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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[X]   |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 
|      |  | FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003                                       
|      |  |                                                                                         
|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 000-26785

PACKETEER, INC.

(Exact name of Registrant as specified in its charter)


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

10201 North De Anza Boulevard, Cupertino, CA 95014
(Address of principal executive offices)

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

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

Yes [X]             No [   ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes [X]             No [   ]

The number of shares outstanding of Registrants common stock, $0.001 par
value, was 32,075,002 at October 23, 2003.

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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              |                                                                                               | FACTORS THAT MAY AFFECT FUTURE RESULTS              
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                          
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II OTHER INFORMATION    
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



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TABLE OF CONTENTS

|           |  |                                                                                                                               |  |   
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I     |  | FINANCIAL INFORMATION                                                                                                         |  |   
|Item 1.    |  | Financial Statements:                                                                                                         |  |   
|           |  | Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002                                          |  | 3 
|           |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2003 and September 30, 2002 |  | 4 
|           |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and September 30, 2002           |  | 5 
|           |  | Notes to Condensed Consolidated Financial Statements                                                                          |  | 6 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                         |  | 10
|           |  | Factors That May Affect Future Results                                                                                        |  | 16
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                                    |  | 24
|Item 4.    |  | Controls and Procedures                                                                                                       |  | 25
|PART II    |  | OTHER INFORMATION                                                                                                             |  |   
|Item 1.    |  | Legal Proceedings                                                                                                             |  | 25
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                              |  | 25
|Signatures |  |                                                                                                                               |  | 25
|Exhibits   |  |                                                                                                                               |  | 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 21, 2003. Forward-looking statements in this report include,
but are not limited to, those relating to the general expansion of our
business, including the expansion of our network product lines, our ability to
develop multiple applications, our planned introduction of new products and
services, the possibility of acquiring complementary businesses, products,
services and technologies, our development of relationships with providers of
leading Internet technologies, our competition, the sufficiency of our cash,
cash equivalents and investments and our business model targets. While this
outlook represents our current judgment on the future direction of the
business, such risks and uncertainties could cause actual results to differ
materially from any future performance suggested below. Readers are cautioned
not to place undue reliance on the forward-looking statements, which speak only
as of the date of this Form 10-Q. Packeteer undertakes no obligation to
publicly release any revisions to forward-looking statements to reflect events
or circumstances arising after the date of this document.

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PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




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

|                                     |                                                                                            |                                            |                      |         |               |        |              |          |        |        | 
|------------------------------------ | ------------------------------------------------------------------------------------------ | ------------------------------------------ | -------------------- | ------- | ------------- | ------ | ------------ | -------- | ------ | ------ | 
|                                     |                                                                                            |                                            |                      |         | September 30, |        | December 31,
|                                     |                                                                                            |                                            |                      |         | 2003          |        | 2002 (1)    
|                                     |                                                                                            |                                            |                      |         |               |        |             
|                                     |                                                                                            |                                            |                      |         | (unaudited)   |        |              |          |       
|ASSETS                               |                                                                                            |                                            |                      |         |               |        |              |         
|Current assets:                      |                                                                                            |                                            |                      |         |               |        |              |         
|                                     | Cash and cash equivalents                                                                  |                                            | $                    | 38,279  |               |        | $            | 46,144   |       
|                                     | Short-term investments                                                                     |                                            |                      | 22,817  |               |        |              | 11,339   |       
|                                     | Accounts receivable, net of allowance for doubtful accounts
of $117 and $145, respectively |                                            |                      | 8,793   |               |        |              | 7,145    |       
|                                     | Other receivables                                                                          |                                            |                      | 201     |               |        |              | 410      |       
|                                     | Inventories                                                                                |                                            |                      | 2,349   |               |        |              | 2,291    |       
|                                     | Prepaids and other current assets                                                          |                                            |                      | 1,445   |               |        |              | 1,302    |       
|                                     |                                                                                            |                                            |                      |         |               |        |              |         
|                                     |                                                                                            |                                            | Total current assets |         |               | 73,884 |              |          |        | 68,631 | 
|Property and equipment, net          |                                                                                            |                                            | 2,432                |         |               |        | 3,027        |         
|Long-term investments                |                                                                                            |                                            | 18,413               |         |               |        | 7,991        |         
|Other assets                         |                                                                                            |                                            | 259                  |         |               |        | 263          |         
|                                     |                                                                                            |                                            |                      |         |               |        |              |         
|                                     |                                                                                            |                                            | Total assets         |         | $             | 94,988 |              |          | $      | 79,912 | 
|                                     |                                                                                            |                                            |                      |         |               |        |              |         
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                            |                                            |                      |         |               |        |              |         
|Current liabilities:                 |                                                                                            |                                            |                      |         |               |        |              |         
|                                     | Line of credit                                                                             |                                            | $                    |        |               |        | $            | 1,000    |       
|                                     | Current portion of capital lease obligations                                               |                                            |                      | 478     |               |        |              | 598      |       
|                                     | Current portion of note payable                                                            |                                            |                      | 189     |               |        |              | 188      |       
|                                     | Accounts payable                                                                           |                                            |                      | 2,233   |               |        |              | 1,352    |       
|                                     | Accrued compensation                                                                       |                                            |                      | 2,734   |               |        |              | 3,452    |       
|                                     | Other accrued liabilities                                                                  |                                            |                      | 3,967   |               |        |              | 3,408    |       
|                                     | Deferred revenue                                                                           |                                            |                      | 7,134   |               |        |              | 5,141    |       
|                                     |                                                                                            |                                            |                      |         |               |        |              |         
|                                     |                                                                                            | Total current liabilities                  |                      |         | 16,735        |        |              |          | 15,139 |       
|Long-term liabilities:               |                                                                                            |                                            |                      |         |               |        |              |         
|                                     | Capital lease obligations, less current portion                                            |                                            |                      | 86      |               |        |              | 405      |       
|                                     | Note payable, less current portion                                                         |                                            |                      |        |               |        |              | 140      |       
|                                     | Deferred revenue                                                                           |                                            |                      | 1,074   |               |        |              | 827      |       
|                                     |                                                                                            |                                            |                      |         |               |        |              |         
|                                     |                                                                                            | Total liabilities                          |                      |         | 17,895        |        |              |          | 16,511 |       
|Stockholders equity:                |                                                                                            |                                            |                      |         |               |        |              |         
|                                     | Common stock, $0.001 par value;                                                            |                                            |                      |         |               |        |              |          |       
|                                     | 85,000 shares authorized; 31,991 and 30,599 shares
issued and
outstanding, respectively    |                                            |                      | 32      |               |        |              | 31       |       
|                                     | Additional paid-in capital                                                                 |                                            |                      | 172,774 |               |        |              | 166,727  |       
|                                     | Deferred stock-based compensation                                                          |                                            |                      |        |               |        |              | (19      | )     
|                                     | Accumulated other comprehensive income                                                     |                                            |                      | 27      |               |        |              | 165      |       
|                                     | Notes receivable from stockholders                                                         |                                            |                      | (6      | )             |        |              | (54      | )     
|                                     | Accumulated deficit                                                                        |                                            |                      | (95,734 | )             |        |              | (103,449 | )     
|                                     |                                                                                            |                                            |                      |         |               |        |              |         
|                                     |                                                                                            | Total stockholders equity                 |                      |         | 77,093        |        |              |          | 63,401 |       
|                                     |                                                                                            |                                            |                      |         |               |        |              |         
|                                     |                                                                                            | Total liabilities and stockholders equity |                      | $       | 94,988        |        |              | $        | 79,912 |       
|                                     |                                                                                            |                                            |                      |         |               |        |              |         



|(1) |  | This information is derived from Packeteer, Inc.s audited
consolidated financial statements.
|--- |  | ---------------------------------------------------------------------------------------------
|    |  |                                                                                              
|    |  | See accompanying notes to condensed consolidated financial statements                        

