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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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FORM 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | for the fiscal year ended December 31,
    2003                                             
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | for the transition period
    from           to          .                                  

Commission File Number 000-26785



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Packeteer, Inc.

(Exact name of Registrant as specified in its
charter)


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

10201 North De Anza

Cupertino, California 95014


(Address of principal executive
offices)


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

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

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

Common Stock, $0.001 Par Value

(Title of Class)


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

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

Indicate by
checkmark whether the registrant is an accelerated filer (as
defined in Exchange Act
Rule 12b-2).     Yes þ          No o

Based on the
closing sale price of the common stock on the Nasdaq National
Market on June 30, 2003, the aggregate market value of the
voting common stock held by non-affiliates of the Registrant was
$360,307,604. Shares of common stock held by each officer and
director and by each person known by the Registrant 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 32,803,380 at February 27, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Information
required by Part III, Items 10, 11, 12, 13 and 14, of
this Form 10-K is incorporated by reference from the
Registrants definitive Proxy Statement for the
Registrants 2004 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, 2003.



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TABLE OF CONTENTS

|              |  |          |    |                                                                                           |  |  |    | 
|------------- |  | -------- | -- | ----------------------------------------------------------------------------------------- |  |  | -- | 
|Part I        |  |          |    |                                                                                           |  |  |    | 
|              |  | Item 1.  |    | Business                                                                                  |  |  | 1  | 
|              |  | Item 2.  |    | Properties                                                                                |  |  | 23 | 
|              |  | Item 3.  |    | Legal Proceedings                                                                         |  |  | 24 | 
|              |  | Item 4.  |    | Submission of Matters to a
    Vote of Security Holders                                   |  |  | 24 | 
|Part II       |  |          |    |                                                                                           |  |  |    | 
|              |  | Item 5.  |    | Market For Registrants
    Common Stock and Related Stockholder Matters                  |  |  | 24 | 
|              |  | Item 6.  |    | Selected Financial Data                                                                   |  |  | 25 | 
|              |  | Item 7.  |    | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |  | 26 | 
|              |  | Item 7A. |    | Quantitative and Qualitative
    Disclosures about Market Risk                            |  |  | 36 | 
|              |  | Item 8.  |    | Financial Statements and
    Supplementary Data                                           |  |  | 36 | 
|              |  | Item 9.  |    | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |  |  | 59 | 
|              |  | Item 9A. |    | Controls and Procedures                                                                   |  |  | 59 | 
|Part III      |  |          |    |                                                                                           |  |  |    | 
|              |  | Item 10. |    | Directors and Executive Officers of the Registrant                                        |  |  |    | 
|              |  | Item 11. |    | Executive Compensation                                                                    |  |  |    | 
|              |  | Item 12. |    | Security Ownership of Certain Beneficial Owners
    and Management                        |  |  |    | 
|              |  | Item 13. |    | Certain Relationships and Related Transactions                                            |  |  |    | 
|              |  | Item 14. |    | Principal Accountant Fees and Services                                                    |  |  |    | 
|Part IV       |  |          |    |                                                                                           |  |  |    | 
|              |  | Item 15. |    | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                      |  |  | 59 | 
|Signatures    |  |          | 60 |                                                                                          
|EXHIBIT 10.25
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 





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PART I






|        |         
|------- | --------
|Item 1. | Business

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 future
revenues and revenue growth, markets for our products, our
ability to continue to innovate and obtain patent protection,
operating expense targets, future profits and liquidity, our
planned introduction of new products and services, the
possibility of acquiring complementary businesses, products,
services and technologies, our international expansion plans 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
traffic management systems designed to deliver a broad set of
visibility, control, and compression capabilities to enterprise
customers and service providers. For enterprise customers, the
system is designed to enable Information Technology, or IT,
organizations to effectively align application and network
resources with the priorities of the business, while providing
measurable cost savings in wide area network, or WAN,
infrastructure investments. For service providers, the Packeteer
systems are designed to provide a platform for delivering
application-intelligent network services that control quality of
service, or QoS, expand revenue opportunities and offer
compelling differentiation from other potential solutions.

The Packeteer application traffic management
system consists of a family of appliances with performance
capabilities that make them capable of deployment within large
data centers as well as smaller remote sites throughout a
distributed enterprise. Each appliance can be configured to
deliver the full range of application traffic management
solutions, from visibility with PacketSeeker®, to control
with PacketShaper®, to compression with PacketShaper
XpressTM. In addition, each appliance can be managed
individually or in context of a completely integrated
policy-based application traffic management system distributed
across multiple locations, using our ReportCenterTM
or PolicyCenterTM software products.

Packeteers products are deployed at more
than 5,000 enterprises and service providers worldwide, and are
sold through an established network of more than 100 resellers,
distributors and system-integrators in more than 50 countries,
complemented by our direct sales organization. Our sales force
and marketing efforts are used to develop brand awareness, drive
demand for system solutions and support our indirect channels.

We were incorporated in Delaware in January 1996
and began shipping our products in February 1997. To date we
have shipped more than 30,000 units. We have subsidiaries
or branch offices in Australia, Canada, Denmark, France,
Germany, Hong Kong, Japan, Singapore, Spain, South Korea, the
Netherlands and the United Kingdom. In this report,
Company, Packeteer, we,
us, and our refer to Packeteer, Inc. and
its subsidiaries. Investors may access our filings with the
Securities and Exchange Commission on our website, which is
located on the Internet at www.packeteer.com, but the
information on our website does not constitute part of this
Annual Report.

Industry Background



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

The Internet and Transmission Control Protocol/
Internet Protocol, or TCP/ IP, have enabled a new generation of
interactive applications to allow information to be exchanged
and business processes to be

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distributed beyond the traditional boundaries of
the enterprise. As a result, these distributed applications
empower companies to conduct business with employees, customers,
partners and suppliers regardless of their physical location.
Protocols are predefined mechanisms for computers to communicate
over networks. TCP/ IP is a two-layer program. The higher layer,
TCP, manages the assembly of a file into smaller packets that
are transmitted over the Internet and received by a TCP layer
that reassembles the packets into the original message. The
lower layer, IP, handles the address part of each packet so it
gets to the right destination.


The emergence of Internet computing has created
new challenges for IT managers. As more core business
applications, such as SAP, Oracle, and Siebel, become
distributed and web-enabled, and the use of video over IP and
voice over IP increases, the amount of network data increases
dramatically. This increase in data makes it difficult for
businesses to ensure the performance of their applications.
Further, enterprise users access graphic-intensive web sites,
download large files, view streaming media presentations,
monitor news and stock quotes and access peer-to-peer
applications, instant messaging and other critical and
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.

Unlike early non-interactive applications that
did not require real-time responsiveness, todays business
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 local area network, or 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 wide
area network, or 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.

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| |                                       
| | --------------------------------------
| | 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. Additional bandwidth may be
unavailable in many international markets. Moreover, incremental
increases in bandwidth may only temporarily alleviate network
congestion, and do not ensure that the additional bandwidth is
available to mission critical applications, leaving the
following problems unresolved:



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

Implementing queuing-based
approaches.Queuing 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 QoS by
reordering packets and then discarding packets when the queues
overflow. Queuing-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 for the following reasons:



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

Deploying traditional compression
technologies.Products are available
which compress traffic. Although compression can increase
available bandwidth, which effectively increases network
capacity and avoids bandwidth upgrades, the network and
application performance problems are not necessarily eliminated.
As TCP/ IP protocol is inherently bursty, non-critical
applications, even though compressed, may still consume the
available bandwidth. In addition, the following problems are
also introduced when deploying traditional compression
technologies:



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

Installing network management
tools.Several vendors provide
software that analyzes and monitors network traffic. While these
products enable network administrators to determine how
bandwidth is being

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utilized, thereby identifying where bandwidth
management is required, they do not comprise a complete solution
for the following reasons:




| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Traditional network management tools only monitor
    and report network performance and bandwidth utilization,
    offering no means of fixing or resolving performance
    problems; and                           
|
| |  | As is the case with queuing-based approaches,
    traditional network management tools are reactive in nature in
    that they detect problems once they occur and do not 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 network 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
traffic management systems designed to deliver a broad set of
visibility, control and compression capabilities to enterprise
customers and service providers. For enterprise customers, the
system is designed to enable IT organizations to effectively
align applications and network resources with the priorities of
the business. For service providers, the Packeteer system is
designed to provide a platform for delivering
application-intelligent network services that control QoS,
expand revenue opportunities and offer compelling
differentiation from other potential solutions. Packeteers
application traffic management system is based on the following:



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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | compression, latency management and tunnel
    management to accelerate policy-managed business traffic.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Centralized
    Management.Packeteer systems provide
    reports describing current and historical network performance.
    Comprehensive reports, graphs and tables enable network managers
    to refine bandwidth management policies, evaluate efficiency and
    plan capacity. Packeteer systems automatically measure per-
    transaction response times for each application. Managers can
    set, enforce and monitor service-level agreements, which
    quantify desired QoS for a particular application or customer.
    Packeteers PolicyCenter, a Windows based software
    solution, is designed to simplify deployment of multiple
    Packeteer appliances by centralizing policy and software upgrade
    distribution and providing a summary view of all managed
    appliances. Packeteers ReportCenter, also a Windows based
    software solution, is designed to provide centralized analysis
    and reporting for large PacketSeeker and PacketShaper system
    deployments.

Our application traffic management systems are
designed to enable businesses and service providers to realize
the following key benefits:



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

Strategy

Our objective is to be the leading provider of
application traffic management 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 networked applications and 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

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network. We believe we have established a
differentiated market position based on our development of a
comprehensive solution that provides for effective bandwidth
management and our 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: Equant, NTT
Communications and StarHub (formerly Singapore Cable). 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 Packeteer systems 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 Managed Application
Services Market.We are actively
pursuing opportunities in the managed application services
market and currently have several managed application service
provider customers, including NTT Communications, Equant and
AT&T using our managed application service features. Our
softwares application discovery and policy based
application management features are designed to enable managed
application service providers to quickly and cost-effectively
deliver secure, measured and performance-assured application
services tailored to the needs of specific markets and
customers. Such features enable service providers to deliver
managed services which provide ongoing visibility into customer
network traffic and enhance the application performance of their
customers priority applications.

Continue to Build Indirect Distribution
Channels.We currently have over 100
resellers, distributors and systems integrators that sell our
products in over 50 countries. These relationships include: ADN
Distribution GmbH, Alternative Technology, Comstor PTE Ltd.,
Equant, Intechnology plc, Kanematsu USA, Macnica, Inc., and
Westcon, Inc. We intend to continue to develop and support new
reseller and distribution relationships, as well as to establish
additional indirect channels with service providers and systems
integrators. We believe this strategy will enable us to increase
the worldwide deployment of our products.

Extend Bandwidth Management Technology
Leadership.Our technological
leadership is based on our sophisticated traffic classification,
flexible policy setting capabilities, precise rate control
expertise, compression technologies 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, increase functionality by
identifying and managing additional applications or traffic
types and increase modularity by taking individual components of
our PacketWise® software together or on a stand-alone basis
with our existing bandwidth management solutions. We also plan
to invest our research and development resources to develop new
leading-edge technologies for emerging markets. These
development plans include 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:
enterprise bandwidth management, application service-level
management and service provider bandwidth management.

Products

Packeteers application traffic management
system is designed to solve network and application performance
problems through a family of appliances with multiple software
options that provide visibility into application performance and
network utilization, control over network performance and
network utilization, and compression to accelerate performance
and increase WAN capacity.

PacketSeekeris
designed to provide application traffic monitoring that builds
on the Companys industry-leading Layer 7 traffic
classification, analysis and reporting technology to provide
visibility into network utilization and application performance.
PacketSeeker distinguishes itself from passive
monitoring solutions

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currently available by giving the user the
ability to seamlessly upgrade the software to become a
PacketShaper when traffic shaping is required to enforce QoS.


PacketShaperis
designed to provide application-based traffic and bandwidth
management to deliver predictable, efficient performance for
applications running over the WAN and Internet. PacketShaper is
designed to provide effective application QoS using
state-of-the-art bandwidth, traffic, service-level and policy
management technology. PacketShaper ISP is designed to enable
service providers to create differentiated services through fast
and efficient bandwidth provisioning and management. The
PacketShaper family currently includes models in the 1500, 2500,
6500, 8500 and 9500 series.

PacketShaper Xpressis designed to provide application
traffic acceleration by leveraging Packeteers expertise in
advanced Web acceleration and content compression technology to
create a universal traffic acceleration solution
that is highly efficient, scalable and simple to administer.
Combining Layer 7 classification, traffic shaping and
application-intelligent acceleration raises the level of control
customers have over the performance of their network
applications and associated bandwidth costs.

PolicyCenteris a
directory-based policy management application that is designed
to enable Packeteers enterprise and service provider
customers to broadly deploy, scale and manage application QoS
throughout the network, PolicyCenter is a lightweight directory
access protocol, or LDAP, directory-enabled application running
under Windows that enables customers to centrally administer and
update policies, software versions, and device status for
Packeteer-based networks.

ReportCenteris an
application that is designed to aggregate metrics from large
deployments and create organization-wide reports to manage
trends and provide support for capacity planning and usage
analysis, ReportCenter lowers the cost of ownership for large
deployments of PacketWise-enabled appliances, improves the
quality of information and eases administrative overhead.

Technology

We differentiate our solution by combining our
knowledge of enterprise applications with our expertise in
underlying network protocols. We have invested heavily in
developing proprietary software and related technologies and, as
of December 31, 2003, we have 12 issued U.S. patents
and 39 pending U.S. patent applications. In particular, we
have developed technology in these major areas: sophisticated
traffic discovery and classification, application-based response
time measurement, flexible policy definition and enforcement,
precise traffic flow management and intelligent compression
algorithms. These technologies help define Packeteers core
value proposition and meet customer requirements for an
application traffic management system capable of delivering
comprehensive visibility, control and compression technologies.



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

We believe the ability to automatically detect
and classify an extensive collection of applications and
protocols differentiates Packeteer systems from other bandwidth
management technologies. Sophisticated traffic classification is
crucial to understanding network congestion and to targeting
appropriate bandwidth-allocation policies. Network software or
devices that claim QoS features typically offer rudimentary
solutions that 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. Packeteer systems discover and classify traffic by
focusing on content and applications where value to the end user
lies.

Relying only on more basic traffic classification
prevents network managers from discovering important traffic
trends and limits policy setting. Sophisticated application
traffic types such as Voice over IP, Oracle and Citrix cannot be
identified using rudimentary traffic classification schemes.
Packeteer systems identify traffic markers, detect changing or
dynamic port assignments and track transactions with changing
port assignments. This sophisticated traffic classification
allows network managers with Packeteer systems to set policies
and control the traffic related to an individual application,
session, client, server or traffic type. Packeteer systems
permit a network manager to isolate each published application
running on a centralized server and can also

7



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##### Table of Contents



differentiate among various applications using
the same port. This ability to individually classify
applications is a highly valuable tool for network managers,
since both 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 may all be assigned to the same TCP port
number on a network but can be individually classified using a
Packeteer system.


Packeteer systems need no assistance from network
managers to automatically detect and identify over 400 different
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 use our technology to define proprietary applications so
that their traffic can be recognized and reported. Our
technology is differentiated by its ability to recognize older
enterprise protocols, such as AppleTalk, DECnet, IPX and SNA. We
frequently enhance our 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.

8



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##### Table of Contents



Some of the traffic types that Packeteers
technology automatically detects and classifies are listed
below. The traffic types are named either with their associated
protocol or application and are grouped according to the class
of application that generated that traffic. Each traffic type
has an associated protocol that allows it to be recognized on
the network.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Client/ServerCVS
    FIX (Finance)
    Folding@Home
    INFOC-RTMS
    INT-1 (Unisys Interact)
    MATIP (Airline)
    MeetingMaker
    NetIQ AppMngr
    OpenConnect JCP
    PEPGate (Attachmate)
    Unisys-TCPAContent DeliveryAriel
    Backweb
    Chaincast
    EntryPoint
    Kontiki
    Marimba
    NewsStand
    PointCast
    WebShotsDatabase and ERPBaan
    FileMaker Pro
    JDENet (JD Edwards)
    MS SQL
    Oracle (7,8,9i)
    Oracle JVM
    Oracle EM
    PostgreSQL
    Progress
    SAPDirectory ServicesCRS
    DHCP
    DNS
    DPA
    Finger
    Ident
    Kerberos
    LDAP
    RADIUS
    RRP
    SSDP
    TACACS
    whois
    WINS |  | E-mail and
    CollaborationBiff
    ccMAIL
    DCOM (MsExchange)
    Groupwise (Novell)
    IMAP
    LotusNotes
    MSSQ
    OSI
    POP3
    SMTPFile ServerAFS
    CIFS-TCP
    CU-Dev
    lockd
    Microsoft-ds
    NetBIOS-IP
    NFS
    Novell NetWare5
    rsync
    SunNDGamesAsherons Call
    Battle.net
    Diablo II
    Doom
    EverQuest
    Half-Life
    Kali
    LucasArts (Jedi*)
    MSN Zone
    Mythic
    Quake I, II, & III
    SonyOnline
    Tribes I,II
    Unreal
    Warcraft III
    Yahoo! GamesHealthcareDICOM
    HL7Host AccessATSTCP
    Attachmate
    Persoft Persona
    SHARESUDP
    SMTBF
    TN3270
    TN5250 |  | InternetActiveX
    FTP, Passive FTP
    Gopher
    HTTP
    HTTP Tunnel
    IP, IPv6, IPIP, UDP, TCP
    IRC
    Mime type
    NNTP
    Socks2http
    SSHTCP
    SSL
    TFTP
    UUCP
    URL
    Web browser typeLegacy LAN
    and Non-IPAFP
    AppleTalk
    DECnet
    FNA, FNAonTCP
    IPX
    LAT
    MOP-DL/RC
    NetBEUI
    PPPoE
    SLP
    SNAMessagingAOL IM,
    Talk, Image,File, ISP,...
    ICQ
    IRC
    Lotus IM
    MSN Messenger
    Windows-POPUP
    Yahoo! MessengerMiddleWareCORBA
    Java RMI
    SmartSockets
    SunRPC (dyn port)
    JavaClientMultiMediaMPEG (Audio, Video)
    Multi-cast NetShow
    NetMeeting
    QuickTime
    Real (Audio, Video)
    RTP
    RTSP
    SHOUTcast Streamworks
    VideoFrame
    WebEx
    WinampStream
    WinMedia |  | Music P2PAimster
    Apple-iTunes
    AudioGalaxy  Rhapsody  Mac
    Satellite
    Bit Torrent
    Blubster
    DirectConnect
    EDonkey  Emule  Overnet
    FileRogue
    Filetopia
    Furthurnet
    Gnutella  Acquisition  Ares  BearShare  Furi  Gnotella  Gnucleus  gtk-gnutella  LimeWire  MyNapster  Mactella  Morpheus  Mutella  Nap
    Share  Phex  Qtraxmax  Qtella  Shareaza  toadnode  XoloX
    Groove
    Hotline
    iMesh
    KaZaA
    KaZaA Lite
    Napster  Amster  audioGnome  File
    Navigator  Gnapster  Grokster  gtk
    napster  jnapster  MacStar  Maxter  My
    Napster  Napigator  NapMX  Napster
    Fast Search  Napster/2  Napster,
    MacOSX  OpenNap  Rapster  Snap  Spotlight  WebNap  WinMX
    PeerEnabler
    Scour
    Tripnosis
    Winny |  | Network ManagementCisco Discovery
    Day-Time
    ICMP(by packet type)
    IPComp
    Microsoft SMS
    NTP
    RSVP
    SMS
    SNMP
    SYSLOG
    Time ServerPrintIPP
    LPR
    TN3287
    TN5250pRoutingAURP
    BGP
    CBT
    DRP
    EGP
    EIGRP
    IGMP
    IGP
    MPLS (+tag, +app)
    OSPF
    PIM
    RARP
    RIP
    Spanning Tree
    VLAN (802.1p/q)Security ProtocolDLS
    DPA
    GRE
    IPMobility
    IPSEC
    ISAKMP/IKE key  exch
    L2TP
    PPTP
    RC5DES
    SOCKS Proxy
    SSH
    SSL (+shell)
    swIPeSessionGoToMyPC
    pcAnywhere
    REXEC
    rlogin
    rsh
    Telnet
    Timbuktu
    VNC
    Xwindows |  | Thin Client or
    Server BasedCitrix  Published
    Apps,  Nfuse, IMA
    RDP/Terminal ServerVoice over IPCiscoCTI
    Clarent
    CUSeeMe
    Dialpad
    H.323
    I-Phone
    MCK Commun.
    Megaco
    Micom VIP
    MGCP
    Net2Phone
    RTP
    RTCP
    SIP
    Skinny (SCCP)
    T.120
    VDOPhone

9



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

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

Packeteers systems are designed to break
each response time measurement into network delay, which is the
amount of time spent in transit, and server delay, which is the
amount of time the server is used to process the request. It can
highlight clients and servers with the slowest performance. The
Packeteer system allows network managers to set acceptability
standards and then track whether performance adheres to the
standards.



