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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 MARCH 31, 2002                                           
|          
|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
(State of incorporation) |  | 77-0420107
(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 30,064,037 at April 30, 2002.

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TABLE OF CONTENTS



|                              |                                                                                                |                                                      |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                  
|                              |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                          
|PART II OTHER INFORMATION    
|                              | ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   



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TABLE OF CONTENTS

|           |  |                                                                                                              |  |   
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|PART I     |  | FINANCIAL INFORMATION                                                                                        |  |   
|Item 1.    |  | Financial Statements:                                                                                        |  |   
|           |  | Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001                             |  | 3 
|           |  | Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2002 and March 31, 2001 |  | 4 
|           |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2002 and March 31, 2001 |  | 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                                                                       |  | 15
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 22
|PART II    |  | OTHER INFORMATION                                                                                            |  |   
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                    |  | 23
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                             |  | 24
|Signatures |  |                                                                                                              |  | 24

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
22, 2002 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.

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PART I.  FINANCIAL INFORMATION




ITEM 1.  FINANCIAL STATEMENTS




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

|                                                                                                                                                         |                                                                                                                                    |                           |          |           |        |              |          |        |        | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | -------- | --------- | ------ | ------------ | -------- | ------ | ------ | 
|                                                                                                                                                         |                                                                                                                                    |                           |          | March 31, |        | December 31,
|                                                                                                                                                         |                                                                                                                                    |                           |          | 2002      |        | 2001        
|                                                                                                                                                         |                                                                                                                                    |                           |          |           |        |             
|ASSETS                                                                                                                                                   |                                                                                                                                    |                           |          |           |        |              |          |       
|Current assets:                                                                                                                                          |                                                                                                                                    |                           |          |           |        |              |          |       
|                                                                                                                                                         | Cash and cash equivalents                                                                                                          |                           | $        | 44,319    |        |              | $        | 50,009 |       
|                                                                                                                                                         | Short-term investments                                                                                                             |                           |          | 12,537    |        |              |          | 8,624  |       
|                                                                                                                                                         | Accounts receivable less allowance for doubtful accounts
of $79 and $132, as of March 31, 2002 and
December 31, 2001, respectively |                           |          | 5,466     |        |              |          | 5,772  |       
|                                                                                                                                                         | Inventories                                                                                                                        |                           |          | 2,421     |        |              |          | 2,189  |       
|                                                                                                                                                         | Prepaids and other current assets                                                                                                  |                           |          | 1,282     |        |              |          | 1,221  |       
|                                                                                                                                                         |                                                                                                                                    |                           |          |           |        |              |          |       
|                                                                                                                                                         |                                                                                                                                    | Total current assets      |          |           | 66,025 |              |          |        | 67,815 | 
|Property and equipment, net                                                                                                                              |                                                                                                                                    |                           | 1,239    |           |        |              | 1,377    |       
|Long-term investments                                                                                                                                    |                                                                                                                                    |                           | 5,696    |           |        |              | 3,588    |       
|Other long-term assets                                                                                                                                   |                                                                                                                                    |                           | 232      |           |        |              | 225      |       
|                                                                                                                                                         |                                                                                                                                    |                           |          |           |        |              |          |       
|Total assets                                                                                                                                             |                                                                                                                                    | $                         | 73,192   |           |        | $            | 73,005   |       
|                                                                                                                                                         |                                                                                                                                    |                           |          |           |        |              |          |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                     |                                                                                                                                    |                           |          |           |        |              |          |       
|Current liabilities:                                                                                                                                     |                                                                                                                                    |                           |          |           |        |              |          |       
|                                                                                                                                                         | Line of credit                                                                                                                     |                           | $        | 1,851     |        |              | $        | 1,851  |       
|                                                                                                                                                         | Current portion of capital lease obligations
and note payable                                                                      |                           |          | 879       |        |              |          | 917    |       
|                                                                                                                                                         | Accounts payable                                                                                                                   |                           |          | 2,480     |        |              |          | 2,282  |       
|                                                                                                                                                         | Accrued compensation                                                                                                               |                           |          | 1,920     |        |              |          | 2,082  |       
|                                                                                                                                                         | Other accrued liabilities                                                                                                          |                           |          | 2,975     |        |              |          | 3,854  |       
|                                                                                                                                                         | Deferred revenue                                                                                                                   |                           |          | 4,626     |        |              |          | 4,106  |       
|                                                                                                                                                         |                                                                                                                                    |                           |          |           |        |              |          |       
|                                                                                                                                                         |                                                                                                                                    | Total current liabilities |          |           | 14,731 |              |          |        | 15,092 | 
|Long-term liabilities                                                                                                                                    |                                                                                                                                    |                           | 1,110    |           |        |              | 1,289    |       
|Common stock; $0.001 par value; 85,000 shares
authorized; 30,044 and 29,951 issued and outstanding at
March 31, 2002 and December 31, 2001, respectively |                                                                                                                                    |                           | 30       |           |        |              | 30       |       
|Additional paid-in capital                                                                                                                               |                                                                                                                                    |                           | 164,815  |           |        |              | 164,273  |       
|Accumulated other comprehensive income                                                                                                                   |                                                                                                                                    |                           | (105     | )         |        |              | (18      | )     
|Deferred stock-based compensation                                                                                                                        |                                                                                                                                    |                           | (263     | )         |        |              | (400     | )     
|Notes receivable from stockholders                                                                                                                       |                                                                                                                                    |                           | (62      | )         |        |              | (83      | )     
|Accumulated deficit                                                                                                                                      |                                                                                                                                    |                           | (107,064 | )         |        |              | (107,178 | )     
|                                                                                                                                                         |                                                                                                                                    |                           |          |           |        |              |          |       
|Total stockholders equity                                                                                                                               |                                                                                                                                    |                           | 57,351   |           |        |              | 56,624   |       
|                                                                                                                                                         |                                                                                                                                    |                           |          |           |        |              |          |       
|Total liabilities and stockholders equity                                                                                                               |                                                                                                                                    | $                         | 73,192   |           |        | $            | 73,005   |       
|                                                                                                                                                         |                                                                                                                                    |                           |          |           |        |              |          |       