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

|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |        |        | 
|----------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------ | ------ | ------------------ | ------ | ----------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                      |                                                                                                                                                                                                                    |                          |        | Three Months Ended |        | Nine Months Ended
|                                                      |                                                                                                                                                                                                                    |                          |        | September 30,      |        | September 30,    
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                  
|                                                      |                                                                                                                                                                                                                    |                          |        | 2003               |        | 2002              |        | 2003   |        | 2002
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |     
|Net revenues:                                         |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|                                                      | Product revenues                                                                                                                                                                                                   |                          | $      | 15,143             |        |                   | $      | 12,006 |        |      | $      | 43,861 |        |   | $      | 33,879 |       
|                                                      | Service revenues                                                                                                                                                                                                   |                          |        | 3,289              |        |                   |        | 2,031  |        |      |        | 8,827  |        |   |        | 5,509  |       
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|                                                      |                                                                                                                                                                                                                    | Total net revenues       |        |                    | 18,432 |                   |        |        | 14,037 |      |        |        | 52,688 |   |        |        | 39,388 | 
|Cost of revenues:                                     |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|                                                      | Product costs                                                                                                                                                                                                      |                          |        | 3,162              |        |                   |        | 2,379  |        |      |        | 9,084  |        |   |        | 7,215  |       
|                                                      | Service costs                                                                                                                                                                                                      |                          |        | 1,096              |        |                   |        | 805    |        |      |        | 3,216  |        |   |        | 2,156  |       
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|                                                      |                                                                                                                                                                                                                    | Total cost of revenues   |        |                    | 4,258  |                   |        |        | 3,184  |      |        |        | 12,300 |   |        |        | 9,371  | 
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|                                                      |                                                                                                                                                                                                                    | Gross profit             |        |                    | 14,174 |                   |        |        | 10,853 |      |        |        | 40,388 |   |        |        | 30,017 | 
|Operating expenses:                                   |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|                                                      | Research and development (exclusive of stock-based compensation expense of $26
for the three months ended September 30, 2002
and $19 and $158 for the nine months ended
September 30, 2003 and 2002, respectively) |                          |        | 3,038              |        |                   |        | 2,725  |        |      |        | 8,886  |        |   |        | 8,108  |       
|                                                      | Sales and marketing (exclusive of stock-based
compensation expense of $35 and $116 for the
three and nine months ended September 30,
2002 respectively)                                                            |                          |        | 6,546              |        |                   |        | 5,825  |        |      |        | 19,390 |        |   |        | 16,825 |       
|                                                      | General and administrative (exclusive of stock-based compensation expense of $12 and $38 for
the three and nine months ended September 30,
2002 respectively)                                                      |                          |        | 1,357              |        |                   |        | 1,152  |        |      |        | 4,062  |        |   |        | 3,431  |       
|                                                      | Stock-based compensation                                                                                                                                                                                           |                          |        |                   |        |                   |        | 73     |        |      |        | 19     |        |   |        | 312    |       
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|                                                      |                                                                                                                                                                                                                    | Total operating expenses |        |                    | 10,941 |                   |        |        | 9,775  |      |        |        | 32,357 |   |        |        | 28,676 | 
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|                                                      |                                                                                                                                                                                                                    | Income from operations   |        |                    | 3,233  |                   |        |        | 1,078  |      |        |        | 8,031  |   |        |        | 1,341  | 
|Other income, net                                     |                                                                                                                                                                                                                    |                          | 72     |                    |        |                   | 309    |        |        |      | 541    |        |        |   | 727    |       
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|Income before provision for income taxes              |                                                                                                                                                                                                                    |                          | 3,305  |                    |        |                   | 1,387  |        |        |      | 8,572  |        |        |   | 2,068  |       
|Provision for income taxes                            |                                                                                                                                                                                                                    |                          | 330    |                    |        |                   | 139    |        |        |      | 857    |        |        |   | 207    |       
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|                                                      |                                                                                                                                                                                                                    | Net income               |        | $                  | 2,975  |                   |        | $      | 1,248  |      |        | $      | 7,715  |   |        | $      | 1,861  | 
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|Basic net income per share                            |                                                                                                                                                                                                                    | $                        | 0.09   |                    |        | $                 | 0.04   |        |        | $    | 0.25   |        |        | $ | 0.06   |       
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|Diluted net income per share                          |                                                                                                                                                                                                                    | $                        | 0.09   |                    |        | $                 | 0.04   |        |        | $    | 0.24   |        |        | $ | 0.06   |       
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|Shares used in computing basic net income per
share   |                                                                                                                                                                                                                    |                          | 31,896 |                    |        |                   | 30,285 |        |        |      | 31,404 |        |        |   | 30,122 |       
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       
|Shares used in computing diluted net income
per share |                                                                                                                                                                                                                    |                          | 32,858 |                    |        |                   | 30,427 |        |        |      | 32,522 |        |        |   | 30,343 |       
|                                                      |                                                                                                                                                                                                                    |                          |        |                    |        |                   |        |        |        |      |        |        |        |   |        |       

See accompanying notes to condensed consolidated financial statements.

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

|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |         |       |        |         |  
|-------------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------------------- | ----------------------------------------- | ----- | ----------------- | ------- | ------- | ----- | ------ | ------- | -
|                                                   |                                                                                   |                                              |                                                    |                                           |       | Nine Months Ended
|                                                   |                                                                                   |                                              |                                                    |                                           |       | September 30,    
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                  
|                                                   |                                                                                   |                                              |                                                    |                                           |       | 2003              |         | 2002   
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|Cash flows from operating activities:              |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|                                                   | Net income                                                                        |                                              | $                                                  | 7,715                                     |       |                   | $       | 1,861   |      
|                                                   | Adjustments to reconcile net income to net cash
provided by operating activities: |                                              |                                                    |                                           |       |                   |         |         |      
|                                                   |                                                                                   | Depreciation                                 |                                                    |                                           | 1,063 |                   |         |         | 1,006 |       
|                                                   |                                                                                   | Other non-cash charges                       |                                                    |                                           | 19    |                   |         |         | 391   |       
|                                                   |                                                                                   | Changes in operating assets and liabilities: |                                                    |                                           |       |                   |         |         |       |       
|                                                   |                                                                                   |                                              | Accounts receivable, net                           |                                           |       | (1,648            | )       |         |       | 817    |        
|                                                   |                                                                                   |                                              | Inventories                                        |                                           |       | (58               | )       |         |       | (9     | )      
|                                                   |                                                                                   |                                              | Prepaids and other current assets                  |                                           |       | 66                |         |         |       | (401   | )      
|                                                   |                                                                                   |                                              | Accounts payable                                   |                                           |       | 881               |         |         |       | (855   | )      
|                                                   |                                                                                   |                                              | Accrued compensation and other accrued liabilities |                                           |       | (159              | )       |         |       | (1,424 | )      
|                                                   |                                                                                   |                                              | Deferred revenue                                   |                                           |       | 2,240             |         |         |       | 1,335  |        
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|                                                   |                                                                                   |                                              |                                                    | Net cash provided by operating activities |       |                   | 10,119  |         |       |        | 2,721   |  
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|Cash flows from investing activities:              |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|                                                   | Purchases of property and equipment                                               |                                              |                                                    | (468                                      | )     |                   |         | (764    | )    
|                                                   | Purchases of investments                                                          |                                              |                                                    | (56,932                                   | )     |                   |         | (58,693 | )    
|                                                   | Proceeds from sales and maturities of investments                                 |                                              |                                                    | 34,894                                    |       |                   |         | 44,224  |      
|                                                   | Other assets                                                                      |                                              |                                                    | 4                                         |       |                   |         | (107    | )    
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|                                                   |                                                                                   |                                              |                                                    | Net cash used in investing activities     |       |                   | (22,502 | )       |       |        | (15,340 | )
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|Cash flows from financing activities:              |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|                                                   | Net proceeds from issuance of common stock                                        |                                              |                                                    | 5,268                                     |       |                   |         | 644     |      
|                                                   | Sale of stock to employees under the ESPP                                         |                                              |                                                    | 780                                       |       |                   |         | 885     |      
|                                                   | Proceeds from stockholders notes receivable                                      |                                              |                                                    | 48                                        |       |                   |         | 27      |      
|                                                   | Repayments of line of credit                                                      |                                              |                                                    | (1,000                                    | )     |                   |         | (851    | )    
|                                                   | Payments of notes payable                                                         |                                              |                                                    | (139                                      | )     |                   |         | (127    | )    
|                                                   | Principal payments of capital lease obligations                                   |                                              |                                                    | (439                                      | )     |                   |         | (557    | )    
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|                                                   |                                                                                   |                                              |                                                    | Net cash provided by financing activities |       |                   | 4,518   |         |       |        | 21      |  
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|Net decrease in cash and cash equivalents          |                                                                                   |                                              | (7,865                                             | )                                         |       |                   | (12,598 | )      
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|Cash and cash equivalents at beginning of period   |                                                                                   |                                              | 46,144                                             |                                           |       |                   | 50,009  |        
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|Cash and cash equivalents at end of period         |                                                                                   | $                                            | 38,279                                             |                                           |       | $                 | 37,411  |        
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|Supplemental disclosures of cash flow information: |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|                                                   | Cash paid during period for interest                                              |                                              | $                                                  | 99                                        |       |                   | $       | 214     |      
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        
|                                                   | Cash paid during period for taxes                                                 |                                              | $                                                  | 556                                       |       |                   | $       | 92      |      
|                                                   |                                                                                   |                                              |                                                    |                                           |       |                   |         |        

See accompanying notes to condensed consolidated financial statements.