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

Packeteer provides network managers flexible
tools to tailor solutions for different applications or traffic
types. Unlike queuing-based approaches, Packeteer systems allow
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. These policy features,
which may be used individually or in conjunction with each
other, 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 for the creation of a separate, exclusive
    channel within a WAN access link. Partitions represent aggregate
    bandwidth minimums or maximums governing how much of the network
    can be used by a single application or traffic category.
    Partitions can be fixed, dedicated virtual circuits, or
    flexible, virtual circuits whose unused bandwidth can be shared.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Dynamic Subscriber Bandwidth
    Provisioning.Dynamic Subscriber
    Bandwidth Provisioning allocates bandwidth and enforces QoS
    policies automatically by mapping a subscribers traffic
    profile (e.g. source/destination IP address, traffic type, URL,
    etc.) to a prescribed policy. This feature is a scaleable and
    easy-to-deploy solution that actively provisions minimum and
    maximum bandwidth to up to 20,000 subscribers accessing the
    network concurrently. Using a 5-to-1 over subscription model,
    not uncommon in todays service provider market, bandwidth
    for as many as 100,000 subscribers can be managed with a single
    Packeteer appliance. This feature also gives service providers
    additional revenue opportunities through multi-tiered Internet
    access services (e.g. bronze, silver, gold) for dial-up, DSL,
    cable and wireless subscribers.
|
| |  | Priority policies.This policy feature enables network managers to assign one of
    eight possible priority levels to each application or traffic
    category. Priority policies are ideal for traffic that does not
    burst, non-IP traffic and traffic characterized by small,
    high-priority flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Admission-control
    policies.Network managers can use
    admission-control policy features to determine the response if a
    bandwidth guarantee cannot be satisfied. Such responses may
    include denying access, accommodating an additional user with
    less than guaranteed performance, or, for web requests,
    redirecting the request to another server. For example, if an
    online streaming-video service suffers a high-demand period and
    all available bandwidth is consumed, an admission-control policy
    could present a web page explaining that resources are busy.
    This allows a maximum number of users to receive a targeted
    service quality without degradation as new users seek to access
    the service.                                                                                                                                                          

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



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

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

For non-TCP-based traffic, such as User Datagram
Protocol, or 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 systems are
designed to effectively make bandwidth available for UDP flows.
The combination of per flow rate scheduling and explicit delay
boundaries removes latency and variability, or jitter, for the
UDP flows traversing the WAN access link.

For example, Voice over IP is a UDP-based
application that is particularly latency-sensitive, requiring
packets to be evenly spaced to eliminate jitter. Packeteer
enhances Voice over IP performance in two ways. First, Packeteer
manages competing traffic by using rate control to constrain
bursty TCP traffic. In addition, a rate policy for Voice over IP
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.



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

Traffic can be accelerated by compression.
Compression reduces traffic primarily by eliminating repeated
sequences. Although compression effectively increases network
capacity and avoids bandwidth upgrades, introducing compression
or bandwidth upgrades does not necessarily eliminate network and
application performance problems. As TCP/ IP is an inherently
bursty protocol, non-critical applications frequently consume
all available bandwidth. Therefore, applying compression may
increase the virtual size of a WAN connection, but
does not ensure that mission-critical application traffic takes
advantage of the newly created bandwidth. In addition, standard
compression adds latency to the compressed traffic. This
latency, which is caused by the act of compressing itself and by
trying to compress traffic that cannot be compressed further,
increases configuration and management complexity.

The Packeteer system merges application traffic
management with acceleration using compression, active tunnel
management and latency management. As a result, increased WAN
capacity is utilized by mission-critical applications by
allocating the newly created virtual bandwidth to the
prioritized applications. Packeteer manages by:



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

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Packeteer also reduces configuration and
management complexity of compression through the use of an
active tunnel management feature. This feature uses dynamic
discovery and automatic establishment of tunnels to simplify
deployment and ongoing maintenance costs.

While traffic management prioritizes
mission-critical applications and smoothes bursty traffic,
Packeteer enhances performance by fostering greater throughput,
faster performance and increased network capacity.

Customers

We sell all of our products primarily through an
established network of more than 100 distributors, resellers and
system integrators in more than 50 countries, complemented by
our direct sales organization. In 2003, sales to Alternative
Technology, Inc., Westcon, Inc. and Macnica, Inc. accounted for
22%, 14% and 10% of net revenues, respectively. In 2002, sales
to the same three customers accounted for 21%, 13% and 11% of
net revenues, respectively. In 2001, Alternative Technology,
Inc. accounted for 22% of net revenues. No other customer
accounted for 10% or more of revenues in 2001. Sales to the top
10 indirect channel partners accounted for 65%, 66% and 59%, of
net revenues in 2003, 2002 and 2001, respectively.

Manufacturing

We outsource all of our manufacturing, including
warranty repair, to one contract manufacturer, SMTC
Manufacturing Corporation, or 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 a majority of the key
components of our products, including printed circuit boards and
software. In addition, we determine the components that are
incorporated into our products and select the appropriate
suppliers of these components. Product testing and burn-in is
performed by our contract manufacturer using tests and automated
testing equipment that we specify. We also use inspection
testing and statistical process controls to assure the quality
and reliability of our products.

We use a rolling six-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 needed within the
next 60 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. We believe that we carry
sufficient finished goods and component inventory to cover a
portion of the transition lead-time if we need to secure
additional manufacturing capacity.

Marketing and Sales

We target our marketing and sales efforts at
enterprises and service providers. Marketing and sales
activities focus on reaching the corporate information
technology organization managers responsible for the performance
of mission-critical applications and maintenance of network
performance in the enterprise. We also focus on reaching service
providers that provide valued-added service offerings, such as
application performance monitoring and 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 traffic management systems. Our marketing
efforts include the following:



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

12



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| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | industry tradeshows, technical conferences and
    technology seminars; and 
|
| |  | focused advertising, direct mail, public
    relations and analyst outreach.

We classify our distribution channels in the
following categories:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Channel Partners.Packeteer has teamed with value-added resellers and distributors
    in the industry that are distinguished by their ability to
    deliver comprehensive QoS solutions, their industry expertise
    and their commitment to customer satisfaction. We have
    established an indirect distribution channel, which is comprised
    of a network of over 100 resellers, distributors and system
    integrators that sell our solutions in over 50 countries. These
    partners sell our systems and software products as well as other
    third-party products that are complementary to our application
    traffic management systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Alliance Partners.Our Alliance Partners unite Packeteer with organizations whose
    product offerings provide strategic value to our customers. Our
    Alliance Partners include systems integrators and service
    providers as well as technology vendors whose products
    complement Packeteers application traffic management
    solutions. In exchange, Packeteer presents Alliance Partners
    with the opportunity to extend to their customers our
    industry-leading application performance and QoS solutions. For
    example, system integrators offer IT consulting, network
    integration, system management and IT outsourcing services. They
    choose Packeteer solutions to help their customers ensure the
    performance of their business critical applications and align IT
    resources with business needs in a cost effective manner. In
    addition to meeting customers bandwidth needs, service
    providers offer Packeteer products and value-added services such
    as application performance, on-going performance monitoring and
    advanced application performance management. Technology
    vendors complementary products interoperate and integrate
    with Packeteers application traffic management solutions
    to help customers leverage their existing investments by
    integrating best-of-breed products. Some of our Alliance
    Partners are Citrix, Equant, HP, InfoVista, NTT and Polycom.

As of December 31, 2003, our worldwide sales
and marketing organization consisted of 87 individuals,
including managers, sales representatives and technical and
administrative support personnel. We have domestic sales offices
located in California, Colorado, Illinois, Massachusetts, New
Jersey, Texas and Washington. In addition, we have international
sales offices located in Australia, Denmark, France, Germany,
Hong Kong, Japan, Singapore, South Korea, Spain, the Netherlands
and the United Kingdom. In addition, we are planning to expand
our operations in the Asia Pacific region in 2004.

We believe there is a strong international market
for our application traffic management solutions. Our
international sales are conducted primarily through our overseas
offices. Sales to customers outside of North America accounted
for 56%, 58% and 55% of our net revenues in 2003, 2002 and 2001,
respectively.

Research and Development

As of December 31, 2003, our research and
development organization consisted of 71 employees providing
expertise in different areas of our software: control and
compression technologies, classification, central management,
user interface and platform engineering. Since inception, we
have focused our research and development efforts on developing
and enhancing our application traffic management solutions.

Customer Service and Technical
Support

Our customer service and support organization
provides technical support services. Our technical support staff
is strategically located in five regional service centers:
California, Hong Kong, Japan, Australia and the Netherlands.
These services, which may include telephone/web support, next
business day advance replacement and access to all software
updates and upgrades, are typically sold as single or multi-year
contracts to our resellers and end users. In addition, Packeteer
has formal agreements with two third-party service providers to
facilitate next business day replacement for end user customers
outside the United States covered by maintenance agreements
providing this service level. We believe that these programs
improve service levels and lead to increased customer
satisfaction.

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Competition

We compete in a 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, other switch/router vendors and several
small private companies that sell products that utilize
competing technologies to provide monitoring or bandwidth
management or compression. None of these companies offer an
integrated visibility, control and compression solution such as
Packeteers application traffic management system. Our
products compete for information technology budget allocations
with products that offer monitoring technologies, such as probes
and related software. Additionally, 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 traffic management 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;                         
|
| |  | ability to compress traffic without decreasing
    throughput, performance or network capacity;                                 
|
| |  | ability to integrate traffic classification,
    management, reporting and acceleration into a single platform;                 
|
| |  | compatibility with industry standards;                                                                                          
|
| |  | products that do not increase latency and packet
    loss;                                                                      
|
| |  | size and scope of distribution network;                                                                                         
|
| |  | brand name; and                                                                                                                 
|
| |  | access to customers and size of installed
    customer base.                                                                    

Intellectual Property

We rely on a combination of patent, copyright and
trademark laws, and on trade secrets, confidentiality provisions
and other contractual provisions to protect our proprietary
rights. These measures afford only limited protection. As of
December 31, 2003, we have 12 issued U.S. patents and
39 pending U.S. 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 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

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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
third-party 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, 2003, Packeteer employed
a total of 222 full-time employees. Of the total number of
employees, 71 were in research and development, 71 in sales and
system engineering, 16 in marketing, 40 in customer support and
operations and 24 in administration. Our employees are not
represented by any collective bargaining agreement with respect
to their employment by Packeteer.

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RISK FACTORS

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



| |                                                                               
| | ------------------------------------------------------------------------------
| | We have a history of losses and
    profitability will be difficult to sustain

We have an accumulated deficit of
$92.4 million at December 31, 2003. Although we earned
net income of $11.3 million and $3.7 million in 2003
and 2002, respectively, we incurred net losses since we
commenced operations until 2002 and our profitability could be
difficult to sustain. If revenues grow slower than we anticipate
or if operating expenditures exceed our expectations or cannot
be adjusted accordingly, we may experience additional losses on
a quarterly and annual basis.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | If the application traffic management
    solutions market fails to grow, our business will
    fail

The market for application traffic 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.



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our future operating results may not meet
    analysts expectations and may fluctuate significantly,
    which could adversely affect our stock price

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



| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | the timing and size of orders and shipments of
    our products;
|
| |  | the 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. Revenue fluctuations resulted primarily from
variations in the volume and mix of products sold and variations
in channels through which products were sold. Operating expenses
in total may fluctuate between quarters due to the timing of
spending. For example, research and development expenses,
specifically prototype expenses, consulting fees and other
program costs, have fluctuated relative to the specific stage of
product development of the various projects underway. Sales and
marketing expenses have fluctuated due to the timing of specific
events such as sales meetings or tradeshows, or the launch of
new products. Additionally, operating costs outside the United
States are incurred in local currencies, and are remeasured from
the local currency to the U.S. dollar upon consolidation.
As exchange rates vary, these operating costs, when remeasured,
may differ from our prior performance and our expectations. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations for detailed
information on our operating results.

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| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not expand or enhance our product
    offerings or respond effectively and on a timely basis to
    technological change, our business may not grow or we may lose
    customers and market share

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



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | develop and maintain competitive products;                                                                               
|
| |  | enhance our products by adding innovative
    features that differentiate our products from those of our
    competitors;
|
| |  | 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.



| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 us

We compete in a rapidly evolving and highly
competitive sector of the networking technology market. We
expect competition to persist and intensify in the future 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., other
switch/router vendors and several small private companies that
utilize competing technologies to provide bandwidth management
and compression. 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 enterprise customers and service providers
increased bandwidth and infrastructure upgrades that increase
the capacity of their networks, which may lessen or delay the
need for application traffic management solutions.

Some of our competitors and potential competitors
are substantially larger than we are and have significantly
greater financial, sales and marketing, technical, manufacturing
and other resources and more established distribution channels.
These competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements or
devote greater resources to the development, promotion and sale
of their products than we can. We have encountered, and expect
to encounter, 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 application traffic management solutions
market, we also expect that other companies may enter or
announce an intention to enter our market with alternative
products and technologies, which could reduce the sales or
market acceptance of our products and services, perpetuate
intense price

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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.




| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | 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.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | 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 56%,58%
and 55% of net revenues in 2003, 2002 and 2001, respectively.
Our ability to grow will depend in part on the expansion of
international sales, which will require success on the part of
our resellers, distributors and systems integrators in marketing
our products.

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



| |                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to develop and maintain
    strong partnering relationships with our indirect channel
    partners, or if their sales efforts on our behalf are not
    successful, or if they fail to provide adequate services to our
    end user customers, our sales may suffer and our revenues may
    not increase

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

We cannot assure you that our indirect channel
partners will market our products effectively or continue to
devote the resources necessary to provide us with effective
sales, marketing and technical support. In order to support and
develop leads for our indirect distribution channels, we plan to
continue to expand our field sales and support staff as needed.
We cannot assure you that this internal expansion will be
successfully completed, that the cost of this expansion will not
exceed the revenues generated or that our expanded sales and
support staff will be able to compete successfully against the
significantly more extensive and well-funded sales and marketing
operations of many of our current or potential competitors. In
addition, our indirect

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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.


In addition, our indirect channel partners may
provide services to our end user customers that are inadequate
or do not meet expectations. Such failures to provide adequate
services could result in customer dissatisfaction with us or our
products and services due to delays in maintenance and
replacement, decreases in our customers network
availability and other losses. These occurrences could result in
the loss of customers and repeat orders and could delay or limit
market acceptance of our products, which would negatively affect
our sales and results of operations.



| |                                                                   
| | ------------------------------------------------------------------
| | Sales to large customers would be difficult
    to replace if lost

A limited number of indirect channel partners
have accounted for a large part of our revenues to date and we
expect that this trend will continue. Because our expense levels
are based on our expectations as to future revenue and to a
large extent are fixed in the short term, any significant
reduction or delay in sales of our products to any significant
indirect channel partner or unexpected returns from these
indirect channel partners could harm our business. In 2003,
sales to Alternative Technology, Inc., Westcon, Inc. and
Macnica, Inc. accounted for 22%, 14% and 10% of net revenues,
respectively. In 2002, sales to the same three customers
accounted for 21%, 13% and 11% of net revenues, respectively. In
2001, Alternative Technology, Inc. accounted for 22% of net
revenues. No other customer accounted for 10% or more of
revenues in 2001. We expect that our largest customers in the
future could be different from our largest customers today. End
users can stop purchasing and indirect channel partners can stop
marketing our products at any time. We cannot assure you that we
will retain these indirect channel partners or that we will be
able to obtain additional or replacement partners. The loss of
one or more of our key indirect channel partners or the failure
to obtain and ship a number of large orders each quarter could
harm our operating results.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | 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 generally do not have significant unfulfilled
product orders at any point in time. Substantially all of our
revenues in any quarter depend upon customer orders that we
receive and fulfill in that quarter. 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.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | We face risks related to inventories of our
    products held by our distributors

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

Additionally, although we monitor and track
channel inventory with our distributors, overstocking could
occur if the demand for our products were to rapidly decline due
to economic downturns, increased competition, underperformance
of distributors or the introduction of new products by our
competitors or ourselves. This could cause sales and cost of
sales to fluctuate from quarter to quarter.

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| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | We have relied and expect to continue to
    rely on a limited number of products for a significant portion
    of our revenues

Most of our revenues have been derived from sales
of our application traffic management systems and related
maintenance and training services. We currently expect that our
system-related revenues will continue to account for a
substantial percentage of our revenues in 2004 and for the
foreseeable future thereafter. Our future operating results are
significantly dependent upon the continued market acceptance of
our products and enhanced applications. Our business will be
harmed if our products do not continue to achieve market
acceptance or if we fail to develop and market improvements to
our products or new and enhanced products. A decline in demand
for our application traffic management systems as a result of
competition, technological change or other factors would harm
our business.



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Introduction of our new products may cause
    customers to defer purchases of our existing products which
    could harm our operating results

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



| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our reliance on SMTC for all of our
    manufacturing requirements could cause us to lose orders if this
    third-party manufacturer fails to satisfy our cost, quality and
    delivery requirements

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



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

We have no long-term contracts or arrangements
with SMTC 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 with SMTC 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 SMTC or that SMTC 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,
or we may be unable to obtain terms that are acceptable to us.
Further, new third-party manufacturers may encounter
difficulties in the manufacture of our products resulting in
product delivery delays.

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| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Most of the components for our products
    come from single or limited sources, and we could lose sales if
    these sources fail to satisfy our supply
    requirements

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

We do not have any long-term supply contracts
with any of our vendors to ensure sources of supply. If our
contract 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 single-sourced or limited-sourced components, or
to develop alternative sources for components or products would
harm our ability to maintain and expand our business.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Potential new accounting pronouncements are
    likely to impact our future financial position and results of
    operations

Proposed initiatives could result in changes in
accounting rules, including legislative and other proposals to
account for employee stock options as compensation expense.
These and other potential changes could materially increase the
expenses we report under generally accepted accounting
principles, and adversely affect our operating results.



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Any acquisitions we make could result in
    dilution to our existing stockholders and difficulties in
    successfully managing our business

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



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulty in integrating the acquired operations
    and retaining acquired personnel;                                                                                                                     
|
| |  | limitations on our ability to retain acquired
    distribution channels and customers;                                                                                                                      
|
| |  | diversion of managements attention and
    disruption of our ongoing business; and                                                                                                                         
|
| |  | limitations on our ability to successfully
    incorporate acquired technology and rights into our product and
    service offerings and maintain uniform standards, controls,
    procedures, and policies.

Furthermore, we may incur indebtedness or issue
equity securities to pay for future acquisitions. The issuance
of equity or convertible debt securities could be dilutive to
our existing stockholders.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Our inability to attract and retain
    qualified personnel could significantly interrupt our business
    operations

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

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| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to effectively manage our
    growth, we may experience operating inefficiencies and have
    difficulty meeting demand for our products

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

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

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



| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products may have errors or defects
    that we find after the products have been sold, which could
    increase our costs and negatively affect our revenues and the
    market acceptance of our products

Our products are complex and may contain
undetected defects, errors or failures in either the hardware or
software. In addition, because our products plug into our end
users existing networks, they can directly affect the
functionality of the network. Furthermore, end users rely on our
products to maintain acceptable service levels. We have in the
past encountered errors in our products, which in a few
instances resulted in network failures and in a number of
instances resulted in degraded service. To date, these errors
have not materially adversely affected us. Additional errors may
occur in our products in the future. The occurrence of defects,
errors or failures could result in the failure of our
customers network or mission-critical applications, delays
in installation, product returns and other losses to us or to
our customers or end users. In addition, we would have limited
experience responding to new problems that could arise with any
new products that we introduce. These occurrences could also
result in the loss of or delay in market acceptance of our
products, which could harm our business.

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



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Failure to adequately protect our
    intellectual property would result in significant harm to our
    business

Our success depends significantly upon our
proprietary technology and our failure or inability to protect
our proprietary technology would result in significant harm to
our business. We rely on a combination of patent, copyright and
trademark laws, and on trade secrets, confidentiality provisions
and other contractual provisions to protect our proprietary
rights. These measures afford only limited protection. As of
December 31, 2003 we have 12 issued U.S. patents
and 39 pending U.S. patent applications. Currently,
none of our technology is patented outside of the United States.
Our means of protecting our proprietary rights in the
U.S. or abroad may not be adequate and competitors may
independently develop similar technologies. Our future success
will depend in part on our ability to protect our proprietary
rights and the technologies used in our principal products.
Despite our efforts to protect our proprietary rights and
technologies unauthorized parties may attempt to copy aspects of
our products or to obtain and use trade secrets or other
information that we regard as proprietary. Legal proceedings to
enforce our intellectual property rights could be burdensome and
expensive and could involve a high degree of uncertainty. These
legal proceedings may also divert managements attention
from growing our business. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do
the laws of the U.S. Issued patents may not preserve our
proprietary position. If we do not enforce and protect our
intellectual property, our business will suffer substantial harm.

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| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | Claims by others that we infringe on their
    intellectual property rights could be costly to defend and could
    harm our business

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 application traffic 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 application traffic 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 must comply with
standards established by the International Electrotechnical
Commission as well as with recommendations of the International
Telecommunication Union. To remain competitive we must continue
to introduce new products and product enhancements that meet
these emerging U.S. and international standards. However, in the
future we may not be able to effectively address the
compatibility and interoperability issues that arise as a result
of technological changes and evolving industry standards.
Failure to comply with existing or evolving industry standards
or to obtain timely domestic or foreign regulatory approvals or
certificates could harm our business.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Our growth and operating results would be
    impaired if we are unable to meet our future capital
    requirements

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

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



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain provisions of our charter and of
    Delaware law make a takeover of Packeteer more difficult, which
    could lower the market price of the common stock

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






|        |           
|------- | ----------
|Item 2. | Properties

We lease approximately 69,000 square feet of
administrative and research and development facilities in
Cupertino, California under a lease that expires November 2007.
We also lease sales offices in various locations throughout the
United States. Our international leased offices include a
research and development

23



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##### Table of Contents



facility located in Canada, and sales and
marketing offices in Australia, France, Germany, Hong Kong,
Japan, Singapore, South Korea, Spain, The Netherlands and the
United Kingdom. We believe that our future growth can be
accommodated by current facilities or by leasing the necessary
additional space. We are planning to expand our operations in
the Asia Pacific region in 2004.







|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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

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

In July 2002, the Company and the individual
defendants joined in an omnibus motion to dismiss challenging
the legal sufficiency of plaintiffs claims. The motion was
filed on behalf of hundreds of issuer and individual defendants
named in similar lawsuits. Plaintiffs opposed the motion, and
the Court heard oral argument on the motion in early November
2002. On February 19, 2003, the Court issued an Opinion and
Order denying the motion to dismiss as to the Company. In
addition, in October 2002, the individual defendants were
dismissed without prejudice.

