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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 JUNE 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

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

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

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

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

Yes [X]         No [   ]

The number of shares outstanding of Registrants common stock, $0.001 par
value, was 30,338,897 at August 7, 2002.

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TABLE OF CONTENTS



|                              |                                                                                               |                                                 |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS          
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                          
|PART II OTHER INFORMATION    
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 4. Submission of Matters to a Vote of Security Holders                                  
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 10.22                
|EXHIBIT 10.23                



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TABLE OF CONTENTS

|           |  |                                                                                                                           |  |   
|---------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I     |  | FINANCIAL INFORMATION                                                                                                     |  |   
|          
|Item 1.    |  | Financial Statements:                                                                                                     |  |   
|          
|           |  | Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001                                           |  | 3 
|          
|           |  | Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended
June 30, 2002 and June 30, 2001 |  | 4 
|          
|           |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and June 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
|          
|PART II    |  | OTHER INFORMATION                                                                                                         |  |   
|          
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                                 |  | 24
|          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                       |  | 25
|          
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                          |  | 25
|          
|Signatures |  | 26                                                                                                                       

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 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)

|                                                                                                                                                        |                                                                                                                                   |                           |          |          |        |              |          |        |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | -------- | -------- | ------ | ------------ | -------- | ------ | ------ | 
|                                                                                                                                                        |                                                                                                                                   |                           |          | June 30, |        | December 31,
|                                                                                                                                                        |                                                                                                                                   |                           |          | 2002     |        | 2001        
|                                                                                                                                                        |                                                                                                                                   |                           |          |          |        |             
|ASSETS                                                                                                                                                  |                                                                                                                                   |                           |          |          |        |              |          |       
|Current assets:                                                                                                                                         |                                                                                                                                   |                           |          |          |        |              |          |       
|                                                                                                                                                        | Cash and cash equivalents                                                                                                         |                           | $        | 50,580   |        |              | $        | 50,009 |       
|                                                                                                                                                        | Short-term investments                                                                                                            |                           |          | 7,423    |        |              |          | 8,624  |       
|                                                                                                                                                        | Accounts receivable less allowance for doubtful accounts
of $79 and $132, as of June 30, 2002 and
December 31, 2001, respectively |                           |          | 5,442    |        |              |          | 5,772  |       
|                                                                                                                                                        | Inventories                                                                                                                       |                           |          | 2,241    |        |              |          | 2,189  |       
|                                                                                                                                                        | Prepaids and other current assets                                                                                                 |                           |          | 1,336    |        |              |          | 1,221  |       
|                                                                                                                                                        |                                                                                                                                   |                           |          |          |        |              |          |       
|                                                                                                                                                        |                                                                                                                                   | Total current assets      |          |          | 67,022 |              |          |        | 67,815 | 
|Property and equipment, net                                                                                                                             |                                                                                                                                   |                           | 1,161    |          |        |              | 1,377    |       
|Long-term investments                                                                                                                                   |                                                                                                                                   |                           | 4,895    |          |        |              | 3,588    |       
|Other long-term assets                                                                                                                                  |                                                                                                                                   |                           | 240      |          |        |              | 225      |       
|                                                                                                                                                        |                                                                                                                                   |                           |          |          |        |              |          |       
|Total assets                                                                                                                                            |                                                                                                                                   | $                         | 73,318   |          |        | $            | 73,005   |       
|                                                                                                                                                        |                                                                                                                                   |                           |          |          |        |              |          |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                    |                                                                                                                                   |                           |          |          |        |              |          |       
|Current liabilities:                                                                                                                                    |                                                                                                                                   |                           |          |          |        |              |          |       
|                                                                                                                                                        | Line of credit                                                                                                                    |                           | $        | 1,501    |        |              | $        | 1,851  |       
|                                                                                                                                                        | Current portion of capital lease obligations
and note payable                                                                     |                           |          | 823      |        |              |          | 917    |       
|                                                                                                                                                        | Accounts payable                                                                                                                  |                           |          | 1,420    |        |              |          | 2,282  |       
|                                                                                                                                                        | Accrued compensation                                                                                                              |                           |          | 2,773    |        |              |          | 2,082  |       
|                                                                                                                                                        | Other accrued liabilities                                                                                                         |                           |          | 2,582    |        |              |          | 3,854  |       
|                                                                                                                                                        | Deferred revenue                                                                                                                  |                           |          | 5,010    |        |              |          | 4,106  |       
|                                                                                                                                                        |                                                                                                                                   |                           |          |          |        |              |          |       
|                                                                                                                                                        |                                                                                                                                   | Total current liabilities |          |          | 14,109 |              |          |        | 15,092 | 
|Long-term liabilities                                                                                                                                   |                                                                                                                                   |                           | 912      |          |        |              | 1,289    |       
|Common stock; $0.001 par value; 85,000 shares
authorized; 30,120 and 29,951 issued and outstanding at
June 30, 2002 and December 31, 2001, respectively |                                                                                                                                   |                           | 30       |          |        |              | 30       |       
|Additional paid-in capital                                                                                                                              |                                                                                                                                   |                           | 165,044  |          |        |              | 164,273  |       
|Accumulated other comprehensive income                                                                                                                  |                                                                                                                                   |                           | 10       |          |        |              | (18      | )     
|Deferred stock-based compensation                                                                                                                       |                                                                                                                                   |                           | (165     | )        |        |              | (400     | )     
|Notes receivable from stockholders                                                                                                                      |                                                                                                                                   |                           | (57      | )        |        |              | (83      | )     
|Accumulated deficit                                                                                                                                     |                                                                                                                                   |                           | (106,565 | )        |        |              | (107,178 | )     
|                                                                                                                                                        |                                                                                                                                   |                           |          |          |        |              |          |       
|Total stockholders equity                                                                                                                              |                                                                                                                                   |                           | 58,297   |          |        |              | 56,624   |       
|                                                                                                                                                        |                                                                                                                                   |                           |          |          |        |              |          |       
|Total liabilities and stockholders equity                                                                                                              |                                                                                                                                   | $                         | 73,318   |          |        | $            | 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 |        | Six months ended
|                                                             |                                                                                                                                                                                                                            |                               |        | June 30,           |        | June 30,        
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                 
|                                                             |                                                                                                                                                                                                                            |                               |        | 2002               |        | 2001             |        | 2002   |        | 2001
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |     
|Revenues:                                                    |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|                                                             | Product revenues                                                                                                                                                                                                           |                               | $      | 11,287             |        |                  | $      | 11,868 |        |      | $      | 21,873 |        |   | $       | 21,967 |        
|                                                             | Service revenues                                                                                                                                                                                                           |                               |        | 1,823              |        |                  |        | 1,220  |        |      |        | 3,478  |        |   |         | 2,302  |        
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|                                                             |                                                                                                                                                                                                                            | Total net revenues            |        |                    | 13,110 |                  |        |        | 13,088 |      |        |        | 25,351 |   |         |        | 24,269  |  
|Cost of revenues:                                            |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|                                                             | Product costs                                                                                                                                                                                                              |                               |        | 2,435              |        |                  |        | 3,151  |        |      |        | 4,836  |        |   |         | 6,155  |        
|                                                             | Service costs                                                                                                                                                                                                              |                               |        | 682                |        |                  |        | 782    |        |      |        | 1,351  |        |   |         | 1,587  |        
|                                                             | Amortization of acquired technology                                                                                                                                                                                        |                               |        |                   |        |                  |        | 599    |        |      |        |       |        |   |         | 1,199  |        
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|                                                             |                                                                                                                                                                                                                            | Total cost of revenues        |        |                    | 3,117  |                  |        |        | 4,532  |      |        |        | 6,187  |   |         |        | 8,941   |  
|                                                             |                                                                                                                                                                                                                            | Gross profit                  |        |                    | 9,993  |                  |        |        | 8,556  |      |        |        | 19,164 |   |         |        | 15,328  |  
|Operating expenses:                                          |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|                                                             | Research and development (exclusive of stock-based compensation expense of $50 and $195
for the three months ended June 30, 2002
and 2001 and $132 and $456 for the six months
ended June 30, 2002 and 2001, respectively) |                               |        | 2,632              |        |                  |        | 3,066  |        |      |        | 5,383  |        |   |         | 5,917  |        
|                                                             | Sales and marketing (exclusive of stock-based
compensation expense of $37 and $113 for the
three months ended June 30, 2002 and 2001 and
$81 and $243 for the six months ended June
30, 2002 and 2001, respectively)       |                               |        | 5,658              |        |                  |        | 5,431  |        |      |        | 11,000 |        |   |         | 11,654 |        
|                                                             | General and administrative (exclusive of
stock-based compensation expense of $13 and $32 for
the three months ended June 30, 2002 and 2001
and $26 and $65 for the six months ended June
30, 2002 and 2001, respectively)  |                               |        | 1,249              |        |                  |        | 1,438  |        |      |        | 2,279  |        |   |         | 2,856  |        
|                                                             | Amortization of goodwill                                                                                                                                                                                                   |                               |        |                   |        |                  |        | 5,508  |        |      |        |       |        |   |         | 11,017 |        
|                                                             | Stock-based compensation                                                                                                                                                                                                   |                               |        | 100                |        |                  |        | 340    |        |      |        | 239    |        |   |         | 764    |        
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|                                                             |                                                                                                                                                                                                                            | Total operating expenses      |        |                    | 9,639  |                  |        |        | 15,783 |      |        |        | 18,901 |   |         |        | 32,208  |  
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|                                                             |                                                                                                                                                                                                                            | Income (loss) from operations |        |                    | 354    |                  |        |        | (7,227 | )    |        |        | 263    |   |         |        | (16,880 | )
|Other income, net                                            |                                                                                                                                                                                                                            |                               | 201    |                    |        |                  | 773    |        |        |      | 418    |        |        |   | 1,007   |       
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|Income (loss) before taxes                                   |                                                                                                                                                                                                                            |                               | 555    |                    |        |                  | (6,454 | )      |        |      | 681    |        |        |   | (15,873 | )     
|Provision for income taxes                                   |                                                                                                                                                                                                                            |                               | 56     |                    |        |                  |       |        |        |      | 68     |        |        |   |        |       
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|                                                             |                                                                                                                                                                                                                            | Net income (loss)             |        | $                  | 499    |                  |        | $      | (6,454 | )    |        | $      | 613    |   |         | $      | (15,873 | )
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|Basic net income (loss) per share                            |                                                                                                                                                                                                                            | $                             | 0.02   |                    |        | $                | (0.22  | )      |        | $    | 0.02   |        |        | $ | (0.54   | )     
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|Diluted net income (loss) per share                          |                                                                                                                                                                                                                            | $                             | 0.02   |                    |        | $                | (0.22  | )      |        | $    | 0.02   |        |        | $ | (0.54   | )     
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|Shares used in computing basic net income (loss)
per share   |                                                                                                                                                                                                                            |                               | 30,074 |                    |        |                  | 29,410 |        |        |      | 30,037 |        |        |   | 29,333  |       
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|Shares used in computing diluted net income (loss)
per share |                                                                                                                                                                                                                            |                               | 30,622 |                    |        |                  | 29,410 |        |        |      | 30,617 |        |        |   | 29,333  |       
|                                                             |                                                                                                                                                                                                                            |                               |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       