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



|1. |  | BASIS OF PRESENTATION
|-- |  | ---------------------

The accompanying unaudited condensed consolidated financial statements
have been prepared by Packeteer, Inc., pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC) and include the accounts of
Packeteer, Inc. and its wholly-owned subsidiaries (Packeteer or collectively
the Company). All significant intercompany accounts and transactions have
been eliminated in consolidation. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
rules and regulations. Certain previously reported amounts have been
reclassified to conform to the current presentation format. While in the
opinion of the Companys management, the unaudited condensed 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, 2002 filed with the
SEC on March 21, 2003.

The results of operations for the three and nine months ended September
30, 2003 are not necessarily indicative of results that may be expected for any
other interim period or for the full year ending December 31, 2003.



|2. |  | STOCK-BASED COMPENSATION
|-- |  | ------------------------

The Company adopted Statement of Financial Accounting Standards (SFAS) No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure,
which amended SFAS 123, Accounting for Stock-Based Compensation, in December
2002. As permitted under SFAS 148, Packeteer has elected to continue to follow
the intrinsic value method in accounting for its stock-based employee
compensation arrangements. The following table illustrates the effect on net
income and net income per share if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation (in
thousands, except per share data).

|                                                                                                             |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                             |  | Three Months Ended |        | Nine Months Ended
|                                                                                                             |  | September 30,      |        | September 30,    
|                                                                                                             |  |                    |        |                  
|                                                                                                             |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                                                                                             |  |                    |        |                   |  |      |        |     
|Net income as reported                                                                                       |  | $                  | 2,975  |                   |  | $    | 1,248  |      |  | $ | 7,715  |   |  | $ | 1,861  |  
|Add: Stock-based
compensation under APB 25,
net of tax                                                       |  |                    |       |                   |  |      | 66     |      |  |   | 17     |   |  |   | 281    |  
|Deduct: Stock-based
compensation expense
determined under fair
value-based method for all
awards, net of tax |  |                    | (2,041 | )                 |  |      | (1,775 | )    |  |   | (5,357 | ) |  |   | (5,114 | )
|                                                                                                             |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Net income (loss) pro forma                                                                                  |  | $                  | 934    |                   |  | $    | (461   | )    |  | $ | 2,375  |   |  | $ | (2,972 | )
|                                                                                                             |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Net income (loss) per share:                                                                                 |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Basic  as reported                                                                                          |  | $                  | 0.09   |                   |  | $    | 0.04   |      |  | $ | 0.25   |   |  | $ | 0.06   |  
|Diluted  as reported                                                                                        |  | $                  | 0.09   |                   |  | $    | 0.04   |      |  | $ | 0.24   |   |  | $ | 0.06   |  
|Basic  pro forma                                                                                            |  | $                  | 0.03   |                   |  | $    | (0.02  | )    |  | $ | 0.08   |   |  | $ | (0.10  | )
|Diluted  pro forma                                                                                          |  | $                  | 0.03   |                   |  | $    | (0.02  | )    |  | $ | 0.08   |   |  | $ | (0.10  | )



|3. |  | CONTINGENCIES
|-- |  | -------------

In November 2001, a putative class action lawsuit was filed in the United
States District Court for the Southern District of New York against the
Company, certain officers and directors of the Company, and the underwriters of
the Companys initial public offering. An amended complaint, captioned In re
Packeteer, Inc. Initial Public Offering Securities Litigation,01-CV-10185
(SAS), was filed on April 20, 2002.

The amended complaint alleges violations of the federal securities laws on
behalf of a purported class of those who acquired the Companys common stock
between the date of the Companys initial public offering, or IPO, and December
6, 2000. The amended complaint alleges that the description in the prospectus
for the Companys IPO was materially false and misleading in describing the
compensation to be earned by the underwriters of the Companys IPO, and in
not describing certain alleged arrangements among

6



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underwriters and initial
purchasers of the Companys common stock. The amended complaint seeks damages
and certification of a plaintiff class consisting of all persons who acquired
shares of the Companys common stock between July 27, 1999 and December 6,
2000.

In July 2002, the Company and the individual defendants joined in an
omnibus motion to dismiss challenging the legal sufficiency of plaintiffs
claims. The motion was filed on behalf of hundreds of issuer and individual
defendants named in similar lawsuits. Plaintiffs opposed the motion, and the
Court heard oral argument on the motion in early November 2002. On February
19, 2003, the Court issued an Opinion and Order denying the motion to dismiss
as to the Company. In addition, in October 2002, the individual defendants
were dismissed without prejudice.

A special committee of the board of directors has authorized the Company
to negotiate a settlement of the pending claims substantially consistent with a
memorandum of understanding negotiated among class plaintiffs, all issuer
defendants and their insurers. Any such settlement would be subject to
approval by the Court. If the settlement is not approved, we intend to
vigorously defend ourselves against plaintiffs allegations. We do not
currently believe that the outcome of this proceeding will have a material
adverse impact on our financial condition, results of operations or cash flows.

The Company is occasionally involved in legal and administrative
proceedings incidental to its normal business activities and also believes that
these matters will not have a material adverse effect on its financial
position, results of operations or cash flows.



|4. |  | GUARANTEES
|-- |  | ----------

The Company records a liability for estimated warranty obligations at the
date products are sold. This warranty reserve approximates the aggregate amount
of expected replacement and repair costs for our products. Our warranty reserve
is based on historical product repair and replacement information. The
following provides a reconciliation of the changes in Packeteers warranty
reserve from December 31, 2002 to September 30, 2003 (in thousands):

|                                                   |                                    |   |     |      |  
|-------------------------------------------------- | ---------------------------------- | - | --- | ---- | -
|Accrued warranty obligations at December 31, 2002  |                                    | $ | 284 |     
|                                                   | Provision for current period sales |   |     | 335  |  
|                                                   | Warranty costs incurred            |   |     | (306 | )
|                                                   |                                    |   |     |     
|Accrued warranty obligations at September 30, 2003 |                                    | $ | 313 |     
|                                                   |                                    |   |     |     

Additionally, our distributor and reseller agreements generally include a
provision for indemnifying such parties against certain liabilities if our
products are claimed to infringe a third partys intellectual property rights.
To date we have not incurred any costs as a result of such indemnifications and
have not accrued any liabilities related to such obligations in the
accompanying condensed consolidated financial statements.



|5. |  | INCOME TAXES
|-- |  | ------------

Our income tax provisions for the periods ended September 30, 2003 and
2002 are primarily attributable to income taxes payable in foreign
jurisdictions. The effective tax rate for the nine-month periods ended
September 30, 2003 and 2002 is approximately 10%.



|6. |  | NET INCOME PER SHARE
|-- |  | --------------------

Basic net income per share has been computed using the weighted-average
number of common shares outstanding during the period, less the
weighted-average number of common shares that are subject to repurchase.
Diluted net income per share has been computed using the weighted average
number of common and potential common shares outstanding during the
period. At September 30, 2003 and 2002, there were 352,305 and
1,789,202 shares, respectively, issuable upon exercise of stock
options and warrants excluded from the computation because the
exercise price was greater than the average market price.