See accompanying notes to condensed consolidated financial statements

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

|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |        |        |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------ | ------------------ | ------ | ---- | ------ | ------ | ------ | -
|                                                             |                                                                                                                                                            |                          |        | Three months ended
|                                                             |                                                                                                                                                            |                          |        | March 31,         
|                                                             |                                                                                                                                                            |                          |        |                   
|                                                             |                                                                                                                                                            |                          |        | 2002               |        | 2001
|                                                             |                                                                                                                                                            |                          |        |                    |        |     
|Revenues:                                                    |                                                                                                                                                            |                          |        |                    |        |      |        |       
|                                                             | Product revenues                                                                                                                                           |                          | $      | 10,586             |        |      | $      | 10,224 |       
|                                                             | Service revenues                                                                                                                                           |                          |        | 1,655              |        |      |        | 957    |       
|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |       
|                                                             |                                                                                                                                                            | Total revenues           |        |                    | 12,241 |      |        |        | 11,181 |  
|Cost of revenues:                                            |                                                                                                                                                            |                          |        |                    |        |      |        |       
|                                                             | Product costs                                                                                                                                              |                          |        | 2,401              |        |      |        | 3,004  |       
|                                                             | Service costs                                                                                                                                              |                          |        | 669                |        |      |        | 805    |       
|                                                             | Amortization of acquired technology                                                                                                                        |                          |        |                   |        |      |        | 600    |       
|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |       
|                                                             |                                                                                                                                                            | Total cost of revenues   |        |                    | 3,070  |      |        |        | 4,409  |  
|                                                             |                                                                                                                                                            | Gross profit             |        |                    | 9,171  |      |        |        | 6,772  |  
|Operating expenses:                                          |                                                                                                                                                            |                          |        |                    |        |      |        |       
|                                                             | Research and development (exclusive of
stock-based compensation expense of
$82 and $261 for the three months ended
March 31, 2002 and 2001, respectively)  |                          |        | 2,751              |        |      |        | 2,851  |       
|                                                             | Sales and marketing (exclusive of
stock-based compensation expense of
$44 and $130 for the three months ended
March 31, 2002 and 2001, respectively)       |                          |        | 5,342              |        |      |        | 6,223  |       
|                                                             | General and administrative (exclusive of
stock-based compensation expense of
$13 and $33 for the three months ended
March 31, 2002 and 2001, respectively) |                          |        | 1,030              |        |      |        | 1,418  |       
|                                                             | Amortization of goodwill                                                                                                                                   |                          |        |                   |        |      |        | 5,509  |       
|                                                             | Stock-based compensation                                                                                                                                   |                          |        | 139                |        |      |        | 424    |       
|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |       
|                                                             |                                                                                                                                                            | Total operating expenses |        |                    | 9,262  |      |        |        | 16,425 |  
|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |       
|                                                             |                                                                                                                                                            | Loss from operations     |        |                    | (91    | )    |        |        | (9,653 | )
|Other income, net                                            |                                                                                                                                                            |                          | 217    |                    |        |      | 234    |       
|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |       
|Net income (loss) before taxes                               |                                                                                                                                                            |                          | 126    |                    |        |      | (9,419 | )     
|Provision for income taxes                                   |                                                                                                                                                            |                          | 12     |                    |        |      |       |       
|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |       
|                                                             |                                                                                                                                                            | Net income (loss)        |        | $                  | 114    |      |        | $      | (9,419 | )
|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |       
|Basic net income (loss) per share                            |                                                                                                                                                            | $                        | 0.00   |                    |        | $    | (0.32  | )     
|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |       
|Diluted net income (loss) per share                          |                                                                                                                                                            | $                        | 0.00   |                    |        | $    | (0.32  | )     
|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |       
|Shares used in computing basic net income (loss) per
share   |                                                                                                                                                            |                          | 30,002 |                    |        |      | 29,264 |       
|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |       
|Shares used in computing diluted net income (loss)
per share |                                                                                                                                                            |                          | 30,540 |                    |        |      | 29,264 |       
|                                                             |                                                                                                                                                            |                          |        |                    |        |      |        |       

See accompanying notes to condensed consolidated financial statements.

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

|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |         |       |        |       |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------ | -------------------------------------------- | --------------------------------- | --------------------------------------------------- | --- | ------------------ | ------ | ------- | ----- | ------ | ----- | -
|                                                     |                                                                                      |                                              |                                   |                                                     |     | Three months ended
|                                                     |                                                                                      |                                              |                                   |                                                     |     | March 31,         
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                   
|                                                     |                                                                                      |                                              |                                   |                                                     |     | 2002               |        | 2001   
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|Cash flows from operating activities:                |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|                                                     | Net income (loss)                                                                    |                                              | $                                 | 114                                                 |     |                    | $      | (9,419  | )    
|                                                     | Adjustments to reconcile net income (loss) to
net cash used in operating activities: |                                              |                                   |                                                     |     |                    |        |         |      
|                                                     |                                                                                      | Depreciation                                 |                                   |                                                     | 380 |                    |        |         | 546   |       
|                                                     |                                                                                      | Amortization of goodwill and intangibles     |                                   |                                                     |    |                    |        |         | 6,132 |       
|                                                     |                                                                                      | Other non-cash charges                       |                                   |                                                     | 137 |                    |        |         | 427   |       
|                                                     |                                                                                      | Changes in operating assets and liabilities: |                                   |                                                     |     |                    |        |         |       |       
|                                                     |                                                                                      |                                              | Accounts receivable               |                                                     |     | 306                |        |         |       | 2,543  |      
|                                                     |                                                                                      |                                              | Inventories                       |                                                     |     | (232               | )      |         |       | 47     |      
|                                                     |                                                                                      |                                              | Prepaids and other current assets |                                                     |     | (61                | )      |         |       | 1,097  |      
|                                                     |                                                                                      |                                              | Accounts payable                  |                                                     |     | 198                |        |         |       | (717   | )    
|                                                     |                                                                                      |                                              | Other accrued liabilities         |                                                     |     | (1,041             | )      |         |       | (1,543 | )    
|                                                     |                                                                                      |                                              | Deferred revenue                  |                                                     |     | 520                |        |         |       | 515    |      
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|                                                     |                                                                                      |                                              |                                   | Net cash provided by (used in) operating activities |     |                    | 321    |         |       |        | (372  | )
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|Cash flows from investing activities:                |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|                                                     | Purchases of property and equipment                                                  |                                              |                                   | (242                                                | )   |                    |        | (457    | )    
|                                                     | Purchases of investments                                                             |                                              |                                   | (10,251                                             | )   |                    |        | (78,008 | )    
|                                                     | Proceeds from sales and maturities of investments                                    |                                              |                                   | 4,159                                               |     |                    |        | 80,727  |      
|                                                     | Other assets                                                                         |                                              |                                   | (7                                                  | )   |                    |        | 440     |      
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|                                                     |                                                                                      |                                              |                                   | Net cash provided by (used in) investing activities |     |                    | (6,341 | )       |       |        | 2,702 |  
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|Cash flows from financing activities:                |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|                                                     | Net proceeds from issuance of common stock                                           |                                              |                                   | 7                                                   |     |                    |        | 145     |      
|                                                     | Proceeds from stockholders notes receivable                                         |                                              |                                   | 21                                                  |     |                    |        | 17      |      
|                                                     | Sale of stock to employees under the ESPP                                            |                                              |                                   | 535                                                 |     |                    |        | 828     |      
|                                                     | Borrowings under line of credit                                                      |                                              |                                   |                                                    |     |                    |        | 1,001   |      
|                                                     | Repayments of line of credit                                                         |                                              |                                   |                                                    |     |                    |        | (465    | )    
|                                                     | Payments of notes payable                                                            |                                              |                                   | (42                                                 | )   |                    |        | (19     | )    
|                                                     | Principal payments of capital lease obligations                                      |                                              |                                   | (175                                                | )   |                    |        | (194    | )    
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|                                                     |                                                                                      |                                              |                                   | Net cash provided by financing activities           |     |                    | 346    |         |       |        | 1,313 |  
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|Foreign currency impact                              |                                                                                      |                                              | (16                               | )                                                   |     |                    |       |        
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|Net increase (decrease) in cash and cash equivalents |                                                                                      |                                              | (5,690                            | )                                                   |     |                    | 3,643  |        
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|Cash and cash equivalents at beginning of period     |                                                                                      |                                              | 50,009                            |                                                     |     |                    | 24,273 |        
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|Cash and cash equivalents at end of period           |                                                                                      | $                                            | 44,319                            |                                                     |     | $                  | 27,916 |        
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|Supplemental disclosures of cash flow information:   |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|                                                     | Cash paid during period for interest                                                 |                                              | $                                 | 83                                                  |     |                    | $      | 127     |      
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        
|                                                     | Cash paid during period for taxes                                                    |                                              | $                                 | 20                                                  |     |                    | $      |        |      
|                                                     |                                                                                      |                                              |                                   |                                                     |     |                    |        |        