A special committee of the board of directors has
authorized the Company to negotiate a settlement of the pending
claims substantially consistent with a memorandum of
understanding negotiated among class plaintiffs, all issuer
defendants and their insurers. Any such settlement would be
subject to approval by the Court. If the settlement is not
approved, we intend to vigorously defend ourselves against
plaintiffs allegations. We do not currently believe that
the outcome of this proceeding will have a material adverse
impact on our financial condition, results of operations or cash
flows.

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






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters 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:

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|2003:          |  |      |       |     |  |   |       | 
|Fourth Quarter |  | $    | 20.86 |     |  | $ | 12.85 | 
|Third Quarter  |  |      | 18.33 |     |  |   | 11.01 | 
|Second Quarter |  |      | 16.74 |     |  |   | 9.44  | 
|First Quarter  |  |      | 10.19 |     |  |   | 7.25  | 

24



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##### Table of Contents



|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|               |  | High |      | Low
|               |  |      |      |    
|2002:          |  |      |      |     |  |   |      | 
|Fourth Quarter |  | $    | 8.28 |     |  | $ | 3.35 | 
|Third Quarter  |  |      | 5.35 |     |  |   | 2.66 | 
|Second Quarter |  |      | 7.50 |     |  |   | 4.13 | 
|First Quarter  |  |      | 7.93 |     |  |   | 5.47 | 

As of February 27, 2004, there were
approximately 350 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.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

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

|                                                               |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |        |        | 
|-------------------------------------------------------------- | ---------------------------------------- | ------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------- | ------ | ------- | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                               |                                          |                                      
|                                                               |                                          | Years Ended December 31,             
|                                                               |                                          |                                      
|                                                               |                                          | 2003                                  |        | 2002   |        | 2001 |        | 2000   |        | 1999
|                                                               |                                          |                                       |        |        |        |      |        |        |        |     
|                                                               |                                          |                                      
|                                                               |                                          | (In thousands, except per share data)
|CONSOLIDATED STATEMENTS OF OPERATIONS DATA:                    |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |       
|Net revenues                                                   |                                          | $                                     | 72,723 |        |        | $    | 55,014 |        |        | $    | 46,661  |        |         | $ | 41,097  |        |        | $ | 18,441  |       
|Product and service costs                                      |                                          |                                       | 17,036 |        |        |      | 12,852 |        |        |      | 13,867  |        |         |   | 12,585  |        |        |   | 5,286   |       
|Amortization of acquired technology                            |                                          |                                       |       |        |        |      |       |        |        |      | 1,199   |        |         |   | 678     |        |        |   |        |       
|                                                               |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |       
|Gross profit                                                   |                                          |                                       | 55,687 |        |        |      | 42,162 |        |        |      | 31,595  |        |         |   | 27,834  |        |        |   | 13,155  |       
|Operating expenses:                                            |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |       
|                                                               | Research and development*                |                                       |        | 12,183 |        |      |        | 10,694 |        |      |         | 11,697 |         |   |         | 8,760  |        |   |         | 5,164  |       
|                                                               | Sales and marketing*                     |                                       |        | 26,433 |        |      |        | 23,269 |        |      |         | 22,417 |         |   |         | 18,614 |        |   |         | 13,737 |       
|                                                               | General and administrative*              |                                       |        | 5,494  |        |      |        | 4,585  |        |      |         | 5,704  |         |   |         | 4,824  |        |   |         | 2,936  |       
|                                                               | Amortization of goodwill                 |                                       |        |       |        |      |        |       |        |      |         | 11,017 |         |   |         | 6,424  |        |   |         |       |       
|                                                               | Impairment of goodwill and intangibles   |                                       |        |       |        |      |        |       |        |      |         | 52,552 |         |   |         |       |        |   |         |       |       
|                                                               | Amortization of stock-based compensation |                                       |        | 19     |        |      |        | 385    |        |      |         | 1,233  |         |   |         | 1,683  |        |   |         | 3,088  |       
|                                                               |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |       
|                                                               |                                          | Total operating expenses              |        |        | 44,129 |      |        |        | 38,933 |      |         |        | 104,620 |   |         |        | 40,305 |   |         |        | 24,925 | 
|                                                               |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |       
|Income (loss) from operations                                  |                                          |                                       | 11,558 |        |        |      | 3,229  |        |        |      | (73,025 | )      |         |   | (12,471 | )      |        |   | (11,770 | )     
|Other income, net                                              |                                          |                                       | 701    |        |        |      | 915    |        |        |      | 2,037   |        |         |   | 3,402   |        |        |   | 894     |       
|                                                               |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |       
|Income (loss) before provision for income taxes                |                                          |                                       | 12,259 |        |        |      | 4,144  |        |        |      | (70,988 | )      |         |   | (9,069  | )      |        |   | (10,876 | )     
|Provision for income taxes                                     |                                          |                                       | 1,226  |        |        |      | 415    |        |        |      |        |        |         |   | 300     |        |        |   |        |       
|                                                               |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |       
|Net income (loss)                                              |                                          | $                                     | 11,033 |        |        | $    | 3,729  |        |        | $    | (70,988 | )      |         | $ | (9,369  | )      |        | $ | (10,876 | )     
|                                                               |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |       
|Basic net income (loss) per share                              |                                          | $                                     | 0.35   |        |        | $    | 0.12   |        |        | $    | (2.40   | )      |         | $ | (0.35   | )      |        | $ | (0.71   | )     
|                                                               |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |       
|Diluted net income (loss) per share                            |                                          | $                                     | 0.32   |        |        | $    | 0.12   |        |        | $    | (2.40   | )      |         | $ | (0.35   | )      |        | $ | (0.71   | )     
|                                                               |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |       
|Shares used in computing basic net income (loss)
    per share |                                          |                                       | 31,634 |        |        |      | 30,205 |        |        |      | 29,559  |        |         |   | 27,152  |        |        |   | 15,343  |       
|                                                               |                                          |                                       |        |        |        |      |        |        |        |      |         |        |         |   |         |        |        |   |         |       

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|                                                                                  |                            |                                       |         |      |  |      |        |      |  |      |        |     |  |   |         |     |  |   |        |       | 
|--------------------------------------------------------------------------------- | -------------------------- | ------------------------------------- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | --- |  | - | ------- | --- |  | - | ------ | ----- | 
|                                                                                  |                            |                                      
|                                                                                  |                            | Years Ended December 31,             
|                                                                                  |                            |                                      
|                                                                                  |                            | 2003                                  |         | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                                                  |                            |                                       |         |      |  |      |        |      |  |     
|                                                                                  |                            |                                      
|                                                                                  |                            | (In thousands, except per share data)
|Shares used in computing diluted net income
    (loss) per share                  |                            |                                       | 34,364  |      |  |      | 30,718 |      |  |      | 29,559 |     |  |   | 27,152  |     |  |   | 15,343 |      
|                                                                                  |                            |                                       |         |      |  |      |        |      |  |      |        |     |  |   |         |     |  |   |        |      
|*Excludes amortization of deferred stock-based
    compensation of the following: |                            |                                       |         |      |  |      |        |      |  |      |        |     |  |   |         |     |  |   |        |      
|                                                                                  | Research and development   |                                       | $       | 19   |  |      | $      | 183  |  |      | $      | 663 |  |   | $       | 558 |  |   | $      | 459   | 
|                                                                                  | Sales and marketing        |                                       |         |     |  |      |        | 151  |  |      |        | 442 |  |   |         | 892 |  |   |        | 2,184 | 
|                                                                                  | General and administrative |                                       |         |     |  |      |        | 51   |  |      |        | 128 |  |   |         | 233 |  |   |        | 445   | 
|                                                                                 
|CONSOLIDATED BALANCE SHEET DATA:                                                  |                            |                                       |         |      |  |      |        |      |  |      |        |     |  |   |         |     |  |   |        |      
|Cash, cash equivalents and investments                                            |                            | $                                     | 86,707  |      |  | $    | 65,474 |      |  | $    | 62,221 |     |  | $ | 62,206  |     |  | $ | 65,158 |      
|Working capital                                                                   |                            |                                       | 75,273  |      |  |      | 53,492 |      |  |      | 52,723 |     |  |   | 51,958  |     |  |   | 51,285 |      
|Total assets                                                                      |                            |                                       | 104,699 |      |  |      | 79,912 |      |  |      | 73,005 |     |  |   | 144,281 |     |  |   | 70,821 |      
|Deferred revenues                                                                 |                            |                                       | 9,592   |      |  |      | 5,968  |      |  |      | 4,106  |     |  |   | 3,367   |     |  |   | 1,212  |      
|Long-term obligations                                                             |                            |                                       |        |      |  |      | 545    |      |  |      | 1,289  |     |  |   | 3,215   |     |  |   | 839    |      
|Total stockholders equity                                                        |                            |                                       | 83,418  |      |  |      | 63,401 |      |  |      | 56,624 |     |  |   | 124,133 |     |  |   | 59,120 |      






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

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

Overview

Packeteer is a leading provider of application
traffic management systems designed to deliver a broad set of
visibility, control, and compression capabilities to enterprise
customers and service providers. For enterprise customers, the
system is designed to enable IT organizations to effectively
align application and network resources with the priorities of
the business, while providing measurable cost savings in WAN
infrastructure investments. For service providers, the Packeteer
systems are designed to provide a platform for delivering
application-intelligent network services that control quality of
service, or QoS, expand revenue opportunities and offer
compelling differentiation from other potential solutions.

The Packeteer application traffic management
system consists of a family of appliances with performance
capabilities that make them capable of deployment within large
data centers as well as smaller remote sites throughout a
distributed enterprise. Each appliance can be configured to
deliver the full range of application traffic management
solutions, from visibility with PacketSeeker®, to control
with PacketShaper®, to compression with PacketShaper
XpressTM. In addition, each appliance can be managed
individually or in context of a completely integrated
policy-based application traffic management system distributed
across multiple locations, using our ReportCenterTM
or PolicyCenterTM software products.

Packeteers products are deployed at more
than 5,000 enterprises and service providers worldwide, and are
sold through an established network of more than
100 resellers, distributors and system-integrators in more
than 50 countries, complemented by our direct sales force.
Our sales force and marketing efforts are used to develop brand
awareness, drive demand for system solutions and support our
indirect channels.

We have a limited positive operating history. As
of December 31, 2003, we had an accumulated deficit of
$92.4 million. Although we earned net income of
$11.3 million and $3.7 million in 2003 and 2002,
respectively, we incurred losses since we commenced operations
in 1996 until 2002, and profitability could be

26



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difficult to sustain. We expect to continue to
incur significant sales and marketing, product development and
administrative expenses and, as a result, will need to generate
significant quarterly revenues to maintain profitability. With
the increase in our install base, we plan to continue to invest
in our customer support group. We plan to continue to invest in
the development and support of our reseller and distributor
relationships. We also plan to continue to invest in appropriate
marketing campaigns and expand our international sales
operations. We plan to continue to invest in research and
development activities to enhance existing products and develop
new features in response to customer demands. We will also add
to our infrastructure to support our growing business.


We believe that our current value proposition,
which enables our enterprise customers to get more value out of
existing network resources and improved performance of their
critical applications, should allow us to grow our business
again in 2004. Our growth rate and net revenues depend
significantly on continued growth in the application traffic
solutions market, our ability to develop and maintain strong
partnering relationships with our indirect channel partners and
our ability to expand or enhance our current product offerings
or respond to technological change. Our growth in service
revenues is dependent upon increasing the number of units under
maintenance, which is dependent on both growing our install base
and renewing existing maintenance contracts. Our future
profitability and rate of growth, if any, will be directly
affected by the continued acceptance of our product in the
marketplace, as well as the timing and size of orders and
shipments, product mix, average selling price of our products
and general economic conditions. Our failure to successfully
convince the market of our value proposition and maintain strong
relationships with our indirect channel partners to ensure the
success of their selling efforts on our behalf, would adversely
impact our net revenues and operating results.

Sources of Revenue

We derive our revenue from two sources, product
revenues and service revenues. Product revenues consist
primarily of sales of our application traffic management
systems. Service revenues consist primarily of maintenance
revenues and, to a lesser extent, training revenues. Product
revenues accounted for 83%, 86% and 88% of our revenues in 2003,
2002 and 2001, respectively. Service revenues continue to
increase as our installed base grows, accounting for 17%, 14%
and 12% of revenues in 2003, 2002 and 2001, respectively.
Maintenance revenues are recognized on a monthly basis, over the
life of the contract. The typical subscription and support term
is twelve months, although multi-year contracts are sold.

Cost of Revenues and Operating
Expenses

Cost of Revenues.Our cost of revenues (excluding amortization of acquired
technology) consists of the cost of finished products purchased
from our contract manufacturer, overhead costs and service
support costs.

For finished product, we outsource all of our
manufacturing to one contract manufacturer, SMTC. We design and
develop a majority of the key components of our products,
including printed circuit boards and software. In addition, we
determine the components that are incorporated into our products
and select the appropriate suppliers of these components. Our
overhead costs consist primarily of personnel related costs for
our product operations and order fulfillment groups and other
product costs such as warranty and fulfillment charges. Service
support costs consist primarily of personnel related costs for
our customer support and training groups, as well as fees paid
to third-party service providers to facilitate next business day
replacement for end user customers located outside the United
States. Additionally, we allocate overhead such as facilities,
depreciation and IT costs to all departments based on headcount
and usage. As such, general overhead costs are reflected in each
cost of revenue and operating expense category.

We must continue to work closely with our
contract manufacturer as we develop and introduce new products
and try to reduce production costs for existing products. To the
extent our customer base continues to grow, we intend to
continue to invest additional resources in our customer support
group and expect that our fees to third-party service providers
will continue to increase as our international install base
grows.

Research and
Development.Research and development
expenses consist primarily of salaries and related personnel
expenses, allocated overhead, consultant fees and prototype
expenses related to the design,

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development, testing and enhancement of our
products and software. We have historically focused our research
and development efforts on developing and enhancing our
application traffic management solutions. We expect that in the
future, our research and development spending will increase in
absolute dollars as we continue to develop and maintain
competitive products and enhance our current products by adding
innovative features that differentiate our products from those
of our competitors. We believe that continued investment in
research and development is critical to attaining our strategic
product and cost control objectives. We expect somewhat higher
absolute spending levels in the upcoming quarters to bring us
more in line with our current long-term business model target of
18% of net revenues by the end of 2004.


Sales and Marketing.Sales and marketing expenses consist primarily of salaries,
commissions and related personnel expenses for those engaged in
the sales, marketing and support of the product, as well as
related trade show, promotional and public relations expenses
and allocated overhead. Although continuing to decrease as a
percentage of net revenues, sales and marketing is our largest
cost, accounting for 36%, 42% and 48% of net revenues for 2003,
2002 and 2001, respectively. We plan to significantly increase
sales and marketing headcount in 2004, as we continue to expand
our global presence. We intend to continue to invest in
appropriate sales and marketing campaigns and therefore expect
sales and marketing expenses in absolute dollars to increase in
the future. Particularly, we have introduced new channel
marketing programs, replacing previous channel rebate programs,
and will see the impact of these changes in operating expenses
during 2004. We expect that sales and marketing expenses will
continue to exceed our revised long-term business model target
of 30% to 32% of net revenues for at least the next twelve to
eighteen months.

General and
Administrative.General and
administrative expenses consist primarily of salaries and
related personnel expenses for administrative personnel,
professional fees, allocated overhead and other general
corporate expenses. Within the next twelve months, we expect
general and administrative expenses to reach our long-term
business model target of 6% to 7% of revenues, although this may
be delayed slightly as we continue to incur the costs of
complying with the requirements of the Sarbanes-Oxley Act of
2002.

Critical Accounting Policies

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

We believe that of our significant accounting
policies, which are described in Note 1 of the Notes to
Consolidated Financial Statements, the following accounting
policies involve a greater degree of judgment and complexity.
Accordingly, we believe the accounting policies below are the
most critical to aid in fully understanding and evaluating our
consolidated results of operations and financial condition.



| |                     
| | --------------------
| | Revenue recognition.

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



| |   |                                              
| | - | ---------------------------------------------
| |  | persuasive evidence of an arrangement exists,
|
| |  | delivery has occurred,                       

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| |   |                                      
| | - | -------------------------------------
| |  | the fee is fixed or determinable, and
|
| |  | collectibility is probable.          

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

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

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

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

Generally, product revenue is recognized upon
shipment. However, product revenue on sales to major new
distributors is recorded based on sell-through to the end user
customers until such time as the Company has established
significant experience with the distributors product
exchange activity. Additionally, when the Company introduces a
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
until such time as demand or acceptance history has been
established.

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

Inventory valuation.Inventories consist primarily of finished goods and are stated
at the lower of cost (on a first-in, first-out basis) or market.
We currently contract with SMTC for the manufacture of all of
our products. We record inventory reserves for excess and
obsolete inventories based on historical usage and forecasted
demand. Factors which could cause our forecasted demand to prove
inaccurate include our reliance on indirect sales channels and
the variability of our sales cycle; the potential of
announcements of our new products or enhancements to replace or
shorten the life cycle of our current products, or cause
customers to defer their purchases; loss of sales due to product
shortages; and the potential of new or alternative technologies
achieving widespread market acceptance and thereby rendering our
existing products obsolete. If future demand or market
conditions are less favorable than our projections, additional
inventory write-downs may be required and would be reflected in
cost of sales in the period the revision is made.

Sales return reserve and allowance for
doubtful accounts.In accordance with
SFAS 48, Revenue Recognition When Right of Return
Exists, management must use judgment and make estimates of
potential future product returns related to current period
product revenue. When providing for sales return reserves, we
analyze historical return rates as we believe they are the
primary indicator for estimating future returns. Material
differences may result in the amount and timing of our revenue
if for any period actual returns differ from our judgments or
estimates. The sales return reserve balances at
December 31, 2003 and 2002 were $713,000 and $875,000,
respectively. We must also make estimates of the
uncollectibility of accounts receivable. When evaluating the
adequacy of the allowance for doubtful accounts, we review the
aged receivables on an account-by-account basis, taking into
consideration such factors as the age of the receivables,
customer history and estimated continued credit-worthiness, as
well as general economic and industry trends. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of

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their ability to make payments, additional
allowances could be required. The allowance for doubtful
accounts was $149,000 and $145,000 at December 31, 2003 and
2002, respectively.


Warranty reserves.Upon shipment of products to our customers, we provide for the
estimated cost to repair or replace products that may be
returned under warranty. Our warranty period is typically
12 months from the date of shipment to the end user
customer. For existing products, the reserve is estimated based
on actual historical experience. For new products, the warranty
reserve is based on historical experience of similar products
until such time as sufficient historical data has been collected
on the new product. Factors that may impact our warranty costs
in the future include our reliance on our contract manufacturer
to provide quality products and the fact that our products are
complex and may contain undetected defects, errors or failures
in either the hardware or the software. To date, these problems
have not materially adversely affected us. Warranty reserves
amounted to $303,000 and $284,000 at December 31, 2003 and
2002, respectively.

Results of Operations

The following table includes selected
consolidated statements of operations data for all quarters of
the periods indicated (in thousands):

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

|                                       |  |                    |        |               |  |          |        |           |  |   |        |  |  |   |        |  
|-------------------------------------- |  | ------------------ | ------ | ------------- |  | -------- | ------ | --------- |  | - | ------ |  |  | - | ------ | -
|                                       |  |                   
|                                       |  | 2002 Quarter Ended
|                                       |  |                   
|                                       |  | December 31,       |        | September 30, |  | June 30, |        | March 31,
|                                       |  |                    |        |               |  |          |        |          
|Net revenues                           |  | $                  | 15,626 |               |  | $        | 14,037 |           |  | $ | 13,110 |  |  | $ | 12,241 |  
|Gross profit                           |  |                    | 12,145 |               |  |          | 10,853 |           |  |   | 9,993  |  |  |   | 9,171  |  
|Income (loss) from operations          |  |                    | 1,888  |               |  |          | 1,078  |           |  |   | 354    |  |  |   | (91    | )
|Net income                             |  |                    | 1,868  |               |  |          | 1,248  |           |  |   | 499    |  |  |   | 114    |  
|Basic and diluted net income per share |  |                    | 0.06   |               |  |          | 0.04   |           |  |   | 0.02   |  |  |   | 0.00   |  

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

|                  |                                     |                    |                        |      |     |      |    |    |     |    |    |    |     |    | 
|----------------- | ----------------------------------- | ------------------ | ---------------------- | ---- | --- | ---- | -- | -- | --- | -- | -- | -- | --- | -- | 
|                  |                                     | 2003               |                        | 2002 |     | 2001
|                  |                                     |                    |                        |      |     |     
|Net revenues:     |                                     |                    |                        |      |     |      |    |    |     |    |    |   
|                  | Product revenues                    |                    |                        | 83   | %   |      |    | 86 | %   |    |    | 88 | %  
|                  | Service revenues                    |                    |                        | 17   |     |      |    | 14 |     |    |    | 12 |    
|                  |                                     |                    |                        |      |     |      |    |    |     |    |    |   
|                  |                                     | Total net revenues |                        |      | 100 |      |    |    | 100 |    |    |    | 100 |   
|Cost of revenues: |                                     |                    |                        |      |     |      |    |    |     |    |    |   
|                  | Product costs                       |                    |                        | 17   |     |      |    | 17 |     |    |    | 24 |    
|                  | Service costs                       |                    |                        | 6    |     |      |    | 6  |     |    |    | 6  |    
|                  | Amortization of acquired technology |                    |                        |     |     |      |    |   |     |    |    | 2  |    
|                  |                                     |                    |                        |      |     |      |    |    |     |    |    |   
|                  |                                     |                    | Total cost of revenues |      |     | 23   |    |    |     | 23 |    |    |     | 32 | 
|                  |                                     |                    |                        |      |     |      |    |    |     |    |    |   
|Gross margin      |                                     |                    | 77                     |      |     |      | 77 |    |     |    | 68 |   
|                  |                                     |                    |                        |      |     |      |    |    |     |    |    |   

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|                                                |                                          |                          |    |      |    |      |    |    |    |  |      |     |     | 
|----------------------------------------------- | ---------------------------------------- | ------------------------ | -- | ---- | -- | ---- | -- | -- | -- |  | ---- | --- | --- | 
|                                                |                                          | 2003                     |    | 2002 |    | 2001
|                                                |                                          |                          |    |      |    |     
|Operating expenses:                             |                                          |                          |    |      |    |      |    |    |    |  |      |    
|                                                | Research and development                 |                          |    | 17   |    |      |    | 20 |    |  |      | 25  |    
|                                                | Sales and marketing                      |                          |    | 36   |    |      |    | 42 |    |  |      | 48  |    
|                                                | General and administrative               |                          |    | 8    |    |      |    | 8  |    |  |      | 12  |    
|                                                | Amortization of goodwill and intangibles |                          |    |     |    |      |    |   |    |  |      | 24  |    
|                                                | Impairment of goodwill and intangibles   |                          |    |     |    |      |    |   |    |  |      | 113 |    
|                                                | Amortization of stock-based compensation |                          |    |     |    |      |    | 1  |    |  |      | 3   |    
|                                                |                                          |                          |    |      |    |      |    |    |    |  |      |    
|                                                |                                          | Total operating expenses |    |      | 61 |      |    |    | 71 |  |      |     | 225 | 
|                                                |                                          |                          |    |      |    |      |    |    |    |  |      |    
|Income (loss) from operations                   |                                          |                          | 16 |      |    |      | 6  |    |    |  | (157 | )  
|Interest and other income                       |                                          |                          | 1  |      |    |      | 3  |    |    |  | 7    |    
|Interest and other expense                      |                                          |                          |   |      |    |      | (1 | )  |    |  | (2   | )  
|                                                |                                          |                          |    |      |    |      |    |    |    |  |      |    
|Income (loss) before provision for income taxes |                                          |                          | 17 |      |    |      | 8  |    |    |  | (152 | )  
|Provision for income taxes                      |                                          |                          | 2  |      |    |      | 1  |    |    |  |     |    
|                                                |                                          |                          |    |      |    |      |    |    |    |  |      |    
|Net income (loss)                               |                                          |                          | 15 | %    |    |      | 7  | %  |    |  | (152 | )% 
|                                                |                                          |                          |    |      |    |      |    |    |    |  |      |    

Overview of Results of Operations for
2003

Net revenues for 2003 were $72.7 million, an
increase of 32% over 2002. Gross profit was $55.7 million,
or 77% of net revenues, and operating income was
$11.6 million. During the comparable period a year ago, net
revenues were $55.0 million, gross profit was
$42.2 million, or 77% of net revenues, and operating income
was $3.2 million.

