |    |      |   |   |     |   |  |   |         |         |   |   |        |         |   |   |          |        
|Amortization of stock-based compensation                                              |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         |        |       |  |      | 2,290  |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   | 2,290   |         |   |   |          |        
|Comprehensive loss:                                                                   |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |      |        |   |  |   |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|                                                                                      | Unrealized loss on investments     |                 |         |             |  |            |     |            |  |         |        |             |  |             |    |        |  |         |         |      |  |      |        |  |  |   |     | (58  | ) |   |      |  |  |   |          |        |   |   |         | (58     | ) |   |          | (58     | )
|                                                                                      | Net loss                           |                 |         |             |  |            |     |            |  |         |        |             |  |             |    |        |  |         |         |      |  |      |        |  |  |   |     |     |   |   |      |  |  |   |          | (10,876 | ) |   |         | (10,876 | ) |   |          | (10,876 | )
|Comprehensive loss                                                                    |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |      |        |   |  |   |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   | (10,934  | )      
|                                                                                      |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |      |        |   |  |   |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|Balances as of December 31, 1999.                                                     |                                    |                 |        |              |  |            |    |             |  |         | 26,792 |              |  |             | 27 |         |  |         | 88,848  |       |  |      | (2,138 | ) |  |   | (58 | )    |   |   | (738 | ) |  |   | (26,821  | )       |   |   | 59,120  |         |   |   | (26,879  | )      
|Stock-based compensation to non-employees                                             |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         | 151     |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   | 151     |         |   |   |          |        
|Issuance of common stock upon exercise of stock
	options                              |                                    |                 |        |              |  |            |    |             |  |         | 694    |              |  |             |   |         |  |         | 2,045   |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   |         |         |   |   | 2,045    |        
|Charges in lieu of income taxes associated with
	alternative minimum income tax       |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         | 300     |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   |         |         |   |   | 300      |        
|Issuance of common stock pursuant to Employee
	Stock Purchase Plan                    |                                    |                 |        |              |  |            |    |             |  |         | 98     |              |  |             |   |         |  |         | 1,303   |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   |         |         |   |   | 1,303    |        
|Issuance of common stock upon exercise of
	warrants, net                              |                                    |                 |        |              |  |            |    |             |  |         | 74     |              |  |             |   |         |  |         |        |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   |         |         |   |   |         |        
|Issuance of common stock and stock options
	related to the Workfire acquisition       |                                    |                 |        |              |  |            |    |             |  |         | 1,806  |              |  |             | 2  |         |  |         | 69,498  |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   |         |         |   |   | 69,500   |        
|Repurchase of common stock                                                            |                                    |                 |        |              |  |            |    |             |  |         | (30    | )            |  |             |   |         |  |         | (27     | )     |  |      |       |   |  |   |    |      |   |   | 2    |   |  |   |         |         |   |   |         |         |   |   | (25      | )      
|Repayments of notes receivable from stockholders                                      |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         |        |       |  |      |       |   |  |   |    |      |   |   | 550  |   |  |   |         |         |   |   |         |         |   |   | 550      |        
|Deferred compensation related to stock options
	issued in the acquisition of Workfire |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         |        |       |  |      | (1,109 | ) |  |   |    |      |   |   |     |   |  |   |         |         |   |   |         |         |   |   | (1,109   | )      
|Amortization of stock-based compensation                                              |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         |        |       |  |      | 1,532  |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   |         |         |   |   | 1,532    |        
|Comprehensive loss:                                                                   |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |      |        |   |  |   |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|                                                                                      | Unrealized gain on investment      |                 |         |             |  |            |     |            |  |         |        |             |  |             |    |        |  |         |         |      |  |      |        |  |  |   |     | 135  |   |   |      |  |  |   |          |        |   |   |         | 135     |   |   |          | 135     |  
|                                                                                      | Net loss                           |                 |         |             |  |            |     |            |  |         |        |             |  |             |    |        |  |         |         |      |  |      |        |  |  |   |     |     |   |   |      |  |  |   |          | (9,369  | ) |   |         | (9,369  | ) |   |          | (9,369  | )
|Comprehensive loss                                                                    |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |      |        |   |  |   |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   | (9,234   | )      
|                                                                                      |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |      |        |   |  |   |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|Balances as of December 31, 2000.                                                     |                                    |                 |        |              |  |            |    |             |  |         | 29,434 |              |  |             | 29 |         |  |         | 162,118 |       |  |      | (1,715 | ) |  |   | 77  |      |   |   | (186 | ) |  |   | (36,190  | )       |   |   | 124,133 |         |   |   | (36,113  | )      
|Stock-based compensation to non-employees                                             |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         | 51      |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   | 51      |         |   |   |          |        
|Issuance of common stock upon exercise of stock
	options                              |                                    |                 |        |              |  |            |    |             |  |         | 401    |              |  |             | 1  |         |  |         | 840     |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   | 841     |         |   |   |          |        
|Issuance of common stock pursuant to Employee
	Stock Purchase Plan                    |                                    |                 |        |              |  |            |    |             |  |         | 141    |              |  |             |   |         |  |         | 1,437   |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   | 1,437   |         |   |   |          |        
|Repurchase of common stock                                                            |                                    |                 |        |              |  |            |    |             |  |         | (25    | )            |  |             |   |         |  |         | (40     | )     |  |      |       |   |  |   |    |      |   |   | 20   |   |  |   |         |         |   |   | (20     | )       |   |   |          |        
|Repayments of notes receivable from stockholders                                      |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         |        |       |  |      |       |   |  |   |    |      |   |   | 83   |   |  |   |         |         |   |   | 83      |         |   |   |          |        
|Amortization of stock-based compensation                                              |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         |        |       |  |      | 1,182  |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   | 1,182   |         |   |   |          |        
|Reversal of unamortized deferred stock-based
	compensation for terminated employees   |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         | (133    | )     |  |      | 133    |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   |        |         |   |   |          |        
|Comprehensive loss:                                                                   |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |      |        |   |  |   |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|                                                                                      | Unrealized gain on investments     |                 |         |             |  |            |     |            |  |         |        |             |  |             |    |        |  |         |         |      |  |      |        |  |  |   |     | 10   |   |   |      |  |  |   |          |        |   |   |         | 10      |   |   |          | 10      |  
|                                                                                      | Accumulated translation adjustment |                 |         |             |  |            |     |            |  |         |        |             |  |             |    |        |  |         |         |      |  |      |        |  |  |   |     | (105 | ) |   |      |  |  |   |          |        |   |   |         | (105    | ) |   |          | (105    | )
|                                                                                      | Net loss                           |                 |         |             |  |            |     |            |  |         |        |             |  |             |    |        |  |         |         |      |  |      |        |  |  |   |     |     |   |   |      |  |  |   |          | (70,988 | ) |   |         | (70,988 | ) |   |          | (70,988 | )
|                                                                                      |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |      |        |   |  |   |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|Comprehensive loss                                                                    |                                    |                 |        |              |  |            |    |             |  |         |       |              |  |             |   |         |  |         |        |       |  |      |       |   |  |   |    |      |   |   |     |   |  |   |         |         |   |   |        |         |   |   | (71,083  | )      
|                                                                                      |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |      |        |   |  |   |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|Balances as of December 31, 2001.                                                     |                                    |                 |        |              |  | $          |    |             |  |         | 29,951 |              |  | $           | 30 |         |  | $       | 164,273 |       |  | $    | (400   | ) |  | $ | (18 | )    |   | $ | (83  | ) |  | $ | (107,178 | )       |   | $ | 56,624  |         |   | $ | (107,196 | )      
|                                                                                      |                                    |                 |         |              |  |            |     |             |  |         |        |              |  |             |    |         |  |         |         |       |  |      |        |   |  |   |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        

See accompanying notes to consolidated financial
statements.