See accompanying notes to condensed consolidated financial statements.

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PACKETEER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 collectively
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 only of
normal recurring adjustments) necessary for a fair statement of interim periods
presented, these financial statements and notes should be read in conjunction
with its audited consolidated financial statements and notes thereto, included
in the Companys Annual Report on Form 10-K for the year ended December 31,
2001 filed with the SEC on March 22, 2002.

The results of operations for the three months ended March 31, 2002 are
not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year ending December 31, 2002.

2.  VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL

The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets
and SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets
on January 1, 2002. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. As a result of the goodwill
write-off in the third quarter of 2001, the adoption of SFAS No. 142 on January
1, 2002, had no effect on the Companys results of operations or financial
position. SFAS No. 144 requires that long-lived assets be measured at the lower
of their carrying amount or fair value, less cost to sell. Adoption of this
statement did not have a material impact on the Companys results of operations
or financial position.

The following table presents the impact of SFAS No. 142 on net income
(loss) and net income (loss) per share had the standard been in effect for the
first quarter of fiscal 2001:

|                                         |                                 |      |           |      |  |   |        |       |  
|---------------------------------------- | ------------------------------- | ---- | --------- | ---- |  | - | ------ | ----- | -
|                                         |                                 |      | March 31,
|                                         |                                 |      |          
|(in thousands, except per share amounts) |                                 | 2002 |           | 2001
|                                         |                                 |      |           |     
|Reported net income (loss)               |                                 | $    | 114       |      |  | $ | (9,419 | )    
|                                         | Add back: Goodwill amortization |      |           |     |  |   |        | 5,509 |  
|                                         |                                 |      |           |      |  |   |        |      
|Adjusted net income (loss)               |                                 | $    | 114       |      |  | $ | (3,910 | )    
|                                         |                                 |      |           |      |  |   |        |      
|Basic earnings per share:                |                                 |      |           |      |  |   |        |      
|                                         | Reported net income             |      | $         | 0.00 |  |   | $      | (0.32 | )
|                                         | Goodwill amortization           |      |           | 0.00 |  |   |        | 0.19  |  
|                                         |                                 |      |           |      |  |   |        |      
|                                         | Adjusted net income (loss)      |      | $         | 0.00 |  |   | $      | (0.13 | )
|                                         |                                 |      |           |      |  |   |        |      
|Diluted earnings per share:              |                                 |      |           |      |  |   |        |      
|                                         | Reported net income             |      | $         | 0.00 |  |   | $      | (0.32 | )
|                                         | Goodwill amortization           |      |           | 0.00 |  |   |        | 0.19  |  
|                                         |                                 |      |           |      |  |   |        |      
|                                         | Adjusted
net income (loss)      |      | $         | 0.00 |  |   | $      | (0.13 | )
|                                         |                                 |      |           |      |  |   |        |      

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. pursuant to the
Companys stated policy. Managements determination of the existence of
impairment indicators included continued general economic slowing, broad based
declines in the values of networking technologies and a review of current,
historical and future projections of cash flows related to these assets. The

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

3.  CONTINGENCY

In November 2001, Packeteer, certain company officers and directors, and
its underwriters were named as defendants in a securities class-action lawsuit
filed in the United States District Court for the Southern District of New
York. The complaint, captioned Antoniono v. Packeteer, Inc. et. al., alleges
violations of Sections 11, 12(a)2 and 15 of the Securities Act of 1933, as
amended, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder on behalf of a purported class of purchasers of
Packeteer common stock between July 27, 1999 and December 6, 2000. The
plaintiffs seek unspecified damages.

Various plaintiffs have filed similar actions asserting virtually
identical allegations against more than 300 other issuers. These cases have all
been assigned to the Hon. Shira A. Scheindlin for coordination and decisions on
pretrial motions, discovery, and related matters other than trial. We believe
that we have meritorious defenses to the lawsuit and will defend ourselves
vigorously in the litigation. An unfavorable resolution of the actions could
have a material adverse effect on our business, results of operations and
financial condition. The Company has considered the requirements of SFAS No. 5,
Accounting for Contingencies, and due to the facts and circumstances of this
case, no accrual for this contingency has been recorded.

4.  NET INCOME (LOSS) PER SHARE

Basic net income (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 or in escrow related to the acquisition of Workfire
Technologies International, Inc. in September 2000. Diluted net income (loss)
per share has been computed using the weighted average number of common and
potential common shares outstanding during the period. All warrants for common
stock, outstanding stock options and shares subject to repurchase have been
excluded from the calculation of diluted net loss per share for periods where
their inclusion would be antidilutive.

