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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 for the fiscal year ended December 31, 2000 or

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 for the transition period from ____________________
        to ________________.

     Commission File Number  _-_____

                                 PACKETEER, INC.
             (Exact name of Registrant as specified in its charter)

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     <S>                                   <C>
           DELAWARE                                      77-0420107
    (State of incorporation)               (I.R.S. Employer Identification No.)
</TABLE>

                               10495 NORTH DE ANZA
                           CUPERTINO, CALIFORNIA 95014
                    (Address of principal executive offices)

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

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

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

                         Common Stock, $0.001 Par Value
                                (Title of Class)

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

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

     Based on the closing sale price of the common stock on the Nasdaq National
Market System on February 28, 2001, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $324,333,232. Shares of
common stock held by each officer and director and by each person known by the
Company to own 10% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

     The number of shares outstanding of Registrant's common stock, $0.001 par
value, was 29,180,035 at February 28, 2001.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Information required by Part III of this form 10-K is incorporated by
reference from the Company's definitive Proxy Statement for the Registrant's
2001 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after December 31,
2000.



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                                ----------------
                                TABLE OF CONTENTS
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<S>        <C>           <C>                                                                                                   <C>
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 Registrant's Common Stock and Related Stockholder Matters...................................    25
           Item 6.       Selected Financial Data............................................................................    27
           Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operation...............    28
           Item 7a       Quantitative and Qualitative Disclosures about Market Risk.........................................    33
           Item 8.       Financial Statements and Supplementary Data........................................................    34
           Item 9.       Changes and Disagreements with Accountants on Accounting and Financial Disclosure..................    52
Part III
           Item 10.      Directors and Executive Officers of the Registrant.................................................    52
           Item 11.      Executive Compensation.............................................................................    52
           Item 12.      Security Ownership of Certain Beneficial Owners and Management.....................................    52
           Item 13.      Certain Relationships and Related Transactions.....................................................    52
Part IV
           Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................    52
Signatures..................................................................................................................    53
</TABLE>



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                                     PART I

ITEM 1. BUSINESS

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

OVERVIEW

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

     Packeteer's products are deployed by Global 2000 corporations and service
providers, and sold through an established network of more than 100 VARs,
distributors, system-integrators and OEMs in more than 50 countries. Our
products are built on hardware platforms based on Intel-compatible
microprocessor technologies. In addition, PacketWise software is licensed by
major communications industry partners who integrate the software into specific
strategic networking solutions. We primarily use indirect channels to leverage
the reach of our sales force to obtain worldwide coverage. Our sales force and
marketing efforts are used to develop brand awareness and support our indirect
channels. We have subsidiaries in Hong Kong, Japan, The Netherlands, United
Kingdom, Australia, Caymans and Canada. To date we have shipped more than 11,000
units.

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

INDUSTRY BACKGROUND

The Emergence of Internet Computing

     Today, both the Internet and its underlying protocol, TCP/IP, have grown to
positions of prominence in enterprise networking. Protocols are predefined
mechanisms for computers to communicate over networks. From its origins as a
network connecting academic and government institutions, the Internet has
evolved into an interactive communications and commerce platform supporting
businesses' daily operations. Originally intended to accommodate non-interactive
traffic such as file transfers and e-mail, the Internet and TCP/IP were designed
with the basic goals of connectivity, versatility and bandwidth exploitation.
With the evolution towards Internet computing, TCP/IP has become the
communications fabric, or as it is commonly referred to in the technology
industry, the underlying protocol of mission-critical enterprise networks. The
Internet has enabled a new generation of interactive applications to deliver
core business functions, including e-commerce, data access and information
exchange, to a broad range of users. Leveraging the fundamental attributes of
the Internet and TCP/IP, businesses, consumers and suppliers have become better
connected. This rapid development of a vast connected economy has given rise to
a new innovative business model, the Internet computing model.

The rapid emergence of Internet computing has had a significant effect on
today's enterprise networks and has created new challenges for information
technology managers. As more interactive business applications are developed
using web-enabled versions



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of enterprise software platforms, such as SAP R/3, Oracle, PeopleSoft and Baan,
the amount of network data is increasing dramatically. E-commerce extends the
confines of the enterprise network across the Internet, making application
performance difficult to ensure. Enterprise users access graphic-intensive web
sites, download large files, view streaming media presentations, monitor news
and stock quotes and access other non-critical information over the Internet.
The resulting traffic deluge impacts network resources that serve point-of-sale,
order processing, enterprise resource planning, supply-chain management and
other vital business functions.

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

The Traffic Bottleneck at the WAN Access Link

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

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

     Many existing and newly emerging telecommunications service providers are
also seeking to address the needs of enterprises that are adopting Internet
computing. Service providers have traditionally functioned as WAN bandwidth
suppliers, leasing data lines and selling Internet access to businesses and
consumers. In the face of heightened competition, service providers are seeking
to differentiate themselves by offering tiered services in order to attract and
retain customers and increase profitability. These offerings include web
hosting, application outsourcing and managed network services. To deliver these
services, service providers must be able to ensure network and application
performance and better manage and allocate network resources.

Limitations of Existing Approaches

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

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

     -    Over-provisioning results in under-utilization of the network during
          non-peak periods;

     -    Increases in bandwidth tend to be consumed quickly by latent demand
          within LAN and backbone infrastructure;

     -    Deployment costs and increases in recurring service charges can be
          prohibitively expensive, especially for networks with many remote
          sites and for international networks; and



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     -    There is no application performance visibility to enable effective
          capacity planning.

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

     -    Queuing-based approaches are reactive in nature and can only address
          congestion after the fact, rather than preventing it from occurring;

     -    Congested queues result in packet loss, retransmissions and delays
          that waste bandwidth and undermine application response times;

     -    Limited traffic classification capabilities inadequately distinguish
          between different types of applications, resulting in sub-optimal
          prioritization of traffic;

     -    Queuing does not directly control end-to-end application performance;
          and

     -    Queuing-based approaches do not control inbound traffic flowing from
          the WAN to the LAN.

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

     -    These products only monitor and report application performance and
          bandwidth utilization, offering no means of fixing or resolving
          performance problems; and

     -    Products that detect problems once they occur are reactive and don't
          proactively prevent similar problems in the future.

The Bandwidth Management Opportunity

     As Internet computing is more widely adopted, both businesses and service
providers are seeking ways to cost-effectively manage bandwidth, ensure
application performance and increase network efficiency. As mission-critical
applications compete with bandwidth-hungry non-critical traffic for limited
network resources, enterprises require a solution that not only monitors and
reports on application performance problems, but also provides the means to fix
such problems. As the complexity of their network infrastructures increases,
enterprises seek solutions that integrate easily into the existing network and
are cost-effective to deploy and maintain. In response to growing competition,
service providers are looking to create new revenue streams by offering
differentiated network and application-based services that meet the needs of
enterprise customers. Whether the solution is implemented by the enterprise or
purchased from a service provider, effectively managing the performance of
mission-critical applications is essential to businesses relying on Internet
computing.

THE PACKETEER SOLUTION

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



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     PacketWise software is at the core of our bandwidth management solutions
and is embedded in Packeteer-manufactured products, basically hardware
platforms, based on Intel-compatible microprocessor technologies, that run
various configurations of the PacketWise software and OEM-manufactured products.
Our PacketShaper products provide customers with solutions designed to be
deployed easily and cost-effectively without additional investment in or impact
to network equipment, software or infrastructure. In addition, by working with
OEM partners to embed PacketWise technology into their networking products, we
are able to address new market opportunities that are outside the scope of our
PacketShaper family of products.

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

     I.   Discover and Classify Traffic. Currently, PacketShaper automatically
          detects and identifies over 300 types of traffic. Network managers can
          refine traffic categories based on application, protocol, web page,
          addresses, users and host names. In addition, managers can define
          criteria to recognize proprietary applications so that PacketShaper
          automatically classifies the associated traffic. Sophisticated traffic
          classification enables network managers to understand network
          congestion and to precisely target bandwidth-allocation policies.

     II.  Analyze Performance. PacketShaper provides detailed analysis and
          evaluation of network resources and application performance.
          PacketShaper tracks traffic levels and trends, measures response times
          and calculates network efficiency. Network managers can analyze all
          traffic traversing a particular WAN access link or can focus on an
          individual application, client, server or traffic type.

     III. Control Traffic. PacketShaper allows network managers to control
          application performance and network resources by defining precise
          bandwidth-allocation policies. Policies can protect important traffic,
          cap bandwidth-intensive traffic and guarantee service levels. Network
          managers can tailor management strategies and bandwidth allocation to
          suit the requirements of particular applications or traffic, such as
          voice, video or data. PacketShaper paces both inbound and outbound
          traffic over the WAN access link to optimize performance and control
          end-to-end QoS. Our control technology can also prohibit specific
          applications, such as web-based entertainment or leisure applications,
          from utilizing any enterprise resources.

     IV.  Report Performance. PacketShaper provides reports describing current
          and historical network performance. Comprehensive reports, graphs and
          tables enable network managers to refine bandwidth management
          policies, evaluate efficiency and plan capacity. PacketShaper
          automatically measures per-transaction response times for each
          application. Managers can set, enforce and monitor service-level
          agreements, which quantify desired QoS for a particular application or
          customer.

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

     -    Gain Network Performance Visibility and Insight. PacketShaper provides
          valuable historical and real-time information about application
          performance and network utilization through an easy-to-use browser
          interface. Network managers gain a better understanding of the nature
          of traffic running on their networks and the problems and
          inefficiencies associated with that traffic.

     -    Ensure Bandwidth to Mission-Critical Applications. Policy-based
          bandwidth allocation protects bandwidth for mission-critical
          applications such as SAP R/3, Oracle and Baan, preventing disruptions
          from bandwidth-hungry but less urgent applications such as file
          transfers or casual web browsing.

     -    Simplify Deployment. PacketShaper installs easily and automatically
          starts to discover, classify and analyze network traffic and suggests
          policies to optimize performance. It complements the existing network
          infrastructure, requires no router reconfiguration or desktop changes
          and is designed not to disrupt network connectivity in the event of
          software or hardware failure.

     -    Enable Interactive Services. VoIP, real-time video and other streaming
          media require guaranteed bandwidth in order to achieve minimum quality
          requirements. By using PacketShaper to set minimum bandwidth
          guarantees and explicit delay bounds, network managers and service
          providers can deliver smooth and predictable performance of these
          delay-sensitive multimedia services.



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     -    Increase Network Efficiency. PacketShaper improves network efficiency
          and helps delay expensive capacity upgrades by managing non-critical
          traffic to reduce retransmission overhead and smooth the variability
          in bandwidth utilization.

     -    Facilitate E-Commerce. PacketShaper can reserve bandwidth for
          individual web site customers on a shared WAN connection. PacketShaper
          can also optimize response time for certain web pages, such as product
          order and home pages, and redirect users with slower connections to
          less data-intensive web pages.

STRATEGY

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

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

     Expand Presence in Telecommunications Service Provider Market. We are
actively pursuing opportunities in the telecommunications service provider
market and currently have numerous telecommunications service provider
customers, including: BIGLOBE, a wholly owned subsidiary of NEC Corporation; NTT
Corporation; Singapore Cable, Fujitsu Cable, EasyNet and Hewlett Packard. We
believe service providers are under increasing pressure to attract new
subscribers, reduce subscriber turnover, improve operating margins and develop
new revenue streams. Specifically, service providers seek to differentiate
themselves through value-added service offerings, such as web hosting,
application outsourcing and application service-level management. We believe our
PacketShaper and PacketWise solutions enable service providers to deliver these
higher value services by enhancing network and application performance and
better managing and allocating network resources. Our goal is to increase demand
for our solutions with service providers by leveraging our strong enterprise
presence.

     Expand Presence in the Application Service Provider Market. We are actively
pursuing opportunities in the application service provider market and currently
have numerous application service provider customers, including Aristasoft,
AT&T, Vistorm, Macquarie and NTT Communications, that are currently using our
application service provider product, AppVantage. AppVantage is the industry's
first policy-based application subscriber management (ASM) system for the
rapidly growing application service provider (ASP) market. The AppVantage system
provides an application infrastructure that designed to enable ASPs to quickly
and cost-effectively deliver secure, measured and performance-assured
application services tailored to the needs of specific markets and customers.
The system is the first ASP-tailored platform to deliver a clearly defined
service demarcation point between ASPs and their customers and delivery-chain
partners; provide and enforce quality of service (QoS) application-specific
service level agreements (SLAs); and enable application-specific billing.
AppVantage will benefit ASPs by enabling faster time-to-market for new services,
reduced service cost basis and increased revenues.

     Continue to Build Indirect Distribution Channels. We believe we have built
a worldwide distribution channel. We currently have over 100 VARs, distributors,
systems integrators and OEMs, that sell our products in over 50 countries. These
relationships include: Alternative Technology, ACAL Nederlands; Syncordia
Solutions, a division of British Telecommunications PLC; First Technology, a
subsidiary of Comparex Holdings; Compaq Computer Corporation; Datacraft Asia
Ltd.; Encom Information Systems Co.; Future Link Europe; Macnica, Inc.; Net One
Systems Co., Ltd.; Nissho Electronics Corporation; Unisys Latin America; and
Williams Communications Solutions, LLC. Recently, we entered into an agreement
with IBM to distribute our products globally. We intend to continue to develop
and support new VAR and distribution relationships, as well as to establish
additional indirect channels with service providers, systems integrators and
OEMs. We believe this strategy will enable us to increase the worldwide
deployment of our products.



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     Develop OEM Relationships to Broaden PacketWise Deployment. We have
designed our PacketWise software in distinct modules to integrate with network
hardware platforms offered by other vendors. This integration brings Packeteer's
unique capabilities into markets where QoS is required but is beyond the scope
of the PacketShaper offering. We currently have two software OEM relationships.
ADC Telecommunications has licensed portions of our PacketWise software to
incorporate in its networking products. Adtran has licensed PacketWise
technology to enable classification and partitioning in managed network services
products. In addition, NEC and Intel both sell PacketShaper with PacketWise
software under their own labels. These private label relationships allow our
products to reach consumers and markets that we would have difficulty reaching
alone. With NEC, we have partners in Asia that provide local account management.
We intend to pursue additional OEM relationships in order to drive the
proliferation of our technology in enterprise and service provider networks.

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

PRODUCTS

     Packeteer's products -- powered by PacketWise(TM) software -- enable
enterprises and service providers to measure, control, accelerate and validate
the performance of networked applications and managed application services.

     PacketShaper. PacketShaper is an application-based traffic and bandwidth
management system designed to deliver predictable, efficient performance for
applications running over the WAN and Internet. The PacketShaper(R) Enterprise
Edition is an application bandwidth management system that provides effective
application QoS using state-of-the-art bandwidth, traffic, service-level and
policy management technology. The PacketShaper ISP Edition is an Internet
bandwidth management platform that enables service providers to create
differentiated services through fast and efficient bandwidth provisioning and
management. With over 10,000 units shipped worldwide in Global 2000 enterprises
and service providers, PacketShaper is the market leader in bandwidth management
systems. The PacketShaper product line currently includes the 1500, 2500, 4500
and 6500 Enterprise Editions and 4500 and 6500 ISP Editions.

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

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

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



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TECHNOLOGY

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

Sophisticated Traffic Discovery and Classification

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

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

     PacketShaper needs no assistance from network managers to automatically
detect and identify over 300 traffic types. Without a sophisticated
identification and classification capability, managers are usually unaware of
the diversity of their own network traffic. In addition, managers can define
proprietary applications so that their traffic can be recognized and reported.
Our PacketShaper technology is differentiated by its ability to recognize older
enterprise protocols, such as AppleTalk, DECnet, IPX and SNA. We continuously
enhance PacketShaper's classification capability to include new traffic types.
Any traffic category can be made even more specific by adding more detailed
criteria -- for example, Oracle traffic to or from a particular database. The
PacketShaper automatically classifies over 300 different traffic types, some of
which are listed below. The traffic types are named either with their associated
protocol or application and are grouped according to the class of application
which generated that traffic. Each traffic type has an associated protocol which
allows it to be recognized on the network.