40



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##### Table of Contents



PACKETEER, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |         |       |        |         |  
|-------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------------- | ------ | ----- | ------ | ------- | ----- | ------ | ------ | ------- | ----- | ------ | ------- | -
|                                                   |                                                                              |                                                                                
|                                                   |                                                                              | Years Ended December 31,                                                       
|                                                   |                                                                              |                                                                                
|                                                   |                                                                              | 2001                                                                            |                                   | 2000                                                 |        | 1999 
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |      
|                                                   |                                                                              |                                                                                
|                                                   |                                                                              | (In thousands)                                                                 
|Cash flows from operating activities:              |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|                                                   | Net loss                                                                     |                                                                                 | $                                 | (70,988                                              | )      |       | $      | (9,369  | )     |        | $      | (10,876 | )    
|                                                   | Adjustments to reconcile net loss to net cash
	used in operating activities: |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |         |      
|                                                   |                                                                              | Depreciation                                                                    |                                   |                                                      | 1,910  |       |        |         | 1,181 |        |        |         | 747   |       
|                                                   |                                                                              | Amortization of goodwill and intangibles                                        |                                   |                                                      | 12,263 |       |        |         | 7,128 |        |        |         |      |       
|                                                   |                                                                              | Impairment of goodwill and other intangibles                                    |                                   |                                                      | 52,552 |       |        |         |      |        |        |         |      |       
|                                                   |                                                                              | Amortization of stock-based compensation                                        |                                   |                                                      | 1,233  |       |        |         | 1,683 |        |        |         | 3,088 |       
|                                                   |                                                                              | Other non-cash charges                                                          |                                   |                                                      | 86     |       |        |         | 79    |        |        |         | 382   |       
|                                                   |                                                                              | Charges in lieu of income taxes associated with
	alternative minimum income tax |                                   |                                                      |       |       |        |         | 300   |        |        |         |      |       
|                                                   |                                                                              | Changes in operating assets and liabilities:                                    |                                   |                                                      |        |       |        |         |       |        |        |         |       |       
|                                                   |                                                                              |                                                                                 | Accounts receivable               |                                                      |        | 1,828 |        |         |       | (3,954 | )      |         |       | (1,186 | )      
|                                                   |                                                                              |                                                                                 | Other receivables                 |                                                      |        | 914   |        |         |       | (1,062 | )      |         |       | 4      |        
|                                                   |                                                                              |                                                                                 | Inventories                       |                                                      |        | 365   |        |         |       | (2,031 | )      |         |       | (335   | )      
|                                                   |                                                                              |                                                                                 | Prepaids and other current assets |                                                      |        | 146   |        |         |       | (668   | )      |         |       | (347   | )      
|                                                   |                                                                              |                                                                                 | Accounts payable                  |                                                      |        | 88    |        |         |       | 432    |        |         |       | 287    |        
|                                                   |                                                                              |                                                                                 | Accrued compensation              |                                                      |        | (328  | )      |         |       | 930    |        |         |       | 1,227  |        
|                                                   |                                                                              |                                                                                 | Other accrued liabilities         |                                                      |        | (392  | )      |         |       | 2,131  |        |         |       | 1,371  |        
|                                                   |                                                                              |                                                                                 | Deferred revenue                  |                                                      |        | 739   |        |         |       | 2,155  |        |         |       | (295   | )      
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|                                                   |                                                                              |                                                                                 |                                   | Net cash provided by (used in) operating
	activities |        |       | 416    |         |       |        | (1,065 | )       |       |        | (5,933  | )
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|Cash flows from investing activities:              |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|                                                   | Purchases of property and equipment                                          |                                                                                 |                                   | (966                                                 | )      |       |        | (2,606  | )     |        |        | (708    | )    
|                                                   | Purchases of investments                                                     |                                                                                 |                                   | (92,710                                              | )      |       |        | (42,298 | )     |        |        | (45,664 | )    
|                                                   | Proceeds from sale of investments                                            |                                                                                 |                                   | 118,441                                              |        |       |        | 50,104  |       |        |        | 1,927   |      
|                                                   | Acquisition, net of cash acquired                                            |                                                                                 |                                   |                                                     |        |       |        | (3,327  | )     |        |        |        |      
|                                                   | Other assets                                                                 |                                                                                 |                                   | 435                                                  |        |       |        | (427    | )     |        |        | (96     | )    
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|                                                   |                                                                              |                                                                                 |                                   | Net cash provided by (used in) investing
	activities |        |       | 25,200 |         |       |        | 1,446  |         |       |        | (44,541 | )
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|Cash flows from financing activities:              |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|                                                   | Net proceeds from issuance of common stock                                   |                                                                                 |                                   | 841                                                  |        |       |        | 2,045   |       |        |        | 62,646  |      
|                                                   | Sale of stock to employees under the ESPP                                    |                                                                                 |                                   | 1,437                                                |        |       |        | 1,303   |       |        |        |        |      
|                                                   | Proceeds from stockholders notes receivable                                 |                                                                                 |                                   | 83                                                   |        |       |        | 550     |       |        |        | 151     |      
|                                                   | Repurchase of common stock                                                   |                                                                                 |                                   | (20                                                  | )      |       |        | (25     | )     |        |        |        |      
|                                                   | Borrowings under line of credit                                              |                                                                                 |                                   | 8,542                                                |        |       |        | 2,900   |       |        |        | 2,651   |      
|                                                   | Repayments of line of credit                                                 |                                                                                 |                                   | (10,370                                              | )      |       |        | (1,111  | )     |        |        | (761    | )    
|                                                   | Proceeds from notes payable                                                  |                                                                                 |                                   | 551                                                  |        |       |        |        |       |        |        | 5,000   |      
|                                                   | Payments of notes payable                                                    |                                                                                 |                                   | (101                                                 | )      |       |        | (2,629  | )     |        |        | (2,570  | )    
|                                                   | Proceeds from lease financing                                                |                                                                                 |                                   |                                                     |        |       |        | 1,500   |       |        |        | 648     |      
|                                                   | Principal payments of capital lease obligations                              |                                                                                 |                                   | (738                                                 | )      |       |        | (195    | )     |        |        | (287    | )    
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|                                                   |                                                                              |                                                                                 |                                   | Net cash provided by financing activities            |        |       | 225    |         |       |        | 4,338  |         |       |        | 67,478  |  
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|Currency impact                                    |                                                                              |                                                                                 | (105                              | )                                                    |        |       |       |         |       |        |       |        
|Net increase in cash and cash equivalents          |                                                                              |                                                                                 | 25,736                            |                                                      |        |       | 4,719  |         |       |        | 17,004 |        
|Cash and cash equivalents at beginning of year     |                                                                              |                                                                                 | 24,273                            |                                                      |        |       | 19,554 |         |       |        | 2,550  |        
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|Cash and cash equivalents at end of year           |                                                                              | $                                                                               | 50,009                            |                                                      |        | $     | 24,273 |         |       | $      | 19,554 |        
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|Supplemental disclosures of cash flow information: |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|                                                   | Cash paid during year for interest                                           |                                                                                 | $                                 | 543                                                  |        |       | $      | 479     |       |        | $      | 550     |      
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|                                                   | Cash paid during year for taxes                                              |                                                                                 | $                                 | 40                                                   |        |       | $      |        |       |        | $      |        |      
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|Non cash investing activities:                     |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|                                                   | Common stock issued in the Workfire acquisition                              |                                                                                 | $                                 |                                                     |        |       | $      | 64,300  |       |        | $      |        |      
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        
|                                                   | Stock options assumed in the Workfire acquisition                            |                                                                                 | $                                 |                                                     |        |       | $      | 5,200   |       |        | $      |        |      
|                                                   |                                                                              |                                                                                 |                                   |                                                      |        |       |        |         |       |        |        |        

See accompanying notes to consolidated financial
statements.

41



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##### Table of Contents



PACKETEER, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(In thousands, except per share
data)


1.     Description of
Business and Summary of Significant Accounting
Policies



| |                        
| | -----------------------
| | Description of Business

Packeteer, Inc., along with its subsidiaries
(collectively referred to herein as the Company)
provides application performance infrastructure systems designed
to provide enterprises and service providers a layer of control
for applications delivered across intranets, extranets and the
Internet. The Companys PacketWise software, the foundation
of the Companys PacketShaper and AppVantage systems,
integrates application discovery, analysis, control and
reporting technologies that enable proactive application
performance and bandwidth management. The Company was
incorporated on January 25, 1996, and commenced principal
operations in 1997, at which time the Company began selling its
products and related services. The Company currently markets and
distributes its products via a worldwide network of resellers,
distributors and systems integrators.



| |                     
| | --------------------
| | Basis of Preparation

The accompanying consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain
previously reported amounts have been reclassified to conform to
the current presentation format.



| |                 
| | ----------------
| | Use of Estimates

The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles 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 inventory valuation, valuation of
long-lived assets, valuation allowances including sales return
reserves and allowance for doubtful accounts, and other
liabilities, specifically warranty reserves. 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.



| |                    
| | -------------------
| | Revenue Recognition

Revenue recognition.Product revenue consists primarily of sales of our PacketShaper,
AppVantage and AppCelera products, which include hardware, as
well as software licenses. Service revenue consists primarily of
maintenance revenue and, to a lesser extent, training revenue.

The Company applies the provisions of Statement
of Position 97-2, Software Revenue Recognition,
as amended by Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions, to all
transactions involving the sale of hardware and software
products. Revenue is generally recognized when all of the
following criteria are met, as set forth in paragraph 8 of
SOP 97-2:



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

This revenue recognition policy is modified under
certain circumstances as follows: Product revenue on sales to
major new distributors are recorded based on sell-through to the
end user customers until such time as the Company has
established significant experience with the distributors
product return and exchange

42



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

activity. Additionally, when the Company
introduces new product into its distribution channel for which
there is no historical customer demand or acceptance history,
revenue is recognized on the basis of sell-through to end user
customers.

The Company has analyzed all of the elements
included in its multiple element arrangements and has determined
that it has sufficient vendor specific objective evidence
(VSOE) to allocate revenue to the maintenance component of
its product and to training. VSOE is based upon separate sales
of maintenance renewals and training to other customers.
Accordingly, assuming other revenue recognition criteria are
met, revenue from product sales is recognized upon delivery
using the residual method in accordance with SOP 98-9, revenue
from maintenance is recognized ratably over the maintenance term
and revenue from training is recognized when the training has
taken place.



| |                      
| | ---------------------
| | Sales Return Reserves

Management makes estimates of potential future
product returns related to current period product revenue. These
sales return reserves are recorded as a reduction to revenue.
The Companys estimate for sales returns is based on its
historical return rates.



| |                                 
| | --------------------------------
| | Allowance for Doubtful
	Accounts

The allowance for doubtful accounts reduces trade
receivables to their net realizable value. When evaluating the
adequacy of the allowance for doubtful accounts, management
reviews the aged receivables on an account-by-account basis,
taking into consideration such factors as age of the
receivables, customer history and projected or estimated
continued credit-worthiness, as well as general economic and
industry trends.



| |                 
| | ----------------
| | Cost of Revenues

Cost of revenues consists primarily of costs of
product, overhead and maintenance support costs. The Company
provides currently for the estimated costs that may be incurred
under product warranties when products are shipped.

Amortization of acquired technology is also
included in total cost of revenues. During the third quarter of
2001, the Company performed an assessment of the carrying value
of goodwill and other intangibles, including acquired
technology. Based on this review, we recorded an impairment
charge that included the unamortized portion of the acquired
technology. For further discussion, see Goodwill and Other
Intangible Assets below.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all highly liquid
investments with a maturity from date of purchase of three
months or less to be cash equivalents. Cash and cash equivalents
consist primarily of cash on deposit with banks, money market
instruments and investments in commercial paper that are stated
at costs which approximate fair market value.



| |            
| | -----------
| | Investments

Management determines the appropriate
classification of investment securities at the time of purchase
and reevaluates such designation as of each balance sheet date.
As of December 31, 2001 and 2000, all investment securities
are designated as available-for-sale.
Available-for-sale securities are carried at fair value based on
quoted market prices, with the unrealized gains
(losses) reported as a separate component of
stockholders equity. The cost of investments sold is
determined on the specific identification method.

43



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |            
| | -----------
| | Inventories

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



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment, including equipment
acquired under capital lease, are recorded at cost. Depreciation
and amortization are provided using a straight-line method over
the estimated useful lives of the assets, generally
18 months to four years. Leasehold improvements are
amortized over the shorter of estimated useful lives of the
assets or the lease term.

The Company accounts for long-lived assets under
Statement of Financial Accounting Standards No. 121,
Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. SFAS No. 121
requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are
considered to be impaired, the impairment loss to be recognized
is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. The Company estimates fair value
based on the present value of estimated future cash flows. The
cash flow calculation would be based on managements best
estimates, using appropriate assumptions and projections at the
time.



| |                                       
| | --------------------------------------
| | Advertising and Sales Promotion
	Costs

Advertising and sales promotion costs are
expensed as incurred. These costs were $345,000, $316,000 and
$350,000 for the years ended December 31, 2001, 2000 and
1999, respectively.



| |                                      
| | -------------------------------------
| | Goodwill and Other Intangible
	Assets

The Company records goodwill when the cost of net
identifiable assets acquired exceeds the fair value of the
assets. Until the third quarter of 2001, goodwill and the cost
of identified intangible assets were being amortized on a
straight-line basis over estimated useful lives. During the
third quarter of 2001, the Company performed an assessment of
the carrying value of the goodwill and other intangible assets
related to the Workfire acquisition as described below. The
Company regularly performs these reviews to determine if the
carrying value of its assets is impaired. The purpose for the
review is to identify any facts or circumstances, either
internal or external, which indicate that the carrying value of
the assets cannot be recovered. If management determines the
existence of impairment indicators, the Company would use
undiscounted cash flows to initially determine whether
impairment should be recognized. If necessary, the Company would
perform a subsequent calculation to measure the amount of
impairment loss based on the excess of the carrying value over
the fair value of the impaired assets. If quoted market prices
for the assets are not available, the fair value would be
calculated using the present value of estimated future cash
flows. The cash flow calculation would be based on
managements best estimates, using appropriate assumptions
and projections at the time.

