<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                       or

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 for the transition period from ____________________ to
     ________________.

                       Commission File Number ___-_______

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

<TABLE>
<S>                                         <C>
        DELAWARE                                         77-0420107
(State of incorporation)                    (I.R.S. Employer Identification No.)
</TABLE>

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

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

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

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

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

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

                             Yes [X]        No [ ]

     The number of shares outstanding of Registrant's common stock, $0.001 par
value, was 29,557,575 at April 11, 2001.

<PAGE>   2

                                ----------------

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>                                                                                              <C>
PART I  FINANCIAL INFORMATION
Item 1. Financial Statements:
        Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000.......   3
        Condensed Consolidated Statements of Operations for the Three Months Ended
        March 31, 2001 and March 31, 2000......................................................   4
        Condensed Consolidated Statements of Cash Flows for the Three Months Ended
        March 31, 2001 and March 31, 2000......................................................   5
        Notes to Condensed Consolidated Financial Statements...................................   6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..   9
        Factors That May Affect Future Results.................................................  13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................  21
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..............................................  22
Item 6. Exhibits and Reports on Form 8-K.......................................................  22
Signatures.....................................................................................  23
</TABLE>


     In addition to historical information, this Form 10-Q contains
forward-looking statements regarding our strategy, financial performance and
revenue sources that involve a number of risks and uncertainties, including
those discussed below at "Factors That May Affect Future Results" and in the
"Risk Factors" section of Packeteer's Annual Report on Form 10-K dated March 29,
2001 as filed with the SEC. Forward-looking statements in this report include,
but are not limited to, those relating to the general rapid expansion of our
business, including the expansion of our network product lines, our ability to
develop multiple applications, our planned introduction of new products and
services, the possibility of acquiring complementary businesses, products,
services and technologies and our development of relationships with providers of
leading Internet technologies. While this outlook represents our current
judgment on the future direction of the business, such risks and uncertainties
could cause actual results to differ materially from any future performance
suggested below. Readers are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this Form 10-Q.
Packeteer undertakes no obligation to publicly release any revisions to
forward-looking statements to reflect events or circumstances arising after the
date of this document.


                                       2
<PAGE>   3
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                          March 31,      December 31,
                                                            2001             2000
                                                          ---------       ---------
<S>                                                       <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents ..........................    $  27,916       $  24,273
  Short-term investments .............................       11,405          32,183
  Accounts receivable less allowance for doubtful
     accounts of $250 and $216, as of March 31, 2001
     and December 31, 2000 ...........................        5,057           7,600
  Inventories ........................................        2,507           2,554
  Prepaids and other current assets ..................        1,184           2,281
                                                          ---------       ---------
          Total current assets .......................       48,069          68,891
Property and equipment, net ..........................        2,440           2,529
Long-term investments ................................       23,912           5,750
Other long-term assets, principally goodwill .........       60,539          67,111
                                                          ---------       ---------
Total assets .........................................    $ 134,960       $ 144,281
                                                          =========       =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Line of credit .....................................    $   4,215       $   3,679
  Current portion of capital leases obligations
     and note payable ................................          798             801
  Accounts payable ...................................        1,946           2,663
  Accrued compensation ...............................        1,901           2,410
  Other accrued liabilities ..........................        2,979           4,013
  Deferred revenue ...................................        3,882           3,367
                                                          ---------       ---------
          Total current liabilities ..................       15,721          16,933
Long-term liabilities ................................        3,008           3,215
Common stock; $0.001 par value; 85,000 shares
  authorized; 29,557 and 29,434 issued and
  outstanding at March 31, 2001 and December 31,
  2000, respectively .................................           30              29
Additional paid-in capital ...........................      163,109         162,118
Accumulated other comprehensive income ...............          180              77
Deferred stock-based compensation ....................       (1,310)         (1,715)
Notes receivable from stockholders ...................         (169)           (186)
Accumulated deficit ..................................      (45,609)        (36,190)
                                                          ---------       ---------
Total stockholders' equity ...........................      116,231         124,133
                                                          ---------       ---------
Total liabilities and stockholders' equity ...........    $ 134,960       $ 144,281
                                                          =========       =========
</TABLE>


      See accompanying notes to condensed consolidated financial statements


                                       3
<PAGE>   4
                                 PACKETEER, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                    Three months ended
                                                                          March 31,
                                                                  -----------------------
                                                                    2001           2000
                                                                  --------       --------
<S>                                                               <C>            <C>
Total net revenues .........................................      $ 11,181       $  7,156

Cost of revenues ...........................................         3,809          2,253
Amortization of acquired technology ........................           600           --
                                                                  --------       --------
          Total cost of revenues ...........................         4,409          2,253

          Gross profit .....................................         6,772          4,903
Operating expenses:
  Research and development (exclusive of
     stock-based compensation expense of
     $261 and $69 for the three months ended
     March 31, 2001 and 2000, respectively) ................         2,851          1,722
  Sales and marketing  (exclusive of
     stock-based compensation expense of
     $130 and $253 for the three months ended
     March 31, 2001 and 2000, respectively) ................         6,223          3,805
  General and administrative (exclusive of
     stock-based compensation expense of
     $33 and $59 for the three months ended
     March 31, 2001 and 2000, respectively) ................         1,418          1,209
  Amortization of goodwill .................................         5,509           --
  Stock-based compensation .................................           424            381
                                                                  --------       --------
          Total operating expenses .........................        16,425          7,117
                                                                  --------       --------
          Loss from operations .............................        (9,653)        (2,214)
Other income, net ..........................................           234            737
                                                                  --------       --------
          Net loss .........................................      $ (9,419)      $ (1,477)
                                                                  ========       ========
Basic and diluted net loss per share .......................      $  (0.32)      $  (0.06)
                                                                  ========       ========
Shares used in computing basic and diluted net loss per
  per share ................................................        29,264         26,125
                                                                  ========       ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                       4