See accompanying notes to condensed consolidated financial statements.

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

|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |         |        |        |        |  
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------------------- | --------------------------------------------------- | --- | ---------------- | ------ | ------- | ------ | ------ | ------ | -
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     | Six months ended
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     | June 30,        
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                 
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     | 2002             |        | 2001   
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|Cash flows from operating activities:              |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|                                                   | Net income (loss)                                                                                  |                                              | $                                                  | 613                                                 |     |                  | $      | (15,873 | )     
|                                                   | Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |                                              |                                                    |                                                     |     |                  |        |         |       
|                                                   |                                                                                                    | Depreciation                                 |                                                    |                                                     | 706 |                  |        |         | 1,012  |       
|                                                   |                                                                                                    | Amortization of goodwill and intangibles     |                                                    |                                                     |    |                  |        |         | 12,263 |       
|                                                   |                                                                                                    | Other non-cash charges                       |                                                    |                                                     | 279 |                  |        |         | 764    |       
|                                                   |                                                                                                    | Changes in operating assets and liabilities: |                                                    |                                                     |     |                  |        |         |        |       
|                                                   |                                                                                                    |                                              | Accounts receivable                                |                                                     |     | 330              |        |         |        | (560   | )     
|                                                   |                                                                                                    |                                              | Inventories                                        |                                                     |     | (52              | )      |         |        | 672    |       
|                                                   |                                                                                                    |                                              | Prepaids and other current assets                  |                                                     |     | (115             | )      |         |        | 1,116  |       
|                                                   |                                                                                                    |                                              | Accounts payable                                   |                                                     |     | (862             | )      |         |        | (1,274 | )     
|                                                   |                                                                                                    |                                              | Accrued compensation and other accrued liabilities |                                                     |     | (581             | )      |         |        | (1,035 | )     
|                                                   |                                                                                                    |                                              | Deferred revenue                                   |                                                     |     | 904              |        |         |        | 888    |       
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|                                                   |                                                                                                    |                                              |                                                    | Net cash provided by (used in) operating activities |     |                  | 1,222  |         |        |        | (2,027 | )
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|Cash flows from investing activities:              |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|                                                   | Purchases of property and equipment                                                                |                                              |                                                    | (490                                                | )   |                  |        | (744    | )     
|                                                   | Purchases of investments                                                                           |                                              |                                                    | (34,669                                             | )   |                  |        | (82,297 | )     
|                                                   | Proceeds from sales and maturities of investments                                                  |                                              |                                                    | 34,551                                              |     |                  |        | 100,869 |       
|                                                   | Other assets                                                                                       |                                              |                                                    | (15                                                 | )   |                  |        | 439     |       
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|                                                   |                                                                                                    |                                              |                                                    | Net cash provided by (used in) investing activities |     |                  | (623   | )       |        |        | 18,267 |  
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|Cash flows from financing activities:              |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|                                                   | Net proceeds from issuance of common stock                                                         |                                              |                                                    | 232                                                 |     |                  |        | 219     |       
|                                                   | Proceeds from stockholders notes receivable                                                       |                                              |                                                    | 26                                                  |     |                  |        | 53      |       
|                                                   | Sale of stock to employees under the ESPP                                                          |                                              |                                                    | 535                                                 |     |                  |        | 828     |       
|                                                   | Borrowings under line of credit                                                                    |                                              |                                                    |                                                    |     |                  |        | 1,314   |       
|                                                   | Repayments of line of credit                                                                       |                                              |                                                    | (350                                                | )   |                  |        | (1,915  | )     
|                                                   | Payments of notes payable                                                                          |                                              |                                                    | (84                                                 | )   |                  |        | (50     | )     
|                                                   | Principal payments of capital lease obligations                                                    |                                              |                                                    | (387                                                | )   |                  |        | (363    | )     
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|                                                   |                                                                                                    |                                              |                                                    | Net cash provided by (used in) financing activities |     |                  | (28    | )       |        |        | 86     |  
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|Net increase in cash and cash equivalents          |                                                                                                    |                                              | 571                                                |                                                     |     |                  | 16,326 |        
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|Cash and cash equivalents at beginning of period   |                                                                                                    |                                              | 50,009                                             |                                                     |     |                  | 24,273 |        
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|Cash and cash equivalents at end of period         |                                                                                                    | $                                            | 50,580                                             |                                                     |     | $                | 40,599 |        
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|Supplemental disclosures of cash flow information: |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|                                                   | Cash paid during period for interest                                                               |                                              | $                                                  | 153                                                 |     |                  | $      | 243     |       
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        
|                                                   | Cash paid during period for taxes                                                                  |                                              | $                                                  | 64                                                  |     |                  | $      |        |       
|                                                   |                                                                                                    |                                              |                                                    |                                                     |     |                  |        |        