44



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Warranty Reserves

Upon shipment of products to its customers, the
Company provides for the estimated cost to repair or replace
products that may be returned under warranty. The Companys
warranty period is typically 12 months from the date of
shipment to the end user customer. For existing products, the
reserve is estimated based on actual historical experience. For
new products, the required reserve is based on historical
experience of similar products until such time as sufficient
historical data has been collected on the new product.



| |                                
| | -------------------------------
| | Research and Development
	Costs

Development costs incurred in the research and
development of new products and enhancements to existing
products are expensed as incurred. Costs for the development of
new software products and enhancements to existing products are
expensed as incurred until technological feasibility has been
established, at which time any additional development costs
would be capitalized in accordance with SFAS No. 86,
Accounting for Costs of Computer Software To Be Sold,
Leased, or Otherwise Marketed. To date, the Companys
software has been available for general release concurrent with
the establishment of technological feasibility, and accordingly,
no costs have been capitalized.



| |                                            
| | -------------------------------------------
| | Concentrations of Credit and Business
	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. Concentrations of credit
risk with respect to trade receivables are 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.

The Company relies on one contract manufacturer
for the production of its product. The inability of the
manufacturer to fulfill supply requirements of the Company could
negatively impact future results. If the Companys contract
manufacturer cannot manufacture its products at required
volumes, on a cost effective basis, in a timely manner, or at
all, the Company will have to secure additional manufacturing
capacity. Even if this additional capacity is available on
commercially acceptable terms, the qualification process could
be lengthy and could cause disruptions to shipments. The Company
attempts to mitigate these risks by working closely with this
manufacturer regarding production planning and product
introduction timing. Additionally, the Company believes that it
carries sufficient finished goods and semi-finished goods
inventory to cover a portion of the transition lead-time if it
needs to secure additional manufacturing capacity.

The Companys products, application
performance infrastructure systems, which are sold worldwide,
are designed to resolve a broad spectrum of problems faced by
enterprises and service providers. Accordingly, the
Companys future success depends upon the capital spending
patterns of such customers and the continued demand by such
customers for the Companys products. The networking
industry is characterized by rapidly changing technology,
evolving industry standards, changes in end-user requirements
and frequent new product introductions and enhancements.

The Companys continued success will depend
upon its ability to enhance existing products and to develop and
introduce, on a timely basis, new products and features that
keep pace with technology developments and emerging industry
standards. Furthermore, as a result of its international sales,
the Companys operations are subject to risks of doing
business abroad including, but not limited to, export duties,
changes to import and export regulations, longer payment cycles,
and greater difficulty in collecting accounts receivable. While
to date these factors have not had an adverse material impact on
the Companys

45



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

consolidated results of operations, there can be
no assurance that there will not be such an impact in the future.

We develop products in the United States and sell
in North America, Asia, Europe and the rest of the world. As a
result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. All sales are currently made in
U.S. dollars; however, a strengthening of the dollar could make
our products less competitive in foreign markets. We have no
foreign exchange contracts, option contracts or other foreign
hedging arrangements.



| |             
| | ------------
| | Income Taxes

The Company uses the asset and liability method
of accounting for income taxes. Under this method, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits of
which future realization is uncertain.



| |                         
| | ------------------------
| | Stock-Based Compensation

For employee stock-based compensation plans, the
Company uses the intrinsic value-based method of accounting as
permitted under SFAS No. 123 Accounting for Stock
Based Compensation and, accordingly, recognizes no
compensation expense for stock options grants with an exercise
price equal to the fair value of shares at the grant date.
Deferred compensation expense associated with stock-based
compensation is amortized on an accelerated basis over the
vesting period of the individual award consistent with the
method described in Financial Accounting Standards Board
Interpretation (FIN) No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or
Award Plans.

For non-employees, the Company computes the fair
value of the stock-based compensation in accordance with SFAS
No. 123 and Emerging Issues Task Force (EITF) 96-18
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services and recognizes stock-based compensation
expense in accordance with FIN No. 28.



| |                              
| | -----------------------------
| | Foreign Currency Transactions

The Companys sales to international
customers are U.S. dollar-denominated. As a result, there are no
foreign currency gains or losses related to these transactions.

The functional currency for the Companys
foreign subsidiaries is the U.S. dollar. Accordingly, the
entities remeasure monetary assets and liabilities at period-end
exchange rates, while non-monetary items are remeasured at
historical rates. Income and expense accounts are remeasured at
the average rates in effect during the year. Remeasurement
adjustments, except those related to intercompany investment
transactions that are long-term in nature, are recognized in
income as transaction gains or losses in the year of occurrence.
To date, the effect of such amounts on net income has not been
significant. Adjustments related to long-term intercompany
investment transactions are not included in net income, but
rather are reported in the same manner as translation
adjustments reported in accumulated other comprehensive income
(loss) within equity.



| |                         
| | ------------------------
| | Other Comprehensive Loss

The Company reports comprehensive income or loss
in accordance with the provisions of SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting comprehensive

46



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PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

income and loss and its components in financial
statements. For the Company, the primary differences between
reported net loss and comprehensive loss are unrealized gains or
losses on securities available for sale and foreign currency
translation adjustments. Tax effects of comprehensive income or
loss are not considered material for any periods presented.



| |                   
| | ------------------
| | Net Loss Per Share

Net loss per share is calculated in accordance
with SFAS No. 128, Earnings per Share. Under
the provisions of SFAS No. 128, basic net loss per share is
computed by dividing the net loss available to common
stockholders for the period by the weighted average number of
common shares outstanding during the period, excluding shares
subject to repurchase and in escrow related to acquisitions.
Diluted net loss per share is computed by dividing the net loss
for the period by the weighted average number of common and
potential common shares outstanding during the period if their
effect is dilutive. Potential common shares comprise restricted
common stock, shares held in escrow, and incremental common
shares issuable upon the exercise of stock options and warrants
To date, the Company has not had any issuances or grants for
nominal consideration. Diluted net loss per share does not
include the effects of the following potential common shares:

|                                                               |  |                          |       |      |  |      |       |  |  |  |       | 
|-------------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                                               |  |                         
|                                                               |  | Years Ended December 31,
|                                                               |  |                         
|                                                               |  | 2001                     |       | 2000 |  | 1999
|                                                               |  |                          |       |      |  |     
|                                                               |  |                         
|                                                               |  | (In thousands)          
|Shares issuable under stock options                            |  |                          | 3,216 |      |  |      | 3,848 |  |  |  | 2,727 | 
|Shares of unvested stock subject to repurchase                 |  |                          | 19    |      |  |      | 300   |  |  |  | 984   | 
|Shares issuable pursuant to warrants to purchase
	common stock |  |                          | 45    |      |  |      | 45    |  |  |  | 143   | 
|Shares held in escrow                                          |  |                          |      |      |  |      | 183   |  |  |  |      | 

The weighted average exercise price of stock
options outstanding was $8.88, $18.09 and $5.68 as of
December 31, 2001, 2000 and 1999, respectively. The
weighted average exercise price of unvested stock subject to
repurchase was $1.64, $0.65 and $0.55 as of December 31,
2001, 2000 and 1999, respectively. The weighted average exercise
price of warrants to purchase common stock was $6.25 as of
December 31, 2001 and 2000, and $4.42 as of
December 31, 1999.



| |                      
| | ---------------------
| | Financial Instruments

The carrying value of cash, cash equivalents,
accounts receivable, accounts payable and accrued expenses
approximates their estimated fair value due to the relative
short maturity of these instruments. The carrying value of
long-term debt and capital lease obligations approximates
estimated fair value based on the market interest rates
available to the Company for debt of similar risk and maturities.



| |                                  
| | ---------------------------------
| | Recent Accounting
	Pronouncements

In September 2000, the FASB issued SFAS
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125. SFAS
No. 140 supersedes and replaces the guidance in FASB
Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures. SFAS
No. 140 is effective for transfers of financial assets
occurring after March 31, 2001. The adoption of this
standard did not have a material impact on the Companys
results of operations or financial position.

In July 2001, the FASB issued SFAS No. 141,
Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS
No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after
September 30, 2001. SFAS No. 142 changes the
accounting for goodwill

47



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

from an amortization method to an impairment-only
approach. As a result of the goodwill write-off in the third
quarter of 2001, the adoption of SFAS No. 142, effective
January 1, 2002, will have no effect on the results of the
Companys results of operations or financial position,
unless the Company enters into additional purchase business
combinations.

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS
No. 143 addresses the financial accounting and reporting
for obligations and retirement costs related to the retirement
of tangible long-lived assets. Packeteer is required to adopt
SFAS No. 143 for our fiscal year beginning January 1,
2003. Adoption of this statement is not expected to have an
impact on the Companys results of operations or financial
position.

In October 2001, the FASB issued SFAS
No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, but
retains many of the fundamental provisions of that Statement.
SFAS No. 144 requires that long-lived assets be measured at
the lower of their carrying amount or fair value, less cost to
sell, whether reported in continuing or discontinued operations.
This statement is effective for Packeteer beginning
January 1, 2002. Adoption of this statement is not expected
to have a material impact on the Companys results of
operations or financial position.

2.     Acquisition

On September 13, 2000, Packeteer completed
the acquisition of Workfire for a total purchase price of
$72.8 million in a transaction accounted for as a purchase.
Workfire develops software that delivers accelerated Internet
services to Internet users. Packeteer exchanged
1,806,000 shares of Packeteer common stock with a fair
value of $64.3 million for all of the outstanding stock of
Workfire. Of the total common shares issued, 183,000 shares
were placed in an escrow account to secure and collateralize the
indemnification obligations of Workfire shareholders to
Packeteer. Packeteer also assumed all of the outstanding stock
options of Workfire with a fair value of approximately
$5.2 million. The options were valued using the
Black-Scholes option pricing model with the following
assumptions: no dividends, 110% volatility, 4.5 years
expected life, and 6.1% for the risk-free interest rate. In
addition, Packeteer paid certain liabilities having an aggregate
value of $1.8 million on behalf of Workfire.com, the sole
shareholder of Workfire. There were also $1.5 million of
direct transaction costs consisting primarily of professional
fees related to this transaction.