                                       9
<PAGE>   10

<TABLE>
<S>                  <C>               <C>               <C>                 <C>              <C>                <C>
                     STREAMING MEDIA   NETWORK           ROUTING             DATABASE         E-MAIL,            GAMING SYSTEMS
                     AND MUSIC P2P     MANAGEMENT        AURP                Oracle 7/8i      COLLABORATION,     Doom
ERP                  WindowsMedia      PROTOCOL          BGP                 FileMaker Pro    MESSAGING          Quake I, II, & III
SAP                  Multi-cast        ICMP by           EGP                 MS SQL           Microsoft          Kali
Oracle Java             NetShow           packet type    EIGRP               Progress            DCOM (MS        Asheron's Call
   Client            Real Audio        SYSLOG            OSPF                                    Exchange)       Battle.net
Baan                 Streamworks       SNMP              RIP                                  SMTP               Diablo II
JD Edwards           RTSP              NTP               RARP                                 cc:MAIL            Half-Life
                     MPEG              Cisco Discovery   Spanning Tree                        Biff               MSN Zone
CLIENT/SERVER APPS   ST2               Microsoft SMS     CBT                 FILE SERVER      POP3               Starsiege Tribes
CORBA                SHOUTcast         RSVP              PIM                 NFS              POP3 Kerberos      Unreal
SunRPC (dyn port)    QuickTime                           IGMP                NetBIOS-IP       IMAP               Yahoo! Games
Java Rmt Mthd        RTP               DIRECTORY         DRP                 Lockd            LotusNotes MSSQ
FIX (Finance)        AudioGalaxy       SERVICES          IGP                 AFS              Novell
MATIP (Airline)      Napster           Finger                                Novell              GroupWise       PUSH
MeetingMaker         Gnutella          LDAP              LEGACY LAN             NetWare5      Yahoo! Messenger   Marimba
OpenConnect          Imesh             DNS               AND NON-IP                           MSN Messenger      PointCast
   JCP               Scour             RADIUS            AppleTalk           SECURITY         AOL Instant        Backweb
Folding@Home                           Kerberos          DECnet              PROTOCOL            Messenger       EntryPoint
                     VOICE OVER IP     TACACS            IPX                 DLS              I Seek You Chat
INTERNET             CUSeeMe           CRS               SNA                 L2TP
HTTP                 H.323             DHCP              FNA                 PPTP             PRINT              MISC
  URL                T.120             DPA               LAT                 IPSEC            LPR                Time Server
  Web browser        RTP               Ident             NetBEUI             GRE              TN5250p            Date-Time
  Mime type          RTCP              WINS              AFP                 DPA              TN3287
FTP, Passive FTP     VDOPhone          whois                                 ISAKMP/IKE       IPP
SSL                  Micom VIP                           THIN CLIENT OR         key exchange
NNTP                 I-Phone           HOST ACCESS       SERVER BASED        SOCKS Proxy
IRC                  Clarent           TN3270            Citrix                               SESSION
Gopher               MCK Commun.       TN5250              Published Apps                     Telnet
UUCP                                   Attachmate           and VideoFrame                    Timbuktu
SSHTCP                                 SHARESUDP         RDP/Terminal                         REXEC
IP, UDP, TCP                           ATSTCP               Server                            rlogin
IPv6                                   SMTBF                                                  Xwindows
TFTP                                   Persoft                                                VNC
ActiveX                                  Persona
</TABLE>

Flexible Policy Definition and Enforcement

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

     -    Per-session rate policies. These policies enable network managers to
          limit or guarantee bandwidth to each individual session of an
          application's traffic. Per-session policies allocate each session an
          appropriate amount of bandwidth and prevent one large session from
          inappropriately impacting others. Network managers specify a
          minimum-guaranteed rate and allow the session scaled access to
          additional available bandwidth. For example, a bandwidth cap for
          traffic prevents web browsers from competing for bandwidth required by
          mission-critical applications. Likewise, a guaranteed rate for audio
          or video streams ensures that they are not interrupted by traffic that
          tends to consume any available bandwidth.

     -    Partitions. Partitions allow the creation of a separate, exclusive
          channel within a WAN access link. Partitions represent aggregate
          bandwidth minimums or maximums governing how much of the network can
          be used by a single application or traffic category. Partitions can be
          fixed, creating dedicated virtual circuits, or burstable, creating
          virtual circuits whose unused bandwidth can be shared.

     -    Priority policies. Priorities may be assigned to each application or
          traffic category. Eight priority levels are available. Priority
          policies are ideal for traffic that does not burst, non-IP traffic and
          traffic characterized by small, high-priority flows.

     -    Admission-control policies. Admission control determines the response
          if a bandwidth guarantee cannot be satisfied. Network managers may
          choose to deny access, accommodate an additional user with less than
          guaranteed performance, or, for web requests, redirect the request to
          another server. For example, if an online streaming-video service
          suffers a high- demand period and all available bandwidth is consumed,
          an admission-control policy could present a web page explaining that
          resources are



                                       10
<PAGE>   11

          busy. This allows a maximum number of users to receive a targeted
          service quality without degradation as new users seek to access the
          service.

     -    Discard and never-admit policies. These policies intentionally block
          traffic. Discard policies toss packets without sending feedback to the
          sender. Never-admit policies are similar to discard policies except
          that the policy informs the sender that service is blocked.

Precise Rate Control

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

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

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

Application-Based Response-Time Measurement

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

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

High-Performance Packet Engines

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

Scaleable Configuration

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



                                       11
<PAGE>   12

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

Web Server Acceleration

           This software technology, represented by the AppCelera ISX-55 and
ISX-75, accelerates the transmission and rendering speed of Internet
applications by compressing traffic from end-to-end and dynamically increasing
the throughput of the low and medium speed connections. The software does this
using dynamic, static and variant content caching together with content-aware
compression and transformation techniques for an increase in performance. The
software determines the type of content, speed of access, and type of browser
and automatically optimizes the speed of delivery and rendering of information.
By combining caching with compression, this technology accelerates delivery of
business content and Internet applications to the user. This approach solves the
last mile problem of low to medium speed Internet connections that is not
addressed by today's reverse-proxy and network-based caching solutions.

CUSTOMERS

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

<TABLE>
<CAPTION>
                                                               EUROPE, AFRICA
                 NORTH AND SOUTH AMERICA                     AND THE MIDDLE EAST                            ASIA
          -----------------------------------         --------------------------------           ----------------------------
          <S>                                         <C>                                        <C>
          AmeriNet, Inc.                              ACAL Nederlands bv                         AsiaSoft HK Ltd.
          Alternative Technology                      Access Networks                            Axishost Pte. Ltd.
          Bay Data Consultants                        Activis, Ltd.                              Datacraft Asia Ltd.
          Charter Communications                      ADAnet IIS Communications                  Datapro Infoworld
          Combyte USA, Inc.                           Alcatel Business Systems                   Encom Information Systems Co.
          Comdisco Computer Corp.                     Antea Consulting                           Express Data
          Compaq Computer Corp.                       Data Construction                          Kanematsu Electronics Ltd.
          C/Soft Inc.                                 First Technology                           Lan Systems Pty Ltd.
          Future Link MicroVisions                    Future Link Europe                         Macnica, Inc.
          GTC Systems, Inc.                           Grupo Antea                                Nissho Electronics Corporation
          Information Systems Group, Inc.             Iperformances                              RBR Networks Pte. Ltd.
          IBM                                         Miel                                       SunRise Information Co. Ltd.
          Intel                                       Q&I Nederland bv                           Teledata (Singapore) Ltd.
          M-13                                        Westcon UK Ltd.                            Transition Systems (M) Sdn. Bhd.
          NETPLEX Systems, Inc.                                                                  Unitech Computer Systems Limited
          Ocean Systems Engineer/ITI
          (OSEC)
          Solunet, Inc.
          Unisys Corp. through LACD
          Williams Telecommunications
</TABLE>

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

<TABLE>
<CAPTION>
                                             ENTERPRISES                                                    SERVICE PROVIDERS
            ----------------------------------------------------------------------                 --------------------------------
            <S>                                       <C>                                          <C>
            ABM Industries Incorporated               Johnson & Johnson                            AT&T
            American Bottling Company                 Korea Exchange Bank                          Aristasoft
            Autodesk, Inc.                            Mitchell International, Inc.                 BIGLOBE
            Borden Chemical Inc.                      Motorola, Inc.                               British Telecommunications PLC
            Boy Scouts of America                     Nokia                                        Cypress Communications
            Canon                                     Northwestern Mutual Life                     Macquarie
            Cytec Industries Inc.                           Insurance Company                      Nifty Corporation
            Charter Communications                    Omnitel                                      NTT Communications
            Daewoo Securities                         Pepsi                                        SONERA Technologies
            Domino's Pizza, Inc.                      Sharp                                        Telefonica de Espana
            EDS                                       Shell                                        Verio Inc.
            Grant Thornton International              Sony Pictures Entertainment                  Vistorm
</TABLE>



                                       12
<PAGE>   13

<TABLE>
            <S>                                       <C>                                          <C>
            Hoechst Marion Roussel AG                 Staley/Tate & Lyle North America
            Hewlett-Packard Company                   Standard & Poor's
            IBM                                       Transamerica Corporation
            Intel                                     Unilever N.V.
</TABLE>

     In 2000, one customer accounted for 12% of total net revenues. In 1999, no
one customer accounted for more than 10% of total net revenues. Sales to the top
10 indirect channel partners accounted for 46% and 37% of total net revenues for
the years ended December 31, 2000 and 1999, respectively.

     The following representative case studies of four of our current customers
illustrate how some of our customers have deployed our products:

     Korean Exchange Bank. Korean Exchange Bank, or KEB, is one of the leading
credit card service organizations in Korea with extensive branch networks.
Sluggish web based banking services frustrated both customers and branch
employees and ever-expanding IP traffic was slowing the performance of
business-critical application using SNA, an enterprise protocol. In order to
avoid the expensive WAN bandwidth upgrades that would be instantly consumed by
non-urgent applications, KEB deployed PacketShapers at KEB's branch offices. The
PacketShaper identified SNA traffic and makes sure it has access to the
bandwidth it needs for timely performance-no matter how active IP is. In
addition, PacketShaper separates KEB's service-oriented web traffic from casual
web browsing and applies per-session bandwidth controls to prevent unwanted
impact. KEB now has protected, predictable performance for both SNA and
web-based applications without the expense of upgrading the WAN links at all 24
branches.

     Ciba Specialty Chemicals. Ciba Specialty Chemicals, or CSC, is one of the
largest producer of specialty chemicals for consumer products. CSC was
frustrated by expensive WAN links in South America and was uncertain about
whether they were getting what they paid for. The PacketShaper was initially
installed to identify the applications on the network and analyze their response
times and share of capacity. They discovered that critical application
performance suffered during spikes in bandwidth-hungry traffic from e-mails with
large attachments, web browsing, and FTP flows. CSC used the PacketShaper's
bandwidth-allocation policies to cap this bandwidth-hungry traffic and commit
bandwidth to critical, time-sensitive traffic.

     ABM Industries. ABM Industries is a large industrial facilities contractor
that implemented thin-client terminals with server-based, centralized
applications in place of personal computers. However, the server-based
applications competed with printing and Web traffic for bandwidth and mission
critical application traffic was unpredictable. ABM deployed over 100
PacketShapers to ensure application performance. First, the traffic was
discovered and classified; next, the traffic types were assigned priorities.
These priorities ensure that the mission critical application traffic is
control. The PacketShaper helped ABM avoid performance and productivity
decreases associated with poorly managed WAN links.

     Hoechst Marion Roussel. Hoechst Marion Roussel, or HMR, is a leading
pharmaceutical company with operations worldwide. When HMR began deploying SAP
R/3 in its Latin American operations to support mission-critical financial
management, manufacturing and sales functions, they found SAP R/3 competed for
network bandwidth with Microsoft Exchange. Adding more bandwidth was not an
effective solution because TCP/IP applications, such as Microsoft Exchange,
attempt to consume all of the available bandwidth on a network, leaving other
applications with inadequate bandwidth to perform properly. WAN bandwidth is
also very expensive in Latin America. Packeteer's TCP rate control technology
enabled HMR to manage their Microsoft Exchange traffic by setting appropriate
bandwidth policies for several applications and enabling SAP R/3 to perform even
during heavy network congestion. The easily deployable nature and remote
management capabilities of Packeteer's solution enabled HMR to deploy
PacketShapers in multiple sites where technical resources were scarce.

MANUFACTURING

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

     We design and develop the key components of our products, including printed
circuit boards and software. In addition, we determine the components that are
incorporated in our products and select the appropriate suppliers of these
components. Product testing and burn-in is performed by our contract
manufacturer using tests and automated testing equipment that we specify. We
also use inspection testing and statistical process controls to assure the
quality and reliability of our products.



                                       13
<PAGE>   14

     We use a rolling seven-month forecast based on anticipated product orders
to determine our material requirements. Lead times for the materials and
components we order vary significantly and depend on factors such as specific
supplier, contract terms and demand for a component at a given time. We submit
purchase orders for quantities requested within 90 days. SMTC or Packeteer may
terminate the contract without cause at any time. At that time the terminating
party must honor all open purchase orders.

MARKETING AND SALES

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

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

     -    publication of technical and educational articles in industry
          magazines;

     -    public speaking opportunities;

     -    web site-based communication and promotion;

     -    industry tradeshows, technical conferences and technology seminars;
          and

     -    advertising, direct mail and public relations.

     We classify our distribution channels in the following categories:

     -    Solutions Partners. We have established an indirect distribution
          channel which is comprised of a network of over 100 VARs, distributors
          and systems integrators that sell our solutions in over 50 countries.
          These solutions partners sell PacketShapers and other products that
          are complementary to our application performance infrastructure
          systems.

     -    Technology Partners. Technology partners are OEMs and companies with
          whom we have established joint development relationships. These
          partners license our PacketWise software for integration into their
          networking products. For example, we established a relationship with
          Hewlett-Packard to enhance HP OpenView so that PacketShaper can be
          managed through its interface.

     -    Alliance Partners. We have developed a marketing alliance program to
          establish new marketing relationships, as well as enhance existing
          relationships, with hardware, software and systems vendors. We believe
          that we can build brand awareness by working with alliance partners to
          identify the needs of specific customer environments. For example, we
          formed an alliance with Citrix to identify and enhance the performance
          of individual applications within the Citrix MetaFrame and WinFrame
          environments and an alliance with Clarent Corporation to identify and
          enhance the quality of their VoIP applications. We work with alliance
          partners on various joint marketing initiatives, including product
          literature, direct mailings and seminars. Some of these partners
          include Great Plains, Sales Logix and Attachmate.

     As of December 31, 2000, our worldwide sales and marketing organization
consisted of 66 individuals, including managers, sales representatives and
technical and administrative support personnel. We have domestic sales offices
located in Bedminster, New Jersey; Schaumberg, Illinois; Cupertino, California;
Dallas, Texas; and Tacoma, Washington. In addition, we have international sales
offices located in Hong Kong; Sydney and Melbourne, Australia; Singapore; Tokyo,
Japan; Kelowna, Canada; and Waddinxveen, The Netherlands.

     We believe there is a strong international market for our bandwidth
management solutions. Our international sales are conducted primarily through
our overseas offices. Sales to customers outside of North America accounted for
54% and 55% of our total net revenues in 2000 and 1999, respectively. In
addition, sales to Asia Pacific accounted for 28% and 26% of our total net
revenues in 2000 and 1999, respectively.



                                       14
<PAGE>   15

RESEARCH AND DEVELOPMENT

     As of December 31, 2000, our research and development organization
consisted of 66 employees, each with expertise in a different area of our
software: core engineering, classification, configuration and reporting
management, user interface and platform engineering. Since inception, we have
focused our research and development efforts on developing and enhancing our
application performance solutions.

CUSTOMER SERVICE AND TECHNICAL SUPPORT

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

COMPETITION

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

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

     -    expertise and in-depth knowledge of applications;

     -    timeliness of new product introductions;

     -    ability to integrate in the existing network architecture without
          requiring network reconfigurations or desktop changes;

     -    ability to ensure end-user performance in addition to aggregate
          performance of the WAN access link;

     -    compatibility with industry standards;

     -    products that do not increase latency and packet loss;

     -    size and scope of distribution network;

     -    brand name; and

     -    access to customers and size of installed customer base.

INTELLECTUAL PROPERTY

We rely on a combination of patent, copyright and trademark laws, and on trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights. These measures afford only limited protection. We
currently have six issued U.S. patents and nine pending patent applications. We
cannot assure you that our means of protecting our proprietary rights in the
U.S. or abroad will be adequate or that competitors will not independently
develop similar technologies. Our future success depends in part on our ability
to protect our proprietary rights to the technologies used in our principal
products. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use trade
secrets or other information that we regard as proprietary. In addition, the
laws of some foreign countries do not protect our proprietary rights as fully as
do the laws of the U.S. We cannot assure you that any issued patent will
preserve our proprietary position, or that competitors or



                                       15
<PAGE>   16

others will not develop technologies similar to or superior to our technology.
Our failure to enforce and protect our intellectual property rights could harm
our business, operating results and financial condition.

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

EMPLOYEES

     As of December 31, 2000, Packeteer employed a total of 183 full-time
employees. Of the total number of employees, 66 were in research and
development, 52 in sales and customer service, 14 in marketing, 26 in operations
and 25 in administration. Our employees are not represented by any collective
bargaining agreement with respect to their employment by Packeteer.

                                  RISK FACTORS

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

OUR LIMITED OPERATING HISTORY AND THE RAPIDLY EVOLVING MARKET WE SERVE MAKES
EVALUATING OUR BUSINESS PROSPECTS DIFFICULT

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

     -    execute our sales and marketing strategy;

     -    maintain current and develop new relationships with key VARs,
          distributors, systems integrators and original equipment
          manufacturers, or OEMs; and

     -    expand our domestic and international sales efforts.

WE HAVE A HISTORY OF LOSSES, EXPECT OUR EXPENDITURES TO INCREASE AND OUR LOSSES
TO CONTINUE, AND MAY NEVER ACHIEVE PROFITABILITY

     We have incurred losses since we commenced operations in 1996 and may never
achieve profitability. Furthermore, we currently expect that our operating
expenditures will continue to increase significantly and we may not generate a
sufficient level of revenues to offset these expenditures or be able to adjust
spending in a timely manner to respond to any unanticipated decline in revenues.
We incurred net losses of $9.4, $10.9 and $8.8 million in 2000, 1999 and 1998,
respectively. As of December 31, 2000, we had an accumulated deficit of $36.2
million. Although our revenues have grown in recent quarters, we cannot be
certain when or if we will realize sufficient revenues to achieve profitability.
If revenues grow slower than we anticipate or if operating expenditures exceed
our expectations or cannot be adjusted accordingly, we may continue to
experience significant losses on a quarterly and annual basis. Even if we
achieve profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future.