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 six months ended June 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 half of fiscal 2001:

|                                         |                                 |      |                    |      |                  |      |        |       |   |   |     |      |  |   |         |        |  
|---------------------------------------- | ------------------------------- | ---- | ------------------ | ---- | ---------------- | ---- | ------ | ----- | - | - | --- | ---- |  | - | ------- | ------ | -
|                                         |                                 |      | Three Months Ended |      | Six Months Ended
|                                         |                                 |      | June 30,           |      | June 30,        
|                                         |                                 |      |                    |      |                 
|(in thousands, except per share amounts) |                                 | 2002 |                    | 2001 |                  | 2002 |        | 2001 
|                                         |                                 |      |                    |      |                  |      |        |       |  
|Reported net income (loss)               |                                 | $    | 499                |      |                  | $    | (6,454 | )     |   | $ | 613 |      |  | $ | (15,873 | )     
|                                         | Add back: Goodwill amortization |      |                    |     |                  |      |        | 5,508 |   |   |     |     |  |   |         | 11,017 |  
|                                         |                                 |      |                    |      |                  |      |        |       |   |   |     |      |  |   |         |       
|Adjusted net income (loss)               |                                 | $    | 499                |      |                  | $    | (946   | )     |   | $ | 613 |      |  | $ | (4,856  | )     
|                                         |                                 |      |                    |      |                  |      |        |       |   |   |     |      |  |   |         |       
|Basic earnings per share:                |                                 |      |                    |      |                  |      |        |       |   |   |     |      |  |   |         |       
|                                         | Reported net income (loss)      |      | $                  | 0.02 |                  |      | $      | (0.22 | ) |   | $   | 0.02 |  |   | $       | (0.54  | )
|                                         | Goodwill amortization           |      |                    | 0.00 |                  |      |        | 0.19  |   |   |     | 0.00 |  |   |         | 0.38   |  
|                                         |                                 |      |                    |      |                  |      |        |       |   |   |     |      |  |   |         |       
|                                         | Adjusted net income (loss)      |      | $                  | 0.02 |                  |      | $      | (0.03 | ) |   | $   | 0.02 |  |   | $       | (0.16  | )
|                                         |                                 |      |                    |      |                  |      |        |       |   |   |     |      |  |   |         |       
|Diluted earnings per share:              |                                 |      |                    |      |                  |      |        |       |   |   |     |      |  |   |         |       
|                                         | Reported net income (loss)      |      | $                  | 0.02 |                  |      | $      | (0.22 | ) |   | $   | 0.02 |  |   | $       | (0.54  | )
|                                         | Goodwill amortization           |      |                    | 0.00 |                  |      |        | 0.19  |   |   |     | 0.00 |  |   |         | 0.38   |  
|                                         |                                 |      |                    |      |                  |      |        |       |   |   |     |      |  |   |         |       
|                                         | Adjusted net income (loss)      |      | $                  | 0.02 |                  |      | $      | (0.03 | ) |   | $   | 0.02 |  |   | $       | (0.16  | )
|                                         |                                 |      |                    |      |                  |      |        |       |   |   |     |      |  |   |         |       

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. COMMITMENT:

During the second quarter, we entered into an agreement with a third party
to provide next business day replacement units for end-user customers outside
the United States covered by maintenance agreements providing this service
level. The agreement has an initial term of three years, renewable for
successive one-year periods, but may be terminated at any time by either party
with twelve months written notice. During the first year of the agreement,
there are guaranteed minimum payments to the service provider of $35,000 per
month. In connection with this agreement, and during the second quarter, the
service provider purchased a number of units that will be used as their spares
pool, to provide replacement service for Packeteer customers, and as
demonstration units, as the service provider is also a reseller of the
Companys products.

4. 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.