The acquisition was accounted for under the
purchase method of accounting in accordance with
APB Opinion No. 16. Under the purchase method of
accounting, the purchase price is allocated to the assets
acquired and liabilities assumed based on their estimated fair
values. The results of operations for Workfire have been
included with the Companys results since
September 13, 2000.

The Company recognized stock-based compensation
expense associated with unvested stock options issued to
employees in conjunction with the acquisition. This amount is
included as a component of stockholders equity and is
being amortized by charges to operations over the vesting period
of the options, consistent with the method described in
FIN No 28. Amortization of stock-based compensation
associated with this acquisition totaled $555,000 and $310,000
for the years ended December 31, 2001 and 2000,
respectively.

48



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a summary of the Workfire
purchase price allocation (in thousands):

|                                  |       |   |        |        | 
|--------------------------------- | ----- | - | ------ | ------ | 
|Property and equipment            |       | $ | 349    |       
|Other assets                      |       |   | 45     |       
|Lease obligations                 |       |   | (159   | )     
|Accounts payable                  |       |   | (696   | )     
|Deferred tax liability            |       |   | (1,400 | )     
|Deferred stock-based compensation |       |   | 1,109  |       
|Developed and core technology     |       |   | 7,194  |       
|Assembled workforce               |       |   | 281    |       
|Goodwill                          |       |   | 66,104 |       
|                                  |       |   |        |       
|                                  | Total |   | $      | 72,287 | 
|                                  |       |   |        |       

The following unaudited pro forma summary
represents the Companys consolidated results of operations
for the year ended December 31, 2000 and 1999 as if the
preceding acquisition had been consummated at the beginning of
the earliest period. The pro forma consolidated results of
operations include certain pro forma adjustments, including
amortization of goodwill and other intangible assets and
amortization of deferred stock-based compensation.

Pro forma results for the years ended
December 31, are as follows (in thousands, except per share
data):

|                                     |  |      |         |      |  |   |         |  
|------------------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                                     |  | 2000 |         | 1999
|                                     |  |      |         |     
|Revenues                             |  | $    | 41,097  |      |  | $ | 18,441  |  
|Net loss                             |  |      | (27,717 | )    |  |   | (36,100 | )
|Basic and diluted net loss per share |  |      | (0.98   | )    |  |   | (2.13   | )

49



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Financial
Instruments

The following is a summary of available-for-sale
debt and marketable equity securities:

|                                                                                             |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |        | 
|-------------------------------------------------------------------------------------------- | --------------------- | ----------------------------- | ------ | ---------- |  | ---------- | --- | ---------- |  | - | --- | --- | - | - | ------ | ------ | 
|                                                                                             |                       |                              
|                                                                                             |                       | Available-for-Sale Securities
|                                                                                             |                       |                              
|                                                                                             |                       |                               |        | Gross      |  | Gross      |     |           
|                                                                                             |                       |                               |        | Unrealized |  | Unrealized |     | Estimated 
|                                                                                             |                       | Cost                          |        | Gains      |  | Losses     |     | Fair Value
|                                                                                             |                       |                               |        |            |  |            |     |           
|                                                                                             |                       |                              
|                                                                                             |                       | (In thousands)               
|DECEMBER 31, 2001                                                                            |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       
|Commercial paper, corporate bonds and notes and
	medium-term notes                           |                       | $                             | 55,418 |            |  | $          | 141 |            |  | $ | (56 | )   |   | $ | 55,503 |       
|                                                                                             |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       
|                                                                                             | Total debt securities |                               |        | 55,418     |  |            |     | 141        |  |   |     | (56 | ) |   |        | 55,503 | 
|U.S. marketable equity securities                                                            |                       |                               | 4,993  |            |  |            | 2   |            |  |   |    |     |   |   | 4,995  |       
|                                                                                             |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       
|                                                                                             |                       | $                             | 60,411 |            |  | $          | 143 |            |  | $ | (56 | )   |   | $ | 60,498 |       
|                                                                                             |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       
|Amounts included in cash and cash equivalents                                                |                       | $                             | 48,336 |            |  | $          | 4   |            |  | $ | (54 | )   |   | $ | 48,286 |       
|Amounts included in short-term investments                                                   |                       |                               | 8,539  |            |  |            | 87  |            |  |   | (2  | )   |   |   | 8,624  |       
|Amounts included in long-term investments                                                    |                       |                               | 3,536  |            |  |            | 52  |            |  |   |    |     |   |   | 3,588  |       
|                                                                                             |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       
|                                                                                             |                       | $                             | 60,411 |            |  | $          | 143 |            |  | $ | (56 | )   |   | $ | 60,498 |       
|                                                                                             |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       
|DECEMBER 31, 2000                                                                            |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       
|Commercial paper, market auction preferred,
	corporate bonds and notes and medium-term notes |                       | $                             | 58,855 |            |  | $          | 101 |            |  | $ | (24 | )   |   | $ | 58,932 |       
|                                                                                             |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       
|                                                                                             | Total debt securities |                               |        | 58,855     |  |            |     | 101        |  |   |     | (24 | ) |   |        | 58,932 | 
|U.S. marketable equity securities                                                            |                       |                               |       |            |  |            |    |            |  |   |    |     |   |   |       |       
|                                                                                             |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       
|                                                                                             |                       | $                             | 58,855 |            |  | $          | 101 |            |  | $ | (24 | )   |   | $ | 58,932 |       
|                                                                                             |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       
|Amounts included in cash and cash equivalents                                                |                       | $                             | 20,997 |            |  | $          | 4   |            |  | $ | (2  | )   |   | $ | 20,999 |       
|Amounts included in short-term investments                                                   |                       |                               | 32,166 |            |  |            | 39  |            |  |   | (22 | )   |   |   | 32,183 |       
|Amounts included in long-term investments                                                    |                       |                               | 5,692  |            |  |            | 58  |            |  |   |    |     |   |   | 5,750  |       
|                                                                                             |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       
|                                                                                             |                       | $                             | 58,855 |            |  | $          | 101 |            |  | $ | (24 | )   |   | $ | 58,932 |       
|                                                                                             |                       |                               |        |            |  |            |     |            |  |   |     |     |   |   |        |       

Maturities of debt securities at market value as
of December 31, 2001 are as follows (in thousands):

|                                           |  |   |        | 
|------------------------------------------ |  | - | ------ | 
|Mature in one year or less                 |  | $ | 56,910 | 
|Mature between one year through five years |  |   | 3,588  | 
|                                           |  |   |        | 
|                                           |  | $ | 60,498 | 
|                                           |  |   |        | 

4.     Inventories

Inventories consisted of the following at
December 31 (in thousands):

|                   |             |      |       |       |  |   |       |       | 
|------------------ | ----------- | ---- | ----- | ----- |  | - | ----- | ----- | 
|                   |             | 2001 |       | 2000 
|                   |             |      |       |      
|Components         |             | $    | 71    |       |  | $ | 911   |      
|Completed products |             |      | 2,118 |       |  |   | 1,643 |      
|                   |             |      |       |       |  |   |       |      
|                   | Inventories |      | $     | 2,189 |  |   | $     | 2,554 | 
|                   |             |      |       |       |  |   |       |      

50



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Packeteer has outstanding purchase order
commitments for completed products of approximately
$1.5 million at December 31, 2001. Packeteer expects
the purchase orders to be fulfilled in the first quarter of 2002.

5.     Property and
Equipment

Property and equipment consisted of the following
at December 31 (in thousands):

|                                                |  |      |       |      |  |   |       | 
|----------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                                |  | 2001 |       | 2000
|                                                |  |      |       |     
|Computers and equipment                         |  | $    | 2,205 |      |  | $ | 1,217 | 
|Equipment under capital lease                   |  |      | 3,143 |      |  |   | 3,348 | 
|Furniture and fixtures                          |  |      | 236   |      |  |   | 195   | 
|Leasehold improvements                          |  |      | 79    |      |  |   | 243   | 
|                                                |  |      |       |      |  |   |       | 
|                                                |  |      | 5,663 |      |  |   | 5,003 | 
|Less: accumulated depreciation and amortization |  |      | 4,286 |      |  |   | 2,474 | 
|                                                |  |      |       |      |  |   |       | 
|Property and equipment, net                     |  | $    | 1,377 |      |  | $ | 2,529 | 
|                                                |  |      |       |      |  |   |       | 

Accumulated depreciation and amortization
includes accumulated amortization of approximately
$2.7 million and $2.1 million on equipment under
capital lease as of December 31, 2001 and 2000,
respectively.

6.     Goodwill and
Other Intangible Assets

Goodwill and other intangible assets consisted of
the following as of December 31 (in thousands):

|                                             |  |      |        |      |  |   |        | 
|-------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                             |  | 2001 |        | 2000
|                                             |  |      |        |     
|Goodwill                                     |  | $    | 66,104 |      |  | $ | 66,104 | 
|Assembled workforce                          |  |      | 281    |      |  |   | 281    | 
|Acquired technology                          |  |      | 7,194  |      |  |   | 7,194  | 
|                                             |  |      |        |      |  |   |        | 
|                                             |  |      | 73,579 |      |  |   | 73,579 | 
|Less: assumed liabilities                    |  |      | 1,636  |      |  |   |       | 
|Less: accumulated amortization               |  |      | 19,391 |      |  |   | 7,128  | 
|Less: impairment of goodwill and intangibles |  |      | 52,552 |      |  |   |       | 
|                                             |  |      |        |      |  |   |        | 
|Goodwill and other intangible assets, net    |  | $    |       |      |  | $ | 66,451 | 
|                                             |  |      |        |      |  |   |        | 

During the third quarter of 2001, the Company
performed an assessment of the carrying value of the goodwill
and other intangible assets related to its acquisition of
Workfire. The assessment was performed pursuant to SFAS
No. 121 based on managements determination of the
existence of impairment indicators including continued general
economic slowing, the general decline in technology valuations
and a review of current, historical and future projections of
cash flows related to these assets. The conclusion of the
assessment was a determination that the carrying value of the
goodwill and other intangible assets exceeded its fair value.
The fair value was determined based on Company projections of
the present value of future net cash flows expected to be
generated over the expected lives of these assets. Accordingly,
the Company recorded an impairment charge of $52.6 million
during the third quarter of 2001 for the entire unamortized
balance.

51



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7.     Revolving Loan
Agreement

In January 2001, the Company renewed a revolving
loan agreement with a maximum line of credit of
$10.0 million. Advances are limited to the lesser of the
maximum line or the borrowing base, which is 90% of eligible
domestic receivables and 80% of eligible international
receivables. Additionally, the Company is required to maintain
certain financial covenants related to working capital and
quarterly net loss amounts. The outstanding principal balance
accrues interest at a per annum rate equal to the prime rate
(which was 4.75% at December 31, 2001) and is secured by
all present and future collateral of the Company. As of
December 31, 2001, the outstanding balance on the line was
$1.9 million. Subsequent to December 31, 2001, the
revolving loan agreement was extended to May 2003.

