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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 SEPTEMBER 30, 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

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 30,499,229 at November 4, 2002.

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|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|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                          
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II OTHER INFORMATION    
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|CERTIFICATIONS               
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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TABLE OF CONTENTS

|               |  |                                                                                                                                      |    |   
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ | -- | --
|PART I         |  | FINANCIAL INFORMATION                                                                                                                |    |   
|              
|Item 1.        |  | Financial Statements:                                                                                                                |    |   
|              
|               |  | Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001                                                 |    | 3 
|              
|               |  | Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended
September 30, 2002 and September 30, 2001 |    | 4 
|              
|               |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and September 30, 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                                                                                               |    | 16
|              
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                                           |    | 23
|              
|Item 4.        |  | Controls and Procedures                                                                                                              |    | 24
|              
|PART II        |  | OTHER INFORMATION                                                                                                                    |    |   
|              
|Item 2.        |  | Changes in Securities and Use of Proceeds                                                                                            |    | 25
|              
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                                                     |    | 26
|              
|Signatures     |  |                                                                                                                                      | 26
|              
|Certifications |  |                                                                                                                                      | 27
|              
|Exhibits       |  |                                                                                                                                      | 29

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 as filed with
the SEC on March 22, 2002. Forward-looking statements in this report include,
but are not limited to, those relating to the general 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, our development of relationships with providers of
leading Internet technologies, our competition, the sufficiency of our cash,
cash equivalents and investments and our business model targets. 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)

|                                                                                                                                                             |                                                                                                                                        |                           |          |               |        |              |          |        |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | -------- | ------------- | ------ | ------------ | -------- | ------ | ------ | 
|                                                                                                                                                             |                                                                                                                                        |                           |          | September 30, |        | December 31,
|                                                                                                                                                             |                                                                                                                                        |                           |          | 2002          |        | 2001        
|                                                                                                                                                             |                                                                                                                                        |                           |          |               |        |             
|ASSETS                                                                                                                                                       |                                                                                                                                        |                           |          |               |        |              |          |       
|Current assets:                                                                                                                                              |                                                                                                                                        |                           |          |               |        |              |          |       
|                                                                                                                                                             | Cash and cash equivalents                                                                                                              |                           | $        | 37,411        |        |              | $        | 50,009 |       
|                                                                                                                                                             | Short-term investments                                                                                                                 |                           |          | 10,519        |        |              |          | 8,624  |       
|                                                                                                                                                             | Accounts receivable less allowance for doubtful accounts
of $79 and $132, as of September 30, 2002 and
December 31, 2001, respectively |                           |          | 4,955         |        |              |          | 5,772  |       
|                                                                                                                                                             | Inventories                                                                                                                            |                           |          | 2,198         |        |              |          | 2,189  |       
|                                                                                                                                                             | Prepaids and other current assets                                                                                                      |                           |          | 1,622         |        |              |          | 1,221  |       
|                                                                                                                                                             |                                                                                                                                        |                           |          |               |        |              |          |       
|                                                                                                                                                             |                                                                                                                                        | Total current assets      |          |               | 56,705 |              |          |        | 67,815 | 
|Property and equipment, net                                                                                                                                  |                                                                                                                                        |                           | 1,135    |               |        |              | 1,377    |       
|Long-term investments                                                                                                                                        |                                                                                                                                        |                           | 16,253   |               |        |              | 3,588    |       
|Other long-term assets                                                                                                                                       |                                                                                                                                        |                           | 332      |               |        |              | 225      |       
|                                                                                                                                                             |                                                                                                                                        |                           |          |               |        |              |          |       
|Total assets                                                                                                                                                 |                                                                                                                                        | $                         | 74,425   |               |        | $            | 73,005   |       
|                                                                                                                                                             |                                                                                                                                        |                           |          |               |        |              |          |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                         |                                                                                                                                        |                           |          |               |        |              |          |       
|Current liabilities:                                                                                                                                         |                                                                                                                                        |                           |          |               |        |              |          |       
|                                                                                                                                                             | Line of credit                                                                                                                         |                           | $        | 1,000         |        |              | $        | 1,851  |       
|                                                                                                                                                             | Current portion of capital lease obligations
and note payable                                                                          |                           |          | 813           |        |              |          | 917    |       
|                                                                                                                                                             | Accounts payable                                                                                                                       |                           |          | 1,427         |        |              |          | 2,282  |       
|                                                                                                                                                             | Accrued compensation                                                                                                                   |                           |          | 2,099         |        |              |          | 2,082  |       
|                                                                                                                                                             | Other accrued liabilities                                                                                                              |                           |          | 2,413         |        |              |          | 3,854  |       
|                                                                                                                                                             | Deferred revenue                                                                                                                       |                           |          | 5,441         |        |              |          | 4,106  |       
|                                                                                                                                                             |                                                                                                                                        |                           |          |               |        |              |          |       
|                                                                                                                                                             |                                                                                                                                        | Total current liabilities |          |               | 13,193 |              |          |        | 15,092 | 
|Long-term liabilities                                                                                                                                        |                                                                                                                                        |                           | 709      |               |        |              | 1,289    |       
|Common stock; $0.001 par value; 85,000 shares
authorized; 30,356 and 29,951 issued and outstanding at
September 30, 2002 and December 31, 2001, respectively |                                                                                                                                        |                           | 30       |               |        |              | 30       |       
|Additional paid-in capital                                                                                                                                   |                                                                                                                                        |                           | 165,806  |               |        |              | 164,273  |       
|Accumulated other comprehensive income                                                                                                                       |                                                                                                                                        |                           | 152      |               |        |              | (18      | )     
|Deferred stock-based compensation                                                                                                                            |                                                                                                                                        |                           | (92      | )             |        |              | (400     | )     
