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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, 2004                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to           .                                 

Commission File Number 000-26785


PACKETEER, INC.


(Exact name of Registrant as specified in its charter)


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

10201 NORTH DE ANZA BLVD.


CUPERTINO, CALIFORNIA 95014


(Address of principal executive offices)


Registrants telephone number, including area code:


(408) 873-4400


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


None


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


Common Stock, $0.001 Par Value


(Title of Class)


þ o


o


þ o




.


DOCUMENTS INCORPORATED BY REFERENCE












---










TABLE OF CONTENTS


|              |  |                                                                                                                     |  |   
|------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | --
|Part I       
|Item 1.       |  | Business                                                                                                            |  | 3 
|Item 2.       |  | Properties                                                                                                          |  | 25
|Item 3.       |  | Legal Proceedings                                                                                                   |  | 25
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                                             |  | 25
|             
|Part II      
|Item 5.       |  | Market For Registrants Common Stock,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  | 25
|Item 6.       |  | Selected Financial Data                                                                                             |  | 27
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                           |  | 28
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                      |  | 37
|Item 8.       |  | Financial Statements and Supplementary
    Data                                                                     |  | 38
|Item 9.       |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                            |  | 64
|Item 9A.      |  | Controls and Procedures                                                                                             |  | 64
|Item 9B.      |  | Other Information                                                                                                   |  | 65
|             
|Part III     
|Item 10.      |  | Directors and Executive Officers of the
    Registrant                                                              |  | 65
|Item 11.      |  | Executive Compensation                                                                                              |  | 65
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Matters                              |  | 65
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                  |  | 65
|Item 14.      |  | Principal Accountant Fees and Services                                                                              |  | 65
|             
|Part IV      
|Item 15.      |  | Exhibits and Financial Statement
    Schedules                                                                      |  | 65
|Signatures    |  | 66                                                                                                                 
|EXHIBIT 10.26
|EXHIBIT 10.27
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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PART I







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



OVERVIEW




tm tm tm








3



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www.packeteer.com


INDUSTRY BACKGROUND




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









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





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



Adding bandwidth and infrastructure to over-provision the
network.




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

Implementing queuing-based approaches.




| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Queuing-based approaches do not control inbound traffic flowing
    from the WAN to the LAN;                                                                                 
|
| |  | 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; and
|
| |  | Queuing does not directly control end-to-end application
    performance.                                                                                                    

Deploying traditional compression technologies.




| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | Latency, or the amount of time it takes a packet to travel from
    source to destination, which can negatively affect performance;

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| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Non selective compression, which results in some already
    compressed application traffic being delayed with no discernable
    benefit to performance; and
|
| |  | Difficulty in configuring and maintaining compression tunnels.                                                                                               

Installing network management tools.




| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Traditional network management tools only monitor and report
    network performance and bandwidth utilization, offering no means
    of fixing or resolving performance problems; and                                
|
| |  | As is the case with queuing-based approaches, traditional
    network management tools are reactive in nature in that they
    detect problems once they occur, but do not prevent similar
    problems in the future.



| |                          
| | -------------------------
| | The Packeteer Opportunity



THE PACKETEER SOLUTION






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Visibility. Before an organization can control
    application performance on the WAN, it needs to know what is
    running on its network and how the network is performing.
    Packeteers monitoring capabilities involve automatic
    identification and classification of traffic through
    Layer 7, the applications layer, which is the highest layer
    in the industry standard Open Systems Interconnection, or OSI,
    model. This application-layer insight is designed to enable
    organizations to analyze application performance and network
    utilization accurately. Packeteers performance analysis
    determines response times, delays, link utilization, and other
    crucial metrics. Depending on the size of the Packeteer
    deployment, performance analysis may be captured via onboard or
    centralized reporting.
|
| |  | Control. Once an organization knows what is running on
    its network and how the network is performing, it can use
    Packeteers control capabilities to set policies that align
    application performance in support of business needs.
    PacketShaper systems allow mission-critical applications to
    perform efficiently and reliably by allocating varying amounts
    of bandwidth to applications depending on their relative
    importance. For instance, network managers can tailor policy
    management and bandwidth allocation to suit the requirements of
    particular applications or traffic, such as Citrix, SAP, Siebel,
    Video over IP and Voice over IP. Meanwhile, peer-to-peer file
    sharing, casual web browsing and other                                                                                          

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | unsanctioned traffic can be eliminated or minimized, depending
    on an organizations available network resources and
    business priorities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Compression and Acceleration. Once an organization sets
    controls to protect critical applications and contain
    non-critical traffic, the next step is to deploy compression to
    stretch the current network capacity and further improve
    application performance by ensuring that the extra capacity goes
    to critical applications first. PacketShaper Xpress provides a
    software option that utilizes application-intelligent
    compression, latency management and tunnel management to
    accelerate policy-managed business traffic. Packeteer SkyX
    provides protocol acceleration (TCP and Web) over satellite,
    long-haul and other latency sensitive WAN links. Capabilities
    include Xpress Transport Protocol, or XTP, Web prefetch and
    multicast content distribution.                                                                                                                                                     
|
| |  | Centralized Management. Packeteer systems provide reports
    describing current and historical network performance.
    Comprehensive reports, graphs and tables enable network managers
    to refine bandwidth management policies, evaluate efficiency and
    plan capacity. Packeteer systems automatically measure 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.
    Packeteers PolicyCenter, a Windows based software
    solution, is designed to simplify deployment of multiple
    Packeteer appliances by centralizing policy and software upgrade
    distribution and providing a summary view of all managed
    appliances. Packeteers ReportCenter, also a Windows based
    software solution, is designed to provide centralized analysis
    and reporting for Packeteer system deployments.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gain Network Performance Visibility and Insight.
    Packeteer systems provide valuable historical and real-time
    information about application performance and network
    utilization through an easy-to-use browser interface. Network
    managers gain a better understanding of the nature of traffic
    running on their networks and the problems and inefficiencies
    associated with that traffic.    
|
| |  | Ensure Bandwidth to Mission-Critical Applications.
    Policy-based bandwidth allocation protects bandwidth for
    mission-critical applications such as SAP, Oracle and Siebel,
    and video over IP or voice over IP, preventing disruptions from
    bandwidth-hungry but less urgent applications such as file
    transfers, peer-to-peer file sharing or casual web browsing.                                 
|
| |  | Permit Easy Deployment. Packeteer systems install easily,
    and automatically start to discover, classify and analyze
    network traffic and suggest policies to optimize performance.
    They complement the existing network infrastructure, require no
    router reconfiguration or desktop changes and are designed not
    to disrupt network connectivity in the event of software or
    hardware failure.
|
| |  | Increase Effective Bandwidth. Packeteer systems
    intelligently increase effective bandwidth and, through
    integration with our advanced monitoring and shaping
    capabilities, enable the additional bandwidth to be utilized by
    mission-critical applications.                                                                                                                                           
|
| |  | Enable Interactive Services. Voice over IP, video over IP
    and other streaming media require guaranteed bandwidth in order
    to achieve minimum quality requirements. By using Packeteer
    systems to set minimum bandwidth guarantees and priority,
    enterprises and service providers can deliver smooth and
    predictable performance of these delay-sensitive multimedia
    services.                
|
| |  | Increase Network Efficiency. Packeteer systems improve
    network efficiency and help delay expensive capacity upgrades by
    managing non-critical traffic to reduce retransmission overhead
    and smooth the variability in bandwidth utilization.                                                                                                                                                              

7



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STRATEGY




Focus on Bandwidth Management Needs of Enterprises.


Continue to Build Indirect Distribution Channels.


Expand Presence in Telecommunications Service Provider
Market.


Expand Presence in the Managed Application Services
Market.


Extend Bandwidth Management Technology Leadership.


8



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PRODUCTS




PacketSeeker


PacketShaper


PacketShaper Xpress


PolicyCenter


ReportCenter


Mentat SkyX


TECHNOLOGY






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



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







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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Partitions. Partitions allow for 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, dedicated virtual
    circuits, or flexible, virtual circuits whose unused bandwidth
    can be shared.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Dynamic Subscriber Bandwidth Provisioning. Dynamic
    Subscriber Bandwidth Provisioning allocates bandwidth and
    enforces QoS policies automatically by mapping a
    subscribers traffic profile (e.g. source/ destination IP
    address, traffic type, URL, etc.) to a prescribed policy. This
    feature is a scaleable and easy-to-deploy solution that actively
    provisions minimum and maximum bandwidth to up to 20,000
    subscribers accessing the network concurrently. 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 Packeteer appliance. This feature
    also gives service providers additional revenue opportunities
    through multi-tiered Internet access services (e.g. bronze,
    silver, gold) for dial-up, DSL, cable and wireless subscribers.
|
| |  | Priority policies. This policy feature enables network
    managers to assign one of eight possible priority levels to each
    application or traffic category. Priority policies are ideal for
    traffic that does not burst, non-IP traffic and traffic
    characterized by small, high-priority flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Admission-control policies. Network managers can use
    admission-control policy features to determine the response if a
    bandwidth guarantee cannot be satisfied. Such responses may
    include denying access, accommodating an additional user with
    less than guaranteed performance, or, for web requests,
    redirecting the request to another server. For example, if an
    online streaming-video service suffers a high-demand period and
    all available bandwidth is consumed, an admission-control policy
    could present a web page explaining that resources are busy.
    This allows a maximum number of users to receive a targeted
    service quality without degradation as new users seek to access
    the service.                                                                                                                                                           
|
| |  | Discard and never-admit policies. These policies
    intentionally block traffic. Discard policies toss packets
    without sending feedback to the sender. Never-admit policies are
    similar to discard policies except that the policy informs the
    sender that service is blocked.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



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







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| |                                                              
| | -------------------------------------------------------------
| | Intelligent Compression Algorithms to Enhance
    Performance







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





CUSTOMERS




MANUFACTURING






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MARKETING AND SALES








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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Channel Partners. Packeteer has teamed with value-added
    resellers and distributors in the industry that are
    distinguished by their ability to deliver comprehensive QoS
    solutions, their industry expertise and their commitment to
    customer satisfaction. We have established an indirect
    distribution channel, which is comprised of a network of over
    300 value-added resellers, distributors and system integrators
    that sell our solutions in over 50 countries. These partners
    sell our systems and software products as well as other
    third-party products that are complementary to our WAN
    Application Traffic Management systems.                                                                                                                                                                                                                                                                                                  
|
| |  | Alliance Partners. Our Alliance Partners unite Packeteer
    with organizations whose product offerings provide strategic
    value to our customers. Our Alliance Partners include systems
    integrators and service providers as well as technology vendors
    whose products complement Packeteers WAN Application
    Traffic Management solutions. In exchange, Packeteer presents
    Alliance Partners with the opportunity to extend to their
    customers our industry-leading application performance and QoS
    solutions. For example, system integrators offer IT consulting,
    network integration, system management and IT outsourcing
    services. They choose Packeteer solutions to help their
    customers ensure the performance of their business critical
    applications. In addition to meeting customers bandwidth
    needs, service providers offer Packeteer products and
    value-added services such as application performance, on-going

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| |  |                                                                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | performance monitoring and advanced application performance
    management. Some of our Alliance Partners are Avaya, Citrix,
    Equant, HP, InfoVista, NTT and Polycom.





RESEARCH AND DEVELOPMENT




CUSTOMER SERVICE AND TECHNICAL SUPPORT




COMPETITION








| |   |                                                  
| | - | -------------------------------------------------
| |  | expertise and in-depth knowledge of applications;
|
| |  | timeliness of new product introductions;         

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| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | 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;                     
|
| |  | ability to compress traffic without decreasing throughput,
    performance or network capacity;                             
|
| |  | ability to integrate traffic classification, management,
    reporting and acceleration into a single platform;             
|
| |  | compatibility with industry standards;                                                                                      
|
| |  | products that do not increase latency and packet loss;                                                                      
|
| |  | size and scope of distribution network;                                                                                     
|
| |  | brand name; and                                                                                                             
|
| |  | access to customers and size of installed customer base.                                                                    

INTELLECTUAL PROPERTY






EMPLOYEES




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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.