8.     Notes
Payable

In August 2001, we secured a $551,000 equipment
loan. Borrowings under this agreement are collateralized by the
equipment, bear interest at the rate of 11.1%, and are repayable
in monthly installments over a three-year period. At
December 31, 2001, approximately $500,000 was outstanding
under this note.

9.     Commitments

The Company leases its facility and certain
equipment under non-cancelable lease agreements that expire at
various dates through 2010. Rent expense was $1.4 million,
$1.1 million, and $722,000 for the years ended
December 31, 2001, 2000 and 1999, respectively. As of
December 31, 2001, the future minimum rental payments under
capital and operating leases are as follows (in thousands):

|                                                                    |            |         |       |           |  |   |       |       | 
|------------------------------------------------------------------- | ---------- | ------- | ----- | --------- |  | - | ----- | ----- | 
|                                                                    |            | Capital |       | Operating
|Years Ending December 31,                                           |            | Lease   |       | Lease    
|                                                                    |            |         |       |          
|                                                                    | 2002       |         | $     | 862       |  |   | $     | 1,512 | 
|                                                                    | 2003       |         |       | 616       |  |   |       | 257   | 
|                                                                    | 2004       |         |       | 496       |  |   |       | 215   | 
|                                                                    | 2005       |         |       |          |  |   |       | 215   | 
|                                                                    | 2006       |         |       |          |  |   |       | 215   | 
|                                                                    | Thereafter |         |       |          |  |   |       | 253   | 
|                                                                    |            |         |       |           |  |   |       |      
|Total future minimum lease payments                                 |            |         | 1,974 |           |  | $ | 2,667 |      
|                                                                    |            |         |       |           |  |   |       |      
|Less amounts representing interest at 6.47%-12.00%                  |            |         | 268   |           |  |   |       |      
|                                                                    |            |         |       |           |  |   |       |      
|Present value of future minimum lease payments
	under capital lease |            |         | 1,706 |           |  |   |       |      
|Less current portion                                                |            |         | 748   |           |  |   |       |      
|                                                                    |            |         |       |           |  |   |       |      
|Long-term portion                                                   |            | $       | 958   |           |  |   |       |      
|                                                                    |            |         |       |           |  |   |       |      

In October 2000, the Company entered into a new
facility lease agreement. The lease term was to commence upon
possession of the facility and have a term of 12 years,
with future minimum lease payments of $49.2 million over
the term of the lease. In March 2001, the Company terminated
this arrangement.

Packeteer has outstanding purchase order
commitments for completed products of approximately
$1.5 million at December 31, 2001. Packeteer expects
the purchase orders to be fulfilled in the first quarter of 2002.

10.     Contingency

In November 2001, Packeteer, certain company
officers and directors, and its underwriters were named as
defendants in a securities class-action lawsuit filed in the
United States District Court for the Southern

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PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

District of New York. The complaint,
captioned Antoniono v. Packeteer, Inc. et. al.,
alleges violations of Sections 11, 12(a)2 and 15 of the
Securities Act of 1933, as amended, Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder on behalf of a purported class of purchasers of
Packeteer common stock between July 27, 1999 and
December 6, 2000. The plaintiffs seek unspecified damages.

Various plaintiffs have filed similar actions
asserting virtually identical allegations against more than
300 other issuers. These cases have all been assigned to
the Hon. Shira A. Scheindlin for coordination and
decisions on pretrial motions, discovery, and related matters
other than trial. We believe that we have meritorious defenses
to the lawsuit and will defend ourselves vigorously in the
litigation. An unfavorable resolution of the actions could have
a material adverse effect on our business, results of operations
and financial condition. As of December 31, 2001 no accrual
for this contingency has been recorded.

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

11.     Income
Taxes

Net loss before income taxes is attributable to
the following geographic locations for the periods ended
December 31:

|              |                               |                |         |         |   |      |        |        |   |   |         |         |  
|------------- | ----------------------------- | -------------- | ------- | ------- | - | ---- | ------ | ------ | - | - | ------- | ------- | -
|              |                               | 2001           |         | 2000    |   | 1999
|              |                               |                |         |         |   |     
|              |                               |               
|              |                               | (In thousands)
|United States |                               | $              | (10,939 | )       |   | $    | (1,858 | )      |   | $ | (11,081 | )      
|Foreign       |                               |                | (60,049 | )       |   |      | (7,211 | )      |   |   | 205     |        
|              |                               |                |         |         |   |      |        |        |   |   |         |        
|              | Net loss before incomes taxes |                | $       | (70,988 | ) |      | $      | (9,069 | ) |   | $       | (10,876 | )
|              |                               |                |         |         |   |      |        |        |   |   |         |        

The Company recorded no income tax provision or
benefit in 2001 or 1999, as the Company reported a net loss in
each year. The income tax provision of $300,000 for 2000
consists of charges in lieu of income taxes associated with
alternative minimum tax.

The provision (benefit) for income taxes
differs from the amount computed by applying the statutory
federal tax rate to loss before tax as follows (in thousands):

|                               |                                  |      |         |      |  |      |        |     |  |   |        |   | 
|------------------------------ | -------------------------------- | ---- | ------- | ---- |  | ---- | ------ | --- |  | - | ------ | - | 
|                               |                                  | 2001 |         | 2000 |  | 1999
|                               |                                  |      |         |      |  |     
|Federal tax at statutory rate  |                                  | $    | (24,136 | )    |  | $    | (3,084 | )   |  | $ | (3,698 | )
|State taxes                    |                                  |      |        |      |  |      |       |     |  |   |       |  
|Deferred tax asset utilized    |                                  |      |        |      |  |      | (4,465 | )   |  |   |       |  
|Operating loss not benefited   |                                  |      | 3,681   |      |  |      | 308    |     |  |   | 3,655  |  
|Non deductible expenses        |                                  |      | 21,652  |      |  |      | 2,226  |     |  |   | 43     |  
|Alternative minimum income tax |                                  |      |        |      |  |      | 300    |     |  |   |       |  
|Imputed interest               |                                  |      |        |      |  |      | 102    |     |  |   |       |  
|Intercompany revenue           |                                  |      |        |      |  |      | 4,913  |     |  |   |       |  
|Foreign tax differential       |                                  |      | (1,197  | )    |  |      |       |     |  |   |       |  
|                               |                                  |      |         |      |  |      |        |     |  |   |        |  
|                               | Total provision for income taxes |      | $       |     |  |      | $      | 300 |  |   | $      |  | 
|                               |                                  |      |         |      |  |      |        |     |  |   |        |  

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PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The types of temporary differences that give rise
to significant portions of the Companys deferred tax
assets and liabilities are set forth below (in thousands):

|                                     |                                                                |                           |                                |        |        |   |         |        |        |        |  
|------------------------------------ | -------------------------------------------------------------- | ------------------------- | ------------------------------ | ------ | ------ | - | ------- | ------ | ------ | ------ | -
|                                     |                                                                | 2001                      |                                | 2000  
|                                     |                                                                |                           |                                |       
|Deferred tax assets:                 |                                                                |                           |                                |        |        |   |         |       
|                                     | Various accruals and reserves not deductible for
	tax purposes |                           | $                              | 1,274  |        |   | $       | 727    |       
|                                     | Property and equipment                                         |                           |                                | 421    |        |   |         | 238    |       
|                                     | Net operating loss carryforwards                               |                           |                                | 18,535 |        |   |         | 10,853 |       
|                                     | Tax credit carryforwards                                       |                           |                                | 2,237  |        |   |         | 1,457  |       
|                                     | Capitalized start-up expenditures                              |                           |                                | 22     |        |   |         | 107    |       
|                                     | Deferred stock-based compensation                              |                           |                                |       |        |   |         | 606    |       
|                                     |                                                                |                           |                                |        |        |   |         |       
|                                     |                                                                | Gross deferred tax assets |                                |        | 22,489 |   |         |        | 13,988 |       
|Valuation allowance                  |                                                                |                           | (22,489                        | )      |        |   | (13,988 | )     
|                                     |                                                                |                           |                                |        |        |   |         |       
|                                     |                                                                | Total deferred tax assets |                                |        |       |   |         |        |       |       
|Deferred tax liabilities:            |                                                                |                           |                                |        |        |   |         |       
|                                     | Intangible assets                                              |                           |                                |       |        |   |         | (1,400 | )     
|                                     | Property and equipment                                         |                           |                                |       |        |   |         |       |       
|                                     |                                                                |                           |                                |        |        |   |         |       
|                                     |                                                                |                           | Total deferred tax liabilities |        |        |  |         |        |        | (1,400 | )
|                                     |                                                                |                           |                                |        |        |   |         |       
|Net deferred tax assets(liabilities) |                                                                | $                         |                               |        |        | $ | (1,400  | )     
|                                     |                                                                |                           |                                |        |        |   |         |       

The net change in the total valuation allowance
was an increase of $8.5 million and $2.6 million for
the years ended December 31, 2001 and 2000, respectively.
As the Company has reported net losses since inception, it has
provided a full valuation allowance on its deferred tax assets.
Management believes that, based on a number of factors, the
available objective evidence creates sufficient uncertainty
regarding the realizability of the deferred tax assets such that
a full valuation allowance has been recorded.

Approximately $8.9 million of the valuation
allowance for deferred tax assets is attributable to employee
stock option deductions, the benefit from which will be
allocated to additional paid-in capital when and if subsequently
realized.

Deferred tax liabilities have not been recognized
for undistributed earnings of foreign subsidiaries because it is
managements intention to reinvest such undistributed
earnings outside the U.S.

At December 31, 2001, the Company has net
operating loss carryforwards for federal and California income
tax purposes of approximately $49.3 million and
$22.9 million, respectively. If not utilized, the federal
net operating loss carryforwards will begin to expire in 2011,
and the California net operating loss carryforwards will begin
to expire in 2004. In addition, the Company had net operating
loss carryforwards of approximately $844,000 for Canadian income
tax purposes. If not utilized, these carryforwards will begin to
expire in 2005. At December 31, 2001, the Company had
federal and California research credit carryforwards of
approximately $1.3 million each. If not utilized, the federal
research credit carryforwards will begin to expire in 2011. The
California research credit carryforwards can be carried forward
indefinitely.

Federal and California tax laws impose
substantial restrictions on the utilization of net operating
loss and tax credit carryforwards in the event of an
ownership change as defined in Internal Revenue Code
Section 382. The Company has not yet determined whether an
ownership change has occurred due to significant stock
transactions in the reporting years disclosed. If an ownership
change occurred, utilization of the net operating loss
carryforwards could be reduced significantly.