The increase in revenues was attributable to both
an increase in the number of units shipped and the number of
units under maintenance contracts. During 2003, we continued to
invest in our operations, with operating expenses of
$44.1 million increasing $5.2 million, or 13%, from
$38.9 million reported in 2002. In particular, we added
personnel in operations, sales and research and development.

During 2003, we generated $15.1 million of
cash from operating activities, compared to $5.4 million
generated in 2002. At December 31, 2003 we had cash, cash
equivalents and investments of $86.7 million, accounts
receivable of $11.0 million and deferred revenues of
$9.6 million.

Net Revenues

Net revenues increased to $72.7 million in
2003 from $55.0 million in 2002 and from $46.7 million
in 2001. The increase from 2002 to 2003 was $17.7 million,
or 32%, and the increase from 2001 to 2002 was
$8.3 million, or 18%. Product revenues increased to
$60.3 million in 2003 from $47.2 million in 2002 and
from $41.1 million in 2001. The increase from 2002 to 2003
of $13.1 million, or 32%, was primarily due to an increase
in the number of units shipped, particularly our 6500 model. The
increase in product revenues from 2001 to 2002 of
$6.1 million, or 15%, was primarily due to a favorable
product mix, as sales of our higher end products represented a
higher percentage of our reported revenues in 2002 than 2001 and
to a lesser extent, an increase in the number of units shipped.
There were no significant changes in selling prices during any
of the periods presented.

Service revenues increased to $12.4 million
in 2003 from $7.8 million in 2002 and from
$5.6 million in 2001. The increase from 2002 to 2003 of
$4.6 million, or 59%, and the increase from 2001 to 2002 of
$2.2 million, or 39%, was due primarily to increases in the
number of units under maintenance contracts.

For 2003, net revenues in North America increased
to $31.7 million, from $23.1 million in 2002 and
$20.8 million in 2001. Sales in North America accounted for
44%, 42% and 45% of net revenues for 2003, 2002 and 2001,
respectively. Net revenues in Asia Pacific were
$21.6 million, $18.0 million and $12.1 million,
or 29%, 33% and 26% of net revenues in 2003, 2002 and 2001,
respectively. The increase in 2002 was due to

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strong sales in Japan. Net revenues in Europe,
the Middle East and Africa, or EMEA, of $19.4 million,
$13.9 million and $13.8 million, represented 27%, 25%
and 29% of net revenues in 2003, 2002 and 2001, respectively.


In 2003, sales to Alternative Technology, Inc.,
Westcon, Inc. and Macnica, Inc. accounted for 22%, 14% and 10%
of net revenues, respectively. In 2002, sales to the same three
customers accounted for 21%, 13% and 11% of net revenues,
respectively. In 2001, Alternative Technology, Inc. accounted
for 22% of net revenues. No other customer accounted for 10% or
more of revenues in 2001. Sales to the top 10 indirect channel
partners accounted for 65%, 66%, and 59%, of net revenues for
2003, 2002 and 2001, respectively. At December 31, 2003,
three customers accounted for 42% of accounts receivable.

Cost of Revenues

Our cost of revenues increased to
$17.0 million in 2003 from $12.9 million in 2002 and
$13.9 million in 2001. The cost of revenues represented
23%, 23% and 30% of net revenues in 2003, 2002, and 2001,
respectively.

Product costs increased to $12.5 million in
2003 from $9.8 million in 2002 and $10.9 million in
2001. From 2002 to 2003, manufacturing costs increased
$1.5 million due to an increase in units shipped and other
product costs, specifically warranty, rework and fulfillment
charges, increased $940,000. Despite theses increases, product
costs, as a percentage of product sales, remained consistent
from 2002 to 2003. The $1.1 million decrease in product
costs from 2001 to 2002 was due to a decrease in per unit
manufacturing costs as a result of lower component prices, as
well as a decrease in other product costs, specifically warranty
and parts costs.

Service costs increased to $4.5 million in
2003 compared to $3.0 million in both 2002 and 2001. The
increased service costs in 2003 compared to 2002 and 2001 are
due to increased personnel costs, as well as service fees
related to an agreement previously entered into by the Company
for the outsourcing of certain maintenance and support services
beginning late in the third quarter of 2002. We expect service
costs to continue at these higher levels as a result of this
outsourcing arrangement, as well as the increase in the number
of units under maintenance contracts.

Amortization of Acquired Technology

Amortization of acquired technology in 2001
relates to the acquired developed technologies of Workfire
Technologies International, Inc. (Workfire). The acquisition
occurred in September 2000. Due to the impairment write-off in
the third quarter of 2001, which is described in greater detail
below under IMPAIRMENT OF GOODWILL AND OTHER
INTANGIBLES , there was no amortization during 2002 or
2003. The amortization of acquired technology was
$1.2 million during 2001.

Research and Development

Excluding the effects of stock-based compensation
of $19,000, $183,000 and $663,000 in 2003, 2002 and 2001,
respectively, research and development expenses increased to
$12.2 million in 2003 from $10.7 million in 2002 and
$11.7 million in 2001. The increase of $1.5 million,
or 14%, from 2002 to 2003 was primarily related to a
$1.2 million increase in personnel costs as a result of
headcount increases. Headcount increased from 63 at December
2002 to 71 at December 2003. The decrease of $1.0 million,
or 9%, in expenses from 2001 to 2002 was primarily due to a
decrease in program related charges, mainly a $578,000 decrease
in project materials, and to a lesser extent, a $265,000
reduction in depreciation expense, partially offset by an
increase in distributed costs. Distributed costs include
expenses related to facilities, communications and technology,
which are allocable to all functional areas of the Company. The
increase in distributed expenses is discussed below under the
heading GENERAL AND ADMINISTRATIVE. Research and
development expenses represented 17%, 20% and 25% of net
revenues in 2003, 2002 and 2001, respectively. As of
December 31, 2003, all research and development costs have
been expensed as incurred.

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Sales and Marketing

Excluding the effects of stock-based compensation
of $151,000 and $442,000 in 2002 and 2001 respectively, sales
and marketing expenses increased to $26.4 million in 2003,
from $23.3 million in 2002, and from $22.4 million in
2001. The increase of $3.1 million, or 13%, from 2002 to
2003 reflects $2.1 million in additional personnel costs,
mainly salaries, commissions, recruiting and $553,000 in
increased travel costs, as well as a $541,000 increase in
marketing programs in connection with building our sales force
and distribution channels. From 2001 to 2002, increases in
personnel costs of $1.5 million, mainly commissions and
recruiting, and distributed costs, were partially offset by
decreases in depreciation expense, supplies costs and marketing
activities of $205,000, $138,000 and $800,000, respectively. The
increase in distributed costs is discussed below under the
heading GENERAL AND ADMINISTRATIVE. Sales and
marketing expenses represented 36%, 42% and 48% of net revenues
in 2003, 2002 and 2001, respectively.

General and Administrative

Excluding the effects of stock-based compensation
of $51,000 and $128,000 in 2002 and 2001 respectively, general
and administrative expenses increased to $5.5 million in
2003 from $4.6 million in 2002 and decreased from
$5.7 million in 2001. The increase in expenses from 2002 to
2003 was primarily attributable to a $632,000 increase in
professional service fees. For 2002 compared to 2001, decreases
in professional services of $526,000 and distributed costs were
partially offset by a $464,000 increase in personnel costs,
primarily related to the CEO transition and search occurring
during the second and third quarters of 2002. Decreases in
distributed costs were due to a change in the allocation of the
expenses associated with our Information Technology group (IT).
Prior to 2002, only a small portion of IT costs were allocated
out of general and administrative expenses. Beginning in 2002,
based on improved tracking and reporting of IT services, a
greater portion of IT costs were allocated to other departments
to better reflect the services performed by this group. When
compared with 2001, during 2002 approximately $640,000 of
additional IT costs were allocated from general and
administrative expenses into cost of revenues, research and
development and sales and marketing. IT expenses in 2003 were
allocated in the same manner as in 2002.

General and administrative expenses represented
8%, 8% and 12% of net revenues in 2003, 2002, and 2001,
respectively. This percentage decrease in 2003 and 2002 compared
to 2001 was due to lower expenses, including the change in
allocation of IT costs, as well as increased revenues.

Amortization of Goodwill

In connection with the Workfire acquisition
completed in September 2000, we recorded goodwill and other
intangible assets of approximately $66.1 million, which was
being amortized on a straight-line basis over a three-year
period. Amortization of this goodwill and other intangibles
totaled an aggregate of $11.0 million in 2001. There was no
amortization during 2003 and 2002, due to an impairment charge
discussed below.

We may have additional acquisitions in future
periods that could give rise to the acquisition of additional
goodwill. Under the provisions of the Statement of Financial
Accounting Standards (SFAS) 142, Goodwill and Other
Intangible Assets, any future goodwill will be accounted
for using an impairment-only approach.

Impairment of Goodwill and Other
Intangibles

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

During the third quarter of 2001, the Company
performed an assessment of the carrying value of the goodwill
and other intangible assets related to its acquisition of
Workfire pursuant to the Companys stated policy as
described in Note 1 to the Financial Statements.
Managements determination of the existence of impairment
indicators included continued general economic slowing, broad
based declines in the values of networking technologies and a
review of current, historical and future projections of cash
flows related to these assets. The conclusion of the assessment
was a determination that the carrying value of the goodwill and
other intangible assets exceeded its fair value. The fair value
was determined based on Company projections of the

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present value of future net cash flows to be
generated over the expected lives of these assets. Accordingly,
the Company recorded an impairment charge of $52.6 million
during the third quarter of 2001 for the entire unamortized
balance.


Stock-Based Compensation

Amortization of stock-based compensation resulted
primarily from stock options grants to employees and options
assumed in the Workfire acquisition. Stock-based compensation
was being amortized to expense in accordance with Financial
Accounting Standards Board (FASB) Interpretation
No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option Award Plans, over the vesting
period of the individual options, generally four years. We
recorded stock-based compensation expense of $19,000, $385,000
and $1.2 million in 2003, 2002 and 2001, respectively. All
stock-based compensation was fully amortized as of June 30,
2003.

Interest and Other Income, Net

Interest and other income, net consists primarily
of interest income from our cash and investments and totaled
$842,000, $1.2 million and $2.6 million in 2003, 2002
and 2001, respectively. The decrease in interest income from
2002 to 2003 and from 2001 to 2002 is the result of lower yields
on invested funds.

Interest Expense

Interest expense consists primarily of interest
expense related to our note payable, capital lease obligations
and former line of credit. Interest expense totaled $141,000,
$265,000, and $569,000 in 2003, 2002 and 2001, respectively. The
decrease in interest expense from 2002 to 2003, and from 2001 to
2002, was attributable to decreased levels of debt.

Income Tax Provision

Our income tax provision for 2003 is primarily
attributable to income taxes payable in foreign jurisdictions.
The effective rate for both 2002 and 2003 is approximately ten
percent. There was no corresponding provision in 2001 due to the
Companys consolidated net loss. As of December 31,
2003, we had net operating loss carryforwards of approximately
$49.9 million and $22.7 million for federal and state
income tax purposes, respectively. These carryforwards, if not
utilized, expire at various dates beginning in 2006. See
Note 9 of Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

Cash
Requirements

During the past three years, we have had
sufficient financial resources to meet our operating
requirements, to fund our capital spending and to repay our bank
line of credit.

We expect to experience growth in our working
capital needs for at least the next twelve months in order to
execute our business plan. We anticipate that operating
activities, as well as planned capital expenditures, will
constitute a partial use of our cash resources. In addition, we
may utilize cash resources to fund acquisitions or investments
in complementary businesses, technologies or products. We
believe that our current cash, cash equivalents and investments
of $86.7 million at December 31, 2003 will be
sufficient to meet our anticipated cash requirements for working
capital and capital expenditures for at least the next twelve
months. However, we may need to raise additional funds if our
estimates of revenues, working capital or capital expenditure
requirements change or prove inaccurate or in order for us to
respond to unforeseen technological or marketing hurdles or to
take advantage of unanticipated opportunities. These funds may
not be available at the time or times needed, or available on
terms acceptable to us. If adequate funds are not available, or
are not available on acceptable terms, we may not be able to
take advantage of market opportunities to develop new products
or to otherwise respond to competitive pressures.

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We have contractual obligations in the form of
operating and capital leases and notes payable. These are
described in further detail in Notes 6 and 7 of the Notes
to the Consolidated Financial Statements. Additionally, we have
purchase obligations reflecting open purchase order commitments.
The following chart details our contractual obligations as of
December 31, 2003 (in thousands):

|                                                          |                             |       |       |                        |  |           |       |           |  |         |       |       |  |   |       |       |  |   |     |     | 
|--------------------------------------------------------- | --------------------------- | ----- | ----- | ---------------------- |  | --------- | ----- | --------- |  | ------- | ----- | ----- |  | - | ----- | ----- |  | - | --- | --- | 
|                                                          |                             |       |       |                       
|                                                          |                             |       |       | Payments Due by Period
|                                                          |                             |       |       |                       
|                                                          |                             |       |       | Less than              |  |           |       | More than
|Contractual Obligations                                   |                             | Total |       | 1 Year                 |  | 1-3 Years |       | 3-5 Years |  | 5 Years
|                                                          |                             |       |       |                        |  |           |       |           |  |        
|Amounts reflected in Balance Sheet                        |                             |       |       |                        |  |           |       |           |  |         |       |       |  |   |       |       |  |   |     |    
|                                                          | Capital lease obligations   |       | $     | 482                    |  |           | $     | 482       |  |         | $     |      |  |   | $     |      |  |   | $   |    | 
|                                                          | Note payable                |       |       | 145                    |  |           |       | 145       |  |         |       |      |  |   |       |      |  |   |     |    | 
|                                                          |                             |       |       |                        |  |           |       |           |  |         |       |       |  |   |       |       |  |   |     |    
|                                                          |                             |       | 627   |                        |  |           | 627   |           |  |         |      |       |  |   |      |       |  |   |    |    
|Other cash obligations not reflected in Balance
    Sheet |                             |       |       |                        |  |           |       |           |  |         |       |       |  |   |       |       |  |   |     |    
|                                                          | Operating lease obligations |       |       | 5,679                  |  |           |       | 1,492     |  |         |       | 2,760 |  |   |       | 1,248 |  |   |     | 179 | 
|                                                          | Purchase obligations        |       |       | 2,814                  |  |           |       | 2,814     |  |         |       |      |  |   |       |      |  |   |     |    | 
|                                                          |                             |       |       |                        |  |           |       |           |  |         |       |       |  |   |       |       |  |   |     |    
|                                                          |                             |       | 8,493 |                        |  |           | 4,306 |           |  |         | 2,760 |       |  |   | 1,248 |       |  |   | 179 |    
|Total                                                     |                             | $     | 9,120 |                        |  | $         | 4,933 |           |  | $       | 2,760 |       |  | $ | 1,248 |       |  | $ | 179 |    
|                                                          |                             |       |       |                        |  |           |       |           |  |         |       |       |  |   |       |       |  |   |     |    



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

Overview.Cash, cash
equivalents and investments increased $21.2 million during
2003 to $86.7 million. The increase during the year was
primarily due to net cash provided by operating activities of
$15.1 million and cash provided by financing activities,
specifically proceeds from the issuance of stock through option
exercises and the Employee Stock Purchase Plan, totaling
$9.1 million. This increase was partially offset by
$1.7 million cash used in financing activities to repay
debt and capital lease obligations.

Operating
Activities.Cash provided by operating
activities was $15.1 million in 2003, up from
$5.4 million in 2002 and $416,000 in 2001. The increase was
primarily due to net income reported in 2003 and 2002, compared
to net losses in 2001.

Investing
Activities.Cash used in investing
activities was $43.0 million and $10.0 million in 2003
and 2002, respectively, primarily reflecting transactions in
marketable securities. Cash provided by investing activities was
$25.2 million in 2001. During 2001, the activity in our
portfolio generated net cash proceeds of $25.7 million,
which was reinvested in short-term securities. Capital
expenditures were $1.0 million, $2.9 million and
$1.0 million in 2003, 2002, and 2001, respectively. The
increase in capital expenditures in 2002 included
$2.0 million related to our headquarters move in December
of that year. Capital expenditures during 2004 are expected to
remain at 2003 levels.

Financing
Activities.Cash provided by financing
activities included $9.1 million, $2.5 million and
$2.3 million in proceeds from employee option exercises and
the Employee Stock Purchase Plan for the years 2003, 2002 and
2001, respectively. Cash used in financing activities included
$1.7 million in both 2003 and 2002, and $2.1 million
in 2001 to repay borrowings under our line of credit, note
payable and capital lease obligations. We paid down the
remaining balance on our line of credit during the first quarter
of 2003 and allowed the line to expire in May 2003. Both the
note payable and our remaining capital lease obligations will be
completely repaid during 2004.

Recent Accounting Pronouncements

The impact of recent accounting pronouncements is
discussed in Note 1 of the Notes to Consolidated Financial
Statements.

35



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##### Table of Contents








|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk



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

Our exposure to market risks for changes in
interest rates and principal relates primarily to investments in
debt securities issued by U.S. government agencies and
corporate debt securities. We place our investments with high
credit quality issuers and, by policy, limit the amount of the
credit exposure to any one issuer. Our investment securities are
classified as available-for-sale and consequently are recorded
on the balance sheet at fair value with unrealized gains and
losses reported as a separate component of accumulated other
comprehensive income (loss). We do not use derivative financial
instruments. In general our policy is to limit the risk of
principal loss and ensure the safety of invested funds by
limiting market and credit risk. All highly liquid investments
with less than three months to maturity from date of purchase
are considered to be cash equivalents; investments with
maturities between three and twelve months are considered to be
short-term investments; and investments with maturities in
excess of twelve months from the balance sheet date are
considered to be long-term investments. The following table
presents the amortized cost, fair value and related
weighted-average interest rates by year of maturity for our
investment portfolio as of December 31, 2003 and comparable
fair values as of December 31, 2002 (in thousands).

|                           |                       |                     |        |      |   |       |       |            |   |            |        |  |  |   |        |  |  |   |        |  | 
|-------------------------- | --------------------- | ------------------- | ------ | ---- | - | ----- | ----- | ---------- | - | ---------- | ------ |  |  | - | ------ |  |  | - | ------ |  | 
|                           |                       |                     |        |      |   |      
|                           |                       | 2003 Amortized Cost |        |      |   |      
|                           |                       |                     |        | 2003 |   | 2002 
|Expected Maturity Date     |                       | 2004                |        | 2005 |   | Total |       | Fair Value |   | Fair Value
|                           |                       |                     |        |      |   |       |       |            |   |           
|Cash equivalents           |                       | $                   | 24,101 |      |   | $     |      |            |   | $          | 24,101 |  |  | $ | 24,102 |  |  | $ | 44,519 | 
|                           | Weighted-average rate |                     |        | 1.05 | % |       |       |           |   |            |        |  |  |   |        |  |  |   |        |  | 
|Short-term investments     |                       |                     | 54,320 |      |   |       |      |            |   |            | 54,320 |  |  |   | 54,317 |  |  |   | 11,339 | 
|                           | Weighted-average rate |                     |        | 1.04 | % |       |       |           |   |            |        |  |  |   |        |  |  |   |        |  | 
|Long-term investments      |                       |                     |       |      |   |       | 6,736 |            |   |            | 6,736  |  |  |   | 6,726  |  |  |   | 7,991  | 
|                           | Weighted-average rate |                     |        |     |   |       |       | 1.37       | % |            |        |  |  |   |        |  |  |   |        |  | 
|                           |                       |                     |        |      |   |       |       |            |   |            |        |  |  |   |        |  |  |   |        | 
|Total investment portfolio |                       | $                   | 78,421 |      |   | $     | 6,736 |            |   | $          | 85,157 |  |  | $ | 85,145 |  |  | $ | 63,849 | 
|                           |                       |                     |        |      |   |       |       |            |   |            |        |  |  |   |        |  |  |   |        | 



| |                 
| | ----------------
| | 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 worldwide markets. All sales are currently made in
U.S. dollars; and as a result, a strengthening of the
dollar could make our products less competitive in foreign
markets. All operating costs outside the United States are
incurred in local currencies, and are remeasured from the local
currency to U.S. dollars upon consolidation. As exchange
rates vary, these operating costs, when remeasured, may differ
from our prior performance and our expectations. We have no
foreign exchange contracts, option contracts or other foreign
currency hedging arrangements.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

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

|                                                                                                                                             |  |        |    | 
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | -- | 
|                                                                                                                                             |  | Page  
|                                                                                                                                             |  | Number
|                                                                                                                                             |  |       
|Independent Auditors Report                                                                                                                 |  |        | 37 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                                             |  |        | 38 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001                                               |  |        | 39 | 
|Consolidated Statements of Stockholders
    Equity and Comprehensive Income (Loss) for the years ended
    December 31, 2003, 2002 and 2001 |  |        | 40 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001                                               |  |        | 41 | 
|Notes to Consolidated Financial Statements                                                                                                   |  |        | 42 | 

36



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

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

We have audited the accompanying consolidated
balance sheets of Packeteer, Inc. and subsidiaries (the Company)
as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders equity
and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
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, 2003 and 2002, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 3 to the Consolidated
Financial Statements, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.