<PAGE>   5
                                 PACKETEER, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                Three month ended
                                                                     March 31,
                                                             -----------------------
                                                               2001           2000
                                                             --------       --------
<S>                                                          <C>            <C>
Cash flows from operating activities:
  Net loss ............................................      $ (9,419)      $ (1,477)
  Adjustments to reconcile net loss to net cash used
    in operating activities:
    Depreciation ......................................           546            160
    Amortization of goodwill and intangibles ..........         6,132           --
    Other non-cash charges ............................           427            430
    Changes in operating assets and liabilities:
      Accounts receivable .............................         2,543            325
      Inventories .....................................            47           (330)
      Prepaids and other current assets ...............         1,097           (536)
      Accounts payable ................................          (717)          (487)
      Other accrued liabilities .......................        (1,543)           990
      Deferred revenue ................................           515            185
                                                             --------       --------
        Net cash used in operating activities .........          (372)          (740)
                                                             --------       --------
Cash flows from investing activities:
  Purchases of property and equipment .................          (457)          (285)
  Purchases of investments ............................       (78,008)       (10,472)
  Proceeds from sale of investments ...................        80,727         29,536
  Other assets ........................................           440            (13)
                                                             --------       --------
        Net cash provided by investing activities .....         2,702         18,766
                                                             --------       --------
Cash flows from financing activities:
  Net proceeds from issuance of common stock ..........           145            629
  Proceeds from stockholders' notes receivable ........            17            232
  Sale of stock to employees under the ESPP ...........           828            640
  Borrowings under line of credit .....................         1,001            170
  Repayments of line of credit ........................          (465)          (417)
  Payments of notes payable ...........................           (19)           (63)
  Proceeds from lease financing .......................          --               62
  Principal payments of capital lease obligations .....          (194)           (50)
                                                             --------       --------
        Net cash provided by financing activities .....         1,313          1,203
                                                             --------       --------
Net increase in cash and cash equivalents .............         3,643         19,229
                                                             --------       --------
Cash and cash equivalents at beginning of period ......        24,273         19,554
                                                             --------       --------
Cash and cash equivalents at end of period ............      $ 27,916       $ 38,783
                                                             ========       ========
Supplemental disclosures of cash flow information:
  Cash paid during period for interest ................      $    127       $    166
                                                             ========       ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.



                                       5

<PAGE>   6
                                 PACKETEER, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)
                                   (unaudited)

1.   BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared by Packeteer, Inc., pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and include the accounts of
Packeteer, Inc. and its wholly-owned subsidiaries ("Packeteer" or collectively
the "Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
rules and regulations. While in the opinion of the Company's management, the
unaudited financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair statement of interim periods
presented, these financial statements and notes should be read in conjunction
with its audited consolidated financial statements and notes thereto, included
in the Company's Annual Report on Form 10-K for the year ended December 31, 2000
filed with the SEC on March 29, 2001.

     The results of operations for the three months ended March 31, 2001 are not
necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year ending December 31, 2001.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     REVENUE RECOGNITION

     The Company recognizes product revenue when it is realized or realizable
and earned. Generally, that occurs after the following events: the receipt of a
non-cancelable purchase order, the shipment of the product, the sales price is
fixed or determinable, and collection of the sales price is reasonably assured.
This policy is modified under certain circumstances as follows. Product revenue
on sales to major new distributors are recorded based on sell-through to the end
user customers until such time the Company has established significant
experience with the distributor's product return and exchange activity. The
Company accrues for estimated customer returns following the guidance of
Statement of Financial Accounting Standards No. 48, "Revenue Recognition When
Right of Return Exists".

     Maintenance revenue on product sales is allocated and deferred based on
vendor specific objective evidence of fair value, generally established based on
renewal rates. The deferred revenues are then recognized ratably over the term
of the maintenance period.

     Upon shipment of products to its customers, the Company provides for the
estimated cost to repair or replace products that may be returned under
warranty. The Company's warranty period is typically 12 months from the date of
shipment to the end user customer.

     Revenue recognition for software transactions is accounted for pursuant to
the American Institute of Certified Public Accountants' (AICPA) Statement of
Position (SOP) 97-2, "Software Revenue Recognition" as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions." SOP 97-2 generally requires revenue earned on software
arrangements involving multiple-elements to be allocated to each element based
on its relative fair value. The fair value of the element must be based on
objective evidence that is specific to the vendor. If a vendor does not have
objective evidence of the fair value of all elements in a multiple-element
arrangement, all revenue from the arrangement must be deferred until such
evidence exists or until all elements have been delivered, unless the only
undelivered element is post-contract customer support, in which case, the entire
fee is recognized over the support period.

     CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of cash on deposit with banks, money market
instruments and investments in commercial paper that are stated at costs which
approximate fair market value.