IF THE WAN APPLICATION TRAFFIC MANAGEMENT SOLUTIONS MARKET
FAILS TO GROW, OUR BUSINESS WILL FAIL




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






| |   |                                                             
| | - | ------------------------------------------------------------
| |  | the timing and size of orders and shipments of our products;
|
| |  | 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.            



IF IN THE FUTURE WE ARE UNABLE TO FAVORABLY ASSESS THE
EFFECTIVENESS OF OUR INTERNAL CONTROL OVER FINANCIAL REPORTING,
OR IF OUR INDEPENDENT AUDITORS ARE UNABLE TO PROVIDE AN
UNQUALIFIED ATTESTATION REPORT ON OUR ASSESSMENT, OUR STOCK
PRICE COULD BE ADVERSELY AFFECTED




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






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IF WE DO NOT EXPAND OR ENHANCE OUR PRODUCT OFFERINGS OR
RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO TECHNOLOGICAL
CHANGE, OUR BUSINESS MAY NOT GROW OR WE MAY LOSE CUSTOMERS AND
MARKET SHARE






| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | 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.                         



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




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








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








SALES TO LARGE CUSTOMERS WOULD BE DIFFICULT TO REPLACE IF
LOST




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OUR RELIANCE ON SALES OF OUR PRODUCTS BY OTHERS MAKES IT
DIFFICULT TO PREDICT OUR REVENUES AND RESULTS OF OPERATIONS






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






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




INTRODUCTION OF OUR NEW PRODUCTS MAY CAUSE CUSTOMERS TO DEFER
PURCHASES OF OUR EXISTING PRODUCTS WHICH COULD HARM OUR
OPERATING RESULTS




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OUR RELIANCE ON THIRD-PARTY MANUFACTURERS FOR ALL OF OUR
MANUFACTURING REQUIREMENTS COULD CAUSE US TO LOSE ORDERS IF
THESE THIRD-PARTY MANUFACTURERS FAIL TO SATISFY OUR COST,
QUALITY AND DELIVERY REQUIREMENTS






| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | reduced control over delivery schedules;                                    
|
| |  | the potential lack of adequate capacity during periods of excess
    demand;
|
| |  | decreases in manufacturing yields and increases in costs;                   
|
| |  | the potential for a lapse in quality assurance procedures;                  
|
| |  | increases in prices; and                                                    
|
| |  | the potential misappropriation of our intellectual property.                





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






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




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






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulty in integrating the acquired operations and retaining
    acquired personnel;                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | limitations on our ability to retain acquired distribution
    channels and customers;                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | diversion of managements attention and disruption of our
    ongoing business;                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | difficulties in managing software development activities to
    define a combined product roadmap, ensuring timely development
    of new products, timely release of new products to market, and
    the development of efficient integration and migration tools;                                                                                                                                                                                                         
|
| |  | the potential product liability associated with selling the
    acquired companys products; and                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | the potential write-down of impaired goodwill and intangible and
    other assets. In particular, we recorded approximately
    $9.5 million in goodwill related to the acquisition of
    Mentat that will not be amortized in the ordinary course of
    business. To the extent that the business acquired in that
    transaction does not remain competitive, some or all of the
    goodwill related to that acquisition could be charged against
    future earnings.



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




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








OUR PRODUCTS MAY HAVE ERRORS OR DEFECTS THAT WE FIND AFTER
THE PRODUCTS HAVE BEEN SOLD, WHICH COULD INCREASE OUR COSTS AND
NEGATIVELY AFFECT OUR REVENUES AND THE MARKET ACCEPTANCE OF OUR
PRODUCTS






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




23



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##### Table of Contents





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




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




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






CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A
TAKEOVER OF PACKETEER MORE DIFFICULT, WHICH COULD LOWER THE
MARKET PRICE OF THE COMMON STOCK




24



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##### Table of Contents










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








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

In re
Packeteer, Inc. Initial Public Offering Securities
Litigation













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






PART II







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



25



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|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|2004:          |  |      |       |     |  |   |       | 
|Fourth Quarter |  | $    | 14.97 |     |  | $ | 10.17 | 
|Third Quarter  |  |      | 15.89 |     |  |   | 7.82  | 
|Second Quarter |  |      | 16.15 |     |  |   | 11.80 | 
|First Quarter  |  |      | 23.10 |     |  |   | 11.95 | 
|2003:          |  |      |       |     |  |   |       | 
|Fourth Quarter |  | $    | 20.86 |     |  | $ | 12.85 | 
|Third Quarter  |  |      | 18.33 |     |  |   | 11.01 | 
|Second Quarter |  |      | 16.74 |     |  |   | 9.44  | 
|First Quarter  |  |      | 10.19 |     |  |   | 7.25  | 



26



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



|                                                             |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |        |        | 
|------------------------------------------------------------ | -------------------------------------- | ------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------- | - | ------- | ------ | ------ | 
|                                                             |                                        | Years Ended December 31,             
|                                                             |                                        |                                      
|                                                             |                                        | 2004                                  |        | 2003   |        | 2002 |        | 2001   |        | 2000
|                                                             |                                        |                                       |        |        |        |      |        |        |        |     
|                                                             |                                        | (In thousands, except per share data)
|CONSOLIDATED STATEMENTS OF OPERATIONS DATA:                  |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       
|Net revenues                                                 |                                        | $                                     | 92,437 |        |        | $    | 72,723 |        |        | $    | 55,014 |        |        | $ | 46,661  |        |         | $ | 41,097  |       
|Product and service costs                                    |                                        |                                       | 22,837 |        |        |      | 17,036 |        |        |      | 12,852 |        |        |   | 13,867  |        |         |   | 12,585  |       
|Amortization of purchased intangible assets                  |                                        |                                       | 38     |        |        |      |       |        |        |      |       |        |        |   | 1,199   |        |         |   | 678     |       
|                                                             |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       
|Gross profit                                                 |                                        |                                       | 69,562 |        |        |      | 55,687 |        |        |      | 42,162 |        |        |   | 31,595  |        |         |   | 27,834  |       
|Operating expenses:                                          |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       
|                                                             | Research and development               |                                       |        | 14,973 |        |      |        | 12,202 |        |      |        | 10,877 |        |   |         | 12,360 |         |   |         | 9,318  |       
|                                                             | Sales and marketing                    |                                       |        | 35,504 |        |      |        | 26,433 |        |      |        | 23,420 |        |   |         | 22,859 |         |   |         | 19,506 |       
|                                                             | General and administrative             |                                       |        | 6,061  |        |      |        | 5,494  |        |      |        | 4,636  |        |   |         | 5,832  |         |   |         | 5,057  |       
|                                                             | Amortization of goodwill               |                                       |        |       |        |      |        |       |        |      |        |       |        |   |         | 11,017 |         |   |         | 6,424  |       
|                                                             | Impairment of goodwill and intangibles |                                       |        |       |        |      |        |       |        |      |        |       |        |   |         | 52,552 |         |   |         |       |       
|                                                             |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       
|                                                             |                                        | Total operating expenses              |        |        | 56,538 |      |        |        | 44,129 |      |        |        | 38,933 |   |         |        | 104,620 |   |         |        | 40,305 | 
|                                                             |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       
|Income (loss) from operations                                |                                        |                                       | 13,024 |        |        |      | 11,558 |        |        |      | 3,229  |        |        |   | (73,025 | )      |         |   | (12,471 | )     
|Other income, net                                            |                                        |                                       | 1,127  |        |        |      | 701    |        |        |      | 915    |        |        |   | 2,037   |        |         |   | 3,402   |       
|                                                             |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       
|Income (loss) before provision (benefit) for income taxes    |                                        |                                       | 14,151 |        |        |      | 12,259 |        |        |      | 4,144  |        |        |   | (70,988 | )      |         |   | (9,069  | )     
|Provision (benefit) for income taxes                         |                                        |                                       | (383   | )      |        |      | 1,226  |        |        |      | 415    |        |        |   |        |        |         |   | 300     |       
|                                                             |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       
|Net income (loss)                                            |                                        | $                                     | 14,534 |        |        | $    | 11,033 |        |        | $    | 3,729  |        |        | $ | (70,988 | )      |         | $ | (9,369  | )     
|                                                             |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       
|Basic net income (loss) per share                            |                                        | $                                     | 0.44   |        |        | $    | 0.35   |        |        | $    | 0.12   |        |        | $ | (2.40   | )      |         | $ | (0.35   | )     
|                                                             |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       
|Diluted net income (loss) per share                          |                                        | $                                     | 0.42   |        |        | $    | 0.32   |        |        | $    | 0.12   |        |        | $ | (2.40   | )      |         | $ | (0.35   | )     
|                                                             |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       
|Shares used in computing basic net income (loss) per share   |                                        |                                       | 32,994 |        |        |      | 31,634 |        |        |      | 30,205 |        |        |   | 29,559  |        |         |   | 27,152  |       
|                                                             |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       
|Shares used in computing diluted net income (loss) per share |                                        |                                       | 34,502 |        |        |      | 34,364 |        |        |      | 30,718 |        |        |   | 29,559  |        |         |   | 27,152  |       
|                                                             |                                        |                                       |        |        |        |      |        |        |        |      |        |        |        |   |         |        |         |   |         |       

|                                       |  |                |         |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |         | 
|-------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                       |  | December 31,  
|                                       |  |               
|                                       |  | 2004           |         | 2003 |  | 2002 |         | 2001 |  | 2000
|                                       |  |                |         |      |  |      |         |      |  |     
|                                       |  | (In thousands)
|CONSOLIDATED BALANCE SHEET DATA:       |  |                |         |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |         | 
|Cash, cash equivalents and investments |  | $              | 92,197  |      |  | $    | 86,707  |      |  | $    | 65,474 |  |  | $ | 62,221 |  |  | $ | 62,206  | 
|Working capital                        |  |                | 73,171  |      |  |      | 75,273  |      |  |      | 53,492 |  |  |   | 52,723 |  |  |   | 51,958  | 
|Total assets                           |  |                | 137,792 |      |  |      | 104,699 |      |  |      | 79,912 |  |  |   | 73,005 |  |  |   | 144,281 | 
|Deferred revenues                      |  |                | 16,157  |      |  |      | 9,592   |      |  |      | 5,968  |  |  |   | 4,106  |  |  |   | 3,367   | 
|Long-term obligations                  |  |                |        |      |  |      |        |      |  |      | 545    |  |  |   | 1,289  |  |  |   | 3,215   | 
|Total stockholders equity             |  |                | 101,959 |      |  |      | 83,418  |      |  |      | 63,401 |  |  |   | 56,624 |  |  |   | 124,133 | 

27



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



OVERVIEW




tm tm tm










28



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SOURCES OF REVENUE




COST OF REVENUES AND OPERATING EXPENSES


Cost of Revenues.




Research and Development.


29



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Sales and Marketing.


General and Administrative.


CRITICAL ACCOUNTING POLICIES






Revenue recognition.




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



30



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Inventory valuation.


Valuation of long-lived and intangible assets and
goodwill.




31



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Sales return reserve.


Rebate reserves.


Warranty reserves.


Accounting for Income Taxes.