OUR FUTURE OPERATING RESULTS MAY NOT MEET ANALYSTS' EXPECTATIONS AND MAY
FLUCTUATE SIGNIFICANTLY, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE



                                       16
<PAGE>   17

     We believe that period-to-period comparisons of our operating results
cannot be relied upon as an indicator of our future performance. Our operating
results may be below the expectations of public market analysts or investors in
some future quarter. If this occurs, the price of our common stock would likely
decrease. Our operating results are likely to fluctuate significantly in the
future on both a quarterly and an annual basis due to a number of factors, many
of which are outside our control. Factors that could cause our operating results
to fluctuate include variations in:

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

     -    the amount and timing of revenues from OEMs;

     -    the mix of products we sell;

     -    the mix of channels through which those products are sold;

     -    the average selling prices of our products; and

     -    the amount and timing of our operating expenses.

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

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

     The timing of our revenues is difficult to predict because of our reliance
on indirect sales channels and the variability of our sales cycle. The length of
our sales cycle for sales through our indirect channel partners to our end users
may vary substantially depending upon the size of the order and the distribution
channel through which our products are sold. We expect to have difficulties in
predicting revenues from OEMs because we are unable to forecast unit sales of
their products which incorporate our technology. Sales from our VARs and systems
integrators to end users typically take three to four months to complete.

     If revenues forecasted in a particular quarter do not occur in that
quarter, our operating results for that quarter could be adversely affected.
Furthermore, because our expense levels are based on our expectations as to
future revenue and to a large extent are fixed in the short term, a substantial
reduction or delay in sales of our products or the loss of any significant
indirect channel partner could harm our business.

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

     The market for application bandwidth management solutions is in an early
stage of development and its success is not guaranteed. Therefore, we cannot
accurately assess the size of the market, the products needed to address the
market, the optimal distribution strategy, or the competitive environment that
will develop. In order for us to be successful, our potential customers must
recognize the value of more sophisticated bandwidth management solutions, decide
to invest in the management of their networks and the performance of important
business software applications and, in particular, adopt our bandwidth
management solutions. The growth of the bandwidth management solutions market
also depends upon a number of factors, including the availability of inexpensive
bandwidth, especially in international markets, and the growth of wide area
networks.

IF WE ARE UNABLE TO DEVELOP AND MAINTAIN STRONG PARTNERING RELATIONSHIPS WITH
OUR INDIRECT CHANNEL PARTNERS, OR IF THEIR SALES EFFORTS ON OUR BEHALF ARE NOT
SUCCESSFUL, OUR SALES MAY SUFFER AND OUR REVENUES MAY NOT INCREASE

We rely primarily on an indirect distribution channel consisting of VARs,
distributors, systems integrators and OEMs for all of our revenues. Because many
of our indirect channel partners also sell competitive products, our success and
revenue growth will depend



                                       17
<PAGE>   18

on our ability to develop and maintain strong cooperative relationships with
significant indirect channel partners, as well as on the sales efforts and
success of those indirect channel partners.

     We cannot assure you that our indirect channel partners will market our
products effectively or continue to devote the resources necessary to provide us
with effective sales, marketing and technical support. In order to support and
develop leads for our indirect distribution channels, we plan to expand our
field sales and support staff significantly. We cannot assure you that this
internal expansion will be successfully completed, that the cost of this
expansion will not exceed the revenues generated or that our expanded sales and
support staff will be able to compete successfully against the significantly
more extensive and well-funded sales and marketing operations of many of our
current or potential competitors. In addition, our indirect channel agreements
are generally not exclusive and one or more of our channel partners may compete
directly with another channel partner for the sale of our products in a
particular region or market. This may cause such channel partners to stop or
reduce their efforts in marketing our products. Our inability to effectively
establish or manage our distribution channels would harm our sales.

IF WE ARE NOT ABLE TO MAINTAIN CURRENT AND FUTURE OEM RELATIONSHIPS, OUR
BUSINESS WILL BE HARMED

     We may be unable to retain our current or future OEM partners. Generally,
OEM relationships can be terminated with little or no notice. Our recent OEM
agreements with ADC Telecommunications, Inc., Adtran, Inc., Skystream Networks,
Inc. and Intel Corporation are not exclusive and the initial terms range from
one to five years, with no obligation to renew their respective agreements with
us. We expect to enter into similar OEM relationships in the future. If our
relationship with any current or future OEM partner is terminated by either
party, we may not be successful in replacing such partner on a timely basis or
at all with another suitable OEM partner.

DEVELOPING STRONG OEM RELATIONSHIPS WILL BE TIME AND RESOURCE INTENSIVE AND MAY
NOT RESULT IN THE SUCCESSFUL DEPLOYMENT OF OUR TECHNOLOGY AND PRODUCTS

     One aspect of our sales strategy is to develop relationships with OEM
partners that will license our PacketWise software and incorporate it into their
networking products. If we are not successful in entering into suitable OEM
relationships, our ability to successfully deploy our PacketWise software and
build brand awareness would be harmed. The development of OEM relationships
generally involves a considerable amount of management time and company
resources as potential OEM partners evaluate the viability of integrating our
technology. We cannot assure you that potential OEM partners will enter into a
relationship with us after we have expended these efforts and costs. In
addition, even if we are successful in entering into an OEM relationship, we
cannot assure you that our current or future OEM partners will be able to
integrate our technology into commercially viable products on a timely basis.
Furthermore, we cannot assure you that our OEM partners will give a high
priority to the marketing and sale of products which incorporate our technology
or that our OEM partners will not develop competitive products and decide to
terminate or minimize their relationship with us. The failure to build and
maintain successful OEM relationships would have a negative effect on the
deployment of our technology and products.

OUR RELIANCE ON OEM PARTNERS FOR THE SALE OF OUR PRODUCTS MAKES IT DIFFICULT TO
MANAGE AND FORECAST PRODUCTION AND DELIVERY SCHEDULES AND SALES EXPECTATIONS

     Our inability to forecast the level of orders from OEM partners may make it
difficult to schedule production, manage our contract manufacturers, and
forecast sales. The level and timing of orders placed by OEM partners who
purchase hardware from us may vary due to many factors including OEM partners'
attempts to balance their inventories, changes in the OEM partners'
manufacturing strategies and variation in demand for their products. Due to
product life cycles, competitive and economic conditions, these OEM partners
generally do not commit to firm production schedules in advance. Anticipated
orders from our current or future OEM partners may not materialize or delivery
schedules may be deferred as a result of changes in customer's business needs.
These order fluctuations and deferrals will harm our business.

OUR PRODUCT LINES CURRENTLY CONSIST OF THE PACKETSHAPER, APPVANTAGE AND
APPCELERA SYSTEMS AND PACKETWISE SOFTWARE, AND ALL OF OUR CURRENT REVENUES AND A
SIGNIFICANT PORTION OF OUR FUTURE GROWTH DEPENDS ON THEIR COMMERCIAL SUCCESS

        All of our current revenues and a significant portion of our future
growth depends on the commercial success of our PacketShaper, AppVantage and
AppCelera lines of products and PacketWise software, which are the only products
that we currently



                                       18
<PAGE>   19

offer. If our target customers do not widely adopt, purchase and successfully
deploy the PacketShaper, AppVantage and Appcelera lines of products or
PacketWise software, our revenues will not grow significantly.

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

        When we announce new products or product enhancements that have the
potential to replace or shorten the life cycle of our existing products,
customers may defer purchasing our existing products. These actions could harm
our operating results by unexpectedly decreasing sales, increasing our inventory
levels of older products and exposing us to greater risk of product
obsolescence.

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

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

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

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

     The failure of our indirect partners to sell our products internationally
will harm our business. Sales to customers outside of North America accounted
for 54% and 55% of our total net revenues in fiscal 2000 and 1999, respectively.
In particular, sales to customers in our Asia Pacific region accounted for 28%
and 26% of our total net revenues in fiscal 2000 and 1999, respectively. Our
ability to grow will depend in part on the expansion of international sales,
which will require success on the part of our VARs, distributors, systems
integrators and OEMs in marketing our products.

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

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

     Our international sales are currently all U.S. dollar-denominated. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in international markets. In
the future, we may elect to invoice some of our international customers in local
currency. Doing so will subject us to fluctuations in exchange rates between the
U.S. dollar and the particular local currency.

SALES TO LARGE CUSTOMERS WOULD BE DIFFICULT TO REPLACE IF LOST

     A limited number of indirect channel partners have accounted for a large
part of our revenues to date and we expect that this trend will continue.
Because our expense levels are based on our expectations as to future revenue
and to a large extent are fixed in the short term, any significant reduction or
delay in sales of our products to any significant indirect channel partner or
unexpected returns from these indirect channel partners could harm our business.
Sales to one customer accounted for 12% of total net revenues in 2000 and 1998.
No one customer accounted for more than 10% of total net revenues in 1999. We
expect that our largest customers in the future could be different from our
largest customers today. End users can stop purchasing and indirect channel
partners can stop marketing



                                       19
<PAGE>   20

our products at any time. We cannot assure you that we will retain these
indirect channel partners or that we will be able to obtain additional or
replacement partners. The loss of one or more of our key indirect channel
partners or the failure to obtain and ship a number of large orders each quarter
could harm our operating results.

OUR ACQUISITION OF WORKFIRE MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND
MANAGEMENT DUE TO DIFFICULTIES IN ASSIMILATING PERSONNEL AND OPERATIONS

     We may not realize the benefits from the acquisition of Workfire we
completed on September 13, 2000. We may not be able to successfully assimilate
the additional personnel, operations, acquired technology and products into our
business. In particular, we will need to assimilate and retain key engineering
personnel and professional consultants. This is particularly difficult because
Workfire's operations are located in Canada and we are headquartered in
California. Key personnel from Workfire may decide that they do not want to work
for us. In addition, we may wish to integrate Workfire products into our
products, and it is uncertain whether we may accomplish this easily or at all.
These difficulties could disrupt our ongoing business, distract management and
employees or increase expenses. Acquisitions are inherently risky and we may
also face unexpected costs, which may adversely affect operating results in any
quarter.

THE MERGER OF WORKFIRE INTO OUR COMPANY COULD ADVERSELY AFFECT OUR COMBINED
FINANCIAL RESULTS

     If the benefits of the merger of Workfire into our company do not exceed
the costs of the merger, including dilution to our stockholders resulting from
the issuance of shares in connection with the merger, our financial results,
including earnings per share, could be adversely affected. We are not certain
that we will be able to achieve our financial estimates if the anticipated
revenue from the sale of products containing technology or other intellectual
property acquired in the merger is not realized. In addition we have recorded
goodwill, intangible assets and deferred stock-based compensation of
approximately $72.8 million in connection with the merger, which will be
amortized over a period of three years from the date of acquisition.

THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE AS A RESULT OF THE MERGER OF
WORKFIRE INTO OUR COMPANY

     The market price of our common stock may decline as a result of the merger
if :

     -    the integration of our company and Workfire is unsuccessful;

     -    we do not achieve the perceived benefits of the merger as rapidly or
          to the extent anticipated by the financial or industry analysts or
          investors; or

     -    the effect of the merger on our financial results is not consistent
          with the expectations of financial or industry analysts or investors.

     The market price of our common stock could also decline as a result of
factors related to the merger which may currently be unforeseen. A decline in
the market price of our common stock could materially and adversely affect our
operating results.

ANY ACQUISITIONS WE MAKE COULD RESULT IN DILUTION, UNFAVORABLE ACCOUNTING
CHARGES AND DIFFICULTIES IN SUCCESSFULLY MANAGING OUR BUSINESS

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

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

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

     -    diversion of management's attention and disruption of our ongoing
          business; and



                                       20
<PAGE>   21

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

     We may not successfully overcome problems encountered in connection with
potential acquisitions. In addition, acquisitions could harm our operating
results by diluting our stockholders' equity and requiring us to amortize
acquisition expenses and acquired assets. Further, potential acquisitions could
cause us to incur additional debt.

     Finally, recent and proposed changes by the Financial Accounting Standards
Board (FASB) and the SEC in the rules for merger accounting may affect our
ability to make acquisitions or be acquired. For example, elimination of the
"pooling" method of accounting for mergers increases the amount of goodwill that
we would be required to recognize if we acquire another company, which would
have an adverse financial impact on our future net loss or net income.

COMPETITION FOR EXPERIENCED PERSONNEL IS INTENSE AND OUR INABILITY TO ATTRACT
AND RETAIN QUALIFIED PERSONNEL COULD SIGNIFICANTLY INTERRUPT OUR BUSINESS
OPERATIONS

     Our future success will depend, to a significant extent, on the ability of
our management to operate effectively, both individually and as a group. Given
our early stage of development, we are dependent on our ability to attract,
retain and motivate high caliber key personnel. We have recently expanded our
sales force, and we are actively searching for systems engineers, research and
development engineers and sales and marketing personnel, all of whom are in
short supply. We currently have a small indirect channel partner and end-user
service and support organization and will need to increase our staff to support
new indirect channel partners and end users and the expanding needs of existing
indirect channel partners and end users. Additionally, we rely on qualified
systems engineers and service and support personnel to provide pre- and
post-sales technical support for our products. Competition for qualified
personnel in the networking industry, including systems engineers, sales and
service and support personnel, is intense, and we may not be successful in
attracting and retaining such personnel. There may be only a limited number of
persons with the requisite skills to serve in these key positions and it may
become increasingly difficult to hire such persons. Our business will suffer if
we encounter delays in hiring these additional personnel.

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

WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES IN OUR MARKET
SECTOR WHO ARE SUBSTANTIALLY LARGER AND MORE ESTABLISHED AND WHO HAVE
SIGNIFICANTLY GREATER RESOURCES THAN OUR COMPANY

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

     Many of our competitors are substantially larger than we are and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources and more established distribution channels. These
competitors may be able to respond more rapidly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than we can. We have
encountered, and expect to encounter, customers who are extremely confident in
and committed to the product offerings of our competitors. Furthermore, some of
our competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties to increase their ability
to rapidly gain market share by addressing the needs of our prospective
customers. These competitors may enter our existing or future markets with
solutions that may be less expensive, provide higher performance or additional
features or be introduced earlier than our solutions. Given the market
opportunity in the bandwidth management solutions market, we also expect that
other companies may enter our



                                       21
<PAGE>   22

market with alternative products and technologies, which could reduce the sales
or market acceptance of our products and services, perpetuate intense price
competition or make our products obsolete. If any technology that is competing
with ours is or becomes more reliable, higher performing, less expensive or has
other advantages over our technology, then the demand for our products and
services would decrease, which would harm our business.

IF WE DO NOT EXPAND OR ENHANCE OUR PRODUCT OFFERINGS OR RESPOND EFFECTIVELY TO
TECHNOLOGICAL CHANGE, OUR BUSINESS MAY NOT GROW

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

     -    develop and maintain competitive products;

     -    enhance our products by adding innovative features that differentiate
          our products from those of our competitors;

     -    bring products to market on a timely basis at competitive prices;

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

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

     We have in the past experienced delays in product development which to date
have not materially adversely affected us. However, these delays may occur in
the future and could result in a loss of customers and market share.

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

     We have rapidly and significantly expanded our operations and anticipate
that further significant expansion will be required to address potential growth
in our customer base and market opportunities. This expansion could place a
significant strain on our management, products and support operations, sales and
marketing personnel and other resources, which could harm our business.

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

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

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

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



                                       22
<PAGE>   23

OUR RELIANCE ON SMTC FOR ALL OF OUR MANUFACTURING REQUIREMENTS COULD CAUSE US TO
LOSE ORDERS IF THIS THIRD PARTY MANUFACTURER FAILS TO SATISFY OUR COST, QUALITY
AND DELIVERY REQUIREMENTS

     We currently contract with SMTC Corporation, for the manufacture of all of
our current products. Any manufacturing disruption could impair our ability to
fulfill orders. Our future success will depend, in significant part, on our
ability to have others manufacture our products cost-effectively and in
sufficient volumes. We face a number of risks associated with our dependence on
third-party manufacturers including:

     -    reduced control over delivery schedules;

     -    the potential lack of adequate capacity during periods of excess
          demand;

     -    manufacturing yields and costs;

     -    quality assurance; and

     -    increases in prices and the potential misappropriation of our
          intellectual property.

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

     In the future, we may seek to use additional contract manufacturers. We may
experience difficulty in locating and qualifying suitable manufacturing
candidates capable of satisfying our product specifications or quantity
requirements. Further, new third-party manufacturers may encounter difficulties
in the manufacture of our products resulting in product delivery delays.