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

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

|                                         |                                     |          |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |         |   |        |        | 
|---------------------------------------- | ----------------------------------- | -------- | --------------------------------------------------- | ---------------------------------------------------------- |  | ------------------ | ------ | ---------------- | - | ------ | ------ | ---- |  | ------ | ------ | ------- | - | ------ | ------ | 
|                                         |                                     |          |                                                     |                                                            |  | Three Months Ended |        | Six Months Ended
|                                         |                                     |          |                                                     |                                                            |  | June 30,           |        | June 30,        
|                                         |                                     |          |                                                     |                                                            |  |                    |        |                 
|(in thousands, except per share amounts) |                                     | 2002     |                                                     | 2001                                                       |  | 2002               |        | 2001            
|                                         |                                     |          |                                                     |                                                            |  |                    |        |                  |   |        |        |     
|Numerator:                               |                                     |          |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |        
|                                         | Net income (loss)                   |          | $                                                   | 499                                                        |  |                    | $      | (6,454           | ) |        | $      | 613  |  |        | $      | (15,873 | )
|                                         |                                     |          |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |        
|Denominator:                             |                                     |          |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |        
|                                         | Basic:                              |          |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |         |  
|                                         |                                     |          | Weighted-average shares of common stock outstanding |                                                            |  | 30,077             |        |                  |   | 29,702 |        |      |  | 30,040 |        |         |   | 29,625 |       
|                                         |                                     |          | Less: shares held in escrow                         |                                                            |  |                   |        |                  |   | 183    |        |      |  |       |        |         |   | 183    |       
|                                         |                                     |          | Less: shares subject to repurchase                  |                                                            |  | 3                  |        |                  |   | 109    |        |      |  | 3      |        |         |   | 109    |       
|                                         |                                     |          |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |        
|                                         |                                     |          |                                                     | Basic weighted-average common shares outstanding           |  |                    | 30,074 |                  |   |        | 29,410 |      |  |        | 30,037 |         |   |        | 29,333 | 
|                                         |                                     |          |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |        
|                                         |                                     | Diluted: |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |         |   |       
|                                         |                                     |          |                                                     | Basic weighted-average common shares outstanding           |  |                    | 30,074 |                  |   |        | 29,410 |      |  |        | 30,037 |         |   |        | 29,333 | 
|                                         |                                     |          |                                                     | Add: potentially dilutive common shares from stock
options |  |                    | 548    |                  |   |        |       |      |  |        | 578    |         |   |        |       | 
|                                         |                                     |          |                                                     | Add: potentially dilutive common shares from warrants      |  |                    |       |                  |   |        |       |      |  |        | 2      |         |   |        |       | 
|                                         |                                     |          |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |        
|                                         |                                     |          |                                                     | Diluted weighted-average common shares                     |  |                    | 30,622 |                  |   |        | 29,410 |      |  |        | 30,617 |         |   |        | 29,333 | 
|                                         |                                     |          |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |        
|                                         | Basic net income (loss) per share   |          | $                                                   | 0.02                                                       |  |                    | $      | (0.22            | ) |        | $      | 0.02 |  |        | $      | (0.54   | )
|                                         |                                     |          |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |        
|                                         | Diluted net income (loss) per share |          | $                                                   | 0.02                                                       |  |                    | $      | (0.22            | ) |        | $      | 0.02 |  |        | $      | (0.54   | )
|                                         |                                     |          |                                                     |                                                            |  |                    |        |                  |   |        |        |      |  |        |        |        

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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 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 June
30, 2002, sales to two customers, Alternative Technology, Inc., and Westcon
Inc. accounted for 19% and 16% of total net revenues, respectively. For the six
months ended June 30, 2002, sales to the same two customers, Alternative
Technology, Inc., and Westcon Inc. accounted for 19%, and 14% of total net
revenues, respectively. In the prior year, for the three months ended June 30,
2001, sales to Alternative Technology, Inc. and Allasso accounted for 20% and
11% of total net revenues, respectively. For the six months ended June 30,
2001, Alternative Technology, Inc., accounted for 19% of total net revenues.

Geographic Information

|               |                          |                    |   |                    |        |                  |   |       |        |  |   |        |        |  |   |        |        | 
|-------------- | ------------------------ | ------------------ | - | ------------------ | ------ | ---------------- | - | ----- | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|               |                          |                    |   | Three months ended |        | Six months ended
|               |                          |                    |   | June 30,           |        | June 30,        
|               |                          |                    |   |                    |        |                 
|(in thousands) |                          | 2002               |   | 2001               |        | 2002             |   | 2001 
|               |                          |                    |   |                    |        |                  |   |       |        | 
|Revenues:      |                          |                    |   |                    |        |                  |   |       |        |  |   |        |        |  |   |       
|               | North America            |                    | $ | 6,048              |        |                  | $ | 5,485 |        |  | $ | 10,373 |        |  | $ | 10,571 |       
|               | Asia Pacific             |                    |   | 3,419              |        |                  |   | 3,422 |        |  |   | 8,228  |        |  |   | 6,340  |       
|               | Europe and rest of world |                    |   | 3,643              |        |                  |   | 4,181 |        |  |   | 6,750  |        |  |   | 7,358  |       
|               |                          |                    |   |                    |        |                  |   |       |        |  |   |        |        |  |   |       
|               |                          | Total net revenues |   | $                  | 13,110 |                  |   | $     | 13,088 |  |   | $      | 25,351 |  |   | $      | 24,269 | 
|               |                          |                    |   |                    |        |                  |   |       |        |  |   |        |        |  |   |       

Revenues reflect the destination of the shipped product.

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

8. RECENT ACCOUNTING PRONOUNCEMENTS

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

9. SUBSEQUENT EVENT

On July 15, 2002, the Company entered into a lease agreement for a new
facility for its Cupertino headquarters. The term of the new lease is five
years and begins in the fourth quarter of 2002 when the Companys current
facilities lease expires. Annual operating costs of the new facilities are
expected to remain at current spending levels.

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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 20,000 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 June 30, 2002, had an accumulated
deficit of $106.6 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 six months ended June 30, 2002, profitability will remain difficult
to continue to achieve and sustain. We expect to continue to invest in sales
and marketing and product development activities and, as a result, will need to
continue to grow revenues to 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 are paid.

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

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

Inventory valuation. Inventories consist primarily of finished goods and
are stated at the lower of cost (on a first-in, first-out basis) or market. We
currently contract with SMTC Corporation for the manufacture of all of our
products. We 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. 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. 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 differ from management
judgments or estimates. The sales return reserve liability balances at

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June 30, 2002 and December 31, 2001 were $654,000 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
projected or estimated continued credit-worthiness, as well as general economic
and industry trends. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances could be required. The allowance for doubtful accounts
was $79,000 and $132,000 at June 30, 2002 and December 31, 2001, respectively.