32



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RESULTS OF OPERATIONS




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

|                                       |  |                    |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|-------------------------------------- |  | ------------------ | ------ | ------------- |  | -------- | ------ | --------- |  | - | ------ |  |  | - | ------ | 
|                                       |  | 2003 Quarter Ended
|                                       |  |                   
|                                       |  | December 31,       |        | September 30, |  | June 30, |        | March 31,
|                                       |  |                    |        |               |  |          |        |          
|Net revenues                           |  | $                  | 20,035 |               |  | $        | 18,432 |           |  | $ | 17,488 |  |  | $ | 16,768 | 
|Gross profit                           |  |                    | 15,299 |               |  |          | 14,174 |           |  |   | 13,335 |  |  |   | 12,879 | 
|Income from operations                 |  |                    | 3,527  |               |  |          | 3,233  |           |  |   | 2,590  |  |  |   | 2,208  | 
|Net income                             |  |                    | 3,318  |               |  |          | 2,975  |           |  |   | 2,591  |  |  |   | 2,149  | 
|Basic and diluted net income per share |  |                    | 0.10   |               |  |          | 0.09   |           |  |   | 0.08   |  |  |   | 0.07   | 



|                                                   |                                             |                          |    |      |     |      |    |    |     |  |    |    |     | 
|-------------------------------------------------- | ------------------------------------------- | ------------------------ | -- | ---- | --- | ---- | -- | -- | --- |  | -- | -- | --- | 
|                                                   |                                             | 2004                     |    | 2003 |     | 2002
|                                                   |                                             |                          |    |      |     |     
|Net revenues:                                      |                                             |                          |    |      |     |      |    |    |     |  |    |   
|                                                   | Product revenues                            |                          |    | 81   | %   |      |    | 83 | %   |  |    | 86 | %  
|                                                   | Service revenues                            |                          |    | 19   |     |      |    | 17 |     |  |    | 14 |    
|                                                   |                                             |                          |    |      |     |      |    |    |     |  |    |   
|                                                   |                                             | Total net revenues       |    |      | 100 |      |    |    | 100 |  |    |    | 100 | 
|Cost of revenues:                                  |                                             |                          |    |      |     |      |    |    |     |  |    |   
|                                                   | Product costs                               |                          |    | 18   |     |      |    | 17 |     |  |    | 18 |    
|                                                   | Service costs                               |                          |    | 7    |     |      |    | 6  |     |  |    | 5  |    
|                                                   | Amortization of purchased intangible assets |                          |    |     |     |      |    |   |     |  |    |   |    
|                                                   |                                             |                          |    |      |     |      |    |    |     |  |    |   
|                                                   |                                             | Total cost of revenues   |    |      | 25  |      |    |    | 23  |  |    |    | 23  | 
|Gross margin                                       |                                             |                          | 75 |      |     |      | 77 |    |     |  | 77 |   
|Operating expenses:                                |                                             |                          |    |      |     |      |    |    |     |  |    |   
|                                                   | Research and development                    |                          |    | 16   |     |      |    | 17 |     |  |    | 20 |    
|                                                   | Sales and marketing                         |                          |    | 38   |     |      |    | 36 |     |  |    | 43 |    
|                                                   | General and administrative                  |                          |    | 7    |     |      |    | 8  |     |  |    | 8  |    
|                                                   |                                             |                          |    |      |     |      |    |    |     |  |    |   
|                                                   |                                             | Total operating expenses |    |      | 61  |      |    |    | 61  |  |    |    | 71  | 
|                                                   |                                             |                          |    |      |     |      |    |    |     |  |    |   
|Income from operations                             |                                             |                          | 14 |      |     |      | 16 |    |     |  | 6  |   
|Interest and other income                          |                                             |                          | 1  |      |     |      | 1  |    |     |  | 2  |   
|Interest and other expense                         |                                             |                          |   |      |     |      |   |    |     |  |   |   
|                                                   |                                             |                          |    |      |     |      |    |    |     |  |    |   
|Income before provision (benefit) for income taxes |                                             |                          | 15 |      |     |      | 17 |    |     |  | 8  |   
|Provision (benefit) for income taxes               |                                             |                          | (1 | )    |     |      | 2  |    |     |  | 1  |   
|                                                   |                                             |                          |    |      |     |      |    |    |     |  |    |   
|Net income                                         |                                             |                          | 16 | %    |     |      | 15 | %  |     |  | 7  | % 
|                                                   |                                             |                          |    |      |     |      |    |    |     |  |    |   

33



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OVERVIEW OF RESULTS OF OPERATIONS FOR 2004








NET REVENUES










COST OF REVENUES






34



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##### Table of Contents









RESEARCH AND DEVELOPMENT




SALES AND MARKETING




GENERAL AND ADMINISTRATIVE




35



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INTEREST AND OTHER INCOME, NET




INTEREST EXPENSE




INCOME TAX PROVISION (BENEFIT)




LIQUIDITY AND CAPITAL RESOURCES




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







36



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##### Table of Contents





|                                                                                |                      |                        |       |           |  |       |       |       |  |           |       |   |  |   |     |   |  |   |     |   | 
|------------------------------------------------------------------------------- | -------------------- | ---------------------- | ----- | --------- |  | ----- | ----- | ----- |  | --------- | ----- | - |  | - | --- | - |  | - | --- | - | 
|                                                                                |                      | Payments Due by Period
|                                                                                |                      |                       
|                                                                                |                      |                        |       | Less than |  | 1 - 3 |       | 3 - 5 |  | More than
|Contractual Obligations                                                         |                      | Total                  |       | 1 Year    |  | Years |       | Years |  | 5 Years  
|                                                                                |                      |                        |       |           |  |       |       |       |  |          
|Cash obligations not reflected in Balance Sheet Operating lease
    obligations |                      | $                      | 4,931 |           |  | $     | 1,839 |       |  | $         | 2,838 |   |  | $ | 154 |   |  | $ | 100 |  
|                                                                                | Purchase obligations |                        |       | 4,972     |  |       |       | 4,972 |  |           |       |  |  |   |     |  |  |   |     |  | 
|                                                                                |                      |                        |       |           |  |       |       |       |  |           |       |   |  |   |     |   |  |   |     |  
|Total                                                                           |                      | $                      | 9,903 |           |  | $     | 6,811 |       |  | $         | 2,838 |   |  | $ | 154 |   |  | $ | 100 |  
|                                                                                |                      |                        |       |           |  |       |       |       |  |           |       |   |  |   |     |   |  |   |     |  



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

Overview.


Operating Activities.


Investing Activities.


Financing Activities.


RECENT ACCOUNTING PRONOUNCEMENTS









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



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



37



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|                           |                       |                     |        |           |   |           |        |       |   |       |        |  |  |   |        |  |  |   |        |  | 
|-------------------------- | --------------------- | ------------------- | ------ | --------- | - | --------- | ------ | ----- | - | ----- | ------ |  |  | - | ------ |  |  | - | ------ |  | 
|                           |                       | 2004 Amortized Cost |        |           |   |          
|                           |                       |                     |        | 2004 Fair |   | 2003 Fair
|Expected Maturity Date     |                       | 2005                |        | 2006      |   | Total     |        | Value |   | Value
|                           |                       |                     |        |           |   |           |        |       |   |      
|Cash equivalents           |                       | $                   | 12,907 |           |   | $         |       |       |   | $     | 12,907 |  |  | $ | 12,904 |  |  | $ | 24,102 | 
|                           | Weighted-average rate |                     |        | 2.61      | % |           |        |      |   |       |        |  |  |   |        |  |  |   |        |  | 
|Short-term investments     |                       |                     | 66,685 |           |   |           |       |       |   |       | 66,685 |  |  |   | 66,512 |  |  |   | 54,317 | 
|                           | Weighted-average rate |                     |        | 2.12      | % |           |        |      |   |       |        |  |  |   |        |  |  |   |        |  | 
|Long-term investments      |                       |                     |       |           |   |           | 10,050 |       |   |       | 10,050 |  |  |   | 10,019 |  |  |   | 6,726  | 
|                           | Weighted-average rate |                     |        |          |   |           |        | 2.99  | % |       |        |  |  |   |        |  |  |   |        |  | 
|                           |                       |                     |        |           |   |           |        |       |   |       |        |  |  |   |        |  |  |   |        | 
|Total investment portfolio |                       | $                   | 79,592 |           |   | $         | 10,050 |       |   | $     | 89,642 |  |  | $ | 89,435 |  |  | $ | 85,145 | 
|                           |                       |                     |        |           |   |           |        |       |   |       |        |  |  |   |        |  |  |   |        | 



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








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



|                                                                                                                                             |  |        |    | 
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | -- | 
|                                                                                                                                             |  | Page  
|                                                                                                                                             |  | Number
|                                                                                                                                             |  |       
|Reports of Independent Registered Public Accounting Firm                                                                                     |  |        | 39 | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                                                                 |  |        | 41 | 
|Consolidated Income Statements for the years ended
    December 31, 2004, 2003 and 2002                                                      |  |        | 42 | 
|Consolidated Statements of Stockholders Equity and
    Comprehensive Income (Loss) for the years ended
    December 31, 2004, 2003 and 2002 |  |        | 43 | 
|Consolidated Statements of Cash Flows for the years ended
    December 31, 2004, 2003 and 2002                                               |  |        | 44 | 
|Notes to Consolidated Financial Statements                                                                                                   |  |        | 45 | 

38



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON INTERNAL CONTROL OVER FINANCIAL REPORTING




Internal Control 
Integrated Framework








Internal
Control  Integrated Framework Internal Control  Integrated
Framework






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





39



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON CONSOLIDATED FINANCIAL STATEMENTS










Internal Control 
Integrated Framework




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





40



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PACKETEER, INC.