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

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

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

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

     Our products are complex and may contain undetected defects, errors or
failures in either the hardware or software. In addition, because our products
plug into our end users' existing networks between the WAN access router and the
enterprise local area network, or LAN, they can directly affect the
functionality of the network. We have in the past encountered errors in our
products, which in a few instances resulted in complete network failures. To
date, these errors have not materially adversely affected us. Additional errors



                                       23
<PAGE>   24

may occur in our products in the future. The occurrence of defects, errors or
failures could result in the failure of our customer's network or
mission-critical applications, delays in installation, product returns and other
losses to us or to our customers or end users. In addition, we would have
limited experience responding to new problems that could arise with any new
products that we introduce. These occurrences could also result in the loss of
or delay in market acceptance of our products, which could harm our business.

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

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

     Our success depends significantly upon our proprietary technology and our
failure or inability to protect our proprietary technology would result in
significant harm to our business. We rely on a combination of patent, copyright
and trademark laws, and on trade secrets and confidentiality provisions and
other contractual provisions to protect our proprietary rights. These measures
afford only limited protection. We currently have five issued U.S. patents, one
published patent and eight pending patent applications including one for which
we have received a notice of allowance. Our means of protecting our proprietary
rights in the U.S. or abroad may not be adequate and competitors may
independently develop similar technologies. Our future success will depend in
part on our ability to protect our proprietary rights and the technologies used
in our principal products. Despite our efforts to protect our proprietary rights
and technologies unauthorized parties may attempt to copy aspects of our
products or to obtain and use trade secrets or other information that we regard
as proprietary. Legal proceedings to enforce our intellectual property rights
could be burdensome and expensive and could involve a high degree of
uncertainty. These legal proceedings may also divert management's attention from
growing our business. In addition, the laws of some foreign countries do not
protect our proprietary rights as fully as do the laws of the U.S. Issued
patents may not preserve our proprietary position. If we do not enforce and
protect our intellectual property, our business will suffer substantial harm.

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

     We may be subject to claims by others that our products infringe on their
intellectual property rights. These claims, whether or not valid, could require
us to spend significant sums in litigation, pay damages, delay product
shipments, reengineer our products or acquire licenses to such third-party
intellectual property. We may not be able to secure any required licenses on
commercially reasonable terms, or at all. We expect that we will increasingly be
subject to infringement claims as the number of products and competitors in the
bandwidth management solutions market grows and the functionality of products
overlaps. Any of these claims or resulting events could harm our business.

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

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

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

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



                                       24
<PAGE>   25

     In addition, we expect to review potential acquisitions that would
complement our existing product offerings or enhance our technical capabilities.
While we have no current agreements or negotiations underway with respect to any
such acquisition, any future transaction of this nature could require
potentially significant amounts of capital. These funds may not be available at
the time or times needed, or available on terms acceptable to us. If adequate
funds are not available, or are not available on acceptable terms, we may not be
able to take advantage of market opportunities to develop new products or to
otherwise respond to competitive pressures.

OUR EXECUTIVE OFFICERS AND DIRECTORS WILL BE ABLE TO CONTROL ALL MATTERS
REQUIRING STOCKHOLDER APPROVAL INCLUDING DELAYING OR PREVENTING A CHANGE IN OUR
CORPORATE CONTROL

     Our executive officers and directors and their affiliates together control
approximately 22% of our outstanding common stock as of February 28, 2001 As a
result, these stockholders, if they act together, will be able to control all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may have the effect of delaying, preventing or deterring a change in control of
Packeteer, could deprive our stockholders of an opportunity to receive a premium
for their common stock as part of a sale of Packeteer and might affect the
market price of our common stock.

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

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

ITEM 2. PROPERTIES

     We lease approximately 35,963 square feet of administrative and research
and development facilities in Cupertino, California. We believe our current
facilities will be sufficient to handle our operations for at least the next 12
months. We believe that we can accommodate future growth by obtaining the
necessary additional space. Packeteer leases offices in the following locations:
Bedminster, New Jersey; Dallas, Texas; Tacoma, Washington; Schaumburg, Illinois;
Branford, Connecticut; Kelowna, Canada; Sydney and Melbourne, Australia; Hong
Kong; Singapore; Tokyo, Japan; and Waddinxveen, The Netherlands.

ITEM 3. LEGAL PROCEEDINGS

     We have no material legal proceedings threatened or pending.

ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

     Not applicable.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

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

                                       25
<PAGE>   26

<TABLE>
<CAPTION>
                                                           HIGH          LOW
                                                           ----          ---
    <S>                                                   <C>          <C>
    Fiscal 2000:
    Fourth Quarter..............................          $40.31       $ 8.69
    Third Quarter...............................           52.38        25.38
    Second Quarter..............................           38.00        10.50
    First Quarter...............................           73.00        33.00

    Fiscal 1999:
    Fourth Quarter..............................           75.38        29.75
    Third Quarter (from July 28, 1999)..........           56.50        21.13
</TABLE>

     As of February 28, 2001, there were approximately 486 registered holders of
our common stock. We have never declared or paid any dividends on our capital
stock. We currently expect to retain future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future. The covenants under our Loan and Security
Agreement with Silicon Valley Bank prohibit us from paying cash dividends.

     Several Packeteer executives have informed us that, in order to diversify
their investment portfolios while avoiding conflicts of interest or the
appearance of any such conflict that might arise from their position with the
company, they have established a written plan in accordance with SEC Rule 10b5-1
for gradually liquidating a portion of their holdings of our common stock. In
particular, we have been notified that Craig W. Elliott, President and CEO and
Brett D. Galloway, Vice President of Corporate Development; intend to sell a
specific number of shares of stock per month, subject to certain contingencies
relating to prevailing stock price. The plans runs from May 1, 2001 through
April 30, 2002.



                                       26
<PAGE>   27

ITEM 6. SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                                                                    PERIOD FROM
                                                                                                   JAN. 25, 1996
                                                           YEARS ENDED DECEMBER 31,                  (INCEPTION)
                                                  ---------------------------------------------          TO
                                                   2000         1999         1998         1997     DEC. 31, 1996
                                                  ------       ------       ------       ------    --------------
                                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                              <C>          <C>          <C>          <C>        <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues:
  Product revenues ..........................    $ 39,540     $ 16,824     $  7,105     $  1,413     $     --
  Licensing revenues ........................       1,557        1,617          125           --           --
                                                 --------     --------     --------     --------     --------
       Total net revenues ...................      41,097       18,441        7,230        1,413           --
Cost of revenues ............................      12,585        5,286        2,386          457           --
Amortization of acquired technology .........         678           --           --           --           --
                                                 --------     --------     --------     --------     --------
Gross profit ................................      27,834       13,155        4,844          956           --
Operating expenses:
  Research and development* .................       8,760        5,164        2,779        2,932          725
  Sales and marketing* ......................      18,614       13,737        8,866        3,210          349
  General and administrative* ...............       4,824        2,936        1,750          934          238
  Amortization of stock-based compensation ..       1,683        3,088          537           --           --
  Amortization of goodwill ..................       6,424           --           --           --           --
                                                 --------     --------     --------     --------     --------
       Total operating expenses .............      40,305       24,925       13,932        7,076        1,312
                                                 --------     --------     --------     --------     --------
Net loss from operations ....................     (12,471)     (11,770)      (9,088)      (6,120)      (1,312)
Interest and other income ...................       4,020        1,757          367          238           75
Interest and other expense ..................        (618)        (863)         (78)         (27)          --
                                                 --------     --------     --------     --------     --------
Net loss before income taxes ................      (9,069)     (10,876)      (8,799)      (5,909)      (1,237)
Provision for income taxes ..................         300           --           --           --           --
                                                 --------     --------     --------     --------     --------
Net loss ....................................    $ (9,369)    $(10,876)    $ (8,799)    $ (5,909)    $ (1,237)
                                                 ========     ========     ========     ========     ========
Basic and diluted net loss per share ........    $  (0.35)    $  (0.71)    $  (1.54)    $  (1.82)    $  (1.28)
                                                 ========     ========     ========     ========     ========
Shares used in computing basic and diluted
  net loss per share(1) .....................      27,152       15,343        5,709        3,253          965
                                                 ========     ========     ========     ========     ========

*Excludes amortization of deferred stock-based
  compensation of the following:

     Research and development ...............    $    558     $    459     $     86     $     --     $     --
     Sales and marketing ....................         892        2,184          436           --           --
     General and administrative .............         233          445           15           --           --
</TABLE>

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                   ------------------------------------------------------
                                                   2000        1999        1998        1997        1996
                                                   ----        ----        ----        ----        ----
                                                                        (IN THOUSANDS)
<S>                                              <C>         <C>         <C>         <C>         <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash, cash equivalents and investments ......    $ 62,206    $ 65,158    $  4,477    $  2,416    $  4,255
Working capital .............................      51,958      51,285       3,501       2,611       4,077
Total assets ................................     144,281      70,821       8,570       4,935       4,453
Long-term obligations .......................       3,215         839         739         356          --
Total stockholders' equity ..................     124,133      59,120       3,759       2,804       4,251
</TABLE>

(1)  See Note 1 of Notes to Consolidated Financial Statements for an explanation
     of the determination of the weighted average common and common equivalent
     shares used to compute net loss per share.



                                       27
<PAGE>   28

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this report. Except for historical information, the discussion in this report
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the
forward-looking statements as a result of a number of factors, including the
risks described in the section titled "Factors Affecting Operating Results" set
forth below.

OVERVIEW

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

     Packeteer's products are deployed by Global 2000 corporations and service
providers, and sold through an established network of more than 100 VARs,
distributors, system-integrators and OEMs in more than 50 countries. Our
products are built on hardware platforms based on Intel-compatible
microprocessor technologies. In addition, PacketWise software is licensed by
major communications industry partners who integrate the software into specific
strategic networking solutions. We primarily use indirect channels, VARs,
distributors, system integrators and OEMS, to leverage the reach of our sales
force and to obtain worldwide coverage. Our sales and marketing efforts are used
to develop brand awareness and support our indirect channels. We have
subsidiaries in Hong Kong, Japan, The Netherlands, United Kingdom, Australia,
Caymans and Canada. To date, we have shipped more than 11,000 units.

     We were incorporated in January 1996. From our inception through January
1997, our operating activities related primarily to establishing a research and
development organization, developing and testing prototype designs, establishing
a sales and marketing organization and developing customer, vendor and
manufacturing relationships. We shipped our first product in February 1997.
Since then, we have focused on developing additional products and product
enhancements, building our worldwide indirect sales channel and establishing our
sales, marketing and customer support organizations. Since inception, we have
incurred significant losses and as of December 31, 2000, had an accumulated
deficit of $36.2 million.

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

     We have a limited operating history. We have not achieved profitability on
a quarterly or annual basis, and we anticipate that we will incur net losses
for at least the next several quarters. We expect to continue to incur
significant sales and marketing, product development and administrative expenses
and, as a result, will need to generate significant quarterly revenues to
achieve and maintain profitability.



                                       28
<PAGE>   29

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                                   ----------------------------------
                                                   2000      1999      1998      1997
                                                   ----      ----      ----      ----
<S>                                                <C>       <C>       <C>      <C>
Net revenues:
  Product revenues ............................      96%       91%       98%      100%
  Licensing revenues ..........................       4         9         2        --
                                                   ----      ----      ----      ----
       Total net revenues .....................     100       100       100       100

Cost of revenues ..............................      31        29        33        32
Amortization of acquired technology ...........       1        --        --        --
                                                   ----      ----      ----      ----

Gross margin ..................................      68        71        67        68

Operating expenses:
  Research and development ....................      21        28        38       208
  Sales and marketing .........................      45        74       123       227
  General and administrative ..................      12        16        24        66
  Amortization of goodwill ....................      16        --        --        --
  Amortization of stock-based compensation ....       4        17         8        --
                                                   ----      ----      ----      ----
       Total operating expenses ...............      98       135       193       501
                                                   ----      ----      ----      ----
Net loss from operations ......................     (30)      (64)     (126)     (433)

Interest and other income .....................      10        10         5        17
Interest and other expense ....................      (2)       (5)       (1)       (2)
                                                   ----      ----      ----      ----
Net loss before income taxes ..................     (22)      (59)     (122)     (418)

Provision for income taxes ....................      (1)       --        --        --
                                                   ----      ----      ----      ----
Net loss ......................................     (23)%     (59)%    (122)%    (418)%
                                                   ====      ====      ====      ====
</TABLE>


TOTAL NET REVENUES

     Our total net revenues consist primarily of product sales and, to a lesser
extent, software licensing fees from OEM partners. Our product revenues consist
of sales of our PacketShaper and AppVantage lines of products.

     The Company recognizes product revenue when it is realized or realizable
and earned. Generally, that occurs after the following events: the receipt of a
non-cancelable purchase order; the shipment of the product; the sales price is
fixed or determinable, and collection of sales price is reasonably assured. This
policy is modified under certain circumstances as follows. Product revenue on
sales to major new distributors are recorded based on sell-through to the end
user customers until such time the Company has established significant
experience with the distributor's product return and exchange activity.
Additionally, when the Company introduces new product into its' distribution
channel for which there is no historical customer demand or acceptance history,
revenue is recognized on the basis of sell-through to end user customers. The
Company accrues for estimated customer returns following the guidance of
Statement of Financial Accounting Standards No. 48, "Revenue Recognition When
Right of Return Exists".

     Maintenance revenue on product sales, which is allocated and deferred based
on vendor specific objective evidence of fair value, is recognized ratably over
the term of the maintenance period.

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

     Revenue recognition for software transactions is accounted for pursuant to
the American Institute of Certified Public Accountants' (AICPA) Statement of
Position (SOP) 97-2, "Software Revenue Recognition" as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions." SOP 97-2 generally requires revenue earned on software



                                       29
<PAGE>   30

arrangements involving multiple-elements to be allocated to each element based
on its relative fair value. The fair value of the element must be based on
objective evidence that is specific to the vendor. If a vendor does not have
objective evidence of the fair value of all elements in a multiple-element
arrangement, all revenue from the arrangement must be deferred until such
evidence exists or until all elements have been delivered, unless the only
undelivered element is post-contract customer support, in which case, the entire
fee is recognized over the support period.

     Licensing revenues relate to OEM software arrangements for the PacketWise
software. The Company recognizes OEM license fees, which include post-contract
customer support, when the software has been shipped to the customer, the fees
are fixed and determinable and there is evidence of the fair value of the
post-contract customer support, generally established based on stated renewal
rates. When sufficient evidence of fair value of post-contract customer support
is not available, revenues are recognized ratably over the support period. The
Company does not have sufficient evidence of fair value of post-contract
customer support for our OEM license arrangements and we recognize the revenues
for these arrangements over the support period.


     Total net revenues increased to $41.1 million in fiscal 2000 from $18.4
million in fiscal 1999 and from $7.2 million in fiscal 1998. Product revenues
increased to $39.5 million in fiscal 2000 from $16.8 million in fiscal 1999 and
from $7.1 million in fiscal 1998 due to the increased number of units sold as a
result of increased channel and market development and product acceptance.
Licensing revenues remained constant at $1.6 million for fiscal 2000 and fiscal
1999, up from $125,000 in fiscal 1998.

     In fiscal 2000 and 1998, one customer accounted for 12% of total revenues.
In fiscal 1999, no one customer accounted for more than 10% of total net
revenues. Sales to the top 10 indirect channel partners accounted for 46% and
37% of total net revenues for fiscal 2000 and fiscal 1999, respectively. See
Note 13 of the notes to consolidated financial statements.

COST OF REVENUES

     Our cost of revenues consists primarily of the cost of finished products
purchased from our turnkey manufacturer and overhead costs. We outsource the
manufacturing of our products. Our cost of revenues increased to $12.6 million
in fiscal 2000 from $5.3 million in fiscal 1999 and from $2.4 million in fiscal
1998. The cost of revenues represented 31%, 29% and 33% of total net revenues in
fiscal 2000, 1999, and 1998, respectively. The percentage increase from fiscal
1999 to fiscal 2000 was due to increases in overhead costs. The percentage
decrease from fiscal 1998 to fiscal 1999 was due to increased economies of scale
and reductions in manufacturing costs.

AMORTIZATION OF ACQUIRED TECHNOLOGY

    Amortization of acquired technology relates to the acquired developed
technologies of Workfire Technologies International, Inc. ("Workfire"). The
amortization of acquired technology was $678,000 in fiscal 2000. The
amortization of acquired technology represented 1% of revenues during the fiscal
year 2000.

RESEARCH AND DEVELOPMENT

     Research and development expenses consist primarily of salaries and related
personnel expenses, consultant fees and prototype expenses related to the
design, development, testing and enhancement of the PacketShaper, AppVantage and
AppCelera and PacketWise software. Research and development expenses increased
to $8.8 million in fiscal 2000 from $5.2 million in fiscal 1999 and from $2.8
million in fiscal 1998. The increase in research and development expenses from
fiscal 1999 to fiscal 2000 was due to increases in staffing and related
personnel costs. The increase in research and development expenses from fiscal
1998 to fiscal 1999 was due to increases in personnel, consulting and related
overhead costs. Research and development expenses represented 21%, 28% and 38%
of total net revenues in fiscal 2000, 1999, and 1998, respectively. These
percentage decreases were primarily due to increased total net revenues.

     As of December 31, 2000, all research and development costs have been
expensed as incurred. We believe that continued investment in research and
development is critical to attaining our strategic product and cost reduction
objectives. We expect these absolute dollar expenses to increase in the future
as we continue to develop new products and enhance existing products.