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

|                                         |                                     |          |                                                     |                                                            |  |           |        |        |   |        |        | 
|---------------------------------------- | ----------------------------------- | -------- | --------------------------------------------------- | ---------------------------------------------------------- |  | --------- | ------ | ------ | - | ------ | ------ | 
|                                         |                                     |          |                                                     |                                                            |  | March 31,
|                                         |                                     |          |                                                     |                                                            |  |          
|(in thousands, except per share amounts) |                                     | 2002     |                                                     | 2001                                                      
|                                         |                                     |          |                                                     |                                                           
|Numerator:                               |                                     |          |                                                     |                                                            |  |           |        |       
|                                         | Net income (loss)                   |          | $                                                   | 114                                                        |  |           | $      | (9,419 | )
|                                         |                                     |          |                                                     |                                                            |  |           |        |       
|Denominator:                             |                                     |          |                                                     |                                                            |  |           |        |       
|                                         | Basic:                              |          |                                                     |                                                            |  |           |        |        |  
|                                         |                                     |          | Weighted-average shares of common stock outstanding |                                                            |  | 30,008    |        |        |   | 29,649 |       
|                                         |                                     |          | Less: shares held in escrow                         |                                                            |  |          |        |        |   | 183    |       
|                                         |                                     |          | Less: shares subject to repurchase                  |                                                            |  | 6         |        |        |   | 202    |       
|                                         |                                     |          |                                                     |                                                            |  |           |        |       
|                                         |                                     |          |                                                     | Basic weighted-average common shares outstanding           |  |           | 30,002 |        |   |        | 29,264 | 
|                                         |                                     |          |                                                     |                                                            |  |           |        |       
|                                         |                                     | Diluted: |                                                     |                                                            |  |           |        |        |   |       
|                                         |                                     |          |                                                     | Basic weighted-average common shares outstanding           |  |           | 30,002 |        |   |        | 29,264 | 
|                                         |                                     |          |                                                     | Add: potentially dilutive common shares from stock
options |  |           | 535    |        |   |        |       | 
|                                         |                                     |          |                                                     | Add: potentially dilutive common shares from warrants      |  |           | 3      |        |   |        |       | 
|                                         |                                     |          |                                                     |                                                            |  |           |        |       
|                                         |                                     |          |                                                     | Diluted weighted-average common shares                     |  |           | 30,540 |        |   |        | 29,264 | 
|                                         |                                     |          |                                                     |                                                            |  |           |        |       
|                                         | Basic net income (loss) per share   |          | $                                                   | 0.00                                                       |  |           | $      | (0.32  | )
|                                         |                                     |          |                                                     |                                                            |  |           |        |       
|                                         | Diluted net income (loss) per share |          | $                                                   | 0.00                                                       |  |           | $      | (0.32  | )
|                                         |                                     |          |                                                     |                                                            |  |           |        |       

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5.  COMPREHENSIVE INCOME (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. For the Company, the primary differences
between reported net income (loss) and comprehensive income (loss) are
unrealized gains or losses on securities available for sale and foreign
currency translation adjustments. Tax effects of comprehensive income or loss
are not considered material for any periods presented.

|                                        |  |                    |     |      |  |   |        |  
|--------------------------------------- |  | ------------------ | --- | ---- |  | - | ------ | -
|                                        |  | Three months ended
|                                        |  | March 31,         
|                                        |  |                   
|(in thousands)                          |  | 2002               |     | 2001
|                                        |  |                    |     |     
|Net income (loss)                       |  | $                  | 114 |      |  | $ | (9,419 | )
|Foreign currency translation adjustment |  |                    | (16 | )    |  |   |       |  
|Unrealized gain (loss) on investments   |  |                    | (71 | )    |  |   | 103    |  
|                                        |  |                    |     |      |  |   |        |  
|Comprehensive income (loss)             |  | $                  | 27  |      |  | $ | (9,316 | )
|                                        |  |                    |     |      |  |   |        |  

6.  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 and maintenance
contracts related to these products. For the three months ended March 31, 2002,
sales to three customers, Alternative Technology, Inc., Westcon, Inc. and
Macnica, Inc. accounted for 18%, 13% and 11% of net revenues, respectively. For
the three months ended March 31, 2001, one customer, Alternative Technology,
Inc. accounted for 18% of net revenues.

Geographic Information

|                    |                          |              |   |                    |        |  |   |       |        | 
|------------------- | ------------------------ | ------------ | - | ------------------ | ------ |  | - | ----- | ------ | 
|                    |                          |              |   | Three months ended
|                    |                          |              |   | March 31,         
|                    |                          |              |   |                   
|(in thousands)      |                          | 2002         |   | 2001              
|                    |                          |              |   |                   
|Total net revenues: |                          |              |   |                    |        |  |   |      
|                    | North America            |              | $ | 4,325              |        |  | $ | 5,086 |       
|                    | Asia Pacific             |              |   | 4,809              |        |  |   | 2,918 |       
|                    | Europe and rest of world |              |   | 3,107              |        |  |   | 3,177 |       
|                    |                          |              |   |                    |        |  |   |      
|                    |                          | Net revenues |   | $                  | 12,241 |  |   | $     | 11,181 | 
|                    |                          |              |   |                    |        |  |   |      

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.

7.  RECENT ACCOUNTING PRONOUNCEMENTS

In November 2001, the
Emerging Issues Task Force (EITF) reached a consensus on
EITF No. 01-09, Accounting for Consideration Given by a
Vendor to a Customer or Reseller of the Vendor's Products. EITF
No. 01-09 addresses the accounting for consideration given by a
vendor to a customer and is a codification of EITF No. 00-14,
Accounting for Certain Sales Incentives, EITF
No. 00-22, Accounting for Points and Certain
Other Time-Based or Volume-Based Sales Incentives Offers and Offers
for Free Products or Services to be Delivered in the Future,
and EITF No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the
Vendors Products. EITF No. 01-09 is effective for
annual or interim periods beginning after December 15, 2001.
Packeteer adopted EITF No. 01-09 January 1, 2002. Adoption
of EITF No. 01-09 had no effect on the Companys results of
operations or financial position.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses the financial accounting and
reporting for obligations and retirement costs related to the retirement of
tangible long-lived assets. Packeteer is required to adopt SFAS No. 143 for our
fiscal year beginning January 1, 2003. Adoption of this statement is not
expected to have an impact on the Companys results of operations or financial
position.

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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 PacketWise® software  are designed
to ensure end-to-end quality of service (QoS) for networked applications and
managed services, enhancing users quality of experience through comprehensive
bandwidth, traffic, content, service-level and policy management. Packeteers
PacketShaper family of products, the PacketShaper® and AppVantage systems,
integrates application discovery, analysis, control and reporting technologies
that are required for proactive application performance and bandwidth
management. The AppCelera family of Internet acceleration appliances employs
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 resellers,
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, resellers,
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, Korea, The Netherlands, England,
Germany, France, Spain, Denmark, Australia, Caymans and Canada. To date, we
have shipped more than 18,000 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 March 31, 2002, had an accumulated
deficit of $107.1 million.