7



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##### Table of Contents



The following table presents the calculation of basic and diluted net
income per share (in thousands, except per share amounts):

|             |                              |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |       |  |        |        | 
|------------ | ---------------------------- |  | ------------------------------------------------------------------------------------------- | -------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ------ | ------ | ----- |  | ------ | ------ | ----- |  | ------ | ------ | 
|             |                              |  |                                                                                             |                                                    |  | Three Months Ended |        | Nine Months Ended
|             |                              |  |                                                                                             |                                                    |  | September 30,      |        | September 30,    
|             |                              |  |                                                                                             |                                                    |  |                    |        |                  
|             |                              |  |                                                                                             |                                                    |  | 2003               |        | 2002              |  | 2003   |        | 2002 
|             |                              |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |      
|Numerator:   |                              |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |      
|             | Net income                   |  | $                                                                                           | 2,975                                              |  |                    | $      | 1,248             |  |        | $      | 7,715 |  |        | $      | 1,861 | 
|             |                              |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |      
|Denominator: |                              |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |      
|             | Basic:                       |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |       | 
|             |                              |  | Weighted-average common shares outstanding                                                  |                                                    |  | 31,896             |        |                   |  | 30,287 |        |       |  | 31,404 |        |       |  | 30,124 |       
|             |                              |  | Less: common shares subject to repurchase                                                   |                                                    |  |                   |        |                   |  | 2      |        |       |  |       |        |       |  | 2      |       
|             |                              |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |      
|             |                              |  |                                                                                             | Basic weighted-average common shares outstanding   |  |                    | 31,896 |                   |  |        | 30,285 |       |  |        | 31,404 |       |  |        | 30,122 | 
|             |                              |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |      
|             | Diluted:                     |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |       | 
|             |                              |  | Basic weighted-average common shares outstanding                                            |                                                    |  | 31,896             |        |                   |  | 30,285 |        |       |  | 31,404 |        |       |  | 30,122 |       
|             |                              |  | Add: potentially dilutive common shares from stock
options and shares subject to repurchase |                                                    |  | 937                |        |                   |  | 142    |        |       |  | 1,096  |        |       |  | 221    |       
|             |                              |  | Add: potentially dilutive common shares from warrants                                       |                                                    |  | 25                 |        |                   |  |       |        |       |  | 22     |        |       |  |       |       
|             |                              |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |      
|             |                              |  |                                                                                             | Diluted weighted-average common shares outstanding |  |                    | 32,858 |                   |  |        | 30,427 |       |  |        | 32,522 |       |  |        | 30,343 | 
|             |                              |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |      
|             | Basic net income per share   |  | $                                                                                           | 0.09                                               |  |                    | $      | 0.04              |  |        | $      | 0.25  |  |        | $      | 0.06  | 
|             |                              |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |      
|             | Diluted net income per share |  | $                                                                                           | 0.09                                               |  |                    | $      | 0.04              |  |        | $      | 0.24  |  |        | $      | 0.06  | 
|             |                              |  |                                                                                             |                                                    |  |                    |        |                   |  |        |        |       |  |        |        |      



|7. |  | COMPREHENSIVE INCOME
|-- |  | --------------------

The Company reports comprehensive income in accordance with the provisions
of SFAS 130, Reporting Comprehensive Income. SFAS 130 establishes standards
for reporting comprehensive income and its components in financial statements.
The difference between reported net income and comprehensive income is not
considered material for the periods presented.



|8. |  | SEGMENT REPORTING
|-- |  | -----------------

The Company has adopted the provisions of SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. The Companys chief
operating decision maker is considered to be the Companys Chief Executive
Officer (CEO). The CEO reviews financial information presented on a
consolidated basis substantially similar to the accompanying condensed
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 revenues from the sale of products and software licenses and maintenance
contracts related to these products. During the three months ended September
30, 2003, three customers, Alternative Technology, Inc., Westcon, Inc. and
Macnica Inc, accounted for 20%, 12% and 11% of total net revenues,
respectively. For the nine months ended September 30, 2003, two customers,
Alternative Technology, Inc. and Westcon, Inc. accounted for 22% and 13% of
total net revenues, respectively. Sales to three customers, Alternative
Technology, Inc., Westcon Inc. and Macnica Inc. accounted for 23%, 16% and 14%
of total net revenues, respectively, for the three months ended September 30,
2002 and 20%, 15% and 11% of total net revenues, respectively, for the nine
months ended September 30, 2002.

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Geographic information (in thousands):

|              |                          |                    |   |                    |        |                   |   |       |        |      |   |        |        |  |   |        |        | 
|------------- | ------------------------ | ------------------ | - | ------------------ | ------ | ----------------- | - | ----- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|              |                          |                    |   | Three Months Ended |        | Nine Months Ended
|              |                          |                    |   | September 30,      |        | September 30,    
|              |                          |                    |   |                    |        |                  
|              |                          |                    |   | 2003               |        | 2002              |   | 2003  |        | 2002
|              |                          |                    |   |                    |        |                   |   |       |        |     
|Net revenues: |                          |                    |   |                    |        |                   |   |       |        |      |   |        |        |  |   |       
|              | North America            |                    | $ | 7,730              |        |                   | $ | 6,477 |        |      | $ | 22,713 |        |  | $ | 16,850 |       
|              | Asia Pacific             |                    |   | 5,947              |        |                   |   | 4,578 |        |      |   | 15,965 |        |  |   | 12,806 |       
|              | Europe and Rest of World |                    |   | 4,755              |        |                   |   | 2,982 |        |      |   | 14,010 |        |  |   | 9,732  |       
|              |                          |                    |   |                    |        |                   |   |       |        |      |   |        |        |  |   |       
|              |                          | Total net revenues |   | $                  | 18,432 |                   |   | $     | 14,037 |      |   | $      | 52,688 |  |   | $      | 39,388 | 
|              |                          |                    |   |                    |        |                   |   |       |        |      |   |        |        |  |   |        |       

Net revenues reflect the destination of the shipped product.

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



|9. |  | RECENT ACCOUNTING PRONOUNCEMENTS
|-- |  | --------------------------------

In November 2002, the Emerging Issues Task Force (EITF) issued EITF 00-21,
Revenue Arrangements with Multiple Deliverables. EITF 00-21 provides guidance
on determining whether a revenue arrangement contains multiple deliverable
items and if so, requires revenue be allocated amongst the different items
based on fair value. EITF 00-21 also requires that revenue on any item in a
revenue arrangement with multiple deliverables that is not delivered completely
must be deferred until delivery of the item is complete. EITF 00-21 is
effective for all arrangements entered into in fiscal periods beginning after
June 15, 2003. Adoption of this Statement did not have a material
impact on the Companys results of operations or financial condition.

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) 46, Consolidation of Variable Interest Entities.
FIN 46 requires consolidation of variable interest entities by the entitys
primary beneficiary if the equity investors in the entity do not have the
characteristics of a controlling financial interest or sufficient equity at
risk for the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. FIN 46 must be
applied beginning July 1, 2003 to variable entities existing prior to February
1, 2003. The Company does not have any ownership interests in Variable Interest
Entities. The adoption of FIN 46 did not have a material impact on the
Companys results of operations or financial condition.

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under SFAS 133, Accounting for Derivative Instruments and Hedging
Activities".SFAS 149 provides greater clarification of the characteristics of
a derivative instrument so that contracts with similar characteristics will be
accounted for consistently. In general, SFAS 149 is effective for contracts
entered into or modified after September 30, 2003, and for hedging
relationships designated after September 30, 2003. As the Company does not
currently have any derivative financial instruments, the adoption of SFAS 149
will not have an impact on the Companys condensed consolidated financial
statements.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
clarifies the accounting for certain financial instruments with characteristics
of both liabilities and equity and requires that those instruments be
classified as liabilities in statements of financial position. Previously, many
of those financial instruments were classified as equity. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. As the Company does not have any of these financial
instruments, the adoption of SFAS 150 did not have an impact on the Companys
condensed consolidated financial statements.

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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 traffic management systems
designed to enable enterprises to gain visibility and control of networked
applications, extend network resources and align application performance with
business priorities. For service providers, Packeteer systems provide a
platform for delivering application-intelligent network services that control
quality of service, or QoS, expand revenue opportunities and offer compelling
differentiation from other potential solutions. Our PacketShaper family of
products, including the PacketShaper®, PacketSeeker and PacketShaper Xpress
systems, integrates application discovery, analysis, control, acceleration and
reporting technologies that are required for proactive application performance
and bandwidth management. Our ReportCenter and PolicyCenter® software products
are designed to enable management of large deployments of our PacketShaper
systems.

Our products are deployed by Global 2000 corporations and service
providers, and are sold through an established network of more than 100
resellers, distributors and system-integrators 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
several communications industry partners who integrate the software into
specific strategic networking solutions. We primarily use indirect channels 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 or branch offices in Australia, Canada,
Caymans, Denmark, England, France, Germany, Hong Kong, Japan, Korea, Singapore,
Spain, and The Netherlands. From inception to date, we have shipped more than
29,000 units.

We were incorporated in January 1996 and 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.

We have a limited positive operating history. As of September 30, 2003, we
had an accumulated deficit of $95.7 million. We achieved profitability
throughout 2002 and for the three and nine months ended September 30, 2003.
However, as we incurred losses since we commenced operations until 2002,
profitability could be difficult to sustain. We expect to continue to incur
significant sales and marketing, product development and administrative
expenses and, as a result, will need to generate significant quarterly revenues
to maintain profitability.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of
operations are based upon our condensed 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 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 under different assumptions or conditions.