SALES AND MARKETING



                                       30
<PAGE>   31

     Sales and marketing expenses consist primarily of salaries, commissions and
related personnel expenses for those engaged in the sales, marketing and support
of the product as well as related trade show, promotional and public relations
expenses. Sales and marketing expenses increased to $18.6 million in fiscal 2000
from $13.7 million in fiscal 1999 and from $8.9 million in fiscal 1998. The
increases in both fiscal 2000 and fiscal 1999 reflected the hiring of additional
personnel in connection with building our sales force, and channel and increased
marketing activities. Sales and marketing expenses represented 45%, 74% and 123%
of total net revenues for fiscal 2000, 1999, and 1998, respectively. These
percentage decreases were due to increased total net revenues. We intend to
pursue sales and marketing campaigns aggressively and therefore expect our
absolute dollar expenses to increase in the future.

GENERAL AND ADMINISTRATIVE

     General and administrative expenses consist primarily of salaries and
related personnel expenses for administrative personnel, professional fees and
other general corporate expenses. General and administrative expenses increased
to $4.8 million in fiscal 2000 from $2.9 million in fiscal 1999 and from $1.8
million in fiscal 1998. General and administrative expenses represented 12%, 16%
and 24% of total net revenues for fiscal 2000, 1999, and 1998, respectively.
These percentage decreases were primarily due to increased net revenues. As we
add personnel and incur additional costs related to the growth of our business,
we expect our absolute dollar expenses to increase in the future.

STOCK-BASED COMPENSATION

     Amortization of stock-based compensation resulted from the granting of
stock options to employees and consultants with exercise prices per share
determined to be below the deemed fair value per share of our common stock on
the dates of grant for financial reporting purposes. Stock-based compensation is
being amortized to expense in accordance with FASB Interpretation No. 28 over
the vesting period of the individual options, generally four years. We recorded
stock-based compensation expense of $1.7 million in fiscal 2000, $3.1 million in
fiscal 1999 and $537,000 in fiscal 1998, leaving $1.8 million to be amortized in
future periods.

AMORTIZATION OF GOODWILL

     Amortization of goodwill relating to our September 2000 acquisition of
Workfire totaled an aggregate of $6.4 million for fiscal year 2000. In
connection with the Workfire acquisition, we recorded goodwill of approximately
$66.1 million, which is being amortized on a straight-line basis over a
three-year period. In addition, we may have additional acquisitions in future
periods which could give rise to the acquisition of additional goodwill. If we
acquire additional goodwill, our acquisition related amortization expense may
increase in future periods.

INTEREST AND OTHER INCOME

     Interest and other income consist primarily of interest income from our
cash and investments. Interest and other income totaled $4.0 million, $1.8
million and $367,000 for fiscal 2000, 1999 and 1998, respectively. The increases
relate to interest income on proceeds from our initial public offering in July
1999.

INTEREST AND OTHER EXPENSE

     Interest and other expense consist of interest expense related to our line
of credit, debt and capital lease obligations. Interest and other expense
totaled $618,000, $863,000 and $78,000 for fiscal 2000, 1999 and 1998,
respectively. The decrease in fiscal 2000 relates to decreased interest charges
on our line of credit, debt and capital lease obligations.

INCOME TAX PROVISION

     In fiscal 2000, we recognized a $300,000 tax provision related to charges
in lieu of income taxes associated with alternative minimum income tax. A
corresponding credit was made to paid-in-capital. Before fiscal 2000, we had
incurred net operating losses for federal and state purposes and had not
recognized any tax provision or benefit. As of December 31, 2000, we had net
operating loss carryforwards of approximately $29.0 million and $15.8 million
for federal and state income tax purposes, respectively. These carryforwards, if
not utilized, expire 2005 through 2020. Federal and state laws impose
significant restrictions on the utilization of net operating loss carryforwards
in the event of a shift in our ownership that constitutes an "ownership change",
as defined in Section 382 of the Internal Revenue Code. If we have an ownership
change, the ability to utilize the stated carryforwards could be significantly
reduced. See Note 10 of notes to consolidated financial statements.



                                       31
<PAGE>   32

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, we have financed our operations primarily from the sale of
preferred and common stock and other financing activities such as bank credit
against accounts receivable, subordinated debt offerings and capital equipment
leasing. Cash, cash equivalents and investments totaled $62.2 million at
December 31, 2000, a decrease of $3.0 million from $65.2 million at December 31,
1999. The decrease reflects cash used in operations, partially offset by cash
provided by investing activities. Net cash used in operating activities in 2000
was $1.1 million, a decrease of $4.8 million from $5.9 million in net cash used
in operating activities in 1999.

     Short-term investments include approximately $3.0 million in corporate
notes of Southern California Edison that have been accounted for as
available-for-sale securities under SFAS No. 115. These notes are valued at fair
market value as of December 31, 2000. On January 16, 2000, the scheduled
redemption date, Southern California Edison announced that it would not redeem
these notes at that time. Subsequently, on March 26, 2001, Packeteer sold these
notes incurring a $545 realized loss.

     We have had leases to finance the acquisition of computer software and
hardware, and furniture. As of December 31, 2000, we have used the $1.5 million
capacity of our current lease and intend to enter into another equipment
financing facility in 2001. As of December 31, 2000, approximately $2.6 million
was outstanding under capital lease obligations related to lease agreements. We
also have a revolving credit facility against accounts receivable which provided
for borrowings of up to $5.0 million and which was renewed and amended on
January 9, 2001 to provide borrowings of $10.0 million. This facility expires on
January 9, 2002. Borrowings under this credit facility bear interest at the
prime rate, which was 9.5% as of December 31, 2000, are due upon demand and are
secured by substantially all of our assets. At December 31, 2000, we had
borrowed $3.7 million against this credit facility.

     We have used the initial public offering proceeds of $62.6 million net
primarily to repay subordinated loans of $5.0 million and to fund operations,
including expanding and enhancing our sales and marketing operations and product
offerings.

     We expect to experience growth in our working capital needs for the
foreseeable future in order to execute our business plan. We anticipate that
operating activities, as well as planned capital expenditures, will constitute a
partial use of our cash resources. In addition, we may utilize cash resources to
fund acquisitions or investments in complementary businesses, technologies or
products and to finance a new facility related to expansion of our business. We
believe that our current cash, cash equivalents, investments and cash generated
from operations and available borrowings under our credit facilities will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the foreseeable future.

RECENT ACCOUNTING PRONOUNCEMENTS

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



                                       32
<PAGE>   33

ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk

Fixed Income Investments

     Our exposure to market risks for changes in interest rates and principal
relates primarily to investments in debt securities issued by U.S. government
agencies and corporate debt securities. We place our investments with high
credit quality issuers and, by policy, limit the amount of the credit exposure
to any one issuer.

     Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. The Company does
not use derivative financial instruments in its investment portfolio. All highly
liquid investments with a less than three months to maturity from date of
purchase are considered to be cash equivalents; investments with maturities
between three and twelve months are considered to be short-term investments; and
investments with maturities in excess of twelve months are considered to be
long-term investments. We do not expect any material loss with respect to our
investment portfolio except for the realized loss associated with the sale of
the Southern California Edison Notes discussed in the following paragraph. The
following table presents the amounts of cash equivalents and investments that
are subject to market risk by range of expected maturity and weighted average
interest rates.

<TABLE>
<CAPTION>
                                                                        DECEMBER 31, 2000          DECEMBER 31, 1999
                                                                    -------------------------  -------------------------
                                                                                    WEIGHTED-                  WEIGHTED-
                                                                                    AVERAGE                      AVERAGE
                                                                    CARRYING        INTEREST   CARRYING         INTEREST
                                                                     AMOUNT           RATE       AMOUNT            RATE
                                                                     ------           ----       ------            ----
<S>                                                                 <C>             <C>        <C>             <C>
Cash equivalents:
  Commercial paper, market auction preferred
    and medium-term notes, net of $2
    and $2 unrealized gain, as of December 31, 2000
    and 1999 ...............................................        $20,999           6.68%     $17,727           6.20%
Short-term investments:
  Commercial paper, corporate notes and bonds,
    and medium-term notes, net of $17 unrealized gain
    and $15 unrealized loss, as of December 31, 2000
    and 1999 ...............................................         32,183           6.95%      37,918           5.91%
Long-term investments:
  Corporate notes and medium-term notes, net of
    $58 unrealized gain and $45 unrealized loss, as of
    December 31, 2000 and 1999 .............................          5,750           7.33%       7,686           6.56%
                                                                    -------                     -------
      Total investment securities ..........................        $58,932           6.89%     $63,331           6.07%
                                                                    =======                     =======
</TABLE>

     Short-term investments include approximately $3 million in corporate notes
of Southern California Edison that have been accounted for as available-for-sale
securities under SFAS No. 115. These notes are valued at fair market value as of
December 31, 2000. On January 16, 2000, the scheduled redemption date, Southern
California Edison announced that it would not redeem these notes at that time.
Subsequently, on March 26, 2001, Packeteer sold these notes incurring a $545
realized loss.

Foreign Exchange

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



                                       33
<PAGE>   34

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                         NUMBER
                                                                         ------
<S>                                                                      <C>
Independent Auditors' Report .........................................     34
Consolidated Balance Sheets as of December 31, 2000 and 1999 .........     35
Consolidated Statements of Operations for the years ended
  December 31, 2000, 1999 and 1998....................................     36
Consolidated Statements of Stockholders' Equity and Comprehensive
  Loss for the years ended December 31, 2000, 1999 and 1998...........     37
Consolidated Statements of Cash Flows for the years ended
  December 31, 2000, 1999 and 1998....................................     38
Notes to Consolidated Financial Statements ...........................     39
</TABLE>

                          INDEPENDENT AUDITORS' REPORT

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

     We have audited the accompanying consolidated balance sheets of Packeteer,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended
December 31, 2000. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule listed in Item
14(a)2. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and the financial
statement schedule based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Packeteer,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.


                                       /s/ KPMG LLP


Mountain View, California
January 19, 2001



                                       34
<PAGE>   35

                                 PACKETEER, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                     ASSETS

                                                                                       DECEMBER 31,
                                                                                  ------------------------
                                                                                     2000          1999
                                                                                     ----          ----
<S>                                                                               <C>           <C>
Current assets:
  Cash and cash equivalents ..................................................    $  24,273     $  19,554
  Short-term investments .....................................................       32,183        37,918
  Accounts receivable, less allowance for doubtful accounts
    of $223, and $217, as of December 31, 2000 and 1999 respectively .........        7,600         3,646
  Other receivables ..........................................................        1,097            35
  Inventories ................................................................        2,554           523
  Prepaids and other current assets ..........................................        1,184           471
                                                                                  ---------     ---------
      Total current assets ...................................................       68,891        62,147

Property and equipment, net ..................................................        2,529           755
Long-term investments ........................................................        5,750         7,686
Other assets .................................................................          660           233
Goodwill and other intangible assets, net ....................................       66,451            --
                                                                                  ---------     ---------
      Total assets ...........................................................    $ 144,281     $  70,821
                                                                                  =========     =========

                                LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Line of credit .............................................................    $   3,679     $   1,890
  Current portion of capital lease obligations ...............................          751           339
  Current portion of note payable ............................................           50         2,524
  Accounts payable ...........................................................        2,663         1,302
  Accrued compensation .......................................................        2,410         1,480
  Other accrued liabilities ..................................................        4,013         2,115
  Deferred revenue ...........................................................        3,367         1,212
                                                                                  ---------     ---------
      Total current liabilities ..............................................       16,933        10,862
Capital lease obligations, less current portion ..............................        1,815           763
Note payable, less current portion ...........................................           --            76
Deferred tax liability .......................................................        1,400            --
                                                                                  ---------     ---------
      Total liabilities ......................................................       20,148        11,701

Commitments (Note 9)

Stockholders' equity:
  Preferred stock, $0.001 par value; 5,000 shares authorized; no shares
    issued and outstanding as of December 31, 2000 and 1999, respectively ....           --            --
  Common stock, $0.001 par value;
    85,000 shares authorized; 29,434 and 26,792 shares issued and
    outstanding at December 31, 2000 and 1999, respectively ..................           29            27
  Additional paid-in capital .................................................      162,118        88,848
  Deferred stock-based compensation ..........................................       (1,715)       (2,138)
  Accumulated other comprehensive income (loss) ..............................           77           (58)
  Notes receivable from stockholders .........................................         (186)         (738)
  Accumulated deficit ........................................................      (36,190)      (26,821)
                                                                                  ---------     ---------
      Total stockholders' equity .............................................      124,133        59,120
                                                                                  ---------     ---------
      Total liabilities and stockholders' equity .............................    $ 144,281     $  70,821
                                                                                  =========     =========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       35
<PAGE>   36

                                 PACKETEER, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                                 ----------------------------------
                                                                   2000         1999         1998
                                                                 --------     --------     --------
<S>                                                              <C>          <C>          <C>
Net revenues:
  Product revenues ..........................................    $ 39,540     $ 16,824     $  7,105
  Licensing revenues ........................................       1,557        1,617          125
                                                                 --------     --------     --------
        Total net revenues ..................................      41,097       18,441        7,230
Cost of revenues ............................................      12,585        5,286        2,386
Amortization of acquired technology .........................         678           --           --
                                                                 --------     --------     --------
        Total cost of revenues ..............................      13,263        5,286        2,386
Gross profit ................................................      27,834       13,155        4,844
Operating expenses:
  Research and development, excluding amortization
    of stock-based compensation of $558, $459 and $86
    for 2000, 1999, and 1998, respectively ..................       8,760        5,164        2,779
  Sales and marketing, excluding amortization
    of stock-based compensation of $892, $2,184 and $436
    for 2000, 1999, and 1998, respectively ..................      18,614       13,737        8,866
  General and administrative, excluding
    amortization of stock-based compensation of
    $233, $445 and $15 for 2000, 1999, and 1998,
    respectively ............................................       4,824        2,936        1,750
Amortization of goodwill ....................................       6,424           --           --
Amortization of stock-based compensation ....................       1,683        3,088          537
                                                                 --------     --------     --------
        Total operating expenses ............................      40,305       24,925       13,932
                                                                 --------     --------     --------
Net loss from operations ....................................     (12,471)     (11,770)      (9,088)
Interest and other income ...................................       4,020        1,757          367
Interest and other expense ..................................        (618)        (863)         (78)
                                                                 --------     --------     --------
Net loss before income taxes ................................      (9,069)     (10,876)      (8,799)
Provision for income taxes ..................................         300           --           --
                                                                 --------     --------     --------
Net loss ....................................................    $ (9,369)    $(10,876)    $ (8,799)
                                                                 ========     ========     ========
Basic and diluted net loss per share ........................    $  (0.35)    $  (0.71)    $  (1.54)
                                                                 ========     ========     ========
Shares used in computing basic and diluted
  net loss per share ........................................      27,152       15,343        5,709
                                                                 ========     ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       36
<PAGE>   37

                                 PACKETEER, INC.
     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
                                 (in thousands)

<TABLE>
<CAPTION>
                                               CONVERTIBLE
                                             PREFERRED STOCK             COMMON STOCK       ADDITIONAL       DEFERRED
                                           -------------------       ---------------------  PAID-IN        STOCK-BASED
                                             SHARES    AMOUNT         SHARES       AMOUNT   CAPITAL       COMPENSATION
                                           --------    ------         ------       ------   -------       ------------
<S>                                        <C>         <C>           <C>          <C>       <C>           <C>
Balances as of December 31, 1997..........     9,838        $10        8,981          $9     $10,145             $--
Issuance of preferred stock...............     2,553          3           --          --       9,105              --
Issuance of common stock upon
  exercise of stock options...............       --         --         1,042           1         619              --
Stock-based compensation to
  non-employees...........................       --         --            --          --         269              --
Issuance of common stock upon
  exercise of stock purchase rights.......       --         --             6          --           1              --
Repurchase of common stock................       --         --          (306)         --         (40)             --
Issuance of warrants for preferred stock..       --         --            --          --          38              --
Repayment of notes receivable from
  stockholders............................       --         --            --          --          --              --
Deferred compensation related to
  stock option grants.....................       --         --            --          --         787            (787)
Amortization of stock-based
  compensation............................       --         --            --          --          --             273
Comprehensive loss:
  Unrealized gain (loss) on investments...       --         --            --          --          --              --
  Net loss................................       --         --            --          --          --              --

Comprehensive loss........................
                                             ------       ----        ------        ----     -------          ------
Balances as of December 31, 1998........... 12,391         13          9,723          10      20,924            (514)
Stock-based compensation to
   non-employees..........................       --         --            --          --         798             --
Stock options granted to
  non-employees...........................       --         --            --          --          42             --
Issuance of common stock upon
  exercise of stock options...............       --         --           125          --         278              --
Issuance of common stock, net of
  issuance costs of $6,445................       --         --         4,600           4      62,552              --
Conversion of preferred stock              (12,391)       (13)        12,391          13          --              --
Repurchase of common stock................       --         --          (103)         --         (28)             --
Issuance of warrants for preferred stock..       --         --           --           --         368              --
Issuance of common stock upon
  exercise of warrants, net...............       --         --           56           --          --              --
Repayments of notes receivable from
  Stockholders............................       --         --           --           --          --              --
Deferred compensation related to
  stock option grants.....................       --         --           --           --       3,914          (3,914)
Amortization of stock-based
  Compensation............................       --         --           --           --          --           2,290
Comprehensive loss:
  Unrealized loss on investments..........       --         --           --           --          --              --
  Net loss................................       --         --           --           --          --              --

Comprehensive loss........................
                                             ------       ----       ------         ----     -------          ------
Balances as of December 31, 1999..........       --         --       26,792           27      88,848          (2,138)
Stock-based compensation to
   non-employees..........................       --         --           --           --         151              --
Issuance of common stock upon
  exercise of stock options...............       --         --          694           --       2,045              --
Charges in lieu of income taxes
  associated with alternative minimum
  income tax..............................       --         --           --           --         300              --
Issuance of common stock pursuant to
  Employee Stock Purchase Plan............       --         --           98           --       1,303              --
Issuance of common stock upon
  exercise of warrants, net...............       --         --           74           --          --              --
Issuance of common stock and stock
  options related to the Work fire               --         --        1,806            2      69,498              --
  acquisition.............................
Repurchase of common stock................       --         --         (30)           --         (27)              --
Repayments of notes receivable from
  stockholders............................       --         --           --           --          --              --
Deferred compensation related to stock
  options issued in the acquisition
  of Work fire............................       --         --           --           --          --          (1,109)
Amortization of stock-based compensation         --         --           --           --          --           1,532
Comprehensive loss:
  Unrealized gain on investment...........       --         --           --           --          --              --
  Net loss................................       --         --           --           --          --              --

Comprehensive loss........................