|Notes receivable from stockholders                                                                                                                           |                                                                                                                                        |                           | (56      | )             |        |              | (83      | )     
|Accumulated deficit                                                                                                                                          |                                                                                                                                        |                           | (105,317 | )             |        |              | (107,178 | )     
|                                                                                                                                                             |                                                                                                                                        |                           |          |               |        |              |          |       
|Total stockholders equity                                                                                                                                   |                                                                                                                                        |                           | 60,523   |               |        |              | 56,624   |       
|                                                                                                                                                             |                                                                                                                                        |                           |          |               |        |              |          |       
|Total liabilities and stockholders equity                                                                                                                   |                                                                                                                                        | $                         | 74,425   |               |        | $            | 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 |        | Nine months ended
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        | September 30,      |        | September 30,    
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                  
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        | 2002               |        | 2001              |        | 2002   |         | 2001 
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |      
|Revenues:                           |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|                                    |                                                              | Product revenues                                                                                                                                                                                                                                    |                               | $      | 12,006             |        |                   | $      | 9,481  |         |       | $      | 33,879 |        |         | $      | 31,448 |        
|                                    |                                                              | Service revenues                                                                                                                                                                                                                                    |                               |        | 2,031              |        |                   |        | 1,447  |         |       |        | 5,509  |        |         |        | 3,749  |        
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|                                    |                                                              |                                                                                                                                                                                                                                                     | Total net revenues            |        |                    | 14,037 |                   |        |        | 10,928  |       |        |        | 39,388 |         |        |        | 35,197  |  
|Cost of revenues:                   |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|                                    |                                                              | Product costs                                                                                                                                                                                                                                       |                               |        | 2,379              |        |                   |        | 2,437  |         |       |        | 7,215  |        |         |        | 8,592  |        
|                                    |                                                              | Service costs                                                                                                                                                                                                                                       |                               |        | 805                |        |                   |        | 721    |         |       |        | 2,156  |        |         |        | 2,308  |        
|                                    |                                                              | Amortization of acquired technology                                                                                                                                                                                                                 |                               |        |                   |        |                   |        |       |         |       |        |       |        |         |        | 1,199  |        
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|                                    |                                                              |                                                                                                                                                                                                                                                     | Total cost of revenues        |        |                    | 3,184  |                   |        |        | 3,158   |       |        |        | 9,371  |         |        |        | 12,099  |  
|                                    |                                                              |                                                                                                                                                                                                                                                     | Gross profit                  |        |                    | 10,853 |                   |        |        | 7,770   |       |        |        | 30,017 |         |        |        | 23,098  |  
|Operating expenses:                 |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|                                    |                                                              | Research and development (exclusive of stock-
based compensation expense of $26 and $113
for the three months ended September 30, 2002
and 2001 respectively and $158 and $570 for the nine
months ended September 30, 2002 and 2001,
respectively) |                               |        | 2,725              |        |                   |        | 3,292  |         |       |        | 8,108  |        |         |        | 9,209  |        
|                                    |                                                              | Sales and marketing (exclusive of stock-based
compensation expense of $35 and $102 for the three
months ended September 30, 2002 and 2001
respectively, and $116 and $345 for the nine months
ended September 30, 2002 and 2001, respectively)      |                               |        | 5,825              |        |                   |        | 5,232  |         |       |        | 16,825 |        |         |        | 16,886 |        
|                                    |                                                              | General and administrative (exclusive of stock-
based compensation expense of $12 and $22 for
the three months ended September 30, 2002 and 2001,
respectively and $38 and $86 for the nine months
ended September 30, 2002 and 2001, respectively) |                               |        | 1,152              |        |                   |        | 1,435  |         |       |        | 3,431  |        |         |        | 4,291  |        
|                                    |                                                              | Amortization of goodwill and other intangibles                                                                                                                                                                                                      |                               |        |                   |        |                   |        |       |         |       |        |       |        |         |        | 11,017 |        
|                                    |                                                              | Impairment of goodwill and other intangibles                                                                                                                                                                                                        |                               |        |                   |        |                   |        | 52,552 |         |       |        |       |        |         |        | 52,552 |        
|                                    |                                                              | Stock-based compensation                                                                                                                                                                                                                            |                               |        | 73                 |        |                   |        | 237    |         |       |        | 312    |        |         |        | 1,001  |        
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|                                    |                                                              |                                                                                                                                                                                                                                                     | Total operating expenses      |        |                    | 9,775  |                   |        |        | 62,748  |       |        |        | 28,676 |         |        |        | 94,956  |  
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|                                    |                                                              |                                                                                                                                                                                                                                                     | Income (loss) from operations |        |                    | 1,078  |                   |        |        | (54,978 | )     |        |        | 1,341  |         |        |        | (71,858 | )
|Other income, net                   |                                                              |                                                                                                                                                                                                                                                     | 309                           |        |                    |        | 696               |        |        |         | 727   |        |        |        | 1,703   |       
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|Income (loss) before taxes          |                                                              |                                                                                                                                                                                                                                                     | 1,387                         |        |                    |        | (54,282           | )      |        |         | 2,068 |        |        |        | (70,155 | )     
|Provision for income taxes          |                                                              |                                                                                                                                                                                                                                                     | 139                           |        |                    |        |                  |        |        |         | 207   |        |        |        |        |       
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|                                    |                                                              |                                                                                                                                                                                                                                                     | Net income (loss)             |        | $                  | 1,248  |                   |        | $      | (54,282 | )     |        | $      | 1,861  |         |        | $      | (70,155 | )
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|Basic net income (loss) per share   |                                                              | $                                                                                                                                                                                                                                                   | 0.04                          |        |                    | $      | (1.83             | )      |        | $       | 0.06  |        |        | $      | (2.38   | )     
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|Diluted net income (loss) per share |                                                              | $                                                                                                                                                                                                                                                   | 0.04                          |        |                    | $      | (1.83             | )      |        | $       | 0.06  |        |        | $      | (2.38   | )     
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|                                    | Shares used in computing basic net income (loss) per
share   |                                                                                                                                                                                                                                                     |                               | 30,285 |                    |        |                   | 29,678 |        |         |       | 30,122 |        |        |         | 29,450 |       
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       
|                                    | Shares used in computing diluted net income (loss)
per share |                                                                                                                                                                                                                                                     |                               | 30,427 |                    |        |                   | 29,678 |        |         |       | 30,343 |        |        |         | 29,450 |       
|                                    |                                                              |                                                                                                                                                                                                                                                     |                               |        |                    |        |                   |        |        |         |       |        |        |        |         |       