We have a limited operating history. We have incurred losses since we
commenced operations in 1996 and, though we have achieved profitability for the
quarter ended March 31, 2002, profitability will remain difficult to achieve
and sustain. We expect to continue to invest in sales and marketing and product
development activities and, as a result, will need to continue to grow revenues
to achieve and maintain profitability.

CRITICAL ACCOUNTING POLICIES

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

The items in our financial statements requiring the most significant
estimates and judgment are as follows:

Revenue recognition. Product revenue consists primarily of sales of our
PacketShaper, AppVantage and AppCelera products, which include hardware, as
well as software licenses. Service revenue consists primarily of maintenance
revenue and, to a lesser extent, training revenue.

The Company applies the provisions of Statement of Position 97-2,
Software Revenue Recognition, as amended by Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions, to all transactions

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involving the sale of hardware and software products. Revenue is generally
recognized when all of the following criteria are met as set forth in paragraph
8 of SOP 97-2:



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

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

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

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

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

This revenue recognition policy is modified under certain circumstances as
follows: Product revenue on sales to major new distributors is recorded based
on sell-through to the end user customers until such time as the Company has
established significant experience with the distributors product return and
exchange activity. Additionally, when the Company introduces a new product into
its distribution channel for which there is no historical customer demand or
acceptance history, revenue is recognized on the basis of sell-through to end
user customers.

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

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

Valuation of Long-Lived and Intangible Assets and Goodwill. The Company
regularly performs reviews to determine if the carrying value of its long-lived
assets is impaired. The purpose of 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. Such facts or circumstances might
include significant underperformance relative to expected historical or
projected future operating results or significant negative industry or economic
trends. If such indicators are present, we determine whether the sum of the
estimated undiscounted cash flows attributable to the assets in question is
less than their carrying value. If less, we recognize an impairment loss based
on the excess carrying amount of the assets over their respective fair values.
If quoted market prices for assets are not available, the fair value is
estimated based on the present value of expected future cash flows. The fair
value of the asset then becomes the assets new carrying value.

Sales return reserve and allowance for doubtful accounts. The preparation
of financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the

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reported amounts of revenues and expenses during the reporting period.
Specifically, management must make estimates of potential future product
returns related to current period product revenue. When providing for sales
return reserves, management analyzes historical return rates as they are the
primary indicators for estimating future returns. Judgments and estimates must
be made in connection with establishing the sales return reserve. Material
differences may result in the amount and timing of our revenue for any period
if management makes different judgments or uses different estimates. The sales
return reserve liability balances at March 31, 2002 and December 31, 2001 were
$511,000 and $331,000, respectively. Management must also make estimates of the
uncollectibility of accounts receivable. When evaluating the adequacy of the
allowance for doubtful accounts, management reviews the aged receivables on an
account-by-account basis, taking into consideration such factors as age of the
receivables, customer history and projected or estimated continued
credit-worthiness, as well as general economic and industry trends. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances could be
required. The allowance for doubtful accounts was $79,000 and $132,000 at March 31,
2002 and December 31, 2001, respectively.

Warranty reserves. Upon shipment of products to its customers, the Company
provides for the estimated cost to repair or replace products that may be
returned under warranty. The Companys warranty period is typically 12 months
from the date of shipment to the end user customer. For existing products, the
reserve is estimated based on actual historical experience. For new products,
the required reserve is based on historical experience of similar products
until such time as sufficient historical data has been collected on the new
product. Factors that may impact our warranty costs in the future include our
reliance on our contract manufacturer to provide quality product in a timely
manner and the fact that our products are complex and may contain undetected
defects, errors or failures in either the hardware or the software which could
affect the functionality of our customers network or mission-critical
applications. To date, these problems have not materially adversely affected
us. Warranty reserves amounted to $535,000 and $552,000 at March 31, 2002 and
December 31, 2001, respectively.

RESULTS OF OPERATIONS

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

|                                    |                                          |                                |     |                    |    |      |     |    |     |  
|----------------------------------- | ---------------------------------------- | ------------------------------ | --- | ------------------ | -- | ---- | --- | -- | --- | -
|                                    |                                          |                                |     | Three months ended
|                                    |                                          |                                |     | March 31,         
|                                    |                                          |                                |     |                   
|                                    |                                          |                                |     | 2002               |    | 2001
|                                    |                                          |                                |     |                    |    |     
|Net revenues                        |                                          |                                | 100 | %                  |    |      | 100 | % 
|Cost of revenues                    |                                          |                                | 25  |                    |    |      | 34  |   
|Amortization of acquired technology |                                          |                                |    |                    |    |      | 5   |   
|                                    |                                          |                                |     |                    |    |      |     |   
|                                    |                                          | Total cost of revenues         |     |                    | 25 |      |     |    | 39  |  
|                                    |                                          | Gross margin                   |     |                    | 75 |      |     |    | 61  |  
|Operating expenses:                 |                                          |                                |     |                    |    |      |     |   
|                                    | Research and development                 |                                |     | 23                 |    |      |     | 25 |    
|                                    | Sales and marketing                      |                                |     | 44                 |    |      |     | 56 |    
|                                    | General and administrative               |                                |     | 8                  |    |      |     | 13 |    
|                                    | Amortization of goodwill                 |                                |     |                   |    |      |     | 49 |    
|                                    | Amortization of stock-based compensation |                                |     | 1                  |    |      |     | 4  |    
|                                    |                                          |                                |     |                    |    |      |     |   
|                                    |                                          | Total operating expenses       |     |                    | 76 |      |     |    | 147 |  
|                                    |                                          |                                |     |                    |    |      |     |   
|Income (loss) from operations       |                                          |                                | (1  | )                  |    |      | (86 | ) 
|Other income, net                   |                                          |                                | 2   |                    |    |      | 2   |   
|                                    |                                          |                                |     |                    |    |      |     |   
|                                    |                                          | Net income (loss) before taxes |     |                    | 1  |      |     |    | (84 | )
|Provision for taxes                 |                                          |                                |    |                    |    |      |    |   
|                                    |                                          |                                |     |                    |    |      |     |   
|Net income (loss)                   |                                          |                                | 1   | %                  |    |      | (84 | )%
|                                    |                                          |                                |     |                    |    |      |     |   

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NET REVENUES

Product revenues consist primarily of sales of our PacketShaper,
AppVantage and AppCelera products. Service revenues consist primarily of
maintenance revenues and, to a lesser extent, training revenues.