Warranty reserves. Upon shipment of products to its customers, the Company
provides for the estimated cost to repair or replace products that may be
returned under warranty. The Companys warranty period is typically 12 months
from the date of shipment to the end user customer. For existing products, the
reserve is estimated based on actual historical experience. For new products,
the required reserve is based on historical experience of similar products
until such time as sufficient historical data has been collected on the new
product. Factors that may impact our warranty costs in the future include our
reliance on our contract manufacturer to provide quality product in a timely
manner and the fact that our products are complex and may contain undetected
defects, errors or failures in either the hardware or the software. To date,
these problems have not materially adversely affected us. Warranty reserves
amounted to $436,000 and $552,000 at June 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 |    | Six months ended
|                                    |                                          |                                |     | June 30,           |    | June 30,        
|                                    |                                          |                                |     |                    |    |                 
|                                    |                                          |                                |     | 2002               |    | 2001             |     | 2002 |     | 2001
|                                    |                                          |                                |     |                    |    |                  |     |      |     |     
|Total net revenues                  |                                          |                                | 100 | %                  |    |                  | 100 | %    |     |      | 100 | %  |    |  | 100 | % 
|Cost of revenues                    |                                          |                                | 24  |                    |    |                  | 30  |      |     |      | 24  |    |    |  | 32  |   
|Amortization of acquired technology |                                          |                                |    |                    |    |                  | 5   |      |     |      |    |    |    |  | 5   |   
|                                    |                                          |                                |     |                    |    |                  |     |      |     |      |     |    |    |  |     |   
|                                    |                                          | Total cost of revenues         |     |                    | 24 |                  |     |      | 35  |      |     |    | 24 |  |     |    | 37  |  
|                                    |                                          | Gross profit                   |     |                    | 76 |                  |     |      | 65  |      |     |    | 76 |  |     |    | 63  |  
|Operating expenses:                 |                                          |                                |     |                    |    |                  |     |      |     |      |     |    |    |  |     |   
|                                    | Research and development                 |                                |     | 20                 |    |                  |     | 23   |     |      |     | 21 |    |  |     | 24 |    
|                                    | Sales and marketing                      |                                |     | 43                 |    |                  |     | 41   |     |      |     | 43 |    |  |     | 48 |    
|                                    | General and administrative               |                                |     | 10                 |    |                  |     | 11   |     |      |     | 9  |    |  |     | 12 |    
|                                    | Amortization of goodwill                 |                                |     |                   |    |                  |     | 42   |     |      |     |   |    |  |     | 45 |    
|                                    | Amortization of stock-based compensation |                                |     | 1                  |    |                  |     | 3    |     |      |     | 2  |    |  |     | 3  |    
|                                    |                                          |                                |     |                    |    |                  |     |      |     |      |     |    |    |  |     |   
|                                    |                                          | Total operating expenses       |     |                    | 74 |                  |     |      | 120 |      |     |    | 75 |  |     |    | 132 |  
|                                    |                                          |                                |     |                    |    |                  |     |      |     |      |     |    |    |  |     |   
|Income (loss) from operations       |                                          |                                | 2   |                    |    |                  | (55 | )    |     |      | 1   |    |    |  | (69 | ) 
|Other income, net                   |                                          |                                | 2   |                    |    |                  | 6   |      |     |      | 1   |    |    |  | 4   |   
|                                    |                                          |                                |     |                    |    |                  |     |      |     |      |     |    |    |  |     |   
|                                    |                                          | Net income (loss) before taxes |     |                    | 4  |                  |     |      | (49 | )    |     |    | 2  |  |     |    | (65 | )
|Provision for taxes                 |                                          |                                |    |                    |    |                  |    |      |     |      |    |    |    |  |    |   
|                                    |                                          |                                |     |                    |    |                  |     |      |     |      |     |    |    |  |     |   
|Net income (loss)                   |                                          |                                | 4   | %                  |    |                  | (49 | )%   |     |      | 2   | %  |    |  | (65 | )%
|                                    |                                          |                                |     |                    |    |                  |     |      |     |      |     |    |    |  |     |   

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##### Table of Contents



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 $13.1 million in the three months ended June 30,
2002 were unchanged from the $13.1 million reported in the same quarter of the
prior year. Total net revenues increased to $25.4 million in the six months
ended June 30, 2002, from $24.3 million in the same period of the prior year,
an increase of 4%. Product revenues of $11.3 million for the quarter declined
$581,000 from the $11.9 million for the three months ended June 30, 2001. The
decline relates primarily to the increase in sales return reserves, a component
of product revenues. Product revenues for the six months ended June 30, 2002
decreased slightly to $21.9 million from $22.0 million for the same period of
the prior year. Service revenues increased to $1.8 million in the three months
ended June 30, 2002 from $1.2 million in the second quarter of fiscal 2001, an
increase of 49%. Service revenues for the six months ended June 30, 2002
increased to $3.5 million, from $2.3 million in the first half of fiscal 2001,
an increase of 51%. These increases were due mainly to increases in the number
of units on maintenance contracts.

For the quarter ended June 30, 2002, net revenues in North America of $6.0
million accounted for 46% of total net revenues, an increase of 4% from the
same period last year. Net revenues in Asia Pacific of $3.4 million, accounted
for 26% of total net revenues and were consistent with the same period last
year in both absolute dollars and as a percentage of sales. Net revenues in
Europe, the Middle East and Africa, EMEA, of $3.7 million, accounting for 28%
of second quarter sales, were down in both absolute dollars and as a percentage
of sales when compared to the three months ended June 30, 2001. For the six
months ended June 30, 2002, net revenues in North America of $10.4 million
accounted for 41% of total net revenues, a decline of 3% from the same period
last year. Net revenues in Asia Pacific, totaling $8.2 million in the first
half of fiscal 2002, accounted for 32% of first half total net revenues,
representing an increase of 6% over the first half of fiscal 2001 due to strong
sales in Japan. EMEA net revenues of $ 6.8 million for the first half of fiscal
2002 were down in both absolute dollars and as a percentage of sales when
compared to the six months ended June 30, 2001 and accounted for 27% of total
net revenues.

During the three months ended June 30, 2002, two customers, Alternative
Technology, Inc., and Westcon, Inc., accounted for 19%, and 16% of total net
revenues, respectively. For the six months ended June 30, 2002, the same two
customers, Alternative Technology, Inc., and Westcon, Inc., accounted for 19%,
and 14% of total net revenues, respectively. For the three months ended June
30, 2001, sales to two customers, Alternative Technology, Inc. and Allasso
accounted for 20% and 11% of total net revenues, respectively. For the six
months ended June 30, 2001, Alternative Technology Inc. accounted for 19% of
total net revenues. Sales to the top 10 indirect channel partners accounted for
66% and 56% of total net revenues for the six months ended June 30, 2002 and
2001, respectively. At June 30, 2002, two customers, Alternative Technology,
Inc. and Westcon, Inc., accounted for 32% of accounts
receivable.

We believe
that our current value proposition, which enables our enterprise customers to
get more value out of existing network resources and improved performance of
their critical applications, combined with the anticipated economic recovery,
should allow us to continue to grow our business in 2002. Our 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 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.

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,
$3.1 million in the three months ended June 30, 2002, declined $816,000, or
21%, from the $3.9 million reported in the same period of fiscal 2001. For the
six months ended June 30, 2002, cost of revenues decreased $1.6 million, or
20%, to $6.2 million from $7.7 million for the same period in 2001. The
decrease in costs was due to reductions in manufacturing costs, other product costs
and service support costs. The cost of revenues represented 24% of total net
revenues for the three and six months ended June 30, 2002, compared to 30% and
32% for the three and six months ended June 30, 2001, respectively.

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Product costs decreased from $3.2 million in the second quarter of fiscal
2001 to $2.4 million in the current quarter, a decline of 23%. Manufacturing
costs declined $222,000 from the same quarter of fiscal 2001 and other overhead
costs, specifically warranty and parts costs, were down $370,000 from the
second quarter of 2001. For the six months ended June 30, 2002, product costs
decreased 21%, to $4.8 million from $6.2 million for the same period in 2001.
Manufacturing costs declined $506,000 and other product costs, specifically
warranty and parts costs, were down $854,000 compared to the first half of
fiscal 2001. Service costs decreased $100,000, from $782,000 in the second
quarter of fiscal 2001 to $682,000 in the current quarter, a decline of 13%.
For the six months ended June 30, 2002, service costs decreased 15%, or
$236,000, to $1.4 million from $1.6 million for the same period in 2001.These
decreases are a result of decreases in consulting fees and personnel related
costs.

During the second quarter, the Company entered into an agreement to
outsource certain of its maintenance support services. Although we expect this
to result in increased service costs beginning in the third quarter of this
year, we believe that this program will improve service levels and lead to
increased customer satisfaction.