See accompanying notes to condensed consolidated financial statements.

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

|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |         |        |        |        |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------------------- | --------------------------------------------------- | ----- | ----------------- | ------- | ------- | ------ | ------ | ------ | -
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       | Nine months ended
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       | September 30,    
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                  
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       | 2002              |         | 2001   
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|Cash flows from operating activities:                |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|                                                     | Net income (loss)                                                                                  |                                              | $                                                  | 1,861                                               |       |                   | $       | (70,155 | )     
|                                                     | Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |                                              |                                                    |                                                     |       |                   |         |         |       
|                                                     |                                                                                                    | Depreciation                                 |                                                    |                                                     | 1,006 |                   |         |         | 1,493  |       
|                                                     |                                                                                                    | Amortization of goodwill and intangibles     |                                                    |                                                     |      |                   |         |         | 12,263 |       
|                                                     |                                                                                                    | Impairment of goodwill and intangibles       |                                                    |                                                     |      |                   |         |         | 52,552 |       
|                                                     |                                                                                                    | Other non-cash charges                       |                                                    |                                                     | 391   |                   |         |         | 1,081  |       
|                                                     |                                                                                                    | Changes in operating assets and liabilities: |                                                    |                                                     |       |                   |         |         |        |       
|                                                     |                                                                                                    |                                              | Accounts receivable                                |                                                     |       | 817               |         |         |        | 1,704  |       
|                                                     |                                                                                                    |                                              | Inventories                                        |                                                     |       | (9                | )       |         |        | 824    |       
|                                                     |                                                                                                    |                                              | Prepaids and other current assets                  |                                                     |       | (401              | )       |         |        | 776    |       
|                                                     |                                                                                                    |                                              | Accounts payable                                   |                                                     |       | (855              | )       |         |        | (860   | )     
|                                                     |                                                                                                    |                                              | Accrued compensation and other accrued liabilities |                                                     |       | (1,424            | )       |         |        | (1,019 | )     
|                                                     |                                                                                                    |                                              | Deferred revenue                                   |                                                     |       | 1,335             |         |         |        | 1,172  |       
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|                                                     |                                                                                                    |                                              |                                                    | Net cash provided by (used in) operating activities |       |                   | 2,721   |         |        |        | (169   | )
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|Cash flows from investing activities:                |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|                                                     | Purchases of property and equipment                                                                |                                              |                                                    | (764                                                | )     |                   |         | (833    | )     
|                                                     | Purchases of investments                                                                           |                                              |                                                    | (58,693                                             | )     |                   |         | (90,229 | )     
|                                                     | Proceeds from sales and maturities of investments                                                  |                                              |                                                    | 44,224                                              |       |                   |         | 116,912 |       
|                                                     | Other assets                                                                                       |                                              |                                                    | (107                                                | )     |                   |         | 428     |       
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|                                                     |                                                                                                    |                                              |                                                    | Net cash provided by (used in) investing activities |       |                   | (15,340 | )       |        |        | 26,278 |  
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|Cash flows from financing activities:                |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|                                                     | Net proceeds from issuance of common stock                                                         |                                              |                                                    | 644                                                 |       |                   |         | 710     |       
|                                                     | Proceeds from stockholders notes receivable                                                       |                                              |                                                    | 27                                                  |       |                   |         | 83      |       
|                                                     | Sale of stock to employees under the ESPP                                                          |                                              |                                                    | 885                                                 |       |                   |         | 1,437   |       
|                                                     | Borrowings under line of credit                                                                    |                                              |                                                    |                                                    |       |                   |         | 5,107   |       
|                                                     | Repayments of line of credit                                                                       |                                              |                                                    | (851                                                | )     |                   |         | (7,537  | )     
|                                                     | Proceeds from notes payable                                                                        |                                              |                                                    |                                                    |       |                   |         | 551     |       
|                                                     | Payments of notes payable                                                                          |                                              |                                                    | (127                                                | )     |                   |         | (62     | )     
|                                                     | Principal payments of capital lease obligations                                                    |                                              |                                                    | (557                                                | )     |                   |         | (542    | )     
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|                                                     |                                                                                                    |                                              |                                                    | Net cash provided by (used in) financing activities |       |                   | 21      |         |        |        | (253   | )
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                                    |                                              | (12,598                                            | )                                                   |       |                   | 25,856  |        
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|Cash and cash equivalents at beginning of period     |                                                                                                    |                                              | 50,009                                             |                                                     |       |                   | 24,273  |        
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|Cash and cash equivalents at end of period           |                                                                                                    | $                                            | 37,411                                             |                                                     |       | $                 | 50,129  |        
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|Supplemental disclosures of cash flow information:   |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|                                                     | Cash paid during period for interest                                                               |                                              | $                                                  | 214                                                 |       |                   | $       | 431     |       
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        
|                                                     | Cash paid during period for taxes                                                                  |                                              | $                                                  | 92                                                  |       |                   | $       |        |       
|                                                     |                                                                                                    |                                              |                                                    |                                                     |       |                   |         |        

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 and nine months ended September
30, 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. GOODWILL AND OTHER INTANGIBLE ASSETS  ADOPTION OF FASB STATEMENT 142

The following table presents the impact of SFAS No. 142, Goodwill and
Other Intangible Assets, on net income (loss) and net income (loss) per share
had the standard been in effect for the first nine months of fiscal 2001:

|                                         |                                 |      |                    |      |                   |      |         |       |   |   |       |      |  |   |         |        |  
|---------------------------------------- | ------------------------------- | ---- | ------------------ | ---- | ----------------- | ---- | ------- | ----- | - | - | ----- | ---- |  | - | ------- | ------ | -
|                                         |                                 |      | Three Months Ended |      | Nine Months Ended
|                                         |                                 |      | September 30,      |      | September 30,    
|                                         |                                 |      |                    |      |                  
|(in thousands, except per share amounts) |                                 | 2002 |                    | 2001 |                   | 2002 |         | 2001 
|                                         |                                 |      |                    |      |                   |      |         |      
|Reported net income (loss)               |                                 | $    | 1,248              |      |                   | $    | (54,282 | )     |   | $ | 1,861 |      |  | $ | (70,155 | )     
|                                         | Add back: Goodwill amortization |      |                    |     |                   |      |         |      |   |   |       |     |  |   |         | 11,017 |  
|                                         |                                 |      |                    |      |                   |      |         |       |   |   |       |      |  |   |         |       
|Adjusted net income (loss)               |                                 | $    | 1,248              |      |                   | $    | (54,282 | )     |   | $ | 1,861 |      |  | $ | (59,138 | )     
|                                         |                                 |      |                    |      |                   |      |         |       |   |   |       |      |  |   |         |       
|Basic earnings per share:                |                                 |      |                    |      |                   |      |         |       |   |   |       |      |  |   |         |       
|                                         | Reported net income (loss)      |      | $                  | 0.04 |                   |      | $       | (1.83 | ) |   | $     | 0.06 |  |   | $       | (2.38  | )
|                                         | Goodwill amortization           |      |                    | 0.00 |                   |      |         |      |   |   |       | 0.00 |  |   |         | 0.37   |  
|                                         |                                 |      |                    |      |                   |      |         |       |   |   |       |      |  |   |         |       
|                                         | Adjusted net income (loss)      |      | $                  | 0.04 |                   |      | $       | (1.83 | ) |   | $     | 0.06 |  |   | $       | (2.01  | )
|                                         |                                 |      |                    |      |                   |      |         |       |   |   |       |      |  |   |         |       
|Diluted earnings per share:              |                                 |      |                    |      |                   |      |         |       |   |   |       |      |  |   |         |       
|                                         | Reported net income (loss)      |      | $                  | 0.04 |                   |      | $       | (1.83 | ) |   | $     | 0.06 |  |   | $       | (2.38  | )
|                                         | Goodwill amortization           |      |                    | 0.00 |                   |      |         |      |   |   |       | 0.00 |  |   |         | 0.37   |  
|                                         |                                 |      |                    |      |                   |      |         |       |   |   |       |      |  |   |         |       
|                                         | Adjusted net income (loss)      |      | $                  | 0.04 |                   |      | $       | (1.83 | ) |   | $     | 0.06 |  |   | $       | (2.01  | )
|                                         |                                 |      |                    |      |                   |      |         |       |   |   |       |      |  |   |         |       

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
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.

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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. INCOME TAXES

Our income tax provision for the quarter and nine months ended September
30, 2002 is primarily attributable to income taxes payable in foreign
jurisdictions. The effective tax rate for the three and nine months ended
September 30, 2002, and the expected annual rate for 2002 is approximately 10%.
There was no corresponding provision in the same periods of the prior year due
to the Companys consolidated net loss for the quarter and nine months ended
September 30, 2001.