54



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Stockholders
Equity



| |                
| | ---------------
| | Preferred Stock

As of the closing of the Companys initial
public offering in July 1999, all preferred stock outstanding
was converted into an aggregate of 12,391,000 shares of common
stock of the Company. Also at the time of the Companys
initial public offering, the Board of Directors changed the
number of authorized shares of preferred stock to
5.0 million. The authorized preferred stock shares are
undesignated and the Board of Directors has the authority to
issue and to determine the rights, preference and privileges
thereof.



| |             
| | ------------
| | Common Stock

As of December 31, 1998 the Company was
authorized to issue 40 million shares of common stock. In
May 1999, the Companys Board of Directors authorized the
Company to issue 85 million shares, effective upon
completion of the initial public offering in July 1999.

In July 1999, the Company completed an initial
public offering in which it sold 4.6 million shares of
common stock raising $62.6 million, net of issuance costs.



| |         
| | --------
| | Warrants

As of December 31, 2001, 45,000 warrants to
purchase common stock were outstanding and exercisable with a
$6.25 exercise price per share and an expiration date in May
2009.



| |                                   
| | ----------------------------------
| | 1999 Employee Stock Purchase
	Plan

In May 1999, the Companys Board of
Directors adopted the 1999 Employee Stock Purchase Plan (the
ESPP). The ESPP became effective July 27, 1999.
At that time, 500,000 shares were reserved for issuance under
this plan. The number of shares reserved under this ESPP
automatically increase annually beginning on January 1,
2000 by the lesser of one million shares or 2% of the total
number of shares of common stock outstanding. The ESPP permits
participants to purchase common stock through payroll deductions
of up to 15% of an employees compensation, including
commissions, overtime, bonuses and other incentive compensation.
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. As of December 31,
2001, 240,000 shares had been issued under the plan and
1.4 million were available for future issuance.



| |                          
| | -------------------------
| | 1999 Stock Incentive Plan

The 1999 Stock Incentive Plan (the 1999
Plan) is intended to serve as the successor program to our
1996 Equity Incentive Plan (the 1996 Plan). In May
1999, the Companys Board of Directors approved the 1999
Plan, which became effective on July 27, 1999, under which
900,000 shares were reserved for issuance. Previously, 515,000
shares were authorized under the 1996 Plan. In addition, any
shares not issued under the 1996 Plan will also be available for
grant under the 1999 Plan. The number of shares reserved under
the 1999 Plan automatically increases annually beginning on
January 1, 2000 by the lesser of three million shares or 5%
of the total number of shares of common stock outstanding. Under
the 1999 Plan, eligible individuals may be granted options to
purchase common shares or may be issued shares of common stock
directly. The 1999 Plan is administered by the Board of
Directors, which sets the terms and conditions of the options.
Non-statutory stock options and incentive stock options are
exercisable at prices not less than 85% and 100%, respectively,
of the fair value on the date of grant. The options 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 sooner if terminated by the Board of
Directors. The options may include a provision whereby the
option holder may elect at any time to exercise the option prior
to the full vesting of the option. Unvested shares so purchased
shall be subject to a

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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

repurchase right by the Company at the original
purchase price. Such right shall lapse at a rate equivalent to
the vesting period of the original option. As of
December 31, 2001, 19,000 shares were subject to repurchase.

In October 2001, the Company announced a
voluntary stock option exchange program, or Offer to
Exchange, for all employees except executive officers.
Under the program, these employees had the opportunity to cancel
certain outstanding options previously granted to them that had
an exercise price at or above $5.00 in exchange for an equal
number of new options to be granted at a future date. The Offer
to Exchange was outstanding until 5:00 p.m., Pacific
Daylight Time on November 30, 2001 (the Expiration
Date). The exercise price of the new options will be equal
to the fair market value of the Companys common stock on
the date of grant, which will be June 3, 2002. Participants
electing to exchange any options were also required to exchange
all options granted to him or her during the six months before
the date of the Offer to Exchange and will be precluded from
receiving any options during the six months after the Expiration
Date. Options totaling 1.5 million shares were canceled
under this program in November 2001.

A summary of stock option activity under the 1996
and 1999 Plans follows:

|                                  |                                 |                                       |       |                     |   |                  |       |        |   |   |       |       | 
|--------------------------------- | ------------------------------- | ------------------------------------- | ----- | ------------------- | - | ---------------- | ----- | ------ | - | - | ----- | ----- | 
|                                  |                                 |                                       |       |                    
|                                  |                                 |                                       |       | Options Outstanding
|                                  |                                 | Available                             |       |                    
|                                  |                                 | for                                   |       | Number of           |   | Weighted-Average
|                                  |                                 | Grant                                 |       | Shares              |   | Exercise Price  
|                                  |                                 |                                       |       |                     |   |                 
|                                  |                                 |                                      
|                                  |                                 | (In thousands, except per share data)
|Balances as of December 31, 1998. |                                 |                                       | 1,388 |                     |   |                  | 1,073 |        |   | $ | 1.90  |      
|                                  | Shares made available for grant |                                       |       | 1,415               |   |                  |       |       |   |   |       |      | 
|                                  | Repurchased                     |                                       |       | 103                 |   |                  |       |       |   |   |       |      | 
|                                  | Granted                         |                                       |       | (1,787              | ) |                  |       | 1,787  |   |   |       | 7.74  | 
|                                  | Exercised                       |                                       |       |                    |   |                  |       | (97    | ) |   |       | 2.75  | 
|                                  | Cancelled                       |                                       |       | 36                  |   |                  |       | (36    | ) |   |       | 3.19  | 
|                                  |                                 |                                       |       |                     |   |                  |       |        |   |   |       |      
|Balances as of December 31, 1999. |                                 |                                       | 1,155 |                     |   |                  | 2,727 |        |   |   | 5.68  |      
|                                  | Shares made available for grant |                                       |       | 1,340               |   |                  |       |       |   |   |       |      | 
|                                  | Repurchased                     |                                       |       | 30                  |   |                  |       |       |   |   |       |      | 
|                                  | Granted                         |                                       |       | (2,043              | ) |                  |       | 2,043  |   |   |       | 29.99 | 
|                                  | Exercised                       |                                       |       |                    |   |                  |       | (606   | ) |   |       | 3.07  | 
|                                  | Cancelled                       |                                       |       | 316                 |   |                  |       | (316   | ) |   |       | 16.70 | 
|                                  |                                 |                                       |       |                     |   |                  |       |        |   |   |       |      
|Balances as of December 31, 2000. |                                 |                                       | 798   |                     |   |                  | 3,848 |        |   |   | 18.09 |      
|                                  | Shares made available for grant |                                       |       | 1,474               |   |                  |       |       |   |   |       |      | 
|                                  | Repurchased                     |                                       |       | 25                  |   |                  |       |       |   |   |       |      | 
|                                  | Granted                         |                                       |       | (2,203              | ) |                  |       | 2,203  |   |   |       | 9.84  | 
|                                  | Exercised                       |                                       |       |                    |   |                  |       | (395   | ) |   |       | 2.10  | 
|                                  | Cancelled                       |                                       |       | 2,440               |   |                  |       | (2,440 | ) |   |       | 25.38 | 
|                                  |                                 |                                       |       |                     |   |                  |       |        |   |   |       |      
|Balances as of December 31, 2001. |                                 |                                       | 2,534 |                     |   |                  | 3,216 |        |   |   | 8.88  |      
|                                  |                                 |                                       |       |                     |   |                  |       |        |   |   |       |      

56



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following tables summarize information about
stock options outstanding under the 1996 and 1999 Plans as of
December 31, 2001 (in thousands, except per share data):

|                         |               |                     |       |                     |  |          |      |             |  |          |       |      |  |  |     |       |  |   |       |      | 
|------------------------ | ------------- | ------------------- | ----- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- | ---- |  |  | --- | ----- |  | - | ----- | ---- | 
|                         |               |                     |       |                     |  |         
|                         |               | Options Outstanding |       |                    
|                         |               |                     |       | Options Exercisable
|                         |               |                     |       | Weighted            |  |          |      |            
|                         |               |                     |       | Average             |  | Weighted |      |             |  | Weighted
|                         |               | Number              |       | Remaining           |  | Average  |      | Number      |  | Average 
|                         |               | Outstanding         |       | Contractual         |  | Exercise |      | Exercisable |  | Exercise
|Range of Exercise Prices |               | at 12/31/01         |       | Life (Years)        |  | Price    |      | at 12/31/01 |  | Price   
|                         |               |                     |       |                     |  |          |      |             |  |         
|$ 0.25-$ 2.50            |               |                     | 209   |                     |  |          | 6.65 |             |  | $        | 1.70  |      |  |  | 160 |       |  | $ | 1.59  |     
|$ 2.77-$ 3.50            |               |                     | 1,106 |                     |  |          | 6.84 |             |  |          | 3.42  |      |  |  | 670 |       |  |   | 3.43  |     
|$ 3.72-$ 7.97            |               |                     | 1,070 |                     |  |          | 9.73 |             |  |          | 5.02  |      |  |  | 45  |       |  |   | 7.11  |     
|$ 8.06-$12.00            |               |                     | 301   |                     |  |          | 8.51 |             |  |          | 10.91 |      |  |  | 105 |       |  |   | 11.05 |     
|$12.38-$16.88            |               |                     | 309   |                     |  |          | 9.08 |             |  |          | 16.87 |      |  |  | 15  |       |  |   | 13.63 |     
|$48.06                   |               |                     | 221   |                     |  |          | 8.07 |             |  |          | 48.06 |      |  |  | 107 |       |  |   | 48.06 |     
|                         |               |                     |       |                     |  |          |      |             |  |          |       |      |  |  |     |       |  |   |       |     
|                         | $0.25- $48.06 |                     |       | 3,216               |  |          |      | 8.24        |  |          |       | 8.88 |  |  |     | 1,102 |  |   |       | 8.50 | 
|                         |               |                     |       |                     |  |          |      |             |  |          |       |      |  |  |     |       |  |   |       |     

|                                                                                    |  |                                       |       |            |  |        |      |            |  |        |       |            |  |   |       |  |  |  |       |  |  |   |       | 
|----------------------------------------------------------------------------------- |  | ------------------------------------- | ----- | ---------- |  | ------ | ---- | ---------- |  | ------ | ----- | ---------- |  | - | ----- |  |  |  | ----- |  |  | - | ----- | 
|                                                                                    |  |                                      
|                                                                                    |  | Years Ended December 31,             
|                                                                                    |  |                                      
|                                                                                    |  |                                       |       |            |  |       
|                                                                                    |  | 2001                                  |       | 2000       |  | 1999  
|                                                                                    |  |                                       |       |            |  |       
|                                                                                    |  |                                       |       | Weighted-  |  |        |      | Weighted-  |  |        |       | Weighted- 
|                                                                                    |  |                                       |       | Average    |  |        |      | Average    |  |        |       | Average   
|                                                                                    |  | Shares                                |       | Fair Value |  | Shares |      | Fair Value |  | Shares |       | Fair Value
|                                                                                    |  |                                       |       |            |  |        |      |            |  |        |       |           
|                                                                                    |  |                                      
|                                                                                    |  | (In thousands, except per share data)
|Weighted-average fair value of options granted
	during the year at market           |  |                                       | 2,203 |            |  | $      | 7.07 |            |  |        | 1,888 |            |  | $ | 22.75 |  |  |  | 445   |  |  | $ | 20.18 | 
|Weighted-average fair value of options granted
	during the year at less than market |  |                                       |      |            |  |        |     |            |  |        | 155*  |            |  |   | 33.55 |  |  |  | 1,342 |  |  |   | 6.45  | 



---



|  |                                                                           
|- | --------------------------------------------------------------------------
|* | These option grants relate to options assumed in
	the Workfire acquisition

In the year ended December 31, 2001, 5,500
shares were issued as a result of the exercise of non-plan
options granted before the July 28, 1999 initial public
offering. As of December 31, 2001, there were 71,000
non-plan options outstanding with a weighted average exercise
price of $1.24 per share.