Balances as of December 31, 2000...              --        $--       29,434          $29    $162,118         $(1,715)
                                             ======       ====       ======         ====    ========         ========
</TABLE>


<TABLE>
<CAPTION>
                                             ACCUMULATED       NOTES
                                                OTHER       RECEIVABLE
                                            COMPREHENSIVE      FROM      ACCUMULATED                COMPREHENSIVE
                                            INCOME (LOSS)   STOCKHOLDERS    DEFICIT       TOTAL           LOSS
                                            -------------   ------------    -------       -----         ---------
<S>                                         <C>            <C>           <C>           <C>          <C>
Balances as of December 31, 1997..........         $--        $(214)       $(7,146)      $2,804
Issuance of preferred stock...............          --            --            --        9,108
Issuance of common stock upon
  exercise of stock options...............          --         (568)            --           52
Stock-based compensation to
  non-employees...........................          --            --            --          269
Issuance of common stock upon
  exercise of stock purchase rights.......          --            --            --            1
Repurchase of common stock................          --            52            --           12
Issuance of warrants for preferred stock..          --            --            --           38
Repayment of notes receivable from
  stockholders............................          --             1            --            1
Deferred compensation related to
  stock option grants.....................          --            --            --           --
Amortization of stock-based
  compensation............................          --            --            --          273
Comprehensive loss:
  Unrealized loss on investments..........          --            --            --           --         $    --
  Net loss................................          --            --        (8,799)      (8,799)         (8,799)
                                                                                                        --------
Comprehensive loss........................                                                               (8,799)
                                                ---------    ------       ---------    -------          ========
Balances as of December 31, 1998...........         --         (729)       (15,945)      3,759
Stock-based compensation to
   non-employees..........................          --           --              --        798
Stock options granted to
  non-employees...........................          --           --              --         42
Issuance of common stock upon
  exercise of stock options...............          --         (188)             --         90
Issuance of common stock, net of
  issuance costs of $6,445................          --           --              --     62,556
Conversion of preferred stock                       --           --              --         --
Repurchase of common stock................          --           28              --         --
Issuance of warrants for preferred stock..          --           --              --        368
Issuance of common stock upon
  exercise of warrants, net...............          --           --              --         --
Repayments of notes receivable from
  Stockholders............................          --          151              --        151
Deferred compensation related to
  stock option grants.....................          --           --              --         --
Amortization of stock-based
  Compensation............................          --           --              --      2,290
Comprehensive loss:
  Unrealized loss on investments..........         (58)          --              --        (58)            (58)
  Net loss................................          --           --         (10,876)   (10,876)        (10,876)
                                                                                                       --------
Comprehensive loss........................                                                             (10,934)
                                               ---------    ------       ---------     -------         ========
Balances as of December 31, 1999..........       (58)         (738)         (26,821)    59,120
Stock-based compensation to
   non-employees..........................         --            --              --        151
Issuance of common stock upon
  exercise of stock options...............         --            --              --      2,045
Charges in lieu of income taxes
  associated with alternative minimum
  income tax..............................         --            --              --        300
Issuance of common stock pursuant to
  Employee Stock Purchase Plan............         --            --              --      1,303
Issuance of common stock upon
  exercise of warrants, net...............         --            --              --         --
Issuance of common stock and stock
  options related to the Work fire                 --            --              --     69,500
  acquisition.............................
Repurchase of common stock................         --             2              --        (25)
Repayments of notes receivable from
  stockholders............................         --           550              --        550
Deferred compensation related to stock
  options issued in the acquisition
  of Work fire............................         --            --              --     (1,109)
Amortization of stock-based compensation           --            --              --      1,532
Comprehensive loss:
  Unrealized gain on investment...........        135            --              --        135              135
  Net loss................................         --            --          (9,369)    (9,369)          (9,369)
                                                                                                        --------
Comprehensive loss........................                                                              $(9,234)
                                               ---------    -------      ---------    --------         =========
Balances as of December 31, 2000...               $77        $(186)      $(36,190)    $124,133
                                               =========    =======      =========    ========
</TABLE>

           See accompanying notes to consolidated financial statements



                                       37
<PAGE>   38

                                 PACKETEER, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                                   ----------------------------------
                                                                     2000         1999         1998
                                                                   --------     --------     --------
<S>                                                                <C>          <C>          <C>
Cash flows from operating activities:
  Net loss ....................................................    $ (9,369)    $(10,876)    $ (8,799)
  Adjustments to reconcile net loss to net cash used
    in operating activities:
    Depreciation ..............................................       1,181          747          215
    Amortization of goodwill and intangibles ..................       7,128           --           --
    Amortization of deferred stock-based compensation .........       1,683        3,088          542
    Issuance of stock purchase rights .........................          --           42           38
    Amortization of warrant discounts .........................          79          340           --
    Charges in lieu of income taxes associated with
       alternative minimum income tax .........................         300           --           --
    Changes in operating assets and liabilities:
      Accounts receivable .....................................      (3,954)      (1,186)      (2,024)
      Other receivables .......................................      (1,062)           4          724
      Inventories .............................................      (2,031)        (335)         175
      Prepaids and other current assets .......................        (668)        (347)          --
      Accounts payable ........................................         665          287         (318)
      Accrued compensation ....................................         930        1,227          168
      Other accrued liabilities ...............................       1,898        1,371          800
      Deferred revenue ........................................       2,155         (295)       1,464
                                                                   --------     --------     --------
        Net cash used in operating activities .................      (1,065)      (5,933)      (7,015)
                                                                   --------     --------     --------
Cash flows from investing activities:
  Purchases of property and equipment .........................      (2,606)        (708)        (605)
  Purchases of short-term investments .........................     (42,298)     (45,664)      (1,927)
  Proceeds from sale of short-term investments ................      50,104        1,927           --
  Acquisition, net of cash acquired ...........................      (3,327)          --           --
  Other assets ................................................        (427)         (96)         (59)
                                                                   --------     --------     --------
        Net cash provided by (used in) investing activities ....       1,446      (44,541)      (2,591)
                                                                   --------     --------     --------
Cash flows from financing activities:
  Net proceeds from issuance of preferred stock ...............          --           --        9,108
  Net proceeds from issuance of common stock ..................       2,045       62,646           53
  Proceeds from stockholders' notes receivable ................         550          151            1
  Repurchase of common stock ..................................         (25)          --           12
  Borrowings under line of credit .............................       2,900        2,651           --
  Repayments of line of credit ................................      (1,111)        (761)          --
  Proceeds from notes payable .................................          --        5,000           --
  Payments of notes payable ...................................      (2,629)      (2,570)         (67)
  Proceeds from lease financing ...............................       1,500          648          749
  Principal payments of capital lease obligations .............        (195)        (287)        (116)
  Sale of stock to employees under the ESPP ...................       1,303           --           --
                                                                   --------     --------     --------
        Net cash provided by financing activities .............       4,338       67,478        9,740
                                                                   --------     --------     --------
Net increase in cash and cash equivalents .....................       4,719       17,004          134
Cash and cash equivalents at beginning of year ................      19,554        2,550        2,416
                                                                   --------     --------     --------
Cash and cash equivalents at end of year ......................    $ 24,273     $ 19,554     $  2,550
                                                                   ========     ========     ========
Supplemental disclosures of cash flow information:
  Cash paid during year for interest ..........................    $    479     $    550     $     48
                                                                   ========     ========     ========
  Cash paid during year for taxes .............................    $     --     $     --     $     --
                                                                   ========     ========     ========
Non cash investing activities::
  Common stock issued in the Workfire acquisition .............    $ 64,300          $--          $--
                                                                   ========     ========     ========
  Stock options assumed in the Workfire acquisition ...........    $  5,200          $--          $--
                                                                   ========     ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       38
<PAGE>   39

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)

1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     DESCRIPTION OF BUSINESS

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

     BASIS OF PREPARATION

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

     USE OF ESTIMATES

     The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

     REVENUE RECOGNITION

     The Company recognizes product revenue when it is realized or realizable
and earned. Generally, that occurs after the following events: the receipt of a
non-cancelable purchase order; the shipment of the product; the sales price is
fixed or determinable, and collection of sales price is reasonably assured. This
policy is modified under certain circumstances as follows. Product revenue on
sales to major new distributors are recorded based on sell-through to the end
user customers until such time the Company has established significant
experience with the distributor's product return and exchange activity.
Additionally, when the Company introduces new product into its' distribution
channel for which there is no historical customer demand or acceptance history,
revenue is recognized on the basis of sell-through to end user customers. The
Company accrues for estimated customer returns following the guidance of
Statement of Financial Accounting Standards (SFAS) No. 48, "Revenue Recognition
When Right of Return Exists".

     Maintenance revenue on product sales, which is allocated and deferred based
on vendor specific objective evidence of fair value, is recognized ratably over
the term of the maintenance period.

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

     Revenue recognition for software transactions is accounted for pursuant to
the American Institute of Certified Public Accountants' (AICPA) Statement of
Position (SOP) 97-2, "Software Revenue Recognition" as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions." SOP 97-2 generally requires revenue earned on software
arrangements involving multiple-elements to be allocated to each element based
on its relative fair value. The fair value of the element must be based on
objective evidence that is specific to the vendor. If a vendor does not have
objective evidence of the fair value of all elements in a multiple-element
arrangement, all revenue from the arrangement must be deferred until such
evidence exists or until all elements have been delivered, unless the only
undelivered element is post-contract customer support, in which case, the entire
fee is recognized over the support period.



                                       39
<PAGE>   40

     Licensing revenues relate to OEM software arrangements for the PacketWise
software. The Company recognizes OEM license fees, which include post-contract
customer support, when the software has been shipped to the customer, the fees
are fixed and determinable and there is evidence of the fair value of the
post-contract customer support, generally established based on stated renewal
rates. When sufficient evidence of fair value of post-contract customer support
is not available, revenues are recognized ratably over the support period. The
Company does not have sufficient evidence of fair value of post-contract
customer support for our OEM license arrangements and we recognize the revenues
for these arrangements over the support period.

     COST OF REVENUES

     Cost of revenues consists primarily of costs of product sales. Costs of
licensing revenues, including product packaging, documentation and reproduction
have not been significant. The Company provides currently for the estimated
costs that may be incurred under product warranties when products are shipped.
Amortization of acquired technology is included in total cost of revenues and is
amortized over three years. See the accounting policy under Goodwill and Other
Intangible Assets.

     CASH AND CASH EQUIVALENTS

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

     INVESTMENTS

     Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. As of December 31, 2000 and 1999, all investment securities
are designated as "available-for-sale." Available-for-sale securities are
carried at fair value based on quoted market prices, with the unrealized gains
(losses), net of tax, reported as a separate component of stockholders' equity.
The cost of investments sold is determined on the specific identification
method.

     INVENTORIES

     Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market.

     PROPERTY AND EQUIPMENT

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

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

    ADVERTISING AND SALES PROMOTION COSTS

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

    GOODWILL AND OTHER INTANGIBLE ASSETS



                                       40
<PAGE>   41

      The Company records goodwill when the cost of net identifiable assets
acquired exceeds the fair value of the assets. Goodwill and the cost of
identified intangible assets are amortized on a straight-line basis over three
years. The Company regularly performs reviews to determine if the carrying value
of these assets is impaired. The purpose for the review is to identify any facts
or circumstances, either internal or external, which indicate that the carrying
value of the assets cannot be recovered. No such impairment has been indicated
to date. If, in the future, management determines the existence of impairment
indicators, the Company would use undiscounted cash flows to initially determine
whether impairment should be recognized. If necessary, the Company would perform
a subsequent calculation to measure the amount of the impairment loss based on
the excess of the carrying value over the fair value of the impaired assets. If
quoted market prices for the assets are not available, the fair value would be
calculated using the present value of estimated expected future cash flows. The
cash flow calculation would be based on management's best estimates, using
appropriate assumptions and projections at the time.


     RESEARCH AND DEVELOPMENT COSTS

     Development costs incurred in the research and development of new products
and enhancements to existing products are expensed as incurred until
technological feasibility in the form of a working model has been established.
To date, software developments have been completed concurrent with the
establishment of technological feasibility and, accordingly, no costs have been
capitalized.

     CONCENTRATIONS OF CREDIT AND BUSINESS RISK

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

     The Company relies on one hardware manufacturer for the production of its
product. The inability of the manufacturer to fulfill supply requirements of the
Company could negatively impact future results. The Company attempts to mitigate
these risks by working closely with this manufacturer regarding production
planning and product introduction timing.

     The Company's products, which are sold worldwide, are targeted to
organizations utilizing wide area networks. Accordingly, the Company's future
success depends upon the capital spending patterns of such customers and the
continued demand by such customers for the Company's products. The networking
industry is characterized by rapidly changing technology, evolving industry
standards, changes in end-user requirements and frequent new product
introductions and enhancements.

     The Company's continued success will depend upon its ability to enhance
existing products and to develop and introduce, on a timely basis, new products
and features that keep pace with technology developments and emerging industry
standards. Furthermore, as a result of its international sales, the Company's
operations are subject to risks of doing business abroad including, but not
limited to, export duties, changes to import and export regulations, longer
payment cycles, and greater difficulty in collecting accounts receivable. While
to date these factors have not had an adverse material impact on the Company's
consolidated results of operations, there can be no assurance that there will
not be such an impact in the future.

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

     INCOME TAXES

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



                                       41
<PAGE>   42

measurement of deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits of which future realization is uncertain.

     STOCK-BASED COMPENSATION

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

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

     FOREIGN CURRENCY TRANSACTIONS

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

     The functional currency for the Company's foreign subsidiaries is the U.S.
dollar. Accordingly, the entities remeasure monetary assets and liabilities at
period-end exchange rates, while non-monetary items are remeasured at historical
rates. Income and expense accounts are remeasured at the average rates in effect
during the year, except for depreciation which is remeasured at historical
rates.

     Remeasurement adjustments and transaction gains and losses are recognized
in income in the year of occurrence. To date, the effect of such amounts on net
income has not been significant.

     OTHER COMPREHENSIVE LOSS

     The Company reports comprehensive income or loss in accordance with the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and loss and its
components in financial statements. Comprehensive income or loss, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. Tax effects of comprehensive income or loss are not considered material
for any periods presented.

     NET LOSS PER SHARE

     Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
per Share". Under the provisions of SFAS No. 128, basic net loss per share is
computed by dividing the net loss available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period, excluding shares subject to repurchase and in escrow related to
acquisitions. Diluted net loss per share is computed by dividing the net loss
for the period by the weighted average number of common and potential common
shares outstanding during the period if their effect is dilutive. Potential
common shares comprise restricted common stock, shares held in escrow, and
incremental common shares issuable upon the exercise of stock options and
warrants. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued for nominal consideration prior to the
anticipated effective date of the initial public offering are included in the
calculation of basic and diluted net loss per share as if they were outstanding
for all periods presented. To date, the Company has not had any issuances or
grants for nominal consideration. Diluted net loss per share does not include
the effects of the following potential common shares:

<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                          -------------------------
                                                          2000      1999       1998
                                                          ----      ----       ----
<S>                                                       <C>       <C>       <C>
Shares issuable under stock options .................     3,848     2,727     1,073
Shares of unvested stock subject to repurchase ......       300       984     2,757
Shares issuable pursuant to warrants to purchase
  common stock ......................................        45       143        58
Shares held in escrow ...............................       183        --        --
Shares issuable related to convertible preferred
</TABLE>



                                       42
<PAGE>   43
<TABLE>
<CAPTION>
<S>                                                       <C>       <C>    <C>
  stock on an "as-if-converted" basis ...............        --        --    12,391
</TABLE>

The weighted average exercise price of stock options outstanding was $18.09,
$5.68 and $1.90 as of December 31, 2000, 1999 and 1998, respectively. The
weighted average exercise price of unvested stock subject to repurchase was
$0.65, $0.55 and $0.34 as of December 31, 2000, 1999 and 1998, respectively. The
weighted average exercise price of warrants to purchase common stock was $6.25,
$4.42 and $1.81 as of December 31, 2000, 1999 and 1998, respectively.