CONSOLIDATED BALANCE SHEETS


|                                              |                                                                                                                                                                  |                                            |   |         |         |  |   |         |         | 
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------- | ------- |  | - | ------- | ------- | 
|                                              |                                                                                                                                                                  | December 31,                              
|                                              |                                                                                                                                                                  |                                           
|                                              |                                                                                                                                                                  | 2004                                       |   | 2003   
|                                              |                                                                                                                                                                  |                                            |   |        
|                                              |                                                                                                                                                                  | (In thousands, except per                 
|                                              |                                                                                                                                                                  | share amounts)                            
|ASSETS                                       
|Current assets:                               |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                              | Cash and cash equivalents                                                                                                                                        |                                            | $ | 15,666  |         |  | $ | 25,664  |        
|                                              | Short-term investments                                                                                                                                           |                                            |   | 66,512  |         |  |   | 54,317  |        
|                                              | Accounts receivable, less allowance for doubtful accounts of
    $229 and $149 as of December 31, 2004 and 2003, respectively                                    |                                            |   | 16,828  |         |  |   | 11,042  |        
|                                              | Other receivables                                                                                                                                                |                                            |   | 1,888   |         |  |   | 187     |        
|                                              | Inventories                                                                                                                                                      |                                            |   | 3,106   |         |  |   | 2,691   |        
|                                              | Prepaids and other current assets                                                                                                                                |                                            |   | 1,784   |         |  |   | 1,133   |        
|                                              |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                              |                                                                                                                                                                  | Total current assets                       |   |         | 105,784 |  |   |         | 95,034  | 
|Non-current assets:                           |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                              | Property and equipment, net                                                                                                                                      |                                            |   | 3,066   |         |  |   | 2,593   |        
|                                              | Long-term investments                                                                                                                                            |                                            |   | 10,019  |         |  |   | 6,726   |        
|                                              | Other non-current assets                                                                                                                                         |                                            |   | 2,233   |         |  |   | 346     |        
|                                              | Goodwill                                                                                                                                                         |                                            |   | 9,527   |         |  |   |        |        
|                                              | Other intangibles, net                                                                                                                                           |                                            |   | 7,163   |         |  |   |        |        
|                                              |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                              |                                                                                                                                                                  | Total assets                               |   | $       | 137,792 |  |   | $       | 104,699 | 
|                                              |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                             
|LIABILITIES AND STOCKHOLDERS EQUITY         
|Current liabilities:                          |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                              | Current portion of capital lease obligations                                                                                                                     |                                            | $ |        |         |  | $ | 457     |        
|                                              | Current portion of note payable                                                                                                                                  |                                            |   |        |         |  |   | 139     |        
|                                              | Accounts payable                                                                                                                                                 |                                            |   | 2,802   |         |  |   | 2,229   |        
|                                              | Accrued compensation                                                                                                                                             |                                            |   | 6,467   |         |  |   | 4,241   |        
|                                              | Other accrued liabilities                                                                                                                                        |                                            |   | 7,588   |         |  |   | 3,339   |        
|                                              | Income taxes payable                                                                                                                                             |                                            |   | 2,438   |         |  |   | 1,059   |        
|                                              | Deferred revenue                                                                                                                                                 |                                            |   | 13,318  |         |  |   | 8,297   |        
|                                              |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                              |                                                                                                                                                                  | Total current liabilities                  |   |         | 32,613  |  |   |         | 19,761  | 
|Non-current liabilities:                      |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                              | Deferred revenue, less current portion                                                                                                                           |                                            |   | 2,839   |         |  |   | 1,295   |        
|                                              | Deferred rent and other                                                                                                                                          |                                            |   | 381     |         |  |   | 225     |        
|                                              |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                              |                                                                                                                                                                  | Total liabilities                          |   |         | 35,833  |  |   |         | 21,281  | 
|Commitments and contingencies (Notes 5 and 6) |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|Stockholders equity:                         |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                              | Preferred stock, $0.001 par value; 5,000 shares
    authorized; no shares issued and outstanding as of
    December 31, 2004 and 2003, respectively              |                                            |   |        |         |  |   |        |        
|                                              | Common stock, $0.001 par value; 85,000 shares
    authorized; 33,418 and 32,501 shares issued and outstanding
    as of December 31, 2004 and 2003, respectively |                                            |   | 33      |         |  |   | 32      |        
|                                              | Additional paid-in capital                                                                                                                                       |                                            |   | 181,625 |         |  |   | 175,820 |        
|                                              | Deferred stock-based compensation                                                                                                                                |                                            |   | (1,610  | )       |  |   |        |        
|                                              | Accumulated other comprehensive loss                                                                                                                             |                                            |   | (207    | )       |  |   | (12     | )      
|                                              | Notes receivable from stockholders                                                                                                                               |                                            |   |        |         |  |   | (6      | )      
|                                              | Accumulated deficit                                                                                                                                              |                                            |   | (77,882 | )       |  |   | (92,416 | )      
|                                              |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                              |                                                                                                                                                                  | Total stockholders equity                 |   |         | 101,959 |  |   |         | 83,418  | 
|                                              |                                                                                                                                                                  |                                            |   |         |         |  |   |        
|                                              |                                                                                                                                                                  | Total liabilities and stockholders equity |   | $       | 137,792 |  |   | $       | 104,699 | 
|                                              |                                                                                                                                                                  |                                            |   |         |         |  |   |        



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##### Table of Contents



PACKETEER, INC.


CONSOLIDATED INCOME STATEMENTS


|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |        |        | 
|----------------------------------------------------- | ------------------------------------------- | ------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                      |                                             | Years Ended December 31,             
|                                                      |                                             |                                      
|                                                      |                                             | 2004                                  |        | 2003   |        | 2002
|                                                      |                                             |                                       |        |        |        |     
|                                                      |                                             | (In thousands, except per share data)
|Net revenues:                                         |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|                                                      | Product revenues                            |                                       | $      | 74,557 |        |      | $      | 60,294 |        |   | $      | 47,192 |       
|                                                      | Service revenues                            |                                       |        | 17,880 |        |      |        | 12,429 |        |   |        | 7,822  |       
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|                                                      |                                             | Total net revenues                    |        |        | 92,437 |      |        |        | 72,723 |   |        |        | 55,014 | 
|Cost of revenues:                                     |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|                                                      | Product costs                               |                                       |        | 16,780 |        |      |        | 12,520 |        |   |        | 9,816  |       
|                                                      | Service costs                               |                                       |        | 6,057  |        |      |        | 4,516  |        |   |        | 3,036  |       
|                                                      | Amortization of purchased intangible assets |                                       |        | 38     |        |      |        |       |        |   |        |       |       
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|                                                      |                                             | Total cost of revenues                |        |        | 22,875 |      |        |        | 17,036 |   |        |        | 12,852 | 
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|Gross profit                                          |                                             |                                       | 69,562 |        |        |      | 55,687 |        |        |   | 42,162 |       
|Operating expenses:                                   |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|                                                      | Research and development                    |                                       |        | 14,973 |        |      |        | 12,202 |        |   |        | 10,877 |       
|                                                      | Sales and marketing                         |                                       |        | 35,504 |        |      |        | 26,433 |        |   |        | 23,420 |       
|                                                      | General and administrative                  |                                       |        | 6,061  |        |      |        | 5,494  |        |   |        | 4,636  |       
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|                                                      |                                             | Total operating expenses              |        |        | 56,538 |      |        |        | 44,129 |   |        |        | 38,933 | 
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|Income from operations                                |                                             |                                       | 13,024 |        |        |      | 11,558 |        |        |   | 3,229  |       
|Interest and other income, net                        |                                             |                                       | 1,165  |        |        |      | 842    |        |        |   | 1,180  |       
|Interest expense                                      |                                             |                                       | (38    | )      |        |      | (141   | )      |        |   | (265   | )     
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|Income before provision (benefit) for income taxes    |                                             |                                       | 14,151 |        |        |      | 12,259 |        |        |   | 4,144  |       
|Provision (benefit) for income taxes                  |                                             |                                       | (383   | )      |        |      | 1,226  |        |        |   | 415    |       
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|Net income                                            |                                             | $                                     | 14,534 |        |        | $    | 11,033 |        |        | $ | 3,729  |       
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|Basic net income per share                            |                                             | $                                     | 0.44   |        |        | $    | 0.35   |        |        | $ | 0.12   |       
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|Diluted net income per share                          |                                             | $                                     | 0.42   |        |        | $    | 0.32   |        |        | $ | 0.12   |       
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|Shares used in computing basic net income per share   |                                             |                                       | 32,994 |        |        |      | 31,634 |        |        |   | 30,205 |       
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       
|Shares used in computing diluted net income per share |                                             |                                       | 34,502 |        |        |      | 34,364 |        |        |   | 30,718 |       
|                                                      |                                             |                                       |        |        |        |      |        |        |        |   |        |       



42



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##### Table of Contents



PACKETEER, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND


COMPREHENSIVE INCOME (LOSS)


|                                                                  |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   |          |        |  
|----------------------------------------------------------------- | ------------------------------ | -------------- | ------ | ---------- |  | ----------- | -- | ------------- |  | ------------- | ------- | ------------ |  | ------- | ------ | ------------- |  | ------------- | ---- | ---- | - | - | --- | - |  | - | -------- | ------ |  | - | ------- | ------ | - | - | -------- | ------ | -
|                                                                  |                                |                |        |            |  |             |    | Accumulated   |  | Notes         |         |              |  |         |        |              
|                                                                  |                                | Common Stock   |        | Additional |  | Deferred    |    | Other         |  | Receivable    |         |              |  |         |        |              
|                                                                  |                                |                |        | Paid-In    |  | Stock-Based |    | Comprehensive |  | From          |         | Accumulated  |  |         |        | Comprehensive
|                                                                  |                                | Shares         |        | Amount     |  | Capital     |    | Compensation  |  | Income (Loss) |         | Stockholders |  | Deficit |        | Total         |  | Income (Loss)
|                                                                  |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |              
|                                                                  |                                | (In thousands)
|Balances as of December 31, 2001                                  |                                |                | 29,951 |            |  | $           | 30 |               |  | $             | 164,273 |              |  | $       | (400   | )             |  | $             | (18  | )    |   | $ | (83 | ) |  | $ | (107,178 | )      |  | $ | 56,624  |        |   | $ | (107,196 | )     
|Stock-based compensation to non-employees                         |                                |                |       |            |  |             |   |               |  |               | 4       |              |  |         |       |               |  |               |     |      |   |   |    |   |  |   |         |        |  |   | 4       |        |   |   |          |       
|Issuance of common stock upon exercise of stock options           |                                |                | 441    |            |  |             | 1  |               |  |               | 1,565   |              |  |         |       |               |  |               |     |      |   |   |    |   |  |   |         |        |  |   | 1,566   |        |   |   |          |       
|Issuance of common stock pursuant to Employee Stock Purchase Plan |                                |                | 207    |            |  |             |   |               |  |               | 885     |              |  |         |       |               |  |               |     |      |   |   |    |   |  |   |         |        |  |   | 885     |        |   |   |          |       
|Repayments of notes receivable from stockholders                  |                                |                |       |            |  |             |   |               |  |               |        |              |  |         |       |               |  |               |     |      |   |   | 29  |   |  |   |         |        |  |   | 29      |        |   |   |          |       
|Amortization of stock-based compensation                          |                                |                |       |            |  |             |   |               |  |               |        |              |  |         | 381    |               |  |               |     |      |   |   |    |   |  |   |         |        |  |   | 381     |        |   |   |          |       
|Comprehensive income:                                             |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   |          |       
|                                                                  | Unrealized gain on investments |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |      | 78   |   |   |     |  |  |   |          |       |  |   |         | 78     |   |   |          | 78     |  
|                                                                  | Other                          |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |      | 105  |   |   |     |  |  |   |          |       |  |   |         | 105    |   |   |          | 105    |  
|                                                                  | Net income                     |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |      |     |   |   |     |  |  |   |          | 3,729  |  |   |         | 3,729  |   |   |          | 3,729  |  
|                                                                  |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   |          |       
|Comprehensive income                                              |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   | 3,912    |       
|                                                                  |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   |          |       
|Balances as of December 31, 2002                                  |                                |                | 30,599 |            |  |             | 31 |               |  |               | 166,727 |              |  |         | (19    | )             |  |               | 165  |      |   |   | (54 | ) |  |   | (103,449 | )      |  |   | 63,401  |        |   |   | (103,284 | )     
|Issuance of common stock upon exercise of stock options           |                                |                | 1,662  |            |  |             | 1  |               |  |               | 8,313   |              |  |         |       |               |  |               |     |      |   |   |    |   |  |   |         |        |  |   | 8,314   |        |   |   |          |       
|Issuance of common stock pursuant to Employee Stock Purchase Plan |                                |                | 240    |            |  |             |   |               |  |               | 780     |              |  |         |       |               |  |               |     |      |   |   |    |   |  |   |         |        |  |   | 780     |        |   |   |          |       
|Repayments of notes receivable from stockholders                  |                                |                |       |            |  |             |   |               |  |               |        |              |  |         |       |               |  |               |     |      |   |   | 48  |   |  |   |         |        |  |   | 48      |        |   |   |          |       
|Amortization of stock-based compensation                          |                                |                |       |            |  |             |   |               |  |               |        |              |  |         | 19     |               |  |               |     |      |   |   |    |   |  |   |         |        |  |   | 19      |        |   |   |          |       
|Comprehensive income:                                             |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   |          |       
|                                                                  | Unrealized loss on investments |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |      | (177 | ) |   |     |  |  |   |          |       |  |   |         | (177   | ) |   |          | (177   | )
|                                                                  | Net income                     |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |      |     |   |   |     |  |  |   |          | 11,033 |  |   |         | 11,033 |   |   |          | 11,033 |  
|                                                                  |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   |          |       
|Comprehensive income                                              |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   | 10,856   |       
|                                                                  |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   |          |       
|Balances as of December 31, 2003                                  |                                |                | 32,501 |            |  |             | 32 |               |  |               | 175,820 |              |  |         |       |               |  |               | (12  | )    |   |   | (6  | ) |  |   | (92,416  | )      |  |   | 83,418  |        |   |   | (92,428  | )     
|Issuance of restricted common stock, net of repurchases           |                                |                | 110    |            |  |             |   |               |  |               | 1,624   |              |  |         | (1,624 | )             |  |               |     |      |   |   |    |   |  |   |         |        |  |   |        |        |   |   |          |       
|Issuance of common stock upon exercise of stock options           |                                |                | 510    |            |  |             | 1  |               |  |               | 2,925   |              |  |         |       |               |  |               |     |      |   |   |    |   |  |   |         |        |  |   | 2,926   |        |   |   |          |       
|Issuance of common stock pursuant to Employee Stock Purchase Plan |                                |                | 297    |            |  |             |   |               |  |               | 1,256   |              |  |         |       |               |  |               |     |      |   |   |    |   |  |   |         |        |  |   | 1,256   |        |   |   |          |       
|Repayments of notes receivable from stockholders                  |                                |                |       |            |  |             |   |               |  |               |        |              |  |         |       |               |  |               |     |      |   |   | 6   |   |  |   |         |        |  |   | 6       |        |   |   |          |       
|Amortization of stock-based compensation                          |                                |                |       |            |  |             |   |               |  |               |        |              |  |         | 14     |               |  |               |     |      |   |   |    |   |  |   |         |        |  |   | 14      |        |   |   |          |       
|Comprehensive income:                                             |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   |          |       
|                                                                  | Unrealized loss on investments |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |      | (195 | ) |   |     |  |  |   |          |       |  |   |         | (195   | ) |   |          | (195   | )
|                                                                  | Net income                     |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |      |     |   |   |     |  |  |   |          | 14,534 |  |   |         | 14,534 |   |   |          | 14,534 |  
|                                                                  |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   |          |       
|Comprehensive income                                              |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   | 14,339   |       
|                                                                  |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   |          |       
|Balances as of December 31, 2004                                  |                                |                | 33,418 |            |  | $           | 33 |               |  | $             | 181,625 |              |  | $       | (1,610 | )             |  | $             | (207 | )    |   | $ |    |   |  | $ | (77,882  | )      |  | $ | 101,959 |        |   | $ | (78,089  | )     
|                                                                  |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |      |      |   |   |     |   |  |   |          |        |  |   |         |        |   |   |          |       