Net revenues increased to $12.2 million in the three months ended March 31,
2002 from $11.2 million in the same quarter of the prior year, an increase
of 9%. Product revenues increased slightly, from $10.2 million for the three
months ended March 31, 2001 to $10.6 million in the current quarter. The
increase was due primarily to a more favorable product mix, as unit sales of
our higher end product continue to represent a higher percentage of the units
shipped. Service revenues increased to $1.7 million in the three months ended
March 31, 2002 from $957,000 in the first quarter of fiscal 2001, an increase
of 73%, due mainly to increases in the number of units on maintenance
contracts.

In the first quarter of fiscal 2002, Asia Pacific accounted for 39% of net
revenues based on very strong revenue growth in Japan, while North America and
EMEA net revenues were down in absolute dollars when compared to the first
quarter of fiscal 2001, and accounted for 35% and 26% of net revenues,
respectively.

During the three months ended March 31, 2002, three customers, Alternative
Technology, Inc., Westcon, Inc. and Macnica, Inc., accounted for 18%, 13% and
11% of net revenues, respectively. For the three months ended March 31, 2001,
one customer, Alternative Technology, Inc. accounted for 18% of net revenues.
Sales to the top 10 indirect channel partners accounted for 69% and 59% of net
revenues in the three months ended March 31, 2002 and 2001, respectively. At
March 31, 2002, one customer, Alternative Technology, Inc., accounted for 18%
of accounts receivable.

We believe that our current value proposition, which enables our
enterprise customers to get more value out of existing network resources and
improved performance of their critical applications, combined with the
anticipated economic recovery, should allow us to continue to grow our business
in 2002. Our future profitability and rate of growth, if any, will be directly
affected by the continued acceptance of our product in the marketplace, as well
as the timing and size of orders, shipments, product mix, average selling price
of our products and general economic conditions. Our growth rate and net
revenue depend significantly on continued growth of the application traffic and
bandwidth solutions market, our ability to develop and maintain strong
partnering relationships with our indirect channel partners and our ability to
expand or enhance our product offerings or respond to technological change. Our
growth in service revenues is dependent upon increasing the number of units on
maintenance contracts, which is dependent on both growing our installed base
and renewing existing maintenance contracts. Our failure to successfully
convince the market of our value proposition and maintain strong relationships
with our indirect channel partners to ensure the success of their selling
efforts on our behalf, would adversely impact our net revenues and operating
results.

COST OF REVENUES

Our cost of revenues (excluding amortization of acquired technology)
consists of the cost of finished products purchased from our turnkey contract
manufacturer and overhead costs. Our cost of revenues, $3.1 million in the
three months ended March 31, 2002, declined $739,000 from the $3.8 million
reported in the same period of fiscal 2001. The decrease in costs was due to
reductions in manufacturing, other product costs and service support costs,
partially offset by increases in overhead costs. The cost of revenues
represented 25% of net revenues in the first quarter of fiscal 2002, compared
to 34% of net revenues in the same quarter of the prior year.

Product costs decreased from $3.0 million in the first quarter of fiscal
2001 to $2.4 million in the current quarter. The decrease included
manufacturing and other product cost reductions of $768,000, partially offset
by increased overhead costs. Service costs declined $136,000, to $669,000 in
the current quarter, reflecting decreases in consulting services, as well as
personnel related costs and supplies expenses.

To maintain our gross margins we must continue to develop and introduce on
a timely basis, new products and enhancements and reduce product costs as we
did in 2001.

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. Due to the impairment write-off in the
third quarter of fiscal 2001, there

12



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was no amortization during the current quarter. Amortization of acquired
technology was $600,000 in the three months ended March 31, 2001 and
represented 5% of total net revenues.

RESEARCH AND DEVELOPMENT

Research and development expenses consist primarily of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development, testing and enhancement of the PacketShaper,
AppVantage and AppCelera products and PacketWise software. Excluding the
effects of stock-based compensation of $82,000 and $261,000 for the three
months ended March 31, 2002 and 2001, respectively, research and development
expenses of $2.8 million in the three months ended March 31, 2002, were down
slightly from the $2.9 million reported for the quarter ended March 31, 2001.
Decreases in personnel related expenses, primarily recruiting fees and travel
costs, were partially offset by increased distributed costs. Distributed costs
include expenses related to facilities, communications and technology, which
are allocable to all functional areas of the Company. The increase in
distributed costs is discussed below under the heading GENERAL AND
ADMINISTRATIVE. Research and development expenses represented 23% and 25% of
net revenues in the three months ended March 31, 2002 and 2001, respectively.
As of March 31, 2002, 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
intend to continue to invest in appropriate projects related to the enhancement
of our product offerings and expect expenses as a percentage of revenue to
continue to decrease over time.

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 products as well as related trade show, promotional and public relations
expenses. Excluding the effects of stock-based compensation of $44,000 and
$130,000 in the three months ended March 31, 2002 and 2001 respectively, sales
and marketing expenses decreased to $5.3 million in the three months ended
March 31, 2002, from $6.2 million in the same quarter in the prior year, a
decrease of 14%. Decreases included personnel related costs, including
salaries, recruiting fees and travel costs, as well as decreased marketing
activities, partially offset by an increase in distributed costs which is
discussed below under the heading GENERAL AND ADMINISTRATIVE. The decreases
reflect cost control measures implemented at the end of March 2001 in response
to the then slowing economy and resulting slowing of revenues. Sales and
marketing expenses represented 44% and 56% of net revenues in the three months
ended March 31, 2002 and 2001, respectively. We intend to continue to invest in
appropriate sales and marketing campaigns and therefore expect our absolute
dollar expenses to increase in the future. We continue to work towards our
long-term business model target showing sales and marketing expenses in the
range of 26% to 28% of revenues, but do not expect to achieve this on a
quarterly basis for at least the next one to two years.

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. Excluding the effects of stock-based
compensation of $13,000 and $33,000 for the three months ended March 31, 2002
and 2001 respectively, general and administrative expenses declined to $1.0
million in the three months ended March 31, 2002, from $1.4 million in the same
quarter of the prior year, a decrease of 27%. Decreases from the first quarter
of 2001 included a reduction in bad debt expenses and distributed costs. The
decrease in distributed costs is due to a change in the allocation of the
expenses associated with our Information Technology group (IT). Prior to
fiscal 2002, only a small portion of IT costs were allocated out of general and
administrative expenses. Beginning in fiscal 2002, based on improved tracking
and reporting of IT services, a greater portion of IT costs were allocated to
other departments to better reflect the services performed by this group. In
the first quarter of fiscal 2002, approximately $160,000 of additional IT costs
were allocated from general and administrative expenses into cost of revenues,
research and development and sales and marketing. Comparable figures for the
prior year are not available.