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

AMORTIZATION OF ACQUIRED TECHNOLOGY

Amortization of acquired technology relates to the acquired developed
technologies of Workfire Technologies International, Inc. (Workfire). The
acquisition occurred in September 2000. Due to the impairment write-off in the
third quarter of fiscal 2001, there was no amortization during the current
fiscal year. The amortization of acquired technology was $599,000 and $1.2
million in the three and six months periods ended June 30, 2001, respectively.
Amortization of acquired technology represented 5% of total net revenues for
the three and six months ended June 30, 2001.

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 $50,000 and $195,000 for the three
months ended June 30, 2002 and 2001, respectively, research and development
expenses of $2.6 million in the three months ended June 30, 2002, were down
$434,000, or 14% from the $3.1 million reported for the quarter ended June 30,
2001. Excluding the effects of stock-based compensation of $132,000 and
$456,000 for the six months ended June 30, 2002 and 2001, respectively,
research and development expenses of $5.4 million decreased $534,000, or 9%,
from the $5.9 million in the same period in the prior year. For both the
quarter and first half 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 20% and 21% of total net revenues
for the quarter and six months ended June 30, 2002, respectively compared to
23% and 24% of total net revenues for the quarter and six months ended June 30,
2001, respectively. As of June 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 intend to continue to invest in appropriate
projects related to the enhancement of our product offerings and expect
expenses as a percentage of revenue to continue to decrease over time.

SALES AND MARKETING

Sales and marketing expenses consist primarily of salaries, commissions
and related personnel expenses for those engaged in the sales and marketing of
the products as well as related trade show, promotional and public relations
expenses. Excluding the effects of stock-based compensation of $37,000 and
$113,000 in the three months ended June 30, 2002 and 2001, respectively, sales
and marketing expenses increased to $5.7 million in the three months ended June
30, 2002, from $5.4 million in the same quarter in the prior year, an increase
of 4%. Increases in personnel costs, specifically recruiting and commissions,
and distributed costs were partially offset by a decrease in advertising costs.
Excluding the effects of stock-based compensation of $81,000 and $243,000 for
the six months ended June 30, 2002 and 2001, respectively, sales and marketing
expenses decreased to $11.0 million in the six months ended June 30, 2002, or
6%, from the $11.7 million in the first half of the prior year. Decreases were
primarily in travel costs and marketing activities, specifically tradeshows 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 43% of total

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net revenues for the three and six-month periods ended June 30, 2002
compared to 41% and 48% of total net revenues in the three and six months ended
June 30, 2001, respectively. We intend to continue to invest in appropriate
sales and marketing campaigns and therefore expect our absolute dollar expenses
to increase in the future. We continue to work towards our long-term business
model target showing sales and marketing expenses in the range of 26% to 28% of
revenues, but do not expect to achieve this on a quarterly basis for at least
the next one to two years.

GENERAL AND ADMINISTRATIVE

General and administrative expenses consist primarily of salaries and
related personnel expenses for administrative personnel, professional fees and
other general corporate expenses. Excluding the effects of stock-based
compensation of $13,000 and $32,000 for the three months ended June 30, 2002
and 2001, respectively, general and administrative expenses declined to $1.2
million in the three months ended June 30, 2002, from $1.4 million in the same
quarter of the prior year, a decrease of 13%. Excluding the effects of
stock-based compensation of $26,000 and $65,000 for the six months ended June
30, 2002 and 2001 respectively, general and administrative expenses were $2.3
million, down 20% from the $2.9 million in the first half of the prior year.
For both the quarter and first half of fiscal 2002, decreases in professional
services and distributed costs were partially offset by increased personnel
costs related to the CEO transition and search announced in a press release on
May 14, 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 six month periods ended June 30, 2002
respectively, approximately $160,000 and $320,000 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 10% and 9% of total net
revenues for the three and six-month periods ended June 30, 2002 compared to
11% 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 11% and 10% of total net
revenues in the three and six-month periods ended June 30, 2002, respectively.
We expect to see general and administrative expenses continue to decline as a
percentage of revenue.

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 $100,000 and $340,000 in the three
months ended June 30, 2002 and 2001, respectively. For the six months ended
June 30, 2002 and 2001, stock based compensation expense was $239,000 and
$764,000, respectively. There is $165,000 remaining to be amortized in future
periods.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS

In connection with the Workfire acquisition completed in September 2000,
we recorded goodwill and other intangible assets of approximately $66.1
million, which was being amortized on a straight-line basis over a three-year
period. Amortization of this goodwill and other intangibles totaled an
aggregate of $6.1 million and $12.3 million in the three and six-month periods
ended June 30, 2001, respectively. 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.

OTHER INCOME, NET

Other income, net consists primarily of interest income from our cash and
investments, interest expense related to our line of credit, debt and capital
lease obligations, and other expenses. Other income, net decreased to $201,000
in the three months ended June 30, 2002 from $773,000 in the same quarter in
the prior year, a decrease of 74%. Other income, net of $418,000 for the
six-month period ended June 30, 2002 decreased $589,000 from the $1.0 million
for the six months ended June 30, 2001, a decrease of 58%. These decreases were
a result of lower yields on invested funds and increased foreign currency
transaction losses, partially offset by lower interest expenses due to
decreased levels of debt.

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INCOME TAX PROVISION

Our income tax provision for the quarter and six months ended June 30,
2002 is primarily attributable to income taxes payable in foreign
jurisdictions. The effective tax rate for the three and six months ended June
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 six months ended June 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 $62.9 million
at June 30, 2002, an increase of $677,000 from December 31, 2001.

Net cash provided by operating activities was $1.2 million in the six
months ended June 30, 2002, compared with net cash used in operations of $2.0
million 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 half of fiscal 2001.

Net cash used in investing activities was $623,000 in the six months ended
June 30, 2002 compared to net cash provided by investing activities of $18.3
million for the same period in the prior year, primarily reflecting
transactions in marketable securities. Fixed asset purchases were $490,000 for
the six months ended June 30, 2002, compared to $744,000 for the same period in
the prior year.

Net cash used in financing activities was $28,000 in the six months ended
June 30, 2002, compared to $86,000 provided by financing activities for the
same period in the prior year. In the six months ended June 30, 2002, proceeds
generated by issuance of common stock totaled $767,000. This was offset by
$821,000 of payments on lease obligations, the note payable and a portion of
borrowings under the line of credit. In the six months ended June 30, 2001,
proceeds generated by issuance of common stock totaled $1.0 million with
borrowings under the line of credit generating an additional $1.3 million,
offset by note payable and lease obligations repayments totaling $2.3 million.

We have entered into capital leases and notes payable to finance the
acquisition of computer software, hardware and furniture. As of June 30, 2002,
approximately $1.3 million was outstanding under capital lease obligations and
an additional $416,000 note payable. We also have a revolving credit facility
against accounts receivable, which provides for borrowings of up to $10.0
million. This facility expires in May 2003. Borrowings under this facility bear
interest at the prime rate, which was 4.75% as of June 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 June 30, 2002, the Company was in
compliance with the covenants and the outstanding balance on the line of credit
was $1.5 million.