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 family of 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 (SOP) 97-2,
Software Revenue Recognition, as amended by SOP 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:



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

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| |  |  | 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 arrangement and are negotiated at the outset of an
arrangement, generally based on specific products and quantities to be
delivered. In the event payment terms are provided that differ significantly
from our standard business practices, the fees are deemed to not be fixed or
determinable and revenue is recognized as the fees become due and payable.

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

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

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

Inventory valuation. Inventories consist primarily of finished goods and
are stated at the lower of cost (on a first-in, first-out basis) or market. We
currently contract with SMTC Manufacturing Corporation, or SMTC, 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.

Sales return reserve and allowance for doubtful accounts. In accordance
with SFAS 48, Revenue Recognition When Right of Return Exists, management
must use judgment and make estimates of potential future product returns
related to current period product revenue. When providing for sales return
reserves, we analyze historical return rates as they are the primary indicator
for estimating future returns. Material differences may result in the amount
and timing of our revenue if for any period actual returns differ from our
judgments or estimates. The sales return reserve balances at September 30, 2003
and December 31, 2002 were $425,000 and $875,000, 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 the age of the receivables, customer history and estimated continued
credit-worthiness, as well as general economic and industry trends. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances could be
required. The allowance for doubtful accounts at September 30, 2003 and
December 31, 2002 was $117,000 and $145,000, respectively.

Warranty reserves. Upon shipment of products to our customers, we provide
for the estimated cost to repair or replace products that may be returned under
warranty. Our warranty period is typically 12 months from the date of shipment
to the end user customer. For existing products, the reserve is estimated based
on actual historical experience. For new products, the warranty 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 products and the

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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 at
September 30, 2003 and December 31, 2002 were $313,000 and $284,000,
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  |  | Nine Months  
|                           |                                          |                                              |    |    | Ended         |  | Ended        
|                           |                                          |                                              |    |    | September 30, |  | September 30,
|                           |                                          |                                              |    |    |               |  |              
|                           |                                          |                                              |    |    | 2003          |  | 2002          |    | 2003 |  | 2002
|                           |                                          |                                              |    |    |               |  |               |    |      |  |     
|Net revenues:              |                                          |                                              |    |    |               |  |               |    |      |  |      |    |     |  |   |   
|                           | Product revenues                         |                                              |    | 82 | %             |  |               | 86 | %    |  |      | 83 | %   |  |   | 86 | %  
|                           | Service revenues                         |                                              |    | 18 |               |  |               | 14 |      |  |      | 17 |     |  |   | 14 |    
|                           |                                          |                                              |    |    |               |  |               |    |      |  |      |    |     |  |   |   
|                           |                                          | Total net revenues                           |    |    | 100           |  |               |    | 100  |  |      |    | 100 |  |   |    | 100 | 
|Cost of revenues:          |                                          |                                              |    |    |               |  |               |    |      |  |      |    |     |  |   |   
|                           | Product costs                            |                                              |    | 17 |               |  |               | 17 |      |  |      | 17 |     |  |   | 18 |    
|                           | Service costs                            |                                              |    | 6  |               |  |               | 6  |      |  |      | 6  |     |  |   | 6  |    
|                           |                                          |                                              |    |    |               |  |               |    |      |  |      |    |     |  |   |   
|                           |                                          | Total cost of revenues                       |    |    | 23            |  |               |    | 23   |  |      |    | 23  |  |   |    | 24  | 
|                           |                                          |                                              |    |    |               |  |               |    |      |  |      |    |     |  |   |   
|                           |                                          | Gross margin                                 |    |    | 77            |  |               |    | 77   |  |      |    | 77  |  |   |    | 76  | 
|Operating expenses:        |                                          |                                              |    |    |               |  |               |    |      |  |      |    |     |  |   |   
|                           | Research and development                 |                                              |    | 16 |               |  |               | 19 |      |  |      | 17 |     |  |   | 20 |    
|                           | Sales and marketing                      |                                              |    | 36 |               |  |               | 41 |      |  |      | 37 |     |  |   | 43 |    
|                           | General and administrative               |                                              |    | 7  |               |  |               | 8  |      |  |      | 8  |     |  |   | 9  |    
|                           | Amortization of stock-based compensation |                                              |    |   |               |  |               | 1  |      |  |      |   |     |  |   | 1  |    
|                           |                                          |                                              |    |    |               |  |               |    |      |  |      |    |     |  |   |   
|                           |                                          | Total operating expenses                     |    |    | 59            |  |               |    | 69   |  |      |    | 62  |  |   |    | 73  | 
|                           |                                          |                                              |    |    |               |  |               |    |      |  |      |    |     |  |   |   
|Income from operations     |                                          |                                              | 18 |    |               |  | 8             |    |      |  | 15   |    |     |  | 3 |   
|Other income, net          |                                          |                                              |   |    |               |  | 2             |    |      |  | 1    |    |     |  | 2 |   
|                           |                                          |                                              |    |    |               |  |               |    |      |  |      |    |     |  |   |   
|                           |                                          | Net income before provision for income taxes |    |    | 18            |  |               |    | 10   |  |      |    | 16  |  |   |    | 5   | 
|Provision for income taxes |                                          |                                              | 2  |    |               |  | 1             |    |      |  | 1    |    |     |  | 0 |   
|                           |                                          |                                              |    |    |               |  |               |    |      |  |      |    |     |  |   |   
|Net income                 |                                          |                                              | 16 | %  |               |  | 9             | %  |      |  | 15   | %  |     |  | 5 | % 
|                           |                                          |                                              |    |    |               |  |               |    |      |  |      |    |     |  |   |   

NET REVENUES

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

Total net revenues of $18.4 million in the three months ended September
30, 2003 increased $4.4 million, or 31%, from the $14.0 million reported in the
same three months of the prior year. Total net revenues of $52.7 million
increased $13.3 million, or 34%, in the nine months ended September 30, 2003,
from $39.4 million in the same period of the prior year. Product revenues of
$15.1 million for the three months ended September 30, 2003 increased $3.1
million, or 26%, from $12.0 million for the three months ended September 30,
2002. Product revenues of $43.9 million for the nine months ended September
30, 2003 increased $10.0 million, or 29%, from $33.9 million for the same
period of the prior year. For both the three and nine-month periods ended
September 30, 2003, the increase in product revenues is primarily a result of
increased shipments of our higher end products, particularly the PacketShaper
6500 models. There were no significant selling price changes during any of the
periods presented.

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Service revenues of $3.3 million in the three months ended September 30,
2003, increased $1.3 million, or 62%, from the $2.0 million reported in the
same three months of the prior year. Service revenues of $8.8 million for the
nine months ended September 30, 2003 increased $3.3 million, or 60%, from $5.5
million in the same period of the prior year. The increase is mainly due to an
increase in the number of units on maintenance contracts.

For the three months ended September 30, 2003, net revenues in North
America of $7.7 million increased $1.2 million, from $6.5 million in the same
period last year, and accounted for 42% of total net revenues, compared to 46%
for the same period last year. Net revenues in Asia Pacific of $5.9 million for
the three months ended September 30 2003, accounted for 32% of total net
revenues compared to $4.6 million or 33% of total net revenues for the same
period last year. Net revenues in Europe, the Middle East and Africa, or
EMEA, of $4.8 million for the three months ended September 30, 2003,
accounted for 26% of total net revenues, compared to $3.0 million and 21% of
total net revenues for the three months ended September 30, 2002. For the nine
months ended September 30, 2003, net revenues in North America of $22.7 million
increased $5.8 million from the $16.9 million reported in the nine months ended
September 30, 2002 and accounted for 43% of total net revenues, the same
percentage as reported in the nine months ended September 30, 2002. Net
revenues in Asia Pacific, totaled $16.0 million in the nine months ended
September 30, 2003, an increase of $3.2 million from the $12.8 million reported
for the nine months ended September 30, 2002, and accounted for 30% of total
net revenues, compared to 33% for the same period last year. EMEA net revenues
of $14.0 million for the nine months ended September 30, 2003 accounted for 27%
of revenues and increased $4.3 million from the $9.7 million, or 25% of net
revenues, reported in the nine months ended September 30, 2002.