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

Mountain View, California

January 21, 2004


37



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##### Table of Contents



PACKETEER, INC.

CONSOLIDATED BALANCE SHEETS

|                                                  |                                                                                                                                                                      |                                            |       |         |         |  |       |          |        | 
|------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------- | ------- |  | ----- | -------- | ------ | 
|                                                  |                                                                                                                                                                      |                                           
|                                                  |                                                                                                                                                                      | December 31,                              
|                                                  |                                                                                                                                                                      |                                           
|                                                  |                                                                                                                                                                      | 2003                                       |       | 2002   
|                                                  |                                                                                                                                                                      |                                            |       |        
|                                                  |                                                                                                                                                                      |                                           
|                                                  |                                                                                                                                                                      | (In thousands,                            
|                                                  |                                                                                                                                                                      | except per share amounts)                 
|ASSETS                                           
|Current assets:                                   |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|                                                  | Cash and cash equivalents                                                                                                                                            |                                            | $     | 25,664  |         |  | $     | 46,144   |       
|                                                  | Short-term investments                                                                                                                                               |                                            |       | 54,317  |         |  |       | 11,339   |       
|                                                  | Accounts receivable, less allowance for doubtful
    accounts of $149 and $145 as of December 31, 2003 and 2002,
    respectively                                    |                                            |       | 11,042  |         |  |       | 7,145    |       
|                                                  | Other receivables                                                                                                                                                    |                                            |       | 187     |         |  |       | 410      |       
|                                                  | Inventories                                                                                                                                                          |                                            |       | 2,691   |         |  |       | 2,291    |       
|                                                  | Prepaids and other current assets                                                                                                                                    |                                            |       | 1,133   |         |  |       | 1,302    |       
|                                                  |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|                                                  |                                                                                                                                                                      | Total current assets                       |       |         | 95,034  |  |       |          | 68,631 | 
|Property and equipment, net                       |                                                                                                                                                                      |                                            | 2,593 |         |         |  | 3,027 |         
|Long-term investments                             |                                                                                                                                                                      |                                            | 6,726 |         |         |  | 7,991 |         
|Other non-current assets                          |                                                                                                                                                                      |                                            | 346   |         |         |  | 263   |         
|                                                  |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|                                                  |                                                                                                                                                                      | Total assets                               |       | $       | 104,699 |  |       | $        | 79,912 | 
|                                                  |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|                                                 
|LIABILITIES AND STOCKHOLDERS
    EQUITY         
|Current liabilities:                              |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|                                                  | Line of credit                                                                                                                                                       |                                            | $     |        |         |  | $     | 1,000    |       
|                                                  | Current portion of capital lease obligations                                                                                                                         |                                            |       | 457     |         |  |       | 598      |       
|                                                  | Current portion of note payable                                                                                                                                      |                                            |       | 139     |         |  |       | 188      |       
|                                                  | Accounts payable                                                                                                                                                     |                                            |       | 2,229   |         |  |       | 1,352    |       
|                                                  | Accrued compensation                                                                                                                                                 |                                            |       | 4,241   |         |  |       | 3,452    |       
|                                                  | Other accrued liabilities                                                                                                                                            |                                            |       | 4,398   |         |  |       | 3,408    |       
|                                                  | Deferred revenue                                                                                                                                                     |                                            |       | 8,297   |         |  |       | 5,141    |       
|                                                  |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|                                                  |                                                                                                                                                                      | Total current liabilities                  |       |         | 19,761  |  |       |          | 15,139 | 
|Long-term liabilities:                            |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|Capital lease obligations, less current portion   |                                                                                                                                                                      |                                            |      |         |         |  | 405   |         
|Note payable, less current portion                |                                                                                                                                                                      |                                            |      |         |         |  | 140   |         
|Deferred revenue                                  |                                                                                                                                                                      |                                            | 1,295 |         |         |  | 827   |         
|Deferred rent                                     |                                                                                                                                                                      |                                            | 225   |         |         |  |      |         
|                                                  |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|                                                  |                                                                                                                                                                      | Total liabilities                          |       |         | 21,281  |  |       |          | 16,511 | 
|Commitments and contingencies (Notes 7
    and 8) |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|Stockholders equity:                             |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|                                                  | Preferred stock, $0.001 par value;                                                                                                                                   |                                            |       |         |         |  |       |          |       
|                                                  | 5,000 shares authorized; no shares issued
    and outstanding as of December 31, 2003 and 2002,
    respectively                                                     |                                            |       |        |         |  |       |         |       
|                                                  | Common stock, $0.001 par value;
    85,000 shares authorized; 32,501 and 30,599 shares
    issued and outstanding as of December 31, 2003 and 2002,
    respectively |                                            |       | 32      |         |  |       | 31       |       
|                                                  | Additional paid-in capital                                                                                                                                           |                                            |       | 175,820 |         |  |       | 166,727  |       
|                                                  | Deferred stock-based compensation                                                                                                                                    |                                            |       |        |         |  |       | (19      | )     
|                                                  | Accumulated other comprehensive income (loss)                                                                                                                        |                                            |       | (12     | )       |  |       | 165      |       
|                                                  | Notes receivable from stockholders                                                                                                                                   |                                            |       | (6      | )       |  |       | (54      | )     
|                                                  | Accumulated deficit                                                                                                                                                  |                                            |       | (92,416 | )       |  |       | (103,449 | )     
|                                                  |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|                                                  |                                                                                                                                                                      | Total stockholders equity                 |       |         | 83,418  |  |       |          | 63,401 | 
|                                                  |                                                                                                                                                                      |                                            |       |         |         |  |       |         
|                                                  |                                                                                                                                                                      | Total liabilities and stockholders equity |       | $       | 104,699 |  |       | $        | 79,912 | 
|                                                  |                                                                                                                                                                      |                                            |       |         |         |  |       |         

See accompanying notes to consolidated financial
statements.

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PACKETEER, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |        |         | 
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------- | 
|                                                                 |                                                                                                                                                 |                                      
|                                                                 |                                                                                                                                                 | Years Ended December 31,             
|                                                                 |                                                                                                                                                 |                                      
|                                                                 |                                                                                                                                                 | 2003                                  |        | 2002   |        | 2001
|                                                                 |                                                                                                                                                 |                                       |        |        |        |     
|                                                                 |                                                                                                                                                 |                                      
|                                                                 |                                                                                                                                                 | (In thousands, except per share data)
|Net revenues:                                                    |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|                                                                 | Product revenues                                                                                                                                |                                       | $      | 60,294 |        |      | $      | 47,192 |        |   | $       | 41,108 |        
|                                                                 | Service revenues                                                                                                                                |                                       |        | 12,429 |        |      |        | 7,822  |        |   |         | 5,553  |        
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|                                                                 |                                                                                                                                                 | Total net revenues                    |        |        | 72,723 |      |        |        | 55,014 |   |         |        | 46,661  | 
|Cost of revenues:                                                |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|                                                                 | Product costs                                                                                                                                   |                                       |        | 12,520 |        |      |        | 9,816  |        |   |         | 10,860 |        
|                                                                 | Service costs                                                                                                                                   |                                       |        | 4,516  |        |      |        | 3,036  |        |   |         | 3,007  |        
|                                                                 | Amortization of acquired technology                                                                                                             |                                       |        |       |        |      |        |       |        |   |         | 1,199  |        
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|                                                                 |                                                                                                                                                 | Total cost of revenues                |        |        | 17,036 |      |        |        | 12,852 |   |         |        | 15,066  | 
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|Gross profit                                                     |                                                                                                                                                 |                                       | 55,687 |        |        |      | 42,162 |        |        |   | 31,595  |       
|Operating expenses:                                              |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|                                                                 | Research and development, excluding amortization
    of stock-based compensation of $19, $183 and $663 in 2003, 2002
    and 2001, respectively |                                       |        | 12,183 |        |      |        | 10,694 |        |   |         | 11,697 |        
|                                                                 | Sales and marketing, excluding amortization of
    stock-based compensation of $151 and $442 in 2002 and 2001,
    respectively                 |                                       |        | 26,433 |        |      |        | 23,269 |        |   |         | 22,417 |        
|                                                                 | General and administrative, excluding
    amortization of stock-based compensation of $51 and $128 in 2002
    and 2001, respectively           |                                       |        | 5,494  |        |      |        | 4,585  |        |   |         | 5,704  |        
|Amortization of goodwill                                         |                                                                                                                                                 |                                       |       |        |        |      |       |        |        |   | 11,017  |       
|Impairment of goodwill and intangibles                           |                                                                                                                                                 |                                       |       |        |        |      |       |        |        |   | 52,552  |       
|Amortization of stock-based compensation                         |                                                                                                                                                 |                                       | 19     |        |        |      | 385    |        |        |   | 1,233   |       
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|                                                                 |                                                                                                                                                 | Total operating expenses              |        |        | 44,129 |      |        |        | 38,933 |   |         |        | 104,620 | 
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|Income (loss) from operations                                    |                                                                                                                                                 |                                       | 11,558 |        |        |      | 3,229  |        |        |   | (73,025 | )     
|Interest and other income, net                                   |                                                                                                                                                 |                                       | 842    |        |        |      | 1,180  |        |        |   | 2,606   |       
|Interest expense                                                 |                                                                                                                                                 |                                       | (141   | )      |        |      | (265   | )      |        |   | (569    | )     
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|Income (loss) before provision for income taxes                  |                                                                                                                                                 |                                       | 12,259 |        |        |      | 4,144  |        |        |   | (70,988 | )     
|Provision for income taxes                                       |                                                                                                                                                 |                                       | 1,226  |        |        |      | 415    |        |        |   |        |       
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|Net income (loss)                                                |                                                                                                                                                 | $                                     | 11,033 |        |        | $    | 3,729  |        |        | $ | (70,988 | )     
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|Basic net income (loss) per share                                |                                                                                                                                                 | $                                     | 0.35   |        |        | $    | 0.12   |        |        | $ | (2.40   | )     
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|Diluted net income (loss) per share                              |                                                                                                                                                 | $                                     | 0.32   |        |        | $    | 0.12   |        |        | $ | (2.40   | )     
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|Shares used in computing basic net income (loss)
    per share   |                                                                                                                                                 |                                       | 31,634 |        |        |      | 30,205 |        |        |   | 29,559  |       
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       
|Shares used in computing diluted net income
    (loss) per share |                                                                                                                                                 |                                       | 34,364 |        |        |      | 30,718 |        |        |   | 29,559  |       
|                                                                 |                                                                                                                                                 |                                       |        |        |        |      |        |        |        |   |         |       

See accompanying notes to consolidated financial
statements.

39



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PACKETEER, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME (LOSS)

|                                                                                       |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |         |  
|-------------------------------------------------------------------------------------- | ------------------------------ | -------------- | ------ | ---------- |  | ----------- | -- | ------------- |  | ------------- | ------- | ------------ |  | ------- | ------ | ------------- |  | ------------- | --- | ---- | - | - | ---- | - |  | - | -------- | ------- | - | - | ------- | ------- | - | - | -------- | ------- | -
|                                                                                       |                                |                |        |            |  |             |    | Accumulated   |  | Notes         |         |              |  |         |        |              
|                                                                                       |                                | Common Stock   |        | Additional |  | Deferred    |    | Other         |  | Receivable    |         |              |  |         |        |              
|                                                                                       |                                |                |        | Paid-in    |  | Stock-Based |    | Comprehensive |  | From          |         | Accumulated  |  |         |        | Comprehensive
|                                                                                       |                                | Shares         |        | Amount     |  | Capital     |    | Compensation  |  | Income (Loss) |         | Stockholders |  | Deficit |        | Total         |  | Income (Loss)
|                                                                                       |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |              
|                                                                                       |                                |               
|                                                                                       |                                | (In thousands)
|Balances as of December 31, 2000                                                       |                                |                | 29,434 |            |  | $           | 29 |               |  | $             | 162,118 |              |  | $       | (1,715 | )             |  | $             | 77  |      |   | $ | (186 | ) |  | $ | (36,190  | )       |   | $ | 124,133 |         |   | $ | (36,113  | )      
|Stock-based compensation to non-employees                                              |                                |                |       |            |  |             |   |               |  |               | 51      |              |  |         |       |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   | 51      |         |   |   |          |        
|Issuance of common stock upon exercise of stock
    options                            |                                |                | 401    |            |  |             | 1  |               |  |               | 840     |              |  |         |       |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   | 841     |         |   |   |          |        
|Issuance of common stock pursuant to Employee
    Stock Purchase Plan                  |                                |                | 141    |            |  |             |   |               |  |               | 1,437   |              |  |         |       |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   | 1,437   |         |   |   |          |        
|Repurchase of common stock                                                             |                                |                | (25    | )          |  |             |   |               |  |               | (40     | )            |  |         |       |               |  |               |    |      |   |   | 20   |   |  |   |         |         |   |   | (20     | )       |   |   |          |        
|Repayments of notes receivable from stockholders                                       |                                |                |       |            |  |             |   |               |  |               |        |              |  |         |       |               |  |               |    |      |   |   | 83   |   |  |   |         |         |   |   | 83      |         |   |   |          |        
|Amortization of stock- based compensation                                              |                                |                |       |            |  |             |   |               |  |               |        |              |  |         | 1,182  |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   | 1,182   |         |   |   |          |        
|Reversal of unamortized deferred stock-based
    compensation for terminated employees |                                |                |       |            |  |             |   |               |  |               | (133    | )            |  |         | 133    |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   |        |         |   |   |          |        
|Comprehensive loss:                                                                    |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|                                                                                       | Unrealized gain on investments |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |     | 10   |   |   |      |  |  |   |          |        |   |   |         | 10      |   |   |          | 10      |  
|                                                                                       | Other                          |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |     | (105 | ) |   |      |  |  |   |          |        |   |   |         | (105    | ) |   |          | (105    | )
|                                                                                       | Net loss                       |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |     |     |   |   |      |  |  |   |          | (70,988 | ) |   |         | (70,988 | ) |   |          | (70,988 | )
|                                                                                       |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|Comprehensive loss                                                                     |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   | (71,083  | )      
|                                                                                       |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|Balances as of December 31, 2001                                                       |                                |                | 29,951 |            |  |             | 30 |               |  |               | 164,273 |              |  |         | (400   | )             |  |               | (18 | )    |   |   | (83  | ) |  |   | (107,178 | )       |   |   | 56,624  |         |   |   | (107,196 | )      
|Stock-based compensation to non-employees                                              |                                |                |       |            |  |             |   |               |  |               | 4       |              |  |         |       |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   | 4       |         |   |   |          |        
|Issuance of common stock upon exercise of stock
    options                            |                                |                | 441    |            |  |             | 1  |               |  |               | 1,565   |              |  |         |       |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   | 1,566   |         |   |   |          |        
|Issuance of common stock pursuant to Employee
    Stock Purchase Plan                  |                                |                | 207    |            |  |             |   |               |  |               | 885     |              |  |         |       |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   | 885     |         |   |   |          |        
|Repayments of notes receivable from stockholders                                       |                                |                |       |            |  |             |   |               |  |               |        |              |  |         |       |               |  |               |    |      |   |   | 29   |   |  |   |         |         |   |   | 29      |         |   |   |          |        
|Amortization of stock- based compensation                                              |                                |                |       |            |  |             |   |               |  |               |        |              |  |         | 381    |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   | 381     |         |   |   |          |        
|Comprehensive income:                                                                  |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|                                                                                       | Unrealized gain on investments |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |     | 78   |   |   |      |  |  |   |          |        |   |   |         | 78      |   |   |          | 78      |  
|                                                                                       | Other                          |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |     | 105  |   |   |      |  |  |   |          |        |   |   |         | 105     |   |   |          | 105     |  
|                                                                                       | Net income                     |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |     |     |   |   |      |  |  |   |          | 3,729   |   |   |         | 3,729   |   |   |          | 3,729   |  
|                                                                                       |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|Comprehensive income                                                                   |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   | 3,912    |        
|                                                                                       |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|Balances as of December 31, 2002                                                       |                                |                | 30,599 |            |  |             | 31 |               |  |               | 166,727 |              |  |         | (19    | )             |  |               | 165 |      |   |   | (54  | ) |  |   | (103,449 | )       |   |   | 63,401  |         |   |   | (103,284 | )      
|Issuance of common stock upon exercise of stock
    options                            |                                |                | 1,662  |            |  |             | 1  |               |  |               | 8,313   |              |  |         |       |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   | 8,314   |         |   |   |          |        
|Issuance of common stock pursuant to Employee
    Stock Purchase Plan                  |                                |                | 240    |            |  |             |   |               |  |               | 780     |              |  |         |       |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   | 780     |         |   |   |          |        
|Repayments of notes receivable from stockholders                                       |                                |                |       |            |  |             |   |               |  |               |        |              |  |         |       |               |  |               |    |      |   |   | 48   |   |  |   |         |         |   |   | 48      |         |   |   |          |        
|Amortization of stock- based compensation                                              |                                |                |       |            |  |             |   |               |  |               |        |              |  |         | 19     |               |  |               |    |      |   |   |     |   |  |   |         |         |   |   | 19      |         |   |   |          |        
|Comprehensive income:                                                                  |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|                                                                                       | Unrealized loss on investments |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |     | (177 | ) |   |      |  |  |   |          |        |   |   |         | (177    | ) |   |          | (177    | )
|                                                                                       | Net income                     |                |        |           |  |             |    |              |  |               |         |             |  |         |        |              |  |               |     |     |   |   |      |  |  |   |          | 11,033  |   |   |         | 11,033  |   |   |          | 11,033  |  
|                                                                                       |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|Comprehensive income                                                                   |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   | 10,856   |        
|                                                                                       |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        
|Balances as of December 31, 2003                                                       |                                |                | 32,501 |            |  | $           | 32 |               |  | $             | 175,820 |              |  | $       |       |               |  | $             | (12 | )    |   | $ | (6   | ) |  | $ | (92,416  | )       |   | $ | 83,418  |         |   | $ | (92,428  | )      
|                                                                                       |                                |                |        |            |  |             |    |               |  |               |         |              |  |         |        |               |  |               |     |      |   |   |      |   |  |   |          |         |   |   |         |         |   |   |          |        

