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

                                    FORM 10-Q

(Mark One)

[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

                                       or

[X]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 for the transition period from __________________ to
     ________________.

                        Commission File Number ____-_____

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

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

               10495 North De Anza Boulevard, Cupertino, CA 95014
                    (Address of principal executive offices)

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

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

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

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

    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                        Yes [X]               No [  ]

    The number of shares outstanding of Registrant's common stock, $0.001 par
value, was 29,915,557 at September 30, 2001.
<PAGE>
                                ----------------
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I   FINANCIAL INFORMATION
Item 1.  Financial Statements:
<S>                                                                                                                <C>
         Condensed Consolidated Balance Sheets as of September 30, 2001 and
          December 31, 2000.....................................................................................    3
         Condensed Consolidated Statements of Operations for the Three Months
          and Nine Months Ended September 30, 2001 and September 30, 2000.............................. ........    4
         Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
          September 30, 2001 and September 30, 2000.............................................................    5
         Notes to Condensed Consolidated Financial Statements...................................................    6
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations..................    9
         Factors That May Affect Future Results.................................................................   13
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.............................................   22
PART II  OTHER INFORMATION
Item 2.  Changes in Securities and Use of Proceeds..............................................................   22
Item 6.  Exhibits and Reports on Form 8-K.......................................................................   23
Signatures....................................................................................................     23
</TABLE>


    In addition to historical information, this Form 10-Q contains
forward-looking statements regarding our strategy, financial performance and
revenue sources that involve a number of risks and uncertainties, including
those discussed below at "Factors That May Affect Future Results" and in the
"Risk Factors" section of Packeteer's Annual Report on Form 10-K dated March 29,
2001 as filed with the SEC. Forward-looking statements in this report include,
but are not limited to, those relating to the general rapid expansion of our
business, including the expansion of our network product lines, our ability to
develop multiple applications, our planned introduction of new products and
services, the possibility of acquiring complementary businesses, products,
services and technologies and our development of relationships with providers of
leading Internet technologies. While this outlook represents our current
judgment on the future direction of the business, such risks and uncertainties
could cause actual results to differ materially from any future performance
suggested below. Readers are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this Form 10-Q.
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.


                                       2
<PAGE>
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                September 30,   December 31,
                                                                    2001           2000
                                                                -------------   ------------
<S>                                                             <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents ..............................         $  50,129       $  24,273
  Short-term investments .................................             4,605          32,183
  Accounts receivable less allowance for doubtful accounts
     of $146 and $223, as of September 30, 2001 and
     December 31, 2000 ...................................             5,896           7,600
  Inventories ............................................             1,730           2,554
  Prepaids and other current assets ......................             1,505           2,281
                                                                   ---------       ---------
          Total current assets ...........................            63,685          68,891

Property and equipment, net ..............................             1,789           2,529
Long-term investments ....................................             6,694           5,750
Other long-term assets ...................................               232          67,111
                                                                   ---------       ---------
Total assets .............................................         $  72,580       $ 144,281
                                                                   =========       =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Lines of credit ........................................         $   1,249       $   3,679
  Current portion of capital leases obligations
     and note payable ....................................               925             801
  Accounts payable .......................................             1,567           2,663
  Accrued compensation ...................................             1,913           2,410
  Other accrued liabilities ..............................             3,491           4,013
  Deferred revenue .......................................             4,539           3,367
                                                                   ---------       ---------
          Total current liabilities ......................            13,684          16,933

Long-term liabilities ....................................             1,638           3,215

Common stock; $0.001 par value; 85,000 shares
  authorized; 29,916 and 29,434 issued and outstanding at
  September 30, 2001 and December 31, 2000, respectively .                30              29
Additional paid-in capital ...............................           164,155         162,118
Accumulated other comprehensive income ...................               126              77
Deferred stock-based compensation ........................              (625)         (1,715)
Notes receivable from stockholders .......................               (83)           (186)
Accumulated deficit ......................................          (106,345)        (36,190)
                                                                   ---------       ---------
Total stockholders' equity ...............................            57,258         124,133
                                                                   ---------       ---------
Total liabilities and stockholders' equity ...............         $  72,580       $ 144,281
                                                                   =========       =========
</TABLE>

      See accompanying notes to condensed consolidated financial statements


                                       3
<PAGE>

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


<TABLE>
<CAPTION>
                                                            Three months ended            Nine months ended
                                                                September 30,                September 30,
                                                          -----------------------       -----------------------
                                                            2001           2000           2001           2000
                                                          --------       --------       --------       --------
<S>                                                       <C>            <C>            <C>            <C>
Net revenues .......................................      $ 10,928       $ 11,504       $ 35,197       $ 27,772

Cost of revenues ...................................         3,158          3,530         10,900          8,642
Amortization of acquired technology ................          --               78          1,199             78
                                                          --------       --------       --------       --------
          Total cost of revenues ...................         3,158          3,608         12,099          8,720