                                       6
<PAGE>   7

     INVESTMENTS

     Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. To date, all investment securities have been designated as
available-for-sale and are carried at fair value based on quoted market prices,
with unrealized gains and losses, net of tax, included in stockholders' equity
as a component of accumulated other comprehensive income and loss. Realized
gains and losses are included in other income, net. Interest and dividends on
all securities are included in other income, net. The cost of investments sold
is determined on the specific identification method.

     GOODWILL AND OTHER INTANGIBLE ASSETS

     The Company records goodwill when the cost of net identifiable assets
acquired exceeds the fair value of the assets. Goodwill and the cost of
identified intangible assets are amortized on a straight-line basis over three
years. The Company regularly performs reviews to determine if the carrying value
of these assets is impaired. The purpose for the review is to identify any facts
or circumstances, either internal or external, which indicate that the carrying
value of the assets cannot be recovered. No such impairment has been indicated
to date. If, in the future, management determines the existence of impairment
indicators, the Company would use undiscounted cash flows to initially determine
whether impairment should be recognized. If necessary, the Company would perform
a subsequent calculation to measure the amount of the impairment loss based on
the excess of the carrying value over the fair value of the impaired assets. If
quoted market prices for the assets are not available, the fair value would be
calculated using the present value of estimated expected future cash flows. The
cash flow calculation would be based on management's best estimates, using
appropriate assumptions and projections at the time.

     NET LOSS PER SHARE

     Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period,
less the weighted-average number of shares of common stock that are subject to
repurchase and in escrow related to the acquisition of Workfire International
Technologies, Inc. in September 2000. All convertible preferred stock, warrants
for common stock, outstanding stock options and shares subject to repurchase
have been excluded from the calculation of diluted net loss per share as their
inclusion would be antidilutive for all periods presented.

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

<TABLE>
<CAPTION>
                                                                         March 31,
                                                                  -----------------------
                                                                    2001           2000
                                                                  --------       --------
<S>                                                               <C>            <C>
Numerator:
  Net loss .................................................      $ (9,419)      $ (1,477)
                                                                  ========       ========
Denominator:
  Basic and diluted:
     Weighted-average shares of common stock outstanding ...        29,649         26,881
     Less: shares held in escrow ...........................           183           --
     Less: shares subject to repurchase ....................           202            756
                                                                  --------       --------
       Weighted-average shares used in computing basic .....        29,264         26,125
                                                                  ========       ========
          and diluted net loss per share

  Basic and diluted net loss per share .....................      $  (0.32)      $  (0.06)
                                                                  ========       ========
</TABLE>


                                       7
<PAGE>   8

     The following potential common shares have been excluded from the
computation of diluted net loss per share for all periods presented because the
effect would have been antidilutive:

<TABLE>
<CAPTION>
                                                                               March 31,
                                                                           -----------------
                                                                           2001        2000
                                                                           -----       -----
<S>                                                                        <C>         <C>
Shares issuable under stock options..............................          3,924       3,142
Shares of unvested stock subject to repurchase...................            202         756
Shares issuable pursuant to warrants to purchase common stock....             45         143
Shares held in escrow............................................            183          --
</TABLE>

     The weighted average exercise price of stock options outstanding was $17.10
and $14.86 as of March 31, 2001 and 2000, respectively. The weighted average
exercise price of unvested stock subject to repurchase was $0.75 and $0.51 as of
March 31, 2001 and 2000, respectively. The weighted average exercise price of
warrants to purchase common stock was $6.25 and $3.58 as of March 31, 2001 and
2000, respectively.

     OTHER COMPREHENSIVE LOSS

     The Company reports comprehensive income or loss in accordance with the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and loss and its
components in financial statements. Comprehensive income or loss, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources.

<TABLE>
<CAPTION>
                                                                Three months ended
                                                                     March 31,
                                                               ---------------------
                                                                 2001         2000
                                                               -------       -------
<S>                                                            <C>           <C>
Net loss...................................................    $(9,419)      $(1,477)
Unrealized gain (loss) on investments .....................        103          (106)
                                                               -------       -------
Comprehensive loss.........................................    $(9,316)      $(1,583)
                                                               =======       =======
</TABLE>

     The tax effects of components of other comprehensive loss are not
considered material. The only component of accumulated other comprehensive loss
was unrealized gains (losses) from investments.

     SEGMENT REPORTING

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

     The Company operates in the United States and internationally and derives
its revenue from the sale of products and software licenses. The Company's
sales, marketing, and development efforts have been focused on the PacketShaper
family of products and PacketWiseTM software. For the three months ended March
31, 2001, one customer accounted for 18% of total net revenues. For the three
months ended March 31, 2000, no one customer accounted for more than 10% of
total net revenues.

     Geographic Information

<TABLE>
<CAPTION>
                                                           Three months ended
                                                                 March 31,
                                                           -------------------
                                                            2001         2000
                                                           -------      ------
<S>                                                        <C>          <C>
Total net revenues:
  North America.......................................     $ 5,086      $3,232
  Asia Pacific .......................................       2,918       2,279
  Europe and rest of world ...........................       3,177       1,645
                                                           -------      ------
    Total net revenues................................     $11,181      $7,156
                                                           =======      ======
</TABLE>


     Total net revenues reflect the destination of the shipped product.