See accompanying notes to consolidated financial
statements

40



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##### Table of Contents



PACKETEER, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |         |        |       |        | 
|-------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------- | ------------------------------------------------------- | ----- | ------ | ------- | ------- | ----- | ------ | ------ | ------- | ------ | ----- | ------ | 
|                                                         |                                                                                              |                                               
|                                                         |                                                                                              | Years Ended December 31,                      
|                                                         |                                                                                              |                                               
|                                                         |                                                                                              | 2003                                           |                                   | 2002                                                    |       | 2001  
|                                                         |                                                                                              |                                                |                                   |                                                         |       |       
|                                                         |                                                                                              |                                               
|                                                         |                                                                                              | (In thousands)                                
|Cash flows from operating activities:                    |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |        
|                                                         | Net income (loss)                                                                            |                                                | $                                 | 11,033                                                  |       |        | $       | 3,729   |       |        | $      | (70,988 | )     
|                                                         | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities: |                                                |                                   |                                                         |       |        |         |         |       |        |        |         |       
|                                                         |                                                                                              | Depreciation                                   |                                   |                                                         | 1,418 |        |         |         | 1,270 |        |        |         | 1,910  |      
|                                                         |                                                                                              | Amortization of goodwill and other intangibles |                                   |                                                         |      |        |         |         |      |        |        |         | 12,263 |      
|                                                         |                                                                                              | Impairment of goodwill and other intangibles   |                                   |                                                         |      |        |         |         |      |        |        |         | 52,552 |      
|                                                         |                                                                                              | Amortization of stock-based compensation       |                                   |                                                         | 19    |        |         |         | 385   |        |        |         | 1,233  |      
|                                                         |                                                                                              | Other non-cash charges                         |                                   |                                                         | 1     |        |         |         | 105   |        |        |         | 86     |      
|                                                         |                                                                                              | Changes in operating assets and liabilities:   |                                   |                                                         |       |        |         |         |       |        |        |         |        |      
|                                                         |                                                                                              |                                                | Accounts receivable               |                                                         |       | (3,897 | )       |         |       | (1,373 | )      |         |        | 1,828 |       
|                                                         |                                                                                              |                                                | Other receivables                 |                                                         |       | 223    |         |         |       | (227   | )      |         |        | 914   |       
|                                                         |                                                                                              |                                                | Inventories                       |                                                         |       | (400   | )       |         |       | (102   | )      |         |        | 365   |       
|                                                         |                                                                                              |                                                | Prepaids and other current assets |                                                         |       | 169    |         |         |       | (264   | )      |         |        | 146   |       
|                                                         |                                                                                              |                                                | Accounts payable                  |                                                         |       | 877    |         |         |       | (930   | )      |         |        | 88    |       
|                                                         |                                                                                              |                                                | Accrued compensation              |                                                         |       | 789    |         |         |       | 1,370  |        |         |        | (328  | )     
|                                                         |                                                                                              |                                                | Other accrued liabilities         |                                                         |       | 1,215  |         |         |       | (446   | )      |         |        | (392  | )     
|                                                         |                                                                                              |                                                | Deferred revenue                  |                                                         |       | 3,624  |         |         |       | 1,862  |        |         |        | 739   |       
|                                                         |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |        
|                                                         |                                                                                              |                                                |                                   | Net cash provided by operating activities               |       |        | 15,071  |         |       |        | 5,379  |         |        |       | 416    | 
|                                                         |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |        
|Cash flows from investing activities:                    |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |        
|                                                         | Purchases of property and equipment                                                          |                                                |                                   | (985                                                    | )     |        |         | (2,920  | )     |        |        | (966    | )     
|                                                         | Purchases of investments                                                                     |                                                |                                   | (88,113                                                 | )     |        |         | (67,586 | )     |        |        | (92,710 | )     
|                                                         | Proceeds from sales and maturities of investments                                            |                                                |                                   | 46,223                                                  |       |        |         | 60,546  |       |        |        | 118,441 |       
|                                                         | Other assets                                                                                 |                                                |                                   | (83                                                     | )     |        |         | (38     | )     |        |        | 435     |       
|                                                         |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |        
|                                                         |                                                                                              |                                                |                                   | Net cash provided by (used in) investing
    activities |       |        | (42,958 | )       |       |        | (9,998 | )       |        |       | 25,200 | 
|                                                         |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |        
|Cash flows from financing activities:                    |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |        
|                                                         | Net proceeds from issuance of common stock                                                   |                                                |                                   | 8,314                                                   |       |        |         | 1,566   |       |        |        | 841     |       
|                                                         | Sale of stock to employees under the ESPP                                                    |                                                |                                   | 780                                                     |       |        |         | 885     |       |        |        | 1,437   |       
|                                                         | Proceeds from stockholders notes receivable                                                 |                                                |                                   | 48                                                      |       |        |         | 29      |       |        |        | 83      |       
|                                                         | Repurchase of common stock                                                                   |                                                |                                   |                                                        |       |        |         |        |       |        |        | (20     | )     
|                                                         | Borrowings under line of credit                                                              |                                                |                                   |                                                        |       |        |         |        |       |        |        | 8,542   |       
|                                                         | Repayments of line of credit                                                                 |                                                |                                   | (1,000                                                  | )     |        |         | (851    | )     |        |        | (10,370 | )     
|                                                         | Proceeds from notes payable                                                                  |                                                |                                   |                                                        |       |        |         |        |       |        |        | 551     |       
|                                                         | Payments of notes payable                                                                    |                                                |                                   | (189                                                    | )     |        |         | (172    | )     |        |        | (101    | )     
|                                                         | Principal payments of capital lease obligations                                              |                                                |                                   | (546                                                    | )     |        |         | (703    | )     |        |        | (738    | )     
|                                                         |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |        
|                                                         |                                                                                              |                                                |                                   | Net cash provided by financing activities               |       |        | 7,407   |         |       |        | 754    |         |        |       | 225    | 
|                                                         |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |        
|Currency impact                                          |                                                                                              |                                                |                                  |                                                         |       |        |        |         |       |        | (105   | )      
|Net increase (decrease) in cash and cash
    equivalents |                                                                                              |                                                | (20,480                           | )                                                       |       |        | (3,865  | )       |       |        | 25,736 |        
|Cash and cash equivalents at beginning of year           |                                                                                              |                                                | 46,144                            |                                                         |       |        | 50,009  |         |       |        | 24,273 |        
|                                                         |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |        
|Cash and cash equivalents at end of year                 |                                                                                              | $                                              | 25,664                            |                                                         |       | $      | 46,144  |         |       | $      | 50,009 |        
|                                                         |                                                                                              |                                                |                                   |                                                         |       |        |         |         |       |        |        |        

See accompanying notes to consolidated financial
statements.

41



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                                                           
|-- | --------------------------------------------------------------------------
|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,
Packeteer, we and us)
provides application traffic management systems designed to
enable enterprises to gain visibility and control for networked
applications, extend network resources and align application
performance with business priorities. For service providers,
Packeteer systems provide a platform for delivering
application-intelligent network services that control QoS,
expand revenue opportunities and offer compelling
differentiation. The Company was incorporated on
January 25, 1996, and commenced principal operations in
1997, at which time the Company began selling its products and
related services. The Company currently markets and distributes
its products via a worldwide network of resellers, distributors
and systems integrators.



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

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



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

The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates,
including those related to inventory valuation, valuation of
long-lived assets, valuation allowances including sales return
and rebate reserves and allowance for doubtful accounts, and
other liabilities, specifically warranty reserves. We base our
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates
under different assumptions or conditions.



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

Product revenues consist primarily of sales of
our PacketShaper products, which include hardware, as well as
software licenses to distributors and resellers. Service
revenues consist primarily of maintenance revenue and, to a
lesser extent, training revenue.

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



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

Generally, product revenue is recognized upon
shipment. However, product revenue on sales to major new
distributors are recorded based on sell-through to the end user
customers until such time as the Company has established
significant experience with the distributors product
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
until such time as demand or acceptance history has been
established.

42



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)


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



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

Management makes estimates of potential future
product returns related to current period product revenue in
accordance with Statement of Financial Accounting Standards
(SFAS) 48, Revenue Recognition When Right of Return
Exists. These sales return reserves are recorded as a
reduction to revenue. The Companys estimate for sales
returns is based on its historical return rates.

The following provides additional details on the
sales return reserves (in thousands):

|                             |                                     |                          |     |        |   |      |     |        |   |   |     |      |  
|---------------------------- | ----------------------------------- | ------------------------ | --- | ------ | - | ---- | --- | ------ | - | - | --- | ---- | -
|                             |                                     |                         
|                             |                                     | Years Ended December 31,
|                             |                                     |                         
|                             |                                     | 2003                     |     | 2002   |   | 2001
|                             |                                     |                          |     |        |   |     
|Balance at beginning of year |                                     | $                        | 875 |        |   | $    | 331 |        |   | $ | 460 |     
|                             | Additions, charged against revenues |                          |     | 1,160  |   |      |     | 2,071  |   |   |     | 434  |  
|                             | Deductions                          |                          |     | (1,322 | ) |      |     | (1,527 | ) |   |     | (563 | )
|                             |                                     |                          |     |        |   |      |     |        |   |   |     |     
|Balance at end of year       |                                     | $                        | 713 |        |   | $    | 875 |        |   | $ | 331 |     
|                             |                                     |                          |     |        |   |      |     |        |   |   |     |     



| |                
| | ---------------
| | Rebate Reserves

Certain distributors and resellers can earn
rebates under several Packeteer programs. The rebates earned are
recorded as a reduction to revenues in accordance with Emerging
Issues Task Force (EITF) 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendors Products). For established programs, the
Companys estimates for rebates are based on historical
usage rates. For new programs, rebate reserves are calculated to
cover the Companys maximum exposure until such time as
historical usage rates are developed.



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

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

The following provides additional details on the
allowance for doubtful accounts (in thousands):

|                             |                                                              |                          |     |      |   |      |     |    |  |   |     |      |  
|---------------------------- | ------------------------------------------------------------ | ------------------------ | --- | ---- | - | ---- | --- | -- |  | - | --- | ---- | -
|                             |                                                              |                         
|                             |                                                              | Years Ended December 31,
|                             |                                                              |                         
|                             |                                                              | 2003                     |     | 2002 |   | 2001
|                             |                                                              |                          |     |      |   |     
|Balance at beginning of year |                                                              | $                        | 145 |      |   | $    | 132 |    |  | $ | 223 |     
|                             | Provision, charged to general and administrative
    expense |                          |     | 65   |   |      |     | 12 |  |   |     | 15   |  
|                             | Write-offs, net of recoveries                                |                          |     | (61  | ) |      |     | 1  |  |   |     | (106 | )
|                             |                                                              |                          |     |      |   |      |     |    |  |   |     |     
|Balance at end of year       |                                                              | $                        | 149 |      |   | $    | 145 |    |  | $ | 132 |     
|                             |                                                              |                          |     |      |   |      |     |    |  |   |     |     

43



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)




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

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

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



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

The Company considers all highly liquid
investments with a maturity of three months or less from date of
purchase 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 cost which approximates 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, 2003 and 2002, all investment securities
are designated as available-for-sale. These
available-for-sale securities are carried at fair value based on
quoted market prices, with the unrealized gains (losses)
reported as a separate component of stockholders equity.
The Company periodically reviews the realizability of its
investments when impairment indicators exist with respect to the
investment. If an other-than-temporary impairment of the
investments is deemed to exist, the carrying value of the
investment would be written down to its estimated fair value.



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

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

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

|                   |             |      |       |       |  |   |       |       | 
|------------------ | ----------- | ---- | ----- | ----- |  | - | ----- | ----- | 
|                   |             | 2003 |       | 2002 
|                   |             |      |       |      
|Completed products |             | $    | 2,622 |       |  | $ | 2,243 |      
|Components         |             |      | 69    |       |  |   | 48    |      
|                   |             |      |       |       |  |   |       |      
|                   | Inventories |      | $     | 2,691 |  |   | $     | 2,291 | 
|                   |             |      |       |       |  |   |       |      



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

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

The Company accounts for long-lived assets under
SFAS 144, Accounting for Impairment or Disposal of
Long-Lived Assets. Under SFAS 144, the Company
regularly performs reviews to determine if the carrying value of
its long-lived assets is impaired. The purpose for the review is
to identify any facts or

44



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)


circumstances, either internal or external, which
indicate that the carrying value of the assets cannot be
recovered. Such facts or circumstances might include significant
underperformance relative to expected historical or projected
future operating results or significant negative industry or
economic trends. If such indicators are present, we determine
whether the sum of the estimated undiscounted cash flows
attributable to the assets in question is less than their
carrying value. If less, we recognize an impairment loss based
on the excess carrying amount of the assets over their
respective fair values. If quoted market prices for assets are
not available, the fair value is estimated based on the present
value of expected future cash flows. The fair value of the asset
then becomes the assets new carrying value.

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

|                                                |  |      |        |      |  |   |        |  
|----------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                |  | 2003 |        | 2002
|                                                |  |      |        |     
|Computers and equipment                         |  | $    | 4,484  |      |  | $ | 3,118  |  
|Equipment under capital lease                   |  |      | 1,436  |      |  |   | 2,199  |  
|Furniture and fixtures                          |  |      | 719    |      |  |   | 673    |  
|Leasehold improvements                          |  |      | 1,504  |      |  |   | 1,540  |  
|                                                |  |      |        |      |  |   |        |  
|                                                |  |      | 8,143  |      |  |   | 7,530  |  
|Less: accumulated depreciation and amortization |  |      | (5,550 | )    |  |   | (4,503 | )
|                                                |  |      |        |      |  |   |        |  
|Property and equipment, net                     |  | $    | 2,593  |      |  | $ | 3,027  |  
|                                                |  |      |        |      |  |   |        |  

Accumulated depreciation and amortization
includes accumulated amortization of approximately
$1.3 million and $2.0 million on equipment under
capital lease as of December 31, 2003 and 2002,
respectively.



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

Advertising and sales promotion costs are
expensed as incurred. These costs were $318,000, $166,000 and
$345,000 for the years ended December 31, 2003, 2002 and
2001, respectively.



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

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

The following provides a reconciliation of
changes in Packeteers warranty reserve (in thousands):

|                             |                                        |                     |     |      |   |      |     |      |   |   |     |      |  
|---------------------------- | -------------------------------------- | ------------------- | --- | ---- | - | ---- | --- | ---- | - | - | --- | ---- | -
|                             |                                        |                    
|                             |                                        | For the Years Ended
|                             |                                        | December 31,       
|                             |                                        |                    
|                             |                                        | 2003                |     | 2002 |   | 2001
|                             |                                        |                     |     |      |   |     
|Balance at beginning of year |                                        | $                   | 284 |      |   | $    | 552 |      |   | $ | 577 |     
|                             | Provision for current year sales       |                     |     | 372  |   |      |     | 227  |   |   |     | 531  |  
|                             | Adjustments of prior accrual estimates |                     |     |     |   |      |     | (128 | ) |   |     |     |  
|                             | Warranty costs incurred                |                     |     | (353 | ) |      |     | (367 | ) |   |     | (556 | )
|                             |                                        |                     |     |      |   |      |     |      |   |   |     |     
|Balance at end of year       |                                        | $                   | 303 |      |   | $    | 284 |      |   | $ | 552 |     
|                             |                                        |                     |     |      |   |      |     |      |   |   |     |     

45



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)




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

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



| |                              
| | -----------------------------
| | Concentrations of Credit Risk

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

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. In 2003, sales to
Alternative Technology, Inc., Westcon, Inc. and Macnica, Inc.
accounted for 22%, 14% and 10% of net revenues, respectively. In
2002, sales to the same three customers accounted for 21%, 13%
and 11% of net revenues, respectively. In 2001, Alternative
Technology, Inc., accounted for 22% of net revenues. No other
customer accounted for 10% or more of revenues in 2001. The loss
of one or more of our key indirect channel partners could harm
our operating results.



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

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

46



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)




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

The Company adopted SFAS 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, which amended SFAS 123,
Accounting for Stock-Based Compensation, in December
2002. As permitted under SFAS 148, Packeteer has elected to
continue to follow the intrinsic value method in accounting for
its stock-based employee compensation arrangements. No
stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock
on the date of grant. The following table illustrates the effect
on net income and earnings per share if the Company had applied
the fair value recognition provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per
share data).

|                                                                                                                              |  |                          |        |      |  |      |        |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | -------- | -
|                                                                                                                              |  |                         
|                                                                                                                              |  | Years Ended December 31,
|                                                                                                                              |  |                         
|                                                                                                                              |  | 2003                     |        | 2002 |  | 2001
|                                                                                                                              |  |                          |        |      |  |     
|Net income (loss) as reported                                                                                                 |  | $                        | 11,033 |      |  | $    | 3,729  |   |  | $ | (70,988  | )
|Add: Stock-based compensation under APB 25,
    net of tax                                                                    |  |                          | 17     |      |  |      | 343    |   |  |   | 1,182    |  
|Deduct: Stock-based employee compensation expense
    determined under fair value-based method for all awards, net of
    tax |  |                          | (9,069 | )    |  |      | (7,669 | ) |  |   | (30,198  | )
|                                                                                                                              |  |                          |        |      |  |      |        |   |  |   |          |  
|Net income (loss) pro forma                                                                                                   |  | $                        | 1,981  |      |  | $    | (3,597 | ) |  | $ | (100,004 | )
|                                                                                                                              |  |                          |        |      |  |      |        |   |  |   |          |  
|Earnings per share:                                                                                                           |  |                          |        |      |  |      |        |   |  |   |          |  
|Basic  as reported                                                                                                           |  | $                        | 0.35   |      |  | $    | 0.12   |   |  | $ | (2.40    | )
|Diluted  as reported                                                                                                         |  | $                        | 0.32   |      |  | $    | 0.12   |   |  | $ | (2.40    | )
|Basic  pro forma                                                                                                             |  | $                        | 0.06   |      |  | $    | (0.12  | ) |  | $ | (3.38    | )
|Diluted  pro forma                                                                                                           |  | $                        | 0.06   |      |  | $    | (0.12  | ) |  | $ | (3.38    | )

Compensation expense for pro forma purposes is
reflected over the vesting period.

For pro forma purposes, the fair value of the
Companys stock option awards was estimated using the
Black-Scholes option-pricing model, assuming no expected
dividends and the following weighted-average assumptions for the
years ended December 31:

|                         |  |         |      |      |  |      |      |   |  |  |      |  
|------------------------ |  | ------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                         |  |        
|                         |  | Options
|                         |  |        
|                         |  | 2003    |      | 2002 |  | 2001
|                         |  |         |      |      |  |     
|Expected life (years)    |  |         | 3.4  |      |  |      | 3.1  |   |  |  | 4.0  |  
|Expected volatility      |  |         | 109  | %    |  |      | 124  | % |  |  | 146  | %
|Risk-free interest rates |  |         | 2.22 | %    |  |      | 3.14 | % |  |  | 3.16 | %

The weighted-average fair value of the options
granted under the 1999 Plan during 2003, 2002 and 2001 was
$6.81, $2.68 and $7.08, respectively.

To comply with pro forma reporting requirements
of SFAS 123, compensation cost is also estimated for the
fair value of the Employee Stock Purchase Plan (ESPP) issuances,
which are included in the pro forma totals above. The fair value
of purchase rights granted under the ESPP is estimated on the
date of grant using the Black-Scholes option-pricing model,
assuming no expected dividends and the following weighted
average assumptions for the years ended December 31:

|                         |  |                |      |      |  |      |      |   |  |  |      |  
|------------------------ |  | -------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                         |  |               
|                         |  | ESPP Issuances
|                         |  |               
|                         |  | 2003           |      | 2002 |  | 2001
|                         |  |                |      |      |  |     
|Expected life (years)    |  |                | 1.3  |      |  |      | 0.5  |   |  |  | 0.5  |  
|Expected volatility      |  |                | 111  | %    |  |      | 124  | % |  |  | 146  | %
|Risk-free interest rates |  |                | 1.10 | %    |  |      | 1.46 | % |  |  | 1.77 | %

47



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)


The weighted-average fair value of the purchase
rights granted under the ESPP during 2003, 2002 and 2001 was
$1.94, $2.80 and $7.50, respectively.



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

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

The functional currency for the Companys
foreign subsidiaries is the U.S. dollar. Accordingly, the
entities remeasure monetary assets and liabilities at period-end
exchange rates, while non-monetary items are remeasured at
historical rates. Income and expense accounts are remeasured at
the average rates in effect during the year. Remeasurement
adjustments are recognized in income as transaction gains or
losses in the year of occurrence. To date, the effect of such
amounts on net income has not been significant.



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

The Company reports comprehensive income or loss
in accordance with the provisions of SFAS 130,
Reporting Comprehensive Income. SFAS 130
establishes standards for reporting comprehensive income and
loss and its components in financial statements. For the
Company, the primary differences between reported net income
(loss) and comprehensive income (loss) are unrealized gains or
losses on securities available for sale. Tax effects of the
components of other comprehensive income (loss) are not
considered material for any periods presented.



| |                                
| | -------------------------------
| | Net Income (Loss) Per
    Share

Basic net income (loss) per share has been
computed using the weighted-average number of common shares
outstanding during the period, less the weighted-average number
of common shares that are subject to repurchase. Diluted net
income (loss) per share has been computed using the weighted
average number of common and potential common shares outstanding
during the period. All warrants for common stock and outstanding
stock options have been excluded from the calculation of diluted
net loss per share for periods where their inclusion would be
antidilutive.

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

|             |                                     |                                            |                                                                                                 |        |        |        |   |       |        |        |   |         |        |        | 
|------------ | ----------------------------------- | ------------------------------------------ | ----------------------------------------------------------------------------------------------- | ------ | ------ | ------ | - | ----- | ------ | ------ | - | ------- | ------ | ------ | 
|             |                                     |                                           
|             |                                     | Years Ended December 31,                  
|             |                                     |                                           
|             |                                     | 2003                                       |                                                                                                 | 2002   |        | 2001  
|             |                                     |                                            |                                                                                                 |        |        |       
|Numerator:   |                                     |                                            |                                                                                                 |        |        |        |   |       |        |        |   |        
|             | Net income (loss)                   |                                            | $                                                                                               | 11,033 |        |        | $ | 3,729 |        |        | $ | (70,988 | )     
|             |                                     |                                            |                                                                                                 |        |        |        |   |       |        |        |   |        
|Denominator: |                                     |                                            |                                                                                                 |        |        |        |   |       |        |        |   |        
|             | Basic:                              |                                            |                                                                                                 |        |        |        |   |       |        |        |   |         |       
|             |                                     | Weighted-average common shares outstanding |                                                                                                 |        | 31,634 |        |   |       | 30,206 |        |   |         | 29,578 |       
|             |                                     | Less: common shares subject to repurchase  |                                                                                                 |        |       |        |   |       | (1     | )      |   |         | (19    | )     
|             |                                     |                                            |                                                                                                 |        |        |        |   |       |        |        |   |        
|             |                                     |                                            | Basic weighted-average common shares outstanding                                                |        |        | 31,634 |   |       |        | 30,205 |   |         |        | 29,559 | 
|             |                                     |                                            |                                                                                                 |        |        |        |   |       |        |        |   |        
|             | Diluted:                            |                                            |                                                                                                 |        |        |        |   |       |        |        |   |         |       
|             |                                     |                                            | Basic weighted-average common shares outstanding                                                |        |        | 31,634 |   |       |        | 30,205 |   |         |        | 29,559 | 
|             |                                     |                                            | Add: potentially dilutive common shares from
    stock options and shares subject to repurchase |        |        | 2,706  |   |       |        | 513    |   |         |        |       | 
|             |                                     |                                            | Add: potentially dilutive common shares from
    warrants                                       |        |        | 24     |   |       |        |       |   |         |        |       | 
|             |                                     |                                            |                                                                                                 |        |        |        |   |       |        |        |   |        
|             |                                     |                                            | Diluted weighted-average common shares outstanding                                              |        |        | 34,364 |   |       |        | 30,718 |   |         |        | 29,559 | 
|             |                                     |                                            |                                                                                                 |        |        |        |   |       |        |        |   |        
|             | Basic net income (loss) per share   |                                            | $                                                                                               | 0.35   |        |        | $ | 0.12  |        |        | $ | (2.40   | )     
|             |                                     |                                            |                                                                                                 |        |        |        |   |       |        |        |   |        
|             | Diluted net income (loss) per share |                                            | $                                                                                               | 0.32   |        |        | $ | 0.12  |        |        | $ | (2.40   | )     
|             |                                     |                                            |                                                                                                 |        |        |        |   |       |        |        |   |        

48



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)


The following table sets forth the potential
common shares that were excluded from the net income (loss)
computation as their effect would have been anti-dilutive (in
thousands).

|                                                                  |  |              |     |      |  |      |       |  |  |  |       | 
|----------------------------------------------------------------- |  | ------------ | --- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                                                  |  |             
|                                                                  |  | Years Ended 
|                                                                  |  | December 31,
|                                                                  |  |             
|                                                                  |  | 2003         |     | 2002 |  | 2001
|                                                                  |  |              |     |      |  |     
|Shares issuable under stock options                               |  |              | 226 |      |  |      | 1,881 |  |  |  | 3,216 | 
|Shares of unvested stock subject to repurchase                    |  |              |    |      |  |      |      |  |  |  | 19    | 
|Shares issuable pursuant to warrants to purchase
    common stock |  |              |    |      |  |      | 45    |  |  |  | 45    | 

For the years ended December 31, 2003 and
2002, certain employee stock options and warrants were excluded
from the computation because the exercise price was greater that
the average market price. For 2001 all employee options and
warrants were excluded from the computation as, due to the net
losses, the effect would have been anti-dilutive.