The following summarizes Packeteers commitments under debt and lease
obligations as of June 30, 2002 and the new facility lease discussed in Note 9
of the notes to the condensed consolidated financial statements, and the effect
such obligations are expected to have on its liquidity and cash flow in future
periods (in thousands):

|                 |       |   |       |       |      |   |              |       |            |   |       |       |  |   |       |       | 
|---------------- | ----- | - | ----- | ----- | ---- | - | ------------ | ----- | ---------- | - | ----- | ----- |  | - | ----- | ----- | 
|                 |       |   |       |       |      |   |              |       |            |   | 2003  |       |  |   |      
|                 |       |   | Total |       | 2002 |   | through 2005 |       | Thereafter
|                 |       |   |       |       |      |   |              |       |           
|Capital leases   |       | $ | 1,543 |       |      | $ | 431          |       |            | $ | 1,112 |       |  | $ |      |      
|Operating leases |       |   | 7,346 |       |      |   | 901          |       |            |   | 3,635 |       |  |   | 2,810 |      
|Note Payable     |       |   | 471   |       |      |   | 109          |       |            |   | 362   |       |  |   |      |      
|                 |       |   |       |       |      |   |              |       |            |   |       |       |  |   |       |      
|                 | Total |   | $     | 9,360 |      |   | $            | 1,441 |            |   | $     | 5,109 |  |   | $     | 2,810 | 
|                 |       |   |       |       |      |   |              |       |            |   |       |       |  |   |       |      

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

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

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complementary businesses, technologies or products. We believe that our
current cash, cash equivalents and investments of $62.9 million at June 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 condensed consolidated financial statements.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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



| |  |  | execute our sales and marketing strategy;                                                                                                              
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | maintain current and develop new relationships with key resellers,
distributors, systems integrators and original equipment manufacturers,
or OEMs; and
|
| |  |  | expand our domestic and international sales efforts.                                                                                                   

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

We have incurred losses since we commenced operations in 1996 and, though
we achieved profitability for the three and six months ended June 30, 2002,
profitability will be difficult to continue to achieve and sustain. We may not
generate a sufficient level of revenues to offset our expenditures or be able
to adjust spending in a timely manner to respond to any unanticipated decline
in revenues. We incurred net losses of $71.0, $9.4 and $10.9 million in 2001,
2000 and 1999 respectively. As of June 30, 2002, we had an accumulated deficit
of $106.6 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 growth of

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the bandwidth management solutions market also depends upon a number of
factors, including the availability of inexpensive bandwidth, especially in
international markets, and the growth of wide area networks.

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

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

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

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



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

In the past, we have experienced fluctuations in operating results. These
fluctuations resulted primarily from variations in the mix of products sold and
variations in channels through which products were sold. Research and
development expenses have fluctuated due to increased prototype expenses and
consulting fees related to the launch of new products and increased personnel
expenses. Sales and marketing expenses have fluctuated due to increased
personnel expenses, expenditures related to trade shows and the launch of new
products. See Managements Discussion and Analysis of Financial Condition and
Results of Operations for detailed information on our operating results.

IF 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 59% of total net revenues in the three and six months ended June
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.

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

IF WE ARE UNABLE TO DEVELOP AND MAINTAIN STRONG PARTNERING RELATIONSHIPS WITH
OUR INDIRECT CHANNEL PARTNERS, 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 the
significantly more extensive and well-funded sales and marketing operations of
many of our current or potential competitors. In addition, our indirect channel
agreements are generally not exclusive and one or more of our channel partners
may compete directly with another channel partner for the sale of our products
in a particular region or market. This may cause such channel partners to stop
or reduce their efforts in marketing our products. Our inability to effectively
establish or manage our distribution channels would harm our sales.

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.

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.

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

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

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

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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

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

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

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



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

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

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

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

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

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

SALES TO LARGE CUSTOMERS WOULD BE DIFFICULT TO REPLACE IF LOST

A limited number of indirect channel partners have accounted for a large
part of our revenues to date and we expect that this trend will continue.
Because our expense levels are based on our expectations as to future revenue
and to a large extent are fixed in the short term, any significant reduction or
delay in sales of our products to any significant indirect channel partner or
unexpected returns from these indirect channel partners could harm our
business. For the three months ended June 30, 2002, sales to two customers,
Alternative Technology, Inc., and Westcon Inc. accounted for 19% and 16% of
total net revenues, respectively. For the six months ended June 30, 2002, the
same two customers, Alternative Technology, Inc., and Westcon Inc. accounted
for 19%, and 14% of total net revenues, respectively. For the three months
ended June 30, 2001, sales to Alternative Technology, Inc. and Allasso
accounted for 20% and 11% of total net revenues, respectively. For the six
months ended June 30, 2001, one customer, Alternative Technology, Inc.,
accounted for 19% of total net revenues. We expect that our largest customers
in the future could be different from our largest customers today. End users
can stop purchasing and indirect channel partners can stop marketing our
products at any time. We cannot assure you that we will retain these indirect
channel partners or that we will be able to obtain additional or replacement
partners. The loss of one or more of our key indirect channel partners or the
failure to obtain and ship a number of large orders each quarter could harm our
operating results and liquidity.

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

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



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

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

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

Our future success will depend, to a significant extent, on the ability of
our management to operate effectively, both individually and as a group. We are
dependent on our ability to attract, retain and motivate high caliber key
personnel. We 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

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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, which may
lessen or delay the need for bandwidth management solutions.

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

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

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



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

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

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

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

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

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

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

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

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

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

Our success depends significantly upon our proprietary technology and our
failure or inability to protect our proprietary technology would result in
significant harm to our business. We rely on a combination of patent, copyright
and trademark laws, and on trade secrets, confidentiality provisions and other
contractual provisions to protect our proprietary rights. These measures afford
only limited protection. As of June 30, 2002 we have nine issued U.S. patents
and thirty pending patent applications. Our means of protecting our proprietary
rights in the U.S. or abroad may not be adequate and competitors may
independently develop similar technologies. Our future success will depend in
part on our ability to protect our proprietary rights and the technologies used
in our principal products. Despite our efforts to protect our proprietary
rights and technologies unauthorized parties may attempt to copy aspects of our
products or to obtain and use trade secrets or other information that we regard
as proprietary. Legal proceedings to enforce our intellectual property rights
could be burdensome and expensive and could involve a high degree of
uncertainty. These legal proceedings may also divert managements attention
from growing our business. In addition, the laws of some foreign countries do
not protect our proprietary rights as fully as do the laws of the U.S. Issued
patents may not preserve our proprietary position. If we do not enforce and
protect our intellectual property, our business will suffer substantial harm.