     FINANCIAL INSTRUMENTS

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

     RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998 and June 1999, the FASB issued SFAS Nos. 133 and 137,
respectively, both titled "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 137 amended the effective date of SFAS No. 133 to the
first quarter of fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that all derivatives be recognized at
fair value in the statements of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging relationship
that exists. Because the Company does not hold any derivative instruments and
does not engage in hedging activities, the adoption of SFAS No. 133 will not
have a material impact on the Company's financial position, result of operations
or cash flows.

     In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements", as amended by SAB Nos. 101A and 101B, which provides guidance on
the recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The Company adopted SAB No. 101 in the fourth quarter of
financial year 2000. The adoption of this new accounting pronouncement did not
have a material effect on the Company's consolidated financial position and
results of operations.

     In March 2000, the FASB issued Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25". This Interpretation clarifies the application of APB No. 25 for
certain issues: (a) the definition of employee for purposes of applying APB No.
25, (b) the criteria for determining whether a plan qualifies as a non
compensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination.
Effective July 1, 2000, the Company adopted Interpretation No. 44. The adoption
of this interpretation did not have material effect on the Company's
consolidated financial position or results of operations.

2.   ACQUISITION

    On September 13, 2000, Packeteer completed the acquisition of Workfire
Technologies International, Inc. ("Workfire") for a total purchase price of
$72,827 in a transaction accounted for as a purchase. Workfire develops software
that delivers accelerated Internet services to Internet users. Packeteer
exchanged 1,806 shares of Packeteer common stock with a fair value of $64,300
for all of the outstanding stock of Workfire. Of the total common shares issued,
183 shares were placed in an escrow account to secure and collateralize the
indemnification obligations of Workfire shareholders to Packeteer. Packeteer
also assumed all of the outstanding stock options of Workfire with a fair value
of approximately $5,200. The options were valued using the Black-Scholes option
pricing model with the following assumptions: no dividends, 110% volatility, 4.5
years expected life, and 6.1% for the risk-free interest rate. In addition,
Packeteer paid certain liabilities having an aggregate value of $1,845 on behalf
of Workfire.com, the sole shareholder of Workfire. There were also $1,482 of
direct transaction costs consisting primarily of professional fees related to
this transaction.

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



                                       43
<PAGE>   44

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

    The following is a summary of the allocation of the purchase price in the
acquisition of Workfire:

<TABLE>
                      <S>                                         <C>
                      Property and equipment .................    $    349
                      Other assets ...........................          45
                      Lease obligations ......................        (159)
                      Accounts payable .......................        (696)
                      Deferred tax liability .................      (1,400)
                      Deferred stock-based compensation ......       1,109
                      Developed and core technology ..........       7,194
                      Assembled workforce ....................         281
                      Goodwill ...............................      66,104
                                                                  --------
                        Total ................................    $ 72,827
                                                                  ========
 </TABLE>

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

      Pro forma (unaudited) results for the years ended December 31, are
as follows:
<TABLE>
<CAPTION>
                                                  2000          1999
                                                  ----          ----
<S>                                             <C>          <C>
Revenues ...................................    $ 41,097     $ 18,441
Net loss ...................................     (27,717)     (36,100)
Basic and diluted net loss per share .......       (0.98)       (2.13)
</TABLE>

3.   FINANCIAL INSTRUMENTS

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

<TABLE>
<CAPTION>
                                                                    AVAILABLE-FOR-SALE SECURITIES
                                                           ----------------------------------------------
                                                                         GROSS       GROSS
                                                                      UNREALIZED   UNREALIZED    ESTIMATED
                                                             COST        GAINS       LOSSES      FAIR VALUE
                                                           --------    --------     --------     ----------
                                                                            (IN THOUSANDS)
<S>                                                        <C>         <C>          <C>          <C>
DECEMBER 31, 2000
Commercial paper, market auction preferred,
  corporate bonds and notes and medium-term notes .....    $ 58,855    $    101     $    (24)    $ 58,932
                                                           --------    --------     --------     --------
     Total debt securities ............................      58,855         101          (24)      58,932
U.S. marketable equity securities .....................          --          --           --           --
                                                           --------    --------     --------     --------
                                                           $ 58,855    $    101     $    (24)    $ 58,932
                                                           ========    ========     ========     ========

Amounts included in cash and cash equivalents .........    $ 20,997    $      4     $     (2)    $ 20,999
Amounts included in short-term investments ............      32,166          39          (22)      32,183
Amounts included in long-term investments .............       5,692          58           --        5,750
                                                           --------    --------     --------     --------
                                                           $ 58,855    $    101     $    (24)    $ 58,932
                                                           ========    ========     ========     ========
DECEMBER 31, 1999
Commercial paper, market auction preferred,
  corporate bonds and notes and medium-term notes .....    $ 63,389    $      2     $    (60)    $ 63,331
                                                           --------    --------     --------     --------
     Total debt securities ............................      63,389           2          (60)      63,331
U.S. marketable equity securities .....................          --          --           --           --
                                                           --------    --------     --------     --------
                                                           $ 63,389    $      2     $    (60)    $ 63,331
                                                           ========    ========     ========     ========
</TABLE>



                                       44
<PAGE>   45

<TABLE>
<S>                                                        <C>         <C>          <C>          <C>
Amounts included in cash and cash equivalents .........    $ 17,725    $      2     $     --     $ 17,727
Amounts included in short-term investments ............      37,933          --          (15)      37,918
Amounts included in long-term investments .............       7,731          --          (45)       7,686
                                                           --------    --------     --------     --------
                                                           $ 63,389    $      2     $    (60)    $ 63,331
                                                           ========    ========     ========     ========
</TABLE>

     Maturities of debt securities at market value as of December 31, 2000 are
as follows:

<TABLE>
<S>                                              <C>
Mature in one year or less ....................    $53,182
Mature between one year through five years ....      5,750
Mature after five years .......................         --
                                                   -------
                                                   $58,932
                                                   =======
</TABLE>

4.   INVENTORIES

     Inventories consisted of the following at December 31:

<TABLE>
<CAPTION>
                              2000      1999
                              ----      ----
<S>                          <C>       <C>
Components ..............    $  911    $   --
Completed products ......     1,643       523
                             ------    ------
      Inventories .......    $2,554    $  523
                             ======    ======
</TABLE>

5.   PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                            2000      1999
                                                            ----      ----
<S>                                                        <C>       <C>
Computers and equipment ...............................    $1,217    $  411
Equipment under capital lease .........................     3,348     1,570
Furniture and fixtures ................................       195        50
Leasehold improvements ................................       243        17
                                                           ------    ------
                                                            5,003     2,048
Less: accumulated amortization ........................     2,474     1,293
                                                           ------    ------
Property and equipment, net ...........................    $2,529    $  755
                                                           ======    ======
</TABLE>

     Accumulated depreciation and amortization includes accumulated amortization
of approximately $2,055 and $974 on equipment under capital lease as of December
31, 2000 and 1999, respectively.

6.   GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill and other intangible assets consisted of the following as of
December 31, 2000.

<TABLE>
<S>                                                        <C>
Goodwill ..............................................    $66,104
Assembled workforce ...................................        281
Acquired technology ...................................      7,194
                                                           -------
                                                            73,579
Less: accumulated amortization ........................      7,128
                                                           -------
Goodwill and other intangible assets, net .............    $66,451
                                                           =======
</TABLE>

7.   REVOLVING LOAN AGREEMENT

     In January 2000, the Company entered into a revolving loan agreement with a
maximum line of credit of $5,000. Advances are limited to the lesser of the
maximum line or the borrowing base which is 80% of eligible receivables. The
outstanding principal



                                       45
<PAGE>   46

balance accrues interest at a per annum rate equal to the prime rate (which was
9.5% at December 31, 2000) and is secured by all present and future collateral
of the Company. The Company is required to maintain certain financial covenants
related to working capital and quarterly maximum net loss amounts. As of
December 31, 2000, the Company was in compliance with the covenants and the
outstanding balance on the line of credit was $3,679. Subsequent to December 31,
2000, the revolving loan agreement was extended to January 2002 and amended,
increasing the maximum line of credit to $10,000.

8.   NOTES PAYABLE

     As of December 31, 2000, the Company had $50 outstanding on a note payable,
which is secured by the Company's property and equipment. This balance is
payable in monthly installments through June 1, 2001. The note has a stated
interest rate of 6.75%.

9.   COMMITMENTS

     The Company leases its facility and certain equipment under non-cancelable
lease agreements which expire at various dates through 2014. Rent expense was
$1,138, $722, and $616 for the years ended December 31, 2000, 1999 and 1998,
respectively. As of December 31, 2000, the future minimum rental payments under
capital and operating leases are as follows:

<TABLE>
<CAPTION>
YEARS ENDING                                               CAPITAL    OPERATING
DECEMBER 31,                                                LEASE      LEASE
------------------                                          ------     -----
<S>                                                        <C>        <C>
   2001 ...............................................    $   937    $ 1,269
   2002 ...............................................        882      4,043
   2003 ...............................................        645      3,482
   2004 ...............................................        519      3,558
   2005 ...............................................         97      3,675
   Thereafter .........................................         --     35,620
                                                           -------    -------
Total future minimum lease payments ...................      3,080    $51,647
                                                                      =======
Less imputed interest .................................        514
                                                           -------
Present value of future minimum lease payments
  under capital lease .................................      2,566
Less current portion ..................................        751
                                                           -------
Long-term portion .....................................    $ 1,815
                                                           =======
</TABLE>

     In October 2000, the Company entered into a new facility lease agreement.
The lease term commences upon possession of the facility and has a term of 12
years. The Company currently expects possession of the facility to occur in the
quarter ending March 31, 2002. Lease payments will be made on an escalating
basis and the total future minimum lease payments amount to $49,225 over the
lease term. The Company will also have to contribute a significant amount
towards construction costs of the facility. The amount is currently estimated at
$7,000 but is subject to change. As part of this agreement, the Company is
required to deliver to the lessor, a letter of credit as a form of security
totaling $3,276 which will be classified as restricted cash on the balance
sheet. The expected date of delivery of the letter of credit is in the quarter
ending June 30, 2001.

     Packeteer has outstanding purchase order commitments for completed products
of approximately $487 at December 31, 2000. Packeteer expects the purchase
orders to be fulfilled in the first quarter of 2001.

10.  INCOME TAXES

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

<TABLE>
<CAPTION>
                                            2000         1999
                                          ---------    ---------
<S>                                       <C>          <C>
United States ........................    $ (1,858)    $(11,081)
Foreign ..............................      (7,211)         205
                                          --------     --------
    Net loss before incomes taxes ....      (9,069)     (10,876)
                                          ========     ========
</TABLE>

     Provision for income taxes for the years ended December 31, consisted of:



                                       46
<PAGE>   47

<TABLE>
<CAPTION>
                                                  2000    1999
                                                  -----   -----
<S>                                               <C>     <C>
Current:
  Federal .....................................   $  --   $  --
  State .......................................      --      --
  Foreign .....................................      --      --
                                                  -----   -----
Total current provision for income taxes ......      --      --
                                                  -----   -----
Deferred:
  Federal .....................................      --      --
  State .......................................      --      --
  Foreign .....................................      --      --
                                                  -----   -----
Total deferred provision for income taxes .....      --      --
                                                  -----   -----
Charges in lieu of income taxes associated
  with alternative minimum income tax .........     300      --
                                                  -----   -----
Total provision for income taxes ..............   $ 300   $  --
                                                  =====   =====
</TABLE>

     The provision for income taxes for the years ended December 31 differed
from the amounts computed by applying the U.S. federal income tax rate of 34% to
net loss before income taxes as a result of the following:

<TABLE>
<CAPTION>
                                               2000        1999
                                             --------    --------
<S>                                          <C>         <C>
Federal tax at statutory rate ...........    $(3,084)    $(3,698)
State taxes .............................         --          --
Deferred tax asset utilized .............     (4,465)         --
Foreign operating loss not benefited ....        308       3,655
Non deductible expenses .................      2,226          43
Alternative minimum income tax ..........        300          --
Imputed interest ........................        102          --
Intercompany revenue ....................      4,913          --
Foreign tax differential ................         --          --
                                             -------     -------
    Total provision for income taxes ....    $   300     $    --
                                             =======     =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                          2000         1999
                                                                        --------     --------
<S>                                                                     <C>          <C>
Deferred tax assets:
  Various accruals and reserves not deductible for tax purposes ....    $    727     $    507
  Property and equipment ...........................................         238           --
  Net operating loss carryforwards .................................      10,853        9,308
  Research credit carryforwards ....................................       1,457          784
  Capitalized start-up expenditures ................................         107          216
  Deferred stock-based compensation ................................         606          675
                                                                        --------     --------
    Gross deferred tax assets ......................................      13,988       11,490
Valuation allowance ................................................     (13,988)     (11,367)
                                                                        --------     --------
    Total deferred tax assets ......................................          --          123

Deferred tax liabilities:
  Intangible assets ................................................      (1,400)
  Property and equipment ...........................................          --         (123)
                                                                        --------     --------
     Total deferred tax liabilities ................................      (1,400)        (123)
                                                                        --------     --------

Net deferred tax assets(liabilities) ...............................    $ (1,400)    $     --
                                                                        ========     ========
</TABLE>

     The net change in the total valuation allowance was an increase of $2,621
and $4,462 for the years ended December 31, 2000 and 1999, respectively. The
Company's accounting for deferred taxes under SFAS No. 109, "Accounting for
Income Taxes", involves the evaluation of a number of factors concerning the
realizability of the Company's deferred tax assets. To support the Company's
conclusion that a 100% valuation allowance was required, management primarily
considered such factors as the Company's history of



                                       47
<PAGE>   48

operating losses, the nature of the Company's deferred tax assets and the
absence of taxable income in prior carryback years. Although management's
operating plans assume taxable and operating income in future periods,
management's evaluation of all the available evidence in assessing the
realizability of the deferred tax assets indicates that such plans are not
considered sufficient to overcome the available negative evidence.

     Approximately $7,100 of the valuation allowance for deferred tax assets is
attributable to employee stock option deductions, the benefit from which will be
allocated to additional paid-in capital when and if subsequently realized.

     As of December 31, 2000, the Company has net operating loss carryforwards
for federal and California income tax purposes of approximately $28,972 and
$15,752, respectively available to reduce future income subject to income taxes.
The Company's federal net operating loss carryforwards will begin to expire in
the year 2011, if not utilized. The Company's California net operating loss
carryforwards will begin to expire in the year 2005, if not utilized.

     As of December 31, 2000, the Company had federal and state research credit
carryforwards of approximately $935 and $778, respectively, available to reduce
future income taxes. The federal research credit carryforwards begin to expire
in the year 2011. The California research credit carryforwards can be carried
forward indefinitely.

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

11. STOCKHOLDERS' EQUITY

PREFERRED STOCK

     As of the closing of the Company's initial public offering in July 1999,
all preferred stock outstanding was converted into an aggregate of 12,391 shares
of common stock of the Company. Also at the time of the Company's initial public
offering, the Board of Directors changed the number of authorized shares of
preferred stock to 5,000. The authorized preferred stock shares are undesignated
and the Board of Directors has the authority to issue and to determine the
rights, preference and privileges thereof.

COMMON STOCK

     As of December 31, 1998 the Company was authorized to issue 40,000 shares
of common stock. In May 1999, the Company's Board of Directors authorized the
Company to issue 85,000 shares, effective upon completion of an initial public
offering in July 1999.

     In July 1999, the Company completed the initial public offering in which it
sold 4,600 shares of common stock raising $62,556, net of issuance costs.

WARRANTS

As of December 31, 2000, 45 warrants to purchase common stock were outstanding
and exercisable with a $6.25 exercise per share and an expiration date in May
2009.

1999 EMPLOYEE STOCK PLAN

     In May 1999, the Company's Board of Directors adopted the 1999 Employee
Stock Purchase Plan (the "ESPP"). The ESPP became effective July 27, 1999. At
that time, 500 shares were reserved for issuance under this plan. The number
of shares reserved under this ESPP will automatically increase annually
beginning on January 1, 2000 by the lesser of 1,000 shares or 2% of the total
number of shares of common stock outstanding. The ESPP permits participants to
purchase common stock through payroll deductions of up to 15% of an employee's
compensation, including commissions, overtime, bonuses and other incentive
compensation. The purchase price per share will be equal to 85% of the fair
market value per share on the participant's entry date into the offering period
or, if lower, 85% of the fair value per share on the semi-annual purchase date.
98 shares of common stock were issued under this ESPP during 2000.



