<PAGE>   1

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


                                    FORM 10-Q

[X]      Quarterly report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000

                                       or

[ ]      Transition report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

                  For the transition period from _____ to _____

                         COMMISSION FILE NUMBER _-_____

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

                  DELAWARE                                   77-0420107
       (State or other jurisdiction of                   (I.R.S. Employer
       incorporation or organization)                 Identification Number)

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

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

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 [ ]

There were 27,106,943 shares of the Company's Common Stock, par value $0.001,
outstanding on April 10, 2000.


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                                                                          Page 1
<PAGE>   2


                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                               PAGE NO.
                                                                               --------
<S>     <C>                                                                    <C>
PART I                       FINANCIAL INFORMATION

Item 1. Financial Statements:

        Condensed Consolidated Balance Sheets as of March 31, 2000 and
        December 31, 1999.....................................................     3

        Condensed Consolidated Statements of Operations for the Three
        Months Ended March 31, 2000 and March 31, 1999........................     4

        Condensed Consolidated Statements of Cash Flows for the Three
        Months Ended March 31, 2000 and March 31, 1999 .......................     5

        Notes to Condensed Consolidated Financial Statements..................     6

Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations.................................................     8

        Factors That May Affect Future Results...............................     12

Item 3. Quantitative and Qualitative Disclosures About Market Risk...........     21

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 including 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 23,
2000 as filed with the SEC. While this outlook represents our current judgement
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. See "Factors that may affect future results" below as well as "Risk
Factors" in Packeteer's Annual Report on Form 10-K dated March 23, 2000 as filed
with the SEC.


                                                                          Page 2
<PAGE>   3


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                March 31,       December 31,
                                                                  2000              1999
                                                               -----------      ------------
                                                               (Unaudited)
<S>                                                            <C>              <C>
ASSETS
Current assets:
  Cash and cash equivalents                                     $ 38,783          $ 19,554
  Short-term investments                                          19,189            37,918
  Accounts receivable, less allowance for doubtful
    accounts of $216 and $217, as of March 31, 2000 and
    December 31, 1999                                              3,606             3,931
  Inventories                                                        853               523
  Prepaids and other current assets                                1,042               506
                                                                --------          --------
          Total current assets                                    63,473            62,432
Property and equipment, net                                          880               755
Long-term investments and other assets                             7,549             7,919
                                                                --------          --------
Total assets                                                    $ 71,902          $ 71,106
                                                                ========          ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Line of credit                                                $  1,643          $  1,890
  Current portion of capital leases obligations                      403               339
  Current portion of notes payable                                 2,530             2,524
  Accounts payable                                                   815             1,302
  Accrued compensation                                             1,026             1,480
  Other accrued liabilities                                        3,844             2,400
  Deferred revenue                                                 1,397             1,212
                                                                --------          --------
          Total current liabilities                               11,658            11,147

Long-term liabilities                                                767               839

Preferred stock; $0.001 par value; 5,000 shares
  authorized; no shares issued and outstanding                        --                --
Common stock; $0.001 par value; 85,000 shares
  authorized; 27,107 and 26,792 shares issued
  and outstanding at March 31, 2000 and
  December 31, 1999, respectively                                     27                27
Additional paid-in capital                                        90,170            88,848
Accumulated other comprehensive loss                                (106)              (58)
Deferred stock-based compensation                                 (1,810)           (2,138)
Notes receivable from stockholders                                  (506)             (738)
Accumulated deficit                                              (28,298)          (26,821)
                                                                --------          --------
Total stockholders' equity                                        59,477            59,120
                                                                --------          --------
Total liabilities and stockholders' equity                      $ 71,902          $ 71,106
                                                                ========          ========
</TABLE>


   See accompanying notes to the condensed consolidated financial statements.