43



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##### Table of Contents



PACKETEER, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                   |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |         |       |        |        |  
|-------------------------------------------------- | --------------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------- | ----------------------------------------- | ------ | ------ | ------- | ------- | ----- | ------ | ------- | ------- | ----- | ------ | ------ | -
|                                                   |                                                                                         | Years Ended December 31,                    
|                                                   |                                                                                         |                                             
|                                                   |                                                                                         | 2004                                         |                                   | 2003                                      |        | 2002  
|                                                   |                                                                                         |                                              |                                   |                                           |        |       
|                                                   |                                                                                         | (In thousands)                              
|Cash flows from operating activities:              |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|                                                   | Net income                                                                              |                                              | $                                 | 14,534                                    |        |        | $       | 11,033  |       |        | $       | 3,729   |      
|                                                   | Adjustments to reconcile net income to net cash provided by
    operating activities:   |                                              |                                   |                                           |        |        |         |         |       |        |         |         |      
|                                                   |                                                                                         | Depreciation                                 |                                   |                                           | 1,728  |        |         |         | 1,418 |        |         |         | 1,270 |       
|                                                   |                                                                                         | Amortization of purchased intangibles        |                                   |                                           | 38     |        |         |         |      |        |         |         |      |       
|                                                   |                                                                                         | Amortization of stock-based compensation     |                                   |                                           | 14     |        |         |         | 19    |        |         |         | 385   |       
|                                                   |                                                                                         | Deferred taxes                               |                                   |                                           | (2,375 | )      |         |         |      |        |         |         |      |       
|                                                   |                                                                                         | Loss on disposal of property and equipment   |                                   |                                           | 9      |        |         |         |      |        |         |         |      |       
|                                                   |                                                                                         | Other non-cash charges                       |                                   |                                           |       |        |         |         | 1     |        |         |         | 105   |       
|                                                   |                                                                                         | Changes in operating assets and liabilities: |                                   |                                           |        |        |         |         |       |        |         |         |       |       
|                                                   |                                                                                         |                                              | Accounts receivable               |                                           |        | (5,351 | )       |         |       | (3,897 | )       |         |       | (1,373 | )     
|                                                   |                                                                                         |                                              | Other receivables                 |                                           |        | 475    |         |         |       | 223    |         |         |       | (227   | )     
|                                                   |                                                                                         |                                              | Inventories                       |                                           |        | (192   | )       |         |       | (400   | )       |         |       | (102   | )     
|                                                   |                                                                                         |                                              | Prepaids and other current assets |                                           |        | (12    | )       |         |       | 169    |         |         |       | (264   | )     
|                                                   |                                                                                         |                                              | Accounts payable                  |                                           |        | 573    |         |         |       | 877    |         |         |       | (930   | )     
|                                                   |                                                                                         |                                              | Accrued compensation              |                                           |        | 2,217  |         |         |       | 789    |         |         |       | 1,370  |       
|                                                   |                                                                                         |                                              | Other accrued liabilities         |                                           |        | 1,896  |         |         |       | 662    |         |         |       | (772   | )     
|                                                   |                                                                                         |                                              | Income taxes payable              |                                           |        | 1,379  |         |         |       | 553    |         |         |       | 326    |       
|                                                   |                                                                                         |                                              | Deferred revenue                  |                                           |        | 6,428  |         |         |       | 3,624  |         |         |       | 1,862  |       
|                                                   |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|                                                   |                                                                                         |                                              |                                   | Net cash provided by operating activities |        |        | 21,361  |         |       |        | 15,071  |         |       |        | 5,379  |  
|                                                   |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|Cash flows from investing activities:              |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|                                                   | Purchases of property and equipment                                                     |                                              |                                   | (1,931                                    | )      |        |         | (985    | )     |        |         | (2,920  | )    
|                                                   | Purchases of investments                                                                |                                              |                                   | (81,384                                   | )      |        |         | (88,113 | )     |        |         | (67,586 | )    
|                                                   | Proceeds from sales and maturities of investments                                       |                                              |                                   | 65,701                                    |        |        |         | 46,223  |       |        |         | 60,546  |      
|                                                   | Acquisition, net of cash acquired                                                       |                                              |                                   | (17,304                                   | )      |        |         |        |       |        |         |        |      
|                                                   | Other assets                                                                            |                                              |                                   | (33                                       | )      |        |         | (83     | )     |        |         | (38     | )    
|                                                   |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|                                                   |                                                                                         |                                              |                                   | Net cash used in investing activities     |        |        | (34,951 | )       |       |        | (42,958 | )       |       |        | (9,998 | )
|                                                   |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|Cash flows from financing activities:              |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|                                                   | Net proceeds from issuance of common stock                                              |                                              |                                   | 2,926                                     |        |        |         | 8,314   |       |        |         | 1,566   |      
|                                                   | Sale of stock to employees under the ESPP                                               |                                              |                                   | 1,256                                     |        |        |         | 780     |       |        |         | 885     |      
|                                                   | Proceeds from repayment of notes receivable from stockholders                           |                                              |                                   | 6                                         |        |        |         | 48      |       |        |         | 29      |      
|                                                   | Repayments of line of credit                                                            |                                              |                                   |                                          |        |        |         | (1,000  | )     |        |         | (851    | )    
|                                                   | Payments of notes payable                                                               |                                              |                                   | (139                                      | )      |        |         | (189    | )     |        |         | (172    | )    
|                                                   | Principal payments of capital lease obligations                                         |                                              |                                   | (457                                      | )      |        |         | (546    | )     |        |         | (703    | )    
|                                                   |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|                                                   |                                                                                         |                                              |                                   | Net cash provided by financing activities |        |        | 3,592   |         |       |        | 7,407   |         |       |        | 754    |  
|                                                   |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|Net decrease in cash and cash equivalents          |                                                                                         |                                              | (9,998                            | )                                         |        |        | (20,480 | )       |       |        | (3,865  | )      
|Cash and cash equivalents at beginning of year     |                                                                                         |                                              | 25,664                            |                                           |        |        | 46,144  |         |       |        | 50,009  |        
|                                                   |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|Cash and cash equivalents at end of year           |                                                                                         | $                                            | 15,666                            |                                           |        | $      | 25,664  |         |       | $      | 46,144  |        
|                                                   |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|Supplemental Disclosures of Cash Flow Information: |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|Non-cash investing and financing activities:       |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        
|                                                   | Issuance of restricted common stock, net of repurchases, to
    former Mentat employees |                                              | $                                 | 1,624                                     |        |        | $       |        |       |        | $       |        |      
|                                                   |                                                                                         |                                              |                                   |                                           |        |        |         |         |       |        |         |        



44



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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



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





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





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





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







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

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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





|                             |                                     |                          |       |        |   |      |     |        |   |   |     |        |  
|---------------------------- | ----------------------------------- | ------------------------ | ----- | ------ | - | ---- | --- | ------ | - | - | --- | ------ | -
|                             |                                     | Years Ended December 31,
|                             |                                     |                         
|                             |                                     | 2004                     |       | 2003   |   | 2002
|                             |                                     |                          |       |        |   |     
|Balance at beginning of year |                                     | $                        | 713   |        |   | $    | 875 |        |   | $ | 331 |       
|                             | Additions, charged against revenues |                          |       | 2,247  |   |      |     | 1,160  |   |   |     | 2,071  |  
|                             | Deductions                          |                          |       | (1,709 | ) |      |     | (1,322 | ) |   |     | (1,527 | )
|                             |                                     |                          |       |        |   |      |     |        |   |   |     |       
|Balance at end of year       |                                     | $                        | 1,251 |        |   | $    | 713 |        |   | $ | 875 |       
|                             |                                     |                          |       |        |   |      |     |        |   |   |     |       



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





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



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                             |                                                          |              |     |      |   |      |     |     |   |   |     |    | 
|---------------------------- | -------------------------------------------------------- | ------------ | --- | ---- | - | ---- | --- | --- | - | - | --- | -- | 
|                             |                                                          | Years Ended 
|                             |                                                          | December 31,
|                             |                                                          |             
|                             |                                                          | 2004         |     | 2003 |   | 2002
|                             |                                                          |              |     |      |   |     
|Balance at beginning of year |                                                          | $            | 149 |      |   | $    | 145 |     |   | $ | 132 |   
|                             | Provision, charged to general and administrative expense |              |     | 89   |   |      |     | 65  |   |   |     | 12 | 
|                             | Write-offs, net of recoveries                            |              |     | (9   | ) |      |     | (61 | ) |   |     | 1  | 
|                             |                                                          |              |     |      |   |      |     |     |   |   |     |   
|Balance at end of year       |                                                          | $            | 229 |      |   | $    | 149 |     |   | $ | 145 |   
|                             |                                                          |              |     |      |   |      |     |     |   |   |     |   



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





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





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





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





|                   |             |      |       |       |  |   |       |       | 
|------------------ | ----------- | ---- | ----- | ----- |  | - | ----- | ----- | 
|                   |             | 2004 |       | 2003 
|                   |             |      |       |      
|Completed products |             | $    | 2,957 |       |  | $ | 2,622 |      
|Components         |             |      | 149   |       |  |   | 69    |      
|                   |             |      |       |       |  |   |       |      
|                   | Inventories |      | $     | 3,106 |  |   | $     | 2,691 | 
|                   |             |      |       |       |  |   |       |      