During the three months ended September 30, 2003, three customers,
Alternative Technology, Inc., Westcon, Inc. and Macnica Inc, accounted for 20%,
12% and 11% of total net revenues, respectively. For the nine months ended
September 30, 2003, two customers, Alternative Technology, Inc. and Westcon,
Inc. accounted for 22% and 13% of total net revenues, respectively. For the
three months ended September 30, 2002, three customers, Alternative Technology,
Inc., Westcon, Inc., and Macnica Inc. accounted for 23%, 16% and 14% of total
net revenues, respectively. For the nine months ended September 30, 2002, the
same three customers accounted for 20%, 15% and 11% of total net revenues,
respectively. At September 30, 2003, three customers accounted for 30% of
accounts receivable.

Despite our belief that worldwide economic growth and IT spending will
remain relatively flat for the remainder of 2003, we believe that our current
value proposition, which enables our enterprise customers to get more value out
of existing network resources and improved performance of their critical
applications, should allow us to continue to grow our business in the fourth
quarter of 2003. Our growth rate and total net revenue depend significantly on
continued growth of the application traffic management 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, which is
dependent on both growing our installed customer base and renewing existing
maintenance contracts. Our future profitability and rate of growth, if any,
will be directly affected by the continued acceptance of our product in the
marketplace, as well as the timing and size of orders, shipments, product mix,
average selling price of our products and general economic conditions. Our
failure to successfully convince the market of our value proposition and
maintain strong relationships with our indirect channel partners to ensure the
success of their selling efforts on our behalf, would adversely impact our net
revenues and operating results.

COST OF REVENUES

Our cost of revenues consists of the cost of finished products purchased
from our turnkey contract manufacturer, overhead costs and service support
costs. Our cost of revenues was $4.3 million in the three months ended
September 30, 2003, an increase of $1.1 million, or 34%, from the $3.2 million
reported in the same period of the prior year. For the nine months ended
September 30, 2003, cost of revenues increased $2.9 million, or 31%, to $12.3
million from $9.4 million for the same period in the prior year. The increase
in costs was due to an increase in units shipped, as well as higher overhead
costs and service support costs. The cost of revenues represented 23% of total
net revenues for the three and nine months ended September 30, 2003, consistent
with 23% and 24% for the three and nine months ended September 30, 2002,
respectively.

Product costs for the three months ended September 30, 2003 increased by
$783,000, or 33%, to $3.2 million from the $2.4 million reported in the same
period of the prior year. For the three months ended September 30, 2003,
manufacturing costs increased $455,000 from the same period of the prior year
due primarily to an increase in units shipped and to a lesser extent, product
mix. Other product costs, specifically warranty, rework and fulfillment costs,
were up $278,000 from the same period of the prior year. For the nine months
ended September 30, 2003, product costs increased $1.9 million, or 26%, to $9.1
million from $7.2 million for the same period in the prior year. For the nine
months ended September 30, 2003, manufacturing costs increased $1.0 million
over the nine months

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ended September 30, 2002 due primarily to an increase in units shipped
and, to a lesser extent, product mix. Other product costs, specifically
warranty, rework and fulfillment costs were up $736,000 from the same period of
the prior year. Despite these increases, product costs as a percentage of
product sales, 21% for the three and nine months ended September 30, 2003,
remained consistent with the 20% and 21% of product sales reported for the
three and nine months ended September 30, 2002, respectively.

Service costs for the three months ended September 30, 2003 increased by
$291,000, or 36%, to $1.1 million from $805,000 reported for the same period of
the prior year. For the nine months ended September 30, 2003, service costs
increased $1.0 million, or 49%, to $3.2 million from $2.2 million for the same
period in the prior year. The increased service costs in both the three and
nine months ended September 30, 2003 are due to increased personnel costs, as
well as service fees related to an agreement previously entered into by the
Company for the outsourcing of certain maintenance and support services
beginning late in the third quarter of the prior year. We expect service costs
to continue at these higher levels as a result of this outsourcing arrangement,
as well as the increase in the number of units under maintenance contracts.

RESEARCH AND DEVELOPMENT

Research and development expenses consist primarily of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development, testing and enhancement of the PacketShaper family of
products and PacketWise software. Excluding the effects of stock-based
compensation of $26,000 for the three months ended September 30, 2002, research
and development expenses of $3.0 million in the three months ended September
30, 2003, were up $313,000, or 11%, from the $2.7 million reported for the
three months ended September 30, 2002. Excluding the effects of stock-based
compensation of $19,000 and $158,000 for the nine months ended September 30,
2003 and 2002, respectively, research and development expenses of $8.9 million
increased $778,000, or 10%, from the $8.1 million in the same period in the
prior year. Increased costs for the three and nine month periods ended
September 30, 2003 over the same periods in the prior year, are primarily
attributable to increased salaries and related personnel expenses. Research and
development expenses represented 16% and 19% of total net revenues for the
three months ended September 30, 2003 and 2002, respectively. Research and
development expenses represented 17% and 20% of total net revenues for the nine
months ended September 30, 2003 and 2002, respectively. As of September 30,
2003, all research and development costs have been expensed as incurred. We
believe that continued investment in research and development is critical to
attaining our strategic product and cost control objectives. We currently
expect to experience somewhat higher spending levels in the upcoming quarters,
but continue to target our spending to approach the lower end of our current
long-term business model target of 18% to 20% of revenues going forward.

SALES AND MARKETING

Sales and marketing expenses consist primarily of salaries, commissions
and related personnel expenses for those engaged in the sales and marketing of
our products as well as related trade show, promotional and public relations
expenses. Excluding the effects of stock-based compensation of $35,000 in the
three months ended September 30, 2002, sales and marketing expenses increased
to $6.5 million in the three months ended September 30, 2003, an increase of
$721,000, or 12%, from the $5.8 million reported for the three months ended
September 30, 2002. Increases included personnel costs, specifically salaries
and commissions, and travel related costs. Excluding the effects of stock-based
compensation of $116,000 for the nine months ended September 30, 2002, sales
and marketing expenses for the nine months ended September 30, 2003 of $19.4
million increased $2.6 million, or 15%, from the $16.8 million for the same
period last year. Increases in personnel costs, specifically salaries,
recruiting and commissions, as well as higher travel costs, accounted for most
of the increase. Sales and marketing expenses represented 36% and 41% of total
net revenues for the three months ended September 30, 2003 and 2002,
respectively. Sales and marketing expenses represented 37% and 43% of total net
revenues for the nine months ended September 30, 2003 and 2002, 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
expect that sales and marketing expenses will continue to exceed our long-term
business model target of 26% to 28% of revenues for at least the next twelve to
eighteen months, although our quarterly spending targets assume gradual
reductions in total expenses as a percent of revenues.

GENERAL AND ADMINISTRATIVE

General and administrative expenses consist primarily of salaries and
related personnel expenses for administrative personnel, professional fees and
other general corporate expenses. Excluding the effects of stock-based
compensation of $12,000 for the three months ended September 30, 2002, general
and administrative expenses increased to $1.4 million in the three months ended
September 30, 2003, from $1.2 million in the same period of the prior year, an
increase of $205,000, or 18%. Increases included personnel costs, specifically
salaries, and consulting fees. Excluding the effects of stock-based
compensation of $38,000 for the nine months ended September 30, 2002, general
and administrative expenses for the nine months ended September 30, 2003 were
$4.1

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million, up $631,000, or18%, from the $3.4 million for the same period in
the prior year. For the nine months ending September 30, 2003, higher
consulting and facilities expenses were partially offset by a decrease in
personnel related expenses, as the second quarter of the prior year included
costs related to the CEO transition and search. General and administrative
expenses represented 7% and 8% of total net revenues for the three months ended
September 30, 2003 and 2002, respectively. General and administrative expenses
represented 8% and 9% of total net revenues for the nine months ended September
30, 2003 and 2002, respectively. Within the next twelve months, we expect to
reach our long-term business model target of 6% to 7% of revenues, although
this may be delayed slightly as we continue to incur the costs of complying
with the requirements of Sarbanes-Oxley.

STOCK-BASED COMPENSATION

Stock-based compensation resulted primarily from stock option grants to
employees and options assumed in the Workfire acquisition. Stock-based
compensation was being amortized in accordance with FIN 28 over the vesting
period of the individual options, generally four years. We recorded stock-based
compensation expense of $0 and $73,000 in the three months ended September 30,
2003 and 2002, respectively. For the nine months ended September 30, 2003 and
2002, stock based compensation expense was $19,000 and $312,000, respectively.
All stock-based compensation was fully amortized as of June 30, 2003.