5. 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. 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:

|                                         |                                     |                    |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |         |   |        |        | 
|---------------------------------------- | ----------------------------------- | ------------------ | --------------------------------------------------- | ---------------------------------------------------------- |  | ------ | ------ | ------- | - | ------ | ------ | ----- |  | ------ | ------ | ------- | - | ------ | ------ | 
|(in thousands, except per share amounts) |                                     | Three Months Ended |                                                     | Nine Months Ended                                         
|                                         |                                     | September 30,      |                                                     | September 30,                                             
|                                         |                                     |                    |                                                     |                                                            |  |        |        |        
|                                         |                                     |                    |                                                     |                                                            |  | 2002   |        | 2001    |   | 2002   |        | 2001 
|                                         |                                     |                    |                                                     |                                                            |  |        |        |         |   |        |        |      
|Numerator:                               |                                     |                    |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |        
|                                         | Net income (loss)                   |                    | $                                                   | 1,248                                                      |  |        | $      | (54,282 | ) |        | $      | 1,861 |  |        | $      | (70,155 | )
|                                         |                                     |                    |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |        
|Denominator:                             |                                     |                    |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |        
|                                         | Basic:                              |                    |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |         |  
|                                         |                                     |                    | Weighted-average shares of common stock outstanding |                                                            |  | 30,287 |        |         |   | 29,723 |        |       |  | 30,124 |        |         |   | 29,495 |       
|                                         |                                     |                    | Less: shares subject to repurchase                  |                                                            |  | 2      |        |         |   | 45     |        |       |  | 2      |        |         |   | 45     |       
|                                         |                                     |                    |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |        
|                                         |                                     |                    |                                                     | Basic weighted-average common shares outstanding           |  |        | 30,285 |         |   |        | 29,678 |       |  |        | 30,122 |         |   |        | 29,450 | 
|                                         |                                     |                    |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |        
|                                         |                                     | Diluted:           |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |         |   |       
|                                         |                                     |                    |                                                     | Basic weighted-average common shares outstanding           |  |        | 30,285 |         |   |        | 29,678 |       |  |        | 30,122 |         |   |        | 29,450 | 
|                                         |                                     |                    |                                                     | Add: potentially dilutive common shares from stock
options |  |        | 142    |         |   |        |       |       |  |        | 221    |         |   |        |       | 
|                                         |                                     |                    |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |        
|                                         |                                     |                    |                                                     | Diluted weighted-average common shares                     |  |        | 30,427 |         |   |        | 29,678 |       |  |        | 30,343 |         |   |        | 29,450 | 
|                                         |                                     |                    |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |        
|                                         | Basic net income (loss) per share   |                    | $                                                   | 0.04                                                       |  |        | $      | (1.83   | ) |        | $      | 0.06  |  |        | $      | (2.38   | )
|                                         |                                     |                    |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |        
|                                         | Diluted net income (loss) per share |                    | $                                                   | 0.04                                                       |  |        | $      | (1.83   | ) |        | $      | 0.06  |  |        | $      | (2.38   | )
|                                         |                                     |                    |                                                     |                                                            |  |        |        |         |   |        |        |       |  |        |        |        

6. 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

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financial statements. The difference between reported net income (loss)
and comprehensive income (loss) was not considered material for the periods
presented.

7. SEGMENT REPORTING

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

The Company operates in the United States and internationally and derives
its revenue from the sale of products and software licenses. The Companys
sales, marketing, and development efforts have been focused on the PacketShaper
family of products and PacketWiseTM software. For the three months ended
September 30, 2002, sales to three customers, Alternative Technology, Inc.,
Westcon Inc. and Macnica Inc. accounted for 23% 16% and 14% of total net
revenues, respectively. For the nine months ended September 30, 2002, sales to
the same three customers, Alternative Technology, Westcon and Macnica accounted
for 20%, 15% and 11% of total net revenues, respectively. In the prior year,
for the three months ended September 30, 2001, sales to Alternative Technology
and Westcon accounted for 26% and 11% of net revenues, respectively. For the
nine months ended September 30, 2001, one customer, Alternative Technology,
accounted for 21% of net revenues.

Geographic Information

|               |                          |                    |   |                    |        |                   |   |       |        |      |   |        |        |  |   |        |        | 
|-------------- | ------------------------ | ------------------ | - | ------------------ | ------ | ----------------- | - | ----- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|               |                          |                    |   | Three months ended |        | Nine months ended
|(in thousands) |                          | September 30,      |   | September 30,     
|               |                          |                    |   |                   
|               |                          |                    |   | 2002               |        | 2001              |   | 2002  |        | 2001
|               |                          |                    |   |                    |        |                   |   |       |        |     
|Revenues:      |                          |                    |   |                    |        |                   |   |       |        |      |   |        |        |  |   |       
|               | North America            |                    | $ | 6,477              |        |                   | $ | 5,046 |        |      | $ | 16,850 |        |  | $ | 15,617 |       
|               | Asia Pacific             |                    |   | 4,578              |        |                   |   | 2,903 |        |      |   | 12,806 |        |  |   | 9,243  |       
|               | Europe and rest of world |                    |   | 2,982              |        |                   |   | 2,979 |        |      |   | 9,732  |        |  |   | 10,337 |       
|               |                          |                    |   |                    |        |                   |   |       |        |      |   |        |        |  |   |       
|               |                          | Total net revenues |   | $                  | 14,037 |                   |   | $     | 10,928 |      |   | $      | 39,388 |  |   | $      | 35,197 | 
|               |                          |                    |   |                    |        |                   |   |       |        |      |   |        |        |  |   |       

Revenues reflect the destination of the shipped product.

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

8. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143 (SFAS 143), Accounting for
Asset Retirement Obligations. SFAS 143 addresses the financial accounting and
reporting for obligations and retirement costs related to the retirement of
tangible long-lived assets. Packeteer is required to adopt SFAS 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.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. SFAS 145 requires that
early extinguishments of debt that are normal and an important part of ongoing
activities not be accounted for as extraordinary items. This Statement also
requires that modifications of capital lease agreements by lessees giving rise
to new operating lease agreements be accounted for as sale-leasebacks.
Generally, SFAS No. 145 is effective for transactions occurring after May 15,
2002. The adoption of this standard is expected to have no impact to the
Company.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (SFAS 146), Accounting for Costs Associated With Exit or Disposal
Activities. SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and requires the costs to be
recorded at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon managements commitment
to an exit plan, which is generally before an actual liability has been
incurred. Packeteer is required to adopt SFAS 146 for any exit or disposal
activities initiated after December 31, 2002. At this time we do not believe
the adoption of SFAS 146 will have a material impact on the Companys results
of operations or financial condition.

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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 22,000 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. Prior to fiscal 2002,
we incurred significant losses and as of September 30, 2002, had an accumulated
deficit of $105.3 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
three and nine months ended September 30, 2002, profitability could remain
difficult to 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 continue 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 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:

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| |  |  | 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 and are negotiated at the outset of an
arrangement, and are 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 and past transaction history of the customer.

Our 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 exchange
activity. Additionally, when the Company introduces a new product into its
distribution channel for which there is no historical customer demand or
acceptance history, revenue is recognized on the basis of sell-through to end
user customers until such time as demand or acceptance history has been
established.

The Company has analyzed all of the elements included in its multiple
element arrangements and has determined that it has sufficient vendor specific
objective evidence (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 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 record inventory reserves for excess and obsolete inventories
based on historical usage and forecasted demand. Factors which could cause our
forecasted demand to prove inaccurate include our reliance on indirect sales
channels and the variability of our sales cycle; the potential of announcements
of our new products or enhancements to replace or shorten the life cycle of our
current products, or cause customers to defer their purchases; loss of sales
due to product shortages; and the potential of new or alternative technologies
achieving widespread market acceptance and thereby rendering our existing
products obsolete. If future demand or market conditions are less favorable
than our projections, additional inventory write-downs may be required and
would be reflected in cost of sales in the period the revision is made.