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

Property and equipment,




|                                                |  |      |        |      |  |   |        |  
|----------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                |  | 2004 |        | 2003
|                                                |  |      |        |     
|Computers and equipment                         |  | $    | 6,848  |      |  | $ | 4,484  |  
|Equipment under capital lease                   |  |      |       |      |  |   | 1,436  |  
|Furniture and fixtures                          |  |      | 783    |      |  |   | 719    |  
|Leasehold improvements                          |  |      | 1,539  |      |  |   | 1,504  |  
|                                                |  |      |        |      |  |   |        |  
|                                                |  |      | 9,170  |      |  |   | 8,143  |  
|Less: accumulated depreciation and amortization |  |      | (6,104 | )    |  |   | (5,550 | )
|                                                |  |      |        |      |  |   |        |  
|Property and equipment, net                     |  | $    | 3,066  |      |  | $ | 2,593  |  
|                                                |  |      |        |      |  |   |        |  

Goodwill


Other intangibles


|                                     |                       |        |       |             |  |  |   |  | 
|------------------------------------ | --------------------- | ------ | ----- | ----------- |  |  | - |  | 
|                                     |                       |        |       | Estimated  
|                                     |                       |        |       | Useful Life
|                                     |                       | Amount |       | in Years   
|                                     |                       |        |       |            
|Developed technology                 |                       | $      | 5,100 |             |  |  | 5 | 
|Customer contracts and relationships |                       |        | 1,900 |             |  |  | 6 | 
|Tradename                            |                       |        | 200   |             |  |  | 3 | 
|                                     |                       |        |       |             |  |  |   | 
|                                     | Purchased Intangibles |        | $     | 7,200       |  |  |   |  | 
|                                     |                       |        |       |             |  |  |   | 



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |  |        |       | 
|---- |  | ------ | ----- | 
|Year |  | Amount
|     |  |       
|2005 |  | $      | 1,403 | 
|2006 |  |        | 1,403 | 
|2007 |  |        | 1,402 | 
|2008 |  |        | 1,337 | 
|2009 |  |        | 1,309 | 
|2010 |  |        | 308   | 
|     |  |        |       | 
|     |  | $      | 7,162 | 
|     |  |        |       | 





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





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





|                             |                                        |                     |     |      |   |      |     |      |   |   |     |      |  
|---------------------------- | -------------------------------------- | ------------------- | --- | ---- | - | ---- | --- | ---- | - | - | --- | ---- | -
|                             |                                        | For the Years Ended
|                             |                                        | December 31,       
|                             |                                        |                    
|                             |                                        | 2004                |     | 2003 |   | 2002
|                             |                                        |                     |     |      |   |     
|Balance at beginning of year |                                        | $                   | 303 |      |   | $    | 284 |      |   | $ | 552 |     
|                             | Provision for current year sales       |                     |     | 422  |   |      |     | 372  |   |   |     | 227  |  
|                             | Adjustments of prior accrual estimates |                     |     |     |   |      |     |     |   |   |     | (128 | )
|                             | Warranty costs incurred                |                     |     | (410 | ) |      |     | (353 | ) |   |     | (367 | )
|                             |                                        |                     |     |      |   |      |     |      |   |   |     |     
|Balance at end of year       |                                        | $                   | 315 |      |   | $    | 303 |      |   | $ | 284 |     
|                             |                                        |                     |     |      |   |      |     |      |   |   |     |     



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



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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









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





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



50



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                                          |  |                          |         |      |  |      |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                          |  | Years Ended December 31,
|                                                                                                                          |  |                         
|                                                                                                                          |  | 2004                     |         | 2003 |  | 2002
|                                                                                                                          |  |                          |         |      |  |     
|Net income as reported                                                                                                    |  | $                        | 14,534  |      |  | $    | 11,033 |   |  | $ | 3,729  |  
|Add: Stock-based compensation under APB 25, net of tax                                                                    |  |                          | 12      |      |  |      | 17     |   |  |   | 343    |  
|Deduct: Stock-based employee compensation expense determined
    under fair value-based method for all awards, net of tax |  |                          | (10,169 | )    |  |      | (9,069 | ) |  |   | (7,669 | )
|                                                                                                                          |  |                          |         |      |  |      |        |   |  |   |        |  
|Net income (loss) pro forma                                                                                               |  | $                        | 4,377   |      |  | $    | 1,981  |   |  | $ | (3,597 | )
|                                                                                                                          |  |                          |         |      |  |      |        |   |  |   |        |  
|Earnings per share:                                                                                                       |  |                          |         |      |  |      |        |   |  |   |        |  
|Basic  as reported                                                                                                       |  | $                        | 0.44    |      |  | $    | 0.35   |   |  | $ | 0.12   |  
|Diluted  as reported                                                                                                     |  | $                        | 0.42    |      |  | $    | 0.32   |   |  | $ | 0.12   |  
|Basic and diluted  pro forma                                                                                             |  | $                        | 0.13    |      |  | $    | 0.06   |   |  | $ | (0.12  | )





|                         |  |         |      |      |  |      |      |   |  |  |      |  
|------------------------ |  | ------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                         |  | Options
|                         |  |        
|                         |  | 2004    |      | 2003 |  | 2002
|                         |  |         |      |      |  |     
|Expected life (years)    |  |         | 3.3  |      |  |      | 3.4  |   |  |  | 3.1  |  
|Expected volatility      |  |         | 102  | %    |  |      | 109  | % |  |  | 124  | %
|Risk-free interest rates |  |         | 2.64 | %    |  |      | 2.22 | % |  |  | 3.14 | %





|                         |  |                |      |      |  |      |      |   |  |  |      |  
|------------------------ |  | -------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                         |  | ESPP Issuances
|                         |  |               
|                         |  | 2004           |      | 2003 |  | 2002
|                         |  |                |      |      |  |     
|Expected life (years)    |  |                | 1.3  |      |  |      | 1.3  |   |  |  | 0.5  |  
|Expected volatility      |  |                | 101  | %    |  |      | 111  | % |  |  | 124  | %
|Risk-free interest rates |  |                | 2.15 | %    |  |      | 1.10 | % |  |  | 1.46 | %





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



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





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





|                             |            |                                                                                                 |      |        |        |      |      |        |        |   |      |       |        |  
|---------------------------- | ---------- | ----------------------------------------------------------------------------------------------- | ---- | ------ | ------ | ---- | ---- | ------ | ------ | - | ---- | ----- | ------ | -
|                             |            | Years Ended December 31,                                                                       
|                             |            |                                                                                                
|                             |            | 2004                                                                                            |      | 2003   |        | 2002
|                             |            |                                                                                                 |      |        |        |     
|Numerator:                   |            |                                                                                                 |      |        |        |      |      |        |        |   |      |      
|                             | Net income |                                                                                                 | $    | 14,534 |        |      | $    | 11,033 |        |   | $    | 3,729 |       
|                             |            |                                                                                                 |      |        |        |      |      |        |        |   |      |      
|Denominator:                 |            |                                                                                                 |      |        |        |      |      |        |        |   |      |      
|                             | Basic:     |                                                                                                 |      |        |        |      |      |        |        |   |      |       |       
|                             |            | Weighted-average common shares outstanding                                                      |      |        | 33,104 |      |      |        | 31,634 |   |      |       | 30,206 |  
|                             |            | Less: common shares subject to repurchase                                                       |      |        | (110   | )    |      |        |       |   |      |       | (1     | )
|                             |            |                                                                                                 |      |        |        |      |      |        |        |   |      |      
|                             |            | Basic weighted-average common shares outstanding                                                |      |        | 32,994 |      |      |        | 31,634 |   |      |       | 30,205 |  
|                             |            |                                                                                                 |      |        |        |      |      |        |        |   |      |      
|                             | Diluted:   |                                                                                                 |      |        |        |      |      |        |        |   |      |       |       
|                             |            | Basic weighted-average common shares outstanding                                                |      |        | 32,994 |      |      |        | 31,634 |   |      |       | 30,205 |  
|                             |            | Add: potentially dilutive common shares from stock options and
    shares subject to repurchase |      |        | 1,485  |      |      |        | 2,706  |   |      |       | 513    |  
|                             |            | Add: potentially dilutive common shares from warrants                                           |      |        | 23     |      |      |        | 24     |   |      |       |       |  
|                             |            |                                                                                                 |      |        |        |      |      |        |        |   |      |      
|                             |            | Diluted weighted-average common shares outstanding                                              |      |        | 34,502 |      |      |        | 34,364 |   |      |       | 30,718 |  
|                             |            |                                                                                                 |      |        |        |      |      |        |        |   |      |      
|Basic net income per share   |            | $                                                                                               | 0.44 |        |        | $    | 0.35 |        |        | $ | 0.12 |      
|                             |            |                                                                                                 |      |        |        |      |      |        |        |   |      |      
|Diluted net income per share |            | $                                                                                               | 0.42 |        |        | $    | 0.32 |        |        | $ | 0.12 |      
|                             |            |                                                                                                 |      |        |        |      |      |        |        |   |      |      

52



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                              |  |              |       |      |  |      |     |  |  |  |       | 
|------------------------------------------------------------- |  | ------------ | ----- | ---- |  | ---- | --- |  |  |  | ----- | 
|                                                              |  | Years Ended 
|                                                              |  | December 31,
|                                                              |  |             
|                                                              |  | 2004         |       | 2003 |  | 2002
|                                                              |  |              |       |      |  |     
|Shares issuable under stock options                           |  |              | 2,170 |      |  |      | 226 |  |  |  | 1,881 | 
|Shares issuable pursuant to warrants to purchase common stock |  |              |      |      |  |      |    |  |  |  | 45    | 





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







53



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





|                                   |                           |   |       |        |  
|---------------------------------- | ------------------------- | - | ----- | ------ | -
|Accounts receivable                |                           | $ | 435   |       
|Non-trade receivables              |                           |   | 2,176 |       
|Inventory, net                     |                           |   | 223   |       
|Prepaids and other current assets  |                           |   | 99    |       
|Property, plant and equipment, net |                           |   | 279   |       
|Intangible assets                  |                           |   | 7,200 |       
|Goodwill                           |                           |   | 9,528 |       
|Other assets                       |                           |   | 19    |       
|                                   |                           |   |       |       
|                                   | Total assets acquired     |   |       | 19,959 |  
|                                   |                           |   |       |       
|Current liabilities                |                           |   | (891  | )     
|Long-term accrued liabilities      |                           |   | (14   | )     
|                                   |                           |   |       |       
|                                   | Total liabilities assumed |   |       | (905   | )
|                                   |                           |   |       |       
|                                   | Net assets acquired       |   | $     | 19,054 |  
|                                   |                           |   |       |       