                                        8
<PAGE>   9




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

3.   RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998 and June 1999, the FASB issued SFAS Nos. 133 and 137,
respectively, both titled "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 137 amended the effective date of SFAS No. 133 to the
first quarter of fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that all derivatives be recognized at
fair value in the statements of financial position, and that the corresponding
gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging relationship
that exists. Because the Company does not hold any derivative instruments and
does not engage in hedging activities, the adoption of SFAS No. 133 did not have
a material impact on the Company's financial position, result of operations or
cash flows.

     In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125." SFAS No. 140 supersedes and replaces the
guidance in FASB Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No. 140 revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures. SFAS No. 140 is
effective for transfers of financial assets occurring after March 31, 2001. The
adoption of this standard is not expected to have a material impact on the
Company's results of operations or financial position.

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

OVERVIEW

     Packeteer is a leading provider of application performance infrastructure
systems designed to provide enterprises and service providers a layer of control
for applications delivered across intranets, extranets and the Internet.
Packeteer's products - powered by PacketWiseTM software - are designed to ensure
end-to-end quality of service (QoS) for networked applications and managed
services, enhancing users' quality of experience through comprehensive
bandwidth, traffic, content, service-level and policy management. Packeteer's
PacketShaper family of products, the PacketShaper(R) and AppVantageTM systems,
integrates application discovery, analysis, control and reporting technologies
that are required for proactive application performance and bandwidth
management. The AppCeleraTM family of Internet acceleration appliances employs
secure socket layer ("SSL") acceleration and advanced content compression,
transformation and caching technologies to improve response times of mission
critical enterprise, eBusiness and eCommerce web applications.

     Packeteer's products are deployed by Global 2000 corporations and service
providers, and sold through an established network of more than 100 VARs,
distributors, system-integrators and OEMs in more than 50 countries. Our
products are built on hardware platforms based on Intel-compatible
microprocessor technologies. In addition, PacketWise software is licensed by
major communications industry partners who integrate the software into specific
strategic networking solutions. We primarily use indirect channels, VARs,
distributors, system integrators and OEMS, to leverage the reach of our sales
force and to obtain worldwide coverage. Our sales and marketing efforts are used
to develop brand awareness and support our indirect channels. We have
subsidiaries in Hong Kong, Japan, The Netherlands, the United Kingdom, Denmark,
Germany, Australia, Caymans and Canada. To date, we have shipped more than
12,000 units.

     We were incorporated in January 1996. From our inception through January
1997, our operating activities related primarily to establishing a research and
development organization, developing and testing prototype designs, establishing
a sales and marketing organization and developing customer, vendor and
manufacturing relationships. We shipped our first product in February 1997.
Since then, we have focused on developing additional products and product
enhancements, building our worldwide indirect sales channel and establishing our
sales, marketing and customer support organizations. Since inception, we have
incurred significant losses and as of March 31, 2001, had an accumulated deficit
of $45.6 million.

     In order to further the growth of our business, we sold 4.6 million shares
of common stock in our initial public offering on July 28, 1999, which raised
approximately $62.6 million net of fees and expenses.

     We have a limited operating history. We have not achieved profitability on
a quarterly or annual basis, and we anticipate that we will incur net losses for
at least the next several quarters. We expect to continue to incur significant
sales and marketing, product


                                       9
<PAGE>   10

development and administrative expenses and, as a result, will need to generate
significant quarterly revenues to achieve and maintain profitability.

     RESULTS OF OPERATIONS

     The following table sets forth certain financial data 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.

<TABLE>
<CAPTION>
                                                                  Three months ended
                                                                      March 31,
                                                                  ------------------
                                                                  2001         2000
                                                                  ----         ----
<S>                                                               <C>         <C>
Total net revenues ........................................       100%        100%

Cost of revenues ..........................................        34          31
Amortization of acquired technology .......................         5          --
                                                                  ---         ---
     Total cost of revenues ...............................        39          31

     Gross margin .........................................        61          69

Operating expenses:
  Research and development ................................        25          24
  Sales and marketing .....................................        56          53
  General and administrative ..............................        13          17
  Amortization of goodwill ................................        49          --
  Amortization of stock-based compensation ................         4           5
                                                                  ---         ---
     Total operating expenses .............................       147          99
                                                                  ---         ---
Loss from operations ......................................       (86)        (30)

Other income, net .........................................         2          10
                                                                  ---         ---
Net loss ..................................................       (84)%       (20)%
                                                                  ===         ===
</TABLE>


     TOTAL NET REVENUES

     Our total net revenues consist primarily of product sales and, to a lesser
extent, software licensing fees from OEM partners. Our product revenues consist
of sales of our PacketShaper, AppVantage and AppCelera lines of product.

     The Company recognizes product revenue when it is realized or realizable
and earned. Generally, that occurs after the following events: the receipt of a
non-cancelable purchase order, the shipment of the product, the sales price is
fixed or determinable, and collection of the sales price is reasonably assured.
This policy is modified under certain circumstances as follows. Product revenue
on sales to major new distributors are recorded based on sell-through to the end
user customers until such time the Company has established significant
experience with the distributor's product return and exchange activity. The
Company accrues for estimated customer returns following the guidance of
Statement of Financial Accounting Standards No. 48, "Revenue Recognition When
Right of Return Exists".

     Maintenance revenue on product sales is allocated and deferred based on
vendor specific objective evidence of fair value, generally established based on
renewal rates. The deferred revenues are then recognized ratably over the term
of the maintenance period.