Valuation of Long-Lived and Intangible Assets. As required by SFAS 144,
Accounting for Impairment or Disposal of Long Lived Assets, 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. In accordance
with SFAS 48, Revenue Recognition When Right of Return Exists, management
must use judgment and make estimates of potential future product returns
related to current period product revenue. When providing for sales return
reserves, we analyze historical return rates, as they are the primary
indicators for estimating future returns. Material differences may result in
the amount and timing of our revenue if for any period actual returns

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differ from management judgments or estimates. The sales return reserve
liability balances at September 30, 2002 and December 31, 2001 were $924,000
and $331,000, respectively. We must also make estimates of the uncollectibility
of accounts receivable. When evaluating the adequacy of the allowance for
doubtful accounts, we review the aged receivables on an account-by-account
basis, taking into consideration such factors as age of the receivables,
customer history and estimated continued credit-worthiness, as well as general
economic and industry trends. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances could be required. The allowance for doubtful accounts
was $79,000 and $132,000 at September 30, 2002 and December 31, 2001,
respectively.

Warranty reserves. Upon shipment of products to our customers, we provide
for the estimated cost to repair or replace products that may be returned under
warranty. Our warranty period is typically 12 months from the date of shipment
to the end user customer. For existing products, the reserve is estimated based
on actual historical experience. For new products, the 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. To date, these problems
have not materially adversely affected us. Warranty reserves amounted to
$322,000 and $552,000 at September 30, 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 |    | Nine months ended
|                                    |                                          |                                |     | September 30,      |    | September 30,    
|                                    |                                          |                                |     |                    |    |                  
|                                    |                                          |                                |     | 2002               |    | 2001              |      | 2002 |      | 2001
|                                    |                                          |                                |     |                    |    |                   |      |      |      |     
|Total net revenues                  |                                          |                                | 100 | %                  |    |                   | 100  | %    |      |      | 100 | %  |    |  | 100  | %  
|Cost of revenues                    |                                          |                                | 23  |                    |    |                   | 29   |      |      |      | 24  |    |    |  | 31   |    
|Amortization of acquired technology |                                          |                                |    |                    |    |                   |     |      |      |      |    |    |    |  | 3    |    
|                                    |                                          |                                |     |                    |    |                   |      |      |      |      |     |    |    |  |      |    
|                                    |                                          | Total cost of revenues         |     |                    | 23 |                   |      |      | 29   |      |     |    | 24 |  |      |     | 34   |  
|                                    |                                          | Gross profit                   |     |                    | 77 |                   |      |      | 71   |      |     |    | 76 |  |      |     | 66   |  
|Operating expenses:                 |                                          |                                |     |                    |    |                   |      |      |      |      |     |    |    |  |      |    
|                                    | Research and development                 |                                |     | 19                 |    |                   |      | 30   |      |      |     | 20 |    |  |      | 26  |     
|                                    | Sales and marketing                      |                                |     | 41                 |    |                   |      | 48   |      |      |     | 43 |    |  |      | 48  |     
|                                    | General and administrative               |                                |     | 8                  |    |                   |      | 13   |      |      |     | 9  |    |  |      | 12  |     
|                                    | Amortization of goodwill                 |                                |     |                   |    |                   |      |     |      |      |     |   |    |  |      | 32  |     
|                                    | Impairment of goodwill and intangibles   |                                |     |                   |    |                   |      | 481  |      |      |     |   |    |  |      | 149 |     
|                                    | Amortization of stock-based compensation |                                |     | 1                  |    |                   |      | 2    |      |      |     | 1  |    |  |      | 3   |     
|                                    |                                          |                                |     |                    |    |                   |      |      |      |      |     |    |    |  |      |    
|                                    |                                          | Total operating expenses       |     |                    | 69 |                   |      |      | 574  |      |     |    | 73 |  |      |     | 270  |  
|                                    |                                          |                                |     |                    |    |                   |      |      |      |      |     |    |    |  |      |    
|Income (loss) from operations       |                                          |                                | 8   |                    |    |                   | (503 | )    |      |      | 3   |    |    |  | (204 | )  
|Other income, net                   |                                          |                                | 2   |                    |    |                   | 6    |      |      |      | 2   |    |    |  | 5    |    
|                                    |                                          |                                |     |                    |    |                   |      |      |      |      |     |    |    |  |      |    
|                                    |                                          | Net income (loss) before taxes |     |                    | 10 |                   |      |      | (497 | )    |     |    | 5  |  |      |     | (199 | )
|Provision for taxes                 |                                          |                                | 1   |                    |    |                   |     |      |      |      |    |    |    |  |     |    
|                                    |                                          |                                |     |                    |    |                   |      |      |      |      |     |    |    |  |      |    
|Net income (loss)                   |                                          |                                | 9   | %                  |    |                   | (497 | )%   |      |      | 5   | %  |    |  | (199 | )% 
|                                    |                                          |                                |     |                    |    |                   |      |      |      |      |     |    |    |  |      |    

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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.

Total net revenues of $14.0 million in the three months ended September
30, 2002 increased $3.1 million, or 28%, from the $10.9 million reported in the
same quarter of the prior year. Total net revenues increased to $39.4 million
in the nine months ended September 30, 2002, from $35.2 million in the same
period of the prior year, an increase of 12%. Product revenues of $12.0 million
for the quarter increased $2.5 million, or 26%, from the $9.5 million for the
three months ended September 30, 2001. Units shipped in the three months ended
September 30, 2002 increased 25% over the number of units shipped in the same
period in 2001. Product revenues for the nine months ended September 30, 2002
increased to $33.9 million, from $31.4 million for the same period of the prior
year, an 8% increase, primarily as a result of a 7% increase in units shipped.
To a lesser extent, a favorable product mix also contributed to the reported
increase in sales year-to-date, as sales of our higher end product continue to
represent a higher percentage of the reported revenue. There were no
significant selling price changes during any of the periods presented. Service
revenues increased to $2.0 million in the three months ended September 30,
2002, from $1.4 million in the second quarter of fiscal 2001, an increase of
40%. Service revenues for the nine months ended September 30, 2002 increased to
$5.5 million, from $3.7 million in the first nine months of fiscal 2001, an
increase of 47%. These increases were mainly due to increases in the number of
units on maintenance contracts.

For the quarter ended September 30, 2002, total net revenues in North
America of $6.5 million increased from $5.0 million in the same period last
year, and accounted for 46% of total net revenues, consistent with the same
period last year. Net revenues in Asia Pacific of $4.6 million for the quarter
ended September 30, 2002, accounted for 33% of total net revenues compared to
$2.9 million and 27% for the same period last year. Net revenues in Europe, the
Middle East and Africa, EMEA, of $3.0 million, accounting for 21% of third
quarter sales, were consistent in absolute dollars but down as a percentage of
net revenues from 27% reported for the three months ended September 30, 2001.
For the nine months ended September 30, 2002, net revenues in North America of
$16.9 million increased from $15.6 million for the same period last year and
accounted for 43% of total net revenues, a decline of 1% from the same period
last year. Net revenues in Asia Pacific, totaling $12.8 million in the nine
months ended September 30, 2002, accounted for 32% of first nine months total
net revenues, representing an increase of 6% over the first nine months of
fiscal 2001 due to strong sales in Japan. EMEA net revenues of $9.7 million
accounted for 25% of total net revenues for the nine months ended September 30,
2002, and were down in both absolute dollars and as a percentage of sales when
compared to $10.3 million and 29% reported for the nine months ended September
30, 2001.