OTHER INCOME, NET

Other income, net consists primarily of investment income from our cash,
cash equivalents and investments, less interest expense related to our line of
credit, debt and capital lease obligations, and other expenses. Other income,
net decreased to $72,000 in the three months ended September 30, 2003 from
$309,000 for the same period in the prior year, a decrease of 77%. Other
income, net of $541,000 for the nine-month period ended September 30, 2003
decreased $186,000 from the $727,000 for the same period in the prior year, a
decrease of 26%. This decrease was primarily a result of lower interest income
due to lower interest rates, offset by lower interest expenses due to decreased
levels of debt.

INCOME TAX PROVISION

Our income tax provisions for the three and nine months ended September
30, 2003 and 2002, respectively, are primarily attributable to income taxes
payable in foreign jurisdictions. The effective tax rate for the three and nine
months ended September 30, 2003 and the expected annual rate for 2003, is
approximately 10%.

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 $79.5 million
at September 30, 2003, an increase of $14.0 million from December 31, 2002.

Net cash provided by operating activities was $10.1 million in the nine
months ended September 30, 2003, compared with net cash provided by operations
of $2.7 million for the same period of the prior year. The increase in
operating cash flows was primarily due to the increase in net income reported
in the current period, compared to the nine months ended September 30, 2002.

Net cash used in investing activities increased to $22.5 million in the
nine months ended September 30 2003, compared to net cash used in investing
activities of $15.3 million for the same period in the prior year, primarily
reflecting a greater movement of funds from cash and cash equivalents to
investments with longer terms to maturity. Fixed asset purchases were $468,000
for the nine months ended September 30, 2003, compared to $764,000 for the same
period in the prior year.

Net cash provided by financing activities was $4.5 million in the nine
months ended September 30, 2003, compared to $21,000 provided by financing
activities for the same period in the prior year. In the nine months ended
September 30, 2003, proceeds generated by issuance of common stock totaled $6.0
million, partially offset by $578,000 of payments on lease obligations, and
notes payable. Additionally, during the current year we paid down the $1.0
million balance remaining on our line of credit as of December 31, 2002.

We have entered into capital leases and notes payable to finance the
acquisition of computer software, hardware and furniture. As of September 30,
2003, approximately $564,000 was outstanding under capital lease obligations
and $189,000 was outstanding on a note payable. The Company had a revolving
credit facility against receivables, which provided for borrowings of up to
$10.0 million.

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The balance outstanding on the line at December 31, 2002 was repaid in the
first quarter of 2003 and the Company allowed the line to expire in May 2003.

The following summarizes Packeteers commitments under debt and lease
obligations, including interest where applicable, as of September 30, 2003, and
the effect such obligations are expected to have on its liquidity and cash flow
in future periods (in thousands):

|                                                      |          |   |       |       |          |   |             |     |            |   |       |       |  |   |       |       | 
|----------------------------------------------------- | -------- | - | ----- | ----- | -------- | - | ----------- | --- | ---------- | - | ----- | ----- |  | - | ----- | ----- | 
|                                                      |          |   | Total |       | 2003 (1) |   | 2004 - 2006 |     | Thereafter
|                                                      |          |   |       |       |          |   |             |     |           
|Amounts reflected in Balance Sheet                    |          |   |       |       |          |   |             |     |            |   |       |       |  |   |       |      
|Capital leases (2)                                    |          | $ | 606   |       |          | $ | 114         |     |            | $ | 492   |       |  | $ |      |      
|Note payable (2)                                      |          |   | 199   |       |          |   | 54          |     |            |   | 145   |       |  |   |      |      
|                                                      |          |   |       |       |          |   |             |     |            |   |       |       |  |   |       |      
|                                                      | Subtotal |   |       | 805   |          |   |             | 168 |            |   |       | 637   |  |   |       |      | 
|Other cash obligations not reflected in Balance Sheet |          |   |       |       |          |   |             |     |            |   |       |       |  |   |       |      
|Operating leases                                      |          |   | 5,856 |       |          |   | 376         |     |            |   | 4,058 |       |  |   | 1,422 |      
|                                                      |          |   |       |       |          |   |             |     |            |   |       |       |  |   |       |      
|                                                      | Total    |   | $     | 6,661 |          |   | $           | 544 |            |   | $     | 4,695 |  |   | $     | 1,422 | 
|                                                      |          |   |       |       |          |   |             |     |            |   |       |       |  |   |       |      



|(1) |  | Cash obligations for the remainder of 2003.
|--- |  | -------------------------------------------
|   
|(2) |  | Includes related interest.                 

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 and capital expenditures will constitute a partial use of
our cash resources. In addition, we may utilize cash resources to fund
acquisitions or investments in complementary businesses, technologies or
products. We believe that our current cash, cash equivalents and investments of
$79.5 million at September 30, 2003 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 9 of
the Notes to the 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 in a
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

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| | - |  | expand our domestic and international sales efforts.
| | - |  | ----------------------------------------------------

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

As of September 30, 2003, we had an accumulated deficit of $95.7 million.
Although we have achieved profitability throughout 2002 and for the three and
nine months ended September 30, 2003, we incurred losses since we commenced
operations until 2002, and our profitability could be difficult to sustain. 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 MANAGEMENT SOLUTIONS MARKET FAILS TO GROW, OUR BUSINESS WILL FAIL

The market for application traffic management solutions is in an early
stage of development and its success is not guaranteed. Therefore, we cannot
accurately assess the size of the market, the products needed to address the
market, the optimal distribution strategy, or the competitive environment that
will develop. In order for us to be successful, our potential customers must
recognize the value of more sophisticated bandwidth management solutions,
decide to invest in the management of their networks and the performance of
important business software applications and, in particular, adopt our
bandwidth management solutions.

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 mix of products we sell;                                
|
| | - |  | the mix of channels through which those products are sold;  
|
| | - |  | the average selling prices of our products; and             
|
| | - |  | the amount and timing of our operating expenses             

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

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.

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 58% and 57% of our net revenues in the three months and nine months ended
September 30, 2003,

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respectively, and 58% and 55% of our net revenues in 2002 and 2001,
respectively. Our ability to grow will depend in part on the expansion of
international sales, which will require success on the part of our
distributors, resellers and systems integrators in marketing our products.

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

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

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

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

We rely primarily on an indirect distribution channel consisting of
distributors, resellers, and systems integrators 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.

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. During the three months ended September 30, 2003, three customers,
Alternative Technology, Inc., Westcon, Inc. and Macnica Inc, accounted for 20%,
12% and 11% of total net revenues, respectively. For the nine months ended
September 30, 2003, two customers, Alternative Technology, Inc. and Westcon,
Inc. accounted for 22% and 13% of total net revenues, respectively. Sales to
three customers, Alternative Technology, Inc., Westcon Inc. and Macnica Inc.
accounted for 23%, 16% and 14% of total net revenues, respectively, for the
three months ended September 30, 2002 and 20%, 15% and 11% of total net
revenues, respectively, for the nine months ended September 30, 2002. Sales to
the top 10 indirect channel

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partners accounted for 66% of net revenues in the first nine months ended
September 30, 2003, compared to 67% for the same period of the prior year. 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.

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 generally do not have significant unfulfilled product orders at any
point in time. Substantially all of our revenues in any quarter depend upon
customer orders that we receive and fulfill in that quarter. 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.

WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF PRODUCTS
FOR A SIGNIFICANT PORTION OF OUR REVENUES

Most of our revenues have been derived from sales of our PacketShaper
family of products and related maintenance and training services. We currently
expect that PacketShaper-related revenues will continue to account for a
substantial percentage of our revenues in 2003 and for the foreseeable future
thereafter. Our future operating results are significantly dependent upon the
continued market acceptance of our PacketShaper family of products and enhanced
PacketShaper applications. Our business will be harmed if our PacketShaper
products do not continue to achieve market acceptance or if we fail to develop
and market improvements to our PacketShaper products or new and enhanced
products. A decline in demand for our PacketShaper family of products as a
result of competition, technological change or other factors 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 traffic
management solutions market is characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. The introduction of new products, market
acceptance of products based on new or alternative technologies, or the
emergence of new industry standards, could render our existing products
obsolete or make it easier for other products to compete with our products.
Developments in router-based queuing schemes could also significantly reduce
demand for our product. Alternative technologies, including packet-queuing and
compression technologies, could achieve widespread market acceptance. Our
future success will depend in large part upon our ability to:



| | - |  | develop and maintain competitive products;
| | - |  | ------------------------------------------

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

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

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

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

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

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



| | - |  | reduced control over delivery schedules;                                
| | - |  | ------------------------------------------------------------------------
|
| | - |  | the potential lack of adequate capacity during periods of excess demand;
|
| | - |  | decreases in manufacturing yields and increases in costs;               
|
| | - |  | the potential lack of 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 manufacturers, such as
inferior quality, insufficient quantities and late delivery of product. To
date, these problems have not materially adversely affected us. We may not be
able to obtain additional volume purchase or manufacturing arrangements on
terms that we consider acceptable, if at all. If we enter into a high-volume or
long-term supply arrangement and subsequently decide that we cannot use the
products or services provided for in the agreement, our business will be
harmed. We cannot assure you that we can effectively manage our contract
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. Any such changes could be costly and result in lost
sales.