                                       48
<PAGE>   49

1999 STOCK INCENTIVE PLAN

     The 1999 Stock Incentive Plan (the "1999 Plan") is intended to serve as the
successor program to our 1996 Equity Incentive Plan (the "1996 Plan"). In May
1999, the Company's Board of Directors approved the 1999 Plan, which became
effective on July 27, 1999, under which 900 shares were reserved for issuance.
Previously, 515 shares were authorized under the 1996 Plan. In addition, any
shares not issued under the 1996 Plan will also be available for grant under the
1999 Plan. The number of shares reserved under the 1999 Plan will automatically
increase annually beginning on January 1, 2000 by the lesser of 3,000 shares or
5% of the total number of shares of common stock outstanding. Under the 1999
Plan, eligible individuals may be granted options to purchase common shares or
may be issued shares of common stock directly. The 1999 Plan is administered by
the Board of Directors, which sets the terms and conditions of the options.
Non-statutory stock options and incentive stock options are exercisable at
prices not less than 85% and 100%, respectively, of the fair value on the date
of grant. The options become 25% vested one year after the date of grant with
1/48 per month vesting thereafter and expire at the end of 10 years from date of
grant or sooner if terminated by the Board of Directors. The options may include
a provision whereby the option holder may elect at any time to exercise the
option prior to the full vesting of the option. Unvested shares so purchased
shall be subject to a repurchase right by the Company at the original purchase
price. Such right shall lapse at a rate equivalent to the vesting period of the
original option. As of December 31, 2000, 300 shares were subject to repurchase.

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

<TABLE>
<CAPTION>
                                                                  OPTIONS OUTSTANDING
                                                            ------------------------------
                                             AVAILABLE      NUMBER OF     WEIGHTED-AVERAGE
                                             FOR GRANT       SHARES        EXERCISE PRICE
                                             ---------       ------        --------------
<S>                                          <C>            <C>           <C>
Balances as of December 31, 1997 .....           272            900         $    0.22
  Shares made available for grant ....         2,025             --                --
  Repurchased ........................           306             --                --
  Granted ............................        (1,300)         1,300              1.96
  Exercised ..........................            --         (1,042)             0.59
  Cancelled ..........................            85            (85)             1.02
                                              ------         ------
Balances as of December 31, 1998 .....         1,388          1,073              1.90
  Shares made available for grant ....         1,415             --                --
  Repurchased ........................           103             --                --
  Granted ............................        (1,787)         1,787              7.74
  Exercised ..........................            --            (97)             2.75
  Cancelled ..........................            36            (36)             3.19
                                              ------         ------
Balances as of December 31, 1999 .....         1,155          2,727              5.68
  Shares made available for grant ....         1,340             --                --
  Repurchased ........................            30             --                --
  Granted ............................        (2,043)         2,043             29.99
  Exercised ..........................            --           (606)             3.07
  Cancelled ..........................           316           (316)            16.70
                                              ------         ------
Balances as of December 31, 2000 .....           798          3,848             18.09
                                              ======         ======
</TABLE>

<TABLE>
<CAPTION>
                                                                     Years ended December 31,
                                               -------------------------------------------------------------------
                                                     2000                   1999                   1998
                                               --------------------   --------------------   ---------------------
                                                          Weighted-             Weighted-                Weighted-
                                                           Average               Average                  Average
                                               Shares    Fair Value   Shares    Fair Value   Shares      Fair Value
                                               ------    ----------   ------    ----------   ------      ----------
<S>                                            <C>       <C>          <C>       <C>          <C>         <C>
Weighted-average fair value of options
granted during the year at market .........    1,888     $   22.75       445    $   20.18      402       $   0.49

Weighted-average fair value of options
granted during the year at less than
market ....................................      155*        33.55     1,342         6.45      898           3.63
</TABLE>

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



                                       49
<PAGE>   50

In the year ended December 31, 2000, 88 shares were issued as a result of the
exercise of non plan options granted before the July 28, 1999 initial public
offering.

The following table summarizes information about stock options outstanding under
the 1996 and 1999 Plans as of December 31, 2000:

<TABLE>
<CAPTION>
                                            OPTIONS OUTSTANDING                               OPTIONS EXERCISABLE
                        -----------------------------------------------------------   --------------------------------
                                                   WEIGHTED
                                                    AVERAGE           WEIGHTED                                WEIGHTED
       RANGE OF               NUMBER               REMAINING          AVERAGE              NUMBER              AVERAGE
       EXERCISE             OUTSTANDING           CONTRACTUAL         EXERCISE           EXERCISABLE          EXERCISE
        PRICES              AT 12/31/00          LIFE (YEARS)          PRICE            AT 12/31/00            PRICE
     ------------       ------------------   -------------------   ----------------   ------------------   -----------
   <S>                  <C>                  <C>                   <C>                <C>                  <C>
    $ 0.10-$ 2.50               413                  6.91              $1.16                 273              $0.94
    $ 2.77-$ 3.50             1,290                  7.61               3.42                 491               3.34
   $ 6.25-$ 12.00               554                  9.04              10.68                  79               9.00
   $ 12.38-$ 26.25              487                  9.54              20.24                   9              15.00
   $ 27.19-$ 44.00              432                  9.44              36.73                  32              35.11
   $ 45.00-$ 67.13              672                  9.18              49.23                   4              55.28
                                ---                                                          ---
        Total                 3,848                  8.46              18.09                 888               4.60
                              =====                                                          ===
</TABLE>

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

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

     Had compensation cost been recognized based on fair value at the date of
grant for options granted and shares purchased under the ESPP plan during 2000,
1999 and 1998, the pro forma amounts of the Company's net loss per share would
have been as follows for the years ended December 31:

<TABLE>
<CAPTION>
                                                         2000          1999         1998
                                                      -----------   ----------   ----------
<S>                                                   <C>           <C>          <C>
Net loss-historical ................................  $   (9,369)   $ (10,876)   $  (8,799)
Net loss-pro forma .................................     (29,504)     (13,986)      (8,854)
Basic and diluted net loss per share-historical ....       (0.35)       (0.71)       (1.54)
Basic and diluted net loss per share-pro forma .....       (1.09)       (0.91)       (1.55)
</TABLE>

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

<TABLE>
<CAPTION>
                                        OPTIONS
                                  --------------------
                                  2000    1999    1998
                                  ----    ----    ----
<S>                               <C>     <C>     <C>
Expected life (years) ........      4       4       4
Expected volatility ..........    137%    110%     50%
Risk-free interest rates .....    5.24%   4.5%    4.5%
</TABLE>

     To comply with pro forma reporting requirements of SFAS No. 123,
compensation cost is also estimated for the fair value of future ESPP issuances
which is included in the pro forma total above. Therefore, the Company has
estimated the compensation cost for its ESPP issuance in January 2001. The fair
value of purchase rights granted under the ESPP is estimated on the date of
grant using the Black-Scholes option pricing model with the above assumptions
except the expected life is 0.5 years. The weighted-average fair value of the
purchase rights granted under the ESPP during fiscal 2000 and 1999 was $19.00
and $23.00, respectively.



                                       50
<PAGE>   51

DEFERRED STOCK-BASED COMPENSATION

     In connection with options granted in fiscal years 1999 and 1998, the
Company has recorded deferred stock-based compensation of $3,914 and $787,
respectively, representing the difference between the exercise price and the
fair value of the Company's common stock at the date of grant. In fiscal year
2000, the Company recorded deferred stock-based compensation of $1,109 related
to employee options assumed in the Workfire acquisition. The amounts are being
amortized over the vesting period for the individual options, generally four
years. Amortization of stock-based compensation of $1,683, $3,088 and $537 was
recognized during the years ended December 31, 2000, 1999 and 1998,
respectively.

12. 401(k) PLAN

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

13.  SEGMENT REPORTING

     The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company's chief
operating decision maker is considered to be the Company's CEO. The CEO reviews
financial information presented on a consolidated basis substantially similar to
the consolidated financial statements. Therefore, the Company has concluded that
it operates in one segment and accordingly has provided only the required
enterprise-wide disclosures.

     The Company operates in the United States and internationally, and derives
its revenue from the sale of products and software licenses. The Company's
sales, marketing, and development efforts have been focused on the PacketShaper
family of products and PacketWise software. In 2000 and 1998, one customer
accounted for 12% of total net revenues. In 1999, no one customer accounted for
more than 10% of total net revenues. Sales outside of North America accounted
for 54%, 55%, and 55% of the Company's total revenues in 2000, 1999, and 1998,
respectively.

Geographic Information

<TABLE>
<CAPTION>
                                          YEARS ENDED DECEMBER 31,
                                     ---------------------------------
                                       2000        1999         1998
                                     -------      -------      -------
<S>                                  <C>          <C>          <C>
Total net revenues:
  North America ...............      $18,791      $ 8,310      $ 3,273
  Asia Pacific ................       11,608        4,795        2,238
  Europe and rest of world ....       10,698        5,336        1,719
                                     -------      -------      -------
     Total net revenues .......      $41,097      $18,441      $ 7,230
                                     =======      =======      =======
</TABLE>

     Total net revenues reflect the destination of the product shipped.

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

14.  SUBSEQUENT EVENT (UNAUDITED)

     Short-term investments includes approximately $3 million in corporate notes
of Southern California Edison that have been accounted for as available-for-sale
securities under SFAS No. 115. These notes are valued at fair market value as of
December 31, 2000. On January 16, 2000, the scheduled redemption date, Southern
California Edison announced that it would not redeem these notes at that time.
Subsequently, on March 26, 2001, Packeteer sold these notes incurring a $545
realized loss.

15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)



                                       51
<PAGE>   52

<TABLE>
<CAPTION>
                                                                      2000
                                                                      ----
                                                                  QUARTER ENDED
                                               ------------------------------------------------------
                                               DECEMBER 31,   SEPTEMBER 30,  JUNE 30,       MARCH 31,
                                               ------------   -------------  --------       ---------
                                                      (in thousands, except per share amounts)
<S>                                            <C>            <C>            <C>            <C>
Total net revenues ......................      $ 13,326       $ 11,504       $  9,111       $  7,156
Gross profit ............................         8,782          7,896          6,253          4,903
Net loss ................................        (6,206)        (1,141)          (545)        (1,477)
Basic and diluted net loss per share ....         (0.22)         (0.04)         (0.02)         (0.06)
</TABLE>

<TABLE>
<CAPTION>
                                                                      1999
                                                                      ----
                                                                  QUARTER ENDED
                                               ------------------------------------------------------
                                               DECEMBER 31,   SEPTEMBER 30,  JUNE 30,       MARCH 31,
                                               ------------   -------------  --------       ---------
                                                      (in thousands, except per share amounts)
<S>                                            <C>            <C>            <C>            <C>
Total net revenues ......................      $ 6,342        $  5,019       $  3,981       $  3,099
Gross profit ............................        4,419           3,583          2,908          2,245
Net loss ................................       (2,227)         (2,926)        (3,200)        (2,523)
Basic and diluted net loss per share ....        (0.09)          (0.14)         (0.41)         (0.35)
</TABLE>

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

     Not Applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Pursuant to General Instruction G to Form 10-K, the information required by
Items 10, 11, 12, and 13 of Part III is incorporated by reference to our
definitive Proxy Statement with respect to our 2001 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A with the Securities and
Exchange Commission not later than 120 days after December 31, 2000.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements

       See the Consolidated Statements beginning on page 35 of this Form 10-K.

   (2) Financial Statement Schedule

       Schedule II - Valuation and Qualifying Accounts and Reserves (see page 54
of this Form 10-K).

   (3) Exhibits

       See the Exhibit Index at page 55 of this Form 10-K.

(b) No reports on Form 8-K were filed during the last quarter of the fiscal year
ended December 31, 2000.

(c)  See the Exhibit Index at page 55 of this Form 10-K.

(d) See the Consolidated Financial Statements beginning on page 35 and Financial
Statement Schedule at page 54 of this Form 10-K.



                                       52
<PAGE>   53

                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Cupertino, State of California, on this 28th day of March, 2001.


                                       PACKETEER, INC.


                                       By:  /s/   DAVID YNTEMA
                                          --------------------------------------
                                          David Yntema
                                          Chief Financial Officer and Secretary
                                          Date: March 28, 2001

                                POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>
                        NAME                                           TITLE                                 DATE
                        ----                                            -----                                ----
<S>                                                   <C>                                               <C>
                /s/ CRAIG ELLIOTT                     President and Chief Executive Officer             March 28, 2001
--------------------------------------------------    (Principal Executive Officer) and Director
                    Craig Elliott

                /s/ DAVID YNTEMA                      Chief Financial Officer and Secretary             March 28, 2001
--------------------------------------------------    (Principal Financial and Accounting Officer)
                    David Yntema

                /s/ BRETT GALLOWAY                    Vice President, Corporate Development,            March 28, 2001
--------------------------------------------------    and Director
                    Brett Galloway

                /s/ HAMID AHAMDI                      Director                                          March 28, 2001
--------------------------------------------------
                    Hamid Ahamdi

                /s/ STEVEN CAMPBELL                   Director                                          March 28, 2001
--------------------------------------------------
                   Steven Campbell

                /s/ JOSEPH GRAZIANO                   Director                                          March 28, 2001
--------------------------------------------------
                   Joseph Graziano

                /s/ L. WILLIAM KRAUSE                 Director                                          March 28, 2001
--------------------------------------------------
                  L. William Krause

                /s/ WILLIAM STENSRUD                  Director                                          March 28, 2001
--------------------------------------------------
                   William Stensrud
</TABLE>



                                       53
<PAGE>   54

                                   SCHEDULE II
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
              For the years ended December 31, 2000, 1999, and 1998
                                 (in thousands)

<TABLE>
<CAPTION>
                                                            ADDITIONS
                                           BALANCE AT      CHARGED TO                       BALANCE AT
                                            BEGINNING       COSTS AND                         END OF
                                            OF PERIOD        EXPENSES      DEDUCTIONS         PERIOD
                                            ---------        --------      ----------         ------
<S>                                        <C>             <C>             <C>              <C>
2000
  Accounts receivable allowances ....      $      217      $       16      $      (10)      $      223
  Warranty reserve ..................             313             747            (483)             577
1999
  Accounts receivable allowances ....             293              28            (104)             217
  Warranty reserve ..................              76             515            (278)             313
1998
  Accounts receivable allowances ....              37             305             (49)             293
  Warranty reserve ..................              32              85             (41)              76
</TABLE>



                                       54
<PAGE>   55

                                 EXHIBITS INDEX

<TABLE>
<CAPTION>
              EXHIBIT
              NUMBER                          DESCRIPTION
              ------                          -----------
              <S>             <C>
               3.1(2)         Registrant's Amended and Restated Certificate of
                              Incorporation.

               3.2(2)         Registrant's Amended and Restated Bylaws.

               3.3(1)         Registrant's Amended and Restated Bylaws.

               4.1(2)         Form of Registrant's Specimen Common Stock
                              Certificate.

               10.1(2)        Lease Agreement between Packeteer and Eldon R.
                              Hoffman dated August 25, 1997.

               10.2(2)        OEM Agreement between Packeteer and ADC
                              Telecommunications, Inc., dated December 17, 1998.

               10.3(2)        Reseller Agreement between Packeteer and Alcatel
                              Business Systems, dated May 7, 1999.

               10.4(2)        Loan and Security Agreement between Packeteer and
                              Silicon Valley Bank, dated January 1, 1999.

               10.5(2)        Export-Import Bank Loan and Security Agreement
                              between Packeteer and Silicon Valley Bank, dated
                              January 19, 1999.

               10.6(2)        Subordinated Loan and Security Agreement between
                              Packeteer and Comdisco, Inc., dated January 21,
                              1999.

               10.7(2)        Master Lease Agreement between Packeteer and
                              Comdisco, Inc., dated June 3, 1997.

               10.8(2)        Registrant's 1996 Equity Incentive Plan.

               10.9(2)        Registrant's 1999 Stock Incentive Plan.

               10.10(2)       Registrant's 1999 Employee Stock Purchase Plan.

               10.11(2)       Form of Indemnity Agreement entered into by
                              Registrant with each of its executive officers and
                              directors.

               10.12(2)       Loan and Security Agreement between Packeteer and
                              MMC/GATX Partnership No. 1 dated May 20, 1999.

               10.13(2)       OEM Agreement between Packeteer and Lucent
                              Technologies, Inc. dated June 25, 1999.

               10.14(2)       OEM Agreement between Packeteer and Adtran, Inc.
                              dated June 29, 1999.

               10.15(3)       Amendment dated February 2, 2000 to the Loan and
                              Security Agreement and the Export-Import Bank Loan
                              and security agreement between Packeteer and
                              Silicon Valley Bank.

               10.16(3)       Master Lease Agreement between Packeteer and
                              Pentech Financial Services, Inc., dated November
                              1, 1999.

               10.17(3)       Addendum to Lease Agreement between Packeteer and
                              Eldon R. Hoffman dated November 1, 1999.

               10.18(4)       Lease Agreement between Packeteer and WTA Piercy
                              LLC dated October 30, 2000

               10.19(1)       Amendment dated March 13, 2001 to the Loan and
                              Security Agreement and the Export-Import Bank Loan
                              and security agreement between Packeteer and
                              Silicon Valley Bank.

               21.1(1)        Subsidiaries of Packeteer

               23.1(1)        Consent of KPMG LLP, Independent Accountants

               24.1(1)        Power of Attorney (see page 54)
</TABLE>

------------

(1)     Filed herewith.

(2)     Incorporated by reference from Packeteer's Registration Statement on
        Form S-1 (Reg. No. 79333-79077), as amended.

(3)     Incorporated by reference from Packeteer's 10-K dated March 23, 2000.

(4)     Incorporated by reference from Packeteer's 10-Q dated November 13, 2000.



                                       55