During the three months ended September 30, 2002, three customers,
Alternative Technology, Inc., Westcon, Inc., and Macnica Inc. accounted for
23%, and 16% and 14% of total net revenues, respectively. For the nine months
ended September 30, 2002, the same three customers, Alternative Technology,
Westcon, and Macnica accounted for 20%, 15% and 11% of total net revenues,
respectively. For the three months ended September 30, 2001, sales to
Alternative Technology and Westcon accounted for 26% and 11% of net revenues,
respectively. For the nine months ended September 30, 2001, one customer,
Alternative Technology, accounted for 21% of net revenues. Sales to the top 10
indirect channel partners accounted for 67% and 57% of total net revenues for
the nine months ended September 30, 2002 and 2001, respectively. At September
30, 2002, two customers, Alternative Technology and Westcon, accounted for 35%
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, should allow us to
continue to grow our business in 2002. Our growth rate and total 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
customer base and renewing existing maintenance contracts. Our future
profitability and rate of growth, if any, will be directly affected by the
continued acceptance of our product in the marketplace, as well as the timing
and size of orders, shipments, product mix, average selling price of our
products and general economic conditions. Our failure to successfully convince
the market of our value proposition and maintain strong relationships with our
indirect channel partners to ensure the success of their selling efforts on our
behalf, would adversely impact our total net revenues and operating results.

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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, overhead costs and service support costs. Our cost of revenues,
$3.2 million in the three months ended September 30, 2002, was unchanged from
the $3.2 million reported in the same period of fiscal 2001. For the nine
months ended September 30, 2002, cost of revenues decreased $1.5 million, or
14%, to $9.4 million from $10.9 million for the same period in 2001. The
decrease in costs was due to reductions in manufacturing costs and other
product costs. The cost of revenues represented 23% and 24% of net revenues for
the three and nine months ended September 30, 2002 respectively, compared to
29% and 31% in the three and nine months ended September 30, 2001,
respectively.

Product costs for the third quarter of 2002, remained constant at $2.4
million, the same as reported in the third quarter of 2001. Manufacturing costs
increased $292,000 from the same quarter of fiscal 2001 due to increased units
shipped. However, overhead costs, specifically warranty and parts costs, were
down $349,000 from the second quarter of 2001. For the nine months ended
September 30, 2002, product costs decreased 16%, to $7.2 million from $8.6
million for the same period in 2001. Overhead costs, specifically warranty and
parts costs, were down $1.4 million compared to the first nine months of fiscal
2001. Although we expect our overhead costs to increase in absolute dollars in
future quarters, as a percent of revenues we do not expect them to return to
fiscal 2001 levels. To maintain our product 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.

Service costs increased $84,000, from $721,000 in the third quarter of
fiscal 2001 to $805,000 in the current quarter, an increase of 12%. The
increased service costs in this quarter are due to service fees and supplies
related to an agreement previously entered into by the Company for the
outsourcing of certain maintenance and support services. For the nine months
ended September 30, 2002, service costs decreased 7%, or $152,000, to $2.2
million from $2.3 million for the same period in 2001. This change is a result
of decreases in consulting fees and personnel related costs. We expect service
costs to increase in absolute dollars in future quarters primarily as a result
of increased service fees related to outsourcing of certain maintenance and
support services.

AMORTIZATION OF ACQUIRED TECHNOLOGY

Amortization of acquired technology relates to the acquired developed
technologies of Workfire Technologies International, Inc.. The acquisition
occurred in September 2000. Due to the impairment write-off in the third
quarter of fiscal 2001, there was no amortization during the current fiscal
year. The amortization of acquired technology was $1.2 million in the nine
month period ended September 30, 2001, representing 3% of 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 $26,000 and $113,000 for the three
months ended September 30, 2002 and 2001, respectively, research and
development expenses of $2.7 million in the three months ended September 30,
2002, were down $567,000, or 17% from the $3.3 million reported for the quarter
ended September 30, 2001. These decreases in expenses were primarily due to a
decrease in program related charges, and to a lesser extent, a reduction in
depreciation expense. Excluding the effects of stock-based compensation of
$158,000 and $570,000 for the nine months ended September 30, 2002 and 2001,
respectively, research and development expenses of $8.1 million decreased $1.1
million, or 12%, from the $9.2 million in the same period in the prior year.
For the nine months of fiscal 2002, the decrease in expenses was primarily due
to decreased personnel related costs, and to a lesser extent a reduction in
depreciation expense, partially offset by an increase in distributed costs.
Personnel costs declined as a result of staffing changes made in June of 2001
as part of overall corporate cost control measures. 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 19% and 20% of total net revenues
for the quarter and nine months ended September 30, 2002, respectively,
compared to 30% and 26% of total net revenues for the quarter and nine months
ended September 30, 2001, respectively. As of September 30, 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 control objectives. We currently expect to experience somewhat
higher spending levels in the upcoming quarters, but continue to target our
spending to approximate our current long-term business model target of 18% to
20% of revenues going forward.

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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
our products as well as related trade show, promotional and public relations
expenses. Excluding the effects of stock-based compensation of $35,000 and
$102,000 in the three months ended September 30, 2002 and 2001, respectively,
sales and marketing expenses increased to $5.8 million in the three months
ended September 30, 2002, from $5.2 million in the same quarter in the prior
year, an increase of 11%. Increases in personnel costs, specifically recruiting
and commissions, and distributed costs were partially offset by decreases in
depreciation expense and supplies costs. Excluding the effects of stock-based
compensation of $116,000 and $345,000 for the nine months ended September 30,
2002 and 2001, respectively, sales and marketing expenses decreased slightly to
$16.8 million in the nine months ended September 30, 2002, from the $16.9
million in the first nine months of the prior year. Decreases were primarily in
travel costs, depreciation expense and marketing activities, specifically
tradeshows, channel programs and public relations expenses, partially offset by
an increase in distributed costs, which is discussed below under the heading
GENERAL AND ADMINISTRATIVE. Sales and marketing expenses represented 41% and
43% of total net revenues for the three and nine-month periods ended September
30, 2002, respectively, compared to 48% of total net revenues in the three and
nine months ended September 30, 2001. 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 $12,000 and $22,000 for the three months ended September 30,
2002 and 2001, respectively, general and administrative expenses declined to
$1.2 million in the three months ended September 30, 2002, from $1.4 million in
the same quarter of the prior year, a decrease of 20%. Excluding the effects of
stock-based compensation of $38,000 and $86,000 for the nine months ended
September 30, 2002 and 2001 respectively, general and administrative expenses
were $3.4 million, down 20% from the $4.3 million in the first nine months of
the prior year. For both the quarter and nine months ending September 30, 2002,
decreases in professional services and distributed costs were partially offset
by increased personnel costs related to the CEO transition and search occurring
during the second and third quarters of 2002. Decreases in distributed costs
are 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 three and nine
month periods ended September 30, 2002 respectively, approximately $160,000 and
$480,000 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 9% of total net
revenues for the three and nine-month periods ended September 30, 2002 compared
to 13% and 12% of total net revenues in the same periods of the prior year,
respectively. This percentage decrease was due to lower expenses as well as
increased total net revenues. Without the change in allocation of IT costs,
general and administrative expenses would have been 9% and 10% of total net
revenues in the three and nine-month periods ended September 30, 2002,
respectively. We expect to see general and administrative expenses continue to
decline as a percentage of revenue and expect to reach our long-term business
model target of 6% to 7% of revenue within the next twelve to eighteen months.