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

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

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

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. Competition for qualified personnel and management in the networking
industry, including engineers, sales and service and support personnel, is
intense, and we may not be successful in attracting and retaining such
personnel. There may be only a limited number of persons with the requisite
skills to serve in these key positions and it may become increasingly difficult
to hire such persons. Competitors and others have in the past and may in the
future attempt to recruit our employees. With the exception of our CEO, we do
not have employment contracts with any of our personnel. Our business will
suffer if we encounter delays in hiring additional personnel as needed.

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

We compete in a 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 that utilize competing technologies to provide bandwidth
management and compression. 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 traffic
management solutions.

Some of our competitors are substantially larger than we are and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources and more established distribution channels. These
competitors may be able to respond more rapidly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than we can. We have
encountered, and expect to encounter, customers who are extremely confident in
and committed to the product offerings of our competitors. Furthermore, some of
our competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties to increase their ability
to rapidly gain market share by addressing the needs of our prospective
customers. These competitors may enter our existing or future markets with
solutions that may be less expensive, provide higher performance or additional
features or be introduced earlier than our solutions. Given the market
opportunity in the traffic 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 ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE MAY EXPERIENCE OPERATING
INEFFICIENCIES AND HAVE DIFFICULTY MEETING DEMAND FOR OUR PRODUCTS

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

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

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could arise with any new products that we introduce. These occurrences
could also result in the loss of or delay in market acceptance of our products,
which could harm our business.

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

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

Our success depends significantly upon our proprietary technology and our
failure or inability to protect our proprietary technology would result in
significant harm to our business. We rely on a combination of patent, copyright
and trademark laws, and on trade secrets, confidentiality provisions and other
contractual provisions to protect our proprietary rights. These measures afford
only limited protection. As of September 30, 2003, we have 12 issued U.S.
patents and 39 pending U.S. patent applications. Currently, none of our
technology is patented outside of the United States. Our means of protecting
our proprietary rights in the U.S. or abroad may not be adequate and
competitors may independently develop similar technologies. Our future success
will depend in part on our ability to protect our proprietary rights and the
technologies used in our principal products. Despite our efforts to protect our
proprietary rights and technologies, unauthorized parties may attempt to copy
aspects of our products or to obtain and use trade secrets or other information
that we regard as proprietary. Legal proceedings to enforce our intellectual
property rights could be burdensome and expensive and could involve a high
degree of uncertainty. These legal proceedings may also divert managements
attention from growing our business. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
U.S. Issued patents may not preserve our proprietary position. If we do not
enforce and protect our intellectual property, our business will suffer
substantial harm.

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

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

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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.

We do not use derivative financial instruments. In general, our policy is
to limit the risk of principal loss and ensure the safety of invested funds by
limiting market and credit risk. All highly liquid investments with less than
three months to maturity from date of purchase are considered to be cash
equivalents; investments with maturities between three and twelve months are
considered to be short-term investments; and investments with maturities in
excess of twelve months are considered to be long-term investments. The
following table presents the amortized cost, fair value and related
weighted-average interest rates by year of maturity for our investment
portfolio as of September 30, 2003 and the comparable fair values as of
December 31, 2002 (in thousands):

|                           |                       |      |                                  |      |                   |      |        |       |   |            |       |            |   |   |        |  |  |   |        |  |  |   |        |  | 
|-------------------------- | --------------------- | ---- | -------------------------------- | ---- | ----------------- | ---- | ------ | ----- | - | ---------- | ----- | ---------- | - | - | ------ |  |  | - | ------ |  |  | - | ------ |  | 
|                           |                       |      | The comparable fair values as of
|                           |                       |      |                                 
|                           |                       |      | September 30, 2003               |      | December 31, 2002
|                           |                       |      |                                  |      |                  
|Expected Maturity Date     |                       | 2003 |                                  | 2004 |                   | 2005 |        | Total |   | Fair Value |       | Fair Value
|                           |                       |      |                                  |      |                   |      |        |       |   |            |       |            |  
|Cash equivalents           |                       | $    | 36,260                           |      |                   | $    |       |       |   | $          |      |            |   | $ | 36,260 |  |  | $ | 36,262 |  |  | $ | 44,519 | 
|                           | Weighted-average rate |      |                                  | 0.97 | %                 |      |        |      |   |            |       |           |   |   |        |  |  |   |        |  |  |   |        |  | 
|Short-term investments     |                       |      | 19,190                           |      |                   |      | 3,621  |       |   |            |      |            |   |   | 22,811 |  |  |   | 22,817 |  |  |   | 11,339 | 
|                           | Weighted-average rate |      |                                  | 1.23 | %                 |      |        | 1.26  | % |            |       |           |   |   |        |  |  |   |        |  |  |   |        |  | 
|Long-term investments      |                       |      |                                 |      |                   |      | 11,646 |       |   |            | 6,747 |            |   |   | 18,393 |  |  |   | 18,413 |  |  |   | 7,991  | 
|                           | Weighted-average rate |      |                                  |     |                   |      |        | 1.19  | % |            |       | 1.37       | % |   |        |  |  |   |        |  |  |   |        |  | 
|                           |                       |      |                                  |      |                   |      |        |       |   |            |       |            |   |   |        |  |  |   |        |  |  |   |        | 
|Total investment portfolio |                       | $    | 55,450                           |      |                   | $    | 15,267 |       |   | $          | 6,747 |            |   | $ | 77,464 |  |  | $ | 77,492 |  |  | $ | 63,849 | 
|                           |                       |      |                                  |      |                   |      |        |       |   |            |       |            |   |   |        |  |  |   |        |  |  |   |        | 

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 worldwide markets. All sales are currently made in U.S.
dollars; and, as a result, a strengthening of the dollar could make our
products less competitive in foreign markets. All operating costs outside the
United States are incurred in local currencies, and are remeasured from the
local currency to U.S. dollars upon consolidation. As exchange rates vary,
these operating costs, when remeasured, may differ from our prior performance
and our expectations. We have no foreign exchange contracts, option contracts
or other foreign currency hedging arrangements.

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ITEM 4. CONTROLS AND PROCEDURES

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this quarterly report.




PART II OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

The information set forth under Note 3, entitled Contingencies, of the
Notes to Condensed Consolidated Financial Statements, is incorporated herein by
reference.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

|             |  |                                                
|------------ |  | -----------------------------------------------
|Exhibit 31.1 |  | Sarbanes-Oxley Section 302 Certification  CEO 
|             |  |                                                
|Exhibit 31.2 |  | Sarbanes-Oxley
Section 302 Certification   CFO
|             |  |                                                
|Exhibit 32.1 |  | Sarbanes-Oxley Section 906 Certification  CEO 
|             |  |                                                
|Exhibit 32.2 |  | Sarbanes-Oxley Section 906 Certification  CFO 

(b)  REPORTS ON FORM 8-K



| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company filed a Current Report on Form 8-K dated July 17, 2003,
furnishing under Item 12 a press release reporting the Companys results of
operations for the three and six months ended June 30, 2003.




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 30th
day of October, 2003.

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

25



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##### Table of Contents






EXHIBIT INDEX

| |  |              |  |                                                
| |  | ------------ |  | -----------------------------------------------
| |  | Exhibit 31.1 |  | Sarbanes-Oxley
Section 302 Certification  CEO 
| |  |              |  |                                                
| |  | Exhibit 31.2 |  | Sarbanes-Oxley
Section 302 Certification   CFO
| |  |              |  |                                                
| |  | Exhibit 32.1 |  | Sarbanes-Oxley
Section 906 Certification  CEO 
| |  |              |  |                                                
| |  | Exhibit 32.2 |  | Sarbanes-Oxley
Section 906 Certification  CFO 

26