          Gross profit .............................         7,770          7,896         23,098         19,052
Operating expenses:
  Research and development (exclusive of stock-
      based compensation expense of $113 and $107
      for the three months ended September 30, 2001
      and 2000 and $570 and $237 for the nine
      months ended September 30, 2001 and 2000,
      respectively) ................................         3,292          2,265          9,209          6,005
  Sales and marketing  (exclusive of stock-based
      compensation expense of $102 and $210 for the
      three months ended September 30, 2001 and
      2000 and $345 and $686 for the nine months
      ended September 30, 2001 and 2000,
      respectively) ................................         5,232          5,181         16,886         13,246
  General and administrative (exclusive of stock-
      based compensation expense of $22 and $58 for
      the three months ended September 30, 2001 and
      2000 and $86 and $175 for the nine months
      ended September 30, 2001 and 2000,
      respectively) ................................         1,435          1,238          4,291          3,502
  Amortization of goodwill .........................          --              916         11,017            916
  Impairment of goodwill and other intangibles .....        52,552           --           52,552           --
  Stock-based compensation .........................           237            375          1,001          1,098
                                                          --------       --------       --------       --------

          Total operating expenses .................        62,748          9,975         94,956         24,767
                                                          --------       --------       --------       --------

          Loss from operations .....................       (54,978)        (2,079)       (71,858)        (5,715)

Other income, net ..................................           696            938          1,703          2,551
                                                          --------       --------       --------       --------

          Net loss .................................      $(54,282)      $ (1,141)      $(70,155)      $ (3,164)
                                                          ========       ========       ========       ========

Basic and diluted net loss per share ...............      $  (1.83)      $  (0.04)      $  (2.38)      $  (0.12)
                                                          ========       ========       ========       ========

Shares used in computing basic and diluted net loss
  Per share ........................................        29,678         27,248         29,450         26,623
                                                          ========       ========       ========       ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                       4
<PAGE>
                                 PACKETEER, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                  Nine months ended
                                                                    September 30,
                                                                        2001           2000
                                                                     ---------       ---------
<S>                                                                  <C>             <C>
Cash flows from operating activities:
  Net loss ....................................................      $ (70,155)      $  (3,164)
  Adjustments to reconcile net loss to net cash used
    in operating activities:
    Depreciation ..............................................          1,493             841
    Amortization of goodwill and intangibles ..................         12,263             998
    Impairment of goodwill and intangibles ....................         52,552            --
    Other non-cash charges ....................................          1,081           1,192
    Changes in operating assets and liabilities:
      Accounts receivable .....................................          1,704          (3,370)
      Inventories .............................................            824          (1,907)
      Prepaids and other current assets .......................            776            (702)
      Accounts payable ........................................           (860)          1,675
      Other accrued liabilities ...............................         (1,019)          1,981
      Deferred revenue ........................................          1,172             812
                                                                     ---------       ---------
        Net cash used in operating activities .................           (169)         (1,644)

Cash flows from investing activities:
  Purchases of property and equipment .........................           (833)         (1,502)
  Purchases of investments ....................................        (90,229)        (25,623)
  Proceeds from sale of investments ...........................        116,912          43,679
  Acquisition, net of cash acquired ...........................           --            (1,829)
  Other assets ................................................            428             (13)
                                                                     ---------       ---------
        Net cash provided by investing activities .............         26,278          14,712

Cash flows from financing activities:
  Net proceeds from issuance of common stock ..................            710           1,640
  Proceeds from stockholders' notes receivable ................             83             547
  Sale of stock to employees under the ESPP ...................          1,437           1,303
  Borrowings under line of credit .............................          5,107           2,343
  Repayments of line of credit ................................         (7,537)         (1,065)
  Proceeds from notes payable .................................            551            --
  Payments of notes payable ...................................            (62)         (2,600)
  Proceeds from lease financing ...............................           --               513
  Principal payments of capital lease obligations .............           (542)           (195)
                                                                     ---------       ---------
        Net cash provided by (used in) financing activities ...           (253)          2,486

Net increase in cash and cash equivalents .....................         25,856          15,554
Cash and cash equivalents at beginning of period ..............         24,273          19,554
                                                                     ---------       ---------
Cash and cash equivalents at end of period ....................      $  50,129       $  35,108
                                                                     =========       =========

Supplemental disclosures of cash flow information:
  Cash paid during period for interest ........................      $     431       $     364
                                                                     =========       =========
</TABLE>


      See accompanying notes to condensed consolidated financial statements.


                                       5
<PAGE>
                                 PACKETEER, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)
                                   (unaudited)

1.  BASIS OF PRESENTATION

    The accompanying unaudited condensed consolidated financial statements have
been prepared by Packeteer, Inc., pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and include the accounts of
Packeteer, Inc. and its wholly-owned subsidiaries ("Packeteer" or the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
rules and regulations. While in the opinion of the Company's management, the
unaudited financial statements reflect all adjustments (consisting of normal
recurring adjustments and an impairment adjustment related to goodwill and
intangible assets) necessary for a fair statement of interim periods presented,
these financial statements and notes should be read in conjunction with the
audited consolidated financial statements and notes thereto, included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000 filed
with the SEC on March 29, 2001.

    The results of operations for the three and nine months ended September 30,
2001 are not necessarily indicative of results that may be expected for any
other interim period or for the full fiscal year ending December 31, 2001.