54



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






55



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                                 |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |        | 
|------------------------------------------------ | --------------------- | ----------------------------- | ------ | ---------- |  | ---------- | -- | ---------- |  | - | ---- | --- | - | - | ------ | ------ | 
|                                                 |                       | Available-For-Sale Securities
|                                                 |                       |                              
|                                                 |                       |                               |        | Gross      |  | Gross      |    |           
|                                                 |                       | Amortized                     |        | Unrealized |  | Unrealized |    | Estimated 
|                                                 |                       | Cost                          |        | Gains      |  | Losses     |    | Fair Value
|                                                 |                       |                               |        |            |  |            |    |           
|DECEMBER 31, 2004                                |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       
|Commercial paper, money markets, corporate notes |                       | $                             | 19,991 |            |  | $          | 2  |            |  | $ | (49  | )   |   | $ | 19,944 |       
|Asset and mortgage backed securities             |                       |                               | 13,623 |            |  |            | 2  |            |  |   | (44  | )   |   |   | 13,581 |       
|                                                 |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       
|                                                 | Total debt securities |                               |        | 33,614     |  |            |    | 4          |  |   |      | (93 | ) |   |        | 33,525 | 
|Government securities                            |                       |                               | 56,028 |            |  |            | 1  |            |  |   | (119 | )   |   |   | 55,910 |       
|                                                 |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       
|                                                 |                       | $                             | 89,642 |            |  | $          | 5  |            |  | $ | (212 | )   |   | $ | 89,435 |       
|                                                 |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       
|Amounts included in cash and cash equivalents    |                       | $                             | 12,907 |            |  | $          | 3  |            |  | $ | (6   | )   |   | $ | 12,904 |       
|Amounts included in short-term investments       |                       |                               | 66,685 |            |  |            | 2  |            |  |   | (175 | )   |   |   | 66,512 |       
|Amounts included in long-term investments        |                       |                               | 10,050 |            |  |            |   |            |  |   | (31  | )   |   |   | 10,019 |       
|                                                 |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       
|                                                 |                       | $                             | 89,642 |            |  | $          | 5  |            |  | $ | (212 | )   |   | $ | 89,435 |       
|                                                 |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       
|DECEMBER 31, 2003                                |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       
|Commercial paper, money markets, corporate notes |                       | $                             | 16,318 |            |  | $          | 1  |            |  | $ |     |     |   | $ | 16,319 |       
|                                                 |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       
|                                                 | Total debt securities |                               |        | 16,318     |  |            |    | 1          |  |   |      |    |   |   |        | 16,319 | 
|Government securities                            |                       |                               | 68,839 |            |  |            | 12 |            |  |   | (25  | )   |   |   | 68,826 |       
|                                                 |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       
|                                                 |                       | $                             | 85,157 |            |  | $          | 13 |            |  | $ | (25  | )   |   | $ | 85,145 |       
|                                                 |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       
|Amounts included in cash and cash equivalents    |                       | $                             | 24,101 |            |  | $          | 1  |            |  | $ |     |     |   | $ | 24,102 |       
|Amounts included in short-term investments       |                       |                               | 54,320 |            |  |            | 11 |            |  |   | (14  | )   |   |   | 54,317 |       
|Amounts included in long-term investments        |                       |                               | 6,736  |            |  |            | 1  |            |  |   | (11  | )   |   |   | 6,726  |       
|                                                 |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       
|                                                 |                       | $                             | 85,157 |            |  | $          | 13 |            |  | $ | (25  | )   |   | $ | 85,145 |       
|                                                 |                       |                               |        |            |  |            |    |            |  |   |      |     |   |   |        |       



|                                      |  |           |        |            |  |   |        | 
|------------------------------------- |  | --------- | ------ | ---------- |  | - | ------ | 
|                                      |  | Amortized |        |           
|                                      |  | Cost      |        | Fair Value
|                                      |  |           |        |           
|Mature in one year or less            |  | $         | 79,592 |            |  | $ | 79,416 | 
|Mature between one year and two years |  |           | 10,050 |            |  |   | 10,019 | 
|                                      |  |           |        |            |  |   |        | 
|                                      |  | $         | 89,642 |            |  | $ | 89,435 | 
|                                      |  |           |        |            |  |   |        | 

56



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                 |                                       |            |        |            |  |   |     |     | 
|------------------------------------------------ | ------------------------------------- | ---------- | ------ | ---------- |  | - | --- | --- | 
|                                                 |                                       |            |        | Unrealized
|                                                 |                                       | Fair Value |        | Losses    
|                                                 |                                       |            |        |           
|Description of Securities                        |                                       |            |        |            |  |   |     |    
|Commercial paper, money markets, corporate notes |                                       | $          | 14,501 |            |  | $ | 49  |    
|Asset and mortgage backed securities             |                                       |            | 11,688 |            |  |   | 44  |    
|Government securities                            |                                       |            | 51,400 |            |  |   | 119 |    
|                                                 |                                       |            |        |            |  |   |     |    
|                                                 | Total temporarily impaired securities |            | $      | 77,589     |  |   | $   | 212 | 
|                                                 |                                       |            |        |            |  |   |     |    







|   |             
|-- | ------------
|4. | NOTE PAYABLE





|   |                           
|-- | --------------------------
|5. | COMMITMENTS AND GUARANTEES



|                                    |            |             |       |       | 
|----------------------------------- | ---------- | ----------- | ----- | ----- | 
|                                    |            | Lease      
|Years Ending December 31,           |            | Obligations
|                                    |            |            
|                                    | 2005       |             | $     | 1,839 | 
|                                    | 2006       |             |       | 1,625 | 
|                                    | 2007       |             |       | 1,213 | 
|                                    | 2008       |             |       | 77    | 
|                                    | 2009       |             |       | 77    | 
|                                    | Thereafter |             |       | 100   | 
|                                    |            |             |       |      
|Total future minimum lease payments |            | $           | 4,931 |      
|                                    |            |             |       |      





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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |              
|-- | -------------
|6. | CONTINGENCIES

In re
Packeteer, Inc. Initial Public Offering Securities
Litigation










|   |             
|-- | ------------
|7. | INCOME TAXES



|              |                                                    |      |        |        |  |      |       |        |  |   |        |       | 
|------------- | -------------------------------------------------- | ---- | ------ | ------ |  | ---- | ----- | ------ |  | - | ------ | ----- | 
|              |                                                    | 2004 |        | 2003   |  | 2002
|              |                                                    |      |        |        |  |     
|United States |                                                    | $    | 2,627  |        |  | $    | 3,337 |        |  | $ | (2,894 | )    
|Foreign       |                                                    |      | 11,524 |        |  |      | 8,922 |        |  |   | 7,038  |      
|              |                                                    |      |        |        |  |      |       |        |  |   |        |      
|              | Income before provision (benefit) for income taxes |      | $      | 14,151 |  |      | $     | 12,259 |  |   | $      | 4,144 | 
|              |                                                    |      |        |        |  |      |       |        |  |   |        |      



|          |         |               |      |        |       |      |       |       |       |   |     |     |     | 
|--------- | ------- | ------------- | ---- | ------ | ----- | ---- | ----- | ----- | ----- | - | --- | --- | --- | 
|          |         | 2004          |      | 2003   |       | 2002
|          |         |               |      |        |       |     
|Current:  |         |               |      |        |       |      |       |       |       |   |     |    
|          | Federal |               | $    | 1,174  |       |      | $     | 75    |       |   | $   |    |    
|          | State   |               |      | 6      |       |      |       | 9     |       |   |     | 6   |    
|          | Foreign |               |      | 812    |       |      |       | 1,142 |       |   |     | 409 |    
|          |         |               |      |        |       |      |       |       |       |   |     |    
|          |         | Total current |      |        | 1,992 |      |       |       | 1,226 |   |     |     | 415 | 
|Deferred: |         |               |      |        |       |      |       |       |       |   |     |    
|          | Federal |               |      | (2,375 | )     |      |       |      |       |   |     |    |    
|          |         |               |      |        |       |      |       |       |       |   |     |    
|          |         | $             | (383 | )      |       | $    | 1,226 |       |       | $ | 415 |    
|          |         |               |      |        |       |      |       |       |       |   |     |    

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                     |                                            |                                  |        |      |   |      |        |       |  |   |        |     | 
|---------------------------------------------------- | ------------------------------------------ | -------------------------------- | ------ | ---- | - | ---- | ------ | ----- |  | - | ------ | --- | 
|                                                     |                                            | For the Years Ended December 31,
|                                                     |                                            |                                 
|                                                     |                                            | 2004                             |        | 2003 |   | 2002
|                                                     |                                            |                                  |        |      |   |     
|Federal tax at statutory rate                        |                                            | $                                | 4,953  |      |   | $    | 4,168  |       |  | $ | 1,409  |    
|State taxes                                          |                                            |                                  | 6      |      |   |      | 9      |       |  |   | 6      |    
|Operating loss (utilized) not benefited              |                                            |                                  | (3,742 | )    |   |      | (1,188 | )     |  |   | 940    |    
|Non deductible expenses                              |                                            |                                  | 65     |      |   |      | 54     |       |  |   | 43     |    
|Alternative minimum income tax                       |                                            |                                  | 1,172  |      |   |      | 75     |       |  |   |       |    
|Change in estimate on deferred tax asset realization |                                            |                                  | (2,375 | )    |   |      |       |       |  |   |       |    
|Tax credits                                          |                                            |                                  | (895   | )    |   |      |       |       |  |   |       |    
|Foreign tax differential                             |                                            |                                  | 400    |      |   |      | (1,892 | )     |  |   | (1,983 | )  
|Other                                                |                                            |                                  | 33     |      |   |      |       |       |  |   |       |    
|                                                     |                                            |                                  |        |      |   |      |        |       |  |   |        |    
|                                                     | Total provision (benefit) for income taxes |                                  | $      | (383 | ) |      | $      | 1,226 |  |   | $      | 415 | 
|                                                     |                                            |                                  |        |      |   |      |        |       |  |   |        |    



|                        |                                                               |                           |         |        |        |   |         |        |        | 
|----------------------- | ------------------------------------------------------------- | ------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                        |                                                               | 2004                      |         | 2003  
|                        |                                                               |                           |         |       
|Deferred tax assets:    |                                                               |                           |         |        |        |   |         |       
|                        | Various accruals and reserves not deductible for tax purposes |                           | $       | 2,319  |        |   | $       | 1,135  |       
|                        | Property and equipment                                        |                           |         | 617    |        |   |         | 523    |       
|                        | Net operating loss carryforwards                              |                           |         | 13,331 |        |   |         | 18,689 |       
|                        | Tax credit carryforwards                                      |                           |         | 3,934  |        |   |         | 3,299  |       
|                        |                                                               |                           |         |        |        |   |         |       
|                        |                                                               | Gross deferred tax assets |         |        | 20,201 |   |         |        | 23,646 | 
|Valuation allowance     |                                                               |                           | (17,826 | )      |        |   | (23,646 | )     
|                        |                                                               |                           |         |        |        |   |         |       
|Net deferred tax assets |                                                               | $                         | 2,375   |        |        | $ |        |       
|                        |                                                               |                           |         |        |        |   |         |       









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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|   |                     
|-- | --------------------
|8. | STOCKHOLDERS EQUITY



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







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





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





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



60



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                 |                                 |           |       |                     |   |                  |       |        |   |   |       |       | 
|-------------------------------- | ------------------------------- | --------- | ----- | ------------------- | - | ---------------- | ----- | ------ | - | - | ----- | ----- | 
|                                 |                                 |           |       | Options Outstanding
|                                 |                                 |           |       |                    
|                                 |                                 | Available |       | Number of           |   | Weighted-Average
|                                 |                                 | for Grant |       | Shares              |   | Exercise Price  
|                                 |                                 |           |       |                     |   |                 
|Balances as of December 31, 2001 |                                 |           | 2,534 |                     |   |                  | 3,216 |        |   | $ | 8.88  |      
|                                 | Shares made available for grant |           |       | 1,498               |   |                  |       |       |   |   |       |      | 
|                                 | Granted                         |           |       | (2,420              | ) |                  |       | 2,420  |   |   |       | 5.49  | 
|                                 | Exercised                       |           |       |                    |   |                  |       | (430   | ) |   |       | 3.59  | 
|                                 | Cancelled                       |           |       | 196                 |   |                  |       | (196   | ) |   |       | 6.87  | 
|                                 |                                 |           |       |                     |   |                  |       |        |   |   |       |      
|Balances as of December 31, 2002 |                                 |           | 1,808 |                     |   |                  | 5,010 |        |   |   | 7.77  |      
|                                 | Shares made available for grant |           |       | 1,530               |   |                  |       |       |   |   |       |      | 
|                                 | Granted                         |           |       | (1,614              | ) |                  |       | 1,614  |   |   |       | 10.84 | 
|                                 | Exercised                       |           |       |                    |   |                  |       | (1,611 | ) |   |       | 5.12  | 
|                                 | Cancelled                       |           |       | 284                 |   |                  |       | (284   | ) |   |       | 11.22 | 
|                                 |                                 |           |       |                     |   |                  |       |        |   |   |       |      
|Balances as of December 31, 2003 |                                 |           | 2,008 |                     |   |                  | 4,729 |        |   |   | 9.51  |      
|                                 | Shares made available for grant |           |       | 1,625               |   |                  |       |       |   |   |       |      | 
|                                 | Granted                         |           |       | (2,337              | ) |                  |       | 2,337  |   |   |       | 16.03 | 
|                                 | Exercised                       |           |       |                    |   |                  |       | (510   | ) |   |       | 5.74  | 
|                                 | Cancelled                       |           |       | 898                 |   |                  |       | (898   | ) |   |       | 14.17 | 
|                                 |                                 |           |       |                     |   |                  |       |        |   |   |       |      
|Balances as of December 31, 2004 |                                 |           | 2,194 |                     |   |                  | 5,658 |        |   |   | 11.80 |      
|                                 |                                 |           |       |                     |   |                  |       |        |   |   |       |      