     Upon shipment of products to its customers, the Company provides for the
estimated cost to repair or replace products that may be returned under
warranty. The Company's warranty period is typically 12 months from the date of
shipment to the end user customer.



                                       10
<PAGE>   11

     Revenue recognition for software transactions is accounted for pursuant to
the American Institute of Certified Public Accountants' (AICPA) Statement of
Position (SOP) 97-2, "Software Revenue Recognition" as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions." SOP 97-2 generally requires revenue earned on software
arrangements involving multiple-elements to be allocated to each element based
on its relative fair value. The fair value of the element must be based on
objective evidence that is specific to the vendor. If a vendor does not have
objective evidence of the fair value of all elements in a multiple-element
arrangement, all revenue from the arrangement must be deferred until such
evidence exists or until all elements have been delivered, unless the only
undelivered element is post-contract customer support, in which case, the entire
fee is recognized over the support period.

     Total net revenues increased to $11.2 million in the three months ended
March 31, 2001 from $7.2 million in the same quarter in the prior year, an
increase of 56%. The increase was due primarily to an increased number of units
sold as a result of increased channel and market development and product
acceptance.

     During the three months ended March 31, 2001, one customer accounted for
18% of total net revenues. Sales to the top 10 indirect channel partners
accounted for 59% and 45% of total net revenues in the three months ended March
31, 2001 and 2000, respectively.

     COST OF REVENUES

     Our cost of revenues consists primarily of the cost of finished products
purchased from our turnkey manufacturer and overhead costs. We outsource the
manufacturing of our products. Our cost of revenues increased to $3.8 million in
the three months ended March 31, 2001 from $2.3 million for the same quarter in
the prior year, an increase of 69%. The cost of revenues represented 34% and 31%
of total net revenues in the three month ended March 31, 2001 and 2000,
respectively. The percentage increase was due primarily to increases in overhead
costs.

     AMORTIZATION OF ACQUIRED TECHNOLOGY

     Amortization of acquired technology relates to the acquired developed
technologies of Workfire Technologies International, Inc. ("Workfire"). The
acquisition occurred in September 2000. The amortization of acquired technology
was $600,000 in the three months ended March 31, 2001 and represented 5% of
total net revenues.

     RESEARCH AND DEVELOPMENT

     Research and development expenses consist primarily of salaries and related
personnel expenses, consultant fees and prototype expenses related to the
design, development, testing and enhancement of the PacketShaper, AppVantage and
AppCelera products and PacketWise software. Research and development expenses
increased to $2.9 million in the three months ended March 31, 2001 from $1.7
million in the same quarter in the prior year, an increase of 66%. This increase
was due to increases in staffing and related personnel costs. Research and
development expenses represented 25% and 24% of total net revenues in the three
months ended March 31, 2001 and 2000, respectively. The percentage increase was
primarily due to the research and development expenses related to the AppCelera
technology acquired in September 2000 in the Workfire acquisition. As of March
31, 2001, all research and development costs have been expensed as incurred. We
believe that continued investment in research and development is critical to
attaining our strategic product and cost reduction objectives. We expect these
absolute dollar expenses to increase in the future as we continue to develop new
products and enhance existing products.

     SALES AND MARKETING

     Sales and marketing expenses consist primarily of salaries, commissions and
related personnel expenses for those engaged in the sales and marketing of the
product as well as related trade show, promotional and public relations
expenses. Sales and marketing expenses increased to $6.2 million in the three
months ended March 31, 2001 from $3.8 million in the same quarter in the prior
year, an increase of 64%. This increase reflected the hiring of additional
personnel in connection with building our sales force, and channel and increased
marketing activities. Sales and marketing expenses represented 56% and 53% of
total net revenues in the three months ended March 31, 2001 and 2000,
respectively. The percentage increase was due to investment in sales personnel
in advance of revenues. We intend to pursue sales and marketing campaigns
aggressively and therefore expect our absolute dollar expenses to increase in
the future after a slight decrease in the near term. This expected decrease
primarily reflects cost control measures implemented at the end of March 2001 in
response to the slowing economy and resulting slowing of revenues.


                                       11
<PAGE>   12




     GENERAL AND ADMINISTRATIVE

     General and administrative expenses consist primarily of salaries and
related personnel expenses for administrative personnel, professional fees and
other general corporate expenses. General and administrative expenses increased
to $1.4 million in the three months ended March 31, 2001 from $1.2 million in
the same quarter in the prior year, an increase of 17%. General and
administrative expenses represented 13% and 17% of total net revenues in the
three months ended March 31, 2001 and 2000, respectively. This percentage
decrease was primarily due to increased net revenues. As we add personnel and
incur additional costs related to the growth of our business, we expect our
absolute dollar expenses to increase in the future.

     STOCK-BASED COMPENSATION

     Stock-based compensation resulted primarily from stock option grants to
employees and options assumed in the Workfire acquisition. Stock-based
compensation is being amortized to expense in accordance with FASB
Interpretation No. 28 over the vesting period of the individual options,
generally four years. We recorded stock-based compensation expense of $424,000
and $381,000 in the three months ended March 31, 2001 and 2000, respectively.
There is $1.3 million remaining to be amortized in future periods.