As permitted under Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, the Company has elected to
continue to follow Accounting Principles Board Opinion
No. 25 (APB No. 25), Accounting for Stock Issued
to Employees in accounting for stock-based awards to
employees. Under APB No. 25, the Company generally
recognizes no compensation expense with respect to such awards.
Amortization of the stock-based compensation in the accompanying
statements of operations relates to awards granted prior to the
initial public offering and the acquisition of Workfire.

Pro forma information regarding the net income
(loss) and net income (loss) per share is required by
SFAS No. 123 for awards granted or modified after
December 31, 1994 as if the Company had accounted for its
stock-based awards to employees under the fair value method of
SFAS No. 123. The fair value of the Companys
stock-based awards to employees was estimated using the
Black-Scholes option pricing model.

57



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The fair value of the Companys stockoption
awards was estimated assuming no expected dividends and the
following weighted-average assumptions for the years ended
December 31:

|                         |  |         |      |      |  |      |      |   |  |  |     |  
|------------------------ |  | ------- | ---- | ---- |  | ---- | ---- | - |  |  | --- | -
|                         |  |        
|                         |  | Options
|                         |  |        
|                         |  | 2001    |      | 2000 |  | 1999
|                         |  |         |      |      |  |     
|Expected life (years)    |  |         | 4    |      |  |      | 4    |   |  |  | 4   |  
|Expected volatility      |  |         | 146  | %    |  |      | 137  | % |  |  | 110 | %
|Risk-free interest rates |  |         | 3.16 | %    |  |      | 5.24 | % |  |  | 4.5 | %

To comply with pro forma reporting requirements
of SFAS No. 123, compensation cost is also estimated for
the fair value of ESPP issuances, which are included in the pro
forma totals below. The fair value of purchase rights granted
under the ESPP is estimated on the date of grant using the
Black-Scholes option pricing model with the same expected
volatility as the above assumptions, an expected life of
0.5 years and risk-free interest rates of 1.77%, 5.24% and
4.5% for the years 2001, 2000 and 1999, respectively. The
weighted-average fair value of the purchase rights granted under
the ESPP during fiscal 2001, 2000 and 1999 was $7.50, $19.00 and
$23.00, respectively.

Had compensation cost been recognized based on
fair value at the date of grant for options granted and shares
purchased under the ESPP plan during 2001, 2000 and 1999, the
pro forma amounts of the Companys net loss per share would
have been as follows for the years ended December 31 (in
thousands, except per share data):

|                                                |  |      |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                |  | 2001 |         | 2000 |  | 1999
|                                                |  |      |         |      |  |     
|Net loss-historical                             |  | $    | (70,988 | )    |  | $    | (9,369  | ) |  | $ | (10,876 | )
|Net loss-pro forma                              |  |      | (79,841 | )    |  |      | (29,504 | ) |  |   | (13,986 | )
|Basic and diluted net loss per share-historical |  |      | (2.40   | )    |  |      | (0.35   | ) |  |   | (0.71   | )
|Basic and diluted net loss per share-pro forma  |  |      | (2.70   | )    |  |      | (1.09   | ) |  |   | (0.91   | )



| |                                   
| | ----------------------------------
| | Deferred Stock-Based
	Compensation

In connection with options granted in fiscal
years 1999 and 1998, the Company has recorded deferred
stock-based compensation of $3.9 million and $787,000,
respectively, representing the difference between the exercise
price and the fair value of the Companys common stock at
the date of grant. In fiscal year 2000, the Company recorded
deferred stock-based compensation of $1.1 million related
to employee options assumed in the Workfire acquisition. The
amounts are being amortized over the vesting period for the
individual options, generally four years. Amortization of
stock-based compensation of $1.2 million, $1.7 million
and $3.1 million was recognized during the years ended
December 31, 2001, 2000 and 1999, respectively.

58



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##### Table of Contents



PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

The following table reflects the accumulated
balances of other comprehensive income (loss) in thousands:

|                          |                     |                   |     |             |   |                   |      |      |   |   |     |     |  
|------------------------- | ------------------- | ----------------- | --- | ----------- | - | ----------------- | ---- | ---- | - | - | --- | --- | -
|                          |                     | Gains (Losses) On |     |             |   | Accumulated Other
|                          |                     | Marketable        |     | Translation |   | Comprehensive    
|                          |                     | Securities        |     | Adjustments |   | Income (Loss)    
|                          |                     |                   |     |             |   |                  
|Balance December 31, 1998 |                     | $                 |    |             |   | $                 |     |      |   | $ |    |    
|                          | Current year change |                   |     | (58         | ) |                   |      |     |   |   |     | (58 | )
|                          |                     |                   |     |             |   |                   |      |      |   |   |     |    
|Balance December 31, 1999 |                     |                   | (58 | )           |   |                   |     |      |   |   | (58 | )  
|                          | Current year change |                   |     | 135         |   |                   |      |     |   |   |     | 135 |  
|                          |                     |                   |     |             |   |                   |      |      |   |   |     |    
|Balance December 31, 2000 |                     |                   | 77  |             |   |                   |     |      |   |   | 77  |    
|                          | Current year change |                   |     | 10          |   |                   |      | (105 | ) |   |     | (95 | )
|                          |                     |                   |     |             |   |                   |      |      |   |   |     |    
|Balance December 31, 2001 |                     | $                 | 87  |             |   | $                 | (105 | )    |   | $ | (18 | )  
|                          |                     |                   |     |             |   |                   |      |      |   |   |     |    

Tax effects of comprehensive income or loss are
not considered material for any periods presented.

13.     401(k)
Plan

In 1997, the Company adopted a 401(k) plan
(401(k)). Participation in the 401(k) is available
to all employees. Entry date to the 401(k) is the first day of
each month. Each participant may elect to contribute an amount
up to 25% of his or her annual base salary plus commission and
bonus, but not to exceed the statutory limit as prescribed by
the Internal Revenue Code. The Company may make discretionary
contributions to the 401(k). To date, no contributions have been
made by the Company.

14.     Segment
Reporting

The Company has adopted the provisions of
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Companys
chief operating decision maker is considered to be the
Companys CEO. The CEO reviews financial information
presented on a consolidated basis substantially similar to the
consolidated 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 these products. In 2001 and 2000, one customer accounted for
22% and 12% of net revenues, respectively. In 1999, no one
customer accounted for more than 10% of net revenues. Sales
outside of North America accounted for 55%, 54% and 55% of the
Companys total revenues in 2001, 2000, and 1999,
respectively.





| |                       
| | ----------------------
| | Geographic Information

|              |                          |                          |   |        |        |      |   |        |        |  |   |       |        | 
|------------- | ------------------------ | ------------------------ | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ----- | ------ | 
|              |                          |                         
|              |                          | Years Ended December 31,
|              |                          |                         
|              |                          | 2001                     |   | 2000   |        | 1999
|              |                          |                          |   |        |        |     
|              |                          |                         
|              |                          | (In thousands)          
|Net revenues: |                          |                          |   |        |        |      |   |        |        |  |   |      
|              | North America            |                          | $ | 20,805 |        |      | $ | 18,791 |        |  | $ | 8,310 |       
|              | Asia Pacific             |                          |   | 12,106 |        |      |   | 11,608 |        |  |   | 4,795 |       
|              | Europe and rest of world |                          |   | 13,750 |        |      |   | 10,698 |        |  |   | 5,336 |       
|              |                          |                          |   |        |        |      |   |        |        |  |   |      
|              |                          | Net revenues             |   | $      | 46,661 |      |   | $      | 41,097 |  |   | $     | 18,441 | 
|              |                          |                          |   |        |        |      |   |        |        |  |   |      

59



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PACKETEER, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Total net revenues reflect the destination of the
product shipped.

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

15.     Quarterly
Results of Operations (Unaudited)

|                                     |  |                                          |        |               |  |          |         |           |  |   |        |   |  |   |        |  
|------------------------------------ |  | ---------------------------------------- | ------ | ------------- |  | -------- | ------- | --------- |  | - | ------ | - |  | - | ------ | -
|                                     |  |                                         
|                                     |  | 2001                                    
|                                     |  |                                         
|                                     |  |                                         
|                                     |  | Quarter Ended                           
|                                     |  |                                         
|                                     |  | December 31,                             |        | September 30, |  | June 30, |         | March 31,
|                                     |  |                                          |        |               |  |          |         |          
|                                     |  |                                         
|                                     |  | (In thousands, except per share amounts)
|Net revenues                         |  | $                                        | 11,464 |               |  | $        | 10,928  |           |  | $ | 13,088 |   |  | $ | 11,181 |  
|Gross profit                         |  |                                          | 8,497  |               |  |          | 7,770   |           |  |   | 8,556  |   |  |   | 6,772  |  
|Net loss from operations             |  |                                          | (1,167 | )             |  |          | (54,978 | )         |  |   | (7,227 | ) |  |   | (9,653 | )
|Net loss                             |  |                                          | (833   | )             |  |          | (54,282 | )         |  |   | (6,454 | ) |  |   | (9,419 | )
|Basic and diluted net loss per share |  |                                          | (0.03  | )             |  |          | (1.83   | )         |  |   | (0.22  | ) |  |   | (0.32  | )

|                                     |  |                                          |        |               |  |          |        |           |  |   |        |   |  |   |        |  
|------------------------------------ |  | ---------------------------------------- | ------ | ------------- |  | -------- | ------ | --------- |  | - | ------ | - |  | - | ------ | -
|                                     |  |                                         
|                                     |  | 2000                                    
|                                     |  |                                         
|                                     |  |                                         
|                                     |  | Quarter Ended                           
|                                     |  |                                         
|                                     |  | December 31,                             |        | September 30, |  | June 30, |        | March 31,
|                                     |  |                                          |        |               |  |          |        |          
|                                     |  |                                         
|                                     |  | (In thousands, except per share amounts)
|Net revenues                         |  | $                                        | 13,326 |               |  | $        | 11,504 |           |  | $ | 9,111  |   |  | $ | 7,156  |  
|Gross profit                         |  |                                          | 8,782  |               |  |          | 7,896  |           |  |   | 6,253  |   |  |   | 4,903  |  
|Net loss from operations             |  |                                          | (6,756 | )             |  |          | (2,079 | )         |  |   | (1,422 | ) |  |   | (2,214 | )
|Net loss                             |  |                                          | (6,206 | )             |  |          | (1,141 | )         |  |   | (545   | ) |  |   | (1,477 | )
|Basic and diluted net loss per share |  |                                          | (0.22  | )             |  |          | (0.04  | )         |  |   | (0.02  | ) |  |   | (0.06  | )

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##### Table of Contents






Item
9.     Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure

Not Applicable.