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 $73,000 and $237,000 in the three
months ended September 30, 2002 and 2001, respectively. For the nine months
ended September 30, 2002 and 2001, stock based compensation expense was
$312,000 and $1.0 million, respectively. There is $92,000 remaining to be
amortized in future periods.

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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 $12.3 million in the nine-month period ended September 30, 2001.
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 corresponding periods of fiscal 2002.

IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES

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

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

OTHER INCOME, NET

Other income, net consists primarily of interest income from our cash and
investments, less interest expense related to our line of credit, debt and
capital lease obligations, and other expenses. Other income, net decreased to
$309,000 in the three months ended September 30, 2002 from $696,000 in the same
quarter in the prior year, a decrease of 56%. Other income, net was $727,000
for the nine-month period ended September 30, 2002, a decrease of $976,000 from
the $1.7 million for the nine months ended September 30, 2001, a decrease of
57%. These decreases were a result of lower yields on invested funds due to
declining interest rates and increased foreign currency transaction losses,
partially offset by lower interest expenses due to decreased levels of debt.

INCOME TAX PROVISION

Our income tax provision for the quarter and nine months ended September
30, 2002 is primarily attributable to income taxes payable in foreign
jurisdictions. The effective tax rate for the three and nine months ended
September 30, 2002, and the expected annual rate for 2002 is approximately 10%.
There was no corresponding provision in the same periods of the prior year due
to the Companys consolidated net loss for the quarter and nine months ended
September 30, 2001.

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 $64.2 million
at September 30, 2002, an increase of $2.0 million from December 31, 2001.

Net cash provided by operating activities was $2.7 million in the nine
months ended September 30, 2002, compared with net cash used in operations of
$169,000 for the same period of the prior year. The increase in operating cash
flows was primarily due to net income reported in the current period, compared
to a net loss in the first nine months of fiscal 2001.

Net cash used in investing activities was $15.3 million in the nine months
ended September 30, 2002 compared to net cash provided by investing activities
of $26.3 million for the same period in the prior year, primarily reflecting
transactions in marketable securities. Fixed asset purchases were $764,000 for
the nine months ended September 30, 2002, compared to $833,000 for the same
period in the prior year.

Net cash provided by financing activities was $21,000 in the nine months
ended September 30, 2002, compared to $253,000 used in financing activities for
the same period in the prior year. In the nine months ended September 30, 2002,
proceeds generated by issuance of common stock totaled $1.5 million. This was
offset by $1.5 million of payments on lease obligations, the note payable and a
portion of borrowings under the line of credit. In the nine months ended
September 30, 2001, proceeds generated by issuance of

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common stock totaled $2.1 million while net proceeds from the note payable
generated $489,000. This was offset by repayments under the line of credit of
$2.4 million, and lease obligations repayments totaling $542,000.

We have entered into capital leases and notes payable to finance the
acquisition of computer software, hardware and furniture. As of September 30,
2002, approximately $1.1 million was outstanding under capital lease
obligations and $373,000 was outstanding on a note payable. We also have a
revolving credit facility against accounts receivable, which provides for
borrowings of up to $10.0 million. As of September 30, 2002, the outstanding
balance on the line was $1.0 million. This facility expires in May 2003.
Borrowings under this facility bear interest at the prime rate, which was 4.75%
as of September 30, 2002, and are secured by substantially all the assets of
the Company. The Company is required to maintain certain financial covenants
related to working capital and quarterly maximum net loss amounts. At September
30, 2002, the Company was in compliance with these covenants.

The following summarizes Packeteers commitments under debt and lease
obligations, including interest where applicable, as of September 30, 2002, and
the effect such obligations are expected to have on its liquidity and cash flow
in future periods (in thousands):

|                 |       |   |       |       |      |   |                   |     |            |   |       |       |  |   |       |       | 
|---------------- | ----- | - | ----- | ----- | ---- | - | ----------------- | --- | ---------- | - | ----- | ----- |  | - | ----- | ----- | 
|                 |       |   | Total |       | 2002 |   | 2003 through 2005 |     | Thereafter
|                 |       |   |       |       |      |   |                   |     |           
|Capital leases   |       | $ | 1,328 |       |      | $ | 216               |     |            | $ | 1,112 |       |  | $ |      |      
|Operating leases |       |   | 7,211 |       |      |   | 705               |     |            |   | 3,696 |       |  |   | 2,810 |      
|Note payable     |       |   | 416   |       |      |   | 54                |     |            |   | 362   |       |  |   |      |      
|                 |       |   |       |       |      |   |                   |     |            |   |       |       |  |   |       |      
|                 | Total |   | $     | 8,955 |      |   | $                 | 975 |            |   | $     | 5,170 |  |   | $     | 2,810 | 
|                 |       |   |       |       |      |   |                   |     |            |   |       |       |  |   |       |      

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 capital expenditures related to a facilities move
anticipated in the fourth quarter of this year, 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
$64.2 million at September 30, 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 8 of
the notes to the unaudited 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;
| | - |  | -----------------------------------------

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| |  |  | 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 COULD BE DIFFICULT TO SUSTAIN

We have incurred losses since we commenced operations in 1996 and, though
we achieved profitability for the three and nine months ended September 30,
2002, profitability could be difficult to 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 September 30, 2002, we had an accumulated deficit
of $105.3 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.

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

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, specifically prototype expenses, consulting fees and
other program costs, have fluctuated relative to the specific stage of product
development of

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the various projects underway. 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 OUR INTERNATIONAL SALES EFFORTS ARE UNSUCCESSFUL, OUR BUSINESS WILL FAIL TO
GROW

The failure of our indirect partners to sell our products internationally
will harm our business. Sales to customers outside of North America accounted
for 54% and 57% of total net revenues in the three and nine months ended
September 30, 2002 and more than half of our total 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.

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

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

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

IF WE ARE UNABLE TO DEVELOP AND MAINTAIN STRONG PARTNERING RELATIONSHIPS WITH
OUR INDIRECT CHANNEL PARTNERS, IF THEIR SALES EFFORTS ON OUR BEHALF ARE NOT
SUCCESSFUL, OR IF THEY FAIL TO PROVIDE ADEQUATE SERVICES TO OUR END-USER
CUSTOMERS, OUR SALES MAY SUFFER AND OUR REVENUES MAY NOT INCREASE

We rely primarily on an indirect distribution channel consisting of
resellers, distributors, 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 more
extensive and well-funded sales and marketing operations of any 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.

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

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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.

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 September 30, 2002, sales to three
customers, Alternative Technology, Inc., Westcon Inc. and Macnica Inc.
accounted for 23% 16% and 14% of total net revenues, respectively. For the nine
months ended September 30, 2002, sales to the same three customers, Alternative
Technology, Westcon and Macnica accounted for 20%, 15% and 11% of total net
revenues, respectively. In the prior year, for the three months ended September
30, 2001, sales to Alternative Technology and Westcon accounted for 26% and 11%
of net revenues, respectively. For the nine months ended September 30, 2001,
one customer, Alternative Technology, accounted for 21% 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.

WE FACE RISKS RELATED TO INVENTORIES OF OUR PRODUCTS HELD BY OUR DISTRIBUTORS

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

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

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.