     AMORTIZATION OF GOODWILL

     Amortization of goodwill relating to our September 2000 acquisition of
Workfire totaled an aggregate of $5.5 million in the three months ended March
31, 2001. In connection with the Workfire acquisition, we recorded goodwill of
approximately $66.1 million, which is being amortized on a straight-line basis
over a three-year period. In addition, we may have additional acquisitions in
future periods that could give rise to the acquisition of additional goodwill.
If we acquire additional goodwill, our acquisition related amortization expense
may increase in future periods.

     OTHER INCOME, NET

     Other income, net consists primarily of interest income from our cash and
investments, interest expense related to our line of credit, debt and capital
lease obligations, and other expense. Other income, net decreased to $234,000 in
the three months ended March 31, 2001 from $737,000 in the same quarter in the
prior year, a decrease of 68%. This decrease was primarily due to the $545,000
loss on the disposition of $3.0 million of defaulted Southern California Edison
notes.

     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 capital equipment
leasing. Cash, cash equivalents and investments totaled $63.2 million at March
31, 2001, an increase of $1.0 million from December 31, 2000. The increase
primarily reflects the decrease in receivables.

     We have entered into leases to finance the acquisition of computer software
and hardware, and furniture. As of March 31, 2001, we have used the $1.5 million
capacity of our current lease and intend to enter into another equipment
financing facility in 2001. As of March 31, 2001, approximately $2.4 million was
outstanding under capital lease obligations related to lease agreements. We also
have a revolving credit facility against accounts receivable which provided for
borrowings of up to $5.0 million and which was renewed and amended on January 9,
2001 to provide borrowings of $10.0 million. This facility expires on January 9,
2002. Borrowings under this credit facility bear interest at the prime rate,
which was 8.0% as of March 31, 2001, are due upon demand and are secured by
substantially all of our assets. At March 31, 2001, we had borrowed $4.2 million
against this credit facility.

     We have used the initial public offering proceeds of $62.6 million net
primarily to repay subordinated loans of $5.0 million and to fund operations,
including expanding and enhancing our sales and marketing operations and product
offerings.

     We expect to experience growth in our working capital needs for the
foreseeable future in order to execute our business plan. We anticipate that
operating activities, as well as planned capital expenditures, will constitute a
partial use of our cash resources. In addition, we may utilize cash resources to
fund acquisitions or investments in complementary businesses, technologies or
products and to finance new facilities related to expansion of our business. We
believe that our current cash, cash equivalents, investments and cash generated
from operations and available borrowings under our credit facilities will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the foreseeable future.



                                       12
<PAGE>   13

     RECENT ACCOUNTING PRONOUNCEMENTS

     The impact of recent accounting pronouncements is discussed in Note 3 of
the notes to condensed consolidated financial statements.

     FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

     -    execute our sales and marketing strategy;

     -    maintain current and develop new relationships with key VARs,
          distributors, systems integrators and OEMs; and

     -    expand our domestic and international sales efforts.

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

     We have incurred losses since we commenced operations in 1996 and may never
achieve profitability. Furthermore, we currently expect that our operating
expenditures will continue to increase significantly and we may not generate a
sufficient level of revenues to offset these expenditures or be able to adjust
spending in a timely manner to respond to any unanticipated decline in revenues.
We incurred net losses of $9.4, $10.9 and $8.8 million in 2000, 1999 and 1998,
respectively. For the three months ended March 31, 2001, we incurred a net loss
of $9.4 million and as of March 31, 2001 we had an accumulated deficit of $45.6
million. Although our revenues have grown over time, we cannot be certain when
or if we will realize sufficient revenues to achieve profitability. If revenues
grow slower than we anticipate or if operating expenditures exceed our
expectations or cannot be adjusted accordingly, we may continue to experience
significant losses on a quarterly and annual basis. Even if we achieve
profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future.

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

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

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

     -    the amount and timing of revenues from OEMs;

     -    the mix of products we sell;

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

     -    the average selling prices of our products; and



                                       13
<PAGE>   14

     -    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 and most recently in the
three months ended March 31, 2001, the delay in customer orders and reductions
in our customers' information technology budgets due to recent changes in the
U.S. economy. Research and development expenses have fluctuated due to increased
prototype expenses and consulting fees related to the launch of new products and
increased personnel expenses. Sales and marketing expenses have fluctuated due
to increased personnel expenses, expenditures related to trade shows and the
launch of new products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our operating
results.

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

     The timing of our revenues is difficult to predict because of our reliance
on indirect sales channels and the variability of our sales cycle. The length of
our sales cycle for sales through our indirect channel partners to our end users
may vary substantially depending upon the size of the order and the distribution
channel through which our products are sold. We expect to have difficulties in
predicting revenues from OEMs because we are unable to forecast unit sales of
their products that incorporate our technology.

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

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

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

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

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

     We cannot assure you that our indirect channel partners will market our
products effectively or continue to devote the resources necessary to provide us
with effective sales, marketing and technical support. In order to support and
develop leads for our indirect distribution channels, we plan to expand our
field sales and support staff significantly. We cannot assure you that this
internal expansion will be successfully completed, that the cost of this
expansion will not exceed the revenues generated or that our expanded sales and
support staff will be able to compete successfully against the significantly
more extensive and well-funded sales and marketing operations of many of our
current or potential competitors. In addition, our indirect channel agreements
are generally not exclusive and one or more of our channel partners may compete
directly with another channel partner for the sale of our products in a
particular region or market. This may cause such channel partners to stop or
reduce their efforts in marketing our products. Our inability to effectively
establish or manage our distribution channels would harm our sales.