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

In June 2001, the FASB issued SFAS 143,
Accounting for Asset Retirement Obligations.
SFAS 143 addresses the financial accounting and reporting
for obligations and retirement costs related to the retirement
of tangible long-lived assets. Packeteer adopted SFAS 143
January 1, 2003. Adoption of this statement did not have an
impact on the Companys results of operations or financial
position.

In June 2002, the FASB issued SFAS 146,
Accounting for Costs Associated With Exit or Disposal
Activities. SFAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal
activities and requires the costs to be recorded at their fair
values when a liability has been incurred. Under previous
guidance, certain exit costs were accrued upon managements
commitment to an exit plan, which is generally before an actual
liability has been incurred. Packeteer adopted SFAS 146
January 1, 2003. Adoption of this statement did not have an
impact on the Companys results of operations or financial
position.

In November 2002, the EITF issued EITF 00-21,
Revenue Arrangements with Multiple Deliverables.
EITF 00-21 provides guidance on determining whether a revenue
arrangement contains multiple deliverable items and if so,
requires revenue be allocated amongst the different items based
on fair value. EITF 00-21 also requires that revenue on any item
in a revenue arrangement with multiple deliverables not
delivered completely must be deferred until delivery of the item
is complete. EITF 00-21 is effective for all arrangements
entered into in fiscal periods beginning after June 15,
2003. Adoption of this statement in the third quarter of 2003
did not have a material impact on the Companys results of
operations or financial position, as the Companys revenue
transactions are generally subject to SOP 97-2.

In January 2003, the FASB issued FASB
Interpretation No. (FIN) 46, Consolidation of
Variable Interest Entities. FIN 46 requires
consolidation of variable interest entities by the entitys
primary beneficiary if the equity investors in the entity do not
have the characteristics of a controlling financial interest or
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after
January 31, 2003. FIN 46 must be applied beginning
July 1, 2003 to variable entities existing prior to
February 1, 2003. As the Company does not have any
ownership interests in Variable Interest Entities, the adoption
of FIN 46 did not have an impact on the Companys
results of operations or financial condition.

In April 2003, the FASB issued SFAS 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS 133,
Accounting for Derivative Instruments and Hedging
Activities. SFAS 149 provides greater clarification
of the characteristics of a derivative instrument so that
contracts with similar characteristics will be accounted for
consistently. In general, SFAS 149 is effective for
contracts entered into or modified after September 30,
2003, and for hedging relationships designated after
September 30, 2003. As the

49



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)


Company does not currently have any derivative
financial instruments, the adoption of SFAS 149 did not
have an impact on the Companys consolidated financial
statements.

In May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity
and requires that those instruments be classified as liabilities
in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS 150
is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. As the Company does not have any of these
financial instruments, the adoption of SFAS 150 did not
have an impact on the Companys consolidated financial
statements.

In November 2003, the EITF reached a consensus on
portions of EITF 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments. The consensus was that certain quantitative
and qualitative disclosures should be required for debt and
marketable equity securities classified as available-for-sale or
held-to-maturity under Statements 115 and 124 that are impaired
at the balance sheet date but for which an other-than-temporary
impairment has not been recognized. The disclosures should
include the aggregate amount of unrealized losses and the
aggregate related fair value of investments with unrealized
losses, categorized by type of security and segregated by the
length of time the individual securities have been in a
continuous unrealized loss position. Additional information in
narrative form should provide sufficient detail to support the
conclusion that the impairments are not other-than-temporary.
These disclosures are effective for fiscal years ending after
December 15, 2003. Adoption of these portions of EITF 03-01
did not have a material impact on the Companys results of
operations or financial condition.



|   |                                     
|-- | ------------------------------------
|3. | Goodwill and Other Intangible Assets

The following table presents the impact of
SFAS 142, Goodwill and Other Intangible Assets,
on net income (loss) and net income (loss) per share had the
standard been in effect for 2001(in thousands, except per share
amounts):

|                            |                                 |                          |        |      |  |      |       |      |  |   |         |        |  
|--------------------------- | ------------------------------- | ------------------------ | ------ | ---- |  | ---- | ----- | ---- |  | - | ------- | ------ | -
|                            |                                 |                         
|                            |                                 | Years Ended December 31,
|                            |                                 |                         
|                            |                                 | 2003                     |        | 2002 |  | 2001
|                            |                                 |                          |        |      |  |     
|Reported net income (loss)  |                                 | $                        | 11,033 |      |  | $    | 3,729 |      |  | $ | (70,988 | )     
|                            | Add back: Goodwill amortization |                          |        |     |  |      |       |     |  |   |         | 11,017 |  
|                            |                                 |                          |        |      |  |      |       |      |  |   |         |       
|Adjusted net income (loss)  |                                 | $                        | 11,033 |      |  | $    | 3,729 |      |  | $ | (59,971 | )     
|                            |                                 |                          |        |      |  |      |       |      |  |   |         |       
|Basic earnings per share:   |                                 |                          |        |      |  |      |       |      |  |   |         |       
|                            | Reported net income (loss)      |                          | $      | 0.35 |  |      | $     | 0.12 |  |   | $       | (2.40  | )
|                            | Goodwill amortization           |                          |        |     |  |      |       |     |  |   |         | 0.37   |  
|                            |                                 |                          |        |      |  |      |       |      |  |   |         |       
|                            | Adjusted net income (loss)      |                          | $      | 0.35 |  |      | $     | 0.12 |  |   | $       | (2.03  | )
|                            |                                 |                          |        |      |  |      |       |      |  |   |         |       
|Diluted earnings per share: |                                 |                          |        |      |  |      |       |      |  |   |         |       
|                            | Reported net income (loss)      |                          | $      | 0.32 |  |      | $     | 0.12 |  |   | $       | (2.40  | )
|                            | Goodwill amortization           |                          |        |     |  |      |       |     |  |   |         | 0.37   |  
|                            |                                 |                          |        |      |  |      |       |      |  |   |         |       
|                            | Adjusted net income (loss)      |                          | $      | 0.32 |  |      | $     | 0.12 |  |   | $       | (2.03  | )
|                            |                                 |                          |        |      |  |      |       |      |  |   |         |       

During the third quarter of 2001, the Company
performed an assessment of the carrying value of the goodwill
and other intangible assets related to its acquisition of
Workfire pursuant to the Companys stated policy.
Managements determination of the existence of impairment
indicators included continued general economic slowing, broad
based declines in the values of networking technologies and a
review of current, historical and future projections of cash
flows related to these assets. The conclusion of the assessment
was a

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)


determination that the carrying value of the
goodwill and other intangible assets exceeded its fair value.
The fair value was determined based on Company projections of
the present value of future net cash flows to be generated over
the expected lives of these assets. Accordingly, the Company
recorded an impairment charge of $52.6 million during the
third quarter of 2001 for the entire unamortized balance.



|   |                      
|-- | ---------------------
|4. | Financial Instruments

The Companys cash equivalents and
investments consist of the following at December 31, 2003
and 2002 (in thousands):

|                                                                      |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |        | 
|--------------------------------------------------------------------- | --------------------- | ----------------------------- | ------ | ---------- |  | ---------- | --- | ---------- |  | - | --- | - |  | - | ------ | ------ | 
|                                                                      |                       |                              
|                                                                      |                       | Available-for-Sale Securities
|                                                                      |                       |                              
|                                                                      |                       |                               |        | Gross      |  | Gross      |     |           
|                                                                      |                       | Amortized                     |        | Unrealized |  | Unrealized |     | Estimated 
|                                                                      |                       | Cost                          |        | Gains      |  | Losses     |     | Fair Value
|                                                                      |                       |                               |        |            |  |            |     |           
|December 31, 2003                                                     |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       
|Commercial paper, money markets, corporate notes                      |                       | $                             | 16,318 |            |  | $          | 1   |            |  | $ |    |   |  | $ | 16,319 |       
|                                                                      |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       
|                                                                      | Total debt securities |                               |        | 16,318     |  |            |     | 1          |  |   |     |  |  |   |        | 16,319 | 
|Government securities                                                 |                       |                               | 68,839 |            |  |            | 12  |            |  |   | (25 | ) |  |   | 68,826 |       
|                                                                      |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       
|                                                                      |                       | $                             | 85,157 |            |  | $          | 13  |            |  | $ | (25 | ) |  | $ | 85,145 |       
|                                                                      |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       
|Amounts included in cash and cash equivalents                         |                       | $                             | 24,101 |            |  | $          | 1   |            |  | $ |    |   |  | $ | 24,102 |       
|Amounts included in short-term investments                            |                       |                               | 54,320 |            |  |            | 11  |            |  |   | (14 | ) |  |   | 54,317 |       
|Amounts included in long-term investments                             |                       |                               | 6,736  |            |  |            | 1   |            |  |   | (11 | ) |  |   | 6,726  |       
|                                                                      |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       
|                                                                      |                       | $                             | 85,157 |            |  | $          | 13  |            |  | $ | (25 | ) |  | $ | 85,145 |       
|                                                                      |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       
|December 31, 2002                                                     |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       
|Commercial paper, corporate bonds and notes and
    medium-term notes |                       | $                             | 46,498 |            |  | $          | 12  |            |  | $ |    |   |  | $ | 46,510 |       
|                                                                      |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       
|                                                                      | Total debt securities |                               |        | 46,498     |  |            |     | 12         |  |   |     |  |  |   |        | 46,510 | 
|Government securities                                                 |                       |                               | 17,186 |            |  |            | 154 |            |  |   | (1  | ) |  |   | 17,339 |       
|                                                                      |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       
|                                                                      |                       | $                             | 63,684 |            |  | $          | 166 |            |  | $ | (1  | ) |  | $ | 63,849 |       
|                                                                      |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       
|Amounts included in cash and cash equivalents                         |                       | $                             | 44,518 |            |  | $          | 1   |            |  | $ |    |   |  | $ | 44,519 |       
|Amounts included in short-term investments                            |                       |                               | 11,245 |            |  |            | 94  |            |  |   |    |   |  |   | 11,339 |       
|Amounts included in long-term investments                             |                       |                               | 7,921  |            |  |            | 71  |            |  |   | (1  | ) |  |   | 7,991  |       
|                                                                      |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       
|                                                                      |                       | $                             | 63,684 |            |  | $          | 166 |            |  | $ | (1  | ) |  | $ | 63,849 |       
|                                                                      |                       |                               |        |            |  |            |     |            |  |   |     |   |  |   |        |       

The amortized cost and estimated fair value of
the Companys investments as of December 31, 2003,
shown by contractual maturity date, are as follows (in
thousands):

|                                      |  |           |        |            |  |   |        | 
|------------------------------------- |  | --------- | ------ | ---------- |  | - | ------ | 
|                                      |  | Amortized |        |           
|                                      |  | Cost      |        | Fair Value
|                                      |  |           |        |           
|Mature in one year or less            |  | $         | 78,421 |            |  | $ | 78,419 | 
|Mature between one year and two years |  |           | 6,736  |            |  |   | 6,726  | 
|                                      |  |           |        |            |  |   |        | 
|                                      |  | $         | 85,157 |            |  | $ | 85,145 | 
|                                      |  |           |        |            |  |   |        | 

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)


The following table shows our investments
gross unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position, at December 31,
2003 (in thousands).

|                                      |  |                     |        |                     |  |            |    |                   |  |            |   |                   |  |   |   |  |  |   |        |  |  |   |    | 
|------------------------------------- |  | ------------------- | ------ | ------------------- |  | ---------- | -- | ----------------- |  | ---------- | - | ----------------- |  | - | - |  |  | - | ------ |  |  | - | -- | 
|                                      |  |                     |        |                     |  |           
|                                      |  | Less than 12 months |        | More than 12 months |  | Total     
|                                      |  |                     |        |                     |  |           
|Description of Securities             |  | Fair Value          |        | Unrealized Losses   |  | Fair Value |    | Unrealized Losses |  | Fair Value |   | Unrealized Losses
|                                      |  |                     |        |                     |  |            |    |                   |  |            |   |                  
|Government Securities                 |  | $                   | 17,230 |                     |  | $          | 25 |                   |  | $          |  |                   |  | $ |  |  |  | $ | 17,230 |  |  | $ | 25 | 
|                                      |  |                     |        |                     |  |            |    |                   |  |            |   |                   |  |   |   |  |  |   |        |  |  |   |    | 
|Total temporarily impaired securities |  | $                   | 17,230 |                     |  | $          | 25 |                   |  | $          |  |                   |  | $ |  |  |  | $ | 17,230 |  |  | $ | 25 | 
|                                      |  |                     |        |                     |  |            |    |                   |  |            |   |                   |  |   |   |  |  |   |        |  |  |   |    | 

Securities listed are composed of US Treasury
obligations and obligations of US government agencies. The
individual securities included in the table above have been in a
continuous loss position for periods ranging from one to seven
months. At this time, we believe that, due to the nature of the
investments, the short time period that these unrealized loss
positions have existed, and Packeteers ability and intent
to hold the investments through these short-term loss positions,
factors would not indicate that these unrealized losses should
be viewed as other-than-temporary under the guidance
of EITF 03-01.



|   |                         
|-- | ------------------------
|5. | Revolving Loan Agreement

The Company had a revolving credit facility that
provided for borrowings of up to $10.0 million. Advances
were limited to the lesser of the maximum line or the borrowing
base, which was 80% of eligible domestic receivables and 90% of
eligible international receivables. Additionally, the Company
was required to maintain certain financial covenants related to
working capital and quarterly net income (loss) amounts. The
outstanding principal balance accrued interest at a per annum
rate equal to the prime rate and was secured by all present and
future collateral of the Company. As of December 31, 2002,
the outstanding balance on the line was $1.0 million.
During the first quarter of 2003, the Company repaid the
outstanding balance and the Company allowed the line to expire
in May 2003.



|   |             
|-- | ------------
|6. | Note Payable

In August 2001, the Company secured a $551,000
equipment loan. Borrowings under this agreement are
collateralized by the purchased equipment, bear interest at the
rate of 11.1%, and are repayable in monthly installments over a
three-year period. At December 31, 2003, approximately
$139,000 was outstanding under this note.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)




|   |                           
|-- | --------------------------
|7. | Commitments and Guarantees

The Company leases its facility and certain
equipment under non-cancelable lease agreements that expire at
various dates through 2010. Some of these arrangements contain
renewal options, and require the Company to pay taxes, insurance
and maintenance costs. Rent expense was $1.9 million,
$1.8 million and $1.4 million for the years ended
December 31, 2003, 2002 and 2001, respectively. As of
December 31, 2003, the future minimum rental payments under
capital and operating leases are as follows (in thousands):

|                                                                       |            |         |     |           |  |   |       |       | 
|---------------------------------------------------------------------- | ---------- | ------- | --- | --------- |  | - | ----- | ----- | 
|                                                                       |            | Capital |     | Operating
|Years Ending December 31,                                              |            | Lease   |     | Lease    
|                                                                       |            |         |     |          
|                                                                       | 2004       |         | $   | 482       |  |   | $     | 1,492 | 
|                                                                       | 2005       |         |     |          |  |   |       | 1,288 | 
|                                                                       | 2006       |         |     |          |  |   |       | 1,472 | 
|                                                                       | 2007       |         |     |          |  |   |       | 1,200 | 
|                                                                       | 2008       |         |     |          |  |   |       | 48    | 
|                                                                       | Thereafter |         |     |          |  |   |       | 179   | 
|                                                                       |            |         |     |           |  |   |       |      
|Total future minimum lease payments                                    |            |         | 482 |           |  | $ | 5,679 |      
|                                                                       |            |         |     |           |  |   |       |      
|Less amounts representing interest at 9.27%-10.00%                     |            |         | (25 | )         |  |   |       |      
|                                                                       |            |         |     |           |  |   |       |      
|Present value of future minimum lease payments
    under capital lease |            | $       | 457 |           |  |   |       |      
|                                                                       |            |         |     |           |  |   |       |      

Total interest paid for our capital lease
obligations, note payable and revolving line of credit was
$110,000, $251,000 and $543,000 for 2003, 2002 and 2001,
respectively.

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



|   |              
|-- | -------------
|8. | Contingencies

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

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

In July 2002, the Company and the individual
defendants joined in an omnibus motion to dismiss challenging
the legal sufficiency of plaintiffs claims. The motion was
filed on behalf of hundreds of issuer and individual defendants
named in similar lawsuits. Plaintiffs opposed the motion, and
the Court heard oral argument on the motion in early November
2002. On February 19, 2003, the Court issued an Opinion and
Order denying the motion to dismiss as to the Company. In
addition, in October 2002, the individual defendants were
dismissed without prejudice.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)


A special committee of the board of directors has
authorized the Company to negotiate a settlement of the pending
claims substantially consistent with a memorandum of
understanding negotiated among class plaintiffs, all issuer
defendants and their insurers. Any such settlement would be
subject to approval by the Court. If the settlement is not
approved, we intend to vigorously defend ourselves against
plaintiffs allegations. We do not currently believe that
the outcome of this proceeding will have a material adverse
impact on our financial condition, results of operations or cash
flows.

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



|   |             
|-- | ------------
|9. | Income Taxes

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

|              |                                        |      |       |        |  |      |        |       |  |   |         |         |  
|------------- | -------------------------------------- | ---- | ----- | ------ |  | ---- | ------ | ----- |  | - | ------- | ------- | -
|              |                                        | 2003 |       | 2002   |  | 2001
|              |                                        |      |       |        |  |     
|United States |                                        | $    | 3,337 |        |  | $    | (2,894 | )     |  | $ | (10,939 | )      
|Foreign       |                                        |      | 8,922 |        |  |      | 7,038  |       |  |   | (60,049 | )      
|              |                                        |      |       |        |  |      |        |       |  |   |         |        
|              | Net income (loss) before incomes taxes |      | $     | 12,259 |  |      | $      | 4,144 |  |   | $       | (70,988 | )
|              |                                        |      |       |        |  |      |        |       |  |   |         |        

Our income tax provision for 2003 and 2002 is
primarily attributable to income taxes payable in foreign
jurisdictions. The Company recorded no income tax provision or
benefit in 2001, as the Company reported a net loss.

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

|                                        |                                  |                                  |        |       |  |      |        |     |  |   |         |   | 
|--------------------------------------- | -------------------------------- | -------------------------------- | ------ | ----- |  | ---- | ------ | --- |  | - | ------- | - | 
|                                        |                                  |                                 
|                                        |                                  | For the Years Ended December 31,
|                                        |                                  |                                 
|                                        |                                  | 2003                             |        | 2002  |  | 2001
|                                        |                                  |                                  |        |       |  |     
|Federal tax at statutory rate           |                                  | $                                | 4,168  |       |  | $    | 1,409  |     |  | $ | (24,136 | )
|State taxes                             |                                  |                                  | 9      |       |  |      | 6      |     |  |   |        |  
|Operating loss (utilized) not benefited |                                  |                                  | (1,188 | )     |  |      | 940    |     |  |   | 3,681   |  
|Non deductible expenses                 |                                  |                                  | 54     |       |  |      | 43     |     |  |   | 21,652  |  
|Alternative minimum income tax          |                                  |                                  | 75     |       |  |      |       |     |  |   |        |  
|Foreign tax differential                |                                  |                                  | (1,892 | )     |  |      | (1,983 | )   |  |   | (1,197  | )
|                                        |                                  |                                  |        |       |  |      |        |     |  |   |         |  
|                                        | Total provision for income taxes |                                  | $      | 1,226 |  |      | $      | 415 |  |   | $       |  | 
|                                        |                                  |                                  |        |       |  |      |        |     |  |   |         |  

The types of temporary differences that give rise
to significant portions of the Companys net deferred tax
assets at December 31 are set forth below (in thousands):

|                        |                                                                   |                           |         |        |        |   |         |        |        | 
|----------------------- | ----------------------------------------------------------------- | ------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                        |                                                                   | 2003                      |         | 2002  
|                        |                                                                   |                           |         |       
|Deferred tax assets:    |                                                                   |                           |         |        |        |   |         |       
|                        | Various accruals and reserves not deductible for
    tax purposes |                           | $       | 1,135  |        |   | $       | 1,251  |       
|                        | Property and equipment                                            |                           |         | 523    |        |   |         | 409    |       
|                        | Net operating loss carryforwards                                  |                           |         | 18,689 |        |   |         | 19,574 |       
|                        | Tax credit carryforwards                                          |                           |         | 3,299  |        |   |         | 2,853  |       
|                        |                                                                   |                           |         |        |        |   |         |       
|                        |                                                                   | Gross deferred tax assets |         |        | 23,646 |   |         |        | 24,087 | 
|Valuation allowance     |                                                                   |                           | (23,646 | )      |        |   | (24,087 | )     
|                        |                                                                   |                           |         |        |        |   |         |       
|Net deferred tax assets |                                                                   | $                         |        |        |        | $ |        |       
|                        |                                                                   |                           |         |        |        |   |         |       

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)


The net change in the total valuation allowance
was a decrease of $0.4 million and increase of
$1.6 million for the years ended December 31, 2003 and
2002, respectively. Although we reported net income in 2003 and
2002, the Company has previously reported net losses since
inception, therefore it has provided a full valuation allowance
on its deferred tax assets. Management believes that, based on a
number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of the
deferred tax assets such that a full valuation allowance has
been recorded.