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

If and 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
excess or obsolescence.

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



| |  |  | reduced control over delivery schedules;                                
| | - |  | ------------------------------------------------------------------------
|
| |  |  | the potential lack of adequate capacity during periods of excess demand;
|
| |  |  | 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 manufacturer fails to obtain components in sufficient
quantities when required, our business could be harmed. Our suppliers also sell
products to our competitors. Our suppliers may enter into exclusive
arrangements with our competitors, stop selling their products or components to
us at commercially reasonable prices or refuse to sell their products or
components to us at any price. Our inability to obtain sufficient quantities of
single-sourced or limited-sourced components, or to develop alternative sources
for components or products would harm our ability to maintain and expand our
business.

POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE LIKELY TO IMPACT OUR FUTURE
FINANCIAL POSITION AND RESULTS OF OPERATIONS

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

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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 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.
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 key personnel could negatively
impact our ability to carry out our business plan.

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

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

Some 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 or announce an intention to enter our market with
alternative products and technologies, which could reduce the sales or market

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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 will 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.

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

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

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

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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 September 30, 2002 we have 11 issued U.S.
patents and 32 U.S. pending patent applications. Currently, none of our
technology is patented outside of the United States. Our means of protecting
our proprietary rights in the U.S. or abroad may not be adequate and
competitors may independently develop similar technologies. Our future success
will depend in part on our ability to protect our proprietary rights and the
technologies used in our principal products. Despite our efforts to protect our
proprietary rights and technologies unauthorized parties may attempt to copy
aspects of our products or to obtain and use trade secrets or other information
that we regard as proprietary. Legal proceedings to enforce our intellectual
property rights could be burdensome and expensive and could involve a high
degree of uncertainty. These legal proceedings may also divert managements
attention from growing our business. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
U.S. Issued patents may not preserve our proprietary position. If we do not
enforce and protect our intellectual property, our business will suffer
substantial harm.

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

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

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

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

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

We currently anticipate that our existing cash and investment balances 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

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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 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 September 30, 2002 and the fair values as of December 31, 2001.

|                           |                       |      |                    |      |          |      |        |       |   |            |        |            |   |   |        |  |  |   |        |  |  |   |        |  | 
|-------------------------- | --------------------- | ---- | ------------------ | ---- | -------- | ---- | ------ | ----- | - | ---------- | ------ | ---------- | - | - | ------ |  |  | - | ------ |  |  | - | ------ |  | 
|                           |                       |      | September 30, 2002 |      | December
|                           |                       |      |                    |      | 31, 2001
|(in thousands)             |                       | 2002 |                    | 2003 |          | 2004 |        | Total |   | Fair Value |        | Fair Value
|                           |                       |      |                    |      |          |      |        |       |   |            |        |           
|Cash equivalents           |                       | $    | 36,295             |      |          | $    |       |       |   | $          |       |            |   | $ | 36,295 |  |  | $ | 36,296 |  |  | $ | 48,286 | 
|                           | Weighted-average rate |      |                    | 1.70 | %        |      |        |      |   |            |        |           |  
|Short-term investments     |                       |      | 2,057              |      |          |      | 8,415  |       |   |            |       |            |   |   | 10,472 |  |  |   | 10,519 |  |  |   | 8,624  | 
|                           | Weighted-average rate |      |                    | 5.41 | %        |      |        | 2.81  | % |            |        |           |  
|Long-term investments      |                       |      |                   |      |          |      | 2,846  |       |   |            | 13,277 |            |   |   | 16,123 |  |  |   | 16,253 |  |  |   | 3,588  | 
|                           | Weighted-average rate |      |                    |     |          |      |        | 3.18  | % |            |        | 2.18       | %
|                           |                       |      |                    |      |          |      |        |       |   |            |        |            |   |   |        |  |  |   |        |  |  |   |        | 
|Total investment portfolio |                       | $    | 38,352             |      |          | $    | 11,261 |       |   | $          | 13,277 |            |   | $ | 62,890 |  |  | $ | 63,068 |  |  | $ | 60,498 | 
|                           |                       |      |                    |      |          |      |        |       |   |            |        |            |   |   |        |  |  |   |        |  |  |   |        | 

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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 world-wide markets. All sales are currently made in U.S.
dollars; and, as a result, a strengthening of the dollar could make our
products less competitive in foreign markets. We have no foreign exchange
contracts, option contracts or other foreign hedging arrangements.




ITEM 4. CONTROLS AND PROCEDURES



| | a. |  | Evaluation of Disclosure Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of the Companys
management, including the Companys Interim Chief Executive Officer and
current Chief Executive Officer along with the Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Companys Interim Chief Executive Officer and current Chief Executive
Officer along with the Chief Financial Officer concluded that our disclosure
controls and procedures are sufficiently effective to ensure that the
information required to be disclosed by the Company in the reports it files
under the Exchange Act is gathered, analyzed and disclosed with adequate
timeliness, accuracy and completeness.
|
| | b. |  | Changes in Internal Controls                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |    |  | There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of the evaluation referred to above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            




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.

25



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##### Table of Contents






ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | EXHIBITS
| | --- |  | --------

|              |  |                                                
|------------- |  | -----------------------------------------------
|Exhibit 99.1: |  | Sarbanes-Oxley Section 906 Certification  CEO 
|             
|Exhibit 99.2: |  | Sarbanes-Oxley Section 906 Certification   CFO



| | (b) |  | REPORTS ON FORM 8-K                                                                                                                                                           
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | A Current Report on Form 8-K dated October 7, 2002, reporting under Item 5
 Other Events, was filed announcing Dave Côté had been appointed
President and CEO of the Company.




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 8th day of November, 2002.

| |  |                 |  |                                                   
| |  | --------------- |  | --------------------------------------------------
| |  | PACKETEER, INC.
| |  | By:             |  | /s/ DAVE CÔTÉ                                     
| |  |                 |  |                                                   
| |  |                 |  | Dave Côté
President and Chief Executive Office    
| |  | By:             |  | /s/ DAVID YNTEMA                                  
| |  |                 |  |                                                   
| |  |                 |  | David Yntema
Chief Financial Officer and Secretary

26



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##### Table of Contents






CERTIFICATIONS

I, Dave Côté, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Packeteer, Inc.;                                                                                                                                                                                                                                                        
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this quarterly
report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15 d-14) for the
registrant and we have:                                                                                                     



| | (a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to
the registrants auditors and the audit committee of registrants board of directors:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       |  |     |  |                                                
|---------------------- |  | --- |  | -----------------------------------------------
|Date: November 8, 2002 |  | /s/ |  | DAVE CÔTÉ                                      
|                       |  |     |  |                                                
|                       |  |     |  | Dave Côté
President and Chief Executive Officer

27



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##### Table of Contents



I, David Yntema, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Packeteer, Inc.;                                                                                                                                                                                                                                                        
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial information included
in this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14
and 15 d-14) for the registrant and we have:                                                                                                     



| | (a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit committee of registrants board of
directors:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in
internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       |  |     |  |                                     
|---------------------- |  | --- |  | ------------------------------------
|Date: November 8, 2002 |  | /s/ |  | DAVID YNTEMA                        
|                       |  |     |  |                                     
|                       |  |     |  | David Yntema
Chief Financial Officer

28