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


                                       14
<PAGE>   15

     We may be unable to retain our current or future OEM partners. Generally,
OEM relationships can be terminated with little or no notice. Our recent OEM
agreements with ADC Telecommunications, Inc., Adtran, Inc., Skystream Networks,
Inc. and Intel Corporation are not exclusive and the initial terms range from
one to five years, with no obligation to renew their respective agreements with
us. We expect to enter into similar OEM relationships in the future. If our
relationship with any current or future OEM partner is terminated by either
party, we may not be successful in replacing such partner on a timely basis or
at all with another suitable OEM partner.

DEVELOPING STRONG OEM RELATIONSHIPS WILL BE TIME AND RESOURCE INTENSIVE AND MAY
NOT RESULT IN THE SUCCESSFUL DEPLOYMENT OF OUR TECHNOLOGY AND PRODUCTS

     One aspect of our sales strategy is to develop relationships with OEM
partners that will license our PacketWise software and incorporate it into their
networking products. If we are not successful in entering into suitable OEM
relationships, our ability to successfully deploy our PacketWise software and
build brand awareness would be harmed. The development of OEM relationships
generally involves a considerable amount of management time and company
resources as potential OEM partners evaluate the viability of integrating our
technology. We cannot assure you that potential OEM partners will enter into a
relationship with us after we have expended these efforts and costs. In
addition, even if we are successful in entering into an OEM relationship, we
cannot assure you that our current or future OEM partners will be able to
integrate our technology into commercially viable products on a timely basis.
Furthermore, we cannot assure you that our OEM partners will give a high
priority to the marketing and sale of products which incorporate our technology
or that our OEM partners will not develop competitive products and decide to
terminate or minimize their relationship with us. The failure to build and
maintain successful OEM relationships would have a negative effect on the
deployment of our technology and products.

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

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

OUR PRODUCT LINES CURRENTLY CONSIST OF THE PACKETSHAPER, APPVANTAGE AND
APPCELERA SYSTEMS AND PACKETWISE SOFTWARE, AND ALL OF OUR CURRENT REVENUES AND A
SIGNIFICANT PORTION OF OUR FUTURE GROWTH DEPENDS ON THEIR COMMERCIAL SUCCESS

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

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

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

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

     Almost all of the components used in our products are obtained from single
or limited sources. Our products have been designed to incorporate a particular
set of components. As a result, our desire to change the components of our
products or our inability to obtain



                                       15
<PAGE>   16

suitable components on a timely basis would require engineering changes to our
products before we could incorporate substitute components.

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

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

     The failure of our indirect partners to sell our products internationally
will harm our business. Sales to customers outside of North America accounted
for 55% of our total net revenues in the three months ended March 31, 2001 and
more than half of our total net revenues for fiscal 2000 and 1999. In
particular, sales to customers in our Asia Pacific region accounted for 26% our
total net revenues in the three months ended March 31, 2001. Our ability to grow
will depend in part on the expansion of international sales, which will require
success on the part of our VARs, distributors, systems integrators and OEMs in
marketing our products.

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

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

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

SALES TO LARGE CUSTOMERS WOULD BE DIFFICULT TO REPLACE IF LOST

     A limited number of indirect channel partners have accounted for a large
part of our revenues to date and we expect that this trend will continue.
Because our expense levels are based on our expectations as to future revenue
and to a large extent are fixed in the short term, any significant reduction or
delay in sales of our products to any significant indirect channel partner or
unexpected returns from these indirect channel partners could harm our business.
Sales to one customer accounted for 18% and 12% of total net revenues in the
three months ended March 31, 2001 and fiscal 2000, respectively. We expect that
our largest customers in the future could be different from our largest
customers today. End users can stop purchasing and indirect channel partners can
stop marketing our products at any time. We cannot assure you that we will
retain these indirect channel partners or that we will be able to obtain
additional or replacement partners. The loss of one or more of our key indirect
channel partners or the failure to obtain and ship a number of large orders each
quarter could harm our operating results.

OUR ACQUISITION OF WORKFIRE MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND
MANAGEMENT DUE TO DIFFICULTIES IN ASSIMILATING PERSONNEL AND OPERATIONS

     We may not realize the benefits from the acquisition of Workfire we
completed on September 13, 2000. We may not be able to successfully assimilate
the additional personnel, operations, acquired technology and products into our
business. In particular, we will need to assimilate and retain key engineering
personnel and professional consultants. This is particularly difficult because
Workfire's operations are located in Canada and we are headquartered in
California. Key personnel from Workfire may decide that they do not want to work
for us. In addition, we may wish to integrate Workfire products into our
products, and it is uncertain whether we may accomplish this easily or at all.
These difficulties could disrupt our ongoing business, distract management and
employees or increase expenses. Acquisitions are inherently risky and we may
also face unexpected costs, which may adversely affect operating results in any
quarter.


                                       16
<PAGE>   17

THE MERGER OF WORKFIRE INTO OUR COMPANY COULD ADVERSELY AFFECT OUR COMBINED
FINANCIAL RESULTS

     If the benefits of the merger of Workfire into our company do not exceed
the costs of the merger, including dilution to our stockholders resulting from
the issuance of shares in connection with the merger, our financial results,
including earnings per share, could be adversely affected. We are not certain
that we will be able to achieve our financial estimates if the anticipated
revenue from the sale of products containing technology or other intellectual
property acquired in the merger is not realized. In addition we have recorded
goodwill, intangible assets and deferred stock-based compensation of
approximately $72.8 million in connection with the merger, which will be
amortized over a period of three years from the date of acquisition. In
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", we plan to review these assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable.

THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE AS A RESULT OF THE MERGER OF
WORKFIRE INTO OUR COMPANY

     The market price of our common stock may decline as a result of the merger
if:

     -    the integration of our company and Workfire is unsuccessful;

     -    we do not achieve the perceived benefits of the merger as rapidly or
          to the extent anticipated by the financial or industry analysts or
          investors; or

     -    the effect of the merger on our financial results is not consistent
          with the expectations of financial or industry analysts or investors.

     The market price of our common stock could also decline as a result of
factors related to the merger, which may currently be unforeseen. A decline in
the market price of our common stock could materially and adversely affect our
operating results.

ANY ACQUISITIONS WE MAKE COULD RESULT IN DILUTION, UNFAVORABLE ACCOUNTING
CHARGES AND DIFFICULTIES IN SUCCESSFULLY MANAGING OUR BUSINESS

     We continually evaluate strategic acquisitions of other businesses. 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.

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

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

     Our future success will depend, to a significant extent, on the ability of
our management to operate effectively, both individually and as a group. Given
our early stage of development, we are dependent on our ability to attract,
retain and motivate high caliber key personnel. We have recently expanded our
sales force, and we are actively searching for systems engineers, research and
development engineers, and sales and marketing personnel, all of whom are in
short supply. We currently have a small indirect channel partner and end-user
service and support organization and will need to increase our staff to support
new indirect channel partners and end users


                                       17
<PAGE>   18

and the expanding needs of existing indirect channel partners and end users.
Additionally, we rely on qualified systems engineers and service and support
personnel to provide pre and post-sales technical support for our products.
Competition for qualified personnel in the networking industry, including
systems engineers, sales and service and support personnel, is intense, and we
may not be successful in attracting and retaining such personnel. There may be
only a limited number of persons with the requisite skills to serve in these key
positions and it may become increasingly difficult to hire such persons. Our
business will suffer if we encounter delays in hiring these additional
personnel.

     Competitors and others have in the past and may in the future attempt to
recruit our employees. We do not have employment contracts with any of our
personnel. The loss of services of any of our senior management could negatively
impact our ability to carry out our business plan.

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

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

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

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

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

     -    develop and maintain competitive products;

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



                                       18
<PAGE>   19

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

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

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

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

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

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

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

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

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

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

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

     -    reduced control over delivery schedules;

     -    the potential lack of adequate capacity during periods of excess
          demand;

     -    manufacturing yields and costs;

     -    quality assurance; and

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

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



                                       19
<PAGE>   20

problems with our contract manufacturer, such as inferior quality, insufficient
quantities and late delivery of product. To date, these problems have not
materially adversely affected us. We may not be able to obtain additional volume
purchase or manufacturing arrangements on terms that we consider acceptable, if
at all. If we enter into a high-volume or long-term supply arrangement and
subsequently decide that we cannot use the products or services provided for in
the agreement, our business will be harmed. We cannot assure you that we can
effectively manage our contract manufacturer or that this manufacturer will meet
our future requirements for timely delivery of products of sufficient quality or
quantity. Any of these difficulties could harm our relationships with customers
and cause us to lose orders.

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

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

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

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

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

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

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

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



                                       20
<PAGE>   21

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

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

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

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

     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. Our general policy is to limit the risk
of principal loss and ensure the safety of invested funds by limiting credit and
market risk. Specifically, we place our investments with issuers we believe to
be of high quality and, by policy, limit the amount of the credit exposure to
any one issuer and limit market risk by limiting duration of any single
investment at 3 years. The Company does not use derivative financial instruments
in its investment portfolio.

     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. We do not expect any material loss with
respect to our investment portfolio. The following table presents the amounts of
cash equivalents and investments that are subject to market risk by range of
expected maturity and weighted average interest rates.



                                       21
<PAGE>   22

<TABLE>
<CAPTION>
                                                             March 31, 2001              December 31, 2000
                                                       -------------------------     ------------------------
                                                                     Weighted-                    Weighted-
                                                       Carrying       Average        Carrying      Average
                                                        Amount     Interest Rate      Amount    Interest Rate
                                                       --------    -------------     --------   -------------
<S>                                                     <C>             <C>          <C>             <C>
Cash equivalents:
  Commercial paper, market auction preferred
    and medium-term notes ........................      $24,126         5.12%        $20,999         6.68%
Short-term investments:
  Commercial paper, corporate notes and bonds ....       11,405         7.87          32,183         6.95
Long-term investments:
  Corporate and US government ....................       23,912         7.83           5,750         7.33
                                                        -------                      -------
      Total investment securities ................      $59,443         5.86         $58,932         6.89
                                                        =======                      =======
</TABLE>

     Foreign Exchange

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

PART II OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

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

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) EXHIBITS

         None

     (b) REPORTS ON FORM 8-K

         None


                                       22
<PAGE>   23

                                   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 4th day of May, 2001.


                                       PACKETEER, INC.


                                       By: /s/ DAVID YNTEMA
                                           -------------------------------------
                                           David Yntema
                                           Chief Financial Officer and Secretary



                                       23