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

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

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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 June 30, 2002 and comparable fair values as of December 31,
2001.

|                           |                       |      |               |      |                   |      |       |       |   |            |       |            |   |   |        |  |  |   |        |  |  |   |        |  | 
|-------------------------- | --------------------- | ---- | ------------- | ---- | ----------------- | ---- | ----- | ----- | - | ---------- | ----- | ---------- | - | - | ------ |  |  | - | ------ |  |  | - | ------ |  | 
|                           |                       |      | June 30, 2002 |      | December 31, 2001
|                           |                       |      |               |      |                  
|(in thousands)             |                       | 2002 |               | 2003 |                   | 2004 |       | Total |   | Fair Value |       | Fair Value
|                           |                       |      |               |      |                   |      |       |       |   |            |       |            |  
|Cash equivalents           |                       | $    | 49,282        |      |                   | $    |      |       |   | $          |      |            |   | $ | 49,282 |  |  | $ | 49,289 |  |  | $ | 48,286 | 
|                           | Weighted-average rate |      |               | 1.84 | %                 |      |       |      |   |            |       |           |   |   |        |  |  |   |        |  |  |   |        |  | 
|Short-term investments     |                       |      | 4,072         |      |                   |      | 3,326 |       |   |            |      |            |   |   | 7,398  |  |  |   | 7,423  |  |  |   | 8,624  | 
|                           | Weighted-average rate |      |               | 5.84 | %                 |      |       | 4.88  | % |            |       |           |   |   |        |  |  |   |        |  |  |   |        |  | 
|Long-term investments      |                       |      |              |      |                   |      | 2,824 |       |   |            | 2,028 |            |   |   | 4,852  |  |  |   | 4,895  |  |  |   | 3,588  | 
|                           | Weighted-average rate |      |               |     |                   |      |       | 3.18  | % |            |       | 3.34       | % |   |        |  |  |   |        |  |  |   |        |  | 
|                           |                       |      |               |      |                   |      |       |       |   |            |       |            |   |   |        |  |  |   |        |  |  |   |        | 
|Total investment portfolio |                       | $    | 53,354        |      |                   | $    | 6,150 |       |   | $          | 2,028 |            |   | $ | 61,532 |  |  | $ | 61,607 |  |  | $ | 60,498 | 
|                           |                       |      |               |      |                   |      |       |       |   |            |       |            |   |   |        |  |  |   |        |  |  |   |        | 

Foreign Exchange

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




PART II OTHER INFORMATION




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

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

The sale of the shares of common stock generated aggregate gross proceeds
of approximately $69.0 million. The aggregate net proceeds were approximately
$62.6 million, after deducting underwriting discounts and commissions of
approximately $4.8 million and expenses of the offering of approximately $1.6
million. Of the net proceeds, Packeteer used $5.0 million to repay two separate
notes payable of $2.5 million each and used $1.8 million in connection with the
acquisition of Workfire. The remaining $55.1 million of the net proceeds has
been and is expected to continue to be used for general corporate purposes,
including working capital, product development and capital expenditures. The
amounts actually expended for such purposes may vary significantly and will
depend on a number of factors described under Factors That May Affect Future
Results. A portion of the net proceeds may also be used to acquire or invest
in complementary businesses or products or to obtain the right to use
complementary technologies, however, Packeteer has no agreements or commitments
with respect to any such acquisition or investments and we are not currently
engaged in any material negotiations with respect to any such transaction.
Pending such uses, the net proceeds of the IPO have been invested in short and
long-term, interest bearing, investment grade securities. None of Packeteers
net proceeds of the IPO were paid directly or indirectly to any director,
officer, general partner of the Company or their associates, persons owning 10%
or more of any class of equity securities of Packeteer, or an affiliate of
Packeteer.

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

The Annual Stockholders Meeting was held on May 22, 2002 for the
following purposes: (1) to elect two directors to serve until the 2005 Annual
Meeting of Stockholders, or until their successors are duly elected and
qualified, (2) to approve a series of amendments to the Packeteer, Inc. 1999
Stock Incentive Plan which would effect the Automatic Option Grant Program in
effect for non-employee board members by (i) increasing the number of shares of
Common Stock granted at the board members initial election to the Board from
20,000 to 30,000 shares, (ii) increasing the number of shares of Common Stock
granted to continuing non-employee board members at each Annual Meeting from
5,000 to 15,000 shares beginning with the 2002 Annual Meeting, and (iii)
providing that the 15,000 share annual option grants, beginning with the grants
to be made at the 2002 Annual General Meeting, vest in two annual installments,
and (3) to ratify the appointment of KPMG LLP as the Companys independent
auditors.

1. The following persons were elected as directors of the Company to serve
until the 2005 Annual Stockholders Meeting, or until
their successors are elected and qualified, with the votes indicated by
their respective names below:

|                   |  |           |            |                |  |  |         | 
|------------------ |  | --------- | ---------- | -------------- |  |  | ------- | 
|                   |  | Votes For |            | Votes Withheld
|                   |  |           |            |               
|Steven J. Campbell |  |           | 22,492,968 |                |  |  | 634,791 | 
|Craig W. Elliot    |  |           | 22,907,652 |                |  |  | 220,107 | 
|Joseph A. Graziano |  |           | 22,677,377 |                |  |  | 450,382 | 

2. The amendments to the Packeteer, Inc. 1999 Stock Incentive Plan were
approved with the following votes:

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For:     |  |  | 17,502,081 | 
|Against: |  |  | 5,563,463  | 
|Abstain: |  |  | 62,215     | 

3. The proposal to ratify the appointment of KPMG LLP as the Companys
independent auditors for the fiscal year ending December 31, 2002 was
approved by the vote of 22,684,558 shares for; 329,921 shares
withheld or voted against the proposal; and 113,280 shares abstained.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

|       |  |                                                                                                                         
|------ |  | ------------------------------------------------------------------------------------------------------------------------
|10.22  |  | Amendment to the 1999 Stock Incentive Plan dated May 22, 2002.                                                          
|      
|10.23+ |  | Facilities Lease Agreement, dated July 15, 2002, between
NMSBPCSLDHB, a California Limited Partnership, and the Company.



---

|+ |  | Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934. In accordance with Rule 24b-2, these confidential portions have
been omitted from this exhibit and filed separately with the SEC.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)  REPORTS ON FORM 8-K

| |                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. A Current Report on Form 8-K dated May 15, 2002, reporting under Item 5
 Other Events, was filed announcing a CEO transition.                                                                                                                                                        
|
| | 2. A Current Report on Form 8-K dated June 4, 2002, reporting under Item
5  Other Events, was filed announcing that certain directors have
established written plans in accordance with SEC Rule 10b5-1 for gradually
liquidating a portion of their holdings of Packeteer common stock.

25



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##### Table of Contents






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 13th day of August, 2002.

| |                                                    |                 
| | -------------------------------------------------- | ----------------
| | PACKETEER, INC.                                   
|
| | By:                                                | /s/ DAVID YNTEMA
| |                                                   
| | David Yntema
Chief Financial Officer and Secretary

26



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##### Table of Contents






EXHIBIT INDEX

|            |  |                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                             
|            |  |                                                                                                                         
|10.22       |  | Amendment to the 1999 Stock Incentive Plan dated May 22, 2002.                                                          
|           
|10.23+      |  | Facilities Lease Agreement, dated July 15, 2002, between
NMSBPCSLDHB, a California Limited Partnership, and the Company.



---

|+ |  | Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934. In accordance with Rule 24b-2, these confidential portions have
been omitted from this exhibit and filed separately with the SEC.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------