Approximately $12.8 million of the valuation
allowance for deferred tax assets is attributable to employee
stock option deductions, the benefit from which will be
allocated to additional paid-in capital when, and if, it is
subsequently realized.

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

At December 31, 2003 the Company has net
operating loss carryforwards for federal and California income
tax purposes of approximately $49.9 million and
$22.7 million, respectively. If not utilized, the federal
net operating loss carryforwards will begin to expire in 2011,
and the California net operating loss carryforwards will begin
to expire in 2006. At December 31, 2003, the Company had
federal and California research credit carryforwards of
approximately $2.0 million and $1.8 million,
respectively. If not utilized, the federal research credit
carryforwards will begin to expire in 2011. The California
research credit carryforwards can be carried forward
indefinitely. Changes in the Companys ownership, as
defined under Section 382 of the Internal Revenue Code,
could result in certain limitations on the annual amount of net
operating losses that may be utilized.

Income taxes paid were $672,000, $89,000 and
$40,000 for 2003, 2002 and 2001, respectively.



|    |                     
|--- | --------------------
|10. | Stockholders Equity



| |                           
| | --------------------------
| | Preferred and Common Stock

The Companys Board of Directors has
authorized 5,000,000 shares of preferred stock. The
authorized preferred stock shares are undesignated and the Board
has the authority to issue and to determine the rights,
preference and privileges thereof.

The Companys Board of Directors has
authorized 85,000,000 shares of common stock.



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

As of December 31, 2003, 45,000 warrants to
purchase common stock were outstanding and exercisable with a
$6.25 exercise price per share and an expiration date in May
2009.



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

In May 1999, the Companys Board of
Directors adopted the 1999 Employee Stock Purchase Plan (the
ESPP). The ESPP became effective July 27, 1999.
At that time, 500,000 shares were reserved for issuance
under this plan. The number of shares reserved under this ESPP
automatically increases annually beginning on January 1,
2000 by the lesser of one million shares or 2% of the total
number of shares of common stock outstanding. The ESPP permits
participants to purchase common stock through payroll deductions
of up to 15% of an employees compensation, including
commissions, overtime, bonuses and other incentive compensation.
The purchase price per share is equal to 85% of the fair market
value per share on the participants entry date into the
offering period or, if lower, 85% of the fair market value per
share on the semi-annual purchase date. As of December 31,
2003, 687,000 shares had been issued under the plan and
2.1 million were available for future issuance. The fair
value of the discount and look-back features are considered
compensation for purposes of computing the Companys
pro-forma earnings for stock based compensation.

55



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)




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

The 1999 Stock Incentive Plan (the 1999
Plan) is intended to serve as the successor program to our
1996 Equity Incentive Plan (the 1996 Plan). In May
1999, the Companys Board of Directors approved the 1999
Plan, which became effective on July 27, 1999, under which
900,000 shares were reserved for issuance. Previously,
515,000 shares were authorized under the 1996 Plan. In
addition, any shares not issued under the 1996 Plan will also be
available for grant under the 1999 Plan. The number of shares
reserved under the 1999 Plan automatically increases annually
beginning on January 1, 2000 by the lesser of three million
shares or 5% of the total number of shares of common stock
outstanding. Under the 1999 Plan, eligible individuals may be
granted options to purchase common shares or may be issued
shares of common stock directly. The 1999 Plan is administered
by the Compensation Committee of 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, 2003, there were no outstanding shares subject
to repurchase. As of December 31, 2003, options for
16.3 million shares had been issued and 2.0 million
were available for future grant.

In October 2001, the Company announced a
voluntary stock option exchange program, or Offer to
Exchange, for all employees except executive officers.
Under the program, these employees had the opportunity to cancel
certain outstanding options previously granted to them that had
an exercise price at or above $5.00 in exchange for an equal
number of new options to be granted at a future date. The Offer
to Exchange was outstanding until 5:00 p.m., Pacific
Daylight Time on November 30, 2001 (the Expiration
Date). The exercise price of the new options was to be
equal to the fair market value of the Companys common
stock on the date of grant, which was June 3, 2002.
Participants electing to exchange any options were also required
to exchange all options granted to him or her during the six
months before the date of the Offer to Exchange and were
precluded from receiving any options during the six months after
the Expiration Date. Options totaling 1.5 million shares
were canceled under this program in November 2001. Options
totaling 1.4 million were reissued on June 3, 2002 at
an option price of $6.10 per share, which was the fair
market value on the date of grant.

A summary of stock option activity under 1999
Plan follows (in thousands, except per share data):

|                                 |                                 |           |       |                     |   |                  |       |        |   |   |       |       | 
|-------------------------------- | ------------------------------- | --------- | ----- | ------------------- | - | ---------------- | ----- | ------ | - | - | ----- | ----- | 
|                                 |                                 |           |       |                    
|                                 |                                 |           |       | Options Outstanding
|                                 |                                 |           |       |                    
|                                 |                                 | Available |       | Number of           |   | Weighted-Average
|                                 |                                 | for Grant |       | Shares              |   | Exercise Price  
|                                 |                                 |           |       |                     |   |                 
|Balances as of December 31, 2000 |                                 |           | 798   |                     |   |                  | 3,848 |        |   | $ | 18.09 |      
|                                 | Shares made available for grant |           |       | 1,474               |   |                  |       |       |   |   |       |      | 
|                                 | Repurchased                     |           |       | 25                  |   |                  |       |       |   |   |       |      | 
|                                 | Granted                         |           |       | (2,203              | ) |                  |       | 2,203  |   |   |       | 9.84  | 
|                                 | Exercised                       |           |       |                    |   |                  |       | (395   | ) |   |       | 2.10  | 
|                                 | Cancelled                       |           |       | 2,440               |   |                  |       | (2,440 | ) |   |       | 25.38 | 
|                                 |                                 |           |       |                     |   |                  |       |        |   |   |       |      
|Balances as of December 31, 2001 |                                 |           | 2,534 |                     |   |                  | 3,216 |        |   |   | 8.88  |      
|                                 | Shares made available for grant |           |       | 1,498               |   |                  |       |       |   |   |       |      | 
|                                 | Granted                         |           |       | (2,420              | ) |                  |       | 2,420  |   |   |       | 5.49  | 
|                                 | Exercised                       |           |       |                    |   |                  |       | (430   | ) |   |       | 3.59  | 
|                                 | Cancelled                       |           |       | 196                 |   |                  |       | (196   | ) |   |       | 6.87  | 
|                                 |                                 |           |       |                     |   |                  |       |        |   |   |       |      

56



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)


|                                 |                                 |           |       |                     |   |                  |       |        |   |  |      |       | 
|-------------------------------- | ------------------------------- | --------- | ----- | ------------------- | - | ---------------- | ----- | ------ | - |  | ---- | ----- | 
|                                 |                                 |           |       |                    
|                                 |                                 |           |       | Options Outstanding
|                                 |                                 |           |       |                    
|                                 |                                 | Available |       | Number of           |   | Weighted-Average
|                                 |                                 | for Grant |       | Shares              |   | Exercise Price  
|                                 |                                 |           |       |                     |   |                 
|Balances as of December 31, 2002 |                                 |           | 1,808 |                     |   |                  | 5,010 |        |   |  | 7.77 |      
|                                 | Shares made available for grant |           |       | 1,530               |   |                  |       |       |   |  |      |      | 
|                                 | Granted                         |           |       | (1,614              | ) |                  |       | 1,614  |   |  |      | 10.84 | 
|                                 | Exercised                       |           |       |                    |   |                  |       | (1,611 | ) |  |      | 5.12  | 
|                                 | Cancelled                       |           |       | 284                 |   |                  |       | (284   | ) |  |      | 11.22 | 
|                                 |                                 |           |       |                     |   |                  |       |        |   |  |      |      
|Balances as of December 31, 2003 |                                 |           | 2,008 |                     |   |                  | 4,729 |        |   |  | 9.51 |      
|                                 |                                 |           |       |                     |   |                  |       |        |   |  |      |      

The following tables summarize information about
stock options outstanding under the 1999 Plan as of
December 31, 2003 (in thousands, except per share data):

|              |  |                     |       |                     |  |          |      |             |  |          |       |  |  |  |       |  |  |   |       | 
|------------- |  | ------------------- | ----- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|              |  |                     |       |                     |  |         
|              |  | Options Outstanding |       |                    
|              |  |                     |       | Options Exercisable
|              |  |                     |       | Weighted            |  |          |      |            
|              |  |                     |       | Average             |  | Weighted |      |             |  | Weighted
|Range of      |  | Number              |       | Remaining           |  | Average  |      | Number      |  | Average 
|Exercise      |  | Outstanding         |       | Contractual         |  | Exercise |      | Exercisable |  | Exercise
|Prices        |  | at 12/31/03         |       | Life (Years)        |  | Price    |      | at 12/31/03 |  | Price   
|              |  |                     |       |                     |  |          |      |             |  |         
|$0.50-$3.50   |  |                     | 793   |                     |  |          | 5.24 |             |  | $        | 2.70  |  |  |  | 349   |  |  | $ | 3.05  | 
|$3.70-$6.06   |  |                     | 683   |                     |  |          | 8.20 |             |  |          | 4.72  |  |  |  | 238   |  |  |   | 4.77  | 
|$6.10         |  |                     | 769   |                     |  |          | 6.81 |             |  |          | 6.10  |  |  |  | 548   |  |  |   | 6.10  | 
|$6.13-$9.87   |  |                     | 1,191 |                     |  |          | 8.63 |             |  |          | 8.15  |  |  |  | 163   |  |  |   | 7.51  | 
|$10.05-$16.26 |  |                     | 839   |                     |  |          | 8.35 |             |  |          | 12.29 |  |  |  | 125   |  |  |   | 12.01 | 
|$16.88-$20.86 |  |                     | 264   |                     |  |          | 8.09 |             |  |          | 17.22 |  |  |  | 153   |  |  |   | 16.88 | 
|$48.06        |  |                     | 190   |                     |  |          | 6.07 |             |  |          | 48.06 |  |  |  | 186   |  |  |   | 48.06 | 
|              |  |                     |       |                     |  |          |      |             |  |          |       |  |  |  |       |  |  |   |       | 
|$0.50-$48.06  |  |                     | 4,729 |                     |  |          | 7.92 |             |  |          | 9.51  |  |  |  | 1,762 |  |  |   | 11.23 | 
|              |  |                     |       |                     |  |          |      |             |  |          |       |  |  |  |       |  |  |   |       | 

In the year ended December 31, 2003,
51,250 shares were issued as a result of the exercise of
non-plan options granted before the July 28, 1999 initial
public offering. As of December 31, 2003, there were 9,333
non-plan options outstanding with a weighted average exercise
price of $0.25 per share.



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

In connection with options granted in 1999 and
1998, the Company recorded deferred stock-based compensation of
$3.9 million and $787,000, respectively, representing the
difference between the exercise price and the fair value of the
Companys common stock at the date of grant. In 2000, the
Company recorded deferred stock-based compensation of
$1.1 million related to employee options assumed in the
Workfire acquisition. The amounts were being amortized over the
vesting period for the individual options, generally four years.
Amortization of stock-based compensation of $19,000, $385,000
and $1.2 million was recognized during the years ended
December 31, 2003, 2002 and 2001, respectively. All
stock-based compensation was fully amortized as of June 30,
2003.

57



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)




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

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

|                          |                     |             |     |             |   |               |      |      |   |   |     |      |  
|------------------------- | ------------------- | ----------- | --- | ----------- | - | ------------- | ---- | ---- | - | - | --- | ---- | -
|                          |                     | Gains       |     |             |   | Accumulated  
|                          |                     | (Losses) On |     |             |   | Other        
|                          |                     | Marketable  |     | Other       |   | Comprehensive
|                          |                     | Securities  |     | Adjustments |   | Income (Loss)
|                          |                     |             |     |             |   |              
|Balance December 31, 2000 |                     |             | 77  |             |   |               |     |      |   |   | 77  |     
|                          | Current year change |             |     | 10          |   |               |      | (105 | ) |   |     | (95  | )
|                          |                     |             |     |             |   |               |      |      |   |   |     |     
|Balance December 31, 2001 |                     |             | 87  |             |   |               | (105 | )    |   |   | (18 | )   
|                          | Current year change |             |     | 78          |   |               |      | 105  |   |   |     | 183  |  
|                          |                     |             |     |             |   |               |      |      |   |   |     |     
|Balance December 31, 2002 |                     | $           | 165 |             |   | $             |     |      |   | $ | 165 |     
|                          | Current year change |             |     | (177        | ) |               |      |     |   |   |     | (177 | )
|                          |                     |             |     |             |   |               |      |      |   |   |     |     
|Balance December 31, 2003 |                     | $           | (12 | )           |   | $             |     |      |   | $ | (12 | )   
|                          |                     |             |     |             |   |               |      |      |   |   |     |     

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



|    |            
|--- | -----------
|11. | 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 100% 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.



|    |                  
|--- | -----------------
|12. | Segment Reporting

The Company has adopted the provisions of
SFAS 131, Disclosures about Segments of an Enterprise
and Related Information. The Companys chief
operating decision maker is considered to be the Companys
CEO. The CEO reviews financial information presented on a
consolidated basis substantially similar to the consolidated
financial statements. Therefore, the Company has concluded that
it operates in one segment and accordingly has provided only the
required enterprise-wide disclosures.

The Company operates in the United States and
internationally, and derives its revenue from the sale of
products and software licenses and maintenance contracts related
to these products. Sales outside of North America accounted for
56%, 58% and 55% of the Companys total revenues in 2003,
2002, and 2001, respectively.

Geographic information is as follows (in
thousands):

|              |                          |                          |   |        |        |      |   |        |        |  |   |        |        | 
|------------- | ------------------------ | ------------------------ | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|              |                          |                         
|              |                          | Years Ended December 31,
|              |                          |                         
|              |                          | 2003                     |   | 2002   |        | 2001
|              |                          |                          |   |        |        |     
|Net revenues: |                          |                          |   |        |        |      |   |        |        |  |   |       
|              | North America            |                          | $ | 31,756 |        |      | $ | 23,109 |        |  | $ | 20,805 |       
|              | Asia Pacific             |                          |   | 21,570 |        |      |   | 17,997 |        |  |   | 12,106 |       
|              | Europe and rest of world |                          |   | 19,397 |        |      |   | 13,908 |        |  |   | 13,750 |       
|              |                          |                          |   |        |        |      |   |        |        |  |   |       
|              |                          | Total net revenues       |   | $      | 72,723 |      |   | $      | 55,014 |  |   | $      | 46,661 | 
|              |                          |                          |   |        |        |      |   |        |        |  |   |       

Net revenues reflect the destination of the
product shipped.

58



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)


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






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

Not Applicable.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

We have performed an evaluation under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended. Based upon that
evaluation, our management, including our Chief Executive
Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures were effective as of the end
of the period covered by this annual report. There has been no
change in our internal control over financial reporting during
the quarter ended December 31, 2003 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.




PART III

Pursuant to General Instruction G to
Form 10-K, the information required by Items 10, 11,
12, 13 and 14 of Part III is incorporated by reference to
our definitive Proxy Statement with respect to our 2004 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, 2003.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)(1) Financial Statements

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

(2) Financial
Statement Schedule

All financial statement schedules are omitted as
the required information is inapplicable or the information is
presented in the consolidated financial statements or related
notes.

(3) Exhibits

See the Exhibit Index of this Form 10-K.

(b) Reports on Form 8-K

The Company filed a Current Report on
Form 8-K dated October 16, 2003, furnishing under
Item 12 a press release reporting the Companys
results of operations for the three and nine months ended
September 30, 2003.

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

(d) See the Consolidated Financial
Statements beginning on page 38.

59



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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 5th day of March, 2004.



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



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

| |                                          
| | -----------------------------------------
| |                                          
| | Dave Côté                                
| | President and Chief Executive
    Officer

Date: March 5, 2004

POWER OF ATTORNEY

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

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

|                                   |  |                                                                                            |  |               |  | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ------------- |  | 
|                                   |  |                                                                                            |  |              
|Name                               |  | Title                                                                                      |  | Date         
|                                   |  |                                                                                            |  |              
|                                  
|/s/ DAVE CÔTÉDave Côté             |  | President and Chief Executive Officer
    (Principal Executive Officer)
    and Director   |  | March 5, 2004
|                                  
|/s/ DAVID YNTEMADavid Yntema       |  | Chief Financial Officer and Secretary (Principal
    Financial and
    Accounting Officer) |  | March 5, 2004
|                                  
|/s/ HAMID AHMADIHamid Ahmadi       |  | Director                                                                                   |  | March 5, 2004
|                                  
|/s/ STEVEN CAMPBELLSteven Campbell |  | Director                                                                                   |  | March 5, 2004
|                                  
|/s/ CRAIG ELLIOTTCraig Elliott     |  | Director                                                                                   |  | March 5, 2004

60



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|                                       |  |          |  |               |  | 
|-------------------------------------- |  | -------- |  | ------------- |  | 
|                                       |  |          |  |              
|Name                                   |  | Title    |  | Date         
|                                       |  |          |  |              
|                                      
|/s/ JOSEPH GRAZIANOJoseph Graziano     |  | Director |  | March 5, 2004
|                                      
|/s/ L. WILLIAM KRAUSEL. William Krause |  | Director |  | March 5, 2004
|                                      
|/s/ PETER VAN CAMPPeter Van Camp       |  | Director |  | March 5, 2004

61



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##### Table of Contents



EXHIBIT INDEX

|        |    |             |  |                                                                                                                              
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1(2)       |  | Registrants Amended and Restated
    Certificate of Incorporation.                                                          
|        | 3  | .3(5)       |  | Registrants Amended and Restated Bylaws.                                                                                    
|        | 4  | .1(2)       |  | Form of Registrants Specimen Common Stock
    Certificate.                                                                  
|        | 10 | .8(2)       |  | Registrants 1996 Equity Incentive Plan.                                                                                     
|        | 10 | .9(2)       |  | Registrants 1999 Stock Incentive Plan.                                                                                      
|        | 10 | .10(2)      |  | Registrants 1999 Employee Stock Purchase
    Plan.                                                                          
|        | 10 | .11(2)      |  | Form of Indemnity Agreement entered into by
    Registrant with each of its executive officers and directors.                
|        | 10 | .14(2)      |  | OEM Agreement between Packeteer and Adtran, Inc.
    dated June 29, 1999.                                                    
|        | 10 | .16(3)      |  | Master Lease Agreement between Packeteer and
    Pentech Financial Services, Inc., dated November 1, 1999.                   
|        | 10 | .21(4)      |  | Amendment dated May 23, 2001 to the 1999
    Stock Incentive Plan                                                            
|        | 10 | .22(5)      |  | Amendment dated May 22, 2002 to the 1999
    Stock Incentive Plan                                                            
|        | 10 | .23(5)      |  | Facilities Lease Agreement dated July 15,
    2003, between NMSPCSLDHB, a California Limited Partnership, and
    the Company
|        | 10 | .24(6)      |  | Employment Agreement dated September 27,
    2002 between Dave Côté and Packeteer, Inc.                                      
|        | 10 | .25(1)      |  | Amendment dated July 16, 2003 to the 1999
    Employee Stock Purchase Plan                                                   
|        | 21 | .1(1)       |  | Subsidiaries of Packeteer                                                                                                    
|        | 23 | .1(1)       |  | Consent of KPMG LLP, Independent Accountants                                                                                 
|        | 24 | .1(1)       |  | Power of Attorney (see page 60)                                                                                              
|        | 31 | .1(1)       |  | Sarbanes-Oxley Section 302
    Certification  CEO                                                                           
|        | 31 | .2(1)       |  | Sarbanes-Oxley Section 302
    Certification  CFO                                                                           
|        | 32 | .1(1)       |  | Sarbanes-Oxley Section 906
    Certification  CEO                                                                           
|        | 32 | .2(1)       |  | Sarbanes-Oxley Section 906
    Certification  CFO                                                                           



---



|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(1) | Filed herewith.                                                                                                          
|   
|(2) | Incorporated by reference from Packeteers
    Registration Statement on Form S-1 (Reg.
    No. 79333-79077), as amended.
|   
|(3) | Incorporated by reference from Packeteers
    10-K dated March 23, 2000.                                                
|   
|(4) | Incorporated by reference from Packeteers
    10-K dated March 22, 2002.                                                
|   
|(5) | Incorporated by reference from Packeteers
    10-Q dated August 13, 2002.                                               
|   
|(6) | Incorporated by reference from Packeteers
    10-K dated March 21, 2003.