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                 |  |                     |       |                     |  |          |      |             |  |          |       |  |  |  |       |  |  |   |       | 
|---------------- |  | ------------------- | ----- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                 |  | Options Outstanding |       | Options Exercisable
|                 |  |                     |       |                    
|                 |  |                     |       | Weighted            |  |          |      |            
|                 |  |                     |       | Average             |  | Weighted |      |             |  | Weighted
|Range of         |  | Number              |       | Remaining           |  | Average  |      | Number      |  | Average 
|Exercise         |  | Outstanding         |       | Contractual         |  | Exercise |      | Exercisable |  | Exercise
|Prices           |  | at 12/31/04         |       | Life (Years)        |  | Price    |      | at 12/31/04 |  | Price   
|                 |  |                     |       |                     |  |          |      |             |  |         
|$0.50            |  |                     | 7     |                     |  |          | 3.15 |             |  | $        | 0.50  |  |  |  | 7     |  |  | $ | 0.50  | 
|$1.50 to $2.25   |  |                     | 20    |                     |  |          | 3.39 |             |  |          | 1.50  |  |  |  | 20    |  |  |   | 1.50  | 
|$2.50 to $3.50   |  |                     | 650   |                     |  |          | 6.93 |             |  |          | 3.46  |  |  |  | 368   |  |  |   | 3.43  | 
|$3.70 to $4.71   |  |                     | 344   |                     |  |          | 6.86 |             |  |          | 4.63  |  |  |  | 241   |  |  |   | 4.64  | 
|$4.75 to $6.10   |  |                     | 675   |                     |  |          | 5.85 |             |  |          | 6.04  |  |  |  | 621   |  |  |   | 6.07  | 
|$6.13 to $8.36   |  |                     | 711   |                     |  |          | 7.79 |             |  |          | 7.91  |  |  |  | 380   |  |  |   | 7.71  | 
|$8.77 to $12.44  |  |                     | 859   |                     |  |          | 8.29 |             |  |          | 11.01 |  |  |  | 288   |  |  |   | 10.73 | 
|$12.55 to $15.12 |  |                     | 981   |                     |  |          | 9.17 |             |  |          | 14.24 |  |  |  | 129   |  |  |   | 13.98 | 
|$15.19 to $20.77 |  |                     | 1,281 |                     |  |          | 8.65 |             |  |          | 18.38 |  |  |  | 199   |  |  |   | 16.82 | 
|$48.06           |  |                     | 130   |                     |  |          | 5.07 |             |  |          | 48.06 |  |  |  | 130   |  |  |   | 48.06 | 
|                 |  |                     |       |                     |  |          |      |             |  |          |       |  |  |  |       |  |  |   |       | 
|$0.50 - $48.06   |  |                     | 5,658 |                     |  |          | 7.83 |             |  |          | 11.80 |  |  |  | 2,383 |  |  |   | 9.90  | 
|                 |  |                     |       |                     |  |          |      |             |  |          |       |  |  |  |       |  |  |   |       | 





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





62



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                          |                     |                |      |             |   |                   |      |     |  |   |      |      |  
|------------------------- | ------------------- | -------------- | ---- | ----------- | - | ----------------- | ---- | --- |  | - | ---- | ---- | -
|                          |                     | Gains (Losses) |      |             |   | Accumulated Other
|                          |                     | On Marketable  |      | Other       |   | Comprehensive    
|                          |                     | Securities     |      | Adjustments |   | Income (Loss)    
|                          |                     |                |      |             |   |                  
|Balance December 31, 2001 |                     | $              | 87   |             |   | $                 | (105 | )   |  | $ | (18  | )   
|                          | Current year change |                |      | 78          |   |                   |      | 105 |  |   |      | 183  |  
|                          |                     |                |      |             |   |                   |      |     |  |   |      |     
|Balance December 31, 2002 |                     |                | 165  |             |   |                   |     |     |  |   | 165  |     
|                          | Current year change |                |      | (177        | ) |                   |      |    |  |   |      | (177 | )
|                          |                     |                |      |             |   |                   |      |     |  |   |      |     
|Balance December 31, 2003 |                     |                | (12  | )           |   |                   |     |     |  |   | (12  | )   
|                          | Current year change |                |      | (195        | ) |                   |      |    |  |   |      | (195 | )
|                          |                     |                |      |             |   |                   |      |     |  |   |      |     
|Balance December 31, 2004 |                     | $              | (207 | )           |   | $                 |     |     |  | $ | (207 | )   
|                          |                     |                |      |             |   |                   |      |     |  |   |      |     





|   |            
|-- | -----------
|9. | 401(k) PLAN





|    |                  
|--- | -----------------
|10. | SEGMENT REPORTING







|              |                             |                          |   |        |        |      |   |        |        |  |   |        |        | 
|------------- | --------------------------- | ------------------------ | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|              |                             | Years Ended December 31,
|              |                             |                         
|              |                             | 2004                     |   | 2003   |        | 2002
|              |                             |                          |   |        |        |     
|Net revenues: |                             |                          |   |        |        |      |   |        |        |  |   |       
|              | Americas                    |                          | $ | 37,934 |        |      | $ | 32,847 |        |  | $ | 24,161 |       
|              | Asia Pacific                |                          |   | 24,963 |        |      |   | 21,570 |        |  |   | 17,997 |       
|              | Europe, Middle East, Africa |                          |   | 29,540 |        |      |   | 18,306 |        |  |   | 12,856 |       
|              |                             |                          |   |        |        |      |   |        |        |  |   |       
|              |                             | Total net revenues       |   | $      | 92,437 |      |   | $      | 72,723 |  |   | $      | 55,014 | 
|              |                             |                          |   |        |        |      |   |        |        |  |   |       





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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures






Managements Report on Internal Control Over Financial
Reporting


Internal Control 
Integrated Framework Internal
Control  Integrated Framework




Limitations on the Effectiveness of Controls




64



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##### Table of Contents








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






PART III







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT








|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION








|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT








|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS








|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES






PART IV







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

Financial Statements




Financial Statement Schedule




Exhibits








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SIGNATURES






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



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

| |                                      
| | -------------------------------------
| |                                      
| | Dave Côté                            
| | President and Chief Executive Officer
| | Date: March 16, 2005                 

POWER OF ATTORNEY






|                                       |  |                                                                                        |  |                |  | 
|-------------------------------------- |  | -------------------------------------------------------------------------------------- |  | -------------- |  | 
|Name                                   |  | Title                                                                                  |  | Date          
|                                       |  |                                                                                        |  |               
|                                      
|/s/ DAVE CÔTÉDave
    Côté             |  | President and Chief Executive Officer
    (Principal Executive Officer) and Director   |  | March 16, 2005
|                                      
|/s/ DAVID YNTEMADavid
    Yntema       |  | Chief Financial Officer and Secretary
    (Principal Financial and Accounting Officer) |  | March 16, 2005
|                                      
|/s/ STEVEN CAMPBELLSteven
    Campbell |  | Chairman of the Board of Directors                                                     |  | March 16, 2005
|                                      
|/s/ CRAIG ELLIOTTCraig
    Elliott     |  | Director                                                                               |  | March 16, 2005
|                                      
|/s/ JOSEPH GRAZIANOJoseph
    Graziano |  | Director                                                                               |  | March 16, 2005

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|                                           |  |          |  |                |  | 
|------------------------------------------ |  | -------- |  | -------------- |  | 
|Name                                       |  | Title    |  | Date          
|                                           |  |          |  |               
|                                          
|/s/ L. WILLIAM KRAUSEL.
    William Krause |  | Director |  | March 16, 2005
|                                          
|/s/ BERNARD MATHAISELBernard
    Mathaisel |  | Director |  | March 16, 2005
|                                          
|/s/ PETER VAN CAMPPeter
    Van Camp       |  | Director |  | March 16, 2005

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EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                          
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1(2)       |  | Registrants Amended and Restated Certificate of
    Incorporation.                                                                                      
|        | 3  | .3(4)       |  | Registrants Amended and Restated Bylaws.                                                                                                                
|        | 4  | .1(2)       |  | Form of Registrants Specimen Common Stock Certificate.                                                                                                  
|        | 10 | .8(2)       |  | Registrants 1996 Equity Incentive Plan.                                                                                                                 
|        | 10 | .9(2)       |  | Registrants 1999 Stock Incentive Plan.                                                                                                                  
|        | 10 | .10(2)      |  | Registrants 1999 Employee Stock Purchase Plan.                                                                                                          
|        | 10 | .11(2)      |  | Form of Indemnity Agreement entered into by Registrant with each
    of its executive officers and directors.                                            
|        | 10 | .21(3)      |  | Amendment dated May 23, 2001 to the 1999 Stock Incentive
    Plan                                                                                        
|        | 10 | .22(4)      |  | Amendment dated May 22, 2002 to the 1999 Stock Incentive
    Plan                                                                                        
|        | 10 | .23(4)      |  | Facilities Lease Agreement dated July 15, 2003, between
    NMSPCSLDHB, a California Limited Partnership, and the Company                                
|        | 10 | .24(5)      |  | Employment Agreement dated September 27, 2002 between Dave
    Côté and Packeteer, Inc.                                                                  
|        | 10 | .25(6)      |  | Amendment dated July 16, 2003 to the 1999 Employee Stock
    Purchase Plan                                                                               
|        | 10 | .26(1)      |  | Amendment dated December 15, 2004 to the 1999 Stock
    Incentive Plan                                                                                   
|        | 10 | .27(1)      |  | Agreement and Plan of Reorganization By and Among Packeteer,
    Inc., P Acquisition Corporation, Mentat Inc. and Certain
    Shareholders of Mentat Inc.
|        | 21 | .1(1)       |  | Subsidiaries of Packeteer                                                                                                                                
|        | 23 | .1(1)       |  | Consent of KPMG LLP, Independent Registered Public Accounting
    Firm                                                                                   
|        | 24 | .1(1)       |  | Power of Attorney (see page 66)                                                                                                                          
|        | 31 | .1(1)       |  | Sarbanes-Oxley Section 302 Certification  CEO                                                                                                           
|        | 31 | .2(1)       |  | Sarbanes-Oxley Section 302 Certification  CFO                                                                                                           
|        | 32 | .1(1)       |  | Sarbanes-Oxley Section 906 Certification  CEO                                                                                                           
|        | 32 | .2(1)       |  | Sarbanes-Oxley Section 906 Certification  CFO                                                                                                           






|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(1) | Filed herewith.                                                                                                          
|   
|(2) | Incorporated by reference from Packeteers Registration
    Statement on Form S-1 (Reg. No. 79333-79077), as
    amended.
|   
|(3) | Incorporated by reference from Packeteers 10-K dated
    March 22, 2002.                                                
|   
|(4) | Incorporated by reference from Packeteers 10-K dated
    March 29, 2001.                                                
|   
|(5) | Incorporated by reference from Packeteers 10-K dated
    March 21, 2003.                                                
|   
|(6) | Incorporated by reference from Packeteers 10-K dated
    March 5, 2004.                                                 

68