PART III

Pursuant to General Instruction G to
Form 10-K, the information required by Items 10, 11,
12, and 13 of Part III is incorporated by reference to our
definitive Proxy Statement with respect to our 2002 Annual
Meeting of Stockholders to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission
not later than 120 days after December 31, 2001.




PART IV




Item
14.     Exhibits, Financial
Statement Schedules and Reports on Form 8-K

(a)(1) Financial Statements

See the Consolidated Statements beginning on
page 38 of this Form 10-K.

(2) Financial Statement
Schedule



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | Schedule II  Valuation and
	Qualifying Accounts and Reserves (see page 63 of this
	Form 10-K).

(3) Exhibits

See the Exhibit Index at page 64 of
this Form 10-K.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | (b) No reports on Form 8-K were filed
	during the last quarter of the fiscal year ended
	December 31, 2001.

(c) See the Exhibit Index at
page 64 of this Form 10-K.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | (d) See the Consolidated Financial
	Statements beginning on page 38 and Financial Statement
	Schedule at page 63 of this Form 10-K.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused
this Annual Report on Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of
Cupertino, State of California, on this 20th day of March, 2002.



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



| |     |                 
| | --- | ----------------
| | By: | /s/ DAVID YNTEMA

| |                                      
| | -------------------------------------
| |                                      
| | David Yntema                         
| | Chief Financial Officer and Secretary
| | Date: March 20, 2002                 

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below hereby constitutes and
appoints, jointly and severally, Craig Elliott and David Yntema,
and each of them acting individual, as his attorney-in-fact,
each with full power of substitution and resubstitution, for him
or her in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K (including
post-effective amendments), and to file the same, with exhibits
thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact full power and authority to do and perform
each and every act and thing requisite and necessary to be done
in connection therewith as fully to all intents and purposes as
he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact, or their substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                       |  |                                                                                     |  |               
|-------------------------------------- |  | ----------------------------------------------------------------------------------- |  | --------------
|Name                                   |  | Title                                                                               |  | Date          
|                                       |  |                                                                                     |  |               
|/s/ CRAIG ELLIOTTCraig Elliott         |  | President and Chief Executive Officer
	(Principal Executive Officer) and Director   |  | March 20, 2002
|/s/ DAVID YNTEMADavid Yntema           |  | Chief Financial Officer and Secretary
	(Principal Financial and Accounting Officer) |  | March 20, 2002
|/s/ BRETT GALLOWAYBrett Galloway       |  | Vice President, Corporate Development, and
	Director                                |  | March 20, 2002
|/s/ HAMID AHMADIHamid Ahmadi           |  | Director                                                                            |  | March 20, 2002
|/s/ STEVEN CAMPBELLSteven Campbell     |  | Director                                                                            |  | March 20, 2002
|/s/ JOSEPH GRAZIANOJoseph Graziano     |  | Director                                                                            |  | March 20, 2002
|/s/ L. WILLIAM KRAUSEL. William Krause |  | Director                                                                            |  | March 20, 2002
|/s/ PETER VAN CAMPPeter Van Camp       |  | Director                                                                            |  | March 20, 2002

62



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##### Table of Contents



SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES

For the years ended December 31, 2001,
2000, and 1999


|     |                                |                |   |            |  |            |   |            |  |  |   |      |   |  |   |     | 
|---- | ------------------------------ | -------------- | - | ---------- |  | ---------- | - | ---------- |  |  | - | ---- | - |  | - | --- | 
|     |                                |                |   | Additions  |  |            |   |           
|     |                                | Balance at     |   | Charged to |  |            |   | Balance at
|     |                                | Beginning      |   | Costs and  |  |            |   | End of    
|     |                                | of Period      |   | Expenses   |  | Deductions |   | Period    
|     |                                |                |   |            |  |            |   |           
|     |                                |               
|     |                                | (In thousands)
|2001 |                                |                |   |            |  |            |   |            |  |  |   |      |   |  |   |    
|     | Accounts receivable allowances |                | $ | 223        |  |            | $ | 15         |  |  | $ | (106 | ) |  | $ | 132 | 
|     | Sales return reserve           |                |   | 460        |  |            |   | 434        |  |  |   | (563 | ) |  |   | 331 | 
|     | Warranty reserve               |                |   | 577        |  |            |   | 531        |  |  |   | (556 | ) |  |   | 552 | 
|2000 |                                |                |   |            |  |            |   |            |  |  |   |      |   |  |   |    
|     | Accounts receivable allowances |                |   | 217        |  |            |   | 16         |  |  |   | (10  | ) |  |   | 223 | 
|     | Sales return reserve           |                |   | 285        |  |            |   | 763        |  |  |   | (588 | ) |  |   | 460 | 
|     | Warranty reserve               |                |   | 313        |  |            |   | 747        |  |  |   | (483 | ) |  |   | 577 | 
|1999 |                                |                |   |            |  |            |   |            |  |  |   |      |   |  |   |    
|     | Accounts receivable allowances |                |   | 293        |  |            |   | 28         |  |  |   | (104 | ) |  |   | 217 | 
|     | Sales return reserve           |                |   |           |  |            |   | 387        |  |  |   | (102 | ) |  |   | 285 | 
|     | Warranty reserve               |                |   | 76         |  |            |   | 515        |  |  |   | (278 | ) |  |   | 313 | 

63



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##### Table of Contents






EXHIBIT INDEX

|        |         |             |  |                                                                                                                                                                        
|------- | ------- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 3.1(2)  |             |  | Registrants Amended and Restated
	Certificate of Incorporation.                                                                                                       
|        | 3.2(2)  |             |  | Registrants Amended and Restated Bylaws.                                                                                                                              
|        | 3.3(5)  |             |  | Registrants Amended and Restated Bylaws.                                                                                                                              
|        | 4.1(2)  |             |  | Form of Registrants Specimen Common Stock
	Certificate.                                                                                                               
|        | 10.1(2) |             |  | Lease Agreement between Packeteer and
	Eldon R. Hoffman dated August 25, 1997.                                                                                         
|        | 10.2(2) |             |  | OEM Agreement between Packeteer and
	ADC Telecommunications, Inc., dated December 17, 1998.                                                                            
|        | 10.3(2) |             |  | Reseller Agreement between Packeteer and Alcatel
	Business Systems, dated May 7, 1999.                                                                                 
|        | 10.4(2) |             |  | Loan and Security Agreement between Packeteer and
	Silicon Valley Bank, dated January 1, 1999.                                                                         
|        | 10.5(2) |             |  | Export-Import Bank Loan and Security Agreement
	between Packeteer and Silicon Valley Bank, dated
	January 19, 1999.                                                    
|        | 10.6(2) |             |  | Subordinated Loan and Security Agreement between
	Packeteer and Comdisco, Inc., dated January 21, 1999.                                                                
|        | 10.7(2) |             |  | Master Lease Agreement between Packeteer and
	Comdisco, Inc., dated June 3, 1997.                                                                                      
|        | 10.8(2) |             |  | Registrants 1996 Equity Incentive Plan.                                                                                                                               
|        | 10.9(2) |             |  | Registrants 1999 Stock Incentive Plan.                                                                                                                                
|        | 10.10(2 | )           |  | Registrants 1999 Employee Stock Purchase
	Plan.                                                                                                                       
|        | 10.11(2 | )           |  | Form of Indemnity Agreement entered into by
	Registrant with each of its executive officers and directors.                                                             
|        | 10.12(2 | )           |  | Loan and Security Agreement between Packeteer and
	MMC/GATX Partnership No. 1 dated May 20, 1999.                                                                      
|        | 10.13(2 | )           |  | OEM Agreement between Packeteer and Lucent
	Technologies, Inc. dated June 25, 1999.                                                                                    
|        | 10.14(2 | )           |  | OEM Agreement between Packeteer and Adtran, Inc.
	dated June 29, 1999.                                                                                                 
|        | 10.15(3 | )           |  | Amendment dated February 2, 2000 to the Loan
	and Security Agreement and the Export-Import Bank Loan and
	security agreement between Packeteer and Silicon Valley Bank.
|        | 10.16(3 | )           |  | Master Lease Agreement between Packeteer and
	Pentech Financial Services, Inc., dated November 1, 1999.                                                                
|        | 10.17(3 | )           |  | Addendum to Lease Agreement between Packeteer and
	Eldon R. Hoffman dated November 1, 1999.                                                                            
|        | 10.19(5 | )           |  | Amendment dated March 13, 2001 to the Loan
	and Security Agreement and the Export-Import Bank Loan and
	security agreement between Packeteer and Silicon Valley Bank.  
|        | 10.20(1 | )           |  | Amendment dated January 9, 2002 to the Loan
	and Security Agreement and the Export-Import Bank Loan and
	Security Agreement between Packeteer and Silicon Valley Bank. 
|        | 10.21(1 | )           |  | Amendment dated May 23, 2001 to the 1999
	Stock Incentive Plan.                                                                                                        
|        | 21.1(1) |             |  | Subsidiaries of Packeteer.                                                                                                                                             
|        | 23.1(1) |             |  | Consent of KPMG LLP, Independent Accountants.                                                                                                                          
|        | 24.1(1) |             |  | Power of Attorney (see page 62).                                                                                                                                       



---



|    |                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------
|(1) | Filed herewith.                                                                                                    
|   
|(2) | Incorporated by reference from Packeteers
	Registration Statement on Form S-1 (Reg.
	No. 79333-79077), as amended.
|   
|(3) | Incorporated by reference from
	Packeteers 10-K dated March 23, 2000.                                             
|   
|(4) | Incorporated by reference from
	Packeteers 10-Q dated November 13, 2000.                                          
|   
|(5) | Incorporated by reference from
	Packeteers 10-K dated March 29, 2001.                                             

64