2.  NET LOSS PER SHARE

    Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period,
less the weighted-average number of shares of common stock that are subject to
repurchase and in escrow related to the acquisition of Workfire International
Technologies, Inc. in September 2000. All warrants for common stock, outstanding
stock options and shares subject to repurchase have been excluded from the
calculation of diluted net loss per share as their inclusion would be
antidilutive for all periods presented.

    The following table presents the calculation of basic and diluted net loss
per share:

<TABLE>
<CAPTION>
                                                                    Three Months Ended            Nine Months Ended
                                                                        September 30,                September 30,
                                                                  -----------------------       -----------------------
                                                                    2001           2000           2001           2000
                                                                  --------       --------       --------       --------
<S>                                                               <C>            <C>            <C>            <C>
Numerator:
  Net loss .................................................      $(54,282)      $ (1,141)      $(70,155)      $ (3,164)
                                                                  ========       ========       ========       ========
Denominator:
  Basic and diluted:
     Weighted-average shares of common stock outstanding ...        29,723         27,857         29,495         27,232
     Less: shares held in escrow ...........................          --              183           --              183
     Less: shares subject to repurchase ....................            45            426             45            426
                                                                  --------       --------       --------       --------
       Weighted-average shares used in computing basic .....        29,678         27,248         29,450         26,623
                                                                  ========       ========       ========       ========
          and diluted net loss per share

  Basic and diluted net loss per share .....................      $  (1.83)      $  (0.04)      $  (2.38)      $  (0.12)
                                                                  ========       ========       ========       ========
</TABLE>

                                       6
<PAGE>

    The following potential common shares have been excluded from the
computation of diluted net loss per share for all periods presented because the
effect would have been antidilutive:

<TABLE>
<CAPTION>
                                                            Three Months Ended    Nine Months Ended
                                                              September 30,         September 30,
                                                            ------------------    -----------------
                                                             2001       2000       2001       2000
                                                             -----      -----      -----      -----
<S>                                                          <C>        <C>        <C>        <C>
     Shares issuable under stock options ..............      3,951      3,635      3,951      3,635
     Shares of unvested stock subject to repurchase ...         45        426         45        426
     Shares issuable pursuant to warrants to purchase
         common stock .................................         45         45         45         45
     Shares held in escrow ............................       --          183       --          183
</TABLE>


    The weighted average exercise price of stock options outstanding was $16.18
and $17.89 as of September 30, 2001 and 2000, respectively. The weighted average
exercise price of unvested stock subject to repurchase was $1.06 and $0.54 as of
September 30, 2001 and 2000, respectively. The weighted average exercise price
of warrants to purchase common stock was $6.25 and $3.58 as of September 30,
2001 and 2000, respectively.

3.   OTHER COMPREHENSIVE LOSS

    The Company reports comprehensive income or loss in accordance with the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and loss and its
components in financial statements. Comprehensive income or loss, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources.

<TABLE>
<CAPTION>
                                                     Three Months Ended             Nine Months Ended
                                                        September 30,                 September 30,
                                                   -----------------------       -----------------------
                                                     2001           2000           2001           2000
                                                   --------       --------       --------       --------
<S>                                                <C>            <C>            <C>            <C>
     Net loss ...............................      $(54,282)      $ (1,141)      $(70,155)      $ (3,164)
     Unrealized gain on investments .........           101             80             49             55
                                                   --------       --------       --------       --------
     Comprehensive loss .....................      $(54,181)      $ (1,061)      $(70,106)      $ (3,109)
                                                   ========       ========       ========       ========
</TABLE>

    The tax effects of components of other comprehensive loss are not considered
material. The only component of accumulated other comprehensive loss was
unrealized gains (losses) from investments.

4.  SEGMENT REPORTING

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

    The Company operates in the United States and internationally and derives
its revenue from the sale of products and software licenses. The Company's
sales, marketing, and development efforts have been focused on the PacketShaper
family of products and PacketWiseTM software. For the three months ended
September 30, 2001, sales to Alternative Technology, Inc. and Westcon accounted
for 26% and 11% of net revenues, respectively. For the nine months ended
September 30, 2001, one customer, Alternative Technology, Inc., accounted for
21% of net revenues. In the prior year, one customer, Intel Corporation
accounted for 12% of net revenues for the quarter ended September 30, 2000. No
single customer accounted for more than 10% of net revenues for the nine months
ended September 30, 2000.

                                       7
<PAGE>
Geographic Information
<TABLE>
<CAPTION>
                                               Three Months Ended         Nine Months Ended
                                                   September 30,             September 30,
                                              --------------------      --------------------
                                               2001          2000         2001         2000
                                              -------      -------      -------      -------
<S>                                           <C>          <C>          <C>          <C>
   Net revenues:
     North America .....................      $ 5,046      $ 4,489      $15,617      $11,803
     Asia Pacific ......................        2,903        3,609        9,243        8,623
     Europe and rest of world ..........        2,979        3,406       10,337        7,346
                                              -------      -------      -------      -------
        Net revenues ...................      $10,928      $11,504      $35,197      $27,772
                                              =======      =======      =======      =======
</TABLE>

    Net revenues reflect the destination of the shipped product.

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

5.  IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES

    The Company records goodwill when the cost of net identifiable assets
acquired exceeds the fair value of the assets. Goodwill and the cost of
identified intangible assets are amortized on a straight-line basis over
estimated useful lives. The Company regularly performs reviews to determine if
the carrying value of these assets is impaired. The purpose for the review is to
identify any facts or circumstances, either internal or external, which indicate
that the carrying value of the assets cannot be recovered

    During the third quarter of 2001, the Company performed an assessment of the
carrying value of the goodwill and other intangible assets related to its
acquisition of Workfire Technologies International, Inc. The assessment was
performed pursuant to SFAS No. 121 based on management's determination of the
existence of impairment indicators including continued general economic slowing,
the general decline in technology valuations and a review of current, historical
and future projections of cash flows related to these assets. The conclusion of
the assessment was a determination that the carrying value of the goodwill and
other intangible assets exceeded its fair value. The fair value was determined
based on Company projections of the present value of future net cash flows
expected to be generated from these assets. Accordingly, the Company recorded an
impairment charge of $52,552 during the quarter for the entire balance.

6.  RECENT ACCOUNTING PRONOUNCEMENTS

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

    In July, 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after September 30, 2001. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Thus
amortization of goodwill will cease upon adoption of that Statement, which for
Packeteer will be January 1, 2002.

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


                                       8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

    OVERVIEW

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

    Packeteer's products are deployed by Global 2000 corporations and service
providers, and sold through an established network of more than 100 VARs,
distributors, system-integrators and OEMs in more than 50 countries. Our
products are built on hardware platforms based on Intel-compatible
microprocessor technologies. In addition, PacketWise software is licensed by
major communications industry partners who integrate the software into specific
strategic networking solutions. We primarily use indirect channels, VARs,
distributors, system integrators and OEMs to leverage the reach of our sales
force and to obtain worldwide coverage. Our sales and marketing efforts are used
to develop brand awareness and support our indirect channels. We have
subsidiaries in Hong Kong, Japan, Singapore, The Netherlands, the United
Kingdom, Denmark, Germany, Australia, France, Caymans and Canada. To date, we
have shipped more than 15,000 units.

    We were incorporated in January 1996. From our inception through January
1997, our operating activities related primarily to establishing a research and
development organization, developing and testing prototype designs, establishing
a sales and marketing organization and developing customer, vendor and
manufacturing relationships. We shipped our first product in February 1997.
Since then, we have focused on developing additional products and product
enhancements, building our worldwide indirect sales channel and establishing our
sales, marketing and customer support organizations. Since inception, we have
incurred significant losses and as of September 30, 2001, had an accumulated
deficit of $106.3 million.

    In order to further the growth of our business, we sold 4.6 million shares
of common stock in our initial public offering on July 28, 1999, which raised
approximately $62.6 million, net of fees and expenses.

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


                                       9
<PAGE>
    RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                        Three months ended       Nine months ended
                                                          September 30,            September 30,
                                                        ------------------       -----------------
                                                        2001         2000        2001        2000
                                                        ----         ----        ----        ----
<S>                                                      <C>         <C>         <C>         <C>
     Net revenues ................................       100%        100%        100%        100%

     Cost of revenues ............................        29          31          31          31
     Amortization of acquired technology .........        --           1           3          --
                                                        ----        ----        ----        ----
          Total cost of revenues .................        29          32          34          31

          Gross margin ...........................        71          68          66          69

     Operating expenses:
       Research and development ..................        30          19          26          21
       Sales and marketing .......................        48          45          48          48
       General and administrative ................        13          11          12          13
       Amortization of goodwill ..................        --           8          31           3

       Impairment of goodwill and intangibles ....       481          --         149          --
       Amortization of stock-based compensation ..         2           3           3           4
                                                        ----        ----        ----        ----
          Total operating expenses ...............       574          86         270          89
                                                        ----        ----        ----        ----
     Loss from operations ........................      (503)        (18)       (204)        (20)

     Other income, net ...........................         6           8           5           9
                                                        ----        ----        ----        ----
     Net loss ....................................      (497)%       (10)%      (199)%       (11)%
                                                        ====        ====        ====        ====
</TABLE>

    NET REVENUES

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

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

    Maintenance revenue on product sales is allocated and deferred based on
vendor specific objective evidence of fair value, generally established based on
renewal rates. The deferred revenues are then recognized ratably over the term
of the maintenance period.

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

Revenue recognition for software transactions is accounted for pursuant to the
American Institute of Certified Public Accountants' (AICPA) Statement of
Position (SOP) 97-2, "Software Revenue Recognition" as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions." SOP 97-2 generally requires revenue earned on software
arrangements involving multiple-elements to be allocated to each element based
on its relative fair value. The fair value of the element


                                       10
<PAGE>

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

    Net revenues decreased to $10.9 million in the three months ended September
30, 2001 from $11.5 million in the same quarter in the prior year, a decline of
5%. The decline for the quarter was due to a decrease in units shipped,
partially offset by a more favorable product mix. Net revenues increased to
$35.2 million in the nine months ended September 30, 2001 from $27.8 million in
the same period in the prior year, an increase of 27%. The year-to-date increase
was due primarily to a more favorable product mix, in addition to an increase in
units shipped.

    For the three months ended September 30, 2001, sales to Alternative
Technology, Inc. and Westcon accounted for 26% and 11% of net revenues,
respectively. For the nine months ended September 30, 2001, one customer,
Alternative Technology, Inc., accounted for 21% of net revenues. In the prior
year, one customer, Intel Corporation., accounted for 12% of net revenues for
the quarter ended September 30, 2000. No single customer accounted for more than
10% of net revenues for the nine months ended September 30, 2000. Sales to the
top 10 indirect channel partners accounted for 57% and 38% of net revenues in
the nine months ended September 30, 2001 and 2000, respectively.

    COST OF REVENUES

    Our cost of revenues consists primarily of the cost of finished products
purchased from our turnkey manufacturer and overhead costs. We outsource the
manufacturing of our products. Our cost of revenues decreased to $3.2 million in
the three months ended September 30, 2001 from $3.5 million for the same quarter
in the prior year, a decrease of 11%. This decrease reflected lower units
shipped, as well as declining manufacturing costs. Our cost of revenues
increased to $10.9 million in the nine months ended September 30, 2001 from $8.6
million in the nine months ended September 30, 2000, an increase of 26%. The
increase was due primarily to increases in units shipped and personnel related
and other cost increases in the customer support and manufacturing operations
functions. As a percentage of sales, the cost of revenues was 31% in both the
nine month periods ended September 30, 2001 and 2000.

    AMORTIZATION OF ACQUIRED TECHNOLOGY

    Amortization of acquired technology relates to the acquired developed
technologies of Workfire Technologies International, Inc. ("Workfire"). The
acquisition occurred in September 2000. There was no amortization during the
third quarter of 2001 due to the impairment reduction discussed below under
"Impairment of Goodwill and Other Intangibles". The amortization of acquired
technology was $1.2 million in the nine months ended September 30, 2001. The
amortization of acquired technology was $78,000 in the three and nine month
periods ended September 30, 2000.

    RESEARCH AND DEVELOPMENT

    Research and development expenses consist primarily of salaries and related
personnel expenses, consultant fees, prototype and other program expenses
related to the design, development, testing and enhancement of the PacketShaper,
AppVantage and AppCelera products and PacketWise software. Research and
development increased to $3.3 million in the three months ended September 30,
2001 from $2.3 million in the same quarter of the prior year, an increase of
45%. This increase includes program related charges and, to a lesser extent,
personnel related costs. For the nine months ended September 30, 2001, research
and development expenses of $9.2 million increased $3.2 million, or 53%, from
the $6.0 million in the same period in the prior year. The increase was due
primarily to increases in staffing and related personnel costs, as well as
program related charges. Research and development represented 26% and 21% of net
revenues in the nine months ended September 30, 2001 and 2000, respectively. As
of September 30, 2001, all research and development costs have been expensed as
incurred. Research and development expenses are expected to decline slightly in
the near future.

    SALES AND MARKETING

    Sales and marketing expenses consist primarily of salaries, commissions and
related personnel expenses for those engaged in the sales and marketing of the
product as well as related trade show, promotional and public relations
expenses. Sales and marketing expenses of $5.2 million were essentially
unchanged when compared to the $5.2 million reported for the three months ended


                                       11
<PAGE>

September 30, 2000. Sales and marketing expenses increased to $16.9 million in
the nine months ended September 30, 2001, up $3.7 million, or 27%, from the
$13.2 million in the first nine months of the prior year. The increase reflects
the hiring of additional personnel in connection with building our sales force,
and increased channel and marketing activities. Sales and marketing expenses
represented 48% of net revenues in both the nine month periods ended September
30, 2001 and 2000. We intend to continue to invest in appropriate sales and
marketing campaigns and therefore expect our absolute dollar expenses to
increase in the future.

    GENERAL AND ADMINISTRATIVE

    General and administrative expenses consist primarily of salaries and
related personnel expenses for administrative personnel, professional fees and
other general corporate expenses. General and administrative expenses increased
to $1.4 million in the three months ended September 30, 2001 from $1.2 million
in the same quarter of the prior year, an increase of 16%. For the first nine
months of 2001, general and administrative expenses were $4.3 million, up 23%
from the $3.5 million in the same period of the prior year. This increase is
primarily related to increases in staffing and related personnel costs. General
and administrative expenses represented 12% and 13% of net revenues in the nine
months ended September 30, 2001 and 2000, respectively. This percentage decrease
was primarily due to increased net revenues. We expect our general and
administrative expenses to remain at current dollar levels in the near future.

    STOCK-BASED COMPENSATION

    Stock-based compensation resulted primarily from stock option grants to
employees and options assumed in the Workfire acquisition. Stock-based
compensation is being amortized to expense in accordance with FASB
Interpretation No. 28 over the vesting period of the individual options,
generally four years. We recorded stock-based compensation expense of $237,000
and $375,000 in the three months ended September 30, 2001 and 2000,
respectively. For the nine months ended September 30, 2001 and 2000, stock based
compensation expense was $1.0 million and $1.1 million, respectively. As of
September 30, 2001, there is $625,000 remaining to be amortized in future
periods.

    AMORTIZATION OF GOODWILL

    In connection with the Workfire acquisition, 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 the nine months ended
September 30, 2001. There was no amortization during the third quarter, due to
an impairment charge discussed below.

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


    IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES

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

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

    OTHER INCOME, NET

    Other income, net consists primarily of interest income from our cash and
investments, net of interest expense related to our line of credit, debt and
capital lease obligations. Other income, net decreased to $696,000 in the three
months ended September 30, 2001 from $938,000 in the same quarter in the prior
year, a decrease of 26%, primarily a result of lower yields on invested funds.
Other


                                       12
<PAGE>

income, net of $1.7 million for the nine-month period ended September 30, 2001
decreased $900,000 from the $2.6 million for the comparable period in the prior
year. This decrease was due primarily to the $545,000 loss on the disposition of
$3.0 million of defaulted Southern California Edison notes, as well as lower
yields and lower average cash balances.

    LIQUIDITY AND CAPITAL RESOURCES

    Since inception, we have financed our operations primarily from the sale of
preferred and common stock and other financing activities such as bank credit
against accounts receivable, subordinated debt offerings and capital equipment
leasing and loans. Cash, cash equivalents and investments totaled approximately
$61.4 million at September 30, 2001, a decrease of $800,000 from December 31,
2000. The decrease primarily reflects payments of financing obligations.

    We have entered into leases to finance the acquisition of computer software
and hardware, and furniture. As of September 30, 2001, approximately $2.0
million was outstanding under capital lease obligations related to lease
agreements. We also have a revolving credit facility against accounts
receivable, which provides for borrowings of up to $10.0 million. This facility
expires on January 9, 2002. Borrowings under this credit facility bear interest
at the prime rate, which was 6.0% as of September 30, 2001, are due upon demand
and are secured by substantially all of our assets. At September 30, 2001, we
had borrowed approximately $1.2 million against this credit facility.

    In August 2001, we secured a $551,000 equipment loan. Borrowings under this
agreement are collateralized by the equipment, bear interest at the rate of
11.1%, and are repayable in monthly installments over a three-year period. At
September 30, 2001, approximately $539,000 was outstanding under this facility.

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

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

    RECENT ACCOUNTING PRONOUNCEMENTS

    The impact of recent accounting pronouncements is discussed in Note 6 of the
notes to condensed consolidated financial statements.

    FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

     -    execute our sales and marketing strategy;

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


                                       13
<PAGE>

     -    expand our domestic and international sales efforts.

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

    We have incurred losses since we commenced operations in 1996 and may never
achieve profitability. Furthermore, we currently expect that our operating
expenditures will continue to increase and we may not generate a sufficient
level of revenues to offset these expenditures or be able to adjust spending in
a timely manner to respond to any unanticipated decline in revenues. We incurred
net losses of $9.4, $10.9 and $8.8 million in 2000, 1999 and 1998, respectively.
For the nine months ended September 30, 2001, we incurred a net loss of $70.2
million, including a $52.6 million goodwill impairment charge, and as of
September 30, 2001 we had an accumulated deficit of $106.3 million. Although our
revenues have grown over time, we cannot be certain when or if we will realize
sufficient revenues to achieve profitability. If revenues grow slower than we
anticipate or if operating expenditures exceed our expectations or cannot be
adjusted accordingly, we may continue to experience significant losses on a
quarterly and annual basis. Even if we achieve profitability, we cannot provide
assurance that we can sustain or increase profitability on a quarterly or annual
basis in the future.

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

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

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

    -   the amount and timing of revenues from OEMs;

    -   the mix of products we sell;

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

    -   the average selling prices of our products; and

    -   the amount and timing of our operating expenses.

    In the past, we have experienced fluctuations in operating results. These
fluctuations resulted primarily from variations in the mix of products sold and
variations in channels through which products were sold and most recently, a
delay in customer orders and reductions in our customers' information technology
budgets due to slowing in the global economy. Research and development expenses
have fluctuated due to increased prototype expenses and consulting fees related
to the launch of new products, increased personnel expenses and program related
charges. Sales and marketing expenses have fluctuated due to increased personnel
expenses, expenditures related to trade shows and the launch of new products.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for detailed information on our operating results.

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

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

If revenues forecasted in a particular quarter do not occur in that quarter, our
operating results for that quarter could be adversely affected. Furthermore,
because our expense levels are based on our expectations as to future revenue
and to a large extent are fixed in


                                       14
<PAGE>

the short term, a substantial reduction or delay in sales of our products or the
loss of any significant indirect channel partner could harm our business.

IF THE APPLICATION PERFORMANCE INFRASTRUCTURE SOLUTIONS MARKET FAILS TO GROW,
OUR BUSINESS WILL FAIL

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

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

    The failure of our indirect channel partners to sell our products
internationally will harm our business. Sales to customers outside of North
America accounted for 56% of our net revenues in the nine months ended September
30, 2001 and more than half of our net revenues for fiscal 2000 and 1999. Our
ability to grow will depend in part on the expansion of international sales,
which will require success on the part of our VARs, distributors, systems
integrators and OEMs in marketing our products.

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

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

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

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

    We rely primarily on an indirect distribution channel consisting of VARs,
distributors, systems integrators and OEMs for all of our revenues. Because many
of our indirect channel partners also sell competitive products, our success and
revenue growth will depend 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 significantly. We cannot assure you
that this internal expansion will be successfully completed, that the cost of
this expansion will not exceed the revenues generated or that our expanded sales
and support staff will be able to compete successfully against the significantly
more extensive and well-funded sales and marketing operations of many of our
current or potential competitors. In addition, our indirect channel agreements
are generally not exclusive and one or more of our channel partners may compete
directly with another channel partner for the sale of our products in a
particular region or market. This may cause such channel partners to stop or
reduce their efforts in marketing our products. Our inability to effectively
establish or manage our distribution channels would harm our sales.


                                       15
<PAGE>
IF WE ARE NOT ABLE TO MAINTAIN CURRENT AND FUTURE OEM RELATIONSHIPS, OUR
BUSINESS WILL BE HARMED

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

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

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

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

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

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

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

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

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

    -   reduced control over delivery schedules;

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

    -   manufacturing yields and costs;

    -   quality assurance; and


                                       16
<PAGE>

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

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

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

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

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

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

SALES TO LARGE CUSTOMERS WOULD BE DIFFICULT TO REPLACE IF LOST

    A limited number of indirect channel partners have accounted for a large
part of our revenues to date and we expect that this trend will continue.
Because our expense levels are based on our expectations as to future revenue
and to a large extent are fixed in the short term, any significant reduction or
delay in sales of our products to any significant indirect channel partner or
unexpected returns from these indirect channel partners could harm our business.
Sales to one customer, Alternative Technology, Inc., accounted for 21% of net
revenues in the nine months ended September 30, 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.

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

    If the benefits of the merger of Workfire into our company do not exceed the
costs of the merger, including dilution to our stockholders resulting from the
issuance of shares in connection with the merger, our financial results,
including earnings per share, could be adversely affected. We are not certain
that we will be able to achieve our financial estimates if the anticipated
revenue from the sale of products containing technology or other intellectual
property acquired in the merger is not realized.

    During the third quarter of 2001, the Company performed an assessment of the
carrying value of the goodwill and other intangible assets related to its
acquisition of Workfire Technologies International, Inc. The assessment was
performed pursuant to SFAS 121


                                       17
<PAGE>

based on management's determination of the existence of impairment indicators
including continued general economic slowing, and a review of current,
historical and future projections of cash flows related to these assets, as well
as the general decline in technology valuations. 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 undiscounted future net cash flows expected to be
generated from these assets. Accordingly, the Company recorded an impairment
charge of $52.6 million during the quarter.

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

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

    -   the integration of our company and Workfire is unsuccessful;

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

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

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

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

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

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

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

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

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

    We may not successfully overcome problems encountered in connection with
potential acquisitions. In addition, acquisitions could harm our operating
results by diluting our stockholders' equity and require us to record impairment
charges on goodwill and intangible assets.

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

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


                                       18
<PAGE>

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

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

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

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

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

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

    -   develop and maintain competitive products;

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

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

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

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


                                       19
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

    Our success depends significantly upon our proprietary technology and our
failure or inability to protect our proprietary technology would result in
significant harm to our business. We rely on a combination of patent, copyright
and trademark laws, and on trade secrets and confidentiality provisions and
other contractual provisions to protect our proprietary rights. These measures
afford only limited protection. As of September 30, 2001, we have seven issued
U.S. patents and sixteen pending patent applications. Our means of protecting
our proprietary rights in the U.S. or abroad may not be adequate and competitors
may independently develop similar technologies. Our future success will depend
in part on our ability to protect our proprietary rights and the technologies
used in our principal products. Despite our efforts to protect our proprietary
rights and technologies unauthorized parties may attempt to copy


                                       20
<PAGE>

aspects of our products or to obtain and use trade secrets or other information
that we regard as proprietary. Legal proceedings to enforce our intellectual
property rights could be burdensome and expensive and could involve a high
degree of uncertainty. These legal proceedings may also divert management's
attention from growing our business. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
U.S. Issued patents may not preserve our proprietary position. If we do not
enforce and protect our intellectual property, our business will suffer
substantial harm.

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

    We may be subject to claims by others that our products infringe on their
intellectual property rights. These claims, whether or not valid, could require
us to spend significant sums in litigation, pay damages, delay product
shipments, reengineer our products or acquire licenses to such third-party
intellectual property. We may not be able to secure any required licenses on
commercially reasonable terms, or at all. We expect that we will increasingly be
subject to infringement claims as the number of products and competitors in the
application performance infrastructure 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 performance infrastructure solutions is
characterized by the need to support industry standards as these different
standards emerge, evolve and achieve acceptance. In the United States, our
products must comply with various regulations and standards defined by the
Federal Communications Commission and Underwriters Laboratories.
Internationally, products that we develop may be required to comply with
standards established by telecommunications authorities in various countries as
well as with recommendations of the International Telecommunication Union. To
remain competitive we must continue to introduce new products and product
enhancements that meet these emerging U.S. and international standards. However,
in the future we may not be able to effectively address the compatibility and
interoperability issues that arise as a result of technological changes and
evolving industry standards. Failure to comply with existing or evolving
industry standards or to obtain timely domestic or foreign regulatory approvals
or certificates could harm our business.

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

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

    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

    POWER OUTAGES IN CALIFORNIA MAY ADVERSELY AFFECT US

    We have significant operations, including our headquarters, contract
manufacturer and order fulfillment vendor in the state of California and are
dependent on a continuous power supply. California's current energy crisis could
substantially disrupt our


                                       21
<PAGE>

operations and increase our expenses. California's power suppliers have recently
implemented, and may in the future continue to implement, rolling blackouts
throughout the state. If blackouts interrupt our power supply, we may be
temporarily unable to continue operations at our California facilities. Any such
interruption in our ability to continue operations at our facilities could delay
the development and delivery of our products and services and otherwise disrupt
communications with our customers or other third parties on whom we rely. Future
interruptions could damage our reputation and could result in lost revenue,
either of which could substantially harm our business and results of operations.
Furthermore, shortages in wholesale electricity supplies have caused power
prices to increase. If energy prices continue to increase, our operating
expenses will likely increase which could have a negative effect on our
operating results.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

    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. Our general policy is to limit the risk
of principal loss and ensure the safety of invested funds by limiting credit and
market risk. Specifically, we place our investments with issuers we believe to
be of high quality and, by policy, limit the amount of the credit exposure to
any one issuer and limit market risk by limiting duration of any single
investment at 3 years. The Company does not use derivative financial instruments
in its investment portfolio.

    All highly liquid investments with less than three months to maturity from
date of purchase are considered to be cash equivalents; investments with
maturities between three and twelve months are considered to be short-term
investments; and investments with maturities in excess of twelve months are
considered to be long-term investments. We do not expect any material loss with
respect to our investment portfolio. The following table presents the amounts of
cash equivalents and investments that are subject to market risk by range of
expected maturity and weighted average interest rates.

<TABLE>
<CAPTION>
                                                                      September 30, 2001             December 31, 2000
                                                                  -------------------------     --------------------------
                                                                                Weighted-                      Weighted-
                                                                  Carrying       Average        Carrying        Average
                                                                   Amount     Interest Rate      Amount      Interest Rate
                                                                  ---------   -------------     ---------    -------------
<S>                                                                 <C>            <C>            <C>             <C>
Cash equivalents:
  Commercial paper and medium-term notes....................        $50,066        2.96%          $20,999         6.68%
Short-term investments:
  Commercial paper, corporate notes and bonds ..............          4,605         5.85           32,183         6.95
Long-term investments:
  Corporate and US government...............................          6,694        5.26             5,750         7.33
                                                                  ---------                     ---------
      Total investment securities...........................      $  61,356        3.42         $  58,932         6.89
                                                                  =========                     =========
</TABLE>

    Foreign Exchange

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

PART II   OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

    (d) Use of Proceeds from Sales of Registered Securities. Packeteer commenced
its initial public offering ("IPO") on July 28, 1999 pursuant to a Registration
Statement on Form S-1 (File No. 333-79077). In the IPO, Packeteer sold an
aggregate of 4.6 million shares of common stock (including an over allotment
option of 600,000 shares) at $15.00 per share.

    The sale of the shares of common stock generated aggregate gross proceeds of
approximately $69.0 million. The aggregate net proceeds were approximately $62.6
million, after deducting underwriting discounts and commissions of approximately
$4.8 million and expenses of the offering of approximately $1.6 million. Of the
net proceeds, Packeteer has used $5.0 million to repay two


                                       22
<PAGE>

separate notes payable of $2.5 million each and has used $1.8 million for
transaction costs in connection with the acquisition of Workfire. The remaining
$55.1 million of the net proceeds are expected to be used for general corporate
purposes, including working capital, product development and capital
expenditures. The amounts actually expended for such purposes may vary
significantly and will depend on a number of factors described under "Factors
That May Affect Future Results". A portion of the net proceeds may also be used
to acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies, however, Packeteer has no agreements or
commitments with respect to any such acquisition or investments and we are not
currently engaged in any material negotiations with respect to any such
transaction. Pending such uses, the net proceeds of the IPO have been invested
in short and long-term, interest bearing, investment grade securities. None of
Packeteer's net proceeds of the IPO were paid directly or indirectly to any
director, officer, general partner of the Company or their associates, persons
owning 10% or more of any class of equity securities of Packeteer, or an
affiliate of Packeteer.

ITEM 6.  Exhibits and Reports on Form 8-K

    (a) EXHIBITS

        None

    (b) REPORTS ON FORM 8-K

        None

                                   SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Quarterly Report on Form 10-Q to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Cupertino, State of California, on this 31st day of October, 2001.

                                    PACKETEER, INC.


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



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