                                                                          Page 3
<PAGE>   4


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


<TABLE>
<CAPTION>
                                                Three months ended
                                                     March 31,
                                             -------------------------
                                               2000             1999
                                             --------          -------
<S>                                          <C>               <C>
Net revenues:
  Product revenues                           $  6,790          $ 2,724
  Licensing revenues                              366              375
                                             --------          -------
          Total net revenues                    7,156            3,099

Cost of revenues                                2,253              854
                                             --------          -------

Gross profit                                    4,903            2,245

Operating expenses:
  Research and development                      1,722              955
  Sales and marketing                           3,805            2,429
  General and administrative                    1,209              533
  Stock-based compensation                        381              865
                                             --------          -------
          Total operating expenses              7,117            4,782
                                             --------          -------

Net loss from operations                       (2,214)          (2,537)

Other income, net                                 737               14
                                             --------          -------
Net loss                                     $ (1,477)         $(2,523)
                                             ========          =======

Basic and diluted net loss per share         $  (0.06)         $ (0.35)
                                             ========          =======
Shares used in computing basic and
     diluted net loss per share                26,125            7,271
                                             ========          =======
</TABLE>


   See accompanying notes to the condensed consolidated financial statements.



                                                                          Page 4
<PAGE>   5


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


<TABLE>
<CAPTION>
                                                               Three months ended
                                                                    March 31,
                                                             -----------------------
                                                               2000           1999
                                                             --------        -------
<S>                                                          <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                     $ (1,477)       $(2,523)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
      Depreciation                                                160            124
      Other non-cash transactions                                 430            994
      Changes in operating assets and liabilities:
        Accounts receivable                                       325          1,313
        Inventories                                              (330)          (231)
        Prepaids and other current assets                        (536)          (100)
        Accounts payable and other accrued liabilities            503            (27)
        Deferred revenue                                          185           (298)
                                                             --------        -------
Net cash used in operating activities                            (740)          (748)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment                              (285)          (103)
Purchases of available-for-sale investments                   (10,472)            --
Sales of available-for-sale investments                        29,536          1,927
Other assets                                                      (13)             6
                                                             --------        -------
Net cash provided by investing activities                      18,766          1,830

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock                        629             28
Proceeds from stockholders' notes receivable                      232             38
Repurchase of common stock                                         --             (1)
Sale of stock to employees under the ESPP                         640             --
Borrowings under line of credit                                   170          1,145
Repayments of line of credit                                     (417)          (165)
Proceeds from notes payable                                        --          2,500
Payments of notes payable                                         (63)          (212)
Proceeds from lease financing                                      62            177
Principal payments of capital lease obligations                   (50)           (58)
                                                             --------        -------
Net cash provided by financing activities                       1,203          3,452
                                                             --------        -------
Net increase in cash and cash equivalents                      19,229          4,534
Cash and cash equivalents at beginning of period               19,554          2,550
                                                             --------        -------

Cash and cash equivalents at end of period                   $ 38,783        $ 7,084
                                                             ========        =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest                                       $    166        $    51
                                                             ========        =======
</TABLE>


   See accompanying notes to the condensed consolidated financial statements.



                                                                          Page 5
<PAGE>   6


                                 PACKETEER, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

        The condensed consolidated financial statements have been prepared by
Packeteer, Inc., pursuant to the rules and regulations of the Securities and
Exchange Commission and include the accounts of Packeteer, Inc. and its
wholly-owned subsidiaries ("Packeteer" or collectively the "Company"). 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 Packeteer, the unaudited financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position at March 31, 2000 and the operating
results and cash flows for the three months ended March 31, 2000 and 1999, these
financial statements and notes should be read in conjunction with Packeteer's
audited consolidated financial statements and notes thereto, included in
Packeteer's Annual Report on Form 10K for the year ended December 31, 1999 filed
with the Securities and Exchange Commission on March 23, 2000.

        The results of operations for the three months March 31, 2000 are not
necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year ending December 31, 2000.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH, CASH EQUIVALENTS AND INVESTMENTS

        We consider all highly liquid investment securities with maturities from
date of purchase of three months or less to be cash equivalents. Short-term
investments consist of debt securities with maturities between three months and
twelve months. Long-term investments consist of debt securities with maturities
greater than 12 months.

        Management determines the appropriate classification of investments at
the time of purchase and reevaluates such determination at each balance sheet
date. To date, all marketable securities have been classified as
available-for-sale and are carried at fair value with material unrealized gains
and losses, if any, included in stockholders' equity. Realized gains and losses
and declines in value of securities judged to be other than temporary are
included in other income, net. Interest and dividends on all securities are
included in other income, net.

REVENUE RECOGNITION

        We recognize product revenues, with provision made for estimated
returns, after the following events have occurred: the customer issues a
noncancelable purchase order; a product has been shipped to the customer; and
collection of the sales price is probable. Revenue from product maintenance
contract sales is deferred and recognized on a straight-line basis over the
contractual period. Amounts billed in excess of revenue recognized are included
as deferred revenue in the accompanying condensed consolidated balance sheets.

        For software transactions entered into after January 1, 1998, the
Company adopted the American Institute of Certified Public Accountants' (AICPA)
Statement of Position (SOP) 97-2, "Software Revenue Recognition" as modified by
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect
to Certain Transactions." SOP 97-2 generally requires revenue earned on software
arrangements involving multiple-elements to be allocated to each element based
on its relative fair value. The fair value of the element must be based on
objective evidence that is specific to the vendor. If a vendor does not have
objective evidence of the fair value of all elements in a multiple-element
arrangement, all revenue from the arrangement must be deferred until such
evidence exists or until all elements have



                                                                          Page 6
<PAGE>   7

been delivered, unless the only undelivered element is post-contract customer
support, in which case, the entire fee is recognized over the support period.

        Licensing revenues relate to OEM arrangements. We recognize OEM license
fees, which include post-contract customer support, when the software has been
shipped to the customer, the fees are fixed and determinable and there is
evidence of the fair value of the post-contract customer support. When
sufficient evidence of fair value of post-contract customer support is not
available, revenues are recognized ratably over the support period. When we do
not have sufficient evidence of fair value of post-contract customer support for
our OEM license arrangements, we recognize the revenues for these arrangements
over the support period.

        Service revenue is recognized ratably over the term of the contract as
the services are performed. To date, these amounts have not been significant.

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. All convertible preferred stock, warrants for convertible preferred
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 (in thousands):

<TABLE>
<CAPTION>
                                                                    Three months ended
                                                                         March 31,
                                                                  -----------------------
                                                                    2000           1999
                                                                  --------        -------
                                                                        (unaudited)
<S>                                                               <C>             <C>
Numerator:
     Net loss                                                     $ (1,477)       $(2,523)
                                                                  --------        -------
Denominator:
     Basic and diluted:
        Weighted-average shares of common stock outstanding         26,881          9,483
        Less: shares subject to repurchase                            (756)        (2,212)
                                                                  --------        -------
        Weighted-average shares used in computing basic
           and diluted net loss per share                           26,125          7,271
                                                                  --------        -------
     Basic and diluted net loss per share                         $  (0.06)       $ (0.35)
                                                                  --------        -------
</TABLE>

        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 (in thousands):

<TABLE>
<CAPTION>
                                                              Three months ended
                                                                    March 31,
                                                              ------------------
                                                               2000        1999
                                                              ------      ------
                                                                 (unaudited)
<S>                                                            <C>         <C>
        Shares issuable under stock options                    3,142       2,310
        Shares of unvested stock subject to repurchase           756       2,212
        Shares issuable pursuant to warrants to purchase
          convertible preferred stock                            143         156
        Shares of convertible preferred stock
          on an "as-if converted" basis                           --      12,391
</TABLE>



                                                                          Page 7
<PAGE>   8

        The weighted average exercise price per share of outstanding stock
options was $14.86 and $2.76 as of March 31, 2000 and 1999, respectively. The
weighted average purchase price per share of unvested stock was $0.51 and $0.34
as of March 31, 2000 and 1999, respectively. The weighted average exercise price
of the warrants was $3.58 and $2.92 as of March 31, 2000 and 1999, respectively.

OTHER COMPREHENSIVE INCOME

        The Company has $106 of net unrealized loss on change in the fair value
of available for sale securities which is a component of other comprehensive
loss.

SEGMENT INFORMATION

        The Company's chief 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.

        For the three months ended March 31, 2000 no one customer accounted for
more than 10% of total net revenues. For the three months ended March 31, 1999,
ADC Telecommunications, Nissho Electronics Corporation, and Macnica, Inc.
accounted for 12.1%, 10.8%, and 10.7% of total net revenues, respectively.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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

OVERVIEW

        Packeteer is a leading provider of Internet application infrastructure
systems designed to enable businesses and service providers to ensure the
quality of experience for networked applications and application services.
Packeteer's advanced PacketWise software, the foundation of the Company's
innovative PacketShaper and AppVantage systems, integrates application
discovery, analysis, control and reporting technologies that are required for
proactive application performance and bandwidth management.

        Packeteer's products are deployed today by leading companies and service
providers through an established network of more than 100 VARs, distributors and
system integrators in more than 50 countries. In addition, PacketWise software
is licensed by major communications industry partners who integrate the software
into specific strategic networking solutions. We have subsidiaries in Hong Kong,
Japan, The Netherlands, and Australia.

        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, the PacketShaper
2000, 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. We
began shipments of the PacketShaper 1000 and 4000 in October 1997. Since
inception, we have incurred



                                                                          Page 8
<PAGE>   9

significant losses and as of March 31, 2000, had an accumulated deficit of $28.3
million.

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

        We sell our products worldwide exclusively through VARs, distributors,
systems integrators and OEMs. We use indirect channels to leverage the reach of
our sales force to obtain worldwide coverage. Our sales force and marketing
efforts are used to develop brand awareness and support our indirect channels.

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                                                 MARCH 31,
                                                            ------------------
                                                             2000      1999
                                                             ----      ----
<S>                                                          <C>       <C>
Net revenues:

  Product revenues..................................          95%       88%
  Licensing revenues................................           5        12
                                                             ---       ---
       Total net revenues...........................         100       100
Cost of revenues....................................          31        28
                                                             ---       ---
Gross margin........................................          69        72
Operating expenses:
  Research and development..........................          24        31
  Sales and marketing...............................          53        78
  General and administrative........................          17        17
  Stock-based compensation..........................           5        28
                                                             ---       ---
       Total operating expenses.....................          99       154
                                                             ---       ---
Net loss from operations............................         (31)      (82)
Other income, net...................................          10         1
                                                             ---       ---
Net loss............................................         (21)%     (81)%
                                                             ===       ===
</TABLE>


Total net revenues

      Our total net revenues consist primarily of product sales and, to a lesser
extent, licensing fees from OEM partners. Our product revenues consist of sales
of our PacketShaper family of products. We recognize product revenues, with
provision made for estimated returns, after the following events have occurred:
the customer issues a noncancelable purchase order; a product has been shipped
to the customer; and collection of the sales price is probable. Maintenance
revenue is deferred and amortized over the period of the contract. Service
revenue is recognized as the services are performed. Maintenance and service
revenues to date have not been



                                                                          Page 9
<PAGE>   10

significant. We routinely analyze and provide, as necessary, reserves at the
time of shipment for product returns and allowances. We have estimated these
reserves based on our experience and other available information since we began
shipping. These amounts have not been significant to date. Our ability to
estimate these reserves is limited to the short history we have of shipping
products. Our licensing revenues currently consist of licensing fees and royalty
payments from unit sales of OEM products that incorporate our technology. We
recognize OEM license fees, which include post-contract customer support, when
the software has been shipped to the customer, the fees are fixed and
determinable and there is evidence of the fair value of the post-contract
customer support. When sufficient evidence of fair value of post-contract
customer support is not available, revenues are recognized ratably over the
support period. When we do not have sufficient evidence of fair value of
post-contract customer support for our OEM license arrangements, we recognize
the revenues for these arrangements over the support period.

        Total net revenues increased to $7.2 million in the three months ended
March 31, 2000 from $3.1 million in the three months ended March 31, 1999.
Product revenues increased to $6.8 million in the three months ended March 31,
2000 from $2.7 million in the three months ended March 31, 1999 due to the
increased number of units sold as a result of increased channel and market
development and product acceptance. Licensing revenues in the three months ended
March 31, 2000 remained approximately consistent as compared to the three months
ended March 31, 1999. Licensing revenue includes $241,000 of minimum royalty
payments received from our OEM partners.

        During the three months ended March 31, 2000, no one customer accounted
for more than 10% of total net revenues. Sales to the top 10 indirect channel
partners accounted for 45% and 54% of total net revenues for the three months
ended March 31, 2000 and March 31, 1999, respectively.

Cost of revenues

        Our cost of revenues consists primarily of the cost of finished products
purchased from our two turnkey manufacturers, documentation and other overhead
costs. We outsource the manufacturing of the PacketShaper 1000 and PacketShaper
2000 to PEMSTAR and the manufacturing of the PacketShaper 4000 to Sanmina. Our
cost of revenues increased $2.3 million in the three months ended March 31, 2000
from $854,000 in the three months March 31, 1999. The cost of revenues
represented 31% and 28% of total net revenues during the three months ended
March 31, 2000 and March 31, 1999, respectively. The percentage increase from
March 31, 1999 was due to increases in manufacturing costs.

Research and development

        Research and development expenses consist primarily of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development, testing and enhancement of the PacketShaper family of
products and PacketWise software. Research and development expenses increased to
$1.7 million for the three months ended March 31, 2000 from $1.0 million for the
three months ended March 31, 1999. The increase in research and development
expenses for the three months ended March 31, 1999 was due to increases in
personnel, consulting and related overhead costs. Research and development
expenses represented 24% and 31% of total net revenues for the three months
ended March 31, 2000 and March 31, 1999, respectively. These percentage
decreases were primarily due to increased total net revenues.

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

Sales and marketing

        Sales and marketing expenses consist primarily of salaries, commissions
and related personnel expenses for those engaged in the sales, marketing and
support of the product as well as related trade show, promotional and public



                                                                         Page 10
<PAGE>   11

relations expenses. Sales and marketing expenses increased to $3.8 million in
the three months ended March 31, 2000 from $2.4 million in the three months
ended March 31, 1999. The increase reflects the hiring of additional personnel
in connection with building our sales force, and channel and increased marketing
activities. Sales and marketing expenses represented 53% and 78% of total net
revenues for the periods March 31, 2000 and March 31, 1999, respectively. These
percentage decreases were due to increased total net revenues. We intend to
pursue sales and marketing campaigns aggressively and therefore expect our
absolute dollar expenses to increase in the future.

General and administrative

        General and administrative expenses consist primarily of salaries and
related personnel expenses for administrative personnel, professional fees and
other general corporate expenses. General and administrative expenses increased
to $1.2 million for the three months ended March 31, 2000 from $0.5 million for
the three months ended March 31, 1999. General and administrative expenses
represented 17% of total net revenues for both the three months ended March 31,
2000 and for the three months ended March 31 1999. As we continue to add
personnel and incur additional costs related to the growth of our business, we
expect our absolute dollar expenses to increase in the future.

Stock based compensation

        Amortization of stock-based compensation resulted from the granting of
stock options to employees and consultants with exercise prices per share
determined to be below the deemed fair value per share of our common stock on
the dates of grant for financial reporting purposes. The 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 $381,000
and $865,000 in the three months ended March 31, 2000 and March 31, 1999,
respectively, leaving $1.8 million to be amortized in future periods.

Other income, net

        Other income, net consists primarily of interest income on our cash and
investments offset by interest expense related on our line of credit, debt and
capital lease obligations. For the three months ended March 31, 2000, interest
income was $952,000 offset by interest expense of $215,000. For the three months
ended March 31, 1999, interest income was $93,000 offset by $79,000 in interest
expense. The increase in interest income relates to increased interest income
from our investments.

LIQUIDITY AND CAPITAL RESOURCES

        We have financed our operations primarily from the sale of preferred and
common stock and other financing activities such as bank credit against accounts
receivable, subordinated debt offerings and capital equipment leasing. Cash,
cash equivalents and investments totaled $65.3 million at March 31, 2000, an
increase of $58.3 million from March 31, 1999. The increase is due to the sale
of common stock in our initial public offering in July 1999 and debt financing,
partially offset by cash used in operations. Cash used in operating activities
for the three months ended March 31, 2000 and March 31, 1999 was approximately
$740,000 and $748,000, respectively.

        Net cash provided by investing activities was $18.8 million and $1.8
million for the three months ended March 31, 2000 and March 31, 1999,
respectively. The increase in net cash provided by investing activities is
primarily due to the sale of available-for-sale investments.

        Net cash provided by financing activities was $1.2 million and $3.5
million for the three months ended March 31, 2000 and March 31, 1999,
respectively. The decrease in net cash provided by financing activities is due
to decreased borrowings under our line of credit and subordinated debt
instruments.

        We expect to experience growth in our working capital needs for the
foreseeable future in order to execute our business plan. We anticipate that



                                                                         Page 11
<PAGE>   12

operating activities, as well as planned capital expenditures, will constitute a
partial use of our cash resources. In addition, we may utilize cash resources to
fund acquisitions or investments in complementary businesses, technologies or
products. We believe that our current cash, cash equivalents, investments and
cash generated from operations and available borrowings under our credit
facilities, will be sufficient to meet our anticipated cash requirements for
working capital and capital expenditures for at least the next 12 months.

Year 2000 Compliance

        Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. In order to
distinguish 21st century dates from 20th century dates, the date code field
needed to be expanded to 4 digits. As a result, many companies' software and
computer systems were upgraded or replaced in order to comply with these year
2000 requirements. The use of software and computer systems that are not year
2000 compliant could have resulted in system failures or miscalculations
resulting in disruptions of operations, including among other things, a
temporary inability to process transactions, send invoices, or engage in normal
business activities.

        To date, we have not suffered any disruptions in our computer systems or
software when the expanded date code field was first used on January 1, 2000. In
addition, to date, we have not been made aware that any third-party systems we
rely on, the manufacturing systems of our vendors or the systems our customers
use to order our services have suffered disruptions in their systems.

        To date, we have spent approximately $50,000 on year 2000 compliance. At
this time, we do not expect to incur future expenditures relating to year 2000
compliance matters.

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 original equipment
          manufacturers, or OEMs; and

        - expand our domestic and international sales efforts.

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

        We have incurred losses since we commenced operations in 1996 and may
never achieve profitability. Furthermore, we currently expect that our operating
expenditures will continue to increase significantly and we may not generate a
sufficient level of revenues to offset these expenditures or be able to adjust
spending in a timely manner to respond to any unanticipated decline in revenues.
We incurred net losses of $5.9 million in 1997, $8.8 million in 1998, and $10.9
million in 1999. For the three months ended March 31, 2000, we incurred a loss
of $1.5



                                                                         Page 12
<PAGE>   13

million and as of March 31, 2000 we had an accumulated deficit of $28.3 million.
Although our revenues have grown in recent quarters, we cannot be certain when
or if we will realize sufficient revenues to achieve profitability. If revenues
grow slower than we anticipate or if operating expenditures exceed our
expectations or cannot be adjusted accordingly, we may continue to experience
significant losses on a quarterly and annual basis. Even if we achieve
profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future.

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

        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 mix of products we sell;

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

        - the average selling prices of our products;

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

        - the amount and timing of revenues from OEMs; and

        - the amount and timing of our operating expenses.

        In the past, we have experienced fluctuations in operating results. For
example, gross margin decreased from 69.6% for the three months ended December
31, 1997 to 61.8% for the three months ended March 31, 1998, primarily due to
variations in the mix of products sold and variations in channels through which
products were sold. Research and development expenses have fluctuated due to
increased prototype expenses and consulting fees related to the launch of new
products, increased personnel expenses and costs associated with a facilities
move. Sales and marketing expenses have fluctuated due to increased personnel
expenses, expenditures related to trade shows and the launch of new products.

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

        The timing of our revenues is difficult to predict because of our
reliance on indirect sales channels and the variability of our sales cycle. The
length of our sales cycle for sales through our indirect channel partners to our
end users may vary substantially depending upon the size of the order and the
distribution channel through which our products are sold. We expect to have
difficulties in predicting revenues from OEMs because we are unable to forecast
unit sales of their products which incorporate our technology. Sales from our
VARs and systems integrators to end users typically take three to four months to
complete. We are dependent on timely and accurate inventory information from our
indirect channel partners to enable us to establish channel inventory reserves
for indirect channel partners whose inventory exceeds normal stocking levels. If
this inventory information is not timely or accurate, we could experience
increased levels of sales returns or unforecasted fluctuations in future
revenue.

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



                                                                         Page 13
<PAGE>   14

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

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

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

        We rely 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 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.

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.

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

        We may be unable to retain our current or future OEM partners.
Generally, OEM relationships can be terminated with little or no notice. Our
recent OEM agreements



                                    Page 14
<PAGE>   15

with ADC Telecommunications, Inc. and Adtran, Inc. are not exclusive and are
each for an initial term of five years, with no obligation for either ADC or
Adtran 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.

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

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

PACKETEER'S PRODUCT FAMILY CURRENTLY CONSISTS OF THE PACKETSHAPER AND APPVANTAGE
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 family 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 family of products or PacketWise software, our revenues will not
grow significantly.

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

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

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

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

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

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

        The failure of our indirect partners to sell our products
internationally will harm our business. Sales to customers outside of North
America accounted for 54.7% of our total net revenues in 1998, 54.9% of our
total net revenues in 1999 and 54.8% of our total net revenues in the three
months ended March 31, 2000. In particular,



                                    Page 15
<PAGE>   16

sales to customers in our Asia Pacific region accounted for 31.0% of our total
net revenues in 1998, 26.0% of our total net revenues in 1999, and 18.1% of our
total net revenues in the three months ended March 31, 2000. Our ability to grow
will depend in part on the expansion of international sales, which will require
success on the part of our VARs, distributors, systems integrators and OEMs in
marketing our products.

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

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

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

SALES TO LARGE CUSTOMERS WOULD BE DIFFICULT TO REPLACE IF LOST

        A limited number of indirect channel partners have accounted for a large
part of our revenues to date and we expect that this trend will continue.
Because our expense levels are based on our expectations as to future revenue
and to a large extent are fixed in the short term, any significant reduction or
delay in sales of our products to any significant indirect channel partner or
unexpected returns from these indirect channel partners could harm our business.
For the three months ended March 31, 2000 no one customer accounted for more
than 10% of total net revenues. For the three months ended March 31, 1999, ADC
Telecommunications, Nissho Electronics Corporation, and Macnica, Inc. accounted
for 12.1%, 10.8%, and 10.7% of total net revenues, respectively. 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.

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

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



                                    Page 16
<PAGE>   17

        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. We currently maintain "key person" life insurance on Craig W.
Elliott, our chief executive officer, Robert L. Packer, our chief technology
officer, and Brett D. Galloway, our vice president of engineering and chief
operating officer. The loss of the 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 bandwidth management solutions market, we also expect that
other companies may enter our market with alternative products and technologies,
which could reduce the sales or market acceptance of our products and services,
perpetuate intense price competition or make our products obsolete. If any
technology that is competing with ours is or becomes more reliable, higher
performing, less expensive or has other advantages over our technology, then the
demand for our products and services would decrease, which would harm our
business.

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

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



                                    Page 17
<PAGE>   18

        - develop and maintain competitive products;

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

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

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

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

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

IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE MAY EXPERIENCE OPERATING
INEFFICIENCIES AND HAVE DIFFICULTY MEETING THE 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 RELIANCE ON PEMSTAR, INC. AND SANMINA CORPORATION FOR ALL OF OUR
MANUFACTURING REQUIREMENTS COULD CAUSE US TO LOSE ORDERS IF THESE THIRD PARTY
MANUFACTURERS FAIL TO SATISFY OUR COST, QUALITY AND DELIVERY REQUIREMENTS

        We currently contract with PEMSTAR, Inc. and Sanmina 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;



                                                                         Page 18
<PAGE>   19

        - quality assurance; and

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

        We have no long-term contracts or arrangements with any of our vendors
that guarantee product availability, the continuation of particular payment
terms or the extension of credit limits. We have experienced in the past, and
may experience in the future, problems with our contract manufacturers, 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 manufacturers or that
these manufacturers 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.

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.

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. If
we were to consummate an acquisition, we would be subject 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



                                                                         Page 19
<PAGE>   20

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

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

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

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

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

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

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

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

        The market for Internet application infrastructure systems 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



                                                                         Page 20
<PAGE>   21

technological changes and evolving industry standards. Failure to comply with
existing or evolving industry standards or to obtain timely domestic or foreign
regulatory approvals or certificates could harm our business.

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

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

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

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

        Our executive officers and directors and their affiliates together
control approximately 39.5% of the outstanding common stock as of March 31,
2000. As a result, these stockholders, if they act together, may be able to
control all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may have the effect of delaying, preventing or deterring a change
in control of Packeteer, could deprive our stockholders of an opportunity to
receive a premium for their common stock as part of a sale of Packeteer and
might affect the market price of our common stock.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Fixed Income Investments

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

        Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. All highly liquid
investments with less than three months to maturity are considered to be cash
equivalents. Investments with maturities between three and twelve months are
considered to be short-term investments. Investments with maturities in excess
of twelve months are considered to be long-term investments. We do not expect
any



                                                                         Page 21
<PAGE>   22

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>
                                                         March 31, 2000              December 31, 1999
                                                     ----------------------        ---------------------
                                                                  WEIGHTED-                    WEIGHTED-
                                                                  AVERAGE                      AVERAGE
                                                     CARRYING     INTEREST         CARRYING    INTEREST
                                                      AMOUNT        RATE            AMOUNT       RATE
                                                     --------     ---------        --------    ---------
<S>                                                  <C>          <C>              <C>         <C>
Cash Equivalents:
Commercial paper, market auction preferred
  and corporate notes and bonds...................    $37,725        5.97%          $17,727       6.20%

Short-term investments:
Corporate notes and bonds and medium-term notes...     19,189        6.25%           37,918       5.91%

Long-term investments:
Corporate notes and medium-term notes.............      7,303        6.87%            7,686       6.56%
                                                      -------                       -------
    Total investment securities...................    $64,217        6.15%          $63,331       6.07%
                                                      =======                       =======
</TABLE>

Foreign Exchange

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

PART II OTHER INFORMATION

        Item 1. Legal Proceedings

                  None.

        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 4,600,000 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 $2.5 million
to repay a note payable. The remaining $60.1 million of the net proceeds are
expected to be used for general corporate purposes, including working capital,
product development and capital expenditures, and to repay a note payable for
$2.5 million. 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 business 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.



                                                                         Page 22
<PAGE>   23

Item 3. Defaults upon Senior Securities

        None.

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

        None.

Item 5. Other information

        None.

Item 6. Exhibits and Reports on Form 8-K

        A. Exhibits

<TABLE>
<CAPTION>
        Exhibit
        Number      Description
<S>                 <C>
        27.1        Financial Data Schedule
</TABLE>

        B. Reports on Form 8-K

               None.


                                    Signature

               Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized and in the capacity
indicated.

                                        PACKETEER, INC.


April 28, 2000
                                        /s/ David C. Yntema
                                        ----------------------------------------
                                        David C. Yntema
                                        Chief Financial Officer and Secretary
                                        (Duly authorized Officer and Principal
                                        Financial and Accounting Officer)




                                                                         Page 23
<PAGE>   24


                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
Exhibit
Number                     Description
-------                    -----------
<S>           <C>
27.1          Financial Data Schedule
</TABLE>