General and administrative expenses represented 8% and 13% of net revenues
in the three months ended March 31, 2002 and 2001, respectively. This
percentage decrease was due to lower expenses as well as increased net
revenues. Without the change in allocation of IT costs, general and
administrative expenses would have been 10% of net revenues in the first
quarter of fiscal 2002. Although we expect to see general and administrative
expenses continue to decline as a percentage of revenue, we do not expect the
absolute dollars spent to remain at these lower spending levels.

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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 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 $139,000 and $424,000 in the three
months ended March 31, 2002 and 2001, respectively. There is $263,000 remaining
to be amortized in future periods.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS

In connection with the Workfire acquisition completed in September 2000,
we recorded goodwill and other intangible assets of approximately $66.1
million, which was being amortized on a straight-line basis over a three-year
period. Amortization of this goodwill and other intangibles totaled an
aggregate of $5.5 million in the first quarter of 2001, or 49% of net
revenues. Because of the impairment write-off in the third quarter of 2001, no
goodwill remained on the balance sheet. Accordingly, there was no amortization
or transition adjustment in the first quarter of 2002.

OTHER INCOME, NET

Other income, net consists primarily of interest income from our cash and
investments, interest expense related to our line of credit, debt and capital
lease obligations, and other expenses. Other income, net decreased to $217,000
in the three months ended March 31, 2002 from $234,000 in the same quarter in
the prior year, a decrease of 7%. This decrease was a result of lower yields on
invested funds, partially offset by lower interest expenses due to decreased
levels of debt.

INCOME TAX PROVISION

Our income tax provision for the three months ended March 31, 2002 is
primarily attributable to income taxes payable in foreign jurisdictions. The
effective tax rate for the first three months of fiscal 2002, and the expected
annual rate for 2002 is approximately ten percent. There was no corresponding
provision in the same quarter of the prior year due to the Companys
consolidated net loss for the quarter.

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 equipment
leasing and loans. Cash, cash equivalents and investments totaled $62.6 million
at March 31, 2002, an increase of $331,000 from December 31, 2001.

Net cash provided by operating activities was $321,000 in the three months
ended March 31, 2002, compared with net cash (used in) operations of ($372,000)
for the same period of the prior year. The increase in operating cash flows was
primarily due to net income reported in the current quarter, compared to a net
loss in the first quarter of fiscal 2001.

Net cash provided by (used in) investing activities was $(6.3) million
and $2.7 million in the three months ended March 31, 2002 and 2001
respectively, primarily reflecting transactions in marketable securities.
Disbursements related to fixed asset purchases were $242,000 in the current
quarter, compared to $457,000 in the first quarter of fiscal 2001.

Net cash provided by financing activities was $346,000 in the three months
ended March 31, 2002, compared to $1.3 million in the same quarter of the prior
year. In the first quarter of fiscal 2001, proceeds generated by issuance of
common stock totaled $973,000 and borrowings under the line of credit
generated an additional $1.0 million, which was partially offset by $678,000 of
disbursements repaying lease obligations, notes payable and a portion of
borrowings under the line of credit. In the first quarter of the current year,
proceeds generated by issuance of common stock totaled $542,000, partially
offset by disbursements related to notes payable and lease obligations totaling
$217,000.

We have entered into capital leases and notes payable to finance the
acquisition of computer software, hardware and furniture. As of March 31, 2002,
approximately $1.5 million was outstanding under capital lease obligations and
an additional $458,000 in notes payable. We also have a revolving credit
facility against accounts receivable, which provides for borrowings of up to
$10.0 million. This facility expires in May 2003. Borrowings under this
facility bear interest at the prime rate, which was 4.75% as of March 31, 2002,
and is secured by substantially all the assets of the Company. The Company is
required to maintain certain financial covenants

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related to working capital and quarterly maximum net loss amounts. At
March 31, 2002, the Company was in compliance with the covenants and the
outstanding balance on the line of credit was $1.9 million.

We have used a portion of the net initial public offering proceeds of
$62.6 million to repay subordinated loans of $5.0 million in 1999 and to fund
operations, including expanding and enhancing our sales and marketing
operations and product offerings. The balance remains invested.

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 any needed capital expenditures, will constitute
a partial use of our cash resources. In addition, we may utilize cash resources
to fund acquisitions or investments in complementary businesses, technologies
or products. We believe that our current cash, cash equivalents and investments
of $62.6 million at March 31, 2002 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.
However, we may need to raise additional funds if our estimates of revenues,
working capital or capital expenditure requirements change or prove inaccurate
or in order for us to respond to unforeseen technological or marketing hurdles
or to take advantage of unanticipated opportunities. These funds may not be
available at the time or times needed, or be 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.

RECENT ACCOUNTING PRONOUNCEMENTS

The impact of recent accounting pronouncements is discussed in Note 7 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 resellers,
distributors, systems integrators and original equipment manufacturers,
or OEMs; and
|
| |  |  | expand our domestic and international sales efforts.                                                                                                   

WE HAVE A HISTORY OF LOSSES AND PROFITABILITY WILL BE DIFFICULT TO ACHIEVE AND
SUSTAIN

We have incurred losses since we commenced operations in 1996 and, though
we achieved profitability for the quarter ended March 31, 2002, profitability
will remain difficult to achieve and sustain. We may not generate a sufficient
level of revenues to offset our expenditures or be able to adjust spending in a
timely manner to respond to any unanticipated decline in revenues. We incurred
net losses of $71.0, $9.4 and $10.9 million in 2001, 2000 and 1999
respectively. As of March 31, 2002, we had an accumulated deficit of $107.1
million. If revenues grow slower than we anticipate or if operating
expenditures exceed our expectations or cannot be adjusted accordingly, we may
experience additional losses on a quarterly and annual basis.

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

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



| |  |  | the timing and size of orders and shipments of our products;
| | - |  | ------------------------------------------------------------
|
| |  |  | the amount and timing of revenues from OEMs;                
|
| |  |  | the mix of products we sell;                                
|
| |  |  | the mix of channels through which those products are sold;  
|
| |  |  | the average selling prices of our products; and             
|
| |  |  | the amount and timing of our operating expenses.            

In the past, we have experienced fluctuations in operating results. These
fluctuations resulted primarily from variations in the mix of products sold and
variations in channels through which products were sold. Research and
development expenses have fluctuated due to increased prototype expenses and
consulting fees related to the launch of new products and increased personnel
expenses. 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.

IF THE APPLICATION TRAFFIC AND BANDWIDTH MANAGEMENT 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 partners to sell our products internationally
will harm our business. Sales to customers outside of North America accounted
for 65% of net revenues in the three months ended March 31, 2002 and more than
half of our net revenues in both fiscal 2001 and 2000. Our ability to grow will
depend in part on the continued expansion of international sales, which will
require success on the part of our resellers, distributors, systems integrators
and OEMs in marketing our products.

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

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

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

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

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

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 continue
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 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.

OUR PRODUCTS 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 DEPEND ON THEIR COMMERCIAL SUCCESS

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

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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 CORPORATION 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;                                                      
|
| |  |  | 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

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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. For the three months ended March 31, 2002, sales to three customers,
Alternative Technology, Inc., Westcon, Inc. and Macnica, Inc., accounted for
18%, 13% and 11% of net revenues, respectively. For the three months ended
March 31, 2001, one customer, Alternative Technology, Inc., accounted for 18%
of net revenues. 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 and
liquidity.

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

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



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

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

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.

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.

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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 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 product. Alternative technologies, including packet-queuing
technology, could achieve widespread market acceptance. Our future success will
depend in large part upon our ability to:



| |  |  | develop and maintain competitive products;                                                                       
| | - |  | -----------------------------------------------------------------------------------------------------------------
|
| |  |  | enhance our products by adding innovative features that differentiate our products from those of our competitors;
|
| |  |  | bring products to market on a timely basis at competitive prices;                                                
|
| |  |  | identify and respond to emerging technological trends in the market; and                                         
|
| |  |  | respond effectively to new technological changes or new product announcements by others.                         

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

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

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

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

OUR PRODUCTS MAY HAVE ERRORS OR DEFECTS THAT WE FIND AFTER THE PRODUCTS HAVE
BEEN SOLD, WHICH COULD NEGATIVELY AFFECT OUR REVENUES AND 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, they can directly affect the
functionality of the network. Furthermore, end users rely on our products to
maintain acceptable service levels. We have in the past encountered errors in
our products, which in a few instances resulted in network failures and in a
number of instances resulted in degraded service. To date, these errors have
not materially adversely affected us. Additional errors may occur in our
products in the future. The occurrence of defects, errors or failures could
result in the failure of our customers network or mission-critical
applications, delays in installation, product returns and other losses to us or
to our customers or end users. In addition, we would have limited experience
responding to new problems that could arise with any new products that we
introduce. These occurrences could also result in the loss of or delay in
market acceptance of our products, which could harm our business.

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

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

Our success depends significantly upon our proprietary technology and our
failure or inability to protect our proprietary technology would result in
significant harm to our business. We rely on a combination of patent, copyright
and trademark laws, and on trade secrets, confidentiality provisions and other
contractual provisions to protect our proprietary rights. These measures afford
only limited protection. As of March 31, 2002 we have eight issued U.S. patents
and twenty-six 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 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

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acquire licenses to such third-party intellectual property. We may not be
able to secure any required licenses on commercially reasonable terms, or at
all. We expect that we will increasingly be subject to infringement claims as
the number of products and competitors in the bandwidth management solutions
market grows and the functionality of products overlaps. Any of these claims or
resulting events could harm our business.

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

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

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

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

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

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

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




ITEM 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. We place our
investments with high credit quality issuers and, by policy, limit the
amount of the credit exposure to any one issuer. Our investment
securities are classified as available-for-sale and consequently are
recorded on the balance sheet at fair value with unrealized gains and
losses reported as a separate component of accumulated other
comprehensive income (loss).

We do not use derivative financial instruments. In general the Companys
policy is to limit the risk of principal loss and ensure the safety of invested
funds by limiting market and credit risk. All highly liquid investments with
less than three months to maturity from date of purchase are considered to be
cash equivalents; investments with maturities between three and twelve months
are considered to

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be short-term investments; and investments with maturities in excess of
twelve months are considered to be long-term investments. The following table
presents the amortized cost, fair value and related weighted-average interest
rates by year of maturity for our investment portfolio as of March 31, 2002 and
comparable fair values as of December 31, 2001.

|                           |                       |      |                |      |      |      |       |       |   |            |       |            |   |   |        |  |  |   |        |  |  |   |              |  | 
|-------------------------- | --------------------- | ---- | -------------- | ---- | ---- | ---- | ----- | ----- | - | ---------- | ----- | ---------- | - | - | ------ |  |  | - | ------ |  |  | - | ------------ |  | 
|                           |                       |      |                |      |      |      |       |       |   |            |       |            |   |   |        |  |  |   |        |  |  |   | December 31,
|                           |                       |      | March 31, 2002 |      | 2001
|                           |                       |      |                |      |     
|(in thousands)             |                       | 2002 |                | 2003 |      | 2004 |       | Total |   | Fair Value |       | Fair Value
|                           |                       |      |                |      |      |      |       |       |   |            |       |           
|Cash equivalents           |                       | $    | 42,982         |      |      | $    |      |       |   | $          |      |            |   | $ | 42,982 |  |  | $ | 42,982 |  |  | $ | 48,286       | 
|                           | Weighted-average rate |      |                | 1.77 | %    |      |       |      | % |            |       |           |   |   |        |  |  |   |        |  |  |   |              |  | 
|Short-term investments     |                       |      | 9,516          |      |      |      | 2,978 |       |   |            |      |            |   |   | 12,494 |  |  |   | 12,537 |  |  |   | 8,624        | 
|                           | Weighted-average rate |      |                | 3.95 | %    |      |       | 4.96  | % |            |       |           |   |   |        |  |  |   |        |  |  |   |              |  | 
|Long-term investments      |                       |      |               |      |      |      | 3,712 |       |   |            | 2,011 |            |   |   | 5,723  |  |  |   | 5,696  |  |  |   | 3,588        | 
|                           | Weighted-average rate |      |                |     |      |      |       | 3.74  | % |            |       | 3.34       | % |   |        |  |  |   |        |  |  |   |              |  | 
|                           |                       |      |                |      |      |      |       |       |   |            |       |            |   |   |        |  |  |   |        |  |  |   |              | 
|Total investment portfolio |                       | $    | 52,498         |      |      | $    | 6,690 |       |   | $          | 2,011 |            |   | $ | 61,199 |  |  | $ | 61,215 |  |  | $ | 60,498       | 
|                           |                       |      |                |      |      |      |       |       |   |            |       |            |   |   |        |  |  |   |        |  |  |   |              | 

Foreign Exchange

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




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 used $5.0 million to repay two
separate notes payable of $2.5 million each and used $1.8 million in connection
with the acquisition of Workfire. The remaining $55.1 million of the net
proceeds has been and is expected to continue 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.

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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 2nd day of May, 2002.

| |  |                 |  |                                                                     
| |  | --------------- |  | --------------------------------------------------------------------
| |  | PACKETEER, INC.
| |  | By:             |  | /s/ DAVID YNTEMA

David Yntema
Chief Financial